Understanding and Making Use of Relative Strength


If you manage your own IRA or 401K, or have any interest in the stock market, this is one of the most important entries you'll read anywhere this year. I asked frequent contributor Harun I. to explain and illustrate "relative strength." The motivation is that I have learned from him how powerful this simple concept can be for investors professional and non-professional alike.

Some very popular bloggers have recently offered advice along the lines of "the best you can do is lose less of your capital than everyone else." For those of us without great scads of capital, or the desire to actually increase our purchasing power rather than watch it decline, this is cold comfort indeed. My own goal is to increase my purchasing power, i.e. increase my capital in real terms. I have no interest in losing, even if it is relatively less than others.

Which brings us to relative strength. The reason why this metric is so powerful is that it can help us identify those sectors or stocks which are outperforming other sectors and indices. While I understand the appeal of an unchanging investment strategy--only buy gold, or index funds, or TIPs bonds, etc.--the reality is various investments outperform other investments, and it does not require the dark arts to ascertain what is outperforming other possible investments.

The investor who manages to buy into those assets which are outperforming others, and then switch at the appropriate juncture to the next outperforming asset, (or short the assets which are underperforming) has the potential to actually increase his/her purchasing power, not just lose less than the next poor bloke.

As I have stated here before, my primary thesis is that no single investment strategy will guarantee increasing purchasing power in the tumultuous years ahead. Even those mighty engines of apparently endless outperformance, gold and oil, may yet underperform other assets. To be blind to that possibility is, well, dangerous to capital growth, not to mention capital perservation.

Here are Harun's comments, with charts which can be expanded into new windows by clicking on them. If you take amoment to study each chart, the fundamental ideas will become clearer.

Please got to www.oftwominds.com/blog.html to view all the charts.

The salient question of most investors and even traders is what and when should I buy or sell? Before the Internet the majority of people either listened to their brokers or opted for professional management via mutual funds. With access to the markets and information made easier by innovations in technology many want to forgo the advice and fees of a broker and step up to the task of managing their investments themselves.

But with so much information and so little time how does one sift through the deluge of information and by what metric(s) does one compare asset classes, sectors, and individual instruments? Should you throw darts, listen to the financial MSM, or diversify until your returns are so diluted your financial goals may never be realized? (It is not that I don’t believe in diversification, what I find unacceptable is diversification based on hope rather than a solid rational). While I offer no definitive answer I hope to provide information that will arouse curiosity.

For market technicians one of the simplest answers comes in the form of what is called ratio analysis or, more commonly, relative strength (RS) analysis. RS is not to be confused with Welles Wilder’s Relative Strength Index (RSI). Whereas RS compares two separate instruments, RSI compares an instrument to itself over n periods.

Expressed as a rational number a/b, understanding how to read an RS chart is simple: when the line is rising (a), the numerate instrument, is outperforming (b), the denominate instrument. And when the RS line is falling (b) is outperforming (a). RS will not tell you the direction of price of the compared assets or instruments.

RS can be used in many ways. It is most useful in determining outperforming assets into which on can employ a strategy for a diversified portfolio; here I will use RS to compare a monetary asset against a sector index to determine the gain/loss of purchasing power. I will then use RS to compare an individual instrument from the sector to ascertain its performance against its parent index and broad market index (did it make more sense to own the index instead of the stock?), and RS will be used to compare the individual instrument against a monetary asset to see whether it is losing or gaining or unchanged in purchasing power.

Gold will be used as the monetary asset. I can hear the arguments now that gold has been demonetized but unless one has been living under a rock it is clear that gold is acting like money. I could use a commodity index as a hard asset but then there would be arguments over the weighting of commodities in the index.

In this first chart is the SP Financial Index compared to gold. From 1989-2000 the trend of RS line indicated that there were better returns to be had owning the SPFI that owning gold or commodities. Purchasing power increase as well in that more gold or commodities could have been purchased in 2000 than at the time of the initial investment in 1989. The price levels during 1989 suggest that buying the SPFI was relatively inexpensive. The 1998 and 1999 peaks of the RS line and the peaks of MACD diverged indicating for the first time that the acceleration of this trend had changed at the primary level.

The third divergent peak occurred in 2001 and the reversal of the RS line and price was confirmed in 2002. The RS line falling into a downtrend indicated that the SPFI or the financial sector was beginning to under-perform gold. The SPFI price chart developed a Head and Shoulders top pattern that failed to complete to the downside, which usually means significant upside in prices ahead.

After the final bottom in price and RS in 2003 price rose while RS remained flat and eventually entered into a down-trend indicating that while price of the index rose the amount of what it could purchase fell. At this point the investor should understand, in this sector, money is being made but purchasing power is being lost at a higher rate and that a defensive strategy should be employed.

