October 2006


Yesterday (Saturday) Walmart surprised us with 0.5% same-store y/y sales. Inflation-adjusted, that will be about 2.5% down.

But don’t blame Walmart, and don’t say it is losing market share to other stores. The overextended consumer is trapped between interest-only adjustable loans and crashing real estate. The only exit is down. Walmart is the first not because it’s anything wrong with it, but because its clientele is the most vulnerable.

The Walmart customers are shopping less in Walmart not because they are shopping more in Bloomingdales. They are just shopping less.

And next year, when hordes of Bloomingdales shoppers will switch to Walmart, it will be doing better.

Nouriel Roubini, the Kassandra of Housing Bubble, is again demonstrating the amazing power of his predictions of GDP growth. Let see the numbers:

Greenspan is on record to speak garbage suspiciously often. He is probably the biggest bullshitter from all former and current Bushites. But usually it takes a while until his words are proved (un)intentionally misleading. But today it was pretty spectacular:

Today’s topic is U.S. current account deficit, which is a net inflow of capital that offsets the trade imbalance. In short, as you probably know, we are consuming more than producing and cover the rest by borrowing. This is how it looks:

The necessary readings are:

The first paper is discussing the fact that the reasons of CA deficit are not the “engineered” surplus in developing countries, as B. Bernanke beleives, but more the following reasons:

  1. The role that U.S. is playing in infrastructure and export needs of developing countries
  2. The U.S. military might that is aimed to enforce its economic policies
  3. The U.S. housing bubble, which triggers the wealth effect and increases consumption

The second paper, stolen from the working desk of U.S. congressmen, is discussing the impossibility of the CA deficit to run forever and the scenarios of its unwinding. Please read the paper for details, but in short we are talking about the constant decline of the dollar for the many years to come.

Let me say, as usual: thank you Mr. Greenspan for all this!

We just learned the strange disconnection between home sales, home prices going down and the last home starts going up.

Is that good news? I think those are bad news, because it seems to me that this shows how home builders are trying to postpone addressing pending problems.

The banks are usually lending money to builders in connection with new home starts. The home is considered started if you put a shovel and a portable toilet on it. That will secure a $500k credit.

What to do if you need $10 million? You need 20 shovels and 20 portable toilets, that’s it.

We just had another record in trade deficit. Simply speaking, trade deficit means that we consume more than we produce (by a lot):

Trade deficit

Any economist will explain that trade deficit is exactly equal to incoming investment flow. The major receivers of foreign investments are:

  1. Treasury bonds (we sell them a lot)
  2. Corporate bonds (means our corporations are at mercy of foreigners)
  3. Real estate market (at some foreigners will stop pay for that)
  4. Stock market (means our corporations are owned by foreigners)

No matter how you twist it, we are selling our assets that we acquired in the previous 230 years of this existence of this country.

Just don’t have any illusions every time you slide your credit card at the counter. That’s George Washington money you spend.

Any bubble, including Nasdaq bubble of 2000, when the index lost 78% of its value after the bubble burst, follow the same psychological pattern of participants, i.e. bubble inflators. This pattern is:

  1. euphoria
  2. denial
  3. recognition
  4. panic
  5. hope (optional)
  6. capitulation

Btw, the lost wars usually follow the same pattern. Now let see the reported RBC Homeowner’s Survey, where homeowners expressed their ridiculous expectations:

  • 75.6%: see their Home’s value climbing over the next few years
  • 46%: expect a gain of 5% or more annually
  • 30%: foresee a rise of 10% to 15% a year
  • 70%: said their home’s value has risen 10% or more in the past 3 years
  • 6% think their home’s value will sink in the next few years
  • 7.8%: worry that their mortgage might exceed the value of their home

As you can see 46% of homeowners are in deep denial and 30% have plain brain damage. Only 6% are absolutely correct.
This stage is called denial, when obvious facts are still ignored by the majority of the market players. It is the same stage where Nasdaq was in early 2001. Please check the charts to see what happened next.