Another Very Bad Year for American Housing


Well the whole world was pretty much down overnight. Blame China, if you must. Today’s Financial Review reports that Chinese regulators are leaning on Chinese banks to quit lending for the rest of the month. It is probably not a request.

“The move to restrict lending is a sign the government is increasingly concerned about asset bubbles and worsening credit quality.” The concern is welcome, but probably a little too late. Chinese stocks and real estate have soared in the last year on the $1.5 trillion lending boom. Check out the chart below.

You can see that Shanghai’s composite index was up nearly 78% from the March low to the August high. Since then, it looks fairly range bound. And below it, the red line shows you the rough correlation between the All Ordinaries and China. The main difference now is that Aussie stocks are just off a new high made early in the New Year.

We freely admit to knowing very little about China, other than what we read and what we think about in our own head. But the numbers – those published by the government – show a huge fixed asset investment book over the last ten years. Whether that boom has become an unsustainable bubble is a good question. But the answer may not actually matter that much.

The point of contention is whether China’s resource-intensive phase of growth – the massive support of Australian resource prices and resource stocks – is fully mature, or has years to go. If it’s fully mature, resource demand is going to be lower and probably stock prices too. We’ll see about that.

The other global downer on the newswires comes from the U.S. housing market. New housing starts fell by 4% in December and index of homebuilder confidence fell too. But by far the more alarming news was that the Federal Housing Administration is increasing mortgage insurance premiums, demanding higher credit scores, and requiring larger down payments from new borrowers.

Don’t worry. It’s not like the FHA is getting too tight with taxpayer money. Mortgage insurance premiums are rising from 1.75% to 2.25% and the down payment required for a new loan is just 3.5%. It’s hard to imagine these moves significantly improving the FHA’s balance sheet.

According to the agency’s own figures, its share of the mortgage market has gone from 3.7% four years ago to 30% in 2009. It was a key agent – along with Fannie and Freddie – in the nationalisation of the American mortgage market. Yes, the U.S. government is keeping the mortgage market afloat…but the FHA’s cash reserves are down to 0.5% of loans outstanding (instead of the robust 2% required by an inept Congress).

All up, it could be another very bad year for American housing. That would be bad for banks, who still own a lot of housing collateral (and have carried it at what can only be described as “hopeful” valuations. And if banks are worried about further collateral destruction, they aren’t going to be in any hurry to lend money into the economy.

Instead, look for them to borrow short-term from Uncle Sam and loan the money right back to him at a higher rate. This is the dynamic that fuelled bank and brokerage trading earnings last year. Falling house prices and a stagnant mortgage market set up 2010 for more of the same.

Some people say they’re contrarian and some people really are contrarian. We just got off an hour long phone call with our friend and Strategic Investment editor Jim Davidson. Our pen literally ran out of ink during the call. We’ll let you know more about Jim’s new project later. But here are some excerpts from today’s chat.

“The earth is not getting warmer. It’s getting colder. The climate Nazis at the UN admitted this week that their claim that the Himalayan glaciers are melting away was false. I may as well have said the Great Salt Lake is going to turn to sugar.”

Jim’s put together a “Little Ice Age Portfolio” as a response to the climate change hysteria. But the investment response is secondary to the seriousness of the issue, he says. “There’s very little evidence that rising carbon dioxide levels lead to rising temperatures. It’s more likely – as temperature records show – that changes in climate are correlated to solar activity and sun cycles. Imagine that.”

“If it were true that reducing carbon dioxide emissions into the earth’s atmosphere reduced the earth’s temperature, it would be a bad idea to do it. In the Dark Ages, another period of lower solar activity, the Nile River froze. On the other hand, Rome prospered because agriculture thrived and you could grow grain in Carthage.”

“In a colder world, Canada would be an iceberg and one of the great grain growing regions of the world would disappear. People believe that because farmers plant a crop, it will be harvested and the modern world can live on a diet of high-fructose corn syrup that malnourishes people and makes them fat. But in another Little Ice age, hundreds of thousands of people would die if the world’s grain growing regions marginally declined. Billions would die if the impact was more severe.”

“The Black Death hit Europe in the Little Ice Age, too. Lower crop yields reduced the quality and quantity of nutrition available. This weakened immune systems and made people more exposed to infectious diseases. Why, if you’re a humanitarian, would you pursue a public policy that pushes a billion people who are already on the edge of starvation into outright famine?

“If winter comes early or stays late, whole crops will be wiped out. Reducing the output of food – something that would result from a colder Earth – is evil. It’s based on non-existent science in which people forecast things that may happen centuries from now based on their ideological resistance to prosperity. They are trying to force down living standards in the Western world based on their own guilt about prosperity and income inequality.”

