Very important day Today

Three things are top of my mind
Fed report
China's market crash
Unemployment numbers

Let's start with the China Stock market Crash. It's down 6.5% but our market seems relatively unaffected. I put in some orders for a few stocks at 10% discounts to what they are selling for (PCP for $100, for example), and I need to find out if I got lucky.

The China market crash was the second engineered crash in 3 months.
What really, relly surprised me is the US market's resilience. Either folks got out after Greenspan's comments last week, or the tide has yet to hit us. Or, more likely, the market is aiting for the Fed results. I think that the Fed will announce a softer bias (ie recession is coming) and that will excite the market because of th einterest rate drop potential on the horizon

Meanwhile, the stocks I have been watching and posted about are almost all uniformly up even when the market wsa way down.

Now let's talk unemployment and the Fed.
For the longest time I have been expecting rising unemployment because it is a fact that lenders have been firing in the 1000s, real estate agents are getting laid off, home building related companies are laying off 1000s, and construction workers especially aren't in demand. Pulte just announced that they are laying off 1,600 and they subcontract a lot - which means that they are affecting at least 10,000+ jobs.

I expected this activity to translate almost overnight into rising unemployment but the rate has stayed flat. My core assumption was that these workers were not illegal immigrants. Most construction work is done by unions and they go nuts when they encounter non-union workers. And I doubt many illegal immigrants worked for lenders.

The importance of illegal immigrant population among manufacturing and construction workers means that they are unregistered in unemployment figures. If they were jettisoned the past few months, then unemployment rates wouldn't change. Only when companieslike Pulte start firing legal, documented workers will unemployment start to rise.

So lets follow this hypothesis a bit further. If the fat has been cut and now companies are working on the meat, that will show up starting next month. And it will accelerate. By January, we might even close on 5% unemployment. While that will set off a chain reaction of fear, it is also able to give the Fed an excuse to raise interest rates because labor cost inflation will be diminishing.

Unemployment rates up, interest rates down. What else? Inflation will be down except for food and energy. Already the housing slowdown is driving down prices for cement, lumber, drywall, and so on. Follow the drop in demand and prices of inputs, and you will see a drop-off in demand for consumer items as consumer spending enjoys its last hurrah this Fall.

With this a few months away, I see the Fed as treading water. As I have said for a long time, the Fed doesn't care about housing: they won't drop rates to prop up the housing market. Instead, they are looking out a few months and they realize that inflation is fairly contained and now the concern is the economic growth cycle.

I also expect that they will revise Q1 GDP down and Q2 will come in pretty light as well. We will show signs of a 1% GDP not a 2% GDP. Recession in a Presidential election year. A Democrat will be elected partly because folks want a rotation, but partly because the economy will suck: home prices down, lots of foreclosures, unemployment rising, consumer confidence dropping, recession, money spent on an Iraq war instead of domestically, etc. The US will be turning inward the next few years.

An interesting note about the housing market in the bay Area. A report out shows that the Bay Area is suffering from a shortage of students. Apparently, many families continue to leave the Bay Area for less expensive places to raise children. That plus the fact that wealthier residents tend to have fewer kids means that San Mateo and Santa Clara counties are talking about closing schools.

Meanwhile Santa Clara County (the heart of Silicon valley) has a rising median home price but is also in 3rd place in the Bay Area for foreclosures.
Next year is the year that folks start saying that the Emperor has no clothes.

And anyone who says that real estate is local apparently hasn't caught up to the digital age. Whether it is Europeans investing in Florida Real Estate, Chinese buying California real estate, or Californian's investing in Nevada real Estate, local markets are most definitely affected by the global cheap money. When that money wave recedes, as it has been doing, the local real estate prices are left to what the local markets can support. And that will be a lot closer to the 5X median salary than the current 10X median salary. That's a 50% price drop.

Also, thanks to the digital age, the word will spread a lot faster than ever before and the drop will happen a lot faster than ever before.

2008 - The Year we say the Emperor has no Clothes. Also called the Year when homeowners become landlords
2009 - The Year of Panic

The bottom will arrive when the cost of building a new home is more than th ecost of buying a used home. Like any other product, market forces dictate that new is more valuable than used. (Except for Collectibles and crappy newly made products.) A lived in home should be cheaper than a new home because it is lived in: banged up, parts showing wear and needing replacement, and so on.