This report only covers durable and non-durable goods, correct? I wonder if there is a typical relationship between consumer spending on those and spending on services.
"Unless the seller can buy TVs at less than wholesale, this is an odd proposition, don't you think?"
It's a truly ominous proposition! That's why we gather here, mostly. The point I was making from a marketer's perspective is how flimsy the notion of value is after a boom. In the long march back to "utility value" a lot of TV's are going to get sold for less than cost, which is why it was posted I suspect. If you are one of the unlucky, props emphasizing utility may well be the new "thing"...along with stairstep commisions.
Along the same line (I think) that calmo is taking, note that there were decent upward revisions to February and March sales. If we look at levels, sales came in 0.3% below what was expected, rather than the 0.6% miss that one would gleen from comparing the result (-0.2%) to the median estimate (+.04%).
When it comes to the implication for GDP, much will depend on whether the upward revision to prior month's retaill sales will be accompanied by upward revision to prior months personal consumption spending, and the extent to which soft core retail sales spending is due to soft prices (core PPI was flat again in April), as well as the strength of service spending, as Kevin suggests.
Preliminarily, some bank forecasters have pulled their estimate of Q2 GDP below 2% (the median in May surveys was 2.2%) in response to the retail sales data. Note that inventory data released today point to a further downward revision to Q1 growth, but that may be good for Q2.
With the Trade data the Q1 GDP is below 1% annual rate. April data is quite weak. Don't these give credence to the forecast that the recession could have begun in March?
I am sticking with my forecast that the recession would be found to have begun during Mar-May of 2007. I like my chances based on the data for the past two months. The home sales reports for April and May will seal the prediction.
Thanks.
Jas
PS: Bloomberg just reported that the divorce rate is the lowest since it peaked in late 1970s. One more reason that you are dead wrong on your estimate for the Fundamental Demand for housing, currently, in the US. BTW, high home prices have forced many people to share housing and reduce the Fundamental Demand. I realize that you will stick to your estimate of 1.7M no matter what the data suggest. Adding 1.2M to Vacant Units, Year Round, in 12 months is evidence enough that you are on some wrong track from which you can't get off. This is a common problem.
Ben B are you listening now? (fingers in ears "la la la")
Also, maybe we should encourage divorce to prop up housing. Econometric modelers - what variable do you attribute to this change? Try the little blue pill!
I think the point of all this is that the stock market responds to good news by going up: soft landing, and to bad news by going up: lowered interest rates.
Add in that no one wants to miss the train as it leaves the station, and the market has a long way to go up.
Once you have defined out of existence bad news, I don't know what's next.
Such a fascination with divorce, Jas, no matter what the data suggest. Don't take your marital bliss out on us...of course Sippn is right: time to kick your partner out into one of those many vacant homes just waiting for some grass cutting attention.
The conditions are perfect for a replay of 1929, or 2001. Couldn't be more obvious as far as I'm concerned. Details are important but should not obscure the big picture which is clear -- economic growth is slowing while financial markets are exploding...
Our model of S&P 500 operating earnings currently predicts a sharp deceleