The Rude Awakening
Wall Street, New York
Tuesday, September 27, 2005
------------------------- - Greenspan: The ultimate contrarian indicator?
- Four days left on the "perfect investment", and,
- Why are all the best tasting food laden with
cholesterol?
-------------------------
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By Eric J. Fry A couple of nagging thoughts have been vexing your editor
lately: 1) Why do so many of God's tastiest dietary creations
contain so much cholesterol? 2) Could the U.S. housing bubble burst at the very
moment when so many people -Chairman Greenspan, in
particular -- expect it to occur?
Neither question invites an easy answer, but we'll offer a
few random thoughts on both topics, nonetheless.
First, the cholesterol issue. It's true that cholesterol assists vital bodily functions.
But this fact does not explain why all the yummy foods
contain lots of cholesterol and the yucky foods do not? Why
does a sundae contain cholesterol and a squash does not? Or
to rephrase the question, wouldn't the world be a more
enjoyable place if crème brullée contained less cholesterol
than Brussels sprouts? Unfortunately, the Divine Plan is
not so configured. Cholesterol's value to the natural world seems only
marginally greater than a mosquito's. And yet, the cardiac-
arresting stuff is everywhere. Why is this so? The Lord only knows… Certainly, by 2005, God could have created cows that
dispense rich-tasting, non-fat, no-cholesterol milk.
(Imagine the genetic possibilities at His disposal, given
an eternity within which to operate). Yet, for reasons that
escape us mortals, He has not done so. Instead, He has
ordained that foods like brie be more dangerous to ingest
than foods like broccoli. In short, high-cholesterol foods
are a mystery - a mystery that has contributed mightily to
your editor's slightly elevated cholesterol readings. But I'm not complaining…Elevated cholesterol readings are
the curse of those who have more than enough to eat. The
world's impoverished masses do not worry about cholesterol,
any more than they would worry about country club dues. So
let's consider cholesterol a blessing of the world's
"comparatively rich." It reminds us to enjoy the here-and-
now, but not to the extent of courting the hereafter.
Now, for the second of today's vexing questions: Whither
the housing market? Two years ago, the "housing bubble" proponents comprised
the lunatic fringe. One year ago, they seemed a little less
crazy, but still constituted a distinct minority. Today,
almost everyone seems to fear a housing bubble and expects
it to burst - or to begin deflating - very soon. We here at the Rude Awakening have counted ourselves among
the bubble-phobic majority of housing market observers, and
have written several columns chronicling the bubble's
dangerous development. But this negative viewpoint has
become so pervasive that we are forced to consider
alternative scenarios. We don't doubt that the housing market contains numerous
pockets of excess and elements of risk. Even so, the bubble
needn't burst in September of 2005, right when so many
folks - including Greenspan - seem to expect it. The fact that Chairman Greenspan has begun to worry about
the housing market is exactly what worries us most about
worrying about the housing market. In other words, if
Greenspan is worried, we probably shouldn't be. The
Chairman is a kind of contrary indicator in pinstripes,
always giving voice (and lots of words) to the prevailing
investment opinions - the very same opinions that tend to
be the wrong opinions. In 1996, Greenspan fretted aloud about the frothy stock
market. But by 2000, he was praising a productivity
revolution that seemed to validate the elevated share
prices of the day. THAT is when the bubble burst and the
stock market cratered. On December 5, 1996, as you may recall, Greenspan uttered
his infamous "irrational exuberance" remark. During a
speech at the American Enterprise Institute for Public
Policy Research in Washington, D.C., Greenspan mused, "How
do we know when irrational exuberance has unduly escalated
asset values, which then become subject to unexpected and
prolonged contractions as they have in Japan over the past
decade?" To all the world, Greenspan's remark seemed a
clear declaration that share prices had risen to excessive
levels. (Greenspan never argued this inference, nor
retracted the comment). Over the ensuing three years, the Nasdaq Composite Index
quadrupled. But instead of worrying more about soaring
stock prices, the Chairman worried less. In early 2000,
with the Nasdaq levitating just below 5,000, the Chairman
seemed to decide that share prices weren't so high after
all. On March 6, 2000, Greenspan assured a Boston College
conference on the "New Economy" that the Internet-based
economy would continue to foster productivity, technology
innovation and enduring wealth creation. "I see nothing to suggest that these opportunities will
peter out anytime soon," Greenspan predicted. "Indeed, many
argue that the pace of innovation will continue to quicken
in the next few years as companies exploit the still
largely untapped potential for e-commerce…" Alas, the Nasdaq topped out almost immediately after
Greenspan stepped away from the podium. 
As we fast-forward to August 27, 2005, we find Chairman
Greenspan musing aloud once again about asset values. But
this time the topic is housing, not stocks. "Nearer term, the housing boom will inevitably simmer
down," the Chairman declared last month at the Jackson Hole
confab of economic mucky-mucks. "As part of that process,
house turnover will decline from currently historic levels,
while home price increases will slow and prices could even
decrease. As a consequence, home equity extraction will
ease and with it some of the strength in personal
consumption expenditures…" It's true; the housing boom will "inevitably simmer down,"
just as the Chairman predicts, but maybe it will not do so
over the "near term." Indeed, yesterday's home sales report
suggests that the housing market has absolutely no
intention of simmering down. Sales of previously owned
homes in August posted their second-highest level on
record, while home prices increased by the largest amount
in 26 years. Median house prices climbed to a record of
$220,000 in August, a gain of 15.8 percent from the same
month a year ago. That was the biggest 12-month increase
since July 1979. So what might keep the U.S. housing boom humming along for
much longer than most of us can imagine?
Maybe a confluence of factors… Specifically, the price of oil and most other commodities
might "simmer down" for a while, thereby allowing consumer
confidence to perk up. Quiescent commodity prices might
also allow interest rates to dip again. And we all know
what confident consumers do with low interest rates: They
borrow and buy…especially houses. A drop in interest
rates would also help mortgage lenders to help home-buyers
to buy "more home" than they could otherwise afford. The housing boom will end, but it may not end exactly on
Greenspan's cue. [Joel's Note: We here at the Rude Awakening thrive on
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