Ben Bernanke, Part I
Brian Trumbore
President/Editor, StocksandNews.com

I thought we'd take a look at the Fed and Ben Bernanke the next few weeks, utilizing my "Week in Review" archives. We start with 2006, when Bernanke replaced Alan Greenspan. Put your mindset back to then, not last year, folks.

Background

Greenspan hiked the federal funds rate for a 14th consecutive time to 4.50% in his last meeting, Jan. 31, 2006. Then Bernanke took over and hiked 25 basis points each of the next three Fed Open Market Committee gatherings to 5.25% on June 29, 2006. That's where the funds rate sat throughout the rest of '06 and well into 2007.

As for the economy, following is the rate of GDP for 2006.

Q1?5.6%
Q2?2.6%
Q3?2.0%
Q4?2.5%

[These were my musings, unedited; warts and all in terms of any predictions I may have made back then.]

WIR 2/18/06

Mr. Smooth, new Federal Reserve Chairman Ben Bernanke, had his coming out party this week as he appeared before both the House and Senate for an update on the economy. Of course this semi-annual exercise is but another reminder of why a senator is a senator, and a congressman a congressman. Let's just say more often than not one sounds like a college graduate, while the other comes off as a subscriber to People. But I digress.

Bernanke is good?real good. And we can understand what he's saying, a gift that eluded his predecessor.

So what did he say? The economy is strong, Bernanke is not concerned about an inverted yield curve, he is going to focus on the hard economic data, perhaps more so than Alan Greenspan, but one of his primary concerns is housing; that and the potential for inflation to seep through the price chain as it has been in some sectors.

Which means one thing. Bernanke is going to be hiking rates, and possibly far more than yours truly thought possible last December.

That won't be good because there is no doubt the Fed is going to overshoot. I would still submit that with the lag effect of past rate hikes it already has.

Inflation hawks may have their day, but it will be brief and I have never been more convinced than I am now that the U.S. economy will flip on a dime, seize up, at some point in the second half of the year.

Housing, of course, will be a major cause of this reversal and you can throw out the January housing start numbers that showed explosive growth in the sector. Heck, even I felt like building a house this past month with temperatures in the 50s here in the New York area. And it would appear many builders just told their guys to throw stuff up, quickly, before more normal weather set in.

[As luck would have it, we got 20+ inches of snow last weekend but by Thursday it was gone?thanks to a resumption of the heatwave.]

What amazes me is this leap of faith among the majority on Wall Street, at least for this past week, that higher rates are no problem, particularly when one looks at the mortgage sector.

Jonathan Laing of Barron's had a terrific piece in the 2/13 edition on the "sub-prime" market. These are the folks who should probably be renting until they build up a little more capital but the lending institutions take the risk, at future cost to the homeowner.

For example, 10% of today's mortgage debt is in sub-prime loans that are in the process of resetting. As Laing illustrates, their monthly payments could rise 50%, easily, over the next two years due to the steep escalation in short-term interest rates.

Of even more concern is that if home values just stagnate, let alone go down, these same homeowners will no longer be able to tap into their equity in order to meet the much higher mortgage payments.

But back to the January housing data specifically, yes, I've always said never put too much stock in one month when it comes to this arena, but at the same time I've said we've now entered a period in housing where it's three steps down for every one up. Housing has peaked. The question is do values now fall. I'll go with stagnation until the economy begins to roll over, then it gets dicey.

One last note on this issue. While some were bamboozled by the January data, I chose instead to focus on a statement out of Washington Mutual, a leading loan originator. They were laying off 2,500.

WIR 3/4/06

Last weekend, Federal Reserve Chairman Ben Bernanke said the U.S. economy has absorbed the oil shock (one can't argue with that), and that his Fed won't focus on asset price bubbles. Commenting on Bernanke's challenges, former Fed chairman Paul Volcker said, "How would you like to be responsible for an economy that's dependent upon $700 billion of foreign money every year?" in reference to the current $726 billion trade imbalance.

