The Tortured Logic of the Stock Market

The "Good Fed" is nothing but a bad magician...

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America’s Unofficial Downgrade

The US has already lost its AAA status in the CDS market...

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The Gun Boom

Americans stock up on gold, guns...

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No Longer a Safe Haven

Why the world's biggest bond fund is fleeing US Treasuries...

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Flight to Crisis?

The US economic recovery is a fairy tale...

WE'RE NOT THE FIRST to say it, but we have said it repeatedly, writes Eric Fry in The Daily Reckoning.

The US economic recovery is a myth...a fairy tale.

The more enthusiastically the Wall Street rah-rahs proclaimed the start of a new growth phase, the more emphatically your editors pooh-poohed the idea. "The non-recovery seems to be gathering momentum," we observed from California in the March 2 edition of the Daily Reckoning. "Almost every day we receive fresh evidence of economic non-growth and non-vitality.

"The economy does manage to get out of bed every morning. Some folks applaud this fact and declare, 'Aha! A recovery!' Other folks...observe that the economy usually crawls right back into bed after brushing its teeth. We see no recovery. We see a coach potato with a very bright smile...an economy that still lacks essential qualities like jobs, corporate revenue growth and credit. The visible effects of this widespread malaise are...well...widespread."

Falling prices tell us that the private sector de-leveraging is continuing. These processes take time, dear reader. Rome wasn't built in a day, and neither did it burn to the ground overnight. Likewise, the vast American economy does not improve or degrade all at once. Even in the midst of difficult conditions, for example, some facets of the economy manage to flourish.

On the other hand, isolated instances of economic growth should not be confused with resurgent national prosperity. Sure, a few government agencies in Washington and a few financial firms in New York may have resumed hiring. But that doesn't mean General Motors can sell a car...or that home prices will rebound from their depressed levels.

In fact, General Motors can't sell a car...and home prices are not rebounding from their depressed levels.

"For US home and auto buyers it's 1983 again," observes Eric Janszen of iTulip.com. "New home sales fell to an annual pace of 300,000 units this May, the lowest yearly unit volume since 1983...An optimist might conclude that home sales are thus only as bad as in 1983, except that the economy was only one quarter the size of today's, [which means that] this post-recession housing market contraction is proportionally four times worse than the housing downturn that occurred at the end of the early 1980s recessions."

Slowly but surely, therefore, investors are beginning to realize that America's economy recovery may be less robust than advertised. This week, the Conference Board's disclosed that its Consumer Confidence Index for June tumbled to 52.9 from 62.7 in May.

The stock market did not greet this news warmly, as the Dow Jones Industrial Average dropped 268 points – falling below 10,000 to within a whisker of a new 9-month low. The Dow has fallen 428 points, or 4.2%, in the past four days. Most overseas markets also slumped Tuesday. The Shanghai Composite Index fell 4.3% to a 14-month low. Britain's FTSE 100 fell 3.1%, Germany's DAX index dropped 3.3%, and France's CAC-40 fell 4%.

Meanwhile, a "flight to safety" pushed the yield on 10-year Treasury notes below 3 percent for the first time in since April 2009, when the financial markets were still in crisis mode.

Bond yields and share prices do not usually tank when economic conditions are improving. Maybe this time is different...Probably it is not.

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Useless Gold, Useless Dollars

Gold Investing is "ridiculous" says the Wall Street Journal...

"In the LAND of the BLIND," as the old saying goes, "the one-eyed man is king." In the world of investing assets, therefore, which asset deserves to be supreme global ruler? asks Eric Fry in The Daily Reckoning.

US Treasuries...? Picassos? Shares of Apple Computer? Vintage Corvettes? Beachfront real estate?

It's a tough call, made even tougher by the volatility of the foreign exchange markets and the capriciousness of national tax authorities. Truth be told, there probably isn't one supreme asset that merits your investing trust above all others. But if there were just one, that asset would be Gold...simply because it has the longest and most impressive resumé.

Nevertheless, this trustworthy asset commands surprisingly little respect from most American investors. They remember gold as the asset that slumbered for two decades while stocks jumped 10-fold. And despite Gold Investing seeing such a strong performance during the decade just passed, most investors are still quick to point out that gold has delivered a negative inflation-adjusted return since 1980. That's 30 years and counting.

