Boom2Bust.com

Weekend Edition: July 28-July 29, 2007

Last week, I published “The Dollar Crisis Examined” where I discussed the huge concentration of U.S. dollars overseas. If foreigners stop accumulating dollars, U.S. stock and bond prices, as well as the dollar, will plummet in value. Here in the United States, we will see higher import prices, inflation, and the erosion of consumer purchasing power. On July 20, I told readers that I’d look overseas for any sign that foreigners are growing weary of the U.S. dollar. My research shows that central bank dollar holdings continue to climb, despite all the diversification talk. On June 30, Reuters reported that the global central banks had hit a record in reserves held in U.S. dollars at $2.24 trillion in the first quarter. Dollar holdings in the International Monetary Fund data, which covers about two-thirds of the world’s currency reserves, remained around the 65% level, roughly the same as in the previous 3 years. In the days prior to the Reuters article, the European Central Bank said the euro’s share in global reserves had also remained stable since 2005, which suggests that the U.S. dollar is still preferred by the central banks. Brad Setser, an economist at NYC-based Roubini Global Economics, told Reuters that as long as these two trends continue, “The overall story is one of more central bank demand for dollars, not less.”

However, some analysts are starting to question the sustainability of the rise in dollar reserves. “We don’t see any significant sell-off in the positions foreigners currently have in Treasury and agency debt, we do see the pace of investment beginning to decline, which will prompt a further decline in the US dollar,” said Bank of New York strategist Michael Woolfolk to Reuters on June 30. Emma Lawson, currency strategist at Merrill Lynch, added she expects emerging markets, like China with its $1.2 trillion in reserves, to let their currencies appreciate further on in 2007 in order to stem capital inflows and cool inflation. To achieve this requires the Chinese central bank to buy fewer dollars, adding downward pressure to the currency, and force other central banks to actively increase holdings in other currencies over the coming years. Furthremore, state-run investment funds, using a portion of reserves that usually go to U.S. securities, may also work against the dollar.

It’s interesting to note that China reduced its holdings of U.S. Treasuries to $407.4 billion from $414.0 billion in May, the second month in a row China cut such holdings. Chris Turner, currency strategist at London-based ING Groep NV, told the Wall Street Journal on July 18 that the drop may reflect “custodial practices.” Still, Mr. Turner said further changes in Chinese holdings need to be watched, as another decline “may add to fears that China is quietly finding more-valuable investment products than U.S. Treasuries — an activity that potentially accounts for some of the heavy [U.S. dollar] losses seen over recent weeks.”

Weekend Edition: July 21-22, 2007

I’ll admit it- I’m a packrat. I think I inherited this trait from my parents, who never throw out anything and are renowned for the quantity and quality of items made available at their garage sales. My problem is with paper- lots and lots of paper. Yet, there are occasions when a few useful items turn up in the clutter. Case in point, the August 14, 2005, issue of Parade, a newspaper magazine found in your Sunday paper. I remember saving this particular issue because it focused on the U.S. housing market. I had a pretty good idea we were fast approaching the residential real estate market top, and wanted a “keepsake” to remember the housing bubble by as well as use as a point of reference in the future.

The U.S. housing market was still in a state of euphoria that summer. Research by the National Association of Realtors (NAR) in July 2005 showed:
• The median price of existing homes was $219,000, 14.7% higher than 12 months earlier.
• Sales of existing homes over that last year set records, with increases in 44 states.
• The rate of new home sales reached 1.3 million units.

Parade described the frenzy in detail:

We’re in one of the most gung-ho real estate markets since pioneer homesteaders raced covered wagons to stake a claim. SUV’s now screech up to open houses where passionate shoppers compare square footage and granite countertops. The Internet has become a mega open house with people checking their homes’ worth- and what their neighbors’ sold for.

American homeowners bought into the hype as well. Parade poll respondents in 2005 revealed that 61% of U.S. households believed the upswing in housing prices would continue, and 47% of Americans said investing in the real estate market back in August 2005 was a wise decision. According to David Lereah, the chief economist for the NAR at that time:

The reason we’re in this boom is the biggest generation ever- the boomers. They are in their peak earning years and spending on real estate at a record-setting pace. Will the boom last forever? No. But it will last as long as the boomers are in it- probably another 10 years.

