Home Prices to Fall in 08, Buffett Slams the Dollar, Crazy New Pentagon Budget, U.K. Trouble, and More!

by Addison Wiggin & Ian Mathias

  • Realtors predict falling home prices in 2008… why you should take that with a grain of salt, and prepare for worse
  • Fed governors ramp up recession talk
  • Buffett predicts “worthless” dollar in 5-10 years, plus the Oracle’s new favorite currency
  • The Pentagon’s startling new budget
  • British consumer confidence hits possible all-time low… the U.K.’s recent tailspin recapped below



Existing home prices will fall 1.2% this year, while new home prices will plunge 4.3%, said the always confident, but rarely accurate forecasters at the National Association of Realtors today.

Thus, the NAR has already revised its 2008 outlook, which forecast flat price growth last month. You may recall our coverage of the NAR in 2007… they revised this estimate no less than 10 times last year. In fact, this time last year, the NAR predicted existing home prices to rise 1.5% in 2007, and new homes to shoot up a remarkable 3% in value. Do yourself a favor… read NAR estimates only if you’re in the mood for a laugh.

Little surprise then economists surveyed by The Wall Street Journal upped their recession odds to 49% from last month’s 40%. Should the now “coin flip” recession materialize, 39% of the same economists say this recession would be worse than the previous two.

“I can also see the possibility of a mild recession,” Richmond Federal Reserve Bank President Jeff Lacker said on Tuesday, shocking the nation, but then he followed with this: It will be “similar to the last two we have experienced — in other words, shallow and with a short recovery,” and the nation sighed with relief.

“If job growth is positive in the months ahead,” Lacker continued, “and if wages can stay ahead of inflation, then income growth should be sufficient to support consumer spending gains and allow us to skirt the boundary of recession…

“The prominence of downside risks means that further easing ultimately may be warranted.”


Then came the Philadelphia Fed’s turn. “The chances of the economy slipping into a recession have risen,” said its president, Charles Plosser. We can only guess it is “practice your public speaking” week at the Fed.

Plosser went on to predict a meager 1% growth for the first two quarters of 2008, U.S. job growth to be “quite weak” and unemployment to rise to 5.25%.

“In taking aggressive action in supporting the economy’s eventual return to its trend growth rate,” Plosser, a voting member of the FOMC, said, dissenting from the prevailing view, “I continue to believe we must not lose sight of the other part of the Fed’s dual mandate — which is price stability. We cannot be confident that a slow-growing economy in 2008 will by itself reduce inflation…

“Unfortunately, I expect little progress to be made in reducing core inflation this year or next.”

At least someone over there is thinking about the dollar.

Gloomy forecasts from the two Fed governors coupled with lousy earnings reports from Macy’s and Toll Brothers made for a bearish afternoon yesterday. The retail sector led U.S. stock markets down across the board. The Dow shed 0.5%, the S&P 500 lost 0.7% and the Nasdaq dropped 1.3%.

The dollar, in the meantime, is enjoying a mite of a rally. Rather, its competitors have run aground and are radioing for help. While the dollar index has edged only a few tenths of a point higher, the euro, for example, has lost nearly 3 cents since Monday, down to $1.45 this morning.

The pound traders anticipated a Bank of England rate cute this morning and sold the British currency down 2 full cents, to $1.94. The Canadian dollar lost a penny, to 98 cents.

The Japanese yen, however, is still holding tight at 106, breaking trend with the other major trading currencies.

Despite the dollar’s ephemeral strength this week, there are still strong head winds arrayed against it. “If the current account deficit continues,” the Oracle of Omaha, Mr. Warren Buffett, reminded us yesterday, “the dollar will be worthless five-10 years from now.”

“Insanity consists of doing the same thing over and over again and expecting the same result,” the sage spake. “In the United States, the cause, in my view, of the declining dollar is the current account deficit, and the trade deficit being the biggest part of that…

“I don’t know what it will look like in the short term, but force-feeding the rest of the world $2 billion a day is inconsistent with a stable dollar.” In a Q&A session with the Financial Post, Buffett admitted he had made “several hundred million” bucks buying loonies over the past year, a position that he also admitted he regretted leaving.

Today, Buffett says he currently owns only two currencies: the embattled greenback and Brazilian real. The dollar, suffice to say, hasn’t been treating him well. Buffett didn’t disclose when he bought reals, so we can only guess how he’s done on that one…

We had lunch with our old friend Jim Davidson, founder of Strategic Investment, yesterday. He, too, has been an avid investor in Brazil recently. But we suspect mostly for sentimental reasons. Two years ago, he married the former Ms. Brazil.

For an easy way to follow in Warren’s footsteps — or Jim’s, for that matter — check out the nifty Brazilian real CD offered as part of EverBank’s World Currency series. You can learn about it here.

The U.S. wars in Afghanistan and Iraq will cost about $170 billion next year.

