The Crowd and a Soft Landing


“When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once.” ~ The Crowd, Gustave Le Bon

Today, the crowd is convinced that U.S. housing is going to make a soft landing.

After all, it’s still America isn’t it? And everything in America has been soft or getting soft for almost as long as we can remember. Manners have become relaxed and virtues pliable. Waistbands expand. Chairs are plush. The dollar itself is turning to mush and the economy is endlessly forgiving.

In America, a person may still run up a fortune in debt. Indeed, in the last four years, Americans have run up debt enough to eat up the whole GDP pie, yet they no longer fall on hard times. Instead, they bounce off downy ones, right into the cushioning arms of cheap credit. At least, that’s been the story this last quarter of a century.

But in the past two years, that simple plot has added a little twist. The Fed has now raised rates to “normalcy.” And having seen things slouch so absurdly for so long, we find we no longer know what shape they were supposed to be in the first place. After all, it’s now “normal” to spend more than you make…and to mortgage and re-mortgage your house, with no intention of ever paying it off. It’s “normal” now to pay daily bills with credit cards. And it’s “normal” for the richest country on the planet to borrow money from the poorest, just to make ends meet. So, why shouldn’t it be “normal” also for house prices to shoot up like the Google IPO? With inflation, why would they do anything else?

But America is a big country and builders can throw up houses faster than people can put down the money to pay for them. Inflation might be up, but wages aren’t. And when wages can’t keep up, sooner or later, the builders have to slow down, housing inventories have to be whittled down, and housing prices have to fall in step with falling supplies to match the real demand.

Now, in a healthy economy, the whole thing could go plumb down the chute and pose no problem at all. But for an economy with an abnormal dependency on housing — for jobs, money and consumer spending — the slightest recovery to normalcy might be abnormally painful.

Normal, economist Robert Schiller tells us, is housing prices that are about 40% below where they are now. But since everyone thought housing prices would rise forever, we got one of Le Bon’s self-fulfilling prophecies. People bought houses not to live in, but to make money; the abnormal became so normal it began popping up everywhere.

But, as Le Bon puts it, “everyone seems to change his mind at once.”

The normal will soon be back in style…even in America. And when it does, the gentle, soft landing Americans believe is their due, may go out the window. Instead, housing will come down like the Hindenburg…and the economy with it.

u2022 Addison Wiggins reports from Cannes, with the latest on his visit with the Good Doctor:

Dr. Kurt Richebcher has an impressive collection of books. In his study, which doubles as his bedroom (overlooking the beach at Cannes lengthwise, mind you) there are shelves that reach from floor-to-ceiling and stretch the length of one wall. These are his books on economics and economic history, primarily in German or English. And he knows them like the back of his own hand.

During one discussion we were having on productivity, the Good Doctor had a minor brainstorm, paused, hobbled over to his shelf, selected a signed copy of a book by Friedrich Hayek and turned directly to a page in which Hayek reviewed David Ricardo’s theory on productivity.

In his living room are two equally large shelves he’s reserved for general history, philosophy, literature and more biographies. These books are in English, German…and French. He has definitive works on the Chinese and Russian revolutions; biographies of Marx, Lenin and Trotsky; studies of Latin American history and the Roman Empire. The books reveal a penchant for German literature and the history of her princes and kaisers. If you needed to learn anything about the World Wars, Thomas Mann or wished to travel around the Mediterranean, you would find ample resource betwixt these pages. Open any book on the shelves and you’ll find annotations by subject in the doctor’s own large script.

From having read these books, or by studying any of the thousands of pages of data and research that line the rest of his open shelf space (periodicals published by the IMF, the Federal Reserve, The Bureau of Economic Analysis, and countless academic journals), we assume he’s fairly accurate when he makes statements

“It’s not surprising that the Anglo Saxons have developed the credit/debt system of banking. They’ve always been this way. In history, the Anglo Saxons are the chief plunderers of the world.

“And they don’t see consequences. Germans, French, Japanese, and Chinese — they all have high savings rates. The British, Americans, Canadians, and New Zealand — they all are close to zero or below.

“We [we, being the French and Germans, as he is a little of both] grow up knowing we are poor. Above the door of the house in which I grew up, there was a sign that read ‘ora et labora’ [Latin expression for pray and work]. If we do not work, we will continue to be poor. And life will be very difficult.

“This is also the ethos of the Puritans who came to the northern part of America. But where has that ethos gone today? The Anglos have not been concerned with tomorrow because they are not concerned with building long-term wealth. They want quick riches. Damn the torpedoes. Full speed ahead!

“Rabid consumer spending on credit is no different. Only now, they are plundering the future. And their influence on the economies of the world is farther reaching than ever before. They may not be concerned with the consequences of their behavior today, but it will have a lasting impact on the global economy.”

u2022 Mortgage rates have gone down for the last five weeks in a row. The yield on a 30-year T-bond is only 4.93% — an amount less than the latest figure for consumer price inflation.

What gives? Bonds seem to be in a bull market (as yields fall, prices rise). In June 2003, we saw what ought to have been the end of the long, 25-year rise in bond prices.

But what’s this now? Is there more to this bull market?

Maybe. Falling bond yields could be signaling an economic slowdown…and lower rates ahead.

Does that mean you should buy bonds? We don’t know. Do you feel lucky?

u2022 “I hate to see another summer pass away,” said our neighbor yesterday, in a reflective mood. Patrice, a cattle breeder, had come over to admire our gypsy wagon. The thing has taken shape over the summer…slowly. Now, it has a roof and walls, but the insides have not been begun yet.

Damien found an abandoned trailer and stripped out the key features — the sink, stove and hot-water heater. He brought them over while Patrice was visiting.

“Here is everything you need,” he announced proudly. “You just have to figure out how to put it together.”

“Damien, this looks like junk,” said Patrice.

“No, it’s perfectly good. I couldn’t believe the guy was throwing it away. I thought it would be just what you need in a gypsy wagon,” said Damien.

“And, look at this…it’s a gas heater.”

Patrice glanced over at us. We were thinking the same thing — the thing didn’t look like a gas heater. It looked like a pile of junk. But Damien picked up the pieces and began to show how to put them together to make a heater.

“Here,” Damien continued, “this goes in here…and this attaches to this…I think…or maybe this is supposed to get screwed into this thing. Let’s see, I took it apart; it’s not hard to put it back together.”

In a few minutes of tinkering, Damien had taken what appeared to be a pile of junk metal and turned it into…a bunch of junk metal parts connected to each other.

“Damien, maybe you should just put a wood stove in the gypsy wagon,” suggested Patrice and returned to his thoughts.

“There is something about the summer that is so special…a type of magic, really,” Patrice said. “I wait for it all year round, and then, when it’s over, I can’t help but feel a little nostalgic. It’s the end of August, now…the wind is already chilly.

“And what do we have to look forward to? A whole year of work…winter…gray days…cold. And when it is over and summer is here again, we’ll be a year older than we are now.”

“Don’t talk like that,” said Damien, taking him by the elbow. “It’s too depressing. C’mon, let’s get a drink. You’ll feel younger…and this thing might start to look like a gas heater.”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.