Backing up, now that we know that the financial sector may be a reasonable investment, let’s look at the performance of one of it largest and most popular stocks, Citigroup, NYSE C, and look at how this stock performed over the same time period. In this second chart Citigroup is compared to gold. During the 1989-1991 period while the sector was out performing gold (increasing purchasing power) Citi failed to do so. Therefore, without looking at other stocks in this sector, it made more sense to own the index than Citi.

Then next chart to examine is the Citi/SPFI ratio chart. Here we see that Citi under-performed its sector index during the period in question and examining the Citi/SP 500 RS chart, Citi under-performed the broad market index as well. What this all says in a nutshell is that during the 1989-1991 period there were better places to invest one's capital than Citigroup.

This changed across the board in 1992. From this point forward we see Citigroup’s out-performance in all comparisons. In 1994 the RS charts with the exception of gold had peaked and turned down until 1998. The gold RS bottomed in 1995 and headed up signaling Citi’s increasing purchasing power but sub-par performance against the broad market and sector indices.

The final highs of the RS charts came in around 2000-2001, and bottomed in 2002 rallied briefly then diverge from price dramatically, and accelerating to the downside in the latter part of 2007.

A review of Citi’s price chart since 2002 reveals that during a time of outstanding profits and billions in bonuses on Wall Street Citi’s price activity was anemic, it simply did not confirm the fundamentals. The discreet signals of the RS charts could have, if heeded, given warning that not only was Citi no longer performing well but the entire sector was under-performing despite the media and industry propaganda.

The yearly price chart of Citi shows what can happen when markets become greatly distorted. The buy and holders in this instrument gave back fairly sizeable nominal gains. But real gains have eroded the greatest since 2001 not 2007.

This has probably sparked more questions than it has answered, but that is the point. A door has been opened; walk through if you choose. Look around and see if there is anything useful; let curiosity fulfill its purpose.

Thank you, Harun, for sharing your insights into relative performance.

Readers commentaries Destruction of the dollar, presidential election politics (Yankees and Cowboys) and more.

The Cost of a 3-Day Hospital Stay ($20K) (a reader)

NOTE: contributions are humbly acknowledged in the order received.

Thank you, Kip S. ($50), for your on-going generous support of this humble site. I am greatly honored by your contributions and readership. All contributors are listed below in acknowledgement of my gratitude.

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Can a Fragmented Culture Find Common Ground?

My goal over the next few weeks is to address long-term trends and forces which typically get short shrift/poor coverage elsewhere. Most topics have been suggested by readers.

Though few seem to think today's topic worthy of attention, I believe it is a long-term trend with potentially negative consequences for the U.S.

During the Vietnam and Watergate eras, some 2/3 of the nation tuned in nightly to one of the three dominant televison networks: NBC, ABC and CBS. Now the typical audience of those broadcasters is around 10-12%. Today, the television audience is fragmented amidst hundreds of competing channels.

Stepping back further into time, please read this excerpt from an excellent account of World War I The Great War and Modern Memory by Paul Fussell (recommended here by knowledgeable reader Lloyd L.):

"(Private John) Ball and his friends had no feeling that literature is not very near the center of normal experience, no sense that it belongs to intellectural or aesthetes or teachers or critics. In 1914 there was virtually no cinema; there was no radio at all; and there was certainly no television. Except for sex and drinking, amusement was largely found in language formally arranged, either in books or periodicals or at the theater and music hall, or in one's own or one's friends' anecdotes, rumors or clever structuring of words.

It is hard for us to recover imaginatively such a world, but we must imagine it if we are to understand the way "literature" dominated the war from beginning to end." (emphasis added-CHS)
(pages 157-158)

The notion that American literature could form the common ground the nation uses to understand war and crisis is as alien as science fiction or medieval Europe. Even the Boob Tube, a.k.a. television, has been fragmented into so many shards that it no longer serves as a common experience.

The timespan of common experience has shrunk to the point that a decade ago is essentially forgotten history. In 1992, a mere 16 years ago, presidential candidate Bill Clinton caused a cultural stir by showing up on the Arsenio Hall TV show to blow some pretty mean saxophone.

Arsenio who? Most of the current TV audience either never heard of the show or has forgotten it existed. Ditto whatever books were bestsellers in 1992, whatever tunes dominated the pop/rap/country charts, and so on in every arts/media/cultural realm.

The reason literature plays a unique role in any literate culture is its longevity. Over time, what is faddish fades, and even what is considered "important" changes. Thus the books of John Dos Passos were highly regarded as important in the 1930s by many critics and intellectuals, but they are largely forgotten/ignored today.

