Friday, March 12, 2010

Bells Will Ring At The Bottom in Stocks and Housing

The cliche will be wrong--bells will toll at the bottom in housing and stocks.

The Wall Street cliche is "they don't ring a bell at the bottom," meaning that there is no definitive signal that a market has truly hit bottom, as opposed to just another leg down in a longer slide.

Guessing that "the bottom is in" sets up another cliche, "catching a falling knife" which describes impatient speculators buying stocks or houses in the conviction that "the bottom is in" only to lose their shirts as the market continues its decline after a brief head-fake of "recovery."

In the standard ideology of "investing" (code word for rampant speculation), it is "impossible" for bells to toll at the bottom because that would be too easy; the market famously trends in whatever way will cause the most loss and grief for the greatest number of participants/players. If a bell rang at the bottom, then everyone could jump in with low-risk certainty that the "bottom is in."

But that's only half the story. Let's start by considering a number of things which are widely considered "impossible." How about the notion that 4% of mortgage holders defaulting could trigger a collapse in the housing bubble?

Can 4% of Homeowners Sink the Entire Market? (February 21, 2007)

Oops, the "impossible" happened.

Here are a few other things currently considered "impossible" which seem not just likely but highly probable, if not guaranteed:

1. States will default on their bond, pension and entitlement obligations.

2. Pension funds will go broke.

3. Vast numbers of cities and counties will go bankrupt as the impossibility of raising taxes and meeting their soaring debt and pension obligations becomes obvious to all.

4. Commercial real estate will rival television as a "vast wasteland" of empty office towers, empty malls, empty strip malls, empty retail and empty warehouses.

So what's the "other half of the story" in why the bells will toll at the bottom in stocks and housing? Simply this: nobody will want to buy stocks or houses even as the bells toll mournfully on, because the foundation beliefs which have propped up those markets for decades will be discredited and repudiated.

Those beliefs are:

1. That housing/real estate is the foundation of long-term wealth

2. That stocks/mutual funds beat other investment asset classes over the long haul.

What seems "impossible" now--that people will repudiate these core beliefs and turn in disgust from "the great opportunities in real estate and stocks"--will not only come to pass but it will mark a long "bottom" characterized by simmering anger at Wall Street and the real estate/lending industries for bankrupting everyone who "believed" that "housing never goes down," "stocks are the best investment in the long run," etc.

Right now our politics of experience is dominated by the stock market and housing. Every "news" website has stock market indices prominently displayed in their top-of-the-fold premium space, and every blip in the housing market is relentlessly hyped in blaring headlines--especially if it's "good news" (foreclosures dipped 1%--the housing recovery is in full swing! Get in now! etc.)

Given that hype about the stock and housing markets is like the water we swim in, it seems "impossible" that a time will come when people either don't care or the very sight of stocks and housing statistics will trigger disgust and revulsion.

This is what happens when the core belief in the goodness and light of housing and stocks is beaten out of a population by relentless, soul-destroying losses.

Here's something else that's currently considered "impossible" which seems highly probable to me, just based on history and human psychology: that stocks will trade at price-earnings ratios of 4 to 6, that dividends will exceed 10% because interest rates exceed 10%, and that houses will routinely sell for 10% or 20% of their bubble highs even in desirable areas. Houses in undesirable areas will have zero value except for scrap, and unfortunately most McMansions have little useable lumber or other materials, being largely constructed of wood chips, defective drywall, plastic piping, fake rock or brick, etc.

Stocks which sold for $40 a share today will trade for $1 or $2. Volume will be light because people will have given up playing the crooked shysters' Wall Street games. The Dow Jones Industrial Average will trade around 1,000 (down from 10,600 today) and after years and years of shouting and screaming and hype about "the bargain of a lifetime" and "this is bottom, the market willl never go lower than 6,700 ever again in the entire history of humankind," etc. etc. etc., people will have finally relinquished their core belief in the fairness, goodness and wonderfulness of stocks and housing as surefire pathways to wealth.

To those of you who consider these wild speculations, I recommend researching valuations in the depths of the Great Depression. Skyscrapers sold for the cost of their elevators. Nobody wanted houses or stocks because they were discredited and repudiated as stores of value and pathways to wealth.

At the bottom in stocks and housing, the bells will toll ceaselessly, but they will be ignored. People will only buy a house if it's cheaper than renting and they have a large sum of disposable cash. The deep-seated notion that housing will appreciate and make the owner wealthy will have been discredited by reality. Nobody will buy for "appreciation" because that belief structure will have been destroyed. Housing will once again be shelter and an imperfect store of value. It will be valued for its "use-value" as shelter and the security of controlling a small parcel of land.

Wall Street will be gutted by one of two actions: people simply opted out, leaving the gangsters, fraudsters, crony "capitalists" and their politico enablers without money to play with/embezzle, or a great political uprising will have overwhelmed the bought-and-paid-for lackeys in Congress and a new political movement will have finally muzzled the ravenous blood-stained jackels of Wall Street, money-center banks and the socialist black holes of Fannie Mae, Freddie Mac, FHA, Ginnie Mae and all the other taxpayer-subsidized moneypits where wealth went to die.

Yes, it's all "impossible," just like the housing bubble popping was "impossible." When you swim in a carefully manufactured politics of experience long enough, the most obscenely blatant hype and embezzlement become normalized. Only when you exit that poisoned water does all become illuminated and the "normal" discredited and repudiated.

There is more on this aspect of the politics of experience in Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer.

Thank you, Don E. ($200), for your staggeringly generous donation and long years of contributions to this site. I am greatly honored by your support and readership. Thank you, Chuck D. ($40), for your wondrously generous donation and essay contributions to the site. I am greatly honored by your support and readership.

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