We drove back into town on Sunday night. People moped around in front of bars. Groups walked uptown from the stadium, their shoulders down, the chins dragging. The city was dark…and unhappy.

There was no joy in Baltimore on Sunday night. Baltimore is a sports town. The Ravens — the only team we know named after a poem — had lost. They would not be going to the Super Bowl.

Baltimore is a funny place. We were happy to leave it for 15 years when we lived in Europe. And we are happy to be back. Living in Europe was hard. Here it is easy. Living in Europe was chic and fashionable. Here, moving to a trailer park would be moving up in the world. Living in Europe was expensive. Baltimore, meanwhile, is one of the cheapest cities in the world.

But we’ll come back to Baltimore in a minute…

What’s in the news today? The Dow rose 83 points yesterday. The 30-year, ‘long’ bond yield dropped below 3%. The price of gold rose to $1,749.

Bond yields signal a recession. Stocks hint at a recovery… Gold? The correction in the gold market didn’t go nearly as far as we expected. And now it’s over. What to make of it? Do people expect inflation? Why are they buying gold?

We know why the Syrians are buying gold. There’s a war on. Gold has always been the thing to own in a war zone. But here, people think the economy is recovering.

The public and the investoriat seem to think all is well. We’ve just had one of our best months in stock market history. Many investors are convinced that it is the beginning of something big.

Our old friend Mark Hulbert, for example, tells us that some of the oldest and wisest of the newsletter gurus are now bullish on stocks.

We don’t have any opinion about stocks. We just don’t like them. And we figure that if they were as valuable as people think, the owners wouldn’t be in such a hurry to unload them. At least, not to us. Instead, they’d hold on.

But some people are always selling. Others always seem to be buying. Prices go up…and down…the world goes ’round and ’round…

…and who are we to argue with it?

The trouble is, the economy is not nearly as strong as most people think. There is no growth to speak of. And without growth, it doesn’t make sense to pay so much for stocks. Forbes:

The Q4 2011 GDP reading of +2.8% produced what may appear to be a respectable headline number, a full percentage point above Q3 GDP growth of 1.8%. On the surface, the Q4 report also compared favorably to an increase in real GDP of 1.7% for all of 2011. But 2.8%, even at first look, is still softer than the 3.0% gain in real GDP logged for 2010, repeating a pattern that we’ve seen over the past few years: GDP rises, only to drop off again.

Although it may be tempting to look at the economy as a glass that’s half full, I’m afraid it’s far emptier than it looks. Diving into the Q4 GDP report, we see that two-thirds of the amount of growth reported (1.9%) was due to private inventory build-up. (According to standard accounting practice, growth in inventory increases GDP, while sales of inventory reduces it.) Drilling further, the stat that is most meaningful is the real final sales of domestic product — GDP minus the change in private inventories. This data point eked out only a 0.8% increase in Q4 2011, compared with an increase of 3.2% in Q3 2011. That is very telling.

Another weakness in consumer spending was reported by the Commerce Department: Personal income grew by 0.5% in December, up from a 0.1% rise in November. Spending was flat, however. The personal saving rate, meanwhile, was 4.0% in December, compared to 3.5% in November. Saving instead of spending may be good for consumers’ personal balances sheets, but it doesn’t do much good for an economy that needs to gain traction. Additionally, sales increases still appear to be driven by increases in debt which is not sustainable.

Without growth, the average stock will go nowhere. How could it? There’s nowhere to go. No growth means that the economy is no larger at the end of the year than it was at the beginning. So, for any company to grow, it would have to take sales and profits from some other company. For one to grow another must shrink. Overall, there would be no growth, and no capital gains for investors.

Trouble is the dividend yield of the stock market is only around 2%. That’s not enough. Take inflation and taxes into account, says our Family Office strategist, Rob Marstrand, and you need more than an 8% return just to break even.

So, if you’re buying stocks in a no-growth market…with a 2% dividend yield…you’re losing 6% on your money.

Heck, you’re much better off buying gold…or property in Baltimore.

Gold has been up every year for the last 11. Even last year, when it supposedly suffered a big correction, it still ended the year up about $300 — which is what you would have paid for a whole ounce of gold in 1999.

As for Baltimore real estate…

We’ve been looking at apartment buildings in B’more. This city is unusual, so you probably shouldn’t generalize. But we’re seeing buildings with “cap rates” of 10% and more…and return on cash as high as 20%. Interest rates are so low you can finance much of the purchase price at low cost…and leverage your investment to get a higher return.

How does that work? Well, the building we just looked at had 5 units. The sales agent explained it to us.

“You get gross rents of about $100,000 and you can buy the building for $800,000. You put down $100,000 and borrow the other $700,000. Then, you pay off your mortgage, pay the upkeep, property taxes, utilities and so forth… You also have to pay management…leave an allowance for vacancies and major repairs…and you end up with about $20,000.

“That’s your return on cash. Not bad, huh?”

Well, it’s about 10 times what you can expect from the stock market.

Trouble is…trouble. Being a landlord in an inner city is trouble. You get trouble from the tenants. Trouble from the city. Trouble from the pipes, the roof, the wires…lead…asbestos — everything. Buy city apartment buildings and you are asking for trouble.

But if you can handle the trouble, hey…see you in Charm City.

Bill Bonner
for The Daily Reckoning

Investment Alternatives in a No-Growth Market originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

That was what the crew told passengers on the Costa Concordia just before it sank.

And it was what the crew of the USS America — the biggest cruise ship of all — were telling passengers last week.

Tutto va bene.

Trouble was, tutto was not going as bene as they claimed. Instead, the ship is sinking.

Stocks sank on Friday. Oil slipped below $100. And the yield on a 10-year T-note dropped to 1.89%. Gold kept going up.

None of these are signs that the voyage is going well.

The US economy has come back to output levels of ’07. But this feeble rebound not only holds the title of “weakest post-war recovery ever,” it also shows that something else is going on. Most economists have no idea what. So, they just think this “recovery” is unusually slow. Ben Bernanke, for example, has pledged to hold down interest rates (at negative real levels) for another three years. He also let it be known that he has his finger on the trigger, ready to blast out some more QE at a moment’s notice.

Last week produced news that the economy expanded in the previous quarter. It went up at a 1.8% annual rate, far below the 3% consensus estimate of economists. That returned it to ’07 output levels, but at what cost? The feds have added $6 trillion in new debt to regain some $600 billion in annual output. Whoa!

And indications are that growth will be just as disappointing this year as it was last. Bloomberg has the story:

US economic growth may not top 2 percent this year and a third round of quantitative easing by the Federal Reserve would have little effect, said Martin Feldstein, a professor of economics at Harvard University.

