So, what is the major storyline?

Dec 29, 2010

Los Perros, Nicaragua

Whoa! Markets are supposed to be quiet between Christmas and New Year. Everyone's supposed to be out of town. On vacation.

But yesterday, gold went up $22.

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What's the story with gold? It went up in a single day by more than 100% of the price of gold 100 years ago.

Recently, we looked at a chart of 100-year performance of various investments. It showed that stocks did better than anything else. But gold was #2.

Before you get too excited about those numbers, remember that numbers lie. The results depend on when you take the measure. At a stock market top, stocks will look like they out-performed everything else forever. At a stock market bottom, stocks will appear to have been losers ever since the Flood.

No matter what you invest in, there will be times when you are up and times when you are down. Unless, of course, you pick a bad stock or a bad currency - in which case, you'll be down forever.

Since we're in a holiday mood, we're going to let you in on a major financial secret:

Investments go up and down. The storyline changes.
Yep. Tell your friends. Gold included.

But how do you know when they are going up...or when they are going down? Ah, there's the rub...there's the game right there.

In order to have an answer, you have to have a story in your mind...a narrative that explains what is going on.

"That's my problem, now," said a dear reader last night. "I can't figure out what the major storyline is."

Our friend is way ahead of most investors. Most do not realize what they are doing. They follow a story without realizing that it is just a story.

All stories are fiction. Even if it is supposed to be history. The historian has to ignore most of what history tells him. Otherwise, his story would have no meaning. He gives it meaning only by taking out the parts that don't fit.

When we try to figure out what is going on we are really trying to understand the major storyline. When we look at it years from now...who will be the hero? Who will be the villain? Who will win? Who will lose?

Of course, we don't know the answer...but we're always guessing...always trying to understand how the story turns out...even before it is over.

Most investors, however, think the tale is not just fiction. They think their stories are God's Own Truth.

In the run up to the crisis of '07 - '09, for example, most Americans came to believe that housing always went up. The story was simple enough. The population was growing. Foreigners were moving in - many of them illegal. There were restrictions on where you could build houses. Family size was falling (requiring more individual housing per person). People were getting richer. And houses were such a good investment that more and more people wanted to buy more and more houses.

They thought the story would go on for many more chapters...with higher prices every year. Housing...or homing, as we call it here at the Daily Reckoning...was a 'can't-lose' investment. At least, that was the story.

And most people weren't aware that it was just a story. And not a particularly good one.

What was wrong with it? It was too simpleminded. Like everything else, homing goes up and down. And the higher it rose, the farther it had to fall.

Even today, there are still many people who believe the homing-can't-go-down story. They've had to edit it slightly - 'homing-can't-go-down-for-long,' they now say to themselves.

Back in the 2002-2007 period, we kept warning that the story was fraudulent. Property in Baltimore, for example, hit a high in the late '20s. In real terms, it NEVER recovered.

More outrageously, we reminded readers that real estate in Rome probably hit a high in the first century AD, during the reign of Emperor Trajan, when the empire reached its limits. It has been downhill ever since - for two MILLENIA. By the Middle Ages, goatherds grazed their flocks among the ruins of Rome. By the 18th century, tourists from England were picking up pieces of the wreck of the coliseum and taking them home with them.

And now US real estate is in decline.

So, what's the story? Our guess is that real estate prices in the US hit their peaks in 2006. Because American power reached its zenith at the end of the 20th century. From now on, some areas will prosper. Some won't. But nationwide, in real terms, real estate will probably never recover. Or, at least not in our lifetimes.

And what's this? The latest report from Bloomberg tells us that the trend continues:

"The S&P/Case-Shiller index of property values fell 0.8 percent from October 2009, the biggest year-over-year decline since December 2009, the group said today in New York. The decrease exceeded the 0.2 percent drop projected by the median forecast of economists surveyed by Bloomberg News. "

A wave of foreclosures waiting to reach the market means home prices will remain under pressure in 2011, representing a risk to household finances. Federal Reserve policy makers this month said "depressed" housing and high unemployment remained constraints on consumer spending, reasons why they reiterated a plan to expand record monetary stimulus.

"We'll remain in negative territory for several more months," said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who forecast a year-on-year drop of 1.3 percent. "The housing market does remain weak and none of the recent data suggest a substantial pickup."

Eighteen of 20 cities showed a decrease in prices in October, led by a 2.1 percent drop in Atlanta, and decreases of 1.8 percent in Chicago and Minneapolis. Denver and Washington were the only two that posted gains.

Six markets, including Atlanta, Charlotte, Miami, Seattle, Tampa and Portland, Oregon, reached their lowest levels in October since prices started to retreat.

"The double-dip is almost here," said David Blitzer, chairman of the index committee at S&P. Sales aren't "giving any sense of optimism."

The drop in prices represents a setback for housing after values recovered earlier this year, thanks to an $8,000 homebuyers' tax credit that lifted purchases.

Reports earlier this month showed the housing market is stuck near recession levels even as the broader economy is recovering.

"The housing sector continues to be depressed," Fed officials said in a statement after the gathering, at which they reiterated a plan to expand record monetary stimulus and said economic growth is "insufficient to bring down unemployment."

Of course, the real estate story is not the only one. There are a million stories in the naked city. But we're not interested in them all. We're interested in the major financial stories.

And we have some ideas about what they will 2011, and beyond. Stay tuned.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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