"At some levels," reasons Brett Arends of the Wall Street Journal, "gold, as an investment, is absolutely ridiculous. Warren Buffett put it well: 'Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.'

"And that's not the half of it," Arends continues. "Gold is volatile. It's hard to value. It generates no income... It's a currency 'substitute,' but it's useless."

Arends offers a familiar and relatively coherent critique of gold's stature in the world. But if gold is as 'ridiculous' and 'useless' as he contends, the Dollar must be doubly ridiculous...and the Euro triply useless.

What intrinsic "value" or utility do these sovereign IOUs possess?

A Dollar possesses value only because enough people agree that it does. But if a large body of Dollar-holders rebelled against this notion, the Dollar's value would decline, if not disappear altogether. Faith and habit support the Dollar's value. Nothing more. Isn't that a bit ridiculous too?

And yet, the world's ridiculous "faith-based" monetary system underpins the entire network of global commerce. Without Dollars and yen and Euros, global commerce would function very poorly. So the system persists, despite its obvious shortcomings. Oil producers, for example, continue to spend decades developing new projects, building pipelines and expanding refineries so that they can continue to exchange one gallon of gasoline for three pieces of green paper.

The whole thing is kind of insane...when you really think about it. But this form of insanity is benign in most economic settings. Everyone knows that a piece of green paper possesses zero intrinsic value. But no one cares, as long as four pieces of green paper buys a breakfast at Denny's, five pieces of paper buys a lunch at McDonald's and six pieces of paper buys a coffee at Starbucks.

Unfortunately, here in A.D. 2010, currencies are coming under suspicion. No one knows which currency is good or which is bad...or if any currency at all can be trusted. The global monetary system is creaking under the weight of excessive government debts. In such an environment, what asset is truly safe?

If money itself is not trustworthy, what is? What asset evokes confidence? What national treasury, government agency, financial institution or pension system inspires complete trust?

The time has come to ask ridiculous questions...and to continue asking ridiculous questions until some of the ridiculous answers begin to make perfect sense.

Gold might be as "useless" as the Journal's Arends contends, but an ounce of it buys about 1,200 Dollar bills. In a few years time, this same useless ounce of metal might buy 5,000 Dollar bills.

The question then would be, "What do I do with all these green pieces of paper?"

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All Hat, No Cattle

What Keats could have taught Greece and Goldman Sachs about Buying Gold...

"BEAUTY IS TRUTH; truth beauty," the poet, John Keats famously mused in his Ode on a Grecian Urn, says Eric Fry in the Daily Reckoning.

Neither Greece nor Goldman Sachs can seem to get the hang of this concept.

Grecian finances, for example, illustrate an opposing principal: deception is ugly. For more than a decade, the Greeks have engaged in a mass deception – that a revenue-starved nation could finance generous social programs. The idea was never viable, feasible or legitimate. But the Greeks wanted to believe it...and so did the rest of the European Union. They all wanted to believe that Greece's last six defaults were a fluke – that the new and improved Greece would behave nothing like the old, profligate one.

The truth would have been better. Greece would have been better off if it had never started its game of make-believe. If, instead of pretending it could afford the unaffordable, it had devised a plan for maintaining legitimate solvency.

The Greeks didn't do that. Instead, they joined the Euro bloc and pretended to "act German". For eleven years this charade succeeded. But the Greeks are not German. (They aren't even French.) Like many American marriages, Greek finances inhabit a chronic state of crisis, interrupted by brief interludes of calm.

But the Greeks are not unique. The nations of the West are full of deadbeats. The Spaniards and Portuguese play make-believe as well as the Greeks. And so do the Italians. But make-believe is not just a Mediterranean game; it is an international game. And no one plays it better than Uncle Sam.

He also pretends to possess the means to "make good" on his debts. And so far, his creditors believe him. Your editors don't. We think the guy is "all hat and no cattle". We don't think Uncle Sam can actually afford to pay the debts he's got already, much less the trillions he's adding to his debt load year by year.

Based on raw numbers, Uncle Sam belongs in a debtor's prison. But that doesn't stop him from borrowing even more money or dispensing more freebies to a populace addicted to "something-for-nothing" or enabling certain privileged financial institutions to leech from the taxpayers' jugular.

