"The best laid schemes o' mice an' men gang aft a-gley," wrote the Scottish poet Robert Burns, noting the tendency of even the best plans to go awry. We are not sure exactly what he had in mind when he wrote it, but we think we see some signs of "a-gley" coming pretty soon in this market.
Today, we belabor one sign:
If you had lent the U.S. government money yesterday, you would have gotten a yield of 4.71% on a six-month loan. On a loan for a longer period, the yield would have been lower: 4.51% for a 30-year bond.
Obviously, there is something distinctly odd about this. Why would you get less money for a loan that takes longer to come back to you? The longer the time, the more risk. Tsunamis, nuclear wars, the melting of the polar ice caps, a new Fed chief…so many things can happen over a longer time, dear reader. So many things can exhibit this nasty tendency to go "a-gley," which is why the long-term rates should be higher. And if they're not, then it's what economists like to call an "inverted yield curve." This means that the line on the chart that indicates yield goes down with time. And most economists now think the yield curve will become even more inverted by the end of March, after Mr. Bernanke announces another rate hike.
Generally, or at least since the 1950s, an invested yield curve has been a signal of a coming slump. It signals that the Fed's short-term rates are too high, which is what makes the economy slump, many believe.
And the fourth quarter of 2005 suggested - well, it was more like proclaimed at the top of its voice - that a slump might be on its way. GDP grew far more slowly than expected, inching along painfully at an annual rate of only 1.1%.
Ours is an economy dominated by consumption, and consumption requires spending, which insists that people have something to spend. In today's news we find that average weekly consumer incomes in the month of January went down 0.4% from the year before. We also find more circumstantial evidence that the spendable cash is getting tighter and tighter.
The reason is not hard to find. The spending boom of the 2001-2005 period owed its genesis to the boom in real estate. Their own four walls and roof turned many Americans into party animals. Asha Bangalore, an economist at Northern Trust Company, figures that 43% of the jobs created in the U.S. during that period were a by-product of real estate. People were put to work building houses, fixing up houses, financing houses, selling houses…or put to work serving drinks to people who made money on houses. In the first nine months of 2005, calculates Bangalore's colleague Paul Kasriel, 100% of the increase in household net worth came from asset-price appreciation, most of which was the increase in house prices.
We can still hear echoes of the boom reverberating, but the source of the explosion seems to have died down. In Orlando, for example, the local paper tells us that there are now twice as many houses for sale as there were a year ago. "Homes hit market in record numbers," says a Sun Sentinel headline.
Since there is no "spot" market in houses, owners adjust their expectations slowly. No one knows what the exact market price really is, and few are willing to accept a figure lower than the one gotten by their neighbor down the street. So, instead of adjusting quickly to a softer market, prices tend to trail off slowly as inventories build. The boom ends with a whimper, not a bang.
It's not really any of his business, but the housing market is bound to be weighing on Ben Bernanke's mind as he considers the Fed's next rate move. The yield curve will be bothering him, too. In a speech last March, Bernanke already told listeners what he would do when he took the top post. He would aim the fed funds rate so that "the slope of the term structure of interest rates is approximately normal, as best as can be determined."
Unfortunately, there is nothing even remotely normal about the present U.S. economy.
But we will let that pass and focus on the shape of that yield curve. "Approximately normal" is a curve that slopes up, not down. To get the present curve back to "approximately normal" either short rates have to go down or long rates have to go up. Mr. Bernanke controls only the rates on the short end. It is hardly a stroke of genius on our part to suggest that he will not raise them. Heck, he might even lower them.
More news from Aussie Joel and The Rude Awakening…
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Maria Reynolds reporting from Wall Street:
"A good leveler is to compare Buenos Aires, Argentina, with Montevideo, Uruguay, and Punta del Este (Uruguay's prime beach resort) with the Argentine Atlantic coast."
For the rest of this story, and for more market insights, see today's issue of The Rude Awakening:
From South America to Wall Street
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Bill Bonner, back in France with more views…
*** From Addison:
"The show CBS Sunday Morning w/Charles Osgood sent a camera crew and producer to Baltimore from their DC bureau on Tuesday. They're doing a story on the American love affair with debt. The segment will air this Sunday. If you're a fan of the show you can check it out between 9:00 - 10:30am on CBS. They were trying to get me to take a pretty hard position on the build up of debt…it wasn't hard to do. Who knows how they'll skew the message.
