One Year Later, Home Prices, China vs. India, Another California Fiasco and More!

by Addison Wiggin & Ian Mathias

September 29, 2009

  • The 5 celebrates a shameful one-year anniversary… what’s changed since, and what hasn’t
  • Home prices improve again… how far we’ve come, and still have to go, in this housing “recovery”
  • Worried about U.S. vs. Iran? China vs. India might be worse, says Chris Mayer
  • California suffers bizarre crisis: Drought made worse by pipeline bursts?

Pop quiz: what happened a year ago today? Here’s a hint:

The House put the kibosh on the first rendition of The Emergency Economic Stabilization Act of 2008 — Former Treasury Sec’y Hank Paulson’s three-page request for a $700 billion blank check for his buddies on Wall Street.

“Investors” threw a tantrum, crashing the Dow 777 points — its biggest point loss in history. Approximately $1.2 trillion in Wall Street shareholder value was wiped out, also a record. This day a year ago, the real market pain began. The S&P fell about 20% over the next two weeks.

The House eventually passed a package — aimed at cleaning up “toxic assets” on big Wall Street balance sheets, but also rife with pork barrel spending. A year later… the stock market has recovered, Congress has spent plenty o’ money, but has anything been done to stave off future CDO or mortgage-backed calamity? No.

Time and clever accounting have put us deservedly back to square one… right? Or as Addison argues in his latest investment report, is this the “biggest financial swindle in world history, engineered by none other than Wall Street and Washington, D.C.”

In the markets this week, the mirage of recovery is remains, though it is blurring in the distance. We were wrong about stocks looking tepid yesterday. The S&P 500 finished up 1.8% after to a barrage of M&A announcements. And the market outlook got off to another rosy start today, thanks in part to this:

“The rate of annual decline in home price values continues to decelerate,” David Blitzer of Standard & Poor’s announced today, “and we now seem to be witnessing some sustained monthly increases across many of the markets.”

Indeed, the July rendition of the Case-Shiller home price index revealed the sixth month in a row of marginal improvement. The 20-city composite index now yields an annual return of negative 13.3%, compared with its crisis low of nearly -20%.

If we zoom out a bit, the picture gets even clearer… this recent recovery is a drop in the bucket compared with the crash that preceded it.

Any housing optimism has been overshadowed by a lousy consumer confidence reading. The Conference Board said this morning that its gauge of American consumption attitudes fell to 53, snapping its three-month winning streak. The Street wanted a rise to 57… thus, major indexes are down about 0.3% as we write.

That market unease has given the dollar sell-off another reprieve. The dollar index is up half a point from yesterday’s low, to 77.2. Then there is this:

“Russia has thrown a cat among the pigeons this morning,” Chuck Butler tells us, referring to Russia’s surprise half-point interest rate cut, to an even 10%.

“Let me tell you why this is a big deal. When everyone is thinking that the go-go countries of Norway, Australia, and Brazil will probably begin their rate hike cycles this year, and others won’t be far behind… while the U.S. drags its feet and wallows in the zero-rate mud… the thinking was that the rate differentials to the dollar would begin to widen, causing even more pain for the dollar. And the reason these countries were able to raise rates was that the global economy was recovering…

“But then along came Russia, and its rate cut overnight. While this is just Russia, and not even a part of the currencies most people think to buy, it just reminded everyone that maybe, just maybe, because you never know, the global economies aren’t as strong as one would like to think.

“And when investors have those thoughts in their minds, the ‘flight to safety’ bull-dookie takes place again, which means… buy dollars!

The U.S.’ potential conflict with Iran might pale in comparison to a fight brewing between China and India, says Chris Mayer. “This one doesn’t seem to get much attention in the Western media, but I’ve read some dire stuff from the Eastern media. By their lights, the Sino-Indian border hasn’t been this tense since 1986-87, when the skirmishes broke out between Indian and Chinese troops.

“The issue is a disputed border between the two. They fought a 32-day war over it in 1962. China emerged victorious, but the whole thing settled nothing. The border between the two remains hotly contested. It is nearly 2,500 miles long and winds its way across difficult mountainous terrain. There is a northeastern state in India called Arunachal Pradesh, which China calls “Southern Tibet” and claims as Chinese territory.

