Bret Piatt

We have a number of financial statistics quickly heading to 0.  The top linked pair of statistics I’m tracking are per capita income and population.  As long as both of those numbers aren’t declining then we’ll eventually burn through the excess inventory in the “bubble” markets.  I’ll define “bubble” as where the rate of supply is increased faster than the long term rate of demand.

Housing starts, existing home sales are both at the lowest levels since WWII and at the current rate of decline they’ll be effectively 0 before summer.  For perspective we’re at an annualized rate of 466,000 new homes each year down from 1.7 million in 2005.  The US adds around 2.5 million people each year with the average family size of 2.6 meaning we need somewhere in the ballpark of 900,000 new homes.  I can’t find the number of homes destroyed on an annual basis due to fire, flood, redevelopment, etc.  We can agree that number if always somewhere at or above 0 so it’s also eating into the inventory.

Auto sales are down to less than 10 million annual units and still declining.  For some perspective approximately 13 million autos are scrapped each year.  This means around 1 in 50 households have 1 less car each year we keep this up.  I’m not sure on the sustainability of the reduction of the number of cars.  Do we have less need as more people move to alternative transport, as our population ages and the retirees don’t need a commuter car each plus the weekend fun car?

For equity markets 0 isn’t really 0.  You’ll hit an effective 0 somewhere above the actual 0 when the price = real book value.  I use the term “real book value” because a number of balance sheets even with mark to market have many arbitrarily valued assets at a book value above what you could sell them for in a liquidation.  Hopefully we don’t go that low, rather we stop at somewhere above “real book value” based on cash flow that can be obtained from operating + RBV.

So when is the time to invest?  When you believe things are cheap enough and cash becomes risky.  Cash is the next “bubble” (a lot of people are talking about this as a T-Bill “bubble”, short term T-Bills are effectively cash).  While the relative value of the dollar may get stronger globally when we inflate our way out of the debt we’re creating the value of an individual dollar is going to decline. As long as the governments of the world are in debt and can print money we’ll have inflation.

I thought we’d see a bottom in the equity markets in February.  That has been wiped out by the threat of common stock equity destruction through intervention.  Once the intervention ceases and the future value of an equity investment can be modeled we’ll see a broad market increase.  1 out of 4 S&P500 stocks is up over the November 21st, 2008 bottom as they aren’t likely candidates for interventionist destruction.

With the way current policy is going now our market bottom could drag out to Q3, anything beyond that isn’t possible as long as the population and per capita incomes keep going up.  If they start going down 0 really can become 0 for everything (-89.6% from the GD is pretty darn close to 0).