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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

This Week in Reality for the Financial Markets

Stock-Markets / Financial Markets Jul 27, 2007 - 03:37 PM GMT

By: Andy_Sutton

Stock-Markets The past few weeks have seen a rude ending to the gala ball which Wall Street, the media and most of America has been attending for the first half of 2007. The drops have come like sudden, swift punches in the stomach. Hard, well-placed and in many cases, almost out of nowhere.

The Ups..

The US dollar index got a fast and steady reprieve from the sub-80 area yesterday, rallying a good bit against most of the majors. Admittedly the dollar was well oversold at those levels, but we've seen a trend reinforced here. The lows are getting lower as are the highs. I have a visual rendition of this phenomena on the main page of my site It paints a pretty grim picture for the buck. How about that strong dollar, Hank?

Oil has been very strong, even in the face of broad weakness in the commodities in general. Save for a thrashing earlier this week, the black gooey stuff has held up very well right around $75/barrel. All this without a single hurricane or a war in the Middle East. Keep in mind that last year's $78ish high was blamed on the mid-summer conflict in the land of sand.

The Downs...

It would finally appear as though the debacles in subprime credit are now starting to be recognized by the markets. It is important to emphasize that this process is only beginning. Much effort and jawboning have gone into keeping a lid on this so far. The really scary thing is that there are now former housing bulls going on the record as saying that this is going to get a whole lot worse. Prices are going to fall further and faster and inventories are going to go higher.

For reference, Eastern PA was considered a fundamentally strong market. In two counties bordering New Jersey, there are now nearly 5000 homes for sale when last year there were just 700! Anyone who thinks that prices will remain stable given this type of supply dynamic needs find David Lereah from the National Association of Realtors for a few rounds of cocktails followed by a therapy session.

The DOW, Nasdaq and S&P 500 got slammed yet again today as new home sales once again failed to meet even the most tepid expectations. A bit of very unsettling news came in the form of admissions that the problem is not just contained to subprime credit. Prime mortgages are starting to see delinquencies, defaults and foreclosures. This does not bode well for the value of any type of packaged real-estate paper.

The Ridiculous.. .

What continues to blow my mind is the exit strategy that much of this money is using. It is going from the frying pan into the fire. Treasuries have been the one winner of late, pushing yields on the 10-year well under 5% back to 4.79% This might (emphasis mine) throw a rope to the housing market, but any rope going in that direction might as well be a noose as opposed to a lifeline.

It has been well-documented that the world is awash with money. The one true bear market right now appears to be in fiat cash. The perception that Treasuries that yield well under the REAL inflation rate are 'safe' is patently absurd. However, there is SO much money and it needs a home. So it washes from one end of the pool to the other.

Going Forward...

Not much of this really matters to the person on the street. This will shake out for the little guy in the form of higher prices going forward as the Fed is forced to crank more and more liquidity to keep the ship from listing too much. All the while, the mediacracy will be busy telling everyone that there is no inflation, prices are stable and wages are rising much faster than the cost of living. In his testimony to Congress last week, Bernanke spoke a great deal about inflationary expectations. The gist of what he was saying was something like: "If we can keep the people fooled into thinking there is no inflation, then they will behave as if there is no inflation which allows us to continue to create inflation".

By Andy Sutton

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. He currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar.

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