Just 2 years later, the story is quite different. On Friday, CNBC real estate reporter Diana Olick characterized the U.S. housing market as “quite weak, as new and existing home sales show no sign of recovery, and prices for both continue to slide from their peaks in 2005.” Challenging recent claims that the housing decline is at or near a bottom, Olick stated:

For those who may have thought the worst was over for the housing industry, none other than Federal Reserve Chairman Ben Bernanke this week threw cold water on that hope when he revised his own prognosis… Chairman Bernanke admitted that, “conditions in the subprime mortgage sector have deteriorated significantly, reflecting mounting delinquency rates on adjustable-rate loans.” He went on to say that, “the ongoing housing correction might prove larger than anticipated, with possible spillovers onto consumer spending.”

Today Bloomberg said that housing reports this week are forecast to show a continuation of the U.S. housing recession. According to economists surveyed by Bloomberg, existing home sales fell to an annual rate of 5.87 million, the lowest in 4 years, from a 5.99 million annual pace in May. The report from the National Association of Realtors will be released on July 25. Government figures due out the next day may reveal that new home sales fell to an 892,000 annual rate in June from 915,000 in the previous month. Federal Reserve policy makers last week lowered forecasts for U.S. economic growth this year and in 2008 as a recovery in home building remains to be seen…

Weekend Edition: June 23-24, 2007

Reverse indicators. Do you use them? I use the term to describe someone or something that is more often wrong than right. My favorite example of a reverse indicator, and its use, is found in George Muzea’s The Vital Few Vs. The Trivial Many. In one section of this fantastic book, Muzea talked about his experience as a stockbroker with E.F. Hutton in New York, where he had a client that was “always wrong at decision time.” He recalled, “I used to call him and tell him about a stock I liked. If he liked the idea, I never offered it to my clients, including him. If he did not like the idea, I aggressively marketed the stock. Even the other brokers would ask me to call my reverse indicator to see if he liked their ideas.” Eventually, the client lost his job and had to close his account. The E.F. Hutton brokers threw a party in his honor, and as Muzea remembers, “We were depressed for him and us.”

When trying to figure out where the U.S. economy is headed, I look to the American consumer as one of my favorite reverse indicators. Specifically, I examine what Americans are spending their “hard-earned” dollars on. I’m being sarcastic here, because Americans no longer depend on savings to make a purchase. Instead, items are bought on credit. And who can blame them? The Federal Reserve was more than accommodating in helping U.S. consumers achieve instant gratification by lowering the Federal Funds Target Rate (short-term rate objective of the Fed) all the way down to 1% back in 2003. With interest rates so low, consumers financed purchases, especially when it came to big-ticket items.

So why do I examine what Americans are buying? Because of the correlation between frivolous spending and the top of an economic cycle. And what are some of the more notable non-essential purchases being made by consumers? Glad you asked. My favorites include:

Bottled Water- Americans drank 26 gallons of bottled water per person last year, or $11 billion worth. As the Sierra Club website notes, “It’s an amazing new fad, one of the most successful advertising hypes in recent history. Advertising for bottled water suggests that drinking water in plastic can make you thin, sexy, healthy, affluent, and environmentally responsible. Water bottles have become a fashion accessory.” However, studies don’t agree that it is any safer than tap water. Yet, in the U.S. a sip of bottled water costs on average 1,000 times a sip of water from the tap.

Outdoor Rooms- According to the Wall Street Journal back on June 8, “Outdoor rooms, one of the decade’s most visible symbols of excess, have been a bonanza for manufacturers of everything from $3,700 waterproof pool tables to $130 patio umbrellas that emit a cooling mist. About one million households have outdoor kitchens, with such features as built-in grills and cooktops, outdoor stereos and TVs, refrigerators— even dishwashers.” Surprisingly, homeowners are finding out about the long hours of upkeep and costly repair involved with these expensive backyards. As a result, some are abandoning the “rooms” altogether.

Retirement Homes For Young Adults- Real estate agents and financial planners around the country are increasingly assisting younger buyers with their purchase of retirement homes for themselves in the years ahead, according to a Wall Street Journal article of May 29. These buyers (30-40 somethings) believe that retirement property is a better investment than other traditional assets classes. One buyer, who was 32 when he bought a place for retirement with his spouse, explained, “The house is an asset, so it’s not like we’re throwing away part of our retirement savings.” A young couple from New Jersey said, “We wanted to get in while it was affordable.”

The last time I saw this kind of spending going on was in the late 1990s. I told anyone willing to listen that we were at the top of an economic cycle and headed downhill. Unfortunately, I think we’re at that point again in the U.S. economy, with an even worse ending in store. So, if there’s anyone you know who’s a “reverse indicator,” ask them where they think the U.S. economy is heading. Better yet, you may want to look at what they’re buying these days.