Is this fair or valid? I have no idea, but books which capture some essence of an era, the American character, or key human experiences tend to keep attracting readers and critics. Former president (and university professor) Woodrow Wilson described it thusly:

"When a book has become immortal, we think that we can see why it became so. It contained, we perceive, a casting of thought which could not but arrest and retain men’s attention; it said some things once and for all because it gave them their best saying."

Unlike other democracies, the U.S. has a fragmented educational system controlled by a patchwork of local school boards. One result of this is that we as a nation cannot assume a supposedly educated citizen has read or understood any American literature which might be considered essential to understanding his/her own country.

Consider Samuel Clemen's (Mark Twain) universally acclaimed classic, The Adventures of Huckleberry Finn. A number of school districts have caved into parental demands that the book is racist and therefore must be banned: 'Huck Finn' a masterpiece -- or an insult

To say these attempts at suppression are misguided is to put it mildly. The book is the narration of a young underclass white boy in the mid-19th century, and was written in the language such an uneducated rural Southern boy would use.

The book's entire point is the humanization of the runaway African-American slave Jim, and the parallels between the white boy Huck's escape from a demonic, tyrannical father and Jim's escape from an equally demonic, tyrannical system of slavery. To call this racist is in some way admitting you haven't even read the book, and that you have zero understanding of its revolutionary quality and deeply anti-racist theme and message.

Yet Americans cling most rabidly to their largely ineffective, weak-willed, ignorant school boards. Is it any wonder American education below the community college level is a scandalous mess of fads and inane controversies?

I understand many educators have identified flaws in the national "No Child Left Behind" program, and I agree that these flaws need to be ironed out. But the program is revolutionary in an extremely positive way for two reasons:

1. perpetual failure will no longer be rewarded with Federal grants and funding

2. students throughout the nation must reach some minimal level of essential proficiencies to earn a high school diploma i.e. claim to be minimally educated.

I look forward to the day some minimal grasp of American literature is required along with math and science. As the media technologies, TV, the Web, radio, theater and the arts churn faster and fragment into thinner and thinner shards of audience experience, literature actually gains in importance; for as President Wilson observed, it gives American history and essential American experiences their best saying.

It is risky indeed to suggest an "essential list of American literature," and I do so with all the trepidation one should feel for the task. Nonetheless, somebody has to start, and so here is my list of what every student in the U.S. should read and understand before gaining a high school diploma. Titles can be substituted, but the era/topic must be addressed.

Please note these are works of fiction or literature; they are not intended as substitutes for history or biographical texts.

Native American experience: Hanta Yo and Bury my Heart At Wounded Knee

Revolutionary / Colonial era: The Autobiography of Benjamin Franklin and Tom Paine's Common Sense

American spirituality: Walden, Uncle Tom's Cabin and a selection of Emerson

U.S. Civil War: Red Badge of Courage and The Autobiography of U.S. Grant

Industrialization: The Jungle

Gold Rush/The West: Roughing It and Call of the Wild

The Roaring 20s: The Great Gatsby

The Depression: Grapes of Wrath

America's global reach: Typee and Two Years Before the Mast

African-American experience and slavery: Invisible Man, Beloved and The Adventures of Huckleberry Finn

Hispanic-American experience: Brown

Asian-American experience: Joy Luck Club

World War II: Catch-22

Politics: Fear and Loathing on the Campaign Trail 1972

Hollywood: The Day of the Locust

Horror/suspense: Edgar Allan Poe stories

Science Fiction: Stranger in a Strange Land, The Foundation Trilogy and Fahrenheit 451

Beatnik/hipster: The Naked Lunch

Poetry: selections of Whitman and Dickinson

Vietnam: Dispatches

I think novels like Absalom! Absalom!, Moby-Dick and Lolita are too advanced for most high school students, hence I left them off the list. I could have added many titles, but the list should be limited and consist of books which are comprehensible by the average student. I also reckon local school boards will add titles as they see fit. This list consists of about 30 titles (poetry assumes a single volume of American poetry). I know I left off Hemingway, and that reveals my own view/prejudice that his books are over-rated. Fitzgerald writes circles around him, breezily and easily, so why include a second-rater? Let the school board add the Hemingway titles and other "favorites."

Your own lists would of course be welcome.

The larger question here is: can any nation tackle the crises we will soon face without some common understanding of the nation's history and experience? I would think not, and thus I worry for the nation and most especially for the younger generations who have known only peace and prosperity. (A war fought by private armies and the sons and daughters of others counts as "peace," for the Iraq war affects few Americans beyond those fighting it and their families. The entire U.S. Military's "point of the sword" number several hundred thousand in a nation of 300 million.)

