Exhaustion, Jobs and Housing


Longtime contributor Cheryl A. proposed an important topic:

"I hope you'll post on Paulson's five year plan and the effect on the economy. Do you think this will delay the recession projected for 2008-2010?"

As you know, the "five year plan" (which smacks most weirdly of old Soviet and current Communist Chinese Central Planning at its best/worst) "solves" the "subprime crisis" by having lenders freeze the interest rates and payments for "some" subprime lenders for the next five years--until 2012.

All of the obvious objections are contained in the quotation marks above:

1. It is not a "solution to keep homeowners from losing their homes," it's a blatant attempt to keep the lenders/investors solvent by chaining underwater/negative equity owners to the debt-serf machine, i.e. mortgage payments on houses which keep declining in value.

2. The crisis is not limited to subprime borrowers, but to virtually everyone who accepted an exotic, ALT-A, HELOC, adjustable or even fixed-rate mortgage on a property which has declined into negative-equity territory.

3. How the triage works--i.e., Who gets offered the "5-year freeze" and who gets dumped in the "hopeless" ward--is unclear. In all likelihood the triage will work like this: if you're six months behind, you're toast; if you're current, you're golden.

But missing from such superficial analyses are two larger factors which will eventually come into play: exhaustion and job losses. Let's start with a chart of how bubbles tend to deflate--symmetrically:



The question posed by this chart (or any chart of a bubble retracing to the mean) is: how long will the "saved" homeowners keep shouldering their mortgages when every year their house is worth less?

Humans are selected for basic optimism, and the real estate industry's PR machine will be wedged in high gear for the next five years, proclaiming every Spring that "the market has turned the corner." If you think this cynical, then I invite you to go to any major newspaper's archives and read the real estate industry's eternally positive "market is turning" hype for the years 1991-1997--a stretch of years in which housing declined in real terms every year.

So how long will you pay $2,000 a month to "keep your piece of the American Dream" when you can rent the same house for $1,200/month? How many years will that $10,000/year difference be "worth it" if the property value erodes like a half-toppled sand castle buffeted by a rising tide? How about when the gutters need replacing in Year Three of the freeze, and when the water heater blows out in Year Four, and the roof starts leaking in Year Five? How motivated will the beseiged homeowner be to scrape up the money for repairs?

The human spirit has limits of endurance, and five years will be plenty long enough to find out just how few people will still believe the "market is turning up" after five years of declines and false hopes dashed/betrayed.

There is nothing new about the current real estate bubble deflation except its size; which brings us to the second type of exhaustion: the physical kind. Back in the early 90s (yes, during the last housing deflation period 1990-1997), there were stories of distant exurbs outside Los Angeles slowly being abandoned by newly-minted homeowners who could no longer maintain the grinding 3-4 hour commutes and the destruction of their family life.

Parents no longer saw their kids except late at night or yawning at 5 a.m. in the morning; the Potemkin Village of hastily constructed McMansions had no town center and nothing to do, so the kids did drugs and defaced the abandoned houses around them. As property values declined, people gave up and left, preferring to rent somewhere closer to their jobs and to "get their life back."

Lastly, consider what happens in the (inevitable) recession just ahead: people lose their jobs. Where will the jobs be lost? Where will they not be lost? Retail: yes. Restaurants: yes. Finance: yes. Manufacturing: yes. Government (as tax receipts plummet): yes. And so on.

Even healthcare will not be immune to job losses. As large employers like government and finance/lenders shed workers, those organizations will not be paying health insurance premiums for ex-employees; not only will those unemployed workers no longer be covered, but all the healthcare businesses which were feeding off those well-insured workers will suddenly find themselves on a starvation diet.

And if the energy scenario plays out according to supply and demand, as I expect, then global recession will cut demand for petroleum and oil prices will drop from $80-$90/barrel to $40/barrel or even less. If that occurs, even the energy sector may find layoff notices are necessary to protect profits.

As those of us who lived through the last "real recession" in 1980-82 (12% unemployment, etc.) recall, job losses quickly spin into a voracious positive feedback loop as layoffs in primary industries trigger layoffs in hospitality, restaurants, entertainment and retail which then trigger declines in tax receipts which then cause horrendous government deficits and "hiring freezes" (a.k.a. layoffs).

