Dear Reader,

Ever have one of "those" weeks where you spend every waking hour hard at work, but when Friday rolls around, your to-do list has somehow doubled in length since Monday morning?

That sums up my week just ended, so I'll be stepping aside momentarily to allow my co-contributors to do the heavy lifting in this edition of The Room.

But first, I want to share an email with you from Casey Research's resident technical analyst, Dominick Graziano:

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Subject: Stealth Correction

Date: Thu, May 8, 2014 at 7:56 AM

Since the beginning of the year, the average stock in the S&P 500 is down 9.3%, while the S&P 500 index is about 1% from its all-time high. Apparently, mega-cap stocks like Apple, Johnson & Johnson, and Berkshire Hathaway, among a handful of others, are holding up the index.

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Typically, Domnick contributes such stock market intel to The Casey Report. But this particular tidbit came to light too late for the newest edition, which just rolled off the presses yesterday.

What does it mean? US equity markets are enjoying their 31st straight month without enduring so much as a 10% correction—a modern record by a wide margin. On average, such corrections occur every 18 months. In other words, we're in uncharted territory.

And the 'stealth correction' already underway—wherein the decent performance of a couple of gigantic companies masks underlying weakness in the stock market—is the latest of a series of mounting signs that the market may finally be entering a long overdue swoon, or worse.

As a shameless plug, we cover this very topic in the May edition of The Casey Report, including a specific trade that will make money if the stock market does crash. And that's only a small piece of the issue: the rest is dedicated to exploring what we think are two excellent investment opportunities outside of the US. Best of all, US investors can easily access both of them with a standard US brokerage account.

You can take The Casey Report for a 90 day risk-free spin by clicking here. Read the current and two more issues, explore the archives, and see all of our portfolio recommendations. You have 90 days to decide if The Casey Report is for you; if not, no hard feelings. Just cancel within that time for a full and prompt refund.

With that, let's get to the meat of the issue. First up is Doug French with analysis on how the Fed's magic elixir of interest rate suppression is failing to juice the real estate market. Then we'll hear from Jeff Tucker, CEO of newly launched Liberty.me.

Last, you'll find a lighthearted poem submitted to the Casey Research Storytelling contest by subscriber Philippe Blumenthal in our Friday Funnies.

Yellen’s Wand Is Running Low on Magic

 Doug French 

How important is housing to the American economy?

If a 2011 SMU paper entitled "Housing's Contribution to Gross Domestic Product (GDP)" is right, nothing moves the economic needle like housing. It accounts for 17% to 18% of GDP.

And don't forget that home buyers fill their homes with all manner of stuff—and that homeowners have more skin in insurance on what's likely to be their family's most important asset.

All claims to the contrary, the disappointing first-quarter housing numbers expose the Federal Reserve as impotent at influencing GDP's most important component.

The Fed: Housing's Best Friend

No wonder every modern Fed chairman has lowered rates to try to crank up housing activity, rationalizing that low rates make mortgage payments more affordable. Back when he was chair, Ben Bernanke wrote in the Washington Post, "Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance."

In her first public speech, new Fed Chair Janet Yellen said one of the benefits to keeping interest rates low is to "make homes more affordable and revive the housing market."

As quick as they are to lower rates and increase prices, Fed chairs are notoriously slow at spotting their own bubble creation. In 2002, Alan Greenspan viewed the comparison of rising home prices to a stock market bubble as "imperfect." The Maestro concluded, "Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole."

Three years later—in 2005—Ben Bernanke was asked about housing prices being out of control. "Well, I guess I don't buy your premise," he said. "It's a pretty unlikely possibility. We've never had a decline in home prices on a nationwide basis."

With never a bubble in sight, the Fed constantly supports housing while analysts and economists count on the housing stimulus trick to work.

2014 GDP Depends on Housing

"There's more expansion ahead for the housing market in 2014, with starts and new-home sales continuing to rise at double-digit rates, thanks to tight inventory," writes Gillian B. White for Kiplinger. The "Timely, Trusted Personal Finance Advice and Business Forecast(er)" says GDP will bounce back.

Fannie Mae Chief Economist Doug Duncan says, "Our full-year 2014 economic forecast accounts for three key growth drivers: an acceleration in spending activity from private-sector forces, waning fiscal drag from the federal government, and continued improvement in the housing market."

We'll see about that last one.

Greatest Housing Subsidy of All Time Running Out of Gas

With the central bank flooding the markets with liquidity, holding short rates low, and buying long-term debt, mortgage rates have been consistently below 5% since the start of 2009. For all of 2012, the 30-year fixed mortgage rate stayed below 4%. In the post-gold-standard era (after 1971), rates have never been this low for this long.