“Global warming just another phrase for good weather. If it’s true carbon dioxide emissions warm the planet, we should burn more coal. You can tell the science is dubious because you now have a bizarre feedback loop in which warming makes the world cooler. It’s rubbish.”

“The big risk in the discrediting of the global warming crowd is that it could discredit other, more legitimate concerns about the climate, like the huge amount of harmful chemicals in our water supply. The persistence of dangerous chemicals in our recycled water is something to be really worried about. You don’t want the environment to turn into a sink for man-made chemicals.”

There was much more to report. But we’ll have to leave the rest for another day. Jim is hard at work on the January issue of Strategic. He’s analysing the possibility of a fiscal collapse in the United States, and where investors can seek refuge before it happens. Until then…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. I agree that Global Warming ‘scientists’ and all that Copenhagen bulldust is stupid, but Jim’s further points are either stupid or just plain obvious (except for the last one). Not insightful Dan. Sounds like Jim’s other projects are a study in redundancy too.

  2. Really Dan?

    So 2005 (or 1998, if you don’t include Arctic temps) being the hottest year to date, and the 4 highest previous years being 1998 (an El Nino year), 2002, ’03, ’04, is “rubbish”? These are actual measurements, made by thermometers and satellites, since 1982 and earlier, back to the mid-70s.

    The principal solar cycle lasts for ~11 years from its maximum to minimum. Energy output over that cycle changes by one tenth of 1% (0.1%). Longer solar cycles include the 22, 87 and 213 year cycles.
    Over the recent ‘modern maximum’, up to the mid-80s, solar radiation has increased only 0.2-0.3%, not nearly enough to account for the measured increase in global temperatures. Solar activity has been declining since, and we’re now at 50 year lows in solar wind pressure and radio emissions, and 100 year lows in sunspots.

    In other words, temperature and Solar activity (in conjunction with volcanic activity) have become completely decoupled. With regard to the predicted cooling in the next few years, due to La Nina among other things, why is that such a problem? After all, Bill Bonner and your good selves predict a last gasp softening in gold and a rise in the USD, before hyperinflation kicks in and the USD goes the way of the Zimbabwean dollar and DOW/gold = 1 or 2.

    I’m not even going to get into Jim’s ridiculous shackling together of the Black Plague (increased European migration perhaps, higher population densities?) and the “ideological objection to prosperity”. Does Jim think drought would not contribute to starving peoples too?

    Trying to frame the argument as ‘global warming’ vs other environmental concerns is a tad disingenous, don’t you think? I’m not sure how Jim links climate to dangerous chemicals in the water supply, but yes, things like pollution, overfishing, loss of arable land and water shortages are all of equally grave concern, but I realise you were jotting notes during a conversation and so could have got a little muddled.

    Before the denialist hotheads here jump all over me, can I say I’m a satisfied subscriber to D&D, so you could hardly call me a hairshirted hippy. I understand the need for hydrocarbon based energy sources, and am invested in cleaner alternatives such as LNG. I’m also excited by the prospect of developing geothermal power, and increasing advances in solar and wind efficiency. Finally, Australia needs urgently to develop a nuclear industry, with control of the life cycle of our Uranium, which means being paid by other countries to take their (our) waste, audit it, and bury it in South Australia. We should also be examining Uranium alternatives, such as Thorium, for fuels in pebble bed reactors.

    Look, I’m a scientist in medical research, and after looking at evidence for and against AGW I really can’t understand what the arguments against it actually are, other than sticking fingers in ears and screaming la la la.

  3. Dan,

    RE: The IPCC admission Regarding glaciers, investigate deeper people. The head of the IPCC is a chairman of the Company the glaciologist works for as well as being the chairman of various other institutions which are set u to make a packet out of the Global warming scam.

    The comment about himilayan glaciers didn’t go form some peer reviewed paper to the IPCC, no it went from a phone interview with a glaciologist (who didn’t give a timeframe) to a reported for New Scientist who wrote an article and the reporter gave it a timeframe. The said article was read by someone from the World Wildlife Fund and then it got into the IPCC report as “scientific consensus” even though there was no scientific method involved at all.

    The Himilayan Glaciers have actually stopped retreating recently anyways – gee that’s inconventient.

    Then the IPCC and Al gore get a Nobel Peace prize for it.

    This is right up their with the graph taken from wikipedia that made it into another one of the IPCCs other major reports.

