By
The
Inflation Trader
:
Markets continue to gyrate in what seems like wider and wider
arcs as volumes gradually decline but the density of news headlines
does not. Wednesday, at least one meaningful piece of news that
pressured stocks early was that hedge fund (and market-maker) SAC
Capital told its investors that
it has received a Wells notice from the SEC
(indicating that the SEC has determined it may bring legal action
against the firm), alleging insider trading. An allegation against
the firm, as opposed to individuals within the firm, is a much
bigger deal and the concern is that if SAC is impacted or
distracted by the charges that liquidity in certain parts of the
market may suffer.
This concern didn't linger very long, though, as stocks were
back in the black by lunchtime.
New Home Sales were reported significantly weaker-than-expected,
with a downward revision to the prior month's reported sales. While
sales of existing homes have been on a steadily improving pace for
a while, New Home Sales have been stuck around 365k since January.
Economists had expected a number more like 390k, which sounds
aggressive when you look at the chart (
source: Bloomberg
) below, but recall that last month's figure had been previously
announced at 389k and the economists' estimates don't seem so
outlandish.
This figure doesn't appreciably change my positive view of the
housing market (and more important for me, price change in the
housing market) going forward, for two reasons. First is that sales
of new homes are dwarfed by sales of existing homes, so that the
latter is simply lots more important and the data more
statistically useful (e.g., the year-on-year change in the median
price follows the same path, but as you can see below in the
Bloomberg chart, the new home sales number is dramatically more
volatile).
The second reason is that I suspect one reason for the failure
of New Home Sales to rise more aggressively is that the gross
inventory of new homes has recently been at the lowest level on
record (dating to at least 1963). This is a better number to look
at, incidentally, than the "months of inventory," which still shows
slower inventory turns than was normal back prior to the bubble.
But that's because of the denominator (monthly sales), not the
numerator (houses for sale). And at some level, there are just not
enough of the right kind of homes where they are needed. With just
147,000 new homes available for sale, there is only 1 new home for
every 2,200 Americans. And they're mostly bunched together. I
suspect this dampens new home sales, and so I am looking much more
closely at existing home sales for both activity indications and
for price indications.
I had the honor of speaking Wednesday at the Euromoney Forex
Forum 2012 in New York on a panel concerning the future of the Euro
and how much that future depended on individuals as opposed to
bigger historical/economic forces. Readers will be unsurprised to
hear that I was fairly firmly on the side of "in the long run,
economics wins."
But as often happens when I am running my mouth, I hit on what I
think is an interesting analogy for the Euro and the Euro crisis,
and for why "kicking the can" makes at least a certain kind of
sense.
The analogy is astronomical in nature, and concerns the process
of accretion as it applies to planets. The way that planets are
thought to form is by the gradual accretion of small bits of matter
- asteroids, rocks, dust into larger and larger bodies until the
resulting body is able to sweep its orbit clean of anything which
might otherwise accrete. But in the process of that accretion,
there are two main determinants of how quickly the accretion occurs
(actually, there are probably hundreds, but an analogy is supposed
to be a simplification, right?). One is the speed of rotation of
the body. A body that is spinning rapidly has a greater tendency to
fling stuff outward, while a body that is spinning slowly allows
more stuff to clump together. The second is the radius of the body:
the larger the body, the greater the angular momentum of the
outlying bits for a given rotational speed.[1]
Now, the unification of the Euro was like the creation of a
planetoid from seventeen different asteroids, each of which was
originally moving with a different vector. As you may recall, the
Maastricht Treaty described convergence criteria that required all
of the member states to essentially match their inflation rates,
their debts, deficits, and interest rates, because the treaty
signers wisely realized that if the countries were all moving at
different speeds when they joined, there was no chance that they
would accrete into a single, unified entity (a planet in my
analogy).
But the planet never entirely formed, and some pieces of it on
the outer fringe are in danger of being ejected by inertia. The
crisis is effectively spinning the planetoid faster and faster,
making it harder and harder for the pieces on the outside to avoid
flying off into new orbits of their own. In this context, it makes
sense to try and slow the rotation, on the theory that if
everything just stops spinning long enough, the natural gravity
will take over and the pieces will fall back in towards the center
and everything will be okay. So policymakers kick the can down the
road, assuming that if they can just keep everything together for
long enough, it will get easier and easier to do so.
The problem, though, is that this body isn't acting in
isolation. There are tidal forces acting to rip the body apart, in
the same way that the comet Shoemaker-Levy 9 was ripped to pieces
as it approached Jupiter -
the difference in the pull of Jupiter's gravity from
one side of the comet
to the other was so significant that there was no way that the
object's gravity could hold it together.
In the same way, in my view, the many significant differences
between the periphery and the core of Europe, combined with the
effects of over-indebtedness and a debt market no longer willing to
ignore the question of a state's ability to repay the debt, are
tidal forces that are destined to rip the periphery from the core,
eventually. I recognize that Europeans will tell me that the
gravity of the Euro itself is far greater than I think it is, and
if they're right, then the Euro will not splinter and the
policymakers are correct to kick the can. But I don't think they're
right.
[1] These two forces work against one another, for when the
radius of the body decreases because stuff falls towards the
center, the speed of rotation accelerates because of the
conservation of angular momentum, but that little detail doesn't
enter into the analogy.
See also
The Judge Should Rule Favorably For Vringo On
Motions
on seekingalpha.com