In testimony before the Senate Armed Services Committee, Defense Secretary Robert Gates estimated some $685 billion in Pentagon spending next year. That’s $170 billion more than the $515 billion the president proposed in his first-ever $3 trillion budget last week.

Gates: “I will spend as much money as humanly possible, with little to no accountability, so help me God.”

But… and here’s the kicker… even Gates doesn’t expect that number to stick. “I have no confidence in that figure,” he admitted. You can expect the estimate to rise in the near future.

In the meantime, Congress is considering legislation to ban China from using its sovereign wealth fund for investing in U.S. assets.

“Rather than produce in the U.S.,” Peter Navarro, a fear-mongering business professor from the University of California will testify today, “[the Chinese] might offshore even more jobs to China. They can influence where research and development is conducted. Rather than do it in Silicon Valley, they might do it in Dalian or Shanghai.”

Yeah, closing our borders to foreign investment… that’s just what we need right now.

Across the pond, British consumer confidence fell to a 3½-year low in January. Not since 2004 have U.K. shoppers been so gloomy about their economic outlook.

The FTSE is down over 9% since the new year. The housing market just recorded its worst month in more than 10 years. The pound has shed 15 cents versus the dollar in the last three months. British GDP is expected to slow to 16-year lows this year. And job demand there is declining rapidly. What’s not to like?

The Brits have been using this particular consumer confidence survey only since May 2004. Thus, sentiment could actually be at five-, 10- or 20-year lows. With their sense of humor, how could you really ever tell anyway?

The Bank of England tipped its hat to the U.K.’s consumer’s perception of the economy this morning by cutting lending rates by 25 points. While this marks the second cut in three months, the BoE’s 5.25% is still a spot higher than the U.S. Fed’s 3%.

The BoE’s European counterparts also met today… Trichet and company chose to leave eurozone lending rates at 4%.

Gold rallied yesterday and overnight, up to about $910 from a low of $885 on Tuesday.

Light sweet crude suffered the opposite fate. Oil has fallen from $92 on Friday to barely $87 this morning. What gives?

Yesterday, the Energy Department reported that crude stockpiles had risen 7 million barrels last week, the biggest weekly inventory gain since March 2004. What’s more, “analysts” expect a 2.6 million barrel increase. A slowdown in the economy often means less oil gets consumed.

“What is all this HOOPLA about Exxon’s obscene profits?” asks a reader. “First, Exxon made 9% profit on sales. Microsoft made over 20%.

“Second, the closing inventory was valued at $95 per barrel — the opening inventory was at $45 on Jan. 1 2007. It had a lot of inventory price inflation determining profit. So Exxon actually may have made only 7% profit, not a princely sum.

“Last, Exxon dug over 20,000 feet deep in the ocean so the people who shout and scream about high gas prices can fill up their Hummers and gigantic SUVs.”

“The other company getting hammered in the press is Wal-mart, and it made 2% of sales. I must say we have a very informed press in this country.”

“Leave it up to Bobby Rubin to point the finger everywhere but at his own industry,” writes a second reader. “We need a ‘more educated electorate’ to hold politicians accountable? Hell, even the sleazemasters running his business didn’t understand what they were doing.

“Besides, keeping the public suitably ignorant is key to the scam. He sure sounds like he worked for the Clintons: It’s never us, it’s everybody else.”

The 5 responds: According to the Fortune magazine reporter covering Rubin’s speech, there were “a pair of aging, scruffy protestors who shouted, ‘Bob Rubin has no answers except war, genocide and hypocrisy!’

“They may have been wrong about the war and the genocide,” comments the reporter, “but as far as hypocrisy goes, they were spot on.”

Even so, Rubin’s point about the electorate is spot on, as well.

“I agree with many of your concerns,” writes a third reader, this one from down under in Australia, “especially around the triple deficits, but long term, I still view the U.S. as the land of innovation and capital creation.

“For many people, it is still the promised land and it will continue to attract many of the best and brightest in the world — in ways that no other country no matter how ‘emerging’ or how ‘developed’ can. Despite its problems and excesses, the combination of net migration and population growth, natural resources, financial resources, political adaptability, individual freedoms and capitalist fervor makes the U.S. almost unreachable by the other big nations anytime soon.

“Thus with an eye to the long term, the current USD weakness is very attractive to me.”

Cheers, mate,

Addison Wiggin
The 5 Min. Forecast

P.S. Not everyone wants to shut foreign capital out of U.S. markets. “I don’t think there’s some diabolical puppeteer behind this deciding to pick off U.S. industries,” suggests Stanford economist Ronald McKinnon. He, along with your faithful editors, thinks that foreign nations are probably just sick of watching their U.S. Treasury holdings lose value year after year.

There’s over $2.5 trillion currently sitting in SWFs across the globe. Chris Hancock of Free Market Investor just polished off a report on how you can profit from their inevitable investment in stocks around the world. Read it here.


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