I believe we need some long-term lens to peer through, some common knowledge of previous crises and challenges, to grasp the nettles which are now in hand. Literature doesn't provide easy answers, but it can offer understanding, and the fortitude that comes with understanding that our predessessors managed to rise above even worse times and persevere. That is the essential American, and indeed, human, experience.

Readers Journal has been updated! An important new essay and more thought-provoking comments.

Readers commentaries Destruction of the dollar, presidential election politics (Yankees and Cowboys) and more.

The Cost of a 3-Day Hospital Stay ($20K) (a reader)

Books mentioned in the commentaries:
The yankee and cowboy war: Conspiracies from Dallas to Watergate

A History of Money and Banking in the United States: The Colonial Era to World War II

NOTE: contributions are humbly acknowledged in the order received.

Thank you, Marcie M.F. ($15), for your much-appreciated support of this humble site. I am greatly honored by your contribution and readership. All contributors are listed below in acknowledgement of my gratitude.

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Is There an Actual Race Underway?


Against long odds, there appears to be an actual race underway for the next U.S. President. Yes, yes, we all know the president has limited powers to actually change or influence the economy, culture and laws; but to say that "it doesn't matter who's president"--that's simply not true, as the last seven years have amply proven.

It is amazingly easy to be cynical about the candidates and the process. But rather than indulge in the easy art of trashing people for various sins, let's try to step back from ideologies and single-issue litmus tests--and perhaps even from likes and dislikes--to make a few observations.

1. Congresspeople generally lose elections to governors. There is no hard and fast rule here, but perhaps the "clubby" atmosphere of the House and especially the Senate does not engender the same skillset as being governor. No one has to herd more cats than a governor of a large state which is in many ways the equivalent of an entire nation.

This historical truism--the last senator to win an election was Jack Kennedy, and that was the nation's closest race until the 2000 election-- would give the governors Romney, Richardson and Huckabee a slight advantage.

2. The worst policy over-reaches tend to become law when the same party controls the White House and Congress. For instance: Vietnam was escalated in a Democrat-controlled era, and the Iraq War was instigated in a Republican-controlled era. (Many other examples come to mind.)

This would argue for a Republican president as being a better choice, as Congress will very likely be controlled by the Democrats.

3. There are Insiders and Outsiders. The political and financial elites may support an Outsider if that's the best way to maintain power (think General Eisenhower or Reagan) but in general they prefer to support an Insider: both Roosevelts, Kennedy, Bush I & II, etc.

Who's an Insider? Romney is the classic example of a wealthy, politically connected Eastern Establishment figure groomed to take care of his class. Hillary, though Midwestern, has elbowed her way into the right circles and is now an Insider--though not by birth like Romney. She is more like the no-holds-barred Mandarin who has fought her way into the inner circles of power--granted, on the ample coattails of her hubby, but nonetheless she made it in a way no former First Lady ever even attempted.

Who is an Outsider, feared and loathed by the Elites? Ron Paul is the ultimate Outsider, but John McCain is not far behind, being truly loathed by the Republican establishment as a "loose cannon" i.e. someone who is willing to buck the Party line. Richardson, Huckabee and Kuchinich are also Outsiders, though Richardson is very well connected in foreign policy circles.

Edwards may appear to be an Insider, but don't let that fool you--he's Southern, which makes him an Outsider. Only carpetbaggers like the Bush brothers--northeastern Elites who moved South but kept all the Yankee Elite connections--are Insiders.

Obama is moving in circles which are both populist and powerful in the Democratic Party, but in the larger scope he is definitely an Outsider.

Examples of Outsider presidents include Harry Truman, Richard Nixon, Jimmy Carter, Reagan and of course Bill Clinton. History suggests that the Elites work hard to trash and destroy any Outsider's presidency/influence, regardless of the party affiliation. Note that Outsiders are always Western (Missouri is the West to Bostonians and New Yorkers) or Southern.

4. Likeability counts except in times of crisis. Richard Nixon was not a cheery, bonhomie character, but the heightened social disorder and disgust with Vietnam in 1968 created a situation in which an unlikeable but tough, well-known Outsider could squeak by "The Happy Warrior," Hubert Humphrey.

Bush was more likeable in person than Gore, Clinton more likeable in person than Bush I or Bob Dole, Reagan was more personable than either Mondale or Carter, Kennedy was more charming than Nixon, etc. Whether you approve of this metric or not, it is rather obviously a key factor.

5. "Big Ideas" do matter. Sometimes a candidate merely represents a warm and fuzzy concept of vague appeal, i.e. "The New Frontier." In other cases, the candidate has a broad, powerful concept which motivates and shapes their presidency, i.e. "The Great Society" of Lyndon Johnson, or triangulating the U.S.S.R. and China to extricate the U.S. from Vietnam with the least possible geopolitical harm (Nixon).

