US Has Two Achilles Heels:
The Dollar And Real Estate
The Dollar -- So far, the action in the dollar has been counter intuitive. In the face of huge current account deficits which now amount to 6.5% of the US Gross Domestic Product, the dollar holds up. The stubborn "holding together" action of the dollar has cost many currency traders major portions of their bank accounts. When you play with the currencies, you're asking for difficulties and frustrations -- they're tough to trade and even harder to figure. Yeah, I know the dollar is going to fall apart -- but when? So far it's not happening. But it will fall -- it will, it will.
Real estate -- Does the same frustration regarding the dollar apply to the real estate bears? So far, the answer seems to be "Looks like it." A recent study shows that as of last September, 9.4% of all mortgage borrowers had either no equity or actual negative equity in their homes. That increased to 29% of all owners who took out first mortgages in 2005. This amounts to the following -- borrowers with $800 billion in mortgages now owe more on their homes than their homes are worth.
Home prices have declined in selected areas of the US, but in general prices are still above those of a year ago. However, home insurer First America states that if prices were to fall just 10%, the share of 2005 owners with no equity or negative equity would surge to nearly 48%.
Thus, keeping home prices up is a "must" for Ben Bernanke and the Fed. For this reason, I expect liquidity to continue to surge -- it has to. The slowly deflating real estate bubble may be Mr. Bernanke's first priority. He's got to keep homes prices from caving in. Therefore, nevermind the interest rates, it's the liquidity that is crucial here. And liquidity is coming in at the rate of almost a trillion dollars a year (the M-3 statistics have now ended).
I started this site talking about the dollar. OK, so what does the Dollar Index look like? Here it is below. It's formed a tightening triangle, and I'm not going to guess which way this triangle breaks. The trendlines are clear enough. The breakout should come soon. I'm waiting, and I'll report it when it happens (I'm talking about the breakout).
This must be the "year of the triangle." Because here's the Phila. Housing Index, and it too has formed a large triangle. Triangles are patterns of indecision -- they can break out either way. The Housing Index looks surprisingly like the Dollar Index. On the fundamentals I would expect this triangle to break down, but why guess -- the answer should be coming up shortly.
Can the Fed keep the US housing market afloat the way it has kept the stock market afloat since 2002? I almost feel sorry for Ben Bernanke. What a mess that little egomaniac, Alan Greenspan left him. But Bernanke took the job, he's got that "Mr. Chairman" title -- now he's got to sweat it out.
Comment -- Both oil and gold have made major moves to the upside, and they should be correcting. Yet, both are holding well and both were up and impressive today. I get the feeling that there's something negative in the wind which both oil and gold are discounting.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
www.dowtheoryletters.com/dtlol.nsf
March 26, 2006
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
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