The Market Process Lives!

Key News

Key Reports (WSJ):
9:00 a.m. Nov S&P/Case Shiller Home Price Index: Previous: -19.1%.
10:00 a.m. Jan Richmond Fed Mfg Survey: Previous: -55.
10:00 a.m. Jan Conference Board Consumer Confidence: Previous: 38.0.
4:30 p.m. API Oil Industry Report
5:00 p.m. ABC/Wash Post Consumer Conf For Jan 24: Previous: -53.

Quotable

"The market, consisting of human beings, unable to foresee the future with certainty, will make mistakes – and some of them in retrospect will look like incredible mistakes. Yet Wall Street, notwithstanding its academic and political detractors, can be claimed as one of the outstanding triumphs of laissez-faire capitalism. The results speak for themselves. The United States has achieved the greatest volume of investment, the greatest capitalistic development, the greatest volume of production, the greatest economy of manpower, the highest standard of living that the world has ever known. And it has been able to do this in an important degree precisely because of the help rendered by the marvelous financial organization centered in Wall Street and not in spite of it. Surely it should have struck Keynes and his followers as worthy of notice that the country with the greatest “gambling casinos” and the greatest “liquidity” was also the country with the world’s greatest capital development and the highest average standard of living!”

                               Henry Hazlitt

FX Trading – The Market Process Lives!
Turning to the news …

We got a bit of a surprise yesterday. In the US, existing home sales rose. That’s right … sales of existing homes did not fall … sales of existing homes did not stay the same. They rose.

Now I ask, ‘Why did home sales rise?’

Was it because the government has told us that a stimulus package and aid to US homeowners is a must? Did they rise because new-to-the-market home buyers said to themselves, “I’ll buy this house now, and if I can’t afford it I’m sure the government will help me out’ …?

I would say that’s NOT how it went down. Though I hope I’m right about that because the government seems to be trying it’s hardest to create a culture of unaccountability and complacency.

In any case, I’d agree with most of the commentary surfacing yesterday afternoon as to why existing home sales actually jumped – an extreme drop in prices.

For those who may be caught up in the “government-will-make-it-right” mentality, asset prices rise and fall because of fluctuations in supply and demand. It’s how the market balances itself out without official intervention; the invisible hand versus the clearly visible and mostly interfering hand.

Anyway, to get back to my point, yesterday’s existing home sales data is a sign the market forces are working. People will be able to afford homes as prices come down. Sure, it’ll be at the detriment to some sellers, but you can bet that lessons will be learned.

Poor decisions will less likely be repeated by the financially afflicted. Home buyers will be in houses because they can actually afford them. They won’t be in a house because they found a bank that found a way to find a loan they couldn’t afford and make it “affordable” … with traditional buying requirements (down payment, proof of income, etc.) removed.

This is the way the market process cleanses the economy. It’s something we shouldn’t be scared of; it’s something we should definitely take note of; it’s something that’s happening elsewhere, right now, and on a grander scale.

 Before the Olympics

Before the Beijing Olympics back in August of 2008, Chinese companies were warned that many would need to be shut down so that China could be nice and clean for its Olympic visitors. So what did they do … they ramped up production of all the stuff they’re notorious for producing with the anticipation of shutting their doors and stopping business for a month.

When they returned to business as usual (note: most factories never re-opened and others shut down following the games), they returned with an inventory glut to an environment of waning demand.

Months later the inventory still isn’t moving how they’d like. Chinese manufacturing growth showed legitimate slowdown in the last months of 2008. The culprit is disappearing demand.

What has to happen? Well, in this environment, for demand to return for such items, China needs to work down excess inventory. They’ll do this by dropping prices and keeping their fingers crossed.

I say keeping their fingers crossed because, of course, they’ve still got to have buyers even after prices fall. And it seems that finding buyers could very much be an impossible task these days.

Demand-side stimulation is the goal right now. But because of the way consumer attitudes have shifted, this goal might very-well be unattainable. With that, the market process is going to have a lot of work to do on the supply-side of things.

I think it’ll live up to the task if we let it. And we just may be pleasantly surprised with the job it does.

No pain, no gain.