The easy thing is seeing the bubble. The hard part is predicting when it will burst or deflate. I'm young but I could see these bubbles at these times.

Internet bubble in 97.

Housing bubble in 2002. Starting to deflate, little panic so far.

China exchange rate problem in 2002 in progress.

Japan carry trade 2005 in progress.

The China exchange rate is the biggest problem out of the 3 bubble on going. It fuels the housing bubble because of the sterilization of China's Yuan (China buys US bonds) to keep the exchange rate at its current levels. This currency practice has allowed China to take business away from Japan and at the same time chokes China’s demand for Japanese goods. This has slowed down Japan’s recovery and prevents them and Asian counties from raising rates.

At sometime in the future, China will have to really "float" its currency and raise rates to stop inflation. At that time, Soros (if alive) or a group of hedge funds are going to make a run on Japan's bank forcing margin calls and an implosion of the carry trade. Asia sees this coming and that is why they are pooling their FOREX reserves together.

The question is when will China get sick of allocating its resources to exporting and decide to look after the welfare of its own society? The longer it takes the harder it will crash.

Until then party on, I don’t think it will end until 2009 by the earliest. What the US should do now is spend, spend, spend, and fix social security. All by issuing debt and giving it to China. China is communist and only cares about keeping its people working and not allowing them to think about what they could have. If China would want to trade they would need to buy from us not just take our electronic paper return.

I second Yal's position - the source of liquidity is labor arbitrage recycled back to the US via PBoC currency rate support. That and BoJ trying to 'keep up'.

And their reserve war chest that every complains about & says is 'too big' might not be high enough when the flood comes so they stack the money bags higher & higher.

If this money growth doesn't flow into MBS & float housing, it will go somewhere... some of it is currently going into PE acquisition & 'support'... and commodities... but neither of those can go on ballooning forever either. So what's next? Or are we getting near the end?

That's the question I believe needs to be answered to accurately 'guess' whether CRs chart results in a 'hard' or 'soft' landing.

JMHO.

Yard sale is old school. They ebay the mortgage payment these days.

Scary graph!

Meanwhile, over at FMT, those commercial loans that are still on the books continue to ripen and the fruit doesn't look very tasty:

The Bad News On Condos

Roubini makes the point at RGE monitor that the increase in housing starts is an illusion.

RGE - Housing Recession Deepens and Subprime Credit Crunch Spills Over to Other Mortgages

"Today's figures on housing starts and building permits show that the housing recession is worsening. First of all the reported 2.5% increase in housing starts in April is a total optical illusion: the reported 1.528 million of housing starts was a 2.5% increase relative to a March figure that was revised significantly downward from 1.518 to 1.491. If you compare housing starts with the initial estimate of starts for March, the increase is only 0.65%. I.e. only if you blissfully ignore that March was much worse ex-post than its first estimate you can argue that you had an increase in April relative to an even more depressed March."

Premier Wen Jiabao pledged that China would further reform its currency controls and take steps to resolve problems ranging from the nation's growing trade surplus to its soaring foreign exchange reserves.

China's overall economic outlook was positive, Wen said Wednesday at the opening of the African Development Bank's annual meeting in Shanghai. He also promised that Beijing would make interest rates more flexible while using all available options to control growth of its money supply and ensure economic stability.

That could indicate tightening measures may be on the way to cool an economy that grew a blistering 11.1 percent in the first quarter _ growth that authorities worry could lead to a debt crisis or higher inflation.

"There are some problems. We face excessive liquidity, an imbalance in the balance of payments, and rapid accumulation of foreign exchange. But we are taking measures to deal with these issues," Wen said.

Spain - crisis looming ?

Spain risks crisis over vanishing reserves - Telegraph

mp said: "...In fact, the stock market's record as a leading indicator is spotty. You should know that, so what exactly is it that you're selling?..."

In fact, I know precisely what the stock market's record is, and you should, too. Show me a U.S. recession that's happened at any time in the past 40 years that wasn't preceded by a serious stock market correction.

