San Diego Housing Bubble News and Analysis

Was just having this discussion w/ a friend earlier today. I agree.

I read an article recently, though I can't seem to find it, which likened this scenario to a Tsunami where all the water first runs away from the shore and everyone stands there looking at it, or worse, chases the water. (deflation)

Then, the actual Tsunami hits (inflation) as people are standing there on what used to be dry ground.

Would like to hear your thoughts on that, Barnaby. Is inflation coming after this or is this a long defaltion cycle like Japan ? How much longer? Months? Years ? Wish I knew.

Wow, strong dollar and cheap oil, food and housing.

What a disaster.

I'm going to move somewhere with a sensible economy, like Iceland or Argentina.

From what I can tell, most people on this site have been waiting for things to come down so that they could buy. Well, it's happening. If you've been responsible with your money and saved, etc...stuffs getting way cheaper than it has been. Seems like a great thing to me! Gas, food, homes. Most goods. I'm liking it! But it's going to come down more in 2009 and the unemployment part is really going to suck. Sit back and enjoy the show. Dont spend yet.

I just hope I'm enjoying the show from a desk instead of a couch.

Gotta think some more on the next step.

I worry about my friends and family, more than myself. I especially worry about my girlfriend. I think at some point in the next few years I will lose my job, but I can't tell when. Right now my company is doing pretty well.

I like the tsunami analogy. However the question in my mind is one of confidence. In order to get people to borrow, you have to get them to believe that its in their interest. The deflation can't be easily stopped like it was in the 30's with a devaluation against gold, our currency isn't tied to gold. You must fight a much harder battle, like the Japanese. Do I think we will endure 10 lost years and 10 partially lost, no. As you all can see from the ruptures in our public marketplaces, we aren't that good at covering up the bodies! What will get people borrowing again?

In my mind it would have to be something like alternative energy mandates, though those have their own costs. Another option would be a wholesale replacement of the US dollar with a new Amero, though thats pretty far fetched. The wealthy wouldn't like that one bit.

Then, the actual Tsunami hits (inflation) as people are standing there on what used to be dry ground.

I've heard this analogy a couple times and I'm not sure what mechanism could cause an 'Inflation Tsunami'.

From my perspective the inflation 'Credit Tsunami' already happened and what we are perceiving as deflation is really just a reversion to mean.

From my POV, only two things could cause massive inflation. One, Helicopter Ben starts giving out economic stimulus checks right from the printing press. Two, a global run on the dollar that causes people holding our hard currency to exchange it for something else.

Regarding the original post, I would not draw such strong conclusions from the exchange rates. As I understand it, we are seeing both a flight to quality - buying the safest investments around - and, in other countries, unwinding "carry trades". Neither of these is deflation.

It seems that deflation is likely, as the shrinking of the debt and asset bubble sucks cash from the economy, and slows it down further as it sucks out cash. But I saw it noted that Japan only got into deflation four years into its crash. Maybe things move faster nowadays.

I cannot understand why Ben is keeping the FFR anywhere above 0%. Maybe he is so preoccupied with the financial system he is not noticing the rapid slowdown in the economy.

The dollar's strength is likely temporary, as bad news will continue to emerge from the U.S. economy, and the Fed and Treasury will support a weakened dollar in order to prop up our export economy. The current situation seems unsustainable.

Disclaimer: I have a vested interest in a weaker dollar, as I diversified from U.S.$ about four months ago, and have lost heavily since then. Well, it seemed like a good idea at the time.

I second this, unless the work from home program goes through at my employer (in testing phase right now) yippee!

I suspect it would be an overreaction of pumping money into the system. By the time they stop pumping money, the pendulum is swinging the other way.

Read somewhere that Japan entered their period of deflation with net savings. We enter ours in debt.

We'll only see price/salary inflation if it moves into the economy.

If all the new money is just replacing old money, or the literal equivalent of being stuffed in a mattress, its a wash.

The dollar's strength is likely temporary, as bad news will continue to emerge from the U.S. economy, and the Fed and Treasury will support a weakened dollar in order to prop up our export economy. The current situation seems unsustainable.