4/1/06

And then there's the Federal Reserve. Chairman Ben Bernanke oversaw his first meeting and took the opportunity to raise the funds rate a 15th consecutive time, another ?-point to 4.75%.

But it was the accompanying statement everyone was looking for. Would the new chairman change the language used by his predecessor, ol' what's his name? [We have fleeting memories, you understand.]

"Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance?.The run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation."

But the Fed also added:

"Possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."

Put it all together and the market now expects yet another rate increase to 5% on May 10 and possibly one on top of that in late June. If you're a saver and/or investor in "cash," you enjoy seeing your money market fund yields continue to rise; as is the case with yours truly. Staying ultra short on the yield curve has been a good bet, in other words. But those investing in longer maturity paper are getting whacked.

WIR 4/29/06

This week Federal Reserve Chairman Ben Bernanke appeared before a joint congressional economic committee and said "vigilance in regard to inflation is essential." But he also added he was concerned about a slowing housing market and rising energy costs and the impact these two in particular can have on the consumer and overall economic activity. So Bernanke added the Fed could pause for a spell to examine more data, as the Fed's governors are certainly well aware there is a lag effect from the 15 interest rate increases they've already instituted.

The bond market took Bernanke's comments to heart and yields on the long end of the curve rose slightly on the week while the two-year Treasury rallied a bit on the theory that the Fed will indeed stop for a while.

The long end, of course, is more concerned with an actual inflation threat, while the shorter end concerns itself with the here and now.

But what does the actual data tell us? This week's readings on housing were decidedly mixed. While existing and new home sales rose, surprising some, the median price on existing was up just 7.4% year over year, as opposed to the double digit growth we've been used to, while the median price on new home sales actually fell 2.2% from a year ago and a full 6.5% between February and March. No matter how you slice it, the market has stagnated in terms of price and the issue becomes is housing on the verge of rolling over?

WIR 5/13/06

Anyway, the Fed concluded for now that while "inflation expectations remain contained," pricing pressures could emerge with the surge in commodity prices. So the real bottom line is: will the consumer buckle under, finally, to higher energy prices and/or a stagnating, verging on crumbling, housing market?

I've argued it would be housing, pointing specifically to the second half. As for energy, it's mostly about Iran for the foreseeable future; that and weather in the Gulf of Mexico. It's almost time for our first tropical wave, after all.

The markets thus took none too kindly to the prospect of further rate increases and runaway commodity prices and it was a two- day bloodbath on Thursday and Friday.

China remains the top story in terms of the global economy with a government think tank forecasting GDP growth of 9.8% in the second quarter and 10% in the third. China also helped fuel the metals surge - copper, zinc, nickel, and platinum among the items hitting record highs, with gold at a 26-year best - in announcing it was going to start building its strategic reserves in uranium, iron, copper and other key materials, plus it was accelerating construction of strategic reserves for oil and coal.

But back to the Fed and Wall Street's loss of faith in Chairman Bernanke and Co., one major concern, and the one with most currency, is the fact the Bank of Japan and the European Central Bank will both be hiking interest rates this summer (as will China) while the Fed could be pausing; ergo, will the Fed then be behind the curve? I don't think they'll put themselves in that position.

We're going higher on rates, in other words, and if we haven't already reached the tipping point, a move to 5.25% end of June would do it.

WIR 6/17/06

But then "Shazam!" After a dead cat bounce on Wednesday, Federal Reserve Chairman Ben Bernanke somehow soothed markets by saying little. For the life of me I don't understand Thursday's rocket launch, when the major indices in the U.S. rose 2% to 3% each.

You see, Bernanke said in a speech that as long as energy prices don't go much higher, overall inflation risks appear to be "manageable," though at the same time he offered that the Fed needed to remain vigilant to inflation expectations.

In other words, he said nothing new. The Fed is still hiking end of the month, a 17th consecutive time, and if the core consumer price index for July is up another 0.3%, the Fed could hike again come August.

The point being, they've already gone too far and with the June 29 increase they will have officially overshot. And, coincidentally, when the economy rolls over, inflation will dry up faster than you can say "Tiger Woods missed the cut at the U.S. Open."

