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Is the Economic Good News a Warning?

Chasing reality in the economic indicators

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The New Home Sales Disaster

Beginning to get the picture? A bona-fide sound economic recovery is underpinned by a non-interventionist Fed; a tax-cutting, budget-balancing administration; and associated strong gains in both the housing and employment sectors.

As I have explained, despite white-hot money creation, we have the most modest employment gains. As to the administration, forget it. And housing? Scary. I just read that the gap between the median price for new homes and “old” homes is a whopping $76,000, and that difference is up a staggering 57% from 2010.

The reason, of course, is a monster backlog of cheap, foreclosed old homes. Americans are simply packing up, putting the key in the door, and splitting, leaving banks around the country to choke on piles of upside-down mortgages. Whole communities quickly become weed-infested rattraps. Check out my down-sloping chart line on new home sales. Like that depressing downside momentum?

And this comes on the heels of a tidal wave of bank credit expansion. Who in his right mind would buy a new home in this market, especially a new home with a phony adjustable rate mortgage? In February, the median price for a new home was about $233,700, versus only $157,000 for an old home. See any problem with these numbers?

Now what? First, thanks to the Fed, America is clearly not in recession. Since last April, there has been but one monthly decline in the Conference Board’s leading indicators.

Secular Swing #3 on the Way

In my nearly five decades in this business, there have been two secular swings in interest rates. Just two. Now number three is on the way.

Can you guess the direction? It’s a little hard to have a secular downswing off a zero base, is it not?

Yes, after the Fed puts the mushrooms away, Alice will shrink. Reality will return. The reality for interest rates will be a nasty stair-step run up. How do you reckon a big increase in interest rates will affect bond prices, the real estate market, the economy and the stock market? Not so good.

In the coming debacle, you will want the financial equivalent of a shotgun in your defensive arsenal, not a pea shooter.

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