Enjoy the weekend!

Christopher E. Hill
Editor
editor@boom2bust.com

Weekend Edition: June 16-17, 2007

With the creation of Boom2Bust.com, I find myself explaining the purpose and rationale behind the blog more frequently to family and friends. I’m in a tough spot. For example, I believe that the U.S. housing market is in serious trouble, and as such, I rent an apartment. However, my father is a retired realtor and owned rental properties for a good deal of his life. Since leaving my parents’ roof, he has insisted that I buy my own place because “to rent is to throw away money” and “real estate always goes up.” Not to be outdone, my sister has poked fun at me for being a renter and once referred to my Chicago apartment building as “the ghetto.” Then there are friends who bought homes during the housing bubble. I have to be honest- I find it difficult telling all these people that I firmly believe a fast-approaching financial storm is coming, with housing as a possible catalyst and casualty.

The responses I get when talking about the blog are predictable- blank stares or a change of subject. However, I’ll stick to my guns. My outlook on the U.S. economy is based on the findings of my ongoing objective research. Unlike the demented perma-bears, I do not look forward to an economic crisis. I’m in the same camp as Warren Buffett, who after placing his infamous bet against the U.S. dollar, explained in Fortune, “Both as an American and as an investor, I actually hope these commitments prove to be a mistake. Any profits Berkshire might make from currency trading would pale against the losses the company and our shareholders, in other aspects of their lives, would incur from a plunging dollar.”

Finally, someone once told me that my views are “un-American.” The way I see it, the conditions for a financial crash were created by misguided U.S. monetary policies. I’m just fortunate that I’m able to recognize the present (and future) situation. In reality, what’s “un-American” is policymaking that is destined to rob American citizens of their hard-earned wealth.

With Boom2Bust.com, I’ll continue to warn and educate those willing to listen about the coming financial storm in the United States. It’s my duty as a “good” American…

Enjoy the weekend!

Christopher E. Hill
Editor
editor@boom2bust.com

Weekend Edition: June 9-10, 2007

Whew! It’s been an exciting first week blogging for Boom2Bust.com. I forgot how much I enjoy writing, although I’m still trying to shake the rust off. I hope you find the blogs worthwhile as well. I am always open to comments from readers. Let me know what you think at editor@boom2bust.com. Just don’t contact me expecting to get into a debate. If I’m not blogging I’m too busy conducting research and getting a new business off the ground.

Speaking about new businesses, I would like to tell you about a piece that was written by Richard Russell entitled “The Perfect Business.” For those of you not familiar with Richard Russell, he has been the editor/publisher of Dow Theory Letters since 1958. From his website:

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron’s during the late-’50s through the ’90s. Through Barron’s and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-’66 bull market. And almost to the day he called the bottom of the great 1972-’74 bear market, and the beginning of the great bull market which started in December 1974.

“The Perfect Business” was written by Mr. Russell in the early 1970s and appears on his website under the heading “Popular Articles.” It is his most requested and most quoted work. In “The Perfect Business,” Mr. Russell lays out the criteria necessary for the “ideal business.” The more criteria you can apply to your new job or business, the better off you will be, Russell says.

Finding myself in the position of starting a new business, I find the article inspirational. But the reason I’m mentioning “The Perfect Business” in this weekend’s blog is that it contains a segment that should serve as a caution to those contemplating a startup anytime soon, based on my belief in a coming financial storm. For all you would-be entrepreneurs, take heed of the following advice Mr. Russell’s father gave him:

Here’s what my dad told me: “Richard, stay out of the retail business. The hours are too long, and you’re dealing with every darn variable under the sun. Stay out of real estate; when hard times arrive real estate comes to a dead stop and then it collapses. Furthermore, real estate is illiquid. When the collapse comes, you can’t unload. Get into manufacturing; make something people can use. And make something that you can sell to the world. But Richard, my boy, if you’re really serious about making money, get into the money business. It’s clean, you can use your brains, you can get rid of your inventory and your mistakes in 30 seconds, and your product, money, never goes out of fashion.”

I can’t predict whether the U.S. financial crash will be swift or drawn out over time, but for someone looking to start a business in the near future, you may want to make a special note of those comments regarding real estate and manufacturing with a global emphasis. Furthermore, be wary of any business that focuses on providing non-essential services. As times get tough, these will be the first to fail. Building a successful business is hard enough. Make sure the type of business you choose is one that will prosper in the coming financial storm.

Enjoy the weekend!

Christopher E. Hill
Editor
editor@boom2bust.com