The economy is already slowing, as the Fed's own report of regional activity (the Beige Book) noted this week. Retail sales are on the weak side and a report on industrial production was kind of punk.

Rising short-term rates are killing consumers with a lot of credit card debt, adjustable rate mortgages and home equity loans, and that will be increasingly reflected in the data. The housing sector is rolling over and the third leg for the economy, capital spending, is as I've said in the past the most squirrelly. Corporate chieftains are the first ones to panic, given any kind of bad news, especially on the geopolitical front, and I see cap-ex falling short of expectations in the second half.

And just a word on energy. Bernanke is right when he says as long as prices don't spike higher, the costs to the economy of $70 oil are manageable. That level isn't great, but it's not the killer a slumping housing market can be coupled with rising short-term interest rates.

But the risks of a price spike are still there for two main reasons these days; Iran and the hurricane season. It's why prices have remained as high as they have given near record levels of inventories. Otherwise, yes, oil should be $50, or lower, and gasoline back below $2 a gallon.

WIR 7/1/06

Stocks rallied strongly following the Federal Reserve's 17th consecutive rate hike, another ?-point on the Fed Funds rate to 5.25%. So what did investors find so super about this? Beats the heck out of me.

Following is part of the statement accompanying the rate move.

"Recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

"Readings on core inflation have been elevated in recent months. Ongoing productivity gains have held down the rise in unit labor costs, and inflation expectations remain contained. However, the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.

"Although the moderation in the growth of aggregate demand should help to limit inflation pressures over time, the Committee judges that some inflation risks remain."

The FOMC then goes on to say it will weigh the data before making its next move.

Immediately after, the majority of market mavens said, "Ah ha! The Fed is finished." I'm sorry, but there is absolutely no way to deduce that.

Unless, of course, the economic data over the next five weeks, before the Aug. 8 Fed meeting, reveals the economy to be slowing even faster than some believe it is and our little inflation scare to be over. But while I've been looking forward to a big second half drop in economic activity (well, you know what I mean), it's likely the inflation indicators will still reveal a worrisome picture. So the Fed will weigh both the plusses and minuses and come up with???something.

One thing is for sure, though, which the Fed can't possibly ignore even though the equity market did this past week, and that's the fact we are suddenly back up to $74 on oil and $2.20 on gasoline futures. [And you'll recall from our little lesson a few weeks ago that $2.20 gasoline translates into about $3.00 on average at the pump?ergo, no relief in sight it would appear.]

The Fed under Ben Bernanke has continuously voiced concerns over energy prices so it's hardly likely it will just look the other way if by August we're still at the $70 and $3 levels.

WIR 8/5/06

Due to an unexciting employment report for the month of July, with the U.S. economy adding all of 113,000 jobs, the experts are saying it's a lock the Fed will finally 'pause' after 17 straight rate increases because the evidence clearly speaks to a slowdown.

Some of the manufacturing data released this week was actually pretty solid, and we got out of the heat by hitting the malls, as some retailers reported, but we've learned in past weeks the days of 5.6% growth, as in the first quarter, are long gone.

As for inflation, Fed Chairman Ben Bernanke earlier expressed confidence that any price pressures would abate as the overall economy slowed so there's further ammunition for the 'pause' camp. This week offered classic evidence of Bernanke's stance in the form of Procter & Gamble's earnings report. The company said it was able to raise prices on selected items recently, but it wasn't confident it would be able to continue to do so in the future.

WIR 8/12/06

The markets held up well under the renewed terror threat but on the week both equities and bonds still declined for one reason; the feeling that the Federal Reserve, despite 'pausing' for the first time since June 30, 2004, may have to resume raising interest rates in the near future.

In announcing its move on Tuesday to hold the line, but with a rare dissenter on the board, the Fed's statement reiterated Chairman Ben Bernanke's consistent message of the past two months, namely that the economy was cooling, thanks to the housing slowdown and high energy prices, as well as because of the lag effect of the past 17 rate hikes.