"But what was more interesting was their interest in our campus here in Baltimore. 'We are dogged by dead men,' we write in the opening of a chapter we affectionately titled The Road To Hell in the Empire of Debt, 'it is in Baltimore, Maryland, where the ghosts haunt us the most. In our very own office, according to the local history buffs, Woodrow Wilson got together with the U.S. Ambassador to Belgium, Theodore Marburg on the of the grandest wish lists of all time - The League of Nations.'
"'You're proud of that?' the producer who conducted the interview asked. They had set up a makeshift studio in the library of the old Marburg mansion - the very room in which the first draft of the League of Nations was reputedly penned.
"Earlier this week, we were interviewed by the Baltimore Sun because of our presence in these buildings in Mt. Vernon. We've apparently had an impact on the job growth in downtown Baltimore.
"The neighborhood has come a long way, certainly. Back in 1995, when we first moved into the Marburg Mansion, the gentleman who was moving out, a doctor retiring from his practice, was mugged at gunpoint on the steps at 1:00 p.m., broad daylight.
"Anyway, these buildings make for entertaining conversation at cocktail parties. Take a look:
Agora in Historic Mt. Vernon
"Here's what we put in the company newsletter after the Baltimore Sun piece was published:
"'Agora Inc. was featured in a front-page news story in the Baltimore Sun for its contribution to the job renaissance underway in downtown Baltimore. Our own Addison Wiggin, of Agora Financial, explained that the neighborhood definitely seems more vibrant than it used to when we moved in a decade ago.
"'About 30 minutes after this article hit the newsstands, the mayor's office called. They've posted the article on their site. Of course, it's a campaign year, so would we expect anything less? Baltimore is, however, being singled out for being a real world example of what's called: New Urbanism. An architectural movement that stresses 'mixed use urban renewal' in direct response to suburban sprawl.'
"To read the full article, click here: Baltimore Sun Article
"Back to Bill…"
*** Is there anyone among you, dear readers, who would like to buy a magnificent chateau in France? The Forbes family has one. Mick Jagger has one. Surely, someone else wants one?
We sincerely hope so.
We drove out to Normandy yesterday. It was bitterly cold and snowing. Maybe the weather depressed us. Or maybe it was the staggering scale of the work - not to mention the expense - on our pile of old stones.
It seemed like such a fun project when we took it on. We imagined ourselves spending weekends out in the country, cheerfully whistling while we lay up stonewalls. We imagined the many conferences, colloquies and seminars that we would be able to host…not to mention the lavish dinner parties and convivial weekend retreats.
But something has gone wrong with this cozy picture. It began, as we have already reported to you, when we gutted the basement and discovered what to old oak beams must be the equivalent of avian flu. They had to come out…to be replaced by concrete. And then, the roof was next. We had not noticed that one of the major structural beams holding it had rotted on one end. The roof had to come off so that it could be replaced. Next, a French bureaucrat informed us, sniffily, that the house was a "public building," even though it was not open to the public. It was simply too large to be considered private. All of a sudden, we were looking at wheelchair ramps and handicapped bathrooms. And then, along came the agency in charge of historic monuments. Didn't we realize that this was a "classified" building? Didn't we realize that we needed permission before we touched anything? And didn't we realize that there was no way in hell that we were going to put in any handicap ramps?
Each step of the way made the project more and more costly and less and less fun. When it is finished, we will have a magnificent building, but we won't be able to take much pleasure in it. We will have spent too much. The chateau will be in good shape. We doubt we will be able to say the same about ourselves.
We chuckle at all this. We, who wrote about the bubble in real estate prices, who warned against spending too much on vanity projects, who profess humility and eschew conspicuous consumption in all its forms - we have let ourselves get trapped by a huge (for us) investment in a grandiose property. Now, we have no choice…we have to hang our head, brace ourselves, and see it through.
We couldn't wait to buy the place two years ago. Now, we can't wait to sell it.
