“The bull forces were at work, and the public is never independently responsive to news. You see that all the time. If there is solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all in the state of sentiment at the time. In this case the Street did not appraise the extent of the catastrophe because it didn’t wish to.” Larry Livingston (pseudonym for Jesse Livermore),
Reminiscences of a Stock Operator


I think people are going to eventually lament that they hadn’t considered the illiquidity of real estate. Generally if your positions are small the investor/trader can move in and out of the market (stock, bonds, commodities) without disturbing it enough to affect his price.

Normally real estate is illiquid. Normally most unsophisticated investors don’t borrow against unrealized gains in their stock portfolios. Even if bond prices go back up to all time highs, can the general public afford home prices today without an unconventional, risk laden mortgage? A return to “normalcy" in housing markets will doom consumer spending. Why would corporations expand when demand for their products is contracting? What’s left to inflate or re-inflate? Those that speculated and those who bought who couldn’t afford to will find themselves caught in the illiquidity trap. Unrealized gains will turn into real losses magnified by leverage.

The dot-com bust wiped out the public. Few got wealthy. The rush to real estate was based on the sure thing concept mixed with desperation. People with no historical context began to repeat mantras (It always goes up) as if hypnotized. Perhaps it is the fear of having to join the 66% of Americans who retired into poverty mixed with the greed to live beyond one’s income that drives people to such irrational behavior.

The implications of what is happening in the housing market should be making people nervous. It is not. Even bears are starting to get edgy about missing something and jumping in (irrational bulls). The early bears positioned short and are getting squeezed and have to buy to cover short positions. And those stops sitting just above the all time highs provide plenty of liquidity for professional traders to liquidate into. The public thinks, “Hooray the stock market will save us from the housing debacle.” The trap is set ready to be sprung.

Greed is not confined to hedge funds, their clients and corporations. It is in everyone who wants something for nothing. Money is made at the U.S. Mint; the individual must earn money. The individual that gets conned does so primarily because he believes there is an easy path to riches. This mentality drives people to live off credit cards and to buy more house than their balance sheet indicates they can afford. This mentality encourages and allows populist politicians to manipulate the markets to strive for economies without recessions. Greed stimulates people to believe they can borrow their way (consumptive debt) to wealth. How else could any rational being believe that the price of anything always goes up? Let the irrational rally continue, we’ve slain secular bear markets!!! I will rush out right now and buy that 600 sq. ft. condo for three quarters of million dollars. Yeah, right.

As always, the public will stay too long and when the inevitable happens they will be worse off than when this all started. The manipulators can play the game as long as they can. The longer they do the more terrible the consequences.

Harun I.