But inflation, it avers, despite running hotter than what the Fed is normally comfortable with, will decline as the pace of economic activity slows. However, the Fed will keep focusing on the data and it is this fact that led to the week's poor performance.

Friday's retail sales report for July was stronger than expected, up 1.4%, which in and of itself would give the Fed pause that perhaps it put on the brakes too soon, but more importantly the import price index component was definitively above any Fed target, up 0.9%.

Ergo, by week's end traders were screeching to a halt in their best Roadrunner interpretation. 'Perhaps we should just wait a while before committing any new capital,' they mused.

Let's face it, for the Federal Reserve to have to raise interest rates all over again come September would be a major bummer. But since it's not likely the Fed wants to admit a mistake, it will probably wait until October to do so, if need be, and imagine if the inflation data in between kept flashing warning signs. So that's the new conundrum.

Meanwhile, housing is tanking. Don't take it from me - though you could have the past year or so and appeared 'in the know' at your cocktail parties, even if not particularly popular - but rather listen to those whose business depends on correctly forecasting trends.

Like Angelo Mozilo, CEO of the largest home mortgage lender Countrywide Financial. "I've never seen a soft landing in 53 years." Or ISI economist Nancy Lazar, who on CNBC said "housing is weakening very significantly." Or Robert Toll, chairman and CEO of luxury home builder Toll Brothers, who said the current slowdown "is the first downturn in the 40 years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors. Instead, it seems to be the result of an oversupply of inventory and a decline of confidence." Signed contracts for Toll are down a whopping 45% from a year ago.

Economist Mark Zandi pretty well summed it up. "We could be underestimating the dark side. Euphoria could turn into abject pessimism very quickly."

So the question becomes, just how much will a slowdown in the housing sector, which has been the engine of growth for years, impact consumer spending? A lot. And that's not taking into consideration the millions in the construction, home improvement and home-lending industries, for starters, that could lose their jobs.

It was all so predictable, even if some of us were early in sounding the alarm. The easiest warning sign, looking back, was housing affordability. Bloomberg News ran a typical story this week in examining Naples, Florida. Admittedly, Naples is bubble central as home prices rose a stupendous 140% since 2001.

But now Naples is losing "teachers, nurses, paralegals and other middle-income workers" who are pursuing jobs elsewhere because they'd have to take out sixteen home equity loans on top of their mortgage to be able to afford to live in this lovely community.

And, again, this is a global phenomenon. It could be crash city, sports fans, though by definition this is 2007's headline, not this year's.

One last item on the topic, and far closer to home, concerns a story in the New York Times on the New York / New Jersey region.

From 1995-2000, incomes rose 33% while property taxes were up just 11%.

From 2000-2004, however, property taxes have gone up two to three times the level of income.

WIR 9/23/06

Meanwhile, down in Washington, the Federal Reserve gathered for its latest Open Market Committee and, as expected, held the line on interest rates again, averring as before that "some inflation risks remain," though any additional firming depends on the outlook and data. Chairman Ben Bernanke and crew (with one dissenting vote) continue to believe that the economy will moderate enough, in time, to take care of any inflation pressures still in the system and today it's helped in this regard by the tumbling housing market.

So is the economy moderating as nicely as the Fed would like? We need more information before drawing any real conclusions, but no doubt it's slowing as a reading of manufacturing activity in the Philadelphia region pointed out on Thursday. In fact the Street was shocked by a negative number for this particular index, while earlier in the week housing starts were off a whopping 6 percent, the 5th such decline in the past six months.

What's good? Energy. The national average for a tank of gas is already below $2.50 and heading lower still. As I was walking around Sofia today, thinking of what to write, I came up with this thought, as weak as it may be.

Today's situation with the consumer boils down to this.

With the decline in gasoline prices, let's say the average driver fills their tank once a week and the car has 15 gallons. At a 60 cent savings off prices from early in the summer, that's $9.00, or about $450 a year. Hey, $9 is $9 and $450 is real money, especially if your commute is long, or you're a trucker, and the savings are even higher.

