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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

US Housing Decline to Continue and Commodities Prices Headed Much Higher

Housing-Market / US Housing Sep 28, 2007 - 12:05 AM GMT

By: Emanuel_Balarie

Housing-Market This past weekend, I went into my local bookstore and saw Alan Greenspan's The Age of Turbulence prominently displayed in front of the store. When Alan Greenspan retired, just over a year ago, CNBC auctioned off a painting of the former head of the Federal Reserve, and financial pundits around the world were lauding his achievements. Unfortunately, as I read the news surrounding housing, our economy, inflation, and the dismal outlook for the US dollar, I cannot understand why most people view him as such a prominent economist.

After all, it was during his watch that

…the money supply (m3) grew exponentially…creating the inflationary problems of today

…the dotcom bubble was created

…interest rates were held artificially low…creating the present day housing bubble/burst

…the US dollar lost its foothold as the world's greatest economy

Nonetheless, most investors (and historians) will likely point to Alan Greenspan as being one of the greatest economists of our time.  Why is this? Perhaps, they are looking through the wrong lenses.

ECON 101

All of this hoopla surrounding Greenspan's new book has led me to pose the following question: Where have all the parrots gone?  What do I mean by this? Well, Thomas Carlyle once said, “Teach a parrot supply and demand…and you have got an economist”. Unfortunately, most economists today are failing to look at the most basic principles of economics. Supply and Demand. They are so bogged down with statistics and lagging indicators that by the time their indicators “scream inflation” or “signal a recession” it is already too late.

The most obvious example of statistical myopia can be seen with the inflationary outlook of the Federal Reserve and most economists. I have talked about this in previous commentary about how measuring a basket of goods (core CPI) that does not include increased cost of food and energy, is a lagging indicator that gives investors a false sense of wealth security. See Food Inflation Article

Indeed, if economists were to simply focus on the supply and demand factors they would realize the byproduct of printing money: the money one has in his pocket now has less value. In short, more money floating around will ultimately affect the price of goods and the purchasing power of one's wealth. A simple look at the money supply chart would back this claim.

While I realize that the focus on supply and demand might sound simplistic at first, it would have prepared you for the present day market envi ronment. Consider for instance, the following two issues- housing and commodities.

US Housing: 

The main factor that fueled housing over the previous 5 years was a growing demand for homes. While this demand was artificial, it nonetheless served as demand. Individuals who previously were not able to own a home at $350,000 were now able to buy a home at $500,000 simply because they were able to receive an interest only mortgage (at historically low rates). In turn, housing prices escalated as the demand from these 1st time home buyers (as well as from speculative home buyers who saw prices rising) pushed prices into bubble territory.

Recently, housing prices have declined. Why? Because demand for housing has waned in the midst of growing supply.   

Supply Outlook: On the supply side, foreclosures have risen to record levels, there are still an abundant amount of homes and condos that are still coming on the market, and homes are staying on the market a lot longer. If we continue to be forward looking, there are over 2 trillion dollars of adjustable rate mortgages that are going to adjust. The result? More foreclosures, more homes on the market, more supply.

Demand Outlook: On the demand side, the more stringent loan standards (post sub-prime meltdown), the inevitable rise in interest rates (and mortgage payments), and the general market sentiments, will keep buyers from coming to the market.

Conclusion: Housing Prices Will Decline


In my recent book, I talk about how even though the commodity bull market has tallied prolific gains over the past five years; many investors have missed out on the opportunity. The reasons, of course, vary. But one of the main reasons has to do with the myths and misconceptions that surround commodities. If one were to simply look at the supply and demand of the commodity markets, the inevitable conclusion would have been a rise in prices.

Over the past few months, commodity prices have escalated to new heights. Gold has roared back to multi-year highs, oil prices have hit their highest levels ever, as have wheat, soybeans, and several other commodities. Interestingly, the media and Wall Street pundits continue to be confused with the movements in the commodity markets. I believe that they have collectively signaled the end of this commodity bull market every few months for the past several years. However, this bull market is fall from over. If they focus on supply and demand, the outlook is clear.

Supply Outlook: There are simply not enough commodities to go around. This is especially true for hard commodities that cannot be grown or replenished. Whether or not you buy into the “peak oil” or “peak gold” theories, there is no question that there are only finite supplies of hard commodities in the world.  The end result, of course, is less supply.

Demand Outlook: Question: What do you get when you have 1/3 of the world constructing buildings, factories, roads, and infrastructure? Answer: Demand for energy and materials. To be honest, it should not take a rocket scientist (or a Federal Reserve chief for that matter) to realize that demand for commodities will increase as industrialization takes route in the remaining agrarian societies. It takes cement, copper, aluminum, energy, lumber, steel, and a slew of other commodities to build a city like Shanghai, China.  I was recently in Shanghai, and let me tell you….there is no end in sight when it comes to construction.  It's absolutely amazing. What is even more amazing, however, is that it is expected that over 400 million Chinese will move into the city over the next 10-15 years. Again, it should not take a brilliant economist to figure out the type of demand this will have on commodities.

Outlook: Commodity prices are heading higher.

There are of course…many, many more factors to this commodity bull market. If you are interested in learning more about the commodity bull market or have a friend or family member that needs to be convinced, I suggest that you order my new book, which Marc Faber called, “an excellent, very compelling, and easy-to-grasp guides to commodities and commodity-related investments….a must-read for your wealth protection!”

Buy Here: Commodities for Every Portfolio: How You Can Profit From The Long-Term Commodity Boom. 

In conclusion, I want to urge investors to augment the commentary they hear from the fed or other Wall Street pundits with back-to-the-basics, economics.  Because at the end of the day, theory and statistics are one thing and the reality that affects your pocketbook is another thing. So the next time you hear talk about inflation being dead, make sure to send your congressman your grocery bill, gas bill, and the bill for your kid's tuition.

By Emanuel Balarie

Emanuel Balarie is a highly regarded advisor who advises high net worth individuals and institutions on the commodity markets and managed futures investments. Mr. Balarie’s research has been published internationally and has appeared recently in The Wall Street Journal , Reuters, and Money Week , as well as on CNBC and MSNBC.

Emanuel Balarie Archive

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