Fearful, all things are temporary care to hazard a guess? As to the unwinding of the carry, that is a knock on effect of the deflation. The Japanese have sustained enough losses that they are saying no mas. That currency is being repatriated yes, or rather parts of it are. I suspect that many of the Japanese banks that have been doing this are sustaining losses though which chills lending, which shrinks the money supply. Though I say up front I have no proof or insight.
Josh

Kwep. I think you've hit on what I've been thinking as well....we've just been through the incredible credit bubble and that WAS the inflationary period. And now we're headed back to the mean. Since it started, big time in 2002. Then that's the prices we're headed towards and we'll probably over-shoot as most reactions do.
Think about it. Wages did not grow, but the availability of money grew exponentially as debt. The economy was growing entirely on debt to a level where the debt could no longer be sustained. But this was hugely inflationary as it allowed all that extra currency to chase goods and services. Now the debt is going bye-bye and we're left with real wages to support the price of goods and services. Hence we're in deflationary pressure. And this feeds on itself as people are unwilling to spend and dont/cant borrow. As well as lenders are hesitant to lend since they just experienced defaults and huge losses. Throw in unemployment fear, and we're going down this path for a while yet. IMO.

I was all gung ho about buying a house, then I just heard today that so and so isn't here anymore. Wow, am I next? Don't really know the real story, seems like I'm always the last to hear. Just got me thinking though with jobs scarce do I really want to invest in something that might become an albatross around my neck? Don't think the family can survive very long with just 1 income earner and a mortgage to boot.

Savings is deflationary!

Japan got hit with a double-edged katana during their deflationary period. A nation of savers that honor their debts.

We have neither of those problems here in America!

I don't know how likely this is to happen but it does concern me. Here's how I see it may play out.

First, we have deflation and deflation makes it more difficult for debtors to pay their debts. We all know that many Americans and companines are having trouble paying their debts. This eventually spirals to the point where gov'ts at all levels are not collecting enough tax revenues to cover their spending and debt.

Next, Democrats control Congress and the Presidency and thereby control spending. New programs (Obama has proposed at least $1 trillion of new spending) are added that increase the debt and deficit while tax revenue continues to decline even as taxes are increased (increased taxes causing economic activity to sink further).

Finally, the debt and deficit swell to the point where foreigners are no longer sure they will get paid back in full because there is no sign the U.S economy will grow fast enough to make up for the increased spending and interest payments. Gov't begins to rapidly print money to not only fund its operations but also to pay for the increased size of the interest payments. There is a massive run to exit the dollar and this fuels hyper-inflation.

Threadkiller makes a very good point that most people on here should listen to. Unemployment! All this talk of ratios of income/prices and rents being less than buying, etc....wont mean a hoot-in-hell if we're at 10% unemployment.

Try not having a job against those ratio's and justifications!!! I assure you, they lose every time.

It gets bad enough and we'll see lots of places that will have a higher rent cost than a mortgage. People are becoming VERY risk averse and this sentiment will grow. That's when I'll get interested.

Finally, the debt and deficit swell to the point where foreigners are no longer sure they will get paid back in full because there is no sign the U.S economy will grow fast enough to make up for the increased spending and interest payments.

O'Neill, fired in a shakeup of Bush's economic team in December 2002, raised objections to a new round of tax cuts and said the president balked at his more aggressive plan to combat corporate crime after a string of accounting scandals because of opposition from "the corporate crowd," a key constituency.
O'Neill said he tried to warn Vice President Dick Cheney that growing budget deficits-expected to top $500 billion this fiscal year alone-posed a threat to the economy. Cheney cut him off. "You know, Paul, Reagan proved deficits don't matter," he said, according to excerpts. Cheney continued: "We won the midterms (congressional elections). This is our due." A month later, Cheney told the Treasury secretary he was fired.

Josh, thanks for your post. Really well-written and right on the money in my humble opinion. The big question is what next? Here's my sense, for what it's worth.

I'm in the deflation camp for now. Nothing left in the tank to inflate wages, so no price pressure in the short term. However, I think we are at great risk right now of currency failure followed by hyperinflation. Denominating oil in something other that the dollar could trigger a chain of events that causes confidence in the dollar to fail.

What's propping us up right now? I think the size/strength of our economy/currency as compared with other regions, and also systemic inertia and psychology. That could change. It's hubris to think otherwise. The imbalances created during the bubble -- the numbers are just staggering, utterly mind-blowing. We're walking the edge of a razor in terms of economic collapse.