But measure that against the value of your home. I've told you before of the 22-unit townhouse development that I've lived in now for 12 years. I paid $240,000 for my place then, yet a basically identical unit went for $690,000 last fall. I wrote of this then and said it was definitely the top. The next sale, about two months ago, was at $640,000 and I bet anyone selling today wouldn't get $600,000. By next spring it will probably be closer to $550,000.

So how does this affect consumer spending? That remains to be seen. Bringing things down closer to the national averages, if you owned a home that cost $200,000 initially, and then saw it go to $400,000, but now it's valued at $350,000, do you spend less? That's a $50,000 paper loss, you might be thinking, as opposed to a $150,000 gain, but assume you still have your job and everything else is equal.

Compare the $50,000 paper loss then with the hard currency gain of $9 a week, or $450 a year. There is no comparison, by my way of thinking, but that's not necessarily how people react.

[Of course I'm ignoring the recent cases where those who bought are already down.]

I just suspect it will take a bit more time for the wealth effect to kick in on the downside for the simple reason that bubble mania of any kind normally takes a while to wear off. The bursting can be quick, a la Nasdaq 5048 in the spring of 2000, but many investors didn't totally throw in the towel until two years later, which of course represented a terrific buying opportunity for others.

Well enough on this topic. For now enjoy the savings; splurge on some premium beer, if you're really feeling good. But if you were in the camp that believed your home's value was going to rise at 5, 7 or 9 percent forever, it's time to start readjusting your targets, and before you know it you may also be adjusting some of your spending habits; much to the chagrin of Corporate America and Wall Street, the latter with still frothy earnings expectations for the former well into the future.

WIR 10/7/06

However, before you go popping the Korbel (hey, it's not like Nasdaq hit a new high, you know), Federal Reserve Chairman Ben Bernanke told you this week, in his strongest words yet on the topic, that real estate was undergoing a "substantial correction" and that it would shave one percent off GDP the second half of the year and who knows how much in '07; admitting it was tough to predict the "dynamics" of housing and its overall impact.

And then Bernanke's vice chairman, Donald Kohn, said the falloff in real estate has "proven to have been more rapid and deeper than many economists had predicted."

Well I'm no economist (my sheepskin says poli-sci major and beer drinker), but anyone with half a brain knew real estate had long entered the frothy stage by last fall?.a full 12 months ago, Mr. Kohn?ergo, when bubbles pop, the fall can be rough. Or maybe Kohn forgot Nasdaq 5048. Moody's Economy.com also weighed in with research that predicts the average home price will decline about 4 percent in 2007, with far greater losses in the hotter markets.

But lest I get too smug, which I'm not entitled to be anyway because I thought the three major equity indexes would decline 3 to 7 percent this year, I do agree with Bernanke that it's tough to predict the dynamics of housing and its overall impact; which is why I muse about the psychological impact between $450 in the pocket and a $20,000 hit to the net worth, as well as the fact that Americans, overall, are spending more on housing (including for real estate taxes, insurance and utilities) than ever before, according to the latest Census Bureau data.

WIR 10/28/06

And I'd be remiss in not mentioning the Federal Reserve. The fact I waited until now to do so is probably a sign they think they're doing a good job. Ben Bernanke and Co. held the line on interest rates again, but the Fed appears to have far more confidence in the health of the economy than some of us do. In fact the Fed appears to be more optimistic than last time, talking of 'moderate' growth going forward, which translates to 2 to 3 percent. A soft landing, in other words. They concede housing is an issue, but at the same time the board offers inflation isn't really one so, net/net, it all comes out a positive by their way of thinking.

Back to earnings, though, in conjunction with the Fed's comments. Bernanke better be right in his forecast of solid growth for the foreseeable future because many more quarters like the third and there is no way in hell you'll see double-digit earnings growth in the future, as currently forecast by most.

WIR 12/2/06

So whither housing in general? Thanks to the fact mortgage rates are falling anew, under 6.15% for a 30-year fixed, that's supplying some support for the sector. No doubt Ben Bernanke is focusing on this. He doesn't dare raise interest rates again until he's certain housing is stabilizing. I just see another leg down coming.