This "system" won't work. It is not a system at all. It is half fairy tale, half scam. America's budget deficit, at 13% of GDP, is nearly identical to Greece's. And America's accumulated debts – at 86% of GDP – do not trail very far behind Greece's at 112% of GDP. But that comparison is hardly comforting. In absolute terms, no debtor can compare to America.

As fellow Reckoner, Joel Bowman observed recently, "In a misguided effort to rescue the economy from the untold horrors of the 'abyss,' the prophets of modern central planning seek to transfer society's means of production from the most to the least productive class; from private fist to public mouth; from worker to moocher; host to parasite."

In doing so, these charlatans shackle the current generation's liabilities to the income statements of futures generations. The nearby chart (which first appeared in the May 10, 2010 edition of The Daily Reckoning) shows the total "bare bones" funding requirement for various countries during the next three years.

Specifically, this chart shows the amount of borrowing that would be required by each country to fund anticipated deficits during the next three years and to re-finance all government debt coming due in the next three years...America's three-year funding requirement is not nothing.

And America is certainly not immune to the kind of investor scrutiny that could produce a debt crisis...or a currency crisis.

In a pinch, Greece could probably borrow $30 billion here or there to plug its revenue shortfall. But in a pinch of similar relative size, the US might not be able to borrow $7 trillion...especially not when the US is unable to scrounge up cash from its own citizens.

"For the 19th consecutive month, the national budget fell disastrously short of anything close to balanced," Joel recently observed. "According to the Treasury Department's own figures April's $82.7 billion deficit was almost four times the shortfall registered in the same month last year. The official tally only tells part of the story. Sadly, it was the best part."

As Addison Wiggin observed last week in The Reckoning, "That figure of $82.7 billion is merely the 'BS' figure the Treasury puts out there when it reports the deficit. The real tell is how much the national debt grew. And in April, that figure was twice the size of the 'official' monthly deficit – $175.6 billion.

"Don't look now," Addison went on, "but we're just a couple of weeks away from the national debt breaking $13 trillion. If you must know, the exact number this morning is $12,931,157,737,293.42."

Historically, April tends to produce a modest surplus (or at least a mitigated deficit), thanks largely to the influx of tax receipts due around the 15th of that month. But despite the administration's assurances that the employment landscape is steadily improving, receipts were down more than $20 billion from the same month last year (2010: $245.27 billion; 2009 $266.21).

Despite the severity of America's indebtedness, most people in positions of power refer to this disaster as if it were merely a broken water pipe. "We really should fix it," they say, as if we could turn a valve here or replace a gasket there and get everything running smoothly again. But no quick fix is possible. In fact based on the numbers, no long fix is possible either.

This, too, is a lie...and it's not pretty.

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Fixing the Unfixable

Greece risks the first, not last, sovereign bond default of our times...

HOW TO FIX the Euro? asks Eric Fry from Laguna Beach, California for The Daily Reckoning.

This troubling question has vexed the financial markets for the last several weeks. One week ago the Eurocrats amassed a $1 trillion war chest (of borrowed money) to "fix" the Greek debt crisis and stabilize the Euro. Seven days into the mission, the Greeks are as bankrupt as ever and the Euro has tumbled to a new four-year low.

The European Central Bank – like British Petroleum – can't seem to figure out how to contain the mess they made, much less how to clean it up for good. Just like the crude oil gushing out of BP's underground well, Europe's sovereign debt crisis continues to gush out of control and threatens to wash up on the shores of Italy, Spain and Portugal.

One week is not enough time to judge the success of the ECB's $1 trillion "Euro Defense Plan", but one week is plenty of time to judge its failure. This $1 trillion fix did not fix anything. It merely annoyed short-sellers for a couple of days and inspired enthusiastic Gold-Buying.

Rome wasn't built in a day, of course. So we should not expect Athens to be rescued in a week...or ever. The country's fiscal condition is beyond repair. Either Greece slips into the Mediterranean, figuratively speaking, or the Euro does...or both. Borrowing $1 trillion to fight against the consequences of excess debt does not seem like a winning strategy.

In a worst-case scenario, the ECB will exhaust its cash, credit and credibility trying to save Greece...and will destroy the Euro in the process. Best case, the "fix" will persuade a few Wall Street strategists that the "worst of the Euro crisis is over" and will suck a few more suckers into the European sovereign debt markets before the situation gets REALLY ugly.

And it will get ugly...one way or another.

Many investors behave as if sovereign defaults are like polio: eradicated forever. These investors are half right. Polio has been eradicated.

