Skeleton Economics

“Markets make opinions,” once said someone who’s much, much smarter than we are.  Perhaps they meant that when markets rise for a long period investors will make up opinions about why they will keep rising further.  Likewise, if markets are falling they’ll come up with reasons why prices will continue to fall.

Of course, everyone’s entitled to their own opinion…regardless of if it’s any good.  One fellow may come up with technical indicators to support their opinion.  Another may follow the fundamentals.  Both, no doubt, are 100 percent correct until just the moment they are wrong.  That’s when they must come up with a new theory to opine.

Housing is one market that has hardly seen a ray of light over the last five years.  After decades of rising prices, culminating in a blowout of irrational exuberance between 2002 and 2006, the impossible happened.  Housing prices didn’t go up.  What’s more, not only did they not go up…they went down.

Since peaking out in 2007, housing prices nationwide have deflated 35 percent.  In some places, like Florida and Las Vegas, the carnage has been much worse.  But now, under everyone’s nose, the housing market bottom may have already come and gone without notice.

How could this be?  Wasn’t the shadow inventory supposed to keep the long slow price slide going forever?  Wasn’t declining wages and high unemployment going to hinder prices perpetually?

Housing Market Update

Certainly, these all seem like compelling reasons why housing prices should continue to fade.  The problem, however, is that these reasons are now at odds with the facts…

“The Standard & Poor’s/Case-Shiller index of home values in the 20 largest U.S. cities showed prices rose 1.6 percent in July from the prior month and 1.2 percent from July 2011,” reported the Los Angeles Times earlier this week.  “It was the fourth consecutive monthly improvement, helping cement confidence that the real estate slump is over.”

But before you don a bowtie and pop a bottle of Strawberry Hill Boone’s Farm…

According to the Los Angeles Times, “…a full throttle housing rebound is unlikely as long as job growth and household incomes remain stagnant.  Indeed, the month-over-month improvement in July was not as strong as the improvement seen from June to July, when prices rose 2.3 percent.  Home prices could flatten or even decline in coming months, producing a jagged recovery, and seasonal fluctuations from month to month should be expected.”

We’ll continue monitoring the situation for you.  In addition, another situation we continue to monitor on your behalf is food prices.  Namely, rising food prices…

Skeleton Economics

Back on August 3rd, we alerted you to the forthcoming food price spike resulting from the worst drought since 1956.  If you recall, that was about the time Oklahoma Governor Mary Fallin declared a state of emergency for all 77 Oklahoma counties “due to extreme or exceptional drought conditions.”

Well, like the knee bone’s connected to the thigh bone and the thigh bone’s connected to the hip bone, after the summer drought first bloomed record grain prices…it will next bloom record meat prices.

Here’s why…

“World food prices will exceed the all-time high set last year as droughts in the U.S., South America and Russia push up animal feed costs, spurring meat and dairy farmers to cut herds,” Rabobank International said.

“Food prices tracked by the United Nations may climb 15 percent by June 2013, surpassing the record set in February 2011, Nick Higgins, an analyst at the bank, said in a report today.  Grain and oilseed prices should ‘remain at elevated levels’ for at least the next 12 months to ration demand and encourage crop farmers to boost planting.

“The worst U.S. drought in half a century followed dry weather in South America in the past season, sending corn prices to a record $8.49 a bushel on August 10 on the Chicago Board of Trade and soybeans to an all-time high of $17.89 a bushel on September 4.  Gains in livestock have trailed rising feed costs because slaughtering animals creates a temporary glut in meat supplies, before output ultimately turns lower.”

You see how it works.  First grain prices rise.  Then meat and dairy farmers reduce their herds so they don’t have to pay to feed them.  For a brief period meat prices drop to account for the culling.  After that, prices explode so that reduced supply can equilibrate with demand.

Earlier this week, in what can only be described as elegant hyperbole, fear of the looming bacon shortage brought forth internet warnings of the “aporkalypse.”  Watch out!


MN Gordon
for Economic Prism

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