Speaking of the Fed chairman, he offered in a speech this week that the Fed would still raise rates before cutting, because he remains concerned about labor costs. Well this is a crock; all he's doing is jawboning. You can be sure corporations, with slowing in evidence now for some time, aren't about to be handing out big raises in 2007. Enjoy what increase you received this year, folks.

WIR 12/16/06

Earlier in the week the Federal Reserve held the line on interest rates again, as expected, but did admit there was a "substantial cooling of the housing market." Yup, there sure is.

But the Fed added, while core inflation remains elevated (above its preferred 2% target), it expects economic growth to "moderate" and, thanks to falling energy, coupled with the slowing economy, inflation will then "moderate" too.

Only one problem with that?.energy isn't going to fall with what I see going on in the Middle East. Plus OPEC is flexing some muscles, and exhibiting a little discipline, in instituting production cuts that are sticking, to a certain extent; "certain extent" being better than their history of outright shoddy compliance. And in one of the dumber moves in the history of commerce, Angola sold its soul to the devil in agreeing to become the first new member of the cartel since 1975, which also means Angola will have to comply with OPEC's wishes and not necessarily develop its resources in its nation's best interests. But then when I'm up late at night, musing about the world and which places I'd like to visit next, Angola isn't part of the equation.

WIR 1/6/07

Before I get to the main topic of discussion this week, I need to clean up some loose ends from my '07 forecast as issued last time. In calling for 1.5% growth for the year it will begin to feel like a recession even though government reports could show positive growth. A Wall Street Journal survey of 60 economists came out this week and their consensus was for 2.3% growth in the first half and 2.8% growth in the second, mirroring the previous review's BusinessWeek forecast. No way either is right.

But when it comes to stocks, as you've seen over the years the market often defies logic, both up and down. Earnings are expected to grow at high single digit rates in '07, the first time below double digits since 2002. If economic growth is slower than consensus, we will finally see earnings disappoint. That would normally be negative, and at times the market will treat it as such, but I just see the end result for stocks being pretty flat. For one thing, even bears have to concede valuations aren't outrageous; certainly nowhere near 1999/2000 levels that defied explanation.

What we will see, however, is rising default levels for individuals; a harbinger of things to come in 2008. A reason why I'm not calling for outright disaster just yet is because, yes, there is a tremendous amount of cash sloshing around, as we'll expound on further in a moment, and spending at the top levels of our society will more than make up for shortfalls at the middle- and lower-income levels. For a while longer, that is.

All of the above is contingent on zero large-scale terror attacks, no attack on Iran, Iran not testing an authentic nuclear weapon, and relatively stable oil prices outside of a hurricane induced spike.

In the here and now, the ISM index on the service sector for December showed some softening vs. November, while the ISM manufacturing barometer, echoing the previous week's Chicago Purchasing Managers index, came in better than expected.

Then the December employment figure was released on Friday and the economy created 167,000 jobs for the month, far greater than anticipated. Stocks sold off, though, because the solid performance indicates the Federal Reserve will not be lowering interest rates any time soon and much of the stock market rally in recent weeks has been based on the assumption it would begin doing just that early in 2007.

Couple the jobs data with the earlier release of the Fed's minutes from its December meeting, where the Fed reiterated its concerns on inflation, and one can only conclude the Fed isn't going to be cutting rates for at least the first two meetings of the year.

Which will be a mistake, because while I talk of basically muddling through, above, that's not a good environment for the majority of Americans; the non-Wall Street/Corporate CEO money machines, that is.

And if you thought I was too bearish last week in my housing comments for this coming year, I can thank home-builder Lennar for making me look good for one week at least.

The Miami developer announced it expects to report a fourth- quarter loss of around $500 million in the face of land-related write-downs. CEO Stuart Miller said "Market conditions continued to weaken throughout the fourth quarter, and we have not yet seen tangible evidence of a market recovery."

