Things More Worrisome than AGW — Opinion: Our Macro World



The Wall Street Journal is doing its part to put on a happy face?

This morning, one headline on the Journal‘s website said, “Stocks Rise on Hopes for Greece.”

Another said, “Home Prices Notch Spring Bounce.”

The reality seems so different?

They’re protesting in the main square in Athens.

The Greek parliament is voting on $40 billion in spending cuts and tax increases tomorrow. But Greece’s two major labor unions don’t want to earn less money and pay more taxes. So they’ve called the second general strike this month and the fourth this year.

One report says protesters overturned café umbrellas and set them on fire. Another report said they “attacked” the front window of a McDonald’s. I guess they couldn’t actually break it.

Greece was bailed out to the tune of 110 billion euros in May 2010. Now, it’s slated for another 28 billion euros ($40 billion) of bailout money from the European Union. But EU officials say Greece first must pass spending cuts and tax increases. The EU finance ministers will meet on July 3 to decide if Greece gets the aid.

It’s a little scary to think a country as small as Greece can cause all this havoc and require such an enormous bailout. I can’t imagine our government doing the same for Mississippi. Even though Mississippi has the smallest economy in the U.S. (on a per-capita basis), it’s still bigger than Greece.

The U.S. is no great example, and I doubt Mississippi is a bastion of free enterprise and fiscal responsibility. But I also doubt it’s as bad as Greece.

The Journal is too sanguine on housing prices. Housing prices didn’t “bounce” in April. They fell 4% compared with April 2010. The April 2011 dip was the 10th straight month housing prices fell. That’s how the Financial Times reported it.

Weird, isn’t it, how the two biggest financial newspapers can disagree on a story that seems so cut-and-dry, so by-the-numbers? and so easy to get right?

The reason housing prices fell so much the last couple of months is obvious. Last year, Obama’s tax credit was in effect until April 30. So everyone who could buy a house did so before April 30. First-time homebuyers got an $8,000 credit. Other homebuyers (like yours truly) got a $6,500 credit.

Of course, all short-term government solutions fail, just as the homebuyer tax credits failed. Housing prices have continued to fall and have fallen even more sharply due to the difficult comparisons with last spring’s stimulus-induced numbers.

So how did the Journal report a “bounce” in housing prices? Well, seasonally adjusted April housing numbers were 0.1% lower than in March, which was better than the expected 0.2% drop. That’s a bounce.

It seems no matter what the government does? and no matter how benign the near-term effect, the longer term (not much longer, these days) is worse than it might have been. It’s as if they’d rather get polio or smallpox than suffer the brief sting of the vaccination needle.

Most people are like that, though. Most don’t save enough (if any) money. Most spend today and don’t think enough about tomorrow. They don’t forgo future consumption. In fact, they borrow as much as they can, pulling consumption forward in time, making it that much harder to save. It’s easy to criticize governments, but if you don’t save money and keep your own debts under control, you shouldn’t be surprised about Greece or the U.S. or any other over-indebted nation.

As for the U.S. dollar? that cat is effectively out of the bag. The Journal isn’t reporting any strong dollar headlines (at least not today). Even central bankers know it’s toast. Swiss bank UBS surveyed central bankers who control about $8 trillion of U.S. dollar reserves. More than half agreed the dollar would lose its reserve currency status within 25 years.

Though it’s refreshing to see central bankers (finally) acknowledging reality, this is not news to us. China, one of the biggest dollar holders, has spent about 75% of its $200 billion expansion in reserves on gold, other currencies, and? well? anything but U.S. dollars.

Central banks are buying more gold than they have in 40 years. Central banks have bought more than 5.3 million ounces of gold so far this year. They’re on track to make their biggest annual purchases of gold since 1971 ? the year the U.S. government finally and completely unhinged the dollar from gold. Central bankers were obviously scared then, and rightly so. Gold went from $35 to a blow-off peak of $850 back then, a 24-fold increase.

And they’re scared again today. Maybe it’s 1971 all over again? And gold is on its way to $6,000, a roughly 24-fold increase from the 1999 bottom of $252 an ounce. Would $6,000 gold surprise anyone at this point? Not me.

Greece melting down? housing prices plummeting due to ill-conceived government solutions? central banks chiming in on the dollar and gold? pension plans set to blow up?

Is this what we’ve come to? Are we doomed to spend the rest of our careers writing about how the government is alternately ruining our economy and setting up a few astute investors to make a big profit?

Apparently so. I can’t imagine being such a doctrinaire bottom-up investor today that you could possibly ignore the current macro environment.

Lots of folks who do value-oriented, bottom-up research and investing for a living feel the same way. I was recently discussing a stock idea with one of my favorite hedge-fund managers. He wrote back that he’s only interested in natural resources and stocks to short due to the Greek meltdown and the negative effects of the debt-ceiling controversy.

This guy runs a focused portfolio. He’s usually the largest shareholder in the companies he invests in. He takes large stakes, usually 15% or more, of his target companies. And he plays an active role in trying to improve each business.

And all this focused, bottom-up value investor can think about is how he’ll protect himself from a falling dollar (natural resources) and mitigate the effects of government wrangling over our economic fate (the debt ceiling).

I guess we’re all top-down macro investors now.