Home Sales Down Despite Tax Credits

Recent Yahoo Finance article shows home sales are down despite the tax credits that were offered to home buyers.

http://finance.yahoo.com/news/May-home-sales-dip-as-housing-apf-1632613040.html?x=0&sec=topStories&pos=2&asset=&ccode=

This is another example of how government programs that are designed to create false demand fail. Why does the government run this desperate program?

Uncle Sam wants YOU to buy a house! And an expensive one! Seriously. That is the only game in town. Let me explain why.

When we borrow money, banks create brand new money. They do not lend existing money. Here is how banks create money:

http://www.tradingstocks.net/html/banks_create_money.html

This is called credit inflation. FED has been inflating credit for the last 50 years faster than GDP growth. This extra money in the economy makes it easier to earn it. People feel good. They forget that entire money supply is borrowed bank credit that needs to be paid back someday with interest!

This flood of money makes the current administration look good. Remember all the talk about "Affordable Housing"? And right after the government promised American dream come true, they made mortgage easy, and propelled the home prices. That is not really affordable housing. Now finally the home prices are coming down, and instead of celebrating that home prices are affordable they are trying to propel them up again. This is because uncle sam wants you to borrow money so that banks create money! As simple as that. The more you borrow, the better it is. This is the only tool that the government has to make it look like they are doing good. Here is how the government uses home prices and easy mortgage to inflate the money supply:

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

Expensive is NOT good. Stocks should be cheap. Why would you want to own something that does not pay a dividend? Homes should be cheap. Why would you want an expensive house? Until these things get cheap, we are NOT going to be wealthy. If people are not able to afford a home, then higher prices are not good.

Anyway, now you get the idea. This is why government subsidizes mortgages with interest deduction from income. That is a direct wealth transfer from renters / owners to the banks and makes it more attractive to buy expensive homes so that people borrow big, banks create money and inject it into the economy. That is why cash for clunkers. So that you borrow and buy a car. That is why 8K first time home buyer credit. Sounds like a good plan, right? Well, there is a limit to how much people can borrow. When the entire population reaches it's natural limit, the bust arrives and the same process reverses itself, and it is called deflation:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

How to Identify a Stock Market Top

Today a financial article made the claim that market timing is not possible and the performance of your portfolio depends on luck:

http://finance.yahoo.com/news/One-Big-Thing-We-Dont-Know-nytimes-2119843318.html?x=0&sec=topStories&pos=6&asset=&ccode=

The article correctly mentions that there are very long (20-40 years) periods where stocks do not perform as good as bonds. This information is largely ignored by the mainstream media who likes to present the buy and hold case for stocks.

There are various technical analysis tools that makes it possible to measure the maturity of a rally or a decline so that you may line up the ods in your favor. Buy and Hold definately does not work and it is displayed by example in this decade and in many decades in the past.

It is possible to identify the market trend via simple tools like moving averages. It is possible to identify a tiring market via advance decline ratios. We can suspect a pending crash when we see accumulation-distribution index declining while stocks are advancing. We have successfully used this many times in our latest stock market forcast service:

http://www.tradingstocks.net/html/latest_opinion.html

Daily sentiment index works as a contratrian indicator. For example back in March 2009, only 3% of traders were bullish and that was a bottom. Fast forward to April 2010, we had 92% of traders bullish on S&P 500 and that made us suspect a stock market top. Here are many other technical indicators that scream when stars are lined up to signal a market top:

http://www.tradingstocks.net/html/spot_stock_market_top.html

It is true that there is nothing certain about financial markets. But it is not purely luck. You can use technical analysis to turn the ods in your favor. Markets are probabilistic and if you know what is more likely you can allocate your protfolio accordingly and perform much better than random trades.

Austerity Measures and Deflation

Deflationary crash continues. As we hear more and more austerity action, we will see less and less spending and as debt deflates, money supply will continue to shrink. UK, other European nations, many US states and local governments are going to cut spending and start saving:

http://www.marketwatch.com/story/uk-plans-59-billion-of-spending-cuts-new-taxes-2010-06-22

This trend of austerity is deflationary. Here is what else is deflationary in the current economic environment:

http://www.tradingstocks.net/html/signs_of_deflation.html

In the past economy seemed to be doing OK solely due to credit inflation that FED and other central banks have fostered. FED made it easy to borrow. The world borrowed and spent. When we borrow money, banks create new money and give it to us. They do not lend existing money. Here is how banks create money.

http://www.tradingstocks.net/html/banks_create_money.html

This new money expands the money supply. It makes it easy to earn. Our economy is now addicted to the ever expanding credit supply. For decades, our total debt (not federal debt, but the debt people owe) increased faster than the GDP. For every unit of GDP increase, we had to borrow more and more every year.

Why does it matter? Well, all of our money supply is bank credit. It is borrowed money. It needs to be paid back as principal + interest. The interest portion is not even created yet. Borrowing MUST increase exponentially so that principal+interest amount exists in the economy so that people can earn it and pay back what they owe. What happens when borrowing stops? Deflationary crash occurs. Debt problem:

http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html

There is a limit to how much people can borrow. To make it last what did they do? They allowed people to deduct mortgage interest from income while calculating tax. That made mortgage more attractive. So people borrowed more and injected new money into the economy. This new money makes the current administration look good. In fact, they guarantee a future bankruptcy but who cares. As long as they get re-elected...

http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html

Government talked about the American Dream and Affordable Housing. Now home prices are becoming affordable, but instead of celebrating, they are scared to death, they are trying to inflate prices again. Home prices are down, sales volume is down. After prime borrowers were exhausted, they changed the rules to allow sub-prime borrowers get big mortgages. No 20% down, liar loans were all to inflate total credit. Now sub-prime is exhausted and the crash has started. 8K tax credit won't work. Home prices must increase exponentially to sustain a recovery. People must borrow HUGE amounts to provide new money to the economy. Who is gonna do that??? Here is why FED's easy money policy does not work beyond some point:

http://www.tradingstocks.net/html/jaguar_inflation.html

Where does that leave us? It leaves us at the top of the greatest bubble ever! What ever you do, make sure you do not take on more debt! Pay off existing debt! If you have existing savings in cash or cash equivalents such as short term US treasuries you should be fine for a few years. At the bottom of depression you may have to jump out of US dollars if FED freaks out and really prints money!

All of the prices, and salaries you see around you were based on inflated credit that happened over 50 years. It is based on a money supply that is almost entirely bank credit. People borrowed and borrowed and spent. The amount of money borrowed reached sky high. You earned in good times! Now, it is reversing course!

Deflation is here! Understand the economic environment we are in:

http://www.tradingstocks.net/html/prepare_for_market_crash.html

Austerity measures are the harbinger of the tidal wave that will wipe us out. Deflationary crash is not over. 2008 was just the warm up. Japan had it for 20 years. Do not think we are immune.