“We’re going to have a hard time reaching 2 percent this coming year,” he said… The economy is still in a “danger zone,” Feldstein said, even as the recession risk “is less now than it was.”

Feldstein, speaking before the GDP report was released, said last year’s growth in household spending was largely due to consumers drawing down their savings, which he said they won’t be able to maintain this year.

Another Bloomberg report tells that consumer spending is already weakening:

Spending at retailers lost momentum each month in the fourth quarter, slowing from a 0.7 percent gain in October to a 0.1 percent increase last month. Merchants including Macy’s Inc., Gap Inc. and Target Corp. cut prices to attract more business during the holiday shopping season…

Government agencies also struggled last quarter as they cut spending at a 4.6 percent annual rate, the fifth straight decline. For all of 2011, government spending dropped 2.1 percent, the biggest decline since 1971.

Our guess is that consumer spending will weaken further as the bear market in housing gets worse. December house sales were the worst in nearly half a century. AP is on the beat:

The Commerce Department said Thursday new-home sales fell 2.2 percent last month to a seasonally adjusted annual pace of 307,000. The pace is less than half the 700,000 that economists say must be sold in a healthy economy.

About 302,000 new homes were sold last year. That’s less than the 323,000 sold in 2010, making last year’s sales the worst on records dating back to 1963. And it coincides with a report last week that said 2011 was the weakest year for single-family home construction on record.

The median sales prices for new homes dropped in December to $210,300. Builders continued to [slash prices] to stay competitive in the depressed market.

And guess what? The outlook for housing is still not improving. Business Insider explains why:

Michelle Meyer, the well-known housing analyst for BofA/ML, has some bad news: The housing crisis isn’t over.

In fact, in her 2012 outlook piece, she says it’s “far from over” and that prices still have another 7% to decline nationally.

The basic problem: There are still tons more foreclosures or “liquidations” yet to come…our securitized products research team estimates another eight million homes will be liquidated over the next four years, which adds to the six million homes that have already been liquidated since 2007. All told, we expect 14 million foreclosures or a quarter of all homeowners with a mortgage.

Ms. Meyer’s estimates seem rather optimistic to us. We’d guess that house prices will go down another 20%. Maybe more. Because, people have less money to spend on housing. Real disposable incomes are lower today than they were a year ago.

People who buy houses don’t really worry too much about the price. What concerns them is the monthly payment. They buy as much house as their monthly income will allow.

That was the real driver of the housing bubble of ’05-’07. Interest rates had been going down for 30 years, lowering monthly mortgage payments. That made it easier to pay a mortgage. Housing prices were going up steadily, giving the impression that houses were a good investment. And the mortgage industry would lend to anyone, solvent or insolvent, jobless or working, dead or alive. That put a lot of air into the housing market.

Now, interest rates are still going down, as near as we can tell. But with incomes going down and lenders much more cautious, the air has whooshed out of the market. It’s no longer pressure-packed. Now it’s vacuum-sealed.

Remember, household debt-to-income was only 70% at the beginning of the ’80s. Now, it’s 120%. In order to get it down, households need to unload debt — especially mortgage debt.

That is, they need to save. Savings rates have recently fallen…to 3.5% down from 5.7%. They will probably go back up as the Great Correction continues.

Which will mean…housing will fall, maybe by 20% more.

Let’s see, housing falling…incomes falling…consumers retrenching…negligible GDP growth…

Tutto va bene!

But back to why the US is going to hell…

The country has been at war in two out of three years since 1989. The interesting thing about it is that 1989 marked an historic juncture. It was the year that the US had no more worthy enemies. The Berlin Wall fell that year. The Soviet Union bit the dust. Francis Fukayama said it was maybe the “end of history.” Charles Krauthammer said it was the beginning of a new world, with only one superpower. He called in a “uni-polar world.”

But a country that has been taken over by its military industry cannot permit peace. It must make war — either against its own people or against some other people. Having no suitable enemies, the deficit-fatted pentagon, its rich lobbyists and the nation’s lard-butt patriots had to find some unsuitable ones.

One of our new, old-fashioned conservative friends explained what happened next:

They turned to the Mideast. Why? As enemies, the Arabs/Muslims have several advantages:

• There are not many in the continental US; not enough to influence elections or run much of a counter-propaganda campaign

• There’s oil in the Mideast; the oil companies contribute a lot of money to campaign coffers. And oil really is a strategic commodity

• Americans don’t understand Arabs or Muslims…yahoo Christians don’t trust them. The Jews hate them.

•   They can’t really do us much harm. We can fight them forever…at huge expense and never win or lose.

• It allows us to make common cause with Israel’s right-wingers…and brings in a lot campaign money from Jewish groups. That’s why all the Republican candidates — except Ron Paul — are pro-war.

Bill Bonner
for The Daily Reckoning

Why Economic Growth Will Continue to Disappoint in 2012 originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

At least, that is what you might think from reading the newspapers. Unemployment is going down. Consumer debt is going up. Even the housing market is showing signs of improvement.

Gold is rising — investors seem to think inflationary pressures are building. The 10-year T-note yield is back over 2%. And stocks are having their best January in 15 years…

And now, once again, the commentariat is talking about a ‘recovery’ from the Great Recession.

But we’ll give it to you straight, dear reader. There wasn’t any Great Recession and there won’t be a recovery. You don’t recover from what ails the US economy. You die. Then, a new economy can be born.

Still, there are many recovery sightings. But so far, the recovery itself remains as elusive as Bigfoot.

Here’s Bloomberg, with more details:

A decline in unemployment and pickup in manufacturing point to accelerating US growth. Some economists say the numbers may not be as good as they look.

One reason: the severity of the economy’s plunge in late 2008 and early 2009 after Lehman Brothers Holdings Inc. collapsed threw a wrench into models used to smooth the data for seasonal changes, according to analysts at Goldman Sachs Group Inc. and Nomura Securities International Inc.

“The impact of the financial crisis does seem to have affected seasonal factors for several indicators,” Andrew Tilton, a senior economist at Goldman Sachs, said in a telephone interview from New York. It “might tend to make things look a little better in the early winter and look a little worse in the spring time.”

Most economic data are adjusted for seasonal changes to facilitate month-to-month comparisons. Without those changes, for example, construction would always pick up in the summer, when the weather is milder, and decline in the winter.

The adjustment process is unable to distinguish between a one-time shock, like Lehman’s demise, and a recurring issue that would need to be smoothed away. For that reason, the mechanism gives some data a leg up from about September through about March before turning negative the rest of the year.

The economy contracted at an average 7.8 percent annual pace from October 2008 through March 2009, the worst back-to-back quarters in the post World War II era. The 18-month recession ended in June 2009.

