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In a commentary
last week, I compared the recent surge in gold prices to the
death of a canary in a coal mine. This week it appears that a few of
Wall Street’s miners have reluctantly gotten a whiff of the stench
and are now scrambling for the exits. In fact, the first week of the
fourth quarter has wiped out all of the gains of the proceeding quarter.
It started on
Monday when the Institute of Supply Management (ISM) released the
largest monthly increases in prices paid in fifteen years, and the largest
back-to-back monthly gain in over fifty years. In the days that
followed, numerous companies announced price increases and several Fed
officials chimed in with comments acknowledging what should have already been
obvious to all; that inflation is not as well contained as they had
previously thought.
Making matters
worse, on Thursday several European central bankers made similarly hawkish statements,
raising the specter of rising interest rates on the other side of the Atlantic as well. Because the U.S. is the
world’s largest debtor nation, and therefore a net payer of interest,
its economy is more vulnerable to rising interest rates then the economies of
creditor nations, which are net earners of interest payments.
In addition to
generally weak economic data, such as Wednesday’s ISM data,
Thursday’s rising jobless claims, today’s employment report
(though the 35,000 decline in September non-farm payrolls was fewer than what
had been forecast,) steadily rising interest rates (ten-year treasury yields
hit a six month high,) disappointing earnings announcements, a declining
dollar and gold prices climbing to yet another eighteen-year high, the week
also contained compelling evidence that the air is about to come out of the
real estate bubble. Not only did the New York Times report on record
insider selling by homebuilders (the housing bubble’s equivalent of
internet incubators,) but it also reported that apartment prices in Manhattan declined by
13% in the third quarter, with prices of high-end apartments collapsing a
staggering 36%.
On the denial
front, most still maintain that when the real estate bubble busts house
prices will not decline in the same manner stock prices did when
that bubble burst. If such assertions prove correct, it will most
likely be because real estate prices collapse even more. The main
argument advanced by those so confident that real estate prices will
hold steady is that people live in their houses, and will therefore not dump
them as investors did stocks. Aside from the fact that in cases of
“investment” and vacation properties homeowners do not reside in
their properties, only a small fraction of homeowners need sell to cause
prices to collapse. As home values are a function of comparable sales,
even if most ride out the decline, those few who do not, in many cases
due to foreclosure or other forced sales, will determine prices for the
entire market. It also seems the height of folly to deny that prices
that have doubled in less than three years could not drop just as
significantly in half the time.
Also, when the
stock market bubble burst, most investors did not sell either. They
simply refused to open their statements, and “held for the long
term.” Yet prices collapse anyway because those few who did sell
did so to an every diminishing pool of buyers. While a small
number of dot-com “investors” were able to get out with profits,
far fewer homeowners will be so lucky. That is because in the real
estate market there are no bids for sellers to hit, and stock market
speculators did not have to make mortgage payments on their portfolios.
As Wall Street
comes to grips with the realities of higher inflation, and the
recessionary implications of the bursting of the real estate bubble, the
stagflation scenario is gaining creditability. As all of this
unfolds in the ominous month of October, a stock market crash not only seems
possible, but a fitting end to Greenspan’s tenure, which may well end
on the same note it rang in on. Perhaps
the Chairman will not make it out of Dodge after all.
Don’t
wait for the bottom to drop out of the market. Get out ahead of the herd. Begin by downloading my free research
report “The Collapsing Dollar:
The Powerful Case for Investing in Foreign Equities” available at www.researchreport1.com
Peter D.
Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA
92660
Toll-free:
888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For those of you still holding dollars, time is
running out to protect the wealth to which those dollars current represent
claims. A good first step is to
down load my free research report “The Collapsing Dollar: The
Powerful Case for Investing in Foreign Equities” available at www.researchreport1.com
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