“My Two Cents”
By Andy Sutton

8/19/2006

In Orwell’s 1984, we read terms such as double-plus-ungood, doublethink, doublespeak and other obvious oxymorons. I think the intention was to show that information can be spun to the opposite of the common sense of the subject matter without causing much in the way of objective opinions to the contrary.

We are seeing much the same phenomenon in the markets recently. What would normally be interpreted as bad news is spun to mean the opposite. A slowing economy caused massive upward eruptions in equity markets this week. PPI was up a mere.1%, largely riding a .8% DECREASE in the prices of automobiles due to giveaways, rebates and other incentives. This will undoubtedly reflect negatively in the bottom line for already beleaguered auto stocks, but it is cause for much shouting and optimism on Wall Street this morning. Doublespeak is in high gear. Since when is a stalling economy a good thing?

The intention of the current spin cycle is obvious. Interest rates must go lower to rescue the drowning real-estate market. I listened to a few financial shows this morning and anytime someone talked about a growing US economy, housing was the only thing mentioned. This is tantamount to an admission that people buying homes and extracting equity from homes is the only round left in this once mighty economic cannon.

According to the National Association of Realtors this week, home prices appreciated 3.7% in the second quarter with condo prices falling .3% While there are both hot and cold spots regionally, this lukewarm overall growth is going to at best put a damper on the equity extractions that drive a sizable portion of consumer spending. Couple this with the more than $1-2 trillion in ARMs that are due to reset in the next year, and it drives home the importance of driving down interest rates.

The propagandists in the government and on TV are trying to talk the stock market to new highs, bond yields to new lows, and the housing market back to solvency. The key question at this point is will skittish ‘investors’ be so quick to jump back in? Surely, speculators will be likely to think twice, but the real question that needs to be answered is who is going to buy these homes? The only way for prices to rise is for demand to outstrip supply. With record supply levels, where is the overmatching demand going to come from? The propagandists don’t talk too much about it because they don’t have an answer.

Once again, it becomes critical to listen to not only what is said, but sometimes more importantly, to what is left unsaid.

Andy Sutton holds an MBA in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics.

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