Home (Equity) for The Holidays
Todd Stein & Steven McIntyre
Archives
The Texas Hedge Report
December 23, 2004
Courtesy of www.texashedge.com
Oh, there's no place like home
for the holidays - unless you take a look at the mind-numbing
amounts of home equity (which took years to build) being pulled
out almost instantaneously to speculate on stocks. According to a December 9th Wall Street Journal
story, "homeowners are pulling money out of their property
at greater rates than ever. From
2001 through the first half of 2002, 11% of total funds obtained
from mortgage refinancings were used for stock-market and other
financial investments.
That is up from less than
2% during a previously studied period." The
average sum that people are pulling from their home to use for
investments was $24,000, up from "relatively small amounts"
in the earlier period.
The $24,000 plowed into
investments topped the averages for nearly all the other categories
for which people used proceeds, including home improvement!
The Journal article
went on to deliver one of our favorite quotes of all time, "In
a brochure distributed at Merrill's annual meeting this year,
it states: 'You may think of your mortgage as a way to buy a
house.
At Merrill Lynch, we
see it as a way to build your wealth'." So let's think about this for a minute - the
way to get rich is to take on debt? Then
take those proceeds from levering up and speculate on overpriced
(likely tech) stocks?
It appears that only a collapsing
dollar (and the subsequent much higher rates that it will spawn)
will kill the average American's appetite to live beyond his
means.
Like a moth to a flame,
the U.S. consumer cannot stop himself from spending and will
behave rationally only when market forces dictate that he must. The most severe consumer recession since the
Great Depression will likely accompany a monumental collapse
in housing and autos not to mention a significant weakening throughout
the economy.
A perfect storm is brewing
and we find it laughable that many in the press talk
positively about the weakening dollar given the chain reaction
it is likely to set off. The idea
that a country can stem its currency decline anytime it wants
when it has such massive imbalances like the U.S. is ludicrous.
Likewise, a weakening dollar
and the current account deficit are not the self-healing miracles
that most economists would have you believe. So
far we have really only seen a correction in non-Asian currencies. The largest imbalances are with our Asian trading
partners and stem from our insatiable appetite for their low
cost goods.
A fifteen, thirty, or
even fifty percent decline in the U.S. dollar will not be enough
to make us competitive with labor costs that our often 1/10th
of what we can offer domestically. Only
by a dramatic pull-back in U.S. consumption of Asian goods (resulting
from the U.S. consumer being forced to fix his debt-laden balance
sheet in the midst of higher rates) will the consumption imbalances
begin to correct themselves. Santa's
gift for Christmas may come in the form of massive dollar devaluation. Our readers are aware of this and many have been
wise enough to keep their savings in something other than dollars.
December 23, 2004
Todd Stein & Steven McIntyre
Archives
Texas Hedge Report
email:
info@texashedge.com
For more information, go to
http://www.texashedge.com
Todd Stein &
Steven McIntyre are internationally known analysts and editors
of The Texas Hedge Report, a market newsletter that highlights
under and overvalued securities in the equity, bond, currency,
and commodity markets.
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321gold Inc
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