Energy is making most of the headlines, but I think it's time to keep a closer eye on this housing boom/bubble bursting question.
The homebuilders look like they're up for another leg down, and the news reports and anecdotes out of real estate seem to suggest a rapid slowdown developing in sales.
Spiking gas prices, rising interest rates, and a sickly real estate market, it's certainly looking like an interesting year, or, as Boone Pickens put it 'not one of our best years'. Though of course the stock market as a whole doesn't appear to care right now.
Peter Thiel of hedge fund firm Clarium Capital has suggested the real estate bubble is going to burst and along with rising interest rates and consumer debt levels, it would blow the US consumer to smithereens and lead to a serious slowdown in the economy. His suggested play: long term US bonds which will benefit as interest rates are lowered by the Fed once this develops.
Interestingly enough, Jim Rogers, the former hedge fund manager and long term commodities bull, also believes we had a real estate bubble that will burst, admits to shorting Fannie Mae and certain homebuilders, yet has also shorted the US long bond, which is the diametric opposite of Peter Thiel's suggestion. Jim believes that inflation is much higher than US government figures are suggesting, thus interest rates will have to go higher to reign in inflation, not lower.
Two great investors with serious money making credentials and with generally the same starting hypothesis, yet reaching opposite conclusions.. Now that's a real conundrum!
The rise in virtually all the other commodities with oil suggests that inflation is the issue, but the bond market generally does not appear convinced of that. But there are two obvious signs of inflation, the rise in housing prices and gas prices, which are the exact items the US government has decided in their wisdom to try to filter out. Too volatile, they decided. There are a couple of other pieces to throw into the mix: the labor market appears to be strong, wages are rising, and companies appear to be starting to pass along rising energy prices.
I can't ignore the evidence, so I must lean with Jim Rogers, but I can't bring myself to short long bonds; oil and commodities contain quite enough inflation bets for me.
But something tells me to keep a sharp eye out for signs of Peter Thiel's thesis developing, and that is what I am doing.
[Both Peter Thiel and Jim Rogers both made good calls on oil and continue to be bullish. Peter Thiel here, and Jim Rogers here. Those stories are old but their thinking is still along those lines.]
Update: In hindsight, I realized I oversimplified Peter Thiel's argument somewhat above. Part of his scenario is that the Fed will likely overshoot in raising interest rates, as has happened in the past.