Some Counter-Arguments

Mark Lapolla blogs some interesting market observations and views, but I think he's trying to rationalize his directional leaning too much in this recent entry.

In response to his quotes, I offer the following opinions:

"The Global Economy is slowing. I believe everywhere--including China."

Many consumers are hitting a wall in the US, but that's because of debt burdens and cost increases. Globally, economies continue to grow, and will continue to grow if the rebalancing process goes smoothly.

"Central Banks are at the end of a MASSIVE, coordinated tightening."

They raised interest rates, but they didn't tighten credit. Money supply continues to expand rapidly. Much of it due to hedge speculation and the Yen carry trade.

"Global inflationary pressures are benign. Labor does NOT have pricing power in the developed world. Period."

That all depends on what you are measuring for inflation and how. Hedonic adjustments help keep CPI low, but monetary expansion keeps building pressure on resource costs while driving down investment returns. Governments and monetary authorities can't resist the inflation temptation for long.

"The World is awash in capacity--China will lead a new round of Global dis-inflation within the next year or two."

The China I've been watching has begun raising prices, and will likely continue to raise prices with foreign currency reserves already approaching $1 trillion.

"Oil is going lower. Period. Intermediate goods pricing will not translate into sustainable end user price increases. Commodity prices will peak and go lower--soon."

Oil has already come down about 15% which is probably enough for producers to ease off of production a little and for China to consider filling up their reserves a little. I expect other commodities will have technical corrections like Oil, but capacity is not rising fast enough to keep up with growing demand.

"The US Housing Bubble is NOT a Bubble. Some US housing markets ARE Bubbles: South Florida condos to name one."

It most definitely IS a national bubble. Easy credit was available everywhere, and hordes of amatuer investors from California leveraged themselves up to buy into markets with lower prices. If prices didn't go up in a region, it was because the economy stunk there and people didn't want to live there. Those factors are getting worse, and rust belt markets are actually leading the nation in price declines as the bubble bursts. As debt burdens become overwhelming, the deleveraging process will hurt prices everywhere.

The media finally caught on to some of the oversupply issues, but they don't understand why builders are choosing to continue building too many houses, and they don't understand the effect foreclosures will have on the market in 2007 and beyond.