Also, I believe pragmatic and multilateral foreign policy is absolutely critical to our interests right now. Economic collapse was ALWAYS the closing strategy behind AQ's war against US. There is a great deal of wealth in the world controlled by interests opposed to American hegemony. These are strange times and we ought to take care.

Have to disagree with you there.

My theory is that all the worlds wealthiest folk realize they have a good thing going and are happy with the status quo. They are willing to do what it takes to keep it that way.

Remember, AQ is at odds with the Saudi Royals as they considered them our toadies.

Hope you're right, kewp.

What's propping us up right now? Big Guns!

http://solari.com/blog/?p=1323

John:

My assessment is that 90% of the value of the U.S. dollar comes from the U.S. military. After we had our satellite systems in place, Cheney said “deficits don’t matter.” The US debt and deficit financing is no longer a debt system. It is a global taxation system.

Catherine

John wrote:

Could you expand on this thought just a little? This is one very sober line of reasoning.

John:

Global treasuries and sovereign wealth funds, central banks and a variety of large institutions buy Treasury securities or hold dollars not because there is economic value behind them or because these financial assets are sound fiscally or in terms of credit. They buy them because if they don’t buy them, their current holdings will drop in value faster (that is given their current holdings, they are better off with a managed fall that a precipitous one) and because they are forced to — both in terms of trade agreements — and because they have a gun at their head. If they don’t buy, they and their population will be subject to a wide variety of demonstrations of physical and financial force that will result in loss of life.

Hence, demand for U.S. dollars and government and agency bonds continues even as value falls. The losses on these holdings represents a tax paid to the “Empire.” The fundamental system is as old as the hills. It is based on force. However, this tax is not paid through the income statements, it is paid through the balance sheet. Hence, national legislators do not have to pass bills to authorize their people paying the tax. There is no disclosure.

This global taxation system can be implemented and enforced through the back door without the average global citizen understanding what is happening. Rather, it is invisible to all but the most financially sophisticated people.

What the implementation of this system means is that the household drain I describe here and the community drain I describe here are happening globally. That is, the Slow Burn (described here ) is draining everyone globally, not just in the U.S.

Abraham Lincoln was right, “You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.”

"Denominating oil in something other that the dollar could trigger a chain of events that causes confidence in the dollar to fail."

Confidence in the dollar is done around the world. The writing is on the wall.

Iran is already doing it.

http://en.wikipedia.org/wiki/Iranian_Oil...

International Oil Bourse,[2] Iran Petroleum Exchange or Oil Bourse in Kish[3] (IOB; the official English language name is unclear) is a commodity exchange which opened on February 17, 2008,[4][5][6][3]. It was created by cooperation between Iranian ministries and other state and private institutions. The IOB is a Petrobourse for petroleum, petrochemicals and gas in various currencies, primarily the euro and Iranian rial and a basket of other major currencies.

And Latin america is setting up banks outside of the West's central banks:

The Bank of the South is necessary to make the region independent from international banking, Venezuelan President Hugo Chavez warned on Wednesday, as he referred to the US financial collapse as part of "a perfect crisis."

During the Third Summit of Presidents of Judicial Powers of the Union of South American Nations (UNASUR) in Margarita Island, Venezuela, Chavez explained that the crisis is not only economical, but also affects politics, ethics, ecology, food and energy.

It is a perfect crisis, with all of them becoming one, a real threat. It is no exaggeration to say that human life in the planet is in danger, said Chavez

He said the entire world will be hit by the US financial crash, which he compared to a sinking elephant in a pool, with effects impossible not to be felt by anyone into that pool.

Other countries too

http://www.metimes.com/Security/2008/10/...

The Japanese, Germans, French, Italians and Canadians, not to mention the Chinese and Indians and Russians and Brazilians, will also want to design the new Bretton Woods system. They will want roles for the yen and yuan, the euro and the rupee, the real and the ruble.

What I read says as you stated the demand for dollars is only the rush for liquidity since the dollar is the world reserve currency.

This is obviously temporary, and doesn't directly mean prices will fall under Rich's definition of inflation/deflation that a dollar buys less/more than it did compared to a previous time.

The bigger fears I think are if the world cashes in their dollars for their own currency, and the US dollar is replaced by the Euro as the reserve currency.