Unfortunately, as this chart shows, job statistics are so phony it will be hard to tell when job losses are actually gaining momentum until the statisticians are no longer able to mask the carnage.



So what happens to the mortgage in two-income households when one wage-earner loses his/her job? The family hangs on for awhile, doing everything in their power to maintain the huge mortgage payments, but recessions don't end in a month or two; they deepen over time as the positive feedback loop of job losses works its way through the entire economy.

Recessions last longer than most people's savings, and so we can anticipate, with much anguish, much more extensive foreclosures, regardless of "Five Year Plans" to freeze payments. Once you're lost your job, a $2,000/month mortgage payments suddenly looms like the summit of Mount Everest right as your oxygen runs out.

Thank you, knowledgeable reader Jeff for correcting my error regarding positive and negative feedback loops. Jeff passed on this link as background: Positive Feedback (Wikipedia)


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Trends and Countertrends

Now that the headlines are filled with doom and gloom about housing and the U.S. economy, I am a stock market Bull. What?! Does that mean I really think the economy is healthy and all the negatives will magically vanish? No, it just means I respect trends and countertrends.

Here's the key illusion to get past: that any market cares about fundamentals. Housing did not double and triple in a decade based on fundamentals of supply and demand-- it tripled on speculative fever. Ditto for every bubble in every era. Demand for petroleum did not suddenly exceed supply in the past 3 months, causing oil to shoot from $70/barrel to $98/barrel--it was driven up by speculators/managers buying oil futures.

Markets respond to sentiment, not fundamentals. And whether we like it or not, the human mind prefers habits of thought. One habit is a desire for change and novelty and a distaste for calm. Thus markets tend to swing from negative sentiment (fear/anxiety) to positive (greed/euphoria).

Like our brethren species the rat, we habituate quickly to what works. The rat soon learns the blue button issues a food pellet and the red one triggers an electric shock. In a similar manner, with the exception of a brief period in 2001-2002, investors and speculators have been amply rewarded for "buying on the dips." Betting against the market can be rewarding during brief countertrends/reversals, but since the emergence of the Great Bull Market in 1982, 25 years ago, buying on the dips as been rewarded as regularly as hitting the blue button for a food pellet.

Along with many others, I have been posting for several years now about the structural problems in the U.S. and global economies, focusing on the inevitable crumbling of the global housing bubble. All of this remains true, but the markets march to different drummers-- other traders and the mad swirl of sentiment.

As soon as everyone everywhere is spouting doom and gloom, the market will surge up. And just as predictably, when everyone is singing the everlasting praises of the economy, then the market is poised for a vicious decline. It's called contrarian investing, and it simply mirrors human psychology.

Isn't the economy sliding into a prolonged recession? Yes. Won't that eventually effect the stock market? Yes. But the long-rewarded habit of buying on the dips will take a few years to be behaviorally modified; only after several years of repeated losses will speculators/investors hesitate from buying on the dips. 25 years is a long time; most traders/investors cannot recall what a Bear Market feels like because they weren't trading 30 years ago.

One thing traders have long noticed is that certain points act as strange attractors in stock charts. That is, prices tend to move up and down to these points. Sometimes the attraction is as simple as a round number; as legendary stock trader Jesse Livermore noted 80 years ago, a stock nearing $100 will almost certainly exceed $100 for absolutely no reason other than the attraction of that big round number. (Ditto for gold, etc.)

Another set of attractors can be found in Fibonacci numbers. Here is a short-term chart of the NASDAQ 100 (NDX) courtesy of frequent contributor Harun I. which illustrates the peculiar but useful attraction of "Fibos":



Interestingly, the long-term Fibonacci 38.2% extension on the NDX lies around 2,300-- meaning that there are purely technical reasons for suspecting that level will act as an attractor, drawing the NDX up to a new high at 2,300, regardless of the lousy fundamentals of the U.S. and global economies.

This kind of analysis tends to keep us honest as investors by calling our assumptions into question. Is there a guarantee than the NASDAQ 100 will shoot up to a new high at 2,300? Of course not, but the possibility should be considered.


