Sunday, December 17, 2006

"No more bubbles to bail out the housing bubble / fleckenstein"

now the prediction is for 2007. his timing has really been bad. but the theses is correct.

nun wird der abschwung für 07 vorhergesagt. sein timing ist wirklich schlecht. die fakten aber sind stimmig.

The negatives keep growing, this time unchecked. The stock market, the real estate market and the economy will get in sync on the downside -- it’s just a matter of when.

Wall Street has a soft spot for the "soft landing" thesis, but to me it's crystal clear that a serious economic slowdown is under way. What has been surprising: not that the economy is weakening but that so many people seem to expect a soft landing, and therefore remain in denial about the seriousness of the slowdown.



I guess the predilection toward a soft landing is a function of the following: So many folks in the investment business -- and in the country at large-- haven't experienced a consumer-led recession in so long that they think this outcome is just not possible. That's because the Federal Reserve Board has evolved into being a business-cycle suppressor and bubble manager. Consequently, folks just assume that economic weakness is a feature of the business cycles of yesteryear.

Bubbles begat bubbles
To review: We had a mindless equity bubble that was precipitated by a complete abdication of responsibility on the part of Fed monetary policy. That bubble popped in 2000, precipitating a recession led by businesses cutting back from their previous misallocations of capital.

Next came our umpteen interest-rate cuts and tax cuts to help fight the aftermath, the result of which was a massive housing bubble -- aided and abetted by the utterly irresponsible actions on the part of lenders. The housing bubble topped out well over a year ago, though it's taken some time for the problems in real estate to begin affecting the consumer.

Follow the money (from sales tax receipts)
Now, however, it's quite clear that the consumer is being affected -- whether one looks at the sales data from Wal-Mart and other retailers, or at the Liscio Report´s

data on state sales-tax receipts. To quote from Liscio's latest survey: "The weakening consumption trend is now established, and the majority of our tax contacts expressed real concern about a slowing in sales-tax collections. It now appears clear that consumers are not spending the billions of dollars they have saved on gas in recent months."

Furthermore, when I e-mailed Liscio to share my view that we are entering a recession, here's the response I received: "We note with a shudder that our indexes look a lot the way they did in fall of 2000, especially the weakening and then big drop in the sales tax survey. The SDI led us into the last recession, and the states that led are very weak right now, as well." (The SDI is Liscio's proprietary sales-diffusion index.)


Wishing on a star, waiting on a slide
It is essential that folks understand the past, in order to prepare for what lies ahead. That the Fed was able to precipitate a housing bubble to bail out the equity bubble was a miracle. But there is no next bubble to bail out the housing bubble. ... an unstable, unsustainable engine of growth.... that the ramifications of the housing bubble's unwinding will be brutal. (just look at the effect of the mortage equity withdraw / man braucht nur auf den effekt der refinanzierung zu gucken)

What has, of course, been impossible to determine in advance is the exact timing of when the stock market, the real estate market and the economy get in sync to the downside -- i.e., "the next time down," to quote my euphemistic, forever-and-a-day-in-the-making outcome.

I expect it to occur in 2007 -- because everything seems lined up, as never before, for that scenario to play out. To quote a personal motto from my Web site: "Often wrong, never in doubt." Various areas in the stock market are more vulnerable than others, though in some ways, it's all one trade. Consequently, I think the chance for at least double-digit negative returns next year is very high.

Now to end by saying I hope everyone has a merry Christmas, happy Hanukkah and a happy new year. Until the Contrarian returns on Jan. 8, I'd like to invite folks to peruse past columns from my daily Market Rap at
FleckensteinCapital.com. A complimentary username/password -- free/free -- has been established to allow access to the site.

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