Planet Yelnick

Beneath the Planet of the Real Estate Bubble

As mortgage rates have approached 6.5%, the real estate bubble is topping. Likely to end with a whimper not a bang, but end nonetheless. A little bit of last minute scrambling to get even those rates locked in, and pffft! If you haven't noticed already, you will now see a plethora of bursting bubble stories.

Barron's ran a nice analysis of how this bubble got started. It is yet another example of the Law of Unintended Consequences. And it should bring a bit of a chill to those relying on consumer borrowing to keep the economy afloat. Excerpts below the fold. 

Conclusion: Extended downturn ahead. It may take a decade or more for real estate to recover.

The Greenspan Wink

A guestblog from Dennis on yet another Greenspan moment.  He is picking up on a deeper phenomenon.  The Fed has been raising short term rates to dampen inflation, yet they continue to pump liquidity into the derivatives market.  This is the Greenspan Put in action!  It might be just a parting shot ... enjoy these comments:   

Alan Greenspan winked at the home loan industry in his testimony to Congress Thursday where he stated that there is no longer a relationship between Fed interest rate increases and market rates. I expect the home loan industry to lower rates from a current 6-1/2 % back to the 5-1/2 or even 5% rate. Greenspan has kept interest rates artificially low to keep the  U.S. economy solvent after the stock market disaster several years ago. In preparation for his departure from the Fed, he has been using his 'measured' approach for the past year to raise rates to where they really belong.  The home loan industry has continued to keep rates low despite the Fed increases in order to squeeze the last bit out of the housing industry -- until this past month. Now that rates have crept up to 6-1/2 %, the economy will slow, because the only thing keeping the economy strong is consumer spending, which is financed almost entirely by high home prices and low interest rates. Greenspan doesn't want to depart his tenure at the Fed leaving a slowing economy. His testimony today stating that the Fed no longer has control over market interest rates was a wink to the housing industry that it is OK to return to low rates for the time being, even though the Fed is raising rates - thereby keeping the economy going, at least until Greenspan retires in January.

The Greenspan Put and the Global Scramble for Yield

Many pundits have noted the Greenspan Put, meaning, every time we have a potential financial meltdown, Greenspan floods liquidity into the markets, bailing out the overextended investors.  This sets up the moral risk that investors will be inclined towards speculation over investment, since the Greenspan Put socializes the downside while privatizing the upside.  The last time this happened was around the time of the 1987 crash, and was one of the causal factors of the crash.  We deregulated the S&L industry but maintained the government guarantee on deposits.  This socialized the downside - if the S&L went under, the government would make good on the deposits - and privatized the upside - no longer did S&L's have to engage in safe banking practices.  Very quickly they got into the junk bond game, and were one of the instruments of takeovers of major US corporations.  You can read about it in dozens of books on the Decade of Greed.  Later the US government bailed out the S&L's, an early version of the Greenspan Put. 

The new Fed Chairman is known as Helicopter Ben for remarks he made to the effect that the Fed could avoid a Kondratieff Winter by helicoptering in new cash and dumping it on the problem.  So far all this new liquidity has sloshed around in financial assets, and not led to any overall inflation.  The US Dollar is the world's reserve currency, and as world trade grows, demand for reserves grow.  The seniorage of the world currency allows the Fed to dump Dollars and avoid inflation. 

What a trick!   Print money, no inflation.  Hahaha!!  Alchemy!  The Sorcerer's Stone has been found, finally!   Hahaha!!

Yelnick has previously noted that in a low return environment - the Kondratieff Winter - there will come a global scramble for yield.   It has started, and it should last for at least a decade. 

Where does this money go?  In a world with a Greenspan Put, it should go into speculation.  Currently we are seeing froth in venture markets, and a rise in m&a activity. 

A lot of the recent activity can be called Google Envy.  Is it now the fastest growing company in history?  Clearly there is a sea change in advertising, and the Lion's share of it is going to Google and Yahoo.  Simple story:  online browsing time is now equal to TV viewing time, yet in the US TV gets $60B of ads and Internet only $10B - last year.  This year, Internet ads have doubled, to $20B, while TV ad spending is flat.  No reason why Internet ads couldn't keep going, and even surpass TV ads.  This leads to the view that much of the speculation will go to what is sometimes called Web 2.0 or more broadly Digital Media.   

The game is afoot.  Let loose the dogs of finance!  Rupert wants to spend $2B to buy into the Internet.  He already spent $1B, buying among other properties MySpace, which has now grown to an astounding 34M members.  eBay paid $4B for Skype, a company with almost no revenues!  Free phone calls!  What a deal!  Microsoft wants to buy AOL.  Everyone wants to buy Chinese search companies like Baidu.  It used to be venture firms only made real returns with a frothy IPO market.  Maybe a frothy m&a market can work as well? 

Stay tuned - another tech bubble lies ahead.  Thank you Alan!  Hahaha!! We'll take it.

Beyond the Planet of the Wolf! Wolf!

I do not normally drop in personal notes but after all the comments recently on Prechter I feel it is time to give a perspective. 

I encourage readers to also read and contribute to the comments. We have some readers who follow Elliott Waves fairly closely, and others new to it, and others just out to have a bit of fun; but there is a lot to be learned by following the comments and in particular the more astute commentators. I read the comments and incorporate their analysis & questions into subsequent posts.

As an aside, I do not do Elliott Wave analysis. Doing it right takes rigor and discipline - and interpretation.  Even The Elliottician with their Refined Elliott Trader software need to interpret the possible wave patterns. Instead I report it, and try to suss out a consensus. Having watched Prechter and others going back to the '80s, I have developed a certain feel for the pattern, and can more easily see the miscalls than the correct calls. I started the Wolf! Wolf! series because I thought Prechter's initial Wolf call was off the mark. So far, way off.

That said, at the end of this post I will give my current view of where we are with wolves (or bears or bulls), but first wanted to discuss Prechter.

Diamonds are a Wolf's Best Friend

Last month Prechter's Financial Forecast noted a bearish diamond formation that was recapitulating a diamond at the top in 2000.  See chart.  This month it noted how the major market indexes had broken below the lower edge of the diamond, and were now returning to kiss it goodbye.  Tonight the STU noted how after several days of attempted rallies the Dow was bumping into resistance just below Dow10500.  You can also see from this chart today how it is coiling into a series of nested 1 and 2 waves.   

The chart also shows the bottom of the diamond formation, and you can see how the market has been riding along the bottom edge, in an extended smackeroo goodbye.  As this smackeroo comes to the 200 DMA, which it should tomorrow, we have the conditions for a sell-off: kissing both the 200 DMA and the diamond edge goodbye.  (The 40 and 200 DMA levels are used by many index programs to make market arbitrage decisions, and often when approached from below form a resistance ceiling unless decisively broken through.)  Given the coiled spring of 1s and 2s, a failure to breach the 200 DMA could lead to a sharp drop.

Whether this is the onset of the 3 of 3 or just part of an extended corrective wave remains to be seen. The STU is watching this closely and is worth reading during this period, despite the frequent cries of Wolf! Wolf!  In addition, Neely has told his followers to expect an up week this week but a likely drop next week.  Zoran says there are times where the setup is there, and we need patience to watch it unfold.  More commentary over this coming weekend.