Stock Markets Falling – Why Now?

[powayseller]

It seems that commodity prices are more a reflection of speculators trading futures, than real demand. Copper went up 100% in a few days this year, because hedge funds were covering their shorts. I read that on the Big Picture. Another example of how you can get short squeezed.

The moral problem is that the manufacturers who need copper to be productive, to actually build something, are having their costs raised by speculators who do nothing but play market games in raising prices. It’s such a shame what these hedge funds are doing. Same with oil. It’s the speculators trading futures who are causing these prices to go sky high. Without all that, the prices would be a little bit lower.

I believe that the US recession will bring on a global slowdown. When that happens, there is no way that commodities will keep rising at the current rate. As the rate of demand slows, so will the price of commodities.

Any thoughts on that? My brother thinks that commodities will keep rising, and China’s economy will keep getting stronger. As their exports decrease, they will just consumer their own products. They’ll use the dollars they already have to buy up natural resources worldwide, and enrich themselves, without another look at the US consumer.

I still think trade tariffs would have prevented the liquidity bubble and stunted wage growth in the US. I disagree with Rich. If we would slap tariffs on all those cheap Asian imports, we could have maintained our US manufacturing base. The downside is that inflation would be MUCH higher, as wages would have gone up faster.

The only reason that wages are not going up much is that we are competing with people working for $4/day.

This is the most important point that zk and others like him must realize when they think that higher wages, rather than falling median home price, may contribute to a rebalancing of the per capita income/median home price ratio.

As long as we have a willing intelligent educated workforce at $4/day, our wages are staying flat.

[privatebanker]

You are right Poway, speculation has caused a lot of problems in the markets. Nothing new there but nothing grows to the sky , everything returns to a mean at some point. As we have observed with Real Estate, a lot of amateurs have come to play in the later stages of the game and are now getting hurt or on their way to be.

As for China, I think it’s hard to say if they could be a self sufficient economy. We will have to wait and see on that. They are currently very dependant on foreign economies.

As for wages, it would take a very, very long time for wages to catch up with housing prices. We really don’t have to speculate with this concept (housing prices) because it’s been proven time and time again that when an asset class deviates out of it’s historical mean of return it ALWAYS corrects. Unfortunately, our current situation with RE prices has a lot of emotion embedded in it. This will intensify the “Hard Landing”.

[powayseller]

zk, on another thread, is saying that wages could rise enough that the ratio of income/house price can normalize without prices dropping. Have you ever heard of an asset bubble popping without nominal prices declining by a LOT?

[4plexowner]

I think we have to assume that Mr Bernanke and Mr Paulson will do everything they can to maintain the current economic status quo.

Hiding the M-3 money aggregates in March of this year made their job easier. They can now run the printing presses with less oversight.

It is probably reasonable to assume that they will try to maintain the housing market or revive it if it turns down significantly.

Another poster pointed out that tax incentives could be offered for real estate investment.

More frightening than additional tax breaks would be some kind of “every American deserves to own a home” program with huge subsidies provided by the government.

These subsidies could be offered in many different ways. Maybe special housing grants to city workers (police, fire, EMT, etc) for purchasing a home in expensive cities. Same thing for teachers, etc. How about housing grants for military service? Get $20K in mortgage credit per year of service!

Given unlimitted access to the printing presses that produce the world’s reserve currency (for now) there are lots of options.

We might even see housing grants for 13 million illegal (oops, I mean ‘undocumented’) aliens.

For that matter, why bother subsidizing the purchase? Why not buy some of the vacant condos as housing for government/civil workers? Provide it as part of the pay package.

Sounds far fetched doesn’t it?

I’m trying not to underestimate the absurdity of what our government and central banking system might attempt in the next few years.

The article linked below sums up why I moved my investment money out of real estate and into the precious metals. This is a real estate holding company summarizing why they are selling their real estate holdings ($350 million worth!):
“There is virtually no upside left, and instead, tremendous downside risk. There will be a significant “flight to quality” by lenders and investors. The risk of remaining heavily invested in real estate is extremely high. Values are far more likely to fall precipitously than to rise modestly. Most real estate should therefore be sold and the extraordinary profits harvested. ” http://news.goldseek.com/DollarCollapse/1149879518.php

I believe the “flight to quality” that they refer to will drive gold to at least $1650/oz and silver to $80/oz.

I own the real estate that I currently live in and plan to keep it. I have stopped telling other people what they should do inre real estate and investing but I am always willing to share what I have done and why. In a nutshell: sell investment real estate and buy precious metals.

[powayseller]

I am certain the government will devalue the dollar. It is the best alternative to pay down the deficit and give us a shot at increasing exports.

The government doesn’t care if individual families are hurt in bankruptcy or lose their homes. They are concerned with price stability and inflation.

As long as the country as a whole can keep paying the bills, so what if a few million people are financially insolvent?

They also realize that the debt game cannot go on forever. This excess liquidity must be wiped out.

Check out the Chart II in Bill Gross (PIMCO) article, which shows a parabolic rise in debt, greater than at any time in US history, greater than during the debt bubble leading to the Depression. He calls our the Finance-based Economy. Remember when we were the manufacturing economy, then the service economy? Now we are reduced to the finance economy. We finance our debt.

As someone wrote earlier, if we truly are the most productive nation on earth, why do we have the most debt? We are unproductive. We are consumers, who consume more than we make.

You can try all kinds of financial and monetary supply shenanigans, but you must ultimately face yourself and you will see that you consume far more than you make and pay for it with borrowed money. When the gig is up, where will you be?

[4plexowner]

Wikipedia says that the world’s total GDP in 2005 was $44.4 trillion dollars. American GDP was $12.2 trillion dollars.

Depending on whose numbers you want to use, the financial derivatives market in 2005 was $150-200 trillion dollars.

How do you explain financial activity that is three times the size of GDP?

I’ll use PS’s words: “all kinds of financial and monetary supply shenanigans”.

With precious metals backed currencies, these financial games would not be possible.

[PD]

Wow, the market is bleeding again today. I thought maybe we would see a little bounce.

[Author]

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