Oh, there's no place like home for the holidays - unless you take a look at the mind-numbing amounts of home equity (which took years to build) being pulled out almost instantaneously to speculate on stocks. According to a December 9th Wall Street Journal story, "homeowners are pulling money out of their property at greater rates than ever. From 2001 through the first half of 2002, 11% of total funds obtained from mortgage refinancings were used for stock-market and other financial investments. That is up from less than 2% during a previously studied period." The average sum that people are pulling from their home to use for investments was $24,000, up from "relatively small amounts" in the earlier period. The $24,000 plowed into investments topped the averages for nearly all the other categories for which people used proceeds, including home improvement!
The Journal article went on to deliver one of our favorite quotes of all time, "In a brochure distributed at Merrill's annual meeting this year, it states: 'You may think of your mortgage as a way to buy a house. At Merrill Lynch, we see it as way to build your wealth'." So let's think about this for a minute - the way to get rich is to take on debt? Then take those proceeds from levering up and speculate on overpriced (likely tech) stocks?
It appears that only a collapsing dollar (and the subsequent much higher rates that it will spawn) will kill the average American's appetite to live beyond his means. Like a moth to a flame, the U.S. consumer cannot stop himself from spending and will behave rationally only when market forces dictate that he must. The most severe consumer recession since the Great Depression will likely accompany a monumental collapse in housing and autos not to mention a significant weakening throughout the economy. A perfect storm is brewing and we find it laughable that many in press talk positively about the weakening dollar given the chain reaction it is likely to set off. The idea that a country can stem its currency decline anytime it wants when it has such massive imbalances like the U.S. is ludicrous.
Likewise, a weakening dollar and the current account deficit are not the self-healing miracles that most economists would have you believe. So far we have really only seen a correction in non-Asian currencies. The largest imbalances are with our Asian trading partners and stem from our insatiable appetite for their low cost goods. A fifteen, thirty, or even fifty percent decline in the U.S. dollar will not be enough to make us competitive with labor costs that our often 1/10th of what we can offer domestically. Only by a dramatic pull-back in U.S. consumption of Asian goods (resulting from the U.S. consumer being forced to fix his debt-laden balance sheet in the midst of higher rates) will the consumption imbalances begin to correct themselves. Santa's gift for Christmas may come in the form of massive dollar devaluation. Our readers are aware of this and many have been wise enough to keep their savings in something other than dollars.