The adjustment process “has been knocked out of whack by the financial crisis,” Ellen Zentner, a senior US economist at Nomura in New York, said in a telephone interview. “The model ends up adjusting for a growth pattern that isn’t there. The sudden drop-off in economic activity in late 2008 is not a pattern, it doesn’t happen late every year. It was a one-off event.”

In effect, the models are over-compensating…trying to make sense of the big collapse of ’08-’09 by treating it as though it were a seasonal adjustment issue. If the winter weather were so severe as to cause such a big drop-off, the machines reason, we must move the bar lower next year. Then, even a modest improvement will look spectacular.

But Goldman’s economists estimate that unemployment will average 8.5% this year — almost unchanged from last year. That is not a recovery. And we have to wonder…what will power the ‘recovery’ analysts believe they seem coming?

Not household spending. Households don’t have any money to spend. What then?

Nothing. There will be no recovery. Instead, the US economy is in the process of zombification and ossification…which is what happens when the feds refuse to allow dead-men industries to die.

Ottmar Issing, of the European Central Bank, is on the case:

“The problem of ‘too big to fail’ is that it has made society — more precisely, the taxpayer — hostage to the survival of individual financial institutions…the taxpayers’ billions committed to rescue supposedly systemic institutions has dealt a big blow to confidence in the free market system…and has in turn become a threat to free societies.”

Well, yes. Now, the game is rigged. The fix is in. The zombies are dealt the aces. The rest of us get a bum hand.

But wait…didn’t the US government make a profit from its loans to the banks? Didn’t the banks pay back the money? Didn’t taxpayers come out ahead?

Oh dear reader, please stop…we can’t stop laughing. We’re afraid we might pull a muscle.

Imagine a bartender. He realizes that his customers have been handing out IOUs all over town — including to him. And he also knows his customers can’t pay. People are beginning to wonder…they’re beginning to discount the IOUs. A crisis is coming…

What does he do? He lends the customers more money and buys the IOUs from the other merchants! Naturally, the value of the IOUs goes back up. Because now, holders know they’ll get their money. Even the value of the IOUs owned by the bartender go up. Wonder of wonders, he has even made a profit on the deal!

Happy days are here again.

Which reminds us of Hemingway’s conversation between Bill Gorton and Mike Campbell.

Bill asks; “How did you go bankrupt?”

Mike answers: “Two ways. Gradually. Then, suddenly.”

We’re still in the ‘gradually’ phase. Stay tuned…

Bill Bonner
for The Daily Reckoning

Confusing Gradual Bankruptcy with Economic Recovery originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Then, on Friday, S&P downgraded several European nations’ debt. This brought the debt of Europe’s stabilization fund, the EFSF, into doubt too. Suddenly, Europe was gurgling again.

Mario Draghi, head of the European Central Bank, wondered on Tuesday if the ratings had any value. After all, he had given the banks 489 billion euros in December. A lack of cash will no longer bring them to grief. Then, what will? That is, of course, what we will find out.

The ECB is scheduled to relax its bungee collateral requirements. The bank will now lend against used cars and day-old bread. But Draghi suggested that he had no intention of following America’s Fed in its irresponsible “quantitative easy” path. Instead of buying the bonds directly, he and the banks will collude to defraud the public. The ECB will pretend to be in control of the situation. The banks will pretend to be solvent.

The conceit of modern public finance is that people with good political skills can do a better job of deciding which banks are solvent than the marketplace. ‘Raw capitalism,’ is just too impulsive, they claim. It makes hasty decisions, often throwing out the baby with the bath water, and the bathtub too. By contrast, wise bureaucrats keep their wits about them, even in a crisis.

The Financial Times is running a series it calls “the Crisis in Capitalism.” The writers claim capitalism needs adult supervision. Samuel Brittan, for example, says it “requires…the use of monetary and fiscal policy…” to keep it doing what it is supposed to do. Where’s that? He thinks he knows. It is “a means to freedom and prosperity, not an end itself.”

We disagree on both points. Capitalism could care less whether people are prosperous or poor. As to fiscal and monetary policy…he presumes settled the very point that is at issue — whether central planning, by bureaucrats, improves market outcomes.

Last Thursday, the US Fed helped to resolve the doubt we never had. It released records of its internal discussions in 2006, when the US housing and finance bubble was reaching its peak. On the evidence provided, the feds never had their wits about them, even when the going was good. Resumed in The New York Times, we discover that “top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers. The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was ‘rising through the roof.’ But the officials, meeting every six weeks to discuss the health of the nation’s economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy…instead they continued to tell one another throughout 2006 that the greatest danger was inflation — the possibility that the economy would grow too fast.”

While the American authorities couldn’t spot a crisis, the Euro- fixers were actively creating one. Draghi is a veteran of the World Bank, the Italian Treasury, and Goldman Sachs. He was on the job in Rome while Italy was building up the debt it now finds so hard to pay. Christine Lagarde, now head of the IMF, was French finance minister from 2007 to 2010 — when France increased its public debt by about 50%. Dust any financial crime scene from the last 20 years and you will find prints from them and the whole confrerie of public payroll dunces who now claim to be fixing the system. They are the very same people who brought Europe…and the world…to the brink of financial disaster. And now they preside over more monetary and fiscal policy tweaks, more controls, more regulations, more ‘stress tests.’

Most likely, the leading financial institutions…as well as most of the sovereign nations of the developed world… are already insolvent. We say “most likely” because neither we nor anyone else can know. Real solvency — like the value of the ECB’s collateral — is not judged by earnest ratings, phony stress tests, or bureaucrats. It’s determined by the real stress test of the marketplace.

No one ever knows what anything is really worth — especially what financial institutions with complex holdings and obscure business models are worth. Not even their owners know. The accountants had to interrupt Jimmy Cayne, CEO of Bear Stearns, during a bridge tournament in 2008, to tell him his company was broke.

Insolvency is like death. When conditions change, so does life expectancy. You discover when a company is broke by testing it. We saw, for example, what the banks were worth under the benign credit conditions leading up to 2007. Then, market conditions changed. Under the stress of the market’s new challenge, Bear Stearns and Lehman Bros. died. This caused investors to wonder about the rest of them. But instead of allowing the process of price discovery go on, US authorities stopped the test.

What a pity. We don’t know which bank…or which nation… is insolvent. Most likely, they all are.

Regards,

Bill Bonner
for The Daily Reckoning

A Real Stress Test: Could Any Major Bank or Developed Nation Survive? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

One of the big questions of the year is whether China blows up or not. Hard landing or soft? When will the clock strike midnight on the Chinese? Things are slowing down, and it feels like it’s getting late.