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Depression In America


I received many emails of condolence from readers regarding the suicide of my old friend. I was surprised by the ubiquity of this tragedy; a number of readers reported they knew three or even more people who had taken their own lives. Here is one longtime correspondent's observations:


"Your column today (12/1/07) was especially poignant. I am deeply sorry for your loss. The emotions you expressed have been experienced by those of us who have also lost friends to suicide. Since 1990, six of our friends -- good friends to professional colleagues -- have committed suicide.

In each case, we wondered if there was more that we could have done. Each time, we pored over the individual's history and talked with family and other friends. All of the people we knew had no financial problems -- some were millionaires. While some were single, others had incredible spouses and outstanding children. All had received medical treatment for depression, ranging from medication to electroshock therapy. This did not prevent multiple suicide attempts by each one. The only thing that became apparent was that the mental pain they experienced daily was over whelming. It is difficult, if not impossible, for those of us who do not suffer from such torment to understand what they experience. "

Another longtime contributor made this observation:

"Very sorry to read about your friend, depression is very hard to handle as I know. I think it's the high standards that we place on ourselves only to fall short in our own eyes. "

This set me wondering if the "pressure to succeed" Western nations have higher suicide rate than other countries. I started with the National Institutes of Health report The Numbers Count: Mental Disorders in America:

Mental Disorders in America

Mental disorders are common in the United States and internationally. An estimated 26.2 percent of Americans ages 18 and older — about one in four adults — suffer from a diagnosable mental disorder in a given year. When applied to the 2004 U.S. Census residential population estimate for ages 18 and older, this figure translates to 57.7 million people.

Even though mental disorders are widespread in the population, the main burden of illness is concentrated in a much smaller proportion — about 6 percent, or 1 in 17 — who suffer from a serious mental illness.1 In addition, mental disorders are the leading cause of disability in the U.S. and Canada for ages 15-44. Many people suffer from more than one mental disorder at a given time. Nearly half (45 percent) of those with any mental disorder meet criteria for 2 or more disorders, with severity strongly related to comorbidity.

In 2004, 32,439 (approximately 11 per 100,000) people died by suicide in the U.S. More than 90 percent of people who kill themselves have a diagnosable mental disorder, most commonly a depressive disorder or a substance abuse disorder. The highest suicide rates in the U.S. are found in white men over age 85. Four times as many men as women die by suicide; however, women attempt suicide two to three times as often as men."

I was staggered by the loss of young lives, and by the total number of deaths, which is similar to the total number of people killed each year in traffic accidents in the U.S. (43,000).

Troubled by the high suicide rate among teens, I found this report: Global suicide rates among young people aged 15-19 which revealed that the U.S. is in the middle of global suicide rates for teenagers. This is not comforting, but it does make you wonder about conditions in nations such as Sri Lanka with rates that are much higher than others.

To find out more about adult suicide rates around the world, I went to Nationmaster.com, a treasure trove of statistics, and found these reports:

global suicide rate, females

global suicide rate, males

Clearly, culture and civil strife/stress play huge determining roles in suicide. Why Sweden and the U.S. have similar rates while Portugal's is much lower, I do not know; but we can surely speculate that Sri Lanka's terrible, decades-long civil war must be a factor in that nation's sky-high suicide rate.

By coincidence, frequent contributor azvitt sent in two links on a major report issued by Mental Health America, formerly known as the National Mental Health Association, the country's largest nonprofit mental health advocacy group.

Utah leads the nation in rates of depression
"Utah is the most depressed state in the country, according to a nationwide study released Wednesday. The first-of-its kind examination of the "level" of depression and actual outcomes for those seeking help to treat it, ranks Utah 51st — last in the nation.

Hawaii, Illinois, Maryland and New Jersey are the healthiest states in terms of depression and suicide. Along with Utah, Idaho, Nevada, Wyoming and West Virginia are the least, according to the study.

Other states have a higher suicide rate — Alaska has the highest; Nevada the second — but the four factors combined in the study places Utah last on the list."

