Market Review: How the West was Lost

The biggest bubble in history expanded a bit more this week…could it be approaching its limits?

New home sales rose in May to the highest level since October. And the National Association of Realtors said 2005 is going to be a record-breaking year for sales of new and existing homes.

"We’re seeing a very hot housing market and that had everything to do with interest rates," said Wesley Beal, chief U.S. economist at "As long as interest rates stay low, the kind of home-value appreciation we’ve seen is going to continue."

Doesn’t that say it all, dear reader?

As nervous as it may makes your humble scribblers a the Daily Reckoning, many ‘experts’ now seem to agree: "Many Americans are now less concerned by the price of a house and how much a home loan will cost over time," said Nicolas Retsinas, head of the Joint Center for Housing Sstudies at Harvard University. "They are only asking how much it will cost next year."

Not only does it show how willing Americans are to live in a state of ignorant bliss, but it begs the obvious question: what happens when interest rates go up?

Americans see no point in saving up to buy a house, or saving for anything at all, for that matter. Americans save 40 cents for every $100 dollars of disposable income. They depend on their homes to make them money – just like they depend on the kindness of their foreign neighbors to the East to support their spending binge.

On Thursday, in an interview with CNBC, Warren Buffett said that he maintains bearish on the dollar, despite its rebound, due to the size of the U.S. trade deficit. The U.S economy must attract around $2 billion of foreign capital every day just to balance its books, alleviate the downward pressure on the dollar and prevent a sharp spike in interest rates.

It’s no wonder that U.S. companies doubled their overseas investment in 2004, and figures show that China was the largest recipient of direct investment in developing countries.

Dan Denning [echoing sentiments from his new hot-selling book The Bull Hunter, see below] puts it into perspective for us…

"While China trades its accumulated dollar reserves for real assets and secures its energy and resource needs, Americans are trading homes to get rich. Hmm. Makes you wonder how many people realize that we in the West are now competing for scare resources with 3 billion new, ambitious, hard-working, high-saving people.

"Not many apparently, which in a way, is just fine with me. We’ll keep sounding the warning, and recommend to keep finding and buying the best companies to profit from the money migration, especially in energy."

Kate Incontrera
The Daily Reckoning

June 26, 2005 — Baltimore, Maryland

P.S. The subprime market – i.e. the deadbeat, bad-credit-risk market – has exploded! Half of all buyers in those ‘hot real estate markets’ are buying houses they can’t afford – even at these low interest rates! They are making a very dumb bet that interest rates are going to go down even more…

— Daily Reckoning Book Of The Week —

The Bull Hunter: Tracking Today’s Hottest Investments
by Dan Denning

Investors who limit themselves to U.S.-based stocks and bonds routinely miss out on global opportunities – because right now, somewhere on earth, a bull market in a little-publicized region is providing savvy insiders with double- and triple-digit returns.

In The Bull Hunter, global investing authority Dan Denning shows ground-floor investors how to zero in on such regions so they can snag safe, outsized profit opportunities in countries, industries, and sectors where huge bull markets are just taking off.

You can order your copy by clicking here:

The Bull Hunter

THIS WEEK in THE DAILY RECKONING: Were you out enjoying the summer weather and happened to miss an issue of The Daily Reckoning? Don’t worry…this week’s schmorgasbord is all here for you…

FIN DE BUBBLE, 200506/24/05
by Bill Bonner

"In the midst of real estate mania, Americans are ready and willing to believe anything…that their homes will always rise in value, that their debt will never catch up with them, and that the American empire is unshakable…"

By Dan Denning

"The marriage of subprime borrowers with ARM’s is hardly a match made in heaven…but Dan Denning explores the more pressing topic – what happens when you combine falling home prices with rising monthly payments…"

By Sala Kannan

"Sometimes the best investment advice is the most obvious: invest in stocks that "make sense" to you – simply put your money in companies that you understand. That’s exactly what famed fund manager; Peter Lynch did…

by Kurt Richebächer

"Do inflating house prices truly enrich homeowners? Do they enrich the nation? Our short answer to both questions is a categorical no. The ugly truth is that both are impoverished. Dr. Richebächer explores…"

By The Mogambo Guru

"Greenspan recently spoke in front of the Joint Economic Committee, answering some questions about the state of the economy. Of course, the Mogambo did not deem his answers acceptable, and has a few things he would like to ask himself…"

FLOTSAM AND JETSAM:Your financial future depends on a new approach and, at the very least, an appreciation of the triple threat we face from the dollar, housing, and the national debt. Dan Denning explores…

by Dan Denning

The threat of a declining dollar, inflated housing values, and growing debt (federal and consumer) are early warning signs that a new strategy is needed. You shouldn’t let fear or panic rule your decisions in the markets. But it’s good to know the lay of the land before you head out hunting. And as a bull hunter, I continue to have faith that bull markets always exist somewhere if we are willing to look for them.

Most investors have a very limited idea of what a bull market is. They think if prices are moving upward, it’s a bull market and if prices are moving down, it’s a bear market. This is flawed thinking because it’s limited thinking. And the world of investment opportunities is anything but limited. Apart from American stocks and bonds, there are other markets with other trends that investors would call bullish and bearish. Yet both kinds of trend can be profitably invested in.

These other trends also directly affect the U.S. dollar. For example, bull markets in energy, raw materials, and China are stronger and more durable than your average cyclical bull market in stocks. That’s because they’re not your average cyclical bull market. Quite the opposite. When you invest in those trends, you’re investing in the powerful forces reshaping the global economy.

After I got back from four months on the road (and three months in Asia), I had a meeting with colleagues in Baltimore, where my publisher is based. I noticed how often the word war kept coming up. Of course, I was the one who kept using it. A war over oil. A war over water. A trade war over food and grains.

My point is this. The more you look around today’s world, the more you see the economic equivalent of war (total economic warfare, as I’ve called it), for a simple reason: More people than ever before are competing for the same scarce resources. This competition is what drives bull markets in emerging markets in Asia and across the board in commodities. But any time you have a competition, you have winners and losers. And if the winners are investors who identify the right themes, the losers are investors who stick with the old themes. Contrary to the itchy-fingered compulsion to call a broker and say, "Buy," we need to come to grips with the reality: American stocks are in a long-term bear market. You can chase the rallies, although I recommend doing so only if you can afford to lose the money, and then doing so through options on index and exchange-traded funds.

A more sensible long-term strategy is to identify where prices are moving (either up or down) and invest accordingly, regardless of the institutional buy-and-hold, mutual fund bias of the entire investment industry. And what better place to start than with one of the fastest plummeting investments in the world, the U.S. dollar?