But first, why does this matter? China matters because China is big. If this were 1980 — when China’s economy was about one-seventh the size of the US’s economy, no one would care. Today, the appetite China has for raw materials is no secret, and is one of the main reasons why miners and oilmen are flush with cash. So if you invest in miners and oil companies, then the answer to the hard landing question decides the fate of your portfolio.

For some ideas on this front, I turned to my friend Ben Simpfendorfer, founder of the Hong Kong-based Silk Road Associates (and author of an excellent book, The New Silk Road). He also writes a very good letter focused on China called China Insider. Ben speaks both Mandarin and Arabic and has traveled extensively in Asia and the Middle East. As such, he has an inside look on two cultures that few Westerners will ever see.

I admire his work for these reasons, and also because he is critical and thoughtful about China’s prospects, whereas many others are either unfailingly sunny or permanently apocalyptic.

In his latest letter, which just hit my inbox this morning, Ben addresses the very question I open with: hard landing or not?

“I expect no hard landing in 2012,” Ben writes. As for 2013-15, Ben is much more bearish. As with any prediction, though, the reasoning is more important (and more interesting) than the conclusion. The key is to understand that China still has a lot of spending power. Let’s take a look…

“China could afford to go on another debt binge in the event that the economy appears to slow abruptly,” Ben writes. “Sure, it has implications for medium-term growth (and I’ll get to that in a moment), but the ability to continue borrowing, or further relax fiscal and monetary policy, does rule out the risks of a hard landing in 2012.”

In the past, China was able to skirt the financial crisis because it simply commanded its state-owned banks and state-owned firms to embark on big projects. It has the firepower to continue to do so in 2012. One place it will certainly focus on is housing. Housing prices are falling nationally. But housing markets are intensely local. You should be suspicious of attempts to aggregate them. Ben appreciates this.

“A look at major city clusters around the country shows that property sales have collapsed in areas centered on Beijing, Shanghai and Hangzhou,” he writes, “even as they remain steady in places such as Chongqing, Hefei and Shenyang.”

Ben continues:

“My own experience — traveling through nearly a dozen second-tier cities over the past six months — echoes the data, with some cities clearly about to suffer a horrible property crash even as others look more balanced owing to less supply, but also a stronger local domestic economy (typically the coastal provinces) that is less reliant on fiscal stimulus.”

As to that stimulus, China’s government plans to build 7 million public housing units annually over the next five years. This is a big increase from the 3 million units China’s state-owned units built in the years 2008-10. And it’s also a lot bigger than the 5 million units the private sector created over that time.

But think what this means. It’s an artificial stimulus. Its goal is mainly to keep people working. However, the market itself clearly does not support such an increase. Ben peels back some of the numbers on the profits earned by builders.

The five large state-owned firms earn profit margins of only 8%, according to data compiled by SouFun (a leading real estate data provider). This compares with 15-25% profit margins for private companies in recent years. I’m taking these at face value, though my suspicion is that the data overstate the profitability of the public firms.

You know, though, how economics works. As profit margins shrink, this is the market’s signal that the capital is perhaps best used elsewhere. Governments can ignore this signal, at least in the short term. But private firms cannot. They must serve the wishes of consumers or they will go out of business eventually. They also have owners who will see that the profits no longer compensate for the risks. They will pull back. And this is what’s happened.

This next chart is telling. It shows you the number of units built each year by private and public firms. You can see the big jump in public construction, which was part of China’s stimulus plan. But look at that blue line. It’s leveled out and declined last year:

“In effect,” Ben sums up, “the shift toward construction of more public housing implies that state-owned firms, operating at smaller margins, will capture an ever-larger share of economic activity…at the expense of the more-dynamic private sector.”

So more and more of China’s economy becomes dependent on government spending. We know that such government spending leads to bridges to nowhere. Or, in China’s case, empty office buildings, empty condo towers, empty malls and, indeed, empty cities. That’s a big problem — but it’s probably not a 2012 story.

Ben concludes: “Whether because of chances that a property crash is limited to certain parts of the country, or because of China’s ability to pump more credit into the economy, the odds are that 2012 turns out to be surprisingly dull, with the economy slowing, but still growing at above an 8% rate…”

It’s also an election year in China. Senior leadership will change in China in late 2012. All the more reason to expect massive spending from government coffers to keep the spell unbroken, if only for another year.

The time frame just beyond 2012 is the problem. Maybe the government spends so much that it produces reasonable-looking economic numbers and keeps people employed, but the resulting economic growth would have been a fantasy. Economies exist only to satisfy human wants and needs. They do not exist to produce numbers that look good in economic reports. China’s economy will have failed, just as other state-directed economies have failed, in its essential task of serving consumers. It becomes, then, an expensive fiction. China’s coffers, as rich as they appear, are also not inexhaustible. All of this means there is an inevitable quality to the collapse here, though the timing is hard to call.

At least for 2012, it seems investors can count on China coming to the table with its usual gusto to spend money. But the clock is ticking and midnight approaches.

Regards,

Chris Mayer
for The Daily Reckoning

China’s Cinderella Story originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Welcome to another Friday the 13th… Where if things aren’t exactly scary, they’re definitely surreal.

The Fed performed its ritual year-opening document purge overnight… unveiling the transcripts from Federal Open Market Committee (FOMC) meetings in 2006.

The account of The New York Times is so remarkable, we allow it to speak for itself: “The officials… gave little credence to the possibility that the faltering housing market would weigh on the broader economy.”

“We just don’t see troubling signs yet of collateral damage, and we are not expecting much,” said New York Fed chief Tim Geithner, who now afflicts us as Treasury Secretary.

We pause here to note that in December 2004, we posted a report called The Total Destruction of the US Housing Market.

It was the only conclusion we could draw after seeing an internal Fannie Mae document revealing the firm’s exposure to the derivatives market. So provocative was the report that Fannie pulled the document off the Internet and fired the poor guy who wrote it.

Back to the Times: “The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.”

Might we submit the problem was a more basic one: Hubris. Or as Friedrich Hayek called it, The Fatal Conceit.

“The power and responsibilities of the Federal Reserve… are premised on the idea that somehow its managers know something that we do not,” writes Laissez-Faire Books executive editor Jeffrey Tucker. “This is the essential error of the central bank’s planning powers.”

“It’s… embarrassing for economics,” grouses University of Pennsylvania econ professor Justin Wolfers to the Times. “My strong guess is that if we had a transcript of any other economist there would be at least as much fodder.”

Yeah, probably.

More surrealiciousness: A CNN alert just flashed on our desktop announcing that the Obama administration plans to elevate the Small Business Administration to a cabinet-level agency.