Why the sad face, Ohio? Experts detail reasons we're among most depressed

"James Brush, a Monfort Heights psychologist, said Ohio's job losses, coupled with high foreclosure rates, are putting a damper on the state's mood.

"I think it comes down to jobs and financial security for so many people," Brush said.

"In Ohio, if you lose a good-paying job, it's not necessarily true that you're going to find another one. And a lot of people as they get older can't move or don't want to move or won't be considered for jobs that pay as well as the jobs they lost and end up working at much lower pay rates. But their bills don't go down and their mortgages don't go down, and now people that might be in over their heads can't get rid of their houses."

Other studies have shown that people in Ohio and Kentucky don't take very good care of themselves, he pointed out; the states rank high for obesity, as well as heart disease, diabetes and other related diseases.

"When people aren't healthy, they're depressed," Brush said.

The study ranked Utah as the most depressed state, and South Dakota as the least."

Mental health is too complex to be reduced to sound-bites, but access to care was also mentioned as a factor. As our "healthcare"/sick-care system falters/becomes ever less accessible, and as our economy stumbles, I fear for the mental health of our citizenry.

Thank you, readers, for your expressions of sympathy and for sharing your own experiences. They helped me understand how widespread this loss is in our country and indeed, our species.



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The Economist Cover Dollar Indicator

Back in December 2004, the dollar swooned to 80 on the Dollar Index (DXY), and The Economist magazine ran a cover suggesting the dollar's demise. As the chart below shows, the dollar shrugged off its lethargy shortly after and climbed 15% over the next year.


Was this a long-term reversal? No, as the dollar resumed its decline a year later. But in the meantime, all those betting against the dollar suffered losses for over a year.

Here is the current cover of The Economist. Need I say more? Below is a chart of the dollar with the date of the previous Economist Cover Indicator.

My first market mentor used to say that it's never what the market already knows that causes big moves, it's what the market doesn't know. As this cover indicates, the market knows all about the dollar's weakness and its structural woes.

Therefore it behooves us to ask: what might cause the dollar to again shrug off the universally negative sentiment and actually rise by 15% or more?

Two frequent contributors sent in very interesting comments which help elucidate just how the dollar might strengthen despite the nearly universal opinion that it is doomed.

Here are Protagoras's cogent comments:

If there is a greater bubble than the US one, with more corrupt lending and worse accounting, its the Chinese one. When this one bursts, a flood of money might well flow back into relative safety of dollars. Accounts of the dollar's short term death might be premature. It might spike amazingly before it goes bad.

You will have heard the story about the salesman the systems engineer and the bear? They are camping and see a bear ambling towards them. The salesman starts to put on his running shoes. The engineer says, you don't think you can outrun a bear? The salesman says, I don't have to, I only have to outrun you.

The US doesn't have to be safe, just safer, and doesn't even have to be safer for very long. (emphasis added--CHS) It just has to be safer than the Asian currencies for a short time, and it will bankrupt a lot of dollar bears.

Albert T. contributed a link about China's Sovereign Fund and added his astute observations:

Great wall of money: $250 billion to flow from China
"HSBC says it reached the $246 billion figure using a formula that assumes China's foreign-exchange reserve expanding at between $30 billion and $40 billion a month, while appreciation of the yuan would be held to 7% against the U.S. dollar. The formula assumes that little of the money will head into global bond markets as the yuan appreciates rapidly and U.S. Treasury yields decline."

"HSBC said that next year Chinese authorities will likely approve $10 billion in overseas investments to mutual funds each month, while $67 billion will be invested through China's sovereign wealth fund, or China Investment Corp., and $27 billion will come from the "through train" investment scheme, which is likely to come into effect during the second half. Fund outflows that have been approved but not yet utilized will make up some of the remainder."

My thoughts on this are very simple: no matter where they start investing their money, prices will be effected elsewhere since any reasonable investors who have assessed their markets as overvalued will invest elsewhere. The other intuition is political: perogatives could take over from financial goals ergo outpace appreciation of yuan (my assumption). Hence they could invest in companies that are industrially important for future development in China.

