Tuesday, November 27, 2012

The US Government & Fed Artificially Push Home Prices Up Again

The Case-Shiller Home Price index showed prices rising for the sixth straight month in September.


Robert Shiller, co-created of the index, discusses briefly in the video below why he has not yet quit his profession to become a full time home flipper as many in America have once again become.

He notes that we still have 10 million homes that are under water (see future inventory). After five years of the government financing 100% of the mortgage market and the Federal Reserve using all their power to temporarily and artificially suppress mortgage rates he says that, "even though home prices are up, they are not up very much."

People such as myself continue to wonder what would occur if just a tiny ounce of that temporary, artificial government support were to be removed and the market had the chance to encounter a glimpse of reality. The results would be devastating for America's leaders: a lower monthly cost of living for every person in the country.

I assure you this will not end well, but the charade is certainly fun to watch.

Sunday, November 25, 2012

US Stocks Surge Back Higher As The Fundamentals Continue To Weaken

The US stock market is once again back over 13000, people have spent the week eating turkey and shopping, and Christmas music is now once again playing as we move closer to the year end holidays.

It would appear that things are once again okay in the world and you only need to turn on a TV or pick up a newspaper to read that very headline. Unfortunately, you come here for reality vs. fantasy, so we'll take a moment to look around the world at what is actually happening.

Last week we took a long look at the coming disaster in Japan through the eyes of Kyle Bass. This morning we briefly reviewed some the problems that France may face over the next year and beyond. Now we can turn our attention to the rest of the world.

The following shows the most recent Markit Eurozone PMI manufacturing index. The Eurzone, as it continues to deal with its debt crisis, has seen a major manufacturing slowdown. GDP (orange line) historically tracks this index (blue line) and Europe is now right at the brink of (officially) crossing back into recession. Europe is part of the three major pillars of the developed global economy (along with Asia and North America), and any slowdown there will have a major ripple effect throughout the world.


This ripple effect can be seen in the following chart showing global business confidence. Over 11,000 companies were surveyed worldwide and sentiment levels are back down to levels seen in 2009.


The slowdown in European manufacturing has only magnified the problems seen in their employment sector. The following shows the under 25 youth unemployment rates in Greece (58%), Spain (54.2%), Italy (35.1%), and the Eurozone as a whole (23.3%). For those wondering how the people of Europe can find time to spend their days rioting on the streets, these incredible numbers sum it up perfectly.


Back over in the United States the global slowdown continues to impact its economy as well. The following shows the coincident/lagging leading economic indicator index dropping to 89.5. Going back to the 1950's, crossing below 91 has always led to a recession (grey lines show recessions). The chart also shows how weak the current "recovery" was compared to those in the past. This is the new normal for the US economy as the days of rapid growth are gone and a choking debt burden continues to tighten around the necks of economy.


The small business optimism index in the United States paints a similar picture. The NFIB index never recovered from the last recession (which was actually the beginning of a depression), and only traced back up about 50% toward the previous highs. This number will continue to roll over as the current administration does everything in its power to make business investment as unappealing as possible.


Get your DOW 13000 hot stocks while you can today. My guess is that they are going to be priced far lower one year from today and that of course is when no one will want to buy them.


h/t Zero Hedge, Street Talk Live, Markit

The Coming Trouble In France

The Economist published an excellent article last week titled "The time-bomb at the heart of Europe." It was the article feature on the cover of the magazine focused on France with the following picture for the world to see.


Following the release of the article French leaders were furious at the Economist for the story. I was both surprised they released it as well as intrigued by how well it is written. It is very rare, if even non-existent, that you see a mainstream news source publish an article about a crisis that is coming vs. a crisis that has already arrived.

While France was upset, everything in the article is completely true. Some of the more important headlines:

*The government debt to GDP has now risen to over 90%. The 90% mark is where Reinhart and Rogoff famously drew the line of danger in their incredible work This Time Is Different.

*Businesses are severely burdened by the new socialist government changes. There is additional product market regulation, social charges on payroll, and a higher minimum wage. This has discouraged most new companies from entering the market.

*Investment capital is being chased out of the country. There is an increased tax on companies, wealth, capital gains, and dividends.

*The impact of these changes has led to 10% of the country now unemployed, 25% of the youth unemployed, and the country now close to entering back into recession.

Last week Moody's downgraded France from AAA to Aa1 status, an ominous sign for the future of the country.

The market currently has French debt priced to perfection (similar to the way they priced Greece, Portugal, Spain, and Italy before rates imploded almost overnight). The problem with this is not only the coming losses that will be taken by French government bond investors (composed in large part by European banks - a problems that would need a post of its own to explain), but that the Eurozone is counting on France to support the other bailouts in the region.

The pressure that trouble in France's bond market would put on Germany to support all of the Eurozone, which is already both unbearable and unsustainable, would certainly be the straw that broke the camel's back.

Keep a close eye on both the French economy, bond market, and political moves as we move into 2013. While the markets are currently calm, they could flair back up in an instant with trouble in Spain, Italy, or the currently unnoticed France.