-- Posted Thursday, 28 September 2006

In the past two weeks I was treated to two particularly moronic public statements from market experts.

Last week, during an interview on CNBC, Dennis Gartman, editor of the highly regarded Gartman Letter, asserted that the storage currency of choice among drug traffickers, arms dealers, and the Russian Mafia had switched from $100 dollar US bills to €500 Euro notes. Gartman proclaimed the development to be bullish for the U.S. economy and bearish for the Euro zone.  Say what? 

Gartman’s “logic” was that when the dormant $100 bills sitting in attaché cases, safety deposit boxes, and mattresses returned to America, the additional spending would boost the US economy.  Conversely, he asserted, the removal of euros from circulation would hurt the euro-zone economies.  Basically, Gartman’s comments boiled down to the belief that economic growth can be created by introducing more money into circulation.  Or, more precisely, that inflation creates prosperity.

The reality is that Americans receive a huge subsidy as a result of U.S. currency being stashed away in foreign suitcases.  It’s like writing checks that no one cashes.  Dollars circulating abroad do not bid up consumer prices at home, which results in Americans having more goods to consume at lower prices.  If the hoarded bills were to suddenly return to domestic circulation, the result would not be more growth but only higher prices and interest rates.  Alternatively, were those dollars deposited in foreign bank accounts, Americans would be required to pay interest on balances that previously earned nothing.

Any way you slice it, the fact that criminals are moving from dollars to euros is a negative development for an American economy accustomed to the subsidy.  In addition, it reveals the diminishing prestige of the dollar and the increasing concerns others have for its reliability as a dependable store of value.  Because cash under a mattress earns no interest, the only consideration given is it’s preservation of purchasing power.  The fact that criminals increasingly prefer euros to dollars speaks volumes.  If only Gartman had the good sense to listen.

Going from the sublime to the ridiculous, this week, in response to the first national year-over-year decline in housing prices since 1995, David Lereah, chief economist for the National Association of Realtors said “We've been anticipating a price correction and now it's here.  The price drop has stopped the bleeding for housing sales.  We think the housing market has now hit bottom.''

First of all, when did Lereah ever predict a price decline?  Isn’t he the same guy who constantly assured us that real estate prices would never fall?  That all that would happen to prices is that they would rise more slowly.

Second, what makes him an economist?  Is he really employed to give an honest assessment of the future prospects of the housing market and real estate prices?  Lereah is no more an economist than Henry Blodget was an analyst.  Despite their titles, both were hired to help salesmen move inventory.  For Blodget it was internet stocks, and for Lereah it is houses.  Realtors cannot convince as many people to over-pay for houses if their own economist forecasts prices to drop.  Why this man still gets taken serious by the media is beyond me.  Anything he says should either be printed in the classified section or as part of a legitimate display advertisement for realtors. 

Finally, what the hell is he talking about?  How can he say that the bleeding has stopped, when its barely just begun?  It reminds me of the Monty Python skit where the Black Knight claims his severed limb is “just a flesh wound.”  Does it seem feasible that the biggest real estate bubble in U.S. history would bottom out after a mere 1.7% price decline?  What signs could he possibly see to confirm that the housing market has bottomed?  Let’s see, national home prices fell for the first time in 11 years, with 2006 likely to be the first calendar year in 70 where that occurred.  Inventories are at record levels and still rising, sales have fallen for five months in a row and are down 12.6% in the past year, foreclosures are surging, builders are offering additional incentives to sell houses, reporting higher cancellation rates, and repeatedly lowering their earnings estimates.  Further, over-stretched homeowners are facing a wave of ARM resets beyond their abilities to pay, the economy is headed for a recession and everyone is still expecting a soft-landing.  Yep, it sure looks like a bottom to me.

Anecdotally, the house I rented two years ago, and moved out of six months ago, sits vacant, despite its advertised rent being 15% below what I initially leased it for.  In addition, when I first rented it in New Canaan, CT there were only about a half dozen single family rentals available there.  Now there are over a hundred.

The reality for real estate is that the only visible signs are those confirming the formation of a major top.  It’s more likely that Mr. Lereah saw Elvis than a bottom in the housing market.  My guess is that we are a very long way from a bottom, and by the time its visible, Lereah will be out of a job.

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