Gov'ts aren't great investors I would think but who knows maybe if they pay their fund managers $3000 dollars a month they will perform just as well as Peter Lynch, or Carl Icahn (sarcasm intended). The wisest solution to this would have been to actually allow people in China to receive gains from Yuan appreciation while it seems like it would have slowed export growth it probably would have increased domestic demand of all goods and shored up stability of demand.

But maybe I am wrong and focusing on exports is the way to go especially when in order to get them you have to keep loaning people money to buy those exports. (emphasis added--CHS) Leveraging to our currency seemed great when we had low inflation and exchange stability but when our inflation magnifies they will have a severe feedback from this currency loop of their own inflation. (probably going on now in the early stages)

$250 billion I am sure could be used to pay foreign firms to build out infrastructure in China, water de-salination, water purification, sewage treatment and other wonderful things could be done. I guess we are going to have a China Stock bubble now. I could see it now them pouring money in for a year or two and after the flows stop massive price collapse and the heads of managers will roll along with investments being reversed and further price collapse until that $250 billion is fully transferred elsewhere. (pardon my cynicism)

Could non-U.S. capital provide a possible prop for the dollar? If all these Sovereign Funds/ government-mandated pools of capital start buying assets--total assets in these funds are supposedly in the $1.2 trillion range and estimated to reach $5+ trillion in a few years--some will surely be made in in the U.S. (25% of global GDP), especially if the weak dollar has put some U.S. assets "on sale." These investments would be made in dollars, meaning the funds have to buy dollars to make the investments. That would serve to strengthen the dollar, regardless of how other currencies were performing vis a vis the dollar.

And as Protagoras observes, the dollar (and by proxy, the U.S.) doesn't have to be safe--it needs only to be perceived as safer for a relatively short period of time.

Here is a short-term chart of the dollar, and an interesting link from frequent contributor U. Doran on the dollar and oil:




The Epic Battle Over Crude Oil and the US$ (by Gary Dorsch, FinancialSense.com)

Thank you, Protagoras, Albert T. and U. Doran for contributing to our understanding of the dollar's moves--and a hat-tip to The Economist for the infallible Cover Indicator.


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When an Old Friend Takes Her Own Life


When an old friend takes her own life, your own life is irrevocably diminished. What seemed to matter before no longer matters, and what seemed to make sense no longer makes sense.

My friend had recently moved 1,000 miles away, to a town which had long extended a magnetic draw on her. But she knew no one there, and since her work was all done on computer, she toiled alone. Like any other human being in those conditions, she was lonely. Yes, she had a loyal companion in her dog, and two very close friends here in California, and a constellation of lesser friends like me; but it was not enough at a critical moment.

She'd had those moments before, and been saved: just as she'd gathered the pills to swallow, a friend had called, and she'd gotten past that moment of dark obsession.

Of all the past days' memories and thoughts, one returns: what if I had sensed her despair and called her at that moment? And why didn't I sense her need for reassurance and human contact at that critical hour? I have often dreamed of her, and had done so just the week before; it was a vivid dream, not at all alarming, and I'd recounted it to her in an email. She'd made no response, and I'd given it no further thought. Was the dream a premonition? No; but perhaps it was a signal, if not of distress, then of some tendril of distress.

It is convenient is think our friends resilient, just as it is convenient for adults to believe children are resilient when turmoil or tragedy strikes the family. Yes, children are resilent--they are human beings. But they are not endlessly resilient, and their quiet after death or upheaval is not resilience or resolve, it is the numbing of terrible pain.

And so this false reliance on resilience nags at me; I was too self-absorbed to think through the underlying conditions in my dear friend's life, and how lonely she might feel. Her childhood was not positive, nor was her family more than grudgingly supportive; there were always squabbles over money and demands for fealty she could not meet. She was resilient, but only just so; and I should have been alert to the proximity of her limits.

But I am also keenly aware of the limits of my influence in her life; though we each wish with all our hearts that we could have saved her in that moment of supreme temptation and pain, there are limits to our influence.

If you think of your oldest, closest friends--I have known and loved her for 37 years now-- then we cannot recall all the thousands of words exchanged or spoken, or the thousands of hours spent together. We recall some few words and scenes, and it is those few we have to cherish and ponder. But what caused us to recall those moments and not others?