Greece may not actually default, depending on the rescue measures that come its way. But Greece is already bankrupt. The creditors to Greece should understand that history is not on their side. In fact, the creditors to every sovereign borrower should understand that history is not on their side.

"While a European sovereign default has appeared inconceivable in recent history," a recent Wall Street Journal article observes, "defaults and debt re-schedulings were actually a common feature of the European financial landscape throughout the nineteenth century and up until the end of World War II, according to the economists Carmen Reinhart and Kenneth Rogoff.

"Greece has defaulted or rescheduled its debt five times since gaining independence in 1829, the economists wrote in their paper This Time Is Different, published in 2008 and recently expanded into a book. Spain has the lead in Europe at 13 times since 1476. Germany and France have both done it 8 times, while the UK has never done it since William the Conqueror invaded in 1066.

"Greece has existed in a 'perpetual state of default' since its independence," the Journal concludes, "having spent 50.6% of those years in default or rescheduling, easily tops in Europe. Russia is next highest, with 39.1% of years spent as a bad debtor after defaulting or rescheduling five times."

Governments default. That's what they do. They tax; they squander the tax revenues; they default. This is the established unnatural order of the governmental world. The Greek crisis may be the first sovereign debt debacle of recent times, but it won't be the last.

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Buying Gold in the Lost Decade

Buy Gold, sell stocks worked great over the last 10 years. But now...?

SELL STOCKS and Buy Gold, writes Eric Fry in The Daily Reckoning.

Ten years ago, this Trade of the Decade provided a great thematic backdrop for everything we would write here at The Daily Reckoning since then. We would write about the coming housing bust, about runaway government deficits and about lots of other things that provided absolutely no reason whatsoever to buy stocks, but plenty of reasons to Buy Gold.

For good measure, we would also write about the scoundrels on Wall Street and about the hazards of leverage. And every once in a while, we would write about the hazards of leverage in the hands of the scoundrels on Wall Street. And that was yet one more reason not to buy stocks.

So here's a picture of the last 10 years in a nutshell: you can see that gold performed very well and that stocks did not. In fact, stocks delivered a negative return.

So we were right – more or less – about what we anticipated. But that's not really great news. I was talking to a married friend of mine recently and he said to me, "Eric, be careful what you wish for. I was chatting with my wife the other evening and I said, 'Honey, we really need to communicate more effectively. So if you don't tell me how you're feeling, I'm not going to know how to make you happy. And so she said, 'Okay, get off of me.'"

So now what? What's next for us investors? What's the next Trade of the Decade?

I don't know, but I'll offer a guess. Bill Bonner here at The Reckoning has offered his guess already – selling Long-dated Treasury bonds and buying deep-value Japanese stocks. I agree with the first half of the trade. But the second half of my Trade of the Decade is to buy uranium.

So my trade is to sell toxic assets and buy radioactive ones. I think this is a trade that will unfold nicely over 10 years, but over 10 weeks or 10 months I'm not so sure. So check back in 10 years and we'll see.

My Trade of the Decade derives from the idea that the US and most of the other Developed Nations – also known as Welfare States – have begun an irreversible decline, and meanwhile SOME Emerging Markets have begun a very long-term growth phase.

These divergent trends won't unfold in one day. In fact, they may not even unfold in one decade. But the time has arrived to begin considering the investment implications of these trends.

The good news is that even as mature economies like the US die, they won't be all bad. Many things improve as they die. I think of maple leaves, for example, and agave plants. I learned a little something about these Agave plants. They are "monocarpic". I didn't know that word. Now I do. Monocarpic plants flower just once, then die. It feels to me like the US is like a monocarpic plant that has just flowered. The bloom was spectacular.

We just enjoyed one of the most incredible economic performances of any nation ever, which morphed into one of the most spectacular credit bubbles of all time. But it feels like that's over now. The ensuing bust won't unfold all at once, but it will unfold. That's a guarantee. And one very solid clue that the bust is coming is that the government is trying to extend the bubble.

We know this about governments: They are good at borrowing. But when it comes to re-paying loans. Not so good. Some of you might have already known that governments sometimes default on their obligations. I was shocked to learn this. In fact, I couldn't believe it. So I Googled "government" and "default" and sure enough, my query returned 160,000,000 responses. When I changed the query to "government default on debt," I still got 10,000,000 responses. So I read some of those query results and it's true; governments do default sometimes. It's not moral and it's not right, but it happens.

