Historically real estate has lagged the stock market by 2 years. The extreme interest rate policy by Greenspan for a supposedly "mild" recession was obviously the biggest factor in that sectors inflation. Doug Noland on Prudent Bear calls it the "great experiment." Let enough people refi their house, extract cash, and perhaps we can avoid a recession. Very myopic strategy by the Fed, IMO.
As measured by closing prices and inventory levels, the bubble is deflating out here - it started in August (8% price drop in last two months) - and I can't wait for the October figures. I get giddy watching the next house being added to the MLS listings while the others remain unsold for 3+ months. It's like a slow motion way of watching the market fall back in 2000.
NY and CA will be especially hard hit and that is meaningful to the US Economy as a whole since those two states have 20% of the country's population. Add in surrounding states like MA, WA, NJ, and a few other bubble states and you can have an issue that will have national implications regardless if you can still buy a house for $100k in some states.
I think the slow upward trajectory of gold and the CRB is a signal of things to come. Kind of like the stock market lingering the 1000 level in the late 70's/80's when nobody would have defined the period as a "bull market" but in fact it had started in 1975. You never really know you're in a bull market until the talk of the town is about it, and by that time it's ending <vbg>. Bring up gold to most academics at a cocktail party and they'll laugh you out of the room.
<<Credit crunches occur when there is too much demand for loans not when there is too much supply. We have a situation of falling demand for loans. If interest rates are rising for certain companies it is because banks are factoring in a perception of higher risk and/or higher inflation expectation.>>
I am a little unsure of that defintion. Perhaps I will be repeating what you just said, but in simple terms, credit crunches occur when you need the money but nobody will give it to you. This generally occurs when you have a cash flow problem. The banks themselves are still lending at fantastic rates to companies that have good balance sheets, the problem is that those companies are few and far between. If Cisco wanted to take a huge loan tomorrow, the banks would give it to them at a much better rate than AT&T because Cisco has tremendous free cash flow to support interest coverage. So I think at this point in time, the higher inflation perception by banks is not there because the industry is so competitive and borrowing rates (for banks) are so low.
<<On a company specific basis, companies with little or no debt have a serious advantage over the big dinosaurs who thought the good times would never end and loaded up with debt. When I look for investment candidates I look for companies without debt.>>
I have to whole-heartedly disagree. Debt is an important part of the capital structure, particularly given its tax-free nature. It allows companies to take advantage of good times and I pesonally would question management that is not taking on at least some debt during good times. Levering the capital structure and taking advantage of good situations is a crucial part of the business cycle and capitalism. Like anything it can be absued, and it is the job of a good analyst/investor to run a Monte Carlo risk scenario for every company he/she covers and see if the debt issue is a problem. |
