I assign a 60% probability to the middle path. Maybe it's my optimistic nature or maybe I'm simply being naive, but I’m hopeful that cooler heads will prevail and we won’t run continual massive deficits larger than the growth of GDP. While that means rather large tax increases -- since the current leadership wants to, and will create massive new health-care entitlements  -- I’d rather have to overcome higher taxes in my business than deal with a collapse of the dollar, high unemployment, high interest rates, and an extremely sluggish economy.

Each scenario will create a different investment environment. Ironically, the middle scenario could be good for the dollar over the long term, but will be hell on corporate profits from US sources. Given the above, it seems like a 95% chance we should start looking at investing a significant percentage outside of the US and Europe - think Canada, Australia, Asia (not Japan), Brazil, South Africa, etc.

Normally, politics doesn’t have all that much of an impact on the stock market. As an example, both Democrats and Republicans can take credit for the '90s, but it was really the dynamic of the free market that worked in spite of government. Same for the Bush years: While the tax cuts did help, it was the free market and increasing leverage that were the dominating factors.

This time it will be different. The choices we make as to how to fund (or not fund) the increases in spending that are our clear and sad destiny, will have a major impact on not just the US, but the world economy. As US consumers have been a major part of the growth of the developing world, especially Asia (China), a slowing of consumption in the US will mean a very slow recovery for the rest of the world. It will happen, but the choices made by politicians this year will have many unintended consequences. Just as deciding we’d take a major part of the corn crop and turn it into expensive ethanol raised the price of tortillas in Mexico, raising taxes in the US will mean lower global consumer spending and trade. It’s a very tangled web we weave.

A Housing Update

If you read the headlines the last few days, you’d think the housing market has turned. Mostly they read something like "Home Sales Rise 0.3%.” And of course, the reflexive bulls started talking about green shoots and a bottom in housing. And while someday we will actually have a bottom in housing, it won’t be this month. It’s been awhile since we’ve looked at the housing market, and it’s time to review.

First: Of course home sales rose - it’s April. Look at the graph below; it’s the time of the year when home sales rise. And 0.3%? Really? The margin of error is close to (plus or minus) 10%, so 0.3% is a meaningless number. It will be revised, but who knows which way? (I’m on a plane, so I cannot access the exact margin of error, but 10% isn’t that far off.)



My main thesis since 2006 has been that the housing market was in a bubble that would burst. We built something like an extra 3 million homes over trend growth, and those homes are going to have to be absorbed in the normal way: through growth of population and the economy. We "need" about 1 million new homes a year to take care of population growth and demand. Further, we’ve cut off home availability to buyers who are in the subprime category, whereas during the boom, you simply had to have a pulse -- even a lying pulse -- to get a home for which you didn’t have a chance of actually paying the mortgage .