In the classes I taught at university one of my mantras was “if you don’t understand the nature of the disease you can only treat the symptoms.” I wasn’t teaching medicine. I was teaching finance. With all the spin and politically distorted commentary from interest groups of every kind, with every known agenda, getting to clarity on the nature of the financial diseases from which America suffers is quite hard.
Two of the truisms that have taken hold in the markets is 1) that markets are neither over-sold nor over-bought and 2) that the housing recovery is underway. At a minimum, housing’s hit bottom and even if it bumps along the bottom for some time isn’t likely to get worst. I’m hearing and reading these two mantras in all the media, but I’m not seeing that in the data.
With minimal commentary from me take a few minutes and let these graphics talk to you.
What the “International Surprise Model” is, in this context, is unimportant. Just observe that it has closely tracked or lead the S&P500 Index since the market bottom in early 2009. This is only the second time it’s been at odds with the S&P500 and the first time it’s been markedly more pessimistic. The suggestion in this graphic is that the equity markets are not reflecting reality. I leave to you to figure out how this separation is to be resolved when the two trends finally merge.
The housing market has, of all markets, received the most massive bullish hype. It is in everyone’s best interest that housing recover … from the first time home buyer to the real estate brokers to the bankrupt Fannie and Freddie to the poobah’s on the Federal Reserve Board of Governors. Clarity is damned hard to come by. The truth is, however, that housing is the ultimate supply and demand marketplace: it’s local, it’s unique and its individualized. Simple equation: no demand = no recovery. No surprise that all the hype is aimed at fostering demand. This graphic asks a simple question: how are prices rising in the face of falling demand? What does the divergence of these two trends suggest to you? Which will influence the reversal of the other?
Then there’s this longer term view of that blue trend line above. Where is it headed? Is the “housing recovery” blaring from the headlines evident to you in this data?
Finally there’s this pair of graphics below. On the truism that you can’t buy what you can’t pay for … well, OK, that’s a lot less true today than it used to be, but humor me here … there’s the small issue of a massive number of people unemployed, in historical terms, for a very long time. There’s the worrisome issue of European levels of persistent unemployment. Another truism: shrinking income = shrinking demand.
Just offering these data for your thoughtful consumption. And perhaps a bit of clarity the next time one of our governmental or private market shills starts carnival barking about the exploding recovery in housing and the wonderful progress we’ve making on the employment front.