    Shhush on the little ice age portfolio please. Let us people who have tolerated being called “Deniers” or “flat earthers” get our chance to become the Landlords of the ignorant masses who thought Al gore was some scientific Demigod.

  4. Jim Rogers – what hysterical unscientific crap. As an aside, I’ve been to the Himalaya several times over 15 years – good luck trying to tell the local people that the glaciers are not diminishing.

  5. Extrapolation Jim Davidson Extrapolation.

    Perhaps using this technique you might be able to rationally extrapolate that the affect of higher concentrations of CO2 and other Hydrocarbons in our atmosphere have an insulating affect.

    Perhaps then Jim Davidson you might be a tad more concerned about the future prospects for our environment than you are now.

    It really does amaze me how a financial analyst can be so incapable of appreciating simple principles that affect a known system (complex as it may be) and can not see the effects.

    It’s like claiming that an expansion of the money supply does not cause inflation.

  6. wow, how about a hypothetical graph that shows a correlation between increased chemicals and pollutants in the environment and economic growth, right back to the Roman times. conclusion: pollution is good.

    it’s ok to put some scepticism into to debate, but putting this feast of rubbish out there as if it speaks for itself is just lazy. better concentrate on the expoiters of the issues, regardless of their truth value. you’d be bound to be on the mark, as usual.

    it’s true though, that a little warming (as these historical examples were) is better than another ice age, but a potential runaway 3 degrees plus is not a picnic. try getting coastal house insurance for that.

  7. Let’s see the Chinese Communist’s economic numbers are bullshit. Why should we compare them to Wall Street’s numbers ? Unless, of course, that’s all bullshit too !!!

    The ecology has collapsed. Where is the water in Australia and California ?

    Look give me enough time and paper and I can prove that 3 + 3 = 9, and maybe get a job on Wall Street or even Washington with cadillac health care…

    Drought, famine, superbugs ? I hope not. But 2010 ain’t gonna be pretty.

  8. Wow.
    I read this site avidly for insightful commentary and analysis of financial trends based on real numbers – as apposed to the tripe I can read in the paper. I’m truly amazed by how in one post you can go from sticking up a graph of a real time series, and analyse and discuss what you see, to calling ‘scribling notes over the phone’ from a renowned climate expert – oh sorry, got that wrong, he’s actually a financial analyst/amateur conspiracy freak – reasonable research and insightful analysis.
    A hint: check out temperature/CO2 data back a tad further than the last 1000-odd years – accurate ice core data (it overlaps with the instrumental age) goes back 800,000 years. The last 100 years stands out like the proverbial canine’s testicles. A little like your climate ignorance Dan.

  9. Don’t know if the planet is ready for life support, but Jim is – clearly senile if not brain dead. NASA has the best data – ask their view on climate effects.

  10. “It’s more likely – as temperature records show – that changes in climate are correlated to solar activity and sun cycles.”

    Actually, it’s more likely that changes in climate are correlated to volcanic activity.

  11. CO2 is not responsible for warming and nor can it cause a greenhouse effect. Total radiation entering and leaving the earth has been measured. Its the same. Historical temps data show much warmer (eg Medieval) but particularly much colder times. The hockey stick is irrelevant and a beat- up in the EXTREME. Read the CRU emails….its all about controlling peoples beliefs and opinions. Money talks.

  12. Have YOU read the CRU emails? Obviously not. Please provide some evidence from them, or evidence from anywhere in fact, that shows

    1. CO2 does not cause warming
    2. CO2 does not cause a greenhouse effect
    I mean real numbers by the way, not hysterical hearsay you are repeating from cospiracy buffoons.

    You could also provide numbers that tell us how the ‘hockey stick’ is a beat-up. Last I checked, the real numbers add up to very real warming in recent decades…ie, the graph goes up as time goes on. These numbers are easy to find. Why don’t you check them out and form your own opinion.

  13. You’ve not used any evidence to prove your assertions. You simply refer to ice core data and give an interpretation of what you see. I can do the same …as I have. I am very certain of what I see. New evidence may change this in the future but at present my opinion is as stated. Its important for your side to have strong evidence considering the government policy changes which may result. I don’t believe you have it.

  14. and there’s your problem right there, lauchlan. you don’t believe there is any evidence. not that you’ve bothered to look for yourself, as it’s all too hard i’m sure. as i said in my first post, many people, including and especially climate scientists, have actually tried to see if there are any natural phenomena that could account for the observed warming. and guess what… nup.

