More Summer Malaise.

Look folks, the property market sucks, no matter what you hear from spokespeople from the National Association of Realtors. Or from the UK equivalent ... or Spain ... or.... And it will continue to suck for quite some time. Are we in a Japanese spiral (the unpleasant slow collapse to 30% valuations over a 10 year period) or something a little more violent but quickly passing? I dunno. Sorry. But there is really no end to the gloom -- or at least for the next year or two.

And in the UK it may be far worse: the UK is a smallish economy that has experienced insane property growth fueled by the greater fool theory, inflows of foreign capital (city driven), and the old stand-by, greed. Everyone just knew that you could get rich by flipping property. Buy to let. Buy three and hold, you know it is headed to the moon because everyone says so and there is only just so much land on our overcrowded island. Morons. So property, particularly in London and in parts where city-folk bought their "estates" skyrocketed.

As I have pointed out before, there is no stability to a market where the bottom rung is unattainable to those who must anchor it: the people who serve the estates have to have a place to live too. Until prices are rooted in that fundamental reality, prices are overinflated. Look at it another way, if you'd like to move to cash in on the gains, but can't find a place to move to -- well then those gains are not really gains, are they? It is illusory. Sure, you can get another mortgage on the increased value -- and spend it, but then you can't afford where you live. And if prices fall, you are toast.

Consider the city lads ... and their Bucks, Hants, Kent estates ... if they lose their city jobs, then they will probably need to sell their estates within a few years -- there is only so much cushion. And if they all want to sell at basically the same time (now), then it becomes "spot the bid." And don't anticipate that there will always be a Russian to buy/bail them out: if Darling and Brown get their way, they will tax these people out of the UK. Also, they are not stupid, either ... buy into the dips and sell into the bear market are phrases they are familiar with and they DO know the distinction between the two. Savills (big estate agents) said that prices in the country estate sector dropped 6.7% in the first six months of this year. Precisely.

The British Chambers of Commerce said "the economic outlook for the business sector was 'grim and ominous' and the downturn could be 'longer and nastier' than previously expected." Since the ex-city economy was largely a new housing driven event -- let's look at that for a moment: Barrat and Taylor and Wimpey shares (two large builders) are down an average of 95%, year on year. Yes, you read that right. Builders are simply walking off the job-site rather than risk any more unsold units ... at the prices they needed to make a profit. They spent too much on the land and infrastructure anticipating a pricing level that is simply not there. Resales are down 7% for June year on year. Mortgages are down 44% May to May.

So what? Well consider that inflation is headed North ... and therefore rates will be headed in that direction. But if Darling is unable to lift rates because of non-existent factory orders and a precarious mortgage industry supporting housing ... can you say "stagflation?" Remember the 1970's? Central banks tried to counter the slowdown caused by spiking oil prices by monetary stimulation ... leading to run-away price spirals and ... no growth to speak of. Do you really remember? I do.

Back to the U.S.....

Conveniently, Democrats are focused on the economy (stupid -- as Bill would say) and have decided that it would do not much for their cause to focus on Iraq for now. General Betray-us (moniker courtesy of Moveon.org -- it should really be "more-on.org" but the neo-commies don't have a sense of humor), uh Petraeus, has shown us how to do it ... finally. And if we can keep enough personnel in Iraq in spite of political pressures -- not to mention financial -- we should be able to gradually restore that country into a functioning society. And no, we cannot leave right now. Maybe not for a long while. The issue is not Shi-ites, it is Iran. You know that too, not that the New York Times will ever print that.

Nadal outlasted Federer. Too bad. But if Nadal would try and smile every now and then, maybe I would feel different. It was, however, the best final I can remember. Maybe ever.

Sorrry.... Back to Big Ben Bernanke. Everyone knows that Ben is a student of economic history, even acknowledged as one of the leading world experts in this subject. So, Great Wizard (my new name for Ben), why are you repeating the mistakes of the 1970's? Refer to the stagflation comments above ... if Darling can do it, why are you thinking about it? The answer I suppose lies in Great Wizard's fear of 1929 repeating itself: the risk he sees is more related to a collapse of the banking system because the the sub prime mess (it is still with us, people). If he makes money too expensive, more pain will hit housing, more pain to people holding essentially worthless securities, more pain to shareholder in US financial institutions. If one or more of those big boys go under, the systemic risk of global financial collapse becomes unacceptable and inevitable. So GW is faced with: inflationary sprial or financial armegeddon. Great choice, huh? And this is because Americans thought about property the same way the Brits did, and our financial institutions came up with creative ways to allow it prosper -- for the greater glory of the end of year bonus along Wall Street, and against all common sense. The Fed should have recongnized this and brought it to a halt, but with the spectre of the Tech Wreck shortly banished, nobody wanted anyone to rain on their latest parade: real estate.

Do you, the reader, realize how few people it actually took to run this massive CDO, etc. industry? Sure there were thousands of mortgage originators across the US, all bent on their little incentive for placing a new load of worthless shit in the hopper to be processed by the Wall Street few, but it is just amazing how a few reckless quants managed to ruin our financial system. Anyway, GW took over far (from Greenspan) too late to have any realistic chance of reversing it, and by then the investment banks had the smell of greed in the air and in their pockets.

If we have stagflation here in the US, the dollar will be worthless, exascerbating the spiral. But maybe our financial institutions won't fold in that scenario. Maybe. Clearly, what we need to do is guarantee our financial system first -- perhaps simply put the Fed put option underneath the whole mess: "We Guarantee" ... "In The Fed We Trust." Not for ever, but until the OCC can certify that the toxic elements are off the books. GW made a step in that direction with opening the Fed window to investment banks, but it needs to make the complete step -- sort of a quasi-nationalization of the U.S. financial system. GW needs to extend this to ALL banks, etc., for the duration, no matter how "clean" their books, because they were ALL guilty. Even Goldman Sachs -- probably more guilty than most, just not so greedy that they kept the toxic stuff on their books, hoping for the homerun.

This possible action by GW would in a stroke shore up the entire U.S. financial market, unleash the taps of credit again -- sensibly and under Fed supervision -- and place a bottom on our stock market. Then raise rates. Raise them sharply to support the dollar -- pass tax incentives to manufacture in the U.S. as opposed to abroad. Then watch oil collapse and inflation too. It might just save the E.U. too. GW might want to limit resales of Treasuries to a fixed percentage per year ... but that might be risky. China remains a wild card, but they need us healthy ... if we collapse, I'd hate to think how bad things could get in China. But that is another rant.