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Five Things You Need to Know: How Extraordinary


What is extraordinary is not merely the fact some are advocating New Deal economic policies, but that no one bats an eye over the fact the last time such policies were utilized was during the Great Depression!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. How Extraordinary

Just how extraordinary is this downturn in housing? Well consider that former Federal Reserve Vice Chairman Alan Blinder wrote a piece for the New York Times over the weekend advocating the resurrection of the Home Owners' Loan Corporation (HOLC).

What is this Home Owners' Loan Corporation and why do we supposedly need it? The HOLC was part of the Home Owner's Refinancing Act, a Franklin D. Roosevelt New Deal agency established in 1933... during the Great Depression. The purpose of the HOLC was to provide homeowners with refinancing to prevent foreclosure.

Part of its legacy was the extension of mortgage payments from a then-standard 15 year term to 30 years. As Blinder notes in his op-ed piece, HOLC at one point owned nearly one in every five mortgages in the U.S. Almost 20% of those borrowers defaulted anyway, leaving the HOLC with the titles on about 200,000 houses.

Expect more of these proposals resurrecting New Deal agencies and bailouts to pop up in the months and years ahead. What is extraordinary is not merely the fact these agencies are being proposed in the first place, but that no one seems to bat an eye about advocating a return to economic policies last implemented during the Great Depression! Are we the only ones who find this stunning?

We're not heading into a recession. We're already in a Stealth Depression.

2. NAR Sees "Stabilization"...

Sales of existing homes in the U.S. fell last month to the lowest in at least nine years, the National Association of Realtors reported. Existing-home sales fell 0.4% to a seasonally adjusted annual rate of 4.89 million units in January from an upwardly revised level of 4.91 million in December. That takes the year-over-year sales rate to 23.4 percent below the pace in January 2007.

The national median existing-home price for all housing types was $201,100 in January, down 4.6% from a year ago. But the price decline is easily explained away says the NAR, because the slowdown in sales is greater in high-cost markets.

NAR President Richard Gaylord, a broker with RE/MAX Real Estate Specialists in Long Beach, CA, said, "Keep in mind the biggest slowdown in home sales last year was in high-cost markets, which were hard-hit by the credit crunch and notably higher interest rates for jumbo loans, but relief is on the way." What relief might that be? Why, the higher FHA and conventional loan limits for Fannie Mae (FNM) and Freddie Mac (FRE).

"Once buyers have greater access to higher loan limits, it will take a few months for increased shopping activity to translate into higher sales," Gaylord said. "We should see some movement of pent-up demand by this summer, but higher loan limits need to be implemented fully and promptly to have maximum benefit."

Meanwhile, Lawrence Yun, NAR chief economist, said, "As the increased limits for FHA and conventional loans are implemented, more buyers will have access to safer FHA loans and lower interest rate loans in high-cost areas, which could lead to steadily higher home sales later in the year."

3. But Lowe's Does Not

One company not positioning itself for "steadily higher home sales later in the year" is Lowe's (LOW).

This morning on the company's earnings conference call, Lowe's Chairman and Chief Executive Officer Robert A. Niblock described how the company uses third party home price information to define three broad market groupings. Based on home price dynamics within those markets, Lowe's breaks the performance into 1) over-priced markets with the correction expected or occurring, 2) over-priced markets with no pricing correction expected and 3) not over-priced markets.

"[A]s we monitor these markets, we have seen an erosion in comp performance across all three market buckets," Niblock said. "Those troubled and relatively stable housing markets have seen an erosion in comp sales that was through from Q2 to Q3 and from Q3 to Q4."

4. "Don't Rerun That '70s Show"

We ran across an interesting piece in the New York Times over the weekend by columnist Paul Krugman, "Don't Rerun That '70s Show," about how this is not simply a repeat of the 1970s bout with stagflation. We agree with that, but not with Krugman, who maintains that we'll have an economy much like the early 1990s.

Instead, Krugman's column is interesting to us is for reasons entirely unrelated to his opinion about economics. Krugman writes, "Jimmy Carter's overall economic record was much better than most people realize - the average economic growth rate under his administration was 3.4 percent per year, slightly higher than the growth rate under Ronald Reagan and far better than growth under either Bush."

And he continues, "Reagan famously asked Americans whether they were better off than they had been four years ago; the answer, actually, was yes - most families had higher real income in 1980 than they did in 1976."

That being the case, why was it the Carter years felt so bad? The answer is rooted in socionomics and has implications for the future president, whomever that may be. Woe to the president that suffers the misfortune of winning office during a period of dark social mood.

Changes in social mood motivate changes in social action. If the Carter years felt worse than the Reagan years it is because public mood was dark and looking for a fight, similar to the transition we are seeing take place today.

5. Socionomics of Time

According to a New York Times article, "More Americans Are Giving Up Golf," the total number of people who play golf has declined or remained flat every year since 2000, falling to 26 million from 30 million. Why? "The problem is time," offered Walter Hurney, a real estate developer. "There just isn't enough time. Men won't spend a whole day away from their family anymore."

This article is almost a week old but we wanted to circle back to it because it addresses a key component of the intangible asset revaluation currently underway.

Conventional wisdom says there is always something to buy in a bear market, and always something to sell in a bull market. But what about a secular bear market that stems from a massive overvaluation of all financial assets due to a long-term financial-asset mania?

If the long-term deflationary thesis is correct, the point of recognition will result in the simultaneous decline of all financial assets. This is a difficult concept to grasp, especially given the length and magnitude of the secular bull market that brought us to this point.

Bear markets exist to "re-adjust" and re-price inflated assets. The conventional wisdom that there is always something to buy in a bear market, sell in a bull market, is indeed grounded in a nugget of truth: manias typically conclude with one asset extremely overvalued at the expense of another asset that is extremely undervalued.

But this mania has created the overvaluation of all financial assets. So what is left that is undervalued? Intangible assets; relationships, time, quietude, reflection - all those things that are difficult to define and whose value deflated in the mania for goods and financial assets.

Since 2000 a number of books have been written from the standpoint that life is about more than work and production. Over the past decade we have seen a compression of time - we do more with less - a consequence of the relentless pursuit of financial assets.

But now social mood is shifting. As a consequence of that shift, certain intangible assets will be re-priced. Perhaps the most important of these intangibles will be time. It is arguably our most precious commodity, and how we spend it may dramatically change as the structural bear market reasserts itself.

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