Whether the agency will do anything to make it easier for small business to stay in business… we suspect is another matter entirely.

Major U.S. stock indexes are down today… and in keeping with the surreal Friday the 13th theme, there’s no obvious reason.

JPMorgan’s profits are down 23% year over year… but that’s no surprise. Rumors swirl that S&P is about to downgrade Austria. And maybe France. Maybe as early as today. Or not.

In any event, the Dow and the S&P are both down about three-quarters of a percent.

The U.S. trade deficit ballooned by 10% in November, according to a report out this morning from the Commerce Department.

At $47.8 billion, the gap was wider than any of the guesses submitted by dozens of economists to Bloomberg.

It’s the first time in five months the trade deficit grew. Blame it mostly on rising prices for (imported) oil.

Addison Wiggin
for The Daily Reckoning

The Basic Problem With the Fed originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Mike Meyer and I were discussing the existing home sales numbers shortly after they came out yesterday morning, and noticed that the headlines on most of the TVs on the trading floor were proclaiming the positive 4% jump in sales compared to last month. But the actual number of homes sold was below estimates, and also below last month’s number, so obviously something was amiss. A deeper dive into the numbers showed us what was causing the discrepancy. The NAR had ‘adjusted’ last month’s number down by 750,000 (a 15% downward revision) which made this month’s 4.42M sales 4% higher than last month’s. And the adjustment made the YOY numbers look even better with a 12.2% increase.

We had a big discussion on the desk last week when a story came across that the National Association of Realtors announced they were making several adjustments to their past estimates of existing home sales. The adjustments were as follows: 2007 sales were 11% lower than previously reported, 2008 sales were 16% lower, 2009 were also 16% lower, and sales last year were 15% lower than the NAR originally reported. The timing of all of these corrections is awfully convenient, as every YOY number during the election year of 2012 will now be much larger than if these discrepancies weren’t uncovered. It is tough getting a read on the economy when the data being reported is in question, one of the reasons we like to keep an eye on the shadow stats website which gives a much different look at the data than what is being fed to us by the administration.

Today’s data cupboard is pretty full and will include the latest estimate of US GDP for the 3rd quarter. Economists think there won’t be any change to the previous estimate that the US economy grew 2% during last quarter. Personal consumption and the GDP price index for the same quarter are not expected to be changed either. And since it is Thursday we will see the weekly jobs data. The numbers aren’t expected to be as good as they were last week, with 380K workers filing for initial jobless claims last week compared to 366K the week before. Continuing claims are projected to be down slightly at 3600K.

A story on NPR this morning was pointing to the Consumer Confidence numbers which will be released later today. U. of Michigan confidence numbers are predicted to have risen to 68 in the December reading from 67.7 in November. The reporters on the radio were pointing to higher consumer confidence as a result of the current administration’s efforts to lead the US economy through these troubling times. Not sure a move of 0.3 is something to hang your hat on, but I guess it is a step in the right direction (if it comes in as expected). And the last two pieces of data out later today will be the Leading indicators and House price index, both of which are expected to be up just slightly.

The dollar drifted lower versus most of the major currencies yesterday, with the exception of the euro (EUR) which is down a tad. The euro had soared higher early yesterday after it was reported that the ECB had injected 489 billion euros into the banking system. But after digesting the news, currency traders quickly reversed these gains. It is a similar situation to the TARP funds which were offered by the Fed during the height of the US credit crisis. US banks were encouraged by policy makers to borrow the money at below market rates as a way to ease the credit crunch. Banks fell in line and borrowed the funds as they were instructed to do, after all, the rates being offered were below market! But it was discovered that a number of these banks were desperate for these funds from the treasury, and suddenly the TARP borrowings became a scarlet letter for all banks, both healthy and not. The ECB borrowings have taken a similar path. Banks were encouraged to borrow, and given excellent terms on the three year loans. But the markets were shocked by the amount of funds the banks accepted, and now many are concerned just how desperately the banks needed liquidity. It is a difficult position for the ECB, as they were told by the markets that they needed to take some dramatic measures, but when they do the markets are concerned by just how big a move they made. It almost seems like traders really don’t want the euro crisis to leave the headlines, as they are making good money with all of the volatility the crisis is causing.

I had a reader encourage me to talk about other currencies beside the euro, and I do like to try and mix it up, but the euro has been dominating the news lately, so it is hard not to focus on it. But here is a bit of news on some of the other currencies out there.

The pound sterling (GBP) matched the moves of the euro yesterday, dropping in the afternoon before rallying back up in overnight trading. UK economic growth accelerated more than previously estimated in the third quarter, helping to push the pound higher. UK GDP rose 0.6% in the third quarter, which was slightly higher than the previous estimate of 0.5% growth. But the BOE warned the third quarter growth would not be repeated, as some of the increase was due to a negative adjustment to the second quarter numbers. BOE officials think the UK economy is going to stall during the fourth quarter and don’t look for any growth during the first half of 2012. As I reported yesterday, the BOE is looking for new and exciting ways to stimulate their economy, so expect another round of QE in 2012.

The Swedish krona (SEK) was one of the best performing non-commodity based currencies yesterday as a report showed Sweden’s producer prices rose 0.8% last month. The Riksbank cut rates by 0.25% earlier this week, a move which was well received by currency investors. The slight increase in PPI has many of these investors thinking this week’s cut will be the last. Norway had also cut rates 0.25% last week, and has also indicated this will be the last rate cut for a while.

At least one country in Europe is actually talking about raising rates. Hungary currently has the EU’s highest benchmark interest rate, and the central bank is indicating they may need to raise rates further. The higher rates haven’t helped the currency, though, as the Hungarian forint is the worst performing currency in the world since June 30.

The SNB has done a great job of keeping the Swiss franc (CHF) from appreciating versus the euro, but Swiss officials are still worried. The Swiss Finance Minister Eveline Widmer-Schlumpf said the government is considering additional options to keep a lid on the Swiss franc, including negative interest rates or capital controls. “If the situation deteriorated further in the foreign-exchange markets, we would have the opportunity to take certain accompanying measures,” Widmer-Schlumpf said at a hearing in Bern yesterday.

The Swiss franc appreciated to record levels versus the euro last year, but the central bank has been able to keep a lid on it since announcing they would peg it at 1.20 francs per euro in September. But fighting against the currency markets is fighting a losing battle, and I don’t think the SNB is going to be able to keep it from appreciating without instituting some of these ‘additional’ measures. That is unfortunate, as I hate to see anything that takes the free market away from setting prices.