In general, you don't want to lend money to a government when times are bad. It's okay to lend money to governments when times are good. They don't typically default or renege when times are good. But in a fair- to-poor environment you need to be careful. This is simply an historic fact.

I ran into a fascinating little tidbit from a book about French financial history entitled, The Undying Debt by Francois Velde. This is a story from the past. But it may also be a story from the future:

"With the opening of hostilities [in WWI], the Bank of France suspended the link between francs and gold, and part of the war was financed with large issues of paper currency. When France's prime minister re- established the link in 1928, he could only do so at 20% of its pre-war parity."

So in other words, the French got into a fix. They got out by defaulting on 80% of their obligations. The history of French financial management is not so different from that of any other nation. Time after time, France found itself a little short. And time after time, it defaulted...devalued...and reneged on its promises. To the extent that, over a three-century period of time, French government debt equal to ten ounces of gold – with a present value of well over €8,000 – was reduced, says Velde, to €1.20.

Oh mon Dieu! C'est pas vrai! Yes, it's true. Governments default just as inevitably as Agave plants flower. But the timing is uncertain. So where are we now in the fiscal lifecycle here in the US?

Well I'm going to share a few vignettes. No answers; just some observations.

Vignette #1: The government is taking over
Government here in the US – as well as several governments in Europe – is attempting to supplant aspects of the private sector. I don't think that's going to work. You cannot ever convert a parasite into a host. They are completely different organisms, which perform completely different functions. So right now we have credit contracting rapidly in the private sector, while it is expanding dramatically in the public sector.

Business lending is falling at a 16.6% rate...the steepest plunge since 1948. But government borrowing is more than making up for the shortfall in private borrowing.
Unfortunately, government borrowing is not the same thing as private sector borrowing. Private sector borrowing facilitates capital formation. It facilitates capitalistic enterprise. But government borrowing burdens it. Government borrowing impedes it. Government borrowing produces more parasites. That's about all it does.

Check out this chart: It shows employment trends in the greater Washington, DC area.

The upwardly sloping blue line is federal employment. The downwardly sloping yellow line is private sector retail employment. Now I don't know what you all think about this chart, but I don't think these are the kinds of employment trends that will produce national prosperity. These are the kinds of trends that will make the economy less productive...at least that would be my guess.

Vignette #2: Talented individuals are fleeing the US
In the recent past, 92% of Chinese PhD's in science and engineering would remain in the United States for at least five years after their studies. So would 85% of Indians. But last year, four researchers from Duke, Harvard, and Berkeley conducted a survey of more than 1,200 foreign-born students. The percentage of Chinese who plan to stay in the US after graduation is now just 54%, while the number of Indians who expect to remain is just 58%.

What's more, only 7% of Chinese students surveyed and 25% of Indian students believed the American economy's best days still lay ahead. But overwhelming majorities of both Indian and Chinese students believed their home country's best days still lay ahead.

Now they could be wrong. But we're talking about a sliver of the talent pool that has a good sense for labor market trends and a good sense for where opportunity lies globally.

Vignette #3: An abysmal fiscal trend is unfolding
The US crossed the $1 trillion deficit level for the first time in 1981, and 28 years later, we've added another $11 trillion. The deficit stands at $12.4 trillion right now and over the next ten years, US debt is forecast to reach $25 trillion - pushing very close to Greek-like levels of debt-to-GDP...

In the last ten years US Federal Debt per person has gone from $20,000 to $40,000. If we were to also include the present value of the government's future unfunded liabilities like Social Security and Medicare, the debt per person would soar to more than $250,000!

These statistics may not necessarily mean anything, but they don't necessarily mean nothing.

Vignette #4: Geopolitical risks could exacerbate fiscal weakness
On top of bad fiscal trends, you've got omnipresent geopolitical risks that are always lurking in the shadows. Some senior Chinese military officers proposed recently that their country should sell some US bonds to punish Washington for its latest round of arms sales to Taiwan.

"Our retaliation should not be restricted to merely military matters," Luo Yuan, a researcher at the Academy of Military Sciences, told Reuters, "For example, we could sanction [the US] using economic means, such as dumping some US government bonds."

