Dear Reader,
Ever have one of “those” weeks where you spend every waking hour hard at work, but when Friday rolls around, your to-do list has somehow doubled in length since Monday morning?
That sums up my week just ended, so I’ll be stepping aside momentarily to allow my co-contributors to do the heavy lifting in this edition of The Room.
But first, I want to share an email with you from Casey Research’s resident technical analyst, Dominick Graziano:
—
Subject: Stealth Correction
Date: Thu, May 8, 2014 at 7:56 AM
Since the beginning of the year, the average stock in the S&P 500 is down 9.3%, while the S&P 500 index is about 1% from its all-time high. Apparently, mega-cap stocks like Apple, Johnson & Johnson, and Berkshire Hathaway, among a handful of others, are holding up the index.
—
Typically, Domnick contributes such stock market intel to The Casey Report. But this particular tidbit came to light too late for the newest edition, which just rolled off the presses yesterday.
What does it mean? US equity markets are enjoying their 31st straight month without enduring so much as a 10% correction—a modern record by a wide margin. On average, such corrections occur every 18 months. In other words, we’re in uncharted territory.
And the ‘stealth correction’ already underway—wherein the decent performance of a couple of gigantic companies masks underlying weakness in the stock market—is the latest of a series of mounting signs that the market may finally be entering a long overdue swoon, or worse.
As a shameless plug, we cover this very topic in the May edition of The Casey Report, including a specific trade that will make money if the stock market does crash. And that’s only a small piece of the issue: the rest is dedicated to exploring what we think are two excellent investment opportunities outside of the US. Best of all, US investors can easily access both of them with a standard US brokerage account.
You can take The Casey Report for a 90 day risk-free spin by The Casey Report. Read the current and two more issues, explore the archives, and see all of our portfolio recommendations. You have 90 days to decide if The Casey Report is for you; if not, no hard feelings. Just cancel within that time for a full and prompt refund.
With that, let’s get to the meat of the issue. First up is Doug French with analysis on how the Fed’s magic elixir of interest rate suppression is failing to juice the real estate market. Then we’ll hear from Jeff Tucker, CEO of newly launched Liberty.me.
Last, you’ll find a lighthearted poem submitted to the Casey Research Storytelling contest by subscriber Philippe Blumenthal in our Friday Funnies.
Yellen’s Wand Is Running Low on Magic
 Doug FrenchÂ
How important is housing to the American economy?
If a 2011 SMU paper entitled “Housing’s Contribution to Gross Domestic Product (GDP)” is right, nothing moves the economic needle like housing. It accounts for 17% to 18% of GDP.
And don’t forget that home buyers fill their homes with all manner of stuff—and that homeowners have more skin in insurance on what’s likely to be their family’s most important asset.
All claims to the contrary, the disappointing first-quarter housing numbers expose the Federal Reserve as impotent at influencing GDP’s most important component.
The Fed: Housing’s Best Friend
No wonder every modern Fed chairman has lowered rates to try to crank up housing activity, rationalizing that low rates make mortgage payments more affordable. Back when he was chair, Ben Bernanke wrote in the Washington Post, “Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.”
In her first public speech, new Fed Chair Janet Yellen said one of the benefits to keeping interest rates low is to “make homes more affordable and revive the housing market.”
As quick as they are to lower rates and increase prices, Fed chairs are notoriously slow at spotting their own bubble creation. In 2002, Alan Greenspan viewed the comparison of rising home prices to a stock market bubble as “imperfect.” The Maestro concluded, “Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.”
Three years later—in 2005—Ben Bernanke was asked about housing prices being out of control. “Well, I guess I don’t buy your premise,” he said. “It’s a pretty unlikely possibility. We’ve never had a decline in home prices on a nationwide basis.”