Sebastia

Fed's Kohn says subprime problems show 'new channels' for financial shocks
The ripple effects of subprime lending problems are one sign of how derivatives and other innovations 'have created new channels for the transmission of shocks within the financial markets and into the economy,' Federal Reserve Governor Donald Kohn said today.
Fed's Kohn says subprime problems show 'new channels' for financial shocks - Forbes.com

They sure are jawboning the derivative risk a lot lately.

In response to: "In fact, I know precisely what the stock market's record is, and you should, too. Show me a U.S. recession that's happened at any time in the past 40 years that wasn't preceded by a serious stock market correction."

Steve said: "You only have to go back to 1990 for that."

It depends on your definitions, which clearly are different from mine. I consider corrections of -10% or more to be serious.

Between October, 1989 and January 1990 (prior to the beginning of the recession later in 1990), the SP500 went through a -10% correction, while the Nasdaq corrected -15%.

Do you now prefer one-line "zingers" to an actual exchange for the purpose of advancing the discussion? Or is this the way it's going to be from here on out?

Sebastia

Do we have to do your work for you Sebastian? Lead time of 1 month in 1990 and -1 month in 1980. More here:
http://tinyurl.com/346zdg

Turbo said: "...in 4 of those 10 recessions, stock market peak to official recession was around three months..."

I don't think I'll ever understand this blog's obsession with the less-likely probabilities.))

This means that 6 of the 10 stock market peaks were more than 3 months from the official recession, right?

At any rate, I'm not pinning my argument solely on the stock market. It's just one more confirming indicator that there's no recession lurking nearby.

Sebastia

Friggin' haloscan. Anyway, Sebastian is resting on his version of the Wright model. While it does not point to recession yet, it doesn't say it's all clear too.
Incredible Charts: Stock Trading Diary
(scroll down to the bottom)

Steve said: "The recession began in July of 1990. Yet you curiously define your "correction" period as ending in January 1990. Why? What happened from January 1990 to July 1990?..."

If you have an issue with the price charts, Steve, take it up with them. I'm just looking at a peak-to-trough correction, not my fault if a low was made in January and the markets rallied after that, hit a new high, then plunged again for an even larger loss.

It doesn't change my point: The economy can't be headed for trouble without it showing up somewhere else first, and the stock market is one of those places.

Sebastia

"the stock market is one of those places"

Now, we are singing an entirely different tune, arent' we? Well, of course the market is one of the seven leading indicators in ECRI's WLI -- tell us something new.

Sebastian- "In fact, I know precisely what the stock market's record is ..."

Sebastian, you shot yourself in the foot on that one.

The second part of my question remains unanswered: exactly what is it that you're selling?

Patriot and Turbo, what would you have me do now? The data you've provided don't seem to match very well, yet both are supposed to be refutations of my position.

Meanwhile, I've had the pertinent historical stock market and recession data for years and am satisfied with the conclusions I've drawn from studying them.

In my initial post I referred to recessions of the past 40 years, and certainly not from the distant past when the U.S. was on the gold standard and there were no such things as airplanes, for God's sake.

Also, I never claimed that the stock market was a stand-alone indicator or that any other economic indicator could be accurate all by itself.

So where does this leave us? As always, with my arguments "totally discredited."

Sebastia

The "smart" thing to do if storm clouds appear is to go to shelter, not climb up the nearest tree.

I guess at some point I'm gonna have to look this up myself, but what were the European bourses trading at before the crash in '29? what was the relationshp between the dow & euro bourse composite from 1919-29?

What was the relationship between the Dow & the Nikkei from say 68-90?
Both instances it was explosive economy B providing tons of capital to invest in party A, now it's China as party B.

Guesstimating from historical precedence without adding additional variables is like reading tea leaves

There is strong evidence to show that GDP forecasts are in the long run, a roll of the dice.

Keep in mind that most economists aren't paid to forecast the economy - they're paid to validate sales pitches, business plans, etc.