At the same time Lennar said it would sell a 62% stake it had in a 15,000 acre track in California, not exactly a ringing endorsement of prospects for a rebound anytime soon there. And Lennar admitted it is doing everything possible on the incentive side to move existing inventory, something to remember next time you see relatively sanguine new home sales data.

I was in Miami myself a few days this week for the Orange Bowl and not having been to the area in years I was floored by some of the high-rise condo developments. Now, granted, I was there over the holiday weekend but on Tuesday, when I expected to see workers back slaving away on the monstrosities lining the beaches and waterways, I saw virtually zero activity.

Coincidentally, I saw a Reuters piece by Jim Loney noting that developers are now pulling the plug on some of the biggest projects (a la Lennar's warning). In fact, Miami officials talk of 15 condo projects, representing 1,900 units, that have been officially pulled, but analysts agree the eventual number will be much higher, taking into consideration the rest of the overbuilt market over the entire state. In other words, there are going to be more than a few eyesores to stare at in the coming years, buildings half complete or giant pits, waiting to swallow up unsuspecting tourists.

There were also a number of tidbits this week regarding the New York City real estate market that foreshadow further softening rather than a bottom having been hit.

For example, construction permits declined for the first time since 1998, demand for office space appears to be hitting a wall (ignore some of the positive spin you may have seen), and the average sales price for a NYC apartment is now off 4% from a year ago; this last fact obviously doesn't represent a crash, but a pigeon in the mine nonetheless. [The Big Apple being an urban area and not exactly a haven for canaries?.then again it's been warm enough for the songbirds, but I digress.]

Of course New York's housing market will also be the recipient of much of Wall Street's largesse, so numbers over the coming months could be a bit out of whack, especially at the very high end, though the primary trend now appears to be in place.

But I want to spend some time musing about the Fall of the Roman Empire, 2007 style.

The Journal's Alan Murray summed it up terrifically the other day in talking about all the cash, or to paraphrase Scarface, what to make of it. [The preceding was heavily censored.]

"There is a steady stream of resources to the most perilous of emerging markets, the most hopeless of troubled companies and the most overextended of home buyers. That's great fun while it lasts. But does anyone seriously think it will last forever?

"Let's start with private equity. Private-equity fund raising set a record last year, as did private-equity deal making. This year will be even bigger. Look for a precedent-breaking $50 billion deal to be announced before the big ball falls in Times Square again.

"The private-equity geniuses would have you believe this is because they've discovered a superior form of running companies. Perhaps some of them have. But mostly, what they've discovered is an amazing gusher of money?.

"(In general), the swollen river of liquidity is also behind happy predictions that housing will recover later this year. Despite rising default rates, mortgages remain cheap and easy.

"Lenders are still willing to let borrowers bury themselves in debt to buy a new home. The money gusher also helps explain why the federal government in Washington can keep spending away, without regard for projections of an exploding federal deficit. And why the dollar remains relatively strong, despite swelling trade deficits. Or why the Dow Jones Industrial Average has managed to go for more than 912 trading days (now 913) without a 2% daily decline - the longest such stretch in its history.

"Perhaps this flood of money will continue through the new year. Fed Chairman Ben Bernanke has argued money flows are the result of a 'global savings glut.' Newly enriched investors in the developing world need to put their money somewhere, and apparently, even the most risky assets will do.

"But as long as the good times are rolling, don't expect Mr. Bernanke to cut interest rates. That's a tool he'll only use when the economy takes a serious turn for the worse. Those who predict otherwise haven't been listening to what he's been saying.

"And don't be fooled into thinking that more drinking will ease the inevitable hangover. At some point, something - a string of big defaults, a sharp decline in the dollar, or, God forbid, a major terror attack - will cause the intoxicating stuff to stop flowing.

"The world is still a risky place, and liquidity, at the end of the day, is just another name for confidence. Eventually, this confidence game will end."

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I'm off next week. Wall Street History will return Feb. 18 with Ben Bernanke, part II. A look at the Fed and 2007. Now it gets ugly.

Brian Trumbore

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.