  15. Climate deniers/skeptics/conspiracy theorists do not all question the veracity of evidence that temperatures are rising and that CO2 has greenhouse properties (along with other molecules such as H2O … can we tax that?). However, the simple argument is that correlation does not mean causation. We don’t really know that CO2 levels are the CAUSE of rising temperatures, although there is a correlation – it is a supposition and not irrefutable truth. So perhaps they are climate agnostics?

  16. But still Tom you give no evidence to show why anyone should favour your belief over my belief. I told you Ive looked at the data and you say I have not. You made the original temperature assertions unaccompanied by data. Wheres your temperature data showing the hockey stick as any more than a weeny teeny up-tick in temps over thousands of years and dwarfed by much higher and much much lower temps?

  17. Volcanoes could do it!

    They can spew vast amounts of CO2 & other noxious gases, water vapour, dust & heat into the atmosphere.

    Undersea volcanoes, of which there are more than on the land, can do the same.

    An oceanic ridge runs directly under the Arctic Ocean, which is largely enclosed by two large land masses. It is not inconceivable that active undersea volcanoes are heating the Arctic & other areas of ocean.

  18. But nobody has quite figured out how to tax volcanoes yet.

  19. I seem to recall reading somewhere that the real problem was cow flatulence? So we should all be investing in biogenetics that target the creation of minimally flatulent bovines I guess?

  20. Justifiable grounds for homicide under Kev’s climate change legislation – The old bugger farted every bloody morning when he waked up Ya Honour! Which also solves the problem of too many “old farts” in the world … I really, really, really reckon I SHOULD run for politics! :)

  21. Climate change is horse manure – Who cares – The simple facts are that if it’s true your grandkids will move to all those new “nice” places in Russia and Canada and have a think about whether they reckon its worth their effort to bother trying to reclaim Oz and India and Africa from the desert sands. Of course the fact that the Chinese are buying 99 year leases to produce their tucker in Africa inclines me to suspect they have a few quiet doubts about the “science”? But irrespective, humans are ultimately adaptable – Or at least the survivors will be! The more I hang around this site, the more my Darwinian side gets cultivated I suspect? :)

  22. Alls quiet on the Western Front? Anyhow the hockey stick and its CRU creator are now under investigation after it was debunked by Steve McIntyre who’s work is freely available for scrutiny unlike the former. So no need to gasp at the silly graphs on wiki because they’re going to disappear soon since they are a proven fraud. Climategate was the last straw.
    We need not worry about warming. If you cant go a day without worrying about something it would be more realistic to worry about a new ice age.

  23. Adjusting environmental practices is one thing (and in many cases a good thing), but taxing the planet (with its economic, social and political ramifications .. world government etc) is quite another.

  24. Global warming has been proven to be in the hands of “scientists” who have deliberately faked the science to get the results they wanted.
    It has always had a very strong flavor of religion which I have found off putting. I have never seen a strong for or against argument until recently.
    Finding out that the source data for this science has been deliberately shredded is as close to a slam dunk for the opposition as you are ever going to get. The fact that Goldman Sachs et al are putting huge lobbying dollars behind carbon legislation should make any reasonable person question who stands to gain here.
    How about focusing our energies on worthy environmental areas like clean air and water? This can be done by enforcing existing law.

  25. tk, why does Australia NEED to urgently develop a nuclear industry? Why would you want to set up a dump for materials that are permanently toxic (as far as we are concerned), and free up other uranium resources around the world to be used for legal and illegal weapons? Does anyone know where the decades of global nuclear waste has been dumped? is it recorded and verified anywhere? or has much of it been simply dumped in the oceans and other remote places? What resources have been put into understanding the complete impact of toxic waste dumping? How much state funding has the nuclear industry tapped over the decades? and how does this compare with state funding for real renewable technologies? Everyone knows state investments in nuclear industries massively dwarf any investments so far in renewables. Obviously it is because of the strategic value of nuclear warheads. I suspect this is why there is such a focus on carbon these days, it is just a marketing program for the uranium industry. The real dilemma that we are facing is overpopulation and biodervisty destruction, and only education and renewables have a chance of combatting this. The nuclear industry is immoral on so many levels and in so many ways, with untold consequences for future generations. Why can’t people get these simple facts?

  26. Here’s a couple of interesting quotes I’ve just found;

    “Liquidity of banks is an entirely meaningless concept in a progressive currency inflation, the ideal of which is to escape the impending depreciation of liquid funds. (In 1923, the Germans called it Substanzwerte, meaning everything from undeveloped real estate to empty matchboxes.) A currency unit with widely fluctuating gold content allows the banks to compromise substantially the standards of credit discrimination”


    “Even land might be liquidated en masse, as most of the real estate in Berlin changed hands during the 1923 inflation when prices, in gold, fell sufficiently.”

