Sir John Templeton is a legendary investor and founder of the Templeton Funds mutual funds. Sir John had this to say recently about the housing market in the United States: �Every previous major bear market has been accompanied by a bear market in home prices. This time home prices have gone up 20% and this represents a very dangerous situation. When home prices do start down, they fall remarkably far. In Japan home prices are down to less than half what they were at the stock market peak� The total debt of Americans now is $31 trillion. That is three times the GNP of the U. S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has and it is bigger than it was at the peak of the stock market boom. Think of the dangers involved! Almost everyone has a home mortgage and some are 89% of the value of the home. If prices start down, there will be bankruptcies and in bankruptcy houses are sold at lower prices, pushing home prices further down.� Sir John is a smart man! He is right to worry about the housing market. We wrote just last week that, �Housing prices have stagnated or fallen in every single period and in every single country following periods of above trend appreciation of that magnitude (5% in real terms).� We are highly likely to see a decline in home prices in real terms starting at any time. The catalyst is likely rising interest rates, but rising unemployment might also trigger the bursting of the housing bubble. Unemployment trends are highly correlated with the housing market � at least they were until the past two years when historically low mortgage rates seem to have trumped rising unemployment as the main factor in the health of the housing market. The unemployment rate is still rising, however, and now so are mortgage rates. As well, it is ominous that bankruptcies are actually already at 10-year highs and foreclosures are at record levels. Oh, and one other opinion Sir John offered: he doesn’t believe the bear market in America is anywhere near over. ************************************************************
Consumer credit rose by $7.3 billion, down from $7.8 billion the prior month. Wholesale inventories fell by 0.3% following a 0.3% drop the prior month and well below expectations of a 0.2% rise. The drop isn�t exactly an endorsement of the idea that the economy is beginning to accelerate out of its soft spot since inventories typically expand along with the economy. Initial jobless claims were 439,000, up from 434,000 the prior week and the 21st week in a row of 400,000 plus claims. The economy continues to shed jobs at an alarming rate and is likely to continue to do so if the weekly claims are any indication. And the fact is that jobs are a coincident indicator, not a lagging indicator as so many economists, Wall Street strategists and media mavens would have you believe � which is why it is one of only four coincident indicators used by the Conference Board. The PPI was up 0.5% versus a drop of 0.3% last month, although the PPI excluding food fell 0.1% versus a rise of 0.1% the prior month, which indicates a continued lack of pricing power for businesses. Finally, the trade balance showed a deficit of $41.8 billion, up slightly from the $41.6 billion the prior month. Analysts expecting the trade deficit to narrow as the dollar weakens must be hoping that the comatose economies of Europe and Japan will suddenly wake up and start buying more U. S. goods and services. The problem is that the weakening dollar is likely to put tremendous pressure on those same economies, weakening them still further�. which is exactly why the competitive devaluation derby is starting to heat up. Treasury secretary Snow got the ball rolling shortly after taking office with a new definition of strong dollar which conveniently ignored the greenback�s relative value to other major currencies. The Japanese are responding to Greenspan�s 24/7 printing of dollars by aggressively selling the yen in record amounts. Gerhardt Schroeder announced last weak that the ECB should weaken the Euro in order to spur exports and help the European Union restart growth. As well, the Bank of England cut rates last week unexpectedly in an effort to weaken the pound (which did sell off on the news). Currency specialists at UBS in London believe that the Bank would be very pleased indeed if the pound were to continue to weaken further. Now, one of the main features of the current monetary regime is that nothing backs the paper currencies of the world. Instead, they float freely relative to one another. But there are actual tangible things in the world that are paid for with the mountains of paper money in circulation. Land, oil, gold, timber, tin, and copper are just a few of the things that are bought and sold with paper currency�. and these tangible things will cost more and more as time goes on and the central banks of the world continue to print more pieces of pretty paper. The central banks of the world are committed to re-inflating the world and we have a sneaking suspicion they will succeed� to the detriment of most financial assets. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
Gold is $345.20 and is still marking time as it waits out the dollar bounce. Interestingly, the yellow metal showed strength Friday despite a strong dollar, which is very bullish because it indicates strong underlying demand on a longer-term basis despite a rise in the cost to foreign investors (gold is priced in dollars). The yellow metal is likely to continue to trade sideways for another few weeks as the dollar finishes its bounce. We are still expecting a move higher to the $430 to $450 range over the next few months. The dollar index is 95.80 and still bouncing off its most recent low. The greenback might make 98 � 100 temporarily, but could easily flame out sooner given the huge and growing current account deficit and the Fed�s inflationary policy. Forecast: The market is still showing signs of distribution and the likelihood of an 8%-10% decline is still very high. Strong internals continue to argue for another try at 1050, perhaps by the fall.
While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers. You can email me at [email protected].
Christopher Norwood manages the Keystone Fund, and the Keystone Stable Fund. To learn more about Chris and the funds he managesCLICK HERE.
Disclaimer: Chris Norwood is the president of Thunderbird Management, which manages three hedge funds in Indianapolis, Indiana. Mr. Norwood periodically publishes columns expressing his personal views regarding particular securities; securities market conditions, and personal and institutional investing in general, as well as related subjects. Mr. Norwood�s columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