The classic here is Reagan's "It's morning in America"--but recall that Reagan tackled the really thorny, politically "impossible" challenges of righting Social Security and taming runaway inflation. Even Clinton had one basic concept: "It's the economy, stupid," and he did manage to shrink the growth of the Federal government far more effectively than the Republicans who spouted off about "smaller governemnt" while ballooning deficits with wild spending increases.

So who has a "Big idea" in this election? From what I read, the only candidates with a consistently held "big idea" are Ron Paul--create a solid currency via a gold-backed dollar, and protection of civil rights--and to some degree, John Edwards, who has maintained a consistent focus on poverty and inequality in the U.S. John McCain has been consistently in favor of staying the course in Iraq, and he is the only candidate who has tried to fashion a comprehensive solution to illegal immigration.

You may not like these candidates' views, but to say they don't espouse--and act on--big ideas is simply not being remotely fair to their records.

As far as I can tell, Hillary Clinton's Big Idea is to channel Karl Rove: treat the media with contempt, go into attack-mode whenever challenged, maintain a constant "whisper campaign" of half-truths and distortions to undermine your competitors and ruthlessly eliminate any staffers who aren't utter sychophants/"yes-men" and "yes-women."

This is certainly putting to use the "lessons learned" from the Bush administration, but I'm not sure the nation needs another four years of stonewalling/lying/obfuscation--I mean more than the usual allowance.

6. The only candidate who is remotely addressing the fundamental financial issues facing the nation is Ron Paul. The rest of the candidates are mum on the destruction of purchasing power (the destruction of the dollar), not to mention the Federal deficit, which gets lip service at best from the rest.

Many readers of this site are deeply concerned about the erosion of civil liberties which have been approved by both parties in Congress, and hence many of you support Ron Paul for his commitment to roll back the powers grabbed via the Orwellian-named Patriot Act. Many others support his consistent position that the Iraq War is a debacle and exiting is the only good strategy.

The rest of the field seems content to run permanent massive deficits, let the dollar sink, and play around the edges of pressing issues like immigration, civil liberties, the credit crisis, education and our failed "healthcare" system. In geopolitics, everyone seems to want the world to like us again. Nice, but what exactly does that mean? Candidates like Huckabee say the defense budget should be bumped back up to a Reagan-era 6% of GDP, but he fails to mention where that $300 billion will come from--borrowed from the Gult states and China, like the $1 trillion borrowed in the past seven years?

Or in summary: I'm here to tell you what you want to hear, but not how we're going to pay for it. The only candidate other than Ron Paul who has shown the courage to espouse unpopular views--for instance, that torture is neither morally justified nor a good policy, even if you're Republican-- is John McCain.

7. Having a solid mate and being a fast learner counts. First ladies (and now, perhaps, First Men) have time and again played pivotal roles in the presidency. We all know Bill, but what about the rest? It's a question I'm not qualified to answer, but I do listen to what my friends say about the spouses, for they are essentially partners in the presidency to come.

Jack Kennedy was as green as Obama or the other younger candidates, and as a result he made a bunch of mistakes early on. But he was a fast learner and he was able to make the right call in the Cuban Missile Crisis. He was cautious, perhaps overly cautious, with his political capital, and he was blessed with a prosperity the next president will only look on with envy. But the issue of adaptability and learning remains key. Who among this varied field will be the quickest study as the crises keep coming? I don't have the answer, but it's an important question to keep in mind, especially given the gravity of the crises facing the nation.

Could Obama be a quick study? Huckabee? No doubt all the candidates are serious, smart people. Who can learn the quickest and not get overwhlemed--that is hard to say, but it remains a good metric to consider.

8. Experience counts--but what kind is actually important? Few presidents had more complex, pressing problems thrown at them one after the other than Harry Truman. He dealt with crippling industrial strikes, first use of nuclear weapons, the start of the Cold War, a hot war in Korea, etc. His popularity was very low and yet from the vantage point of history his standing continues to rise--if not to greatness, than to a stature lost on his critics at the time.

I personally attribute his toughness not to faith, though he had that, but to his experience as a combat officer in World War I. The more you know about World War I, the more you dwell on this experience as a possible crucible for Mr. Truman. Certainly the same could be said of Eisenhower's tremendous challenges as Supreme Commander in World War II (he was also an under-rated president) and Franklin Roosevelt's polio and subsequent Wilderness years.