This "tsunami" I see threatening when that happens at the same time as our Government's reckless printing to stop the bleeding hits full force to the tune of several trillion dollars.

At that time the Fed will be forced to raise rates, and the question will be is it too late.

We are in such chaos that anything can happen. There are factions in China that are pushing for a move away from an export based economy - decoupling. The economic situation is weakening fast in China, and why would not the country start spending its $1.8 trillion in foreign exchange reserves to bolster the internal economy?

Conversely, the rest of the world could fall apart and the U.S. is the only economy left (relatively) standing - and the interested parties wish to preserve the financial status quo. The dollar would rise pretty rapidly in that case.

Whatever happens, it seems to be accelerating. Feedback loops galore! I thought of another one: Homeowner bailouts could worsen the situation, as the prospect of a bailout will increase the propensity for people to simply stop paying their mortgages. I, for one, would love to be in an underwater house right now.

Eric

I, for one, would love to be in an underwater house right now.

Somehow I have to feel you are being sarcastic. I think you've hit on something. The deflation is unprecedented and as such the playbooks of all the players don't really cope with whats happening. This makes it (deflation) very dynamic. We could have all sorts of weird or unpleasant outcomes. I don't claim to be a psychic. This thread was really intended to highlight something that I see as being a direct effect of the deflation, namely the increasing strength of the dollar.

The way I am seeing it, we are screwed, but everyone else is screwed worse. Australia may have no budget deficit, and a surplus, but that will evaporate in the face of slack demand for the commodities they export. The US has huge current account deficits, but the world needs to keep selling it crap to keep its factories going. Lots of ugly, very few rays of sunshine.
Josh

There is some truth behind it; if I were in an underwater house, I would be sorely tempted to stop making payments and wait for the sheriff to come. I could easily see it being a year until they get around to me, and in the meantime, there may well be a bailout headed my way.

I think we are seeing asset deflation on an tremendous scale; how quickly that translates to consumer price deflation is a complete mystery to me.

Can't Fed and Treasury directly pump the (consumer) money supply by distributing a stimulus payment, issuing Treasury notes, and then buying those Treasury notes right back? It seems to me that the money supply can be pumped in a number of different ways, especially if deflationary expectations have not yet taken hold. If deflationary expectations have taken hold, then if Treasury issues stimulus payments, consumers will save the money, or use it to pay down debt, and the money supply will not be inflated. This was Japan's trap, no?

The speed with which dollar strength subsequently changes will illustrate the extent to which we are in consumer price deflation. I do not think either inflation or deflation sets in as quickly as exchange rates have recently changed.

Chaos. We are in the midst of chaos that I find frankly alarming. The Nikkei is down 5% as I write this. I suspect the drop in the Nikkei is partly due to Sony's poor forecast, which is partly due to increasing Yen strength, which makes Japanese exporters less competitive.

Eric

The way I am seeing it, we are screwed, but everyone else is screwed worse.

Yup. Or so I hope.

America has everything it needs to be self-sufficient. We have natural resources, an abundance of food and the best *human* resources on the planet.

We can afford to sit this thing out. Gonna suck for those whom have never known hard times.

Can't Fed and Treasury directly pump the (consumer) money supply by distributing a stimulus payment, issuing Treasury notes, and then buying those Treasury notes right back?

I referenced this earlier; i.e. the Fed printing money and giving it right to the consumer.

This has the potential to be hyper-inflationary, much more so than lending money to banks.

A better idea would be for the Fed to open up credit lines directly to consumers and business with something (salary, revenue) as collateral. Prove you make money and the Fed lends you money. Customers could use this to pay down high interest debt and give the economy some breathing room.

I'm no economist, but I agree with peterb and kewp, up to the point where we are now, ie a correction is taking place. But as I understand it, factors outside the credit bubble, such as food price increases, which some say is caused largely by biofuel projects, and oil prices which seem attributable to several factors, are also a part of the inflation equation.

As to the dollar strengthening, it's all relative isn't it? Currencies like sterling and to an extent the euro have been weakening, due to their respective weakening economies, which makes the dollar appear to be strengthening. Just my very small penny's worth.

Here is one guys take on the dollar.

Dollar Death Dance

http://www.contraryinvestorscafe.com/bro...