March 17, 2009

Global Market Comments for March 17, 2009
Featured Trades: (REAL ESTATE)

1) I am more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last 120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven't even fallen to the past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around $66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976, 1983, and 1996. These figures suggest the best case low is down a further 28%, and the worst case is down another 51%. I think I'll go find something else to trade.

2) After a merciless torrent of budget cuts, California's public education system has been bled dry, and now ranks 50th in the US, down from number one when I attended classes here a half century ago (oops!). The golden state now spends more on its 170,000 prisoners that on educating the young. When I recently tried to get Fedex to send a package to Japan, the clerk thought it was a city on the east coast and refused to take it because she couldn't find the zip code. I ended up mailing it. Those trying to engineer an economic recovery in California don't understand that you can't become globally competitive with a dumbed down work force.

3) If you are wondering why it has gotten so hard to sell wine, look at this chart of personal consumption cuts which I fudged from Business Week. It says that Americans have chopped their purchases of alcoholic beverages by $11.2 billion YOY. Opening a restaurant is even a worse idea because spending there has dropped by $55.7 billion.

Change in personal consumption
billions of 2007 dollars

Cars, light trucks, SUV's        -$115.2 billion
Food    -$55.7 billion
Clothing, accessories, and jewelry    -$18.1 billion
Household operation            -$15.9 billion
Alcoholic beverages            -$11.2 billion


'The dark side of the moon is the hardest to see,' said Nassim Taleb, author of The Black Swan-The Impact of the Highly Improbable.'