Maybe the Swiss are looking at the Chinese currency and figure “if it works for them maybe we can get it to work for us”. The Chinese renminbi’s (CNY) value is set by the government on a daily basis, and while the Swiss seem to be moving toward a more tightly regulated currency, the Chinese are moving in the opposite direction. The People’s Bank of China (PBOC) says the Chinese economy is cooling which could lead to a further loosening in monetary policy. The PBOC cut bank’s reserve requirements for the first time since 2008, earlier this month, as Chinese inflation eased to the lowest in 14 months.

The Canadian dollar (CAD) climbed a bit yesterday versus the US dollar as crude oil edged higher. A report yesterday showed that retail sales in Canada increased, doubling economist’s predictions. Consumer demand and rising oil prices could force the Bank of Canada to start raising rates in 2012, which would certainly cause the loonie to appreciate versus the US dollar as investors continue to look for currencies with positive interest rate differentials to the US.

New Zealand boasts one of the best interest rate differentials to the US, and a report released today was good news for the kiwi. GDP rose 0.8% in the third quarter, beating economists’ estimates of a 0.6% rise. The central bank is forecasting a steady pickup in growth for 2012 on rebuilding of earthquake devastated Christchurch. Both the New Zealand dollar (NZD) and Aussie dollar (AUD) have been trading in a fairly tight range the past two days after seeing a nice move higher at the beginning of the week. The commodity currencies will still end out the week as the best performers versus the US dollar as investors gain confidence and move money back into these higher yielding markets.

Not much to report on the metals this morning, as they continue to trade in a range. Both gold and silver are slightly down this morning. A report yesterday showed that holdings in exchange traded funds dropped to the lowest level in more than a year as investors sold bullion to cover losses in other markets.

Then there was this… Chuck sent me a note to take a look at a story on Bloomberg which was titled ‘Bernanke prods savers to become consumers’. It talks about how Bernanke’s zero rate policies are finally having a positive impact on the US economy. One line from the story really caught my eye “When the Fed sprinkles happy dust on the economy, we always respond.” This wasn’t a quote from Bernanke, but it sure is indicative of what the folks on Wall Street want to see; the Fed sprinkling happy dust in the form of easy money on the markets.

Recap… US housing data showed a 4% increase, but the actual numbers were down (figure that one out). The euro was sold after investors worried about the size of the ECB lending. I talked about 7 currencies other than the euro, though they all are trading in fairly tight ranges in these light markets. Gold and silver continue to trend higher, but don’t have any dramatic moves. And Bernanke is credited with creating our latest economic recovery with all of the ‘happy dust’ he has been sprinkling on the markets.

Chris Gaffney
for The Daily Reckoning

Existing Home Sales: Up or Down? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

If you have been dreaming about that Spanish Hacienda or Portuguese villa in an olive grove, you are right to get excited.

But, PLEASE, PLEASE wait.

The deals are set to get much better despite brokers’ efforts to talk up markets. If, like me, you closely follow what’s under the bonnet of European real estate markets you will have found that these comments from brokers and journalists don’t give the full picture.

Sure, as the writers of articles like in the WSJ piece above point out, prices have fallen. But they are set to go into free fall in parts of Spain and Portugal. As for Greece…how far prices will fall and what currency real estate will change hands for is anyone’s guess. You would be insane to go there now and spend euros unless the deal is so good you are almost given a villa.

Ireland’s economy and real estate market is in deep distress. Four years into our crisis, prices are still falling. As I told you three weeks ago, a recent survey put Ireland on top of the charts for price falls so far this year. And as you have been reading in these alerts: My recommendation for Ireland is to only buy if you find a killer deal.

Ireland isn’t a buy…but there are nuggets in the debris. For now, at least, the best place to find these nuggets is in the fire sale auctions I have told you about.

Before we look at what really is happening in the rest of Europe — a word of caution…

Europe Has Gone to “No Bid”

“Price expectations have finally adjusted to the new reality. People are finally accepting that the game has changed,” says Joachim Wrang Widen, director of Christie’s International Real Estate in Europe.

This is the type of rubbish we have come to expect from brokers. Almost all markets in Europe are still “no bid”. There’s almost no activity.

Mainstream outlets across Europe and the US (this was quoted unquestioned in The Wall Street Journal) are more than happy to fill space with these half truths and misrepresentations. Sometimes the newspaper is trying to keep the real estate ads sections of their newspapers full.

I watched this play out in Ireland, too. The market in Ireland stopped in ’06 amid uncertainty over stamp duty (transfer tax) rates. By ’07 it imploded. Read how the following Irish deal is described, and then I’ll comment:

Earls Well that ends well
By Tommy Barker
Saturday, May 09, 2009

BUYERS, be brave — you’ll be the real winners at Waterfall’s Earls Well development — getting the best new homes, bar none, built in Cork (if not all of Munster) in decades. And, you’re being offered them for a bargain, value for money price.

Assertive statements, to be sure, especially when prices here for these smart, contemporary-designed country houses do indeed start at just over the €1 million level — at what is clearly the worst time ever for the country’s house builders and property market.

But, it’s true, there’s value, and quality of build here the likes of which you won’t have seen in a decade of the property boom. Had these houses been launched a few years ago, prices could well have been up to and over the €2m mark.

Nothing sold in this development. Not a single “real winner”. The developer hasn’t actually closed on the access land even now. This was written at a time when the developer’s business was unraveling and the Irish real estate market was dead and buried.

Why Pay Twice as Much as You Have to for Any Property?

So, tread carefully when it comes to attaching any significance to what you read or what agents tell you. It’s easy to get seduced by that villa in an olive grove. But you don’t want to pay double what you might pay in two or three years. It can take a very long time for markets to find their new equilibrium. Particularly in Europe where foreclosure and bankruptcy processes are much more complex and drawn out than in the US.

Over in Europe…

Firstly it’s important to understand that Europe (or these PIIGS) certainly isn’t a homogeneous market. Tuscan villas, for example, are predominantly owned by wealthy Italian families. The house may have been in the family for generations and is likely debt-free. The owner won’t sell unless he absolutely has to.

In the Algarve on the other hand…Irish people bought villas on golf courses at inflated prices with 100% mortgages from developers who are now bankrupt. This buyer in many instances is not making his mortgage payments. The banks are sitting on the problem. They might realize 250,000 euro from the sale of a villa with an 800,000 euro mortgage. The shortfall would need to be written off and the bank’s mortgage book would need to be written down. We see a similar situation on some of Spain’s costas.

A Tale of Two PIIGS…

PIIGS #1

So, we have places like Spain and Portugal’s tourist costas where British and Irish bought at inflated prices with finance. Many bought as investors in the final breaths of the bubble. Germans have also bought in some of these areas but they tend to be less leveraged and they bought as a second home they would use. The are less likely to be distressed. In these areas there can be major oversupply problems. There was too much construction — many of it poor quality or half built.

