I got another one of those “when are stock and real estate prices going to bottom?” question e-mails, this time from reader G.R.P.. He was anxious that both the value of his house (in coastal southern California!) and his 401(k) have both already lost about half their value. The plain truth is that we are nowhere near the bottom. The economy won’t turn around until a lot of malinvestment and toxic debt gets worked out of the system. And markets won’t re-liquidify until after asset values get close to a bottom. For now, prices are still marked to mystery rather than marked to market. I’ve twice posted the link to a chart from the Calculated Risk blog, but perhaps its full import was missed by G.R.P. and a few other readers. This chart clearly shows that residential real estate has a lot farther to fall, especially in the bubble regions where NINJA (“Liar Loan”) financing was use extensively. Many of those hundreds of thousands of mortgages were rolled up into Collateralized Debt Obligations (CDOs)–now next to worthless–and much of that that paper was insured with umpteen billions of dollars in Credit Default Swap (CDS) derivatives. Many of those CDSes no have counterparties twisting in the breeze. The CDOs won’t reach bottom until the waves of subprime, Alt-A and “Interest-only” borrowers’ defaults subside. Then, and only then, can realistic valuations be established for the ocean of toxic debt that is in circulation from here to Reykjavik. We can expect at least another three years of declining house prices. And, as I’ve mentioned before, P/E ratios are still out of whack, so equities have a lot father to fall, too. Tighten your seatbelts. The roller coaster ride is far from over.
D.S. sent this: Wall Street Looks Ahead: Inflation vs. Deflation. A key quote.”We believe it’s quite possible to have commodity-price inflation at the same time you have broad-based deflation,” says Jason Trennert, chief investment strategist and managing partner at Strategas Research Partners. This is accord with my assertions in a February, 2008 SurvivalBlog article.
Items from The Economatrix:
European Protesters March in G20 Rallies
G20 Activists: Why We are Protesting
Fears Police Tactics at G20 Protests Will Lead to Violence
G20 Protesters Expect Agents Provocateurs
Seven Hours to Save the World
Merkel Warns on Further Stimulus
Ron Paul: is There Any Gold Inside Fort Knox?
The Race to Financial Safety is On
Down the Memory Hole, Alan Greenspan Style
Ninth Georgia Bank Collapses (Omni National Bank, Atlanta) FDIC expects failure to cost $290 Million, one of the most costly to date
Stocks Slide as Investors Cash in on March Rally
Soros: Britain May Have to Seek IMF Rescue
Economy Blamed For Jump in Arson Cases
Only United Front at G20 Can Save World
Seven States See Double Digit Jobless Rates Wyoming continues to have the lowest: 3.9%