The more things change, the more they stay the same, right?
Not exactly.
The more people think things have changed, the more they stay the same is more like it.
This year was the year things were going to change. Escape velocity, sustainable growth… pick the term you want to use.
So far, that has hardly been the case. When you’re making money, it seems like the sky is the limit. 2013 handsomely rewarded investors.
So analysts and economists, wearing their rose-tinted glasses, saw nothing but more of the same going into 2014. Unfortunately, things didn’t change aside from investor sentiment.
There is still a bullish perception that the dip we just saw in the markets was a pure buying opportunity. However, I agree with Doug Kass, president of hedge fund Seabreeze Partners Management.
He sees investors as overly optimistic about corporate profits and economic growth. Indeed, a lot of the gains of last year were based on forward-looking multiples, not current financial statements.
“It remains my view that the S&P 500 will be down between 5 percent and 15 percent in 2014. [Price-earnings] ratios could contract this year — in marked contrast to the expectations of most Wall Street strategists.”
“In essence, the unexpected rise in stock prices in 2013 borrowed from 2014.”
Stocks certainly aren’t alone in getting too far ahead of themselves. Three trends show that as much as people think things have changed, we’re exiting a brief aberration in the economy, and nothing has actually changed at all.
High Expectations
We coasted into this year with lofty goals and a hint of evidence that our economic fortunes were going to change.
Diving into the details painted a far gloomier picture. If you break up 2013 and look at the last half of the year, a massive inventory build-up occurred that did not reflect demand. In fact, it was about 2.5 to 3 times as large as the inventory increase in the first half of the year.
As a result, fourth quarter 2013 GDP growth is very likely to be revised under 3%. First quarter 2014 is looking even worse. We’ll be lucky to hit 2%.
Economic figures at the time reflected this production, but now we have to deal with the consequences. Economists are slashing their forecasts:
So much for escape velocity. GDP is a complicated and sometimes messy thing to estimate, but this downward revision is nothing new:
Every quarter and every year, people think things have changed and we’re about to see the economy ramp up. Every time, they’re forced to admit nothing has changed.
Coming Full Circle
Overall, the housing market has stabilized and is looking healthier. If only the buying and selling that has occurred was normal.
A strange and utterly unsustainable distortion in housing has been running its course for well over a year now.
A lot of the buyers are only interested in capitalizing on markets that have bottomed out, especially in the hardest-hit cities.
All-cash purchases accounted for 42% of all sales of residential property in November. The cities with the biggest month-over-month jumps in the number of all-cash sales, according to RealtyTrac, included Florida (63%), Georgia and Nevada (both 51%), South Carolina (50%), and Michigan (49%).
These aren’t people moving in. These are investors interested in flipping for a profit or buying existing homes for rental income.
The year-to-year increase in U.S. residential sales is only up 10% from a year ago. Back in August, Goldman Sachs estimated that cash sales accounted for 57% of all homes versus 19% in 2005.
American families aren’t buying homes. The wealthy are making short-term investments. For mortgage lenders, that is a real issue.
Rising mortgage rates since the middle of last year are expected to reduce total U.S. mortgage lending in 2014 by 36% to $1.12 trillion, according to the Mortgage Bankers Association
As such, they are coming full circle. Wells Fargo is trying to stem a decline in revenue. Since no families are buying to make a long-term investment and settle in for 30 years, it is heading right back into subprime lending.
Smaller companies outside the banking system, like Citadel Servicing Corp., are moving back in as well. Since no one wants to call it subprime, some marketers moved in to rebrand these loans as “another chance mortgages” or “alternative mortgage programs.”
Citadel lends money to people with credit scores as low as 490 at interest rates above 10%.
Of course, they haven’t entirely forgotten what happened to them the last time housing tanked. Wells Fargo, along with Citadel and others, are trying to only lend when the Federal Housing Administration guarantees them.
After that, they’ll package the sketchy mortgages into bonds and sell them to investors. How likely is it that investors will want exposure to people with credit scores of 490 and over 10% interest rates? I think that is rhetorical.
And so the profit incentive is back to obscure risk to investors and minimize collateral damage to the lender. With mortgage revenue dwindling by more that a third this year, we can expect everyone else to follow suit so they don’t get left out.
People think things have changed in the mortgage industry, but they have stayed the same.
What Super Cycle?
With all the blind faith in an economic recovery and building momentum, analysts and investors turned on commodities last year.
It was supposed to be the end of the great commodities super cycle. Gold and silver would sink to new lows and remain depressed for years to come.
As we’ve seen this year, that has hardly been the case. Gold and gold miners in particular are in a very bullish trend:
It isn’t just gold, either. Copper, platinum, and palladium have all taken off since the beginning of this month.
There is plenty of room for commodities, especially gold, to rally further. But gold has seen some large gains in a very short time frame already and could enter a period of slower and steadier gains.
Forget GDP recovery. Forget the housing market. Precious metals are where it’s at.
This is especially true for silver. Its potential to rally is astounding right now.
Bolstered by industrial demand, stagnant production, and investor demand that is overwhelming mints, silver could easily outperform gold through the rest of the year.
Outsider Club’s Jimmy Mengel has a perfect way to capitalize on the impending silver rally. With his research, investors can double any of the gains traditional silver investors see this year. Take a look at his Crow’s Nest newsletter to learn how you can too..