The Fed's unprecedented mortgage subsidy has helped the market make a dead-cat bounce since the crash of 2008. After peaking in July 2006 at 206.52, the Case-Shiller 20-City composite index bottomed in February 2012 at 134.06. It had recovered to 165.50 as of January.

However, while low rates have propped up prices, sales of existing homes have fallen in seven of the last eight months. In March re-sales were down 7.5% from a year earlier. That's the fifth month in a row in which sales fell below the year-earlier level.

David Stockman writes, "March sales volume remained the slowest since July 2012." He listed 13 major metro areas whose sales declined from a year ago, led by San Jose, down 18%. The three worst performers and 6 of the bottom 11 were California cities. Las Vegas and Phoenix were also in the bottom 10, with sales down double-digits from a year ago.

This after housing guru Ivy Zelman told CNBC in February, "California is back to where it was in nirvana." Considering the entire nation, she said, "I think nirvana is not far around the corner… I think that I have to tell you, I'm probably the most bullish I've ever been fundamentally, and I'm dating myself, been around for over 20 years, so I've seen a lot of ups and downs."

Housing Headwinds

Housing is contributing less to overall growth than during both the days of 20% mortgage rates in the 1980s and the S&L crisis of the early 1990s.

In Phoenix, where home prices have bounced back and Wall Street money has vacuumed up thousands of distressed properties, the market has gone flat.

In Belfiore Real Estates' April market report, Jim Belfiore wrote, "The bad news for home builders is they have created a glut of supply in previously hot market areas… Potential buyers, as might be expected, feel no sense of urgency to buy because they believe this glut is going to exist indefinitely."

Nick Timiraos points out in the Wall Street Journal that with a 4.5% mortgage rate and prices 20% below their peak, "… homes are still more affordable than in most periods between 1990 and 2008." So why is demand for new homes so tepid? And why have refinancings fallen 58% year-over-year in the first quarter?

"Housing's rocky recovery could signal weakness more broadly in the economy," writes Timiraos, "reflecting the lingering damage from the bust that has left millions of households unable to participate in any housing recovery. Many still have properties worth less than the amount borrowers owe on their mortgages, while others have high levels of debt, low levels of savings, and patchy incomes."

More specifically, "So far we have experienced 7 million foreclosures," David Stockman, former director of the Office of Management and Budget, writes. "Beyond that there are still nine million homeowners seriously underwater on their mortgages, and there are millions more who are stranded in place because they don't have enough positive equity to cover transactions costs and more stringent down payment requirements."

Young people used to drive real estate growth, but not anymore. The percentage of young home buyers has been declining for years. Between 1980 and 2000, the percentage of homeowners among people in their late twenties fell from 43% to 38%. And after the crash, the downtrend continued. The percentage of young people who obtained mortgages between 2009 and 2011 was just half what it was ten years ago.

Young people don't seem to view owning a home as the American dream, as was the case a generation ago. Plus, who has room to take on more debt when 7 in 10 students graduate college with an average $30k in student loan debt?

"First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly," Fed Chairman Ben Bernanke told homebuilders two years ago.

There's not much good news for housing these days. For a little while, the Fed's suppression of interest rates juiced housing enough to distract Americans from weak job creation and stagnant real wages. Don't have a job? No problem! Just borrow against the appreciation of your house to feed your family.

But Yellen's interest rate wand looks to be out of magic. The government had a pipe dream of white picket fences for everyone. But Americans can't refinance their way to wealth. Especially in the Greater Depression.

The Great Migration

 Jeffrey Tucker 

I was in a hotel in a strange city but needed to get to a drug store. Out came the smartphone from my pocket, and I knew in an instant that a CVS was a 10-minute walk away.

Saved by the digital age again! This sort of activity is so routine for most of us that we hardly even remember that it wasn't possible ten years ago. We navigate unfamiliar cities, monitor our sleep, talk to anyone through video, watch stock prices, make trades, and a million other things.

Using technology, we perform tasks that a previous generation couldn't imagine. And to what do we owe these wonders? The miracle of entrepreneurial drive working through open markets, made possible by the Internet.

About one year ago, my friends and I began to imagine the next step. The digital world is this generation's frontier. What if we follow the path of our ancestors and found a new city in the digital cloud? What if this new city helped us rediscover liberty in a despotic age? It will. Frontiers do this.

The wonderful result is Liberty.me, a place of friendship, learning, and publishing for anyone seeking more freedom. We've been hard at work now for eight months putting it together. We wanted to replicate the experience of living in a community—the only difference being that it lives on the Internet.

And we are just now ready for new residents.

As high-tech as this all sounds, it is actually a repeat of old themes from history. In the early Middle Ages, people migrated from rural isolation to feudal lands in search of security, food, and a better life. When feudalism transitioned to capitalism, people moved to the cities in search of even more.