So who amongst the candidates vying for the presidency has any personal experience of war, or a measure of personal crisis beyond typical human experience? In terms of war, only John McCain, the man who the Bush toadies saw fit to slander in 2000 (the last time I voted for him, against Bush) as "off his rocker" as a result of his experience as a prisoner of war in North Vietnam.

Though John Edwards is widely mocked for his hair and for being a "lightweight," such mockery will not be sputtered here; for the loss of one's child is a blow no one but fellow parents can understand. Perhaps that loss has steeled him to make tough decisions and ignore the political consequences.

The rarest event in politics is a politician who takes an unpopular stand and sticks with it despite the catcalls, the boos, the derision and the slander. So far, the only candidates who have taken very unpopular stands and stuck with them, even when facing hostile crowds, are Ron Paul and John McCain. At a very personal level, that of integrity when under great pressure, I would choose one of these candidates. Policies can change or be dropped as reality changes, but the character of "grace under pressure" and the courage of conviction cannot be so easily acquired or sloughed off.

I am sure the other candidates have had their moments of difficult candor; that they have strong beliefs, and faith that they can do a good job for the American people; but that's not the same as being able to make choices which virtually no one will like and which the financial and political Elites will loathe. The person who can do that is the person who is qualified to be President--in my humble opinion.

Readers Journal has been updated! Three great new essays, a half-dozen thought-provoking comments plus a terrific short poem.

Readers commentariesGovernment bail-outs, Texas S&Ls, Eichler homes, polls, Anchorage and more

An Oxbridge Education (protagoras)

No Knowledge, No Accountability, No Problem: How Financial Institutions Use "Unknowable" to Dodge Responsibility for Their Own Mess (Zeus Y.)

Innovative Financing and the Housing Bubble: leasing with an option to buy (Peter F.)

Sitting with the Body (poem, Verona U.)

NOTE: contributions are humbly acknowledged in the order received.

Thank you, John I. ($30), for your continuing generous support of this humble site. I am greatly honored by your contributions and readership. All contributors are listed below in acknowledgement of my gratitude.

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Brain-Dead Predictions about More Stuff


Once again, I'm going with predictions so obvious they qualify as brain-dead. And once again they carry profound implications for the U.S. and the world.

1. The working class and middle class finally face up to their declining living standards and find some righteous anger. Let's face it--the shell game is over. Living standards (as defined by purchasing power of wages/earned income) have been falling for most wage-earners for decades. The dot-com era gave many a brief boost (or perhaps merely the perception of a boost via pension and 401k gains), then the housing bubble cranked up the house-ATM, enabling people to offset their declining living standards by extracting and spending real estate equity.

That party is over and now presidential candidates Edwards and Huckabee are firing up crowds in both parties with appeals to a middle class which is finally seeing what the end of the borrow-and-spend decade will look like: a pinced lifestyle without many of the upper-middle class trappings they enjoyed when their equity was rising.

The Bush administration successfully tamped down this realization by constructing very simple sentences for seven years: a noun, a verb and the words "war on Terror." Now that canard has worn thin and people are waking up to massive debt, stagnant wages and sinking purchasing power. It's dusk in America, folks; that housing ATM has been ripped out and boarded up.

2. Hillary Clinton's campaign implodes (see item 1 above). Regardless of what platitudes she may mouth, Ms. Clinton's constituency is not the middle class. I know her campaign is doomed for a very simple reason: the three women I know who should be for her-- busy parents with careers who are registered Democrats and politically liberal--are not voting for her.

That suggests to me her "support" is the proverbial inch deep and a mile wide. Let's also note that the media is terrified of her, her staff is terrified of her, and her experience is basically social-climbing/glad-handing everyone who passed through the Clinton White House. No senator has won a presidential election since Jack Kennedy.

As people'a anger ignites, they're not cheering for Hillary; they're cheering for John Edwards, whose campaign has focused on alleviating poverty and income inequality. Whether you agree or not, he has been consistent (just as John McCain has been consistently positive about staying the course in Iraq).

Wishy-washy senators who inspire fear and loathing don't win presidential elections. Maybe if people thought she stood for something other than Hillary and Corporate America, it might be different. Not only that: early favorites have a habit of imploding, and if Hillary doesn't win decisively in both Iowa and New Hampshire, her shallow support may vanish like mist in a hot Mojave wind.

3. The U.S. "healthcare" system gets even more Kafka-esque, more idiotically inefficient and more expensive while even the wimpiest attempts at reform are shot down by entrenched interests. You must have your own stories, but here's one for the record: a friend's elderly father went to a first-rate hospital complaining of abdominal pain. Tests were done and the verdict: a gallstone. He felt better after some modest drug treatment and wanted to go home the first day, but nope, the stay stretched into 8 days and various invasive things were done to remove the gallstone. End result: a bill for $120,000 (paid for mostly by taxpayers, via Medicare, of course) and he still has the gallstone.

