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Good story on where we may be going. Rick Ackerman writes a column every
3rd week in the San Francisco Examiner Sunday paper and always seems to be
ahead of the curve.
JW
abprosys@xxxxxxx <mailto:abprosys@xxxxxxx>
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Real estate could harm bears and bulls
Rick Ackerman
OF THE EXAMINER STAFF
Sunday, September 27, 1998
URL:
http://www.sfgate.com/cgi-bin/article.cgi?file=/examiner/hotnews/stories/27/
Backerman27.dtl
THESE ARE SURELY giddy times for bears. And why not? For most of them the
summer's stock market crash came on with a warning that had all the subtlety
of a brass band parading down Main Street.
For technical analysts in particular the indicators were as clear and
spine-tingling as the trill of piccolos above a Sousa march.
By June, the analysts' most trusted runes were in rare harmony, all clearly
signaling a decrescendo to the bull market that began in 1982.
Even the geopolitical world seemed poised to acquiesce: Japan and most of
Asia were slipping into the mire of depression, Russia was about to kiss off
Western bankers and President Clinton was precipitating a quintessentially
American crisis of recrimination and self-doubt.
All of which looked like money in the bank to those dour realists of a
practical bent who were paying close attention.
Indeed, if the boasts of bears on the Internet are to be believed, many
heeded the signs and bet heavily against equities just before stock averages
began to tank in late July.
One need look no further than the bank stocks to appreciate the source of
their professed glee -- and profits. Citicorp dropped 54Çpercent from peak
to trough, and Chase Manhattan fell by nearly half. Bankers Trust, perhaps
the most notorious and inventive crapshooter of them all, shed 56Çpercent of
its capitalization.
A timely $200 wager against any one of them in July could have produced
gains exceeding $7,000 in just six weeks.
And that, ironically, is what so far is most troubling about this bear
market.
For if its end is to break the spirit of speculators and annihilate the
greedy, its means is to visit pain and suffering on bulls and bears alike.
Which is to suggest that, among investors, neither the optimists nor even
the most astute pessimists should have anything to brag about once this bear
market has run its course.
We are therefore impelled to ask, "What terrible surprise might await both
bears and bulls?"
I am firmly convinced the answer lies in that seeming bedrock of savings and
investment, residential real estate.
Pumped by profits from the bull market in stocks, housing prices have
reached unsustainable levels, especially in or around such heady financial
centers as San Francisco, New York and Los Angeles.
Ordinarily a bear market could be expected to deflate the real estate
market, or at least cause it to level off somewhat. This has happened
regularly in the past.
But this time the bear market is global, and its cause is not merely a
downturn in the business cycle but the bursting of a credit bubble that has
engulfed us all.
Much has been written about the bubble, and its destructive potential has
been tacitly acknowledged by the world's most influential banker, Fed
Chairman Alan Greenspan.
But if Greenspan truly understands whence the bubble's power comes, he is
most skillful in hiding his fear of it.
For here is the bottom line: Every penny of every debt eventually must be
paid -- if not by the borrower, then by the lender.
C.V. Myers, the late economist, formulated that maxim in his prescient book
of 1977, "The Coming Deflation," and it will always hold true. He was
attempting to dispel the notion that we can simply "walk away" from our
debts.
The collapse of the banking stocks because of loans gone sour in faraway
places is ample proof that ultimately, someone -- in this instance bank
shareholders -- will have to shoulder the debts on which someone else has
reneged.
Globally, debt has grown to incalculable size. Some sources attempt to
measure it in relation to the derivatives market, a realm of financial
prestidigitation that has helped to create credit money three to four times
the size of dollar trade in worldwide goods and services.
Others simply look at Uncle Sam's books and see $5 trillion in on-the-books
debt, $9 trillion in off-the-books debt, and who-knows-how-much in
way-off-the-books debt.
Applying Myers' rule, the amount that we collectively owe must eventually
settle against what we own -- essentially, the homes, stocks and bonds in
which nearly all of America's savings are vested.
This explains the mechanism that has been deflating Asia's economies. In
effect, corporate borrowers can't produce enough cars, or cut enough timber
or sell enough silicon wafers to service their debt.
The implication for the homeowner is sobering. When deflation spreads to
these shores, as it must, asset values and income will fall, and even a
modest drop will be enough to bury most mortgage borrowers.
Try to imagine being yoked to a 6.8 percent mortgage on a $300,000 house
after it has been reassessed at $150,000. Now reweigh your relative burden
when the highest rate of return available to you in T-bills or a passbooks
account has fallen to less than 0.5 percent, as occurred during the Great
Depression.
Toss in a delinquent home equity loan and a touch of joblessness and the
picture is complete. The silver lining? Houses aren't as liquid as stocks,
and the banks therefore won't be able to repossess them all.
But their shares will adjust to misfortune by falling precipitously. I've
forecast that Citicorp, currently trading for around $105 a share, will drop
to under $10 at the trough of this bear market.
Since there is no way to profit by selling the housing market short, bears,
too, will be dealt a stunning
blow. ----------------------------------------------
Rick Ackerman forecasts stock, index and commodity futures prices for market
professionals in his daily newsletter, Little Black Box Forecasts. His
e-mail address is rick@xxxxxxxxx
©1998 San Francisco Examiner
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