Comstock Partners, Inc.June 05, 2008
It's The Housing Market, Stupid!
Remember when Bush senior was running for President against Clinton (Mr.) and, in order to emphasize what was the most important issue in the campaign, the
To put this in perspective, you have to understand that the total value of the housing market was close to $21 trillion in 2006. It got to that level by almost doubling from 2000 to 2006 by misleading lending (bordering on fraudulent), way too easy monetary policy, and major over-building relative to job growth and incomes. We have been convinced for some time that the housing market value would decline by at least 20% and could decline by over 35%. So far it has declined by about 16% meaning that over $3 trillion was extracted from the
If that were not enough, the rising prices of energy and food will clearly have a very adverse effect on the spending binge of the
The bulls have been claiming that all they really need is for the U.S. dollar to rise. This will trigger the energy prices to decline followed by the other dollar based commodities. When commodities break the inflationary problem will ease and the stock market will do very well.
For a short period of time on Tuesday the bulls thought they had a major break through as
After the speech, the dollar rallied, commodities broke down, and the stock market rallied as the bulls have been predicting. The rally continued with little volume until it ran out of steam and dropped sharply without any news. We think the market broke because the bull's case of the dollar rising, commodities breaking, and a strong stock market is flawed. The flaw is the fact that housing problems (it always comes back to housing) have already spilled over to the consumer and the only thing keeping the economy slightly positive is exports, which have been driven by a weak dollar. What happens if or when Bernanke raises interest rates to support the dollar and is successful? We think the economy goes into the tank.
We will do a "special report" next week to answer the question raised in the last "special report", "How We Got into This Mess", titled "How to get Out of this Mess".