How else do you explain why indicators such as the yield curve and the LEI have done far better than economists in predicting economic turning points?

k harris, I think most would agree that attempting to forecast recessions is Mannichean. After all, one is not only attempting to forecast an economic slowdown, but also second-guess how the NBER will judge the slowdown, assuming that it occurs, after the fact. For me, the slowdown is the main event. People can call it whatever they want to call it. What I object to is the pretense of certainty when there is none.

Tanta, stick this in your liability pipe and smoke it!

Ohio AG seeks Wall St. tie to subprime fraud
He said one legal strategy he might pursue is using the U.S. Racketeer Influenced and Corrupt Organizations (RICO) Act, which was formulated to fight organized crime. The act allows for civil claims to be filed, too, to allege fraud.
Business & Financial News, Breaking US & International News | Reuters.com

In September 2005, Mr. Geithner brought together the so-called 14 families of Wall Street and told them to fix the problems they had found.
Calm Before and During a Storm; Derivatives May Put the New York Fed Chief Through a Stress Test - NY Times

Looks like the Don's better call a family meeting. I guess Rove missed one in the sweep!

(background)
Calculated Risk: Bagholder Bondholder Liability: Can’t Have That

MEW is not income. It cannot make up for lost income. The whole idea of using your house as an ATM is not only trite, but inaccurate.

MEW is a loan using your home as collateral. It's not the equivalent to pulling money out of your bank account. It's a very favorable loan, no doubt about it, but it's not free money. You still have to have the capacity to make payments on the loan. The money has to come from somewhere.

If MEW wasn't available, consumers no doubt would have had to resort to less favorable sources of financing and therefore wouldn't have been able to consumer as much, but there were and are other options available. If you don't believe me, take a look at consumer debt growth rates after the 1991 recession.

Lately I've seen people notice the increase in consumer debt and respond with, "Oh, the consumer is turning to plan B."

No, MEW was plan B. The consumer is returning to plan A.

barely - CC's AREN'T the last resort... the LAST resort will be when mfgrs, retailers and service providers offer credit on their own terms as a means to keep sales 'strong'.

For example say Best Buy in collaboration with a manufacturer offers you a three year no payment, no interest 'loan' on plasmas... if I recall they were doing that last winter.

How can they do it?

If they can borrow into that liquidity stream better than the consumer can...then offer it to the consumer on condition that the consumer buy from them... then who needs MEW or CCs?

Of course the retailer eventually has to get paid... but for three years their executives have accrued earnings on the books and the possibility of hitting their numbers & receiving a bonus... and the economy continues to chug along on vapors.

I think there are lots of ways the consumer can dig themselves deeper if retailers & producers continue to offer them credit...

ozajh - check out one of Setser's recent entries...

More evidence the world economy isn't really rebalancing

China's q1 surplus is up. Japan's q1 surplus is up too.

Pretty much says it all... they are all doing it. It is a race without a finish line.

dryfly,

To some extent that article reinforces my point. Japan has a monthly 30 Billion US$ Current Account surplus, and yet the yen is falling against every major trading currency.

It seems that every other day someone in the US is spouting inflammatory protectionist rhetoric about China, which is still a poor country. Meanwhile Japan, which is rich these days, is getting away with a blatantly mercantilist trade and currency policy almost unnoticed.

No inversion of the Wright Model "B" yield-curve, no correction in the stock market, steady earnings growth, industrial expansion, low inflation, low and steady unemployment, positive growth in durable goods.

No inverted yield curve because of China's fiscal policies.

No correction in stock market because of China & Japan's fiscal policies

Steady earning growth due to declining US$

Industrial expansion is in heavy equipment for China & Oil

Low inflation due to cooking thru hedonics: Old basket has inflation running 4-5% higher.

Low unemployment rate due to changes in hiring practices, workforce participation % is down, below population growth rate.

Durable Goods is up to supply china & oil and is one of the few growth industries: Tech is slumping, as are housing, autos & retail; but that only makes, what, 30% of GDP?

These are the "good times", god forbid what it looks like when it goes pear shaped.