In every migration of this sort, there are two forces at work: the desire to escape privation and sometimes despotism, and the search for more opportunity and prosperity. Or you can summarize the driving force in one word: freedom. The story of freedom's march is bound up with all the great migrations in history.

Think of the incredible move to the New World from the Old that took place over 250 years from the 17th to the late 19th century. The motivations were the same. Get away from tyranny. Get to a place where freedom stands a chance. The New World was born with the idea of freedom at its very heart.

The same thing happened in the westward migrations in the 19th century. People gave up the comforts of the status quo in the original colonies to take outrageous risks in far-off places from the Dakotas to Texas to California. They wanted material prosperity, but more importantly, they wanted something they could call their own, and to build new lives based on a dream.

Within these new communities, survival requires the formation of strong social ties. They are based on trust, shared mores, and, mostly, personal investment in property. They had "skin in the game." That gave them a strong incentive to increase the value of their communities through constant improvement, sharing of knowledge, and mutual support. Their fundamental shared value was the love of liberty itself.

These new communities were a reason freedom survived at all. The central government in the United States was already becoming threatening only a few years after the Constitution was ratified. Controls on political speech caused huge upheavals and ultimately led to the election of Thomas Jefferson as president in 1800.

Migrating has always meant outrunning those who are trying to control you. You migrate from tyranny to freedom. That's the driving ethos.

Over the last 20 years, we've seen how this works. Mail moved from physical to digital. Phones left their attachment to the walls, landed in our pockets, and became Internet portals.

Then came images. Then came movies. With the opening of the app economy, millions of life functions have left the physical world to live in the digital sector of life. To carry all the world's knowledge in a device in your pocket that is updated every instant, day and night. It's like science-fiction, except that it's real.

What's more, we are only at the beginning of this revolution. With three-dimensional printing, physical objects themselves will be liberated to the digital cloud.

Despite spying and interventions, the Internet remains the freest sector of life. This is the core reason why it is so vibrant, innovative, efficient, orderly, and expanding. It has allowed us to outrun the government's desire to control the world. It has carved out a special zone of freedom.

The parallels with the past are clear. People are drawn to places where liberty lives. They leave places where despots rule.

So it is at Liberty.me. We put together technologies that allow maximum human contact, so that we can work to build new solutions to the problems of our time. We will have dozens of guides, from handling personal finance to dealing with cops. One hundred liberty-minded classic books are there for the download, and every book has a discussion forum. It's a Facebook-style social network, but also far more.

Our members enjoy turnkey online classes and seminars that allow real-time interaction with professors and successful entrepreneurs. Finally, the online classroom is easy to use! There are event calendars, a complete guide to liberty organizations, an around-the-clock news feed, and so much more.

Also, and this is the part that amazes me, every single member gets his or her own publishing site. There is nothing to download, no coding to learn, no additional fees to pay. It's like having your own plot of land to develop.

What's old is new again! The frontier not only made us free. It will keep us this way.

Friday Funnies

Mary Poppins

By Philippe Blumenthal

This is the tale of breaking a habit

That resulted from the purchase of a white rabbit.

Though not prone to flights of fancy

And the thought of animals at home do make me antsy

I went with my daughter to buy a fish,

A reward for finishing some dinner dish

My wife, Nili, came with us too

For we had much to see and do

Into the pet store we did proceed

When some irrationality did reason supersede.

There, on the floor sat a cute white bunny

"Look," exclaimed my daughter, "isn't she lovely and funny?"

Oh darling said my wife can we take her instead

My first thought was caca on the bed

Boy or girl was the question at hand

My daughter wanted a girl, and that I can understand.

So, I to their pleas did accede

And adopted the rabbit for my wife and daughter to please.

Now to the naming of the new family member

We needed something easy to remember

"Mary Poppins," my daughter exclaimed with passion and bravado

And so, that was the name which got the go.

Mary has been with us for a little while

And added merriment to the house in her inimitable style

My daughter was tickled pink

As she and Mary trounced about in sync.

Mary was her little sister you see

Someone to hold, cuddle, and simply be

The tale became one of tragedy and woe

As to the veterinarian we had to go

Mary had a skin rash

Yet exhibited no signs of a temperature flash.

So the doctor was very professional and nice

And was sure that Mary had no pestilence or lice.

So where is the tragedy in this tale?

On examination it was determined that Mary was a male.

"NO, she is my sister," cried my daughter with alarm

"Well, now you have a brother, it's really no harm."

Absolutely not, she howled and cried

And I did not want too much her feelings to deride

She will remain Mary and not be confused

"Papa, can't we just keep up this ruse?"

What was I to say

Nothing had prepared me for this day.

I suggested Charlie or Bob or Will,

But that did not any endearment instill.

So, now we have a Rabbit male

Mary is his name and the end of the tale.

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Cirque De Soleil Towel Dance