  27. “most of the real estate in Berlin changed hands during the 1923 inflation when prices, in gold, fell sufficiently” – No idea on the history? But the thought that comes to mind is that it was related to either of the following? :

    * Vastly increased govt charges requiring sale of property to meet taxes (Yes, I hold a bit of gold to meet risk of same) – Sounds like potential overkill these days, but what the heck, I bought a little bit in 2005 and figure it doesn’t do a lot of harm to have it laying around.

    * Unemployment was so high that people had to sell real assets to continue eating regularly – Yep, there’s a lot to be said for having a job. Or some rellies who have a regular income and like you enough to chuck a spud or two your way this week. (If push really came to shove I think my dear old Oz government subsidised pensioner ma and pa might spare me a spud or three?)

  28. I think it had more to do with the need for ‘liquidity’ to redeem liabilities.

    Bank assets were illiquid & depreciating against gold & probably also Marks, hence the inflation of the currency ‘to escape the impending depreciation of liquid funds’. Real estate (in the form of housing related credit) was among those ‘assets’ or ‘liquid funds’.

    Inflating the currency does not help asset prices in terms of gold however, so presumably when prices, in gold, fell enough there were buyers.

    Here’s a couple more quotes;

    “The practice of many American banks to invest major amounts in mortgages was exceedingly dangerous, especially when it was done on the basis of reckless overvaluation and almost criminal disregard for the elementary rules of prudence”.


    “it is in the sphere of security and mortgage investments, and long-term industrial credits, that by far most of the banks’ mistakes and losses occur”.

    By the way, this was written in……..1937

    Doesn’t the old saying go, “There is nothing new under the sun”.

  29. G’day Justin – I went through a “New Bretton Woods”/”Gold is Money” thing very early in this crisis. And while I did reckon it would be really nice, I also reckoned it simply wasn’t going to happen as central banks have figured out another way that they reckon is a way better.

    The thought crossed my mind that the Chinese or the Russians might try to change the game (they did huff and puff about it briefly) – But then I went, Get real – They are ultimately going to suffer similar problems and want the same outs.

    I agree with DR that fiat money has no real value other than what it may buy today. But that doesn’t make me feel more inclined to love gold over land or sugar or oil or cow dung as an asset class – Because central banks have no interest in being constrained by any standard of any type.

    “Stuff” is worth what it’s worth in today’s fiat dollars. With gold being no exception in that regard.

  30. Spot on Ned. Stuff is stuff, and money is an abstraction for stuff. Money is also power, of course – and that’s what money is to banks – they are the new princes of the earth.

    Now if you had no money, but had lots of stuff (and useful stuff, like a proper veggie patch), you wouldn’t need money … apart from that needed to beat off the flies (ie: land tax and council rates). I’d take that over gold in a blink.

  31. “central banks have figured out another way that they reckon is a way better”.

    That’s just the problem Ned. I’m sure they do ‘reckon’ that, but it does not make untrue the statement, “A currency unit with widely fluctuating gold content allows the banks to compromise substantially the standards of credit discrimination”.

    They will ‘reckon’ that until the the standards of credit discrimination have been lowered as far as they can possibly go, which will require ever increasing ‘inflation of the currency’ to “escape the impending depreciation of liquid funds”.

    And mark my words, they have been ‘inflating the currency’.

  32. Yes Justin, you and I are both onto their cunning little “cheat” – I CAN’T BELIEVE IT TOOK ME SO LONG – I AM THE STUPIDEST MAN TO EVER WALK GOD’S EARTH! But having said that, it IS how they are going to continue to operate until something stops them. And given that they’ve now discovered the joys of QE, I’m not at all sure what that “something” might be? – Enlightened and enraged citizens perhaps? That would be ideal. But I also think it would be a “first”?

  33. Dear Dan,

    You are embarrassing yourself with these articles on climate change. Stick to the analysis of mining stocks mate, you have no idea about science. (Ditto on history by the way; did you really include Rome and Carthaginian crop yields in a comment about the Dark Ages? Go back to school!)


  34. True Dan,

    You need to stop making statements on climate change as you have no cred on this subject.

    It will simply lead those of us who want to take your investment advice seriously to believe you are a right wing “Fox News” spruiker.

    Stick to finance and I’ll keep reading, theres already enough uninformed and ill informed commentary on mans impact on the globe.

    Fiscal Phil
    January 25, 2010

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