Probably, Luo Yuan's suggestion will gain no traction in Beijing. Probably. But his suggestion nevertheless underscores the precarious economic arrangements that support the modern world of finance. Prudent investors cannot afford complacency.

Geopolitical tensions are not only a China-US thing, they are also a Germany-Greece thing. Everyone thinks Greece will pull out of its mess with austerity measures and German bailouts. I'm not so sure about either assumption. Of almost 31,000 votes cast in an online survey by the German daily Bild, 82% of respondents said the European Union should not rescue Greece. And an editorial in the same paper declared, "The proud, cheating, profligate Greeks" ought to be "thrown out of the euro on their ear." I think this editorial expresses a very pervasive view in Europe that is not expressed by the politicians, but it is one that will influence their decision-making.

Unfortunately, Greece's finances are not unique; they are emblematic. Sovereign borrowers are out of control. Greece is just an icon for all of Europe, and also the US.
So I view Greece as the Bear Stearns of the upcoming sovereign debt crisis. You may recall that in June, 2007, Bear Stearns stepped in to bail out two of its own hedge funds by pledging collateral for a $3.2 billion loan.

Nine months later, in March, 2008, JP Morgan Chase took over a functionally bankrupt Bear. And at that point most of the official Wall Street elite believed that the crisis had been averted. But six months later, on September 15, 2008, Lehman Bros. filed for bankruptcy. And the rest is history. It is amazing to remember that 15 months elapsed between the first signs of difficulty in the US financial sector and Lehman's bankruptcy.

So mark your calendars; the Sovereign debt crisis should unfurl by May 2011 – that would be about 15 months after the initial headlines about Greece.

Now the financial news is not all bad, however. In the Developing World we have some shining stars. And I would be putting my capital there.

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US Home Sales Plummet

Not even an $8000 tax break has staunched the loss of value in US housing...

SALES OF EXISTING U.S. homes plunged 17% in December, the biggest decline since record-keeping began in 1968, notes Eric Fry for The Daily Reckoning.

This disheartening news item shocked economic forecasters, but hardly anyone else. Most of us non-experts already knew that folks without incomes or credit buy very few houses.

But for some reason, the experts shun this intuitive logic. Instead, they study their econometric models, tweak their spreadsheets, and go public with forecasts that would embarrass a tealeaf.

These seers might not be so blind if they bothered to observe the world around them, rather than their computer monitors. Then again, the "world" that surrounds most Wall Street economists is a place that still practices (slightly less) conspicuous consumption...and therein lies the root of their woefully misguided forecasts.

Because out on Main Street, conspicuous consumption has become so inconspicuous that it's invisible. Out on Main Street, incomes are still dropping and credit is still contracting.

"We're past the bottom," says Adam York, an economist at Wells Fargo Securities LLC in Charlotte who correctly predicted December's steep drop in home sales.

"[But] I don't think there's going to be a lot of buyers out there looking for a home outside of the tax-induced effects until they feel more comfortable with the labor market."

"Past the bottom" but going nowhere is a forecast we can live with. And for perspective, the "recovering" housing market has not really recovered at all.

For all of 2009, existing home sales rose 4.9% to 5.16 million, the first gain in four years. This is the "past the bottom" part of the story. The "going nowhere" part is that the median sales price dropped 12% from 2008, the biggest annual drop on record.

In other words, the NUMBER of existing homes sold increased slightly in 2009, but the VALUE of all existing homes sold actually DROPPED. This unusual divergence suggests that most sales are occurring at the low end of the housing market, where the government's $8,000 tax credit provides the greatest relative benefit.

Meanwhile at the mid- to higher-end of the market, where $8,000 would represent the cost of renovating a half-bath, sales are still dead in the water.

Moreover, as our colleague Dan Denning puts it in his Daily Reckoning Australia today:

"In November, first-home buyers taking advantage of the tax credit made up 50% of demand for existing homes. In December, it fell to 43%. Those two months were supposed to be the final months of the credit. The December decline shows that most people who intended to take advantage of the credit had already locked it in.

"But what now? The credit supported prices and sent sales soaring. The Congress extended the credit through April 30th of this year. But we doubt it will lead to a huge recovery in home prices."

Why not? There is 7.2 months supply of homes at the current sales rate, explains Dan. That's a huge surplus inventory. And it puts massive downward pressure on prices...

...and that's before another likely wave of foreclosures hits the US housing market.

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