We are ripe to influence and connection only rarely; even our closest friends only influence our thinking and emotions at certain unpredictable junctures. After the fact, often when things have gone awry, we remember what they told us, or the comment they made off-handedly, or perhaps most rarely, their earnestly offered advice which we'd promptly ignored.

And so I hold two uncomfortably conflicting truths: that I could have been, and should have been, a better friend to her these past few months, when she needed all her friends' presence and understanding. But feeling this, and knowing it to be painfully true does not alter the limits of my influence in her life. Perhaps I could have contacted her in just the right moment, when my call or words could have tipped her away from that terrible decision; but more likely, that is a vain hope of a heartbroken friend, looking back from the periphery of her life.

For there are limits to us, this poor amalgam of brain and emotion; yes, faith can help, pets can help, friends and family can help, medication can help, insight can help, resolve can help--but none of these, or all of them put together, is guaranteed to overcome the darkness within us at its bleakest. The sufferer must be attuned to that particular wavelength at that moment in time; and if they have spun beyond our reach, then our ability to save them is lost as well.

Those of you who were born with minds which don't follow the happier pathways, the easier pathways, know that the "normal" person cannot understand the despair felt by those prone to one or more of the many madnesses which plague the human mind and spirit. Yes, we all know despression and anxiety, but those blessed with standard-issue minds will never experience the bottomlessness the others experience.

In a peculiarity of natural selection, or God's will (perhaps, despite the false labeling imposed by language, they amount to the same thing), the human spirits with the most enthusiasm for life, the ones with the poet's spark, the ones with the keenest sensibilities and sensitivities to life, are the ones most often drawn to that terrible cliff of self-destruction.

Some may mock Thanatos, the urge to self-destruction, the yin to the will to live's yang, as illusion. But it is real, and if you have not felt it, then count your blessings.

It is ironic, and tragic, that the selfish among us, the bitter types who have soured on life and who tap an endless well of bile to blame others for their own difficulties, or those who always find the energy to trumpet their own self-glory, never end their own lives. They cling on, as if the will to sow discord and ego are indestructable. No, it is the fragile ones, the thoughtful ones, who are drawn to that dark edge, and who jump; for life is too painful to bear at times, and they think not of faith or the love of their friends and family, but of escape.

It is an illusion, a cherished one, and one I wish was true, that love alone can save a lovely soul in extremis. She was loved, dearly, and yet we who loved her could not save her. We cannot but wish with all our own lifeforce that we could have done so, but there are limits, even to love. How I wish I had felt an urge to pick up the phone and call her that day, that hour, in the hope that perhaps that simple act would have distracted her, or comforted her just enough to stay her hand. But I had felt no such urge, and so the moment was lost.

To wish for that is to wish for powers and strengths I do not possess; I am just another muddled, muddling-through human, struggling daily with my own weaknesses and demons, trying not to fail those I love in this life. But I cannot help but feel I failed her, and that haunts me, and will haunt me, even as I know that to want that power in her life is not the same as actually wielding it. Though it is natural to wish for a limitless ability to save such a dear soul, perhaps it is overstating our reach.

When an old friend takes her own life, then you come to know how little you knew of her and of her life in that distant town. There are limits on what a friend can know, at least a friend who is not in the inner circle; and perhaps even they cannot know.

We were close at times, something like cousins or perhaps at the very best, as she once told me, siblings; she had no brothers. There is no good analog or word for friendships with no romantic frisson between men and women. We did not look anything alike; I am tall and fair, and she was very petite, with skin and eyes far different from my own.

She was the much better writer, the one who deservedly won the notice of mentors and prize committees. In comparison, I am a plodder, the aspirant who rows along without attracting much notice because, well, I'm just not that good. I thought her beautiful, and liked looking at her; she had an enthusiasm for things, and life, which I admired and even envied at times.

Now she is gone, and my life is so much poorer. My only consolation, and it too is a poor one, is that I had just written her that I loved her very much, and had always loved her. She'd made no answering comment, for it was known, and understood; but I hope, in my secret heart, that it gave her some small solace to read it, and to know it was true.

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