The Economy Guy

In the news today…..

Existing Home Sales FALL 27% in July – from the previous month and this is a 15 year low in sales of existing homes.  This is far worse than anyone expected, and shows how many homes were purchased because of the government’s tax credit incentive that is now over.  Why are the number of sales dropping?  It is because buyers think that prices will be coming down (and they are right), and they are waiting for them to decline before jumping in again.  This is a self-fulfilling promise, as when buyers wait, prices drop. Prices are also falling because of the high foreclosure rate across the US – as foreclosure sales (REOs and Short Sales) are always less than the non-foreclosure prices in any neighborhood.  As long as foreclosures continue at HIGH rates (it’s now 10 times higher than before the bust), prices will continue going down.  Naturally, there is a bottom – it is zero.  But, more realistically, prices start to slow down in their fall when a buyer (an investor in this case) can rent the property and make a good profit.  Naturally, the government is doing as much as possible to make any investor think twice before buying – as new taxes and new costs of buying are hitting the market all the time.  So, don’t believe the government is trying to make things better – they aren’t.  Mortgage rates are at very low rates right now – making it better for buyers and investors – but people are waiting longer anyway.

The supply of existing homes on the market represents 12.5 months worth of inventory at the current rate of sales.  This is a disaster.

Today’s home sales figures dominate today’s news.  This news drove stock prices down, gold up, oil down (expect lower gas soon), bond prices way up and the dollar went sideways.

Let’s review the US economy right now.

1. The housing market has not recovered, and in fact, is tanking further right now.  The housing market must stop falling for the US to pull out of our doledrums – or would you call it a recession – or depression as some are now calling it.
2. The jobs market is getting worse as the number of people claiming unemployment benefits is starting to go back up.  Remember when the President said we are creating jobs, and everything would be okay – well he doesn’t have a clue.  The President and his policies are creating an environment of unknowns for small businesses (who create the majority of new jobs), so he isn’t helping at all.
3. As housing and commercial property prices fall, debt obligations become more precarious, and deflation is real.
4. Inflation is also part of our lives, but no one wants to talk about it.  Food prices are rising, and food packaging is getting smaller at the same prices (have you seen this in your grocery store?) The anomaly of some prices rising and others falling is baffling to politicians and unfortunately to most economists too.
5. We are in a “stagflation” pattern right now, and it will change in the future.
6. Did we ever come out of the last recession?  Many say “NO.”  They would contend that this is not a double dip recession, but a continuation of the past recession.  Congressional stimulus brought the stock market back, but not the jobs market and not the housing market.
   

So, where are the markets heading in this mess?

1. Stocks are heading down.  The “small guy” is pulling money out of stock mutual funds are an amazing rate as they are just scared.  All the technicals are pointing to lower stock prices – and the big boys are preparing for that eventuality too.
2. Bonds are heading up (interest rates down) as those stock mutual fund withdrawals are also going into bond funds.  Bonds are going up because the FED is buying bonds actively as a “mini-Quantitative Easing” policy.  Ultimately, the FED easing will turn into inflation.  Are you prepared for that possibility, or eventuality?
3. Oil and gasoline are tanking as a poor economy says less energy consumption, and larger oil/gasoline reserves.
4. The dollar is going sideways.  It is falling against the Yen.  It is gaining against the Euro.  Europe is having its own problems, and will probably announce more debt problems later this fall – this will be a bombshell when it explodes on the news corps.
5. Gold continues its move up.  Russia is buying more gold – each and every month.  India is about to make it jewelry buy next month.  Any bad news will create a condition for a New High for gold.  At $1230 right now, it is within striking distance of that new high.  
   

Here are the closing numbers for today:
Dow Jones 30 Industrial – 10.040 (down 134)
10 Year Treasury Bond – 2.50% (down 0.11%)
Euro – $1.2674
Gold – $1231 (up $4)
Oil – $71.58 (down $1.52)
Gasoline – $1.85  (down $0.03)