I visited Portugal’s Algarve on a scouting trip to find distressed opportunities two years ago. This is an area I like…and enjoy visiting. You haven’t yet heard about Portuguese distressed opportunities in these alerts because there are much better deals to come.

In many ways these markets mirror what has been happening in Ireland with two exceptions:

1. Fire sales haven’t really started the way we are seeing with the auctions in Ireland.

2. The economic outlook in Ireland is very bad. But there is a vibrant and booming multinational export sector. There is no bright spot to the economies of Spain and Portugal and the Spanish banks might be the time bomb that’s too big to fix.

Estimates put the total of Spain’s excess supply and distressed inventory as high as 2 million units. Much of this inventory is along the touristy costas. Unemployment is topping 21%. If you are under 25-years-old there’s a 46.2% chance you are unemployed. In a dramatic shift young people are clambering to get visas to work in countries like Chile and Brazil.

There has been no genuine effort to move this inventory of 1 million-2 million units (depending on who’s guesses you believe). Spanish banks have offered finance of up to 100% for some buyers of distressed properties on their books. But the prices offered just don’t make any sense — they tend to be between 70% and 100% off peak prices. On the open market these units would have to be discounted by at least another half to sell. My point is we have no idea, nor does anyone else.

Before we will have any sense of how far prices will fall we need a market. This inventory will have to be dripped to the market. In Ireland we have been able to get a snap shot picture of the market through the fire sale auctions. They tell us that prices will likely be 70% to 80% off peak prices if you need to sell today.

Driving across Dublin from the International Financial Services Center last weekend I visited a dozen condo buildings that are complete and now controlled by our “bad bank” NAMA. In the coming months these buildings will be sold. The buildings I visited alone hold a multiple of the inventory that was sold in ALL these fire sale auctions. That’s a lot of inventory to be added to an illiquid market. This will put further downward pressure on prices. That’s why I believe Ireland is only a buy if you find and can bid uncontested on one of those nuggets.

In Spain and Portugal they haven’t even got to the first phase of recognizing the problem. The market first needs to be tested through a vehicle like these fire sale auctions we have in Ireland. That will give us a starting data point. Then we can guess how far prices will be pushed down as this excess inventory is absorbed.

Don’t hold your breath about Spain or Portugal growing their way out of their problems. Don’t hold your breath for a surge in demand for second homes from northern Europeans. The British were always the biggest buyers here and they have their own challenges.

PIIGS #2

The other PIIGS are places like Tuscany and Sicily in Italy…Granada in Spain…and for simplicity let’s lump France’s Provence and the Cote D’Azur in here, too. Leverage and distress is much less of an issue in these markets. There’s isn’t this oversupply problem. While prices rose dramatically in the boom, the construction frenzy we saw elsewhere wasn’t permitted.

If you have your eye on a Tuscan vineyard and/or remote Spanish hacienda you might be wondering what a glut of condos on the Costa del Sol has to do with you. My point is that when this inventory hits the market (and it has to sooner or later) it will drag all prices down. Sure, the prices of condos on the Costa del Sol will fall further but everything will be affected.

This is a time for keeping your powder dry. Prices are only heading in one direction for the moment. We have been waiting for the opportunities to come.

Get Ready for the Property Opportunity of a Lifetime…

Two years ago I told you about a strong opportunity in Granada, Spain. Since then I have run the rule over more than 100 deals…and passed each time. Our patience is being rewarded as the deals are getting better. It’s frustrating though that we have to wait so long. But when the opportunity comes we’ll be ready to act. It might just be the opportunity of a lifetime. The real estate markets of Europe’s most attractive second home markets were in disarray before this current crisis engulfed us.

A story/urban myth about a major US developer and investor goes as follows: As a real estate crisis took hold he gathered with a golden circle of developers and bankers to figure out how they could re-energize the market and save their businesses. To start, they traded tales about how bad things were. Our friend stood up and put on his coat. When asked where he was going he replied “to the beach, call me when all this is over”. Sometimes doing nothing is the best action we can take.

The first quarter of next year I plan to be a very good customer of Irish budget airline Ryanair. I’ll be making multiple scouting trips to Spain, Portugal, Italy…and Greece once we see what will happen around their default.

Stay tuned…go to the beach and wait to hear from me when it’s time to act in Europe. I’m hoping it will be in the not-to-distant future.

Regards,

Ronan McMahon
for The Daily Reckoning

P.S. If you do come across a fire sale that you feel is just too good to pass up, remember my golden rules of buying distressed property. Only buy quality…the creme de la creme. Don’t ever buy in a half-built project. And don’t buy in a project where there isn’t a functioning and funded HOA with enough owners contributing to maintain services.

Europe on Sale? Baloney! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

This morning, the euro has gapped up 1-cent after it was announced that Italy had successfully auctioned off 5 billion (euros) of bills… (At the highest rate in a month of Sundays). But since I came in, the euro has dropped again, thus wiping out most of that 1-cent gain earlier. Up and down, Up and down… Reminds me of that classic song by the Ohio Players, Love Rollercoaster…

But in the end, folks… The euro will continue to lose ground, as long as the markets and media carry on about the Eurozone debt… That’s not to say that I don’t think it’s not bad… For it is… But as bad as our debt? Hardly! Oh… To give you a sample of what I’m talking about…

How many people heard about the largest municipal bankruptcy in US history that took place yesterday? That’s right… Jefferson County, Alabama, declared bankruptcy after failing to gain support for a deal to reduce their debt… Now, here’s a classic statement by the County Commissioner, and one that will be repeated here in the US on a national platform one day…

“We’ve reached the last resort. We could continue and keep kicking this can down the road, but I think the people of Jefferson County have had enough.”

But for now… The markets and media want to focus on the Eurozone… They flip flop, though, as you may recall just last summer when the focus was on US debt 24/7. And personally, (this is my conspiracy hat, so if don’t want to go through this, skip ahead) I feel the media is directed by the government… So… As I’ve told you many, many times before, the US needs to have a cheaper dollar so that they can repay debt interest with cheaper dollars. But… They can’t have the dollar fall off a cliff… So, when things begin to get a little too much in dollar strength, oddly, the media and thus the markets begin to focus on US debt again, and the dollar loses ground until… It looks like the dollar is ready to fall off that cliff, then oddly, the media and markets focus on Eurozone debt…

OK… Glad you stayed along for the ride… Or if you skipped ahead, I’m ready to carry on my wayward son!