“India claims last year there were nearly 300 border violations by Chinese troops and over 2,000 instances of ‘aggressive border patrolling.’ In the Indian media, it’s become a kind of sport to guess when China will attack India. And a recent essay by a Chinese analyst added fuel to the fire when it claimed China could ‘dismember the so-called “Indian Union” with one little move.’

“What would the effects be? It’s hard to say. But if the world’s two largest and fastest- growing emerging markets go to war, the results can’t be good for the global economy. China is even India’s largest trading partner. It all depends on how it unfolds.”

Chris will be getting a frontlines view of this flash point over the next few weeks. He and our executive publisher Addison Wiggin will be scouting potential joint ventures in the UAE and India from this weekend until mid-October. For highlights, be sure to check your daily 5 Min. Forecast. But for the nitty-gritty — and actionable advice — keep your eyes open for our new BRIC report… it’ll be ready very soon.

On the other side of the world, check out this snapshot from LA:

Heh, we should seriously consider moving our offices to California, as the mega-state has done a bang-up job embodying nearly every theme that keeps us up at night: Debt is out of control, the budget is shot, state pensions are in real danger, real estate is still in dire straights, unemployment is higher than normal and now — in the middle of a water scarcity dilemma — the state’s largest city is suffering an infrastructure crisis. There have been 43 water main breaks in Los Angeles just this month — more than double September 2008’s total. (The worst of which prompted the photo above.)

Ironically, we’re told it was state imposed drought cutbacks that likely triggered the infrastructure fallout. City residents are permitted to water lawns and engage in other wastes of potable water only on Mondays and Thursdays… a policy the University of Southern California says causes surges in water flow that likely attributed to the wave of pipeline implosions.

Then again, The N.Y. Times reports that “one burst pipe dated from 1917.” That might just be part of the problem too.

But never mind this back-page anecdote… we’re sure these types of things will fix themselves over the next decade or so. Better to spend our money on Citigroup and AIG.

“What’s so bad about law school?” a blog reader asks in response to our cheap shot at lawyers in yesterday’s 5. We’ll respond with this recent sound bite from Peter Kalis, managing partner of K&L Gates, one of the biggest law firms in the U.S.:

“The business model of the U.S. law school doesn’t quite make sense to me. Law schools will bring you in from college and educate you, but they will encumber you with six-figure indebtedness at a tender age.

“The assumption was that there was no problem, because law firms like K&L Gates would pay that off for you. And that is where the wheels are falling off.

“I’ve heard that law school applications are actually increasing. We will be pouring tens of thousands of young people into a market that I suspect is not going to be able to absorb them at the remuneration levels that would have justified them taking on that debt.”

“It looks like there is no chance that the government is going to allow the ‘too big to fail’ institutions to fail,” a reader writes, “but given the need for moral hazard to restrain them, I propose the following:

“Take the name of everyone in such institutions who makes more than $500,000 per year gross, including salary, bonuses and benefits, write the name on a card and drop it in a bowl. If the institution comes back needing another bailout, or other federal support to survive, provide the help, but take 10% of the names out of the bowl and shoot the people associated with those names.

“Oh, and I would keep those names in the bowl for up to 10 years after people leave such an institution, so that they have a vested interest in making decisions now that will still be good for a decade or more to come. Perhaps we might add their name again each year that they meet the stated criteria, so that an individual’s risk would diminish with time after they leave a company, while keeping risk higher for those who continue to make the decisions and the big bucks. And another point: No immunity and no pardons. If someone leaves Fannie Mae and takes a job as, say, secretary of the Treasury, or gets elected to Congress, he remains at risk for the following decade. I want them all to fear the phrase, ‘Your name was drawn. You have 24 hours in custody to settle your affairs and say your goodbyes.’

“Yeah, I know, it’s never going to happen, but it would improve the quality of the decisions.”

The 5: Heh, well… fair enough.

Thanks for reading,
Ian Mathias

The 5 Min. Forecast

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