The instances of insanely poor care at supposedly "top-notch" hospitals are legion. Nobody knows what medications the patient is taking, or if he/she has taken them; rest is impossible with all the noise; patients are shuttled around with no explanation (we can assume to save money, but perhaps not--there's no one to ask who knows anything) and a Kafka-esque mix of insurance company gatekeepers and primary-care physicians, nurses, and specialists are in control--you are told, but you rarely get to see them unless you make a big stink.

Absolutely nothing is remotely on the horizon which would change any of this insanity in a fundamental way. Rather, 46 million uninsured and millions of illegal immigrants will continue to get their medical care at emergency rooms, which are closing as the flood of non-paying customers bankrupts the hospitals. What a great system! Just hope you don't get in an auto accident far from one of the few remaining emergency rooms; you might just die because the nearest emergency care is now far far away.

4. Americans' physical and mental health follows the same track as their broken "healthcare" system: down. Eating the American diet is a classic case of "garbage in, garbage out." A no-exercise lifestyle of salt, sugar and fat-loaded food leads to chronic illness. It did so last year and will do so this year. No surprise there.

5. There will be more sports and doping scandals (yawn). As long as sports allegiances substitute for identity and social engagement, any scandal will be tolerated.

6. The U.S. economy will implode, starting a chain reaction which causes the global economy to implode--though in slow motion. Blah blah blah--please visit my archives (in right sidebar) for dozens of fact-filled explanations of how this will unfold.

7. U.S. financial stocks will leap up before settling back into a downtrend. Nothing goes down in a straight line forever, and there are always moments when "the smart money" detects a bottom. We're approaching just such a moment. Sure, the banks/lenders are essentially insolvent, but that doesn't mean their stocks can't double in value before foundering.

8. The Olympics will be an anti-climax, heralding China's relative decline (i.e. slower rates of everything good and higher rates of everything bad). Combine a grandiosely hyped event with high expectations and a huge extreme of over-investment, and you get if not a complete flop then at least a disappointment--one which seems perfectly timed to signal a slowdown/malaise in the China miracle.

Lagniappe: Americans will continue to waste prodigious quantities of petroleum, food, water and other valuable resources. They're just not expensive enough yet to be conserved.

Readers Journal has been updated! Three great new essays, a half-dozen thought-provoking comments plus a terrific short poem.

Readers commentariesGovernment bail-outs, Texas S&Ls, Eichler homes, polls, Anchorage and more

An Oxbridge Education (protagoras)

No Knowledge, No Accountability, No Problem: How Financial Institutions Use "Unknowable" to Dodge Responsibility for Their Own Mess (Zeus Y.)

Innovative Financing and the Housing Bubble: leasing with an option to buy (Peter F.)

Sitting with the Body (poem, Verona U.)

NOTE: contributions are humbly acknowledged in the order received.

Thank you, Tom S. ($50), for your continuing extremely generous support of this humble site. I am greatly honored by your contributions and readership. All contributors are listed below in acknowledgement of my gratitude.

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Brain-Dead Predictions about Housing


What would the New Year be without some predictions? Rather than strive for wild guesses from the edge, I'm going with predictions so obvious they qualify as brain-dead. Nonetheless--or perhaps because of their tremendous obviousness-- they carry profound implications for the U.S. economy and culture.

1. Housing prices will fall farther and longer than every guess being bandied about in the mainstream and financial media. You know the stories--expert #1 foresees a 15% drop, expert #2 says a 30% decline is possible in the frothiest markets, etc.

Why fuss around with namby-pamby numbers like 15-30%? I'd say it's absurdly obvious that 80% to 100% declines are already baked into some areas--yes, houses won't find buyers for a $1, i.e. the value will suffer a 100% decline to zero.

2. The housing market won't turn around in 2008--or 2009, 2010, 2011, either. The really smart folks will be saving their money for 2012 or maybe 2013, when years of grinding losses will have stripped the assets of everyone who bought real estate with the idea of retiring on the proceeds. At that bottom, everyone will be disgusted with real estate, both residential and commercial, and no one will be dumb enough to sink dead money into an asset class which continues to decline in value year after year.

At that point, say Q1 2013, then housing will again become a buy.

How can a house become worthless? Just ask residents in depopulated areas of Detroit. If people pull up stakes because jobs disappeared, then houses drop to zero value. This is not some bleak future--this has been the case in areas of Detroit for many years. (Note that the larger Detroit-Ann Arbor-Flint metropolitan area actually gained population in 1990-2000.)

Will this happen everywhere? Of course not. But four other easily predictable forces will trigger huge declines in areas which have been seen as "safe from price decline."