Yesterday, only Japanese yen (JPY) and Chinese renminbi (CNY) were able to post gains versus the dollar. Today, most currencies are seeing some sunshine versus the dollar, with the euro up slightly at this point. Gold is down $5 this morning… Which is odd to me… Again this is just Chuck’s opinion, but I think that any time it looks like the risk assets are going to have a bad day, the price manipulators take that time as an excuse to bring gold down again… For, if gold was trading on fundamentals only… The shiny metal would be shining even brighter during times like this, because there is so much uncertainty in the Eurozone right now… But it’s not… Sso what does that tell you? I told you what it tells me…

Of course those of you who go with the “flow” would say right off the bat that gold is down because the dollar is up… But there’s more to it than that, I’m afraid… And to that… I have this note from King World News… “Geopolitical analyst James G. Rickards, who spoke at GATA’s Gold Rush 2011 conference in London in August, told King World News yesterday that a second but secret London Gold Pool is being operated by Western central banks to suppress gold’s price…and that he doesn’t expect it to survive more than two more years.”

And going back to Japanese yen… It appears that the Bank of Japan (BOJ) has intervened at least three times since Halloween last week. The poor manufacturing sector of Japan has really taken the brunt of the 50% gain of yen in the past five years, right on the chin. They’ve seen China overtake them as the World’s second-largest economy, and now the latest blow to Japan is being seen by carmakers that are moving more and more production overseas… I know it’s probably not seen as a safe idea right now, but fundamentally, Japan is a mess, and the yen should not be as strong as it currently is… But, it is what it is… I would just say that buying yen at these current prices isn’t on terra firma, in my opinion.

The Swiss have already gone so far as to clamp the franc’s (CHF) rise (which was also not fundamentally supported) by placing a ceiling on it versus its biggest trading partner, the Eurozone’s euro. Will Japan be next? I think that it would be a “toward the end” type thing if they did, but Japan could very well follow Switzerland here…

In Australia overnight, they printed a jobs report that no one noticed, because of all the focus on the Eurozone… But I did… So, now you will! HA! Australia created 10,100 jobs in October. Not the kind of job growth they had there a few months ago, but still positive, and nothing to ignore for the island nation. Unfortunately, with all the focus on the Eurozone, the Aussie dollar (AUD) was not able to rally on the employment report… UGH!

So… If all the focus is on the Eurozone, we may as well head back there to see what else we can talk about… I saw this quote and thought it made sense… Jean-Claude Juncker, head of the Eurogroup, said that while some Eurozone countries are struggling with a sovereign-debt crisis, the currency is not in trouble. “The euro is not in crisis,” Juncker said. “I become filled with rage when people say the euro is in crisis. We have a crisis of public debt in certain Eurozone members, and one in particular, but the euro is not at stake.”

Then there was this… Yesterday Mike told you about the rot that’s still on Housing’s vine… To follow that up, we have a story on Adivsorone.com about loan delinquencies… Here’s a snippet from that story…

Loan delinquencies are on the rise again for the first time since the end of 2009, an ominous sign for a housing market that has yet to gain its footing in a battered economy. News of the 5.88% increase in delinquencies at the end of the third quarter came as a surprise to TransUnion, which compiles the data. The downturn spells more trouble for Fannie Mae and Freddie Mac.

The Chicago-based credit information provider said the housing market reversal came after six consecutive quarters in which the number of consumers making timely mortgage payments increased — a trend TransUnion executive Tim Martin expected to continue.

Martin blames economic shocks for the change in trend; in a TransUnion release issued Tuesday he cited “the US credit rating downgrade, stock price declines, European debt concerns, stubbornly high unemployment, more downward pressure on home values and low consumer confidence. All of this affects a borrower’s net worth and desire, or ability, to continue making house payments — especially if they are facing negative equity in their homes due to price depreciation.”

It is estimated that more than one-quarter of all households hold mortgages worth more than their houses. The TransUnion third quarter report shows that mortgage delinquencies rose in 40 states and in 64% of US metropolitan areas. Just 21% of US metropolitan regions saw an increase in delinquencies in the second quarter, a difference TransUnion called “significant.”

To recap… The euro has bounced around overnight, first rising 1-cent on the news that Italy had a successful bill auction, but then retreating when it was learned that Italy had to pay the highest rate in a month of Sundays on those bills. Focus right now is all about the Eurozone debt, but did anyone else see that the largest municipal bankruptcy in US history took place yesterday? Jefferson Co. Alabama, decided to stop kicking the can down the road… When will that happen on a national stage?

Chuck Butler
for The Daily Reckoning

Italy Successfully Auctions Bills originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

An Irish friend tells us what it was like for a renter during the great housing boom.

“The idea was that housing prices always went up. Ireland is a small country. There were new people coming in from Eastern Europe. There were also a lot of Irish people coming back from overseas. We were the ‘Celtic Tiger,’ after all. The land of opportunity.

“So people thought housing prices could only go one way — up. And you had to get on the escalator as soon as possible. Otherwise, you would be left behind. You had to buy a starter home…like one of these new apartments.”

We were driving by a housing development, almost in the shadow of the Wicklow mountains. On the right hand side was a very new apartment complex.

“See all those apartments. They’re empty. They can’t sell them. They were just a little late to the party, I guess. They probably started construction in 2006 and by the time they were ready to sell, the lights had already been turned off.

“You had to buy a starter home when you were in your 20s so that you could trade up to a family home when you were in your 30s. Prices were rising all the time, so if you didn’t have a starter home to trade in you’d never have the money to buy a family home. I guess that meant you couldn’t have a family and your life would be ruined.”

The Irish real estate market has gone bust. But looking in the window of a real estate agent, it appeared to your editor that the boom-time spirit had not been completely crushed. Prices — based on US equivalents — seemed reasonable.

But reasonable is what you get in the middle, not what you get at the top or the bottom. At the top, the house might have sold for twice what it sells for today. At the bottom, it should sell for about half.

In order to reach a real bottom, investors — and ordinary people, for that matter — need to repudiate the idea of the boom itself. That is, they have to come to believe that the premise that drove prices up is false. That is why it is so hard to be a real contrarian investor. It is one thing to recognize that prices go up and down. It is one thing to believe that you should buy when things are cheap and sell when they are expensive. But the person who can resist the logic of a major market trend is rare.

The idea that Ireland’s property was destined to rise was just such an idea. Was it not true that Ireland is a small island? Was it not true that its economy was growing — thanks to integration with the rest of Europe? Was it not true that Ireland had the most attractive business tax rates in all of Europe? Was it not true that people were moving to Ireland by the planeloads…and that they needed a place to live?

Of course it was true. It was irrefutable. Until it wasn’t true anymore.

Regards,

Bill Bonner,
for The Daily Reckoning

Finding Reason in the Irish Real Estate Market originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.