3. Exurban burnout and job losses will take a toll. Take two hideously long commutes to distant jobs, a centerless, lifeless suburb in the middle of nowhere, take away one job and presto, you get an empty subdivision of essentially worthless McMansions nobody wants at any price. Add a dash of decay which acts as a catalyst, and you speed up the abandonment of the exurb.

4. People will "double up" as the economy sours. As I have commented here many times, the population of San Francisco rose by 52,000 (7.6%) in the dot-com boom in 1995-2000, even though the number of new housing units increased by only 5.4% between 1990 and 2000. Take a look at these numbers, all courtesy of the U.S. Census Bureau:

housing units in S.F. 2003: 346,527
residents in S.F. 2003: 751,733

residents per unit: 2.17

housing units in S.F. 1990: 328,471
residents in S.F. 1990: 724,000

residents per unit: 2.20

Looks pretty stable, right? But the population was 776,733 in 2000--meaning 50,000 people moved into the city in the late 90s and 25,000 had left by 2003.

The city added 18,000 units in the full decade 1990-2000, which historically correlates to about 37,000 residents. Indeed, the number of residents per housing unit has actually declined since 1990.

So what's the point? Just this: 5% of a population can move in or out of a city regardless of how many housing units are present. Simply put: people double up in boom times when housing is in short supply and in recessions when money is short.

Many single people bought houses they couldn't afford in the bubble. So did families. So where are they moving? In with someone else is the answer for many. Some people who are trying to hang onto their homes are taking renters, who then leave vacant apartments or condos behind, while others who have bailed out are moving in with other family members or friends.

Take 75 million housing units nationally and 5% of the population doubling up, and you get 4 million empty residences. You think the inventory of empty homes is high now, look what happens when people start losing their jobs. They will get very creative about living quarters, and very creative about cutting expenses they can no longer afford like mortgages and rent.

Houses can't be moved (at least not cheaply), but people move all the time. And when they move away from places, the price of housing in that area declines. It's supply and demand, and as money gets tight the demand for housing drops. People take roommates, move back home, double up.

5. Houses built where they should not have been built will be abandoned. Large swaths of known floodplains are now covered with subdivisions in the Sacramento Delta region. No doubt the same can be said of certain stretches of the Mississippi River region and other coastal and riverine flood zones.

Back in the good old days of say, 2007, governments might have reckoned they had the funds to rebuild dikes and other engineering wonders to protect a few thousand new homes. But as the economy sours, governments are suddenly short of funds. And as people leave those distant suburbs, then the stark reality will become apparent: it isn't worth tens of millions of dollars to protect a few hundred homes (many standing empty) which should not have been permitted in the first place.

Of course the homeowners will feel entitled to government protection; it is a natural assumption that if the county allowed the builder to build the homes, then it was "safe" to do so. New Orleans is not the only inhabited area with grave risks of flooding; the willy-nilly building boom saw thousands of houses tossed up on land which was rather clearly unsuitable due to heightened risks of flooding, etc.

Will government buy out beleaguered homeowners? No doubt there will be cries to do so, and other voices noting that governments are now broke or in deficit mode. Lawsuits will be filed and much money will be spent resolving a crisis which resulted from lax approval of questionable building sites.

6. Poorly built McMansions will be abandoned as the costs of repair exceed the value. Those of you not in the building trades may scoff at this, but go find a "new home" which has had the plumbing fixtures and copper piping ripped out (to be sold for the scrap value), a swimming pool filled with guck and leaky flashing around the chimney, not to mention broken windows, buckled hardwood veneer flooring and damp, rotten carpets. The cost of fixing all this is huge, especially if water has leaked into the framing or subfloor.

Although I can't locate the source, I remember reading that in the depths of the 1930s Depression a premiere commercial building in New York sold for less than the installation cost of its elevators in 1928, just before the Crash.

If you doubt that property can drop 80% or more in value, recall that real estate remains a business proposition: if you can't make money owning this asset as a business, not as a speculation, why buy it? If you can't rent the property for a profit, and keep it rented through thick and thin, then why risk buying it? Owning a property which sits empty for months or years is a very sure way to go broke. If you can't sell it, then you walk away and start over. That's Capitalism with a capital C, folks.

In honor of football season, let's trundle out a football metaphor: you can toss the ball in the end zone, but if there's nobody there to catch it, you still lose.

Readers Journal will be updated tomorrow.


NOTE: contributions are humbly acknowledged in the order received.

Thank you, Vera K. ($50), for your ongoing and extremely generous support of this humble site. I am greatly honored by your contributions and readership. All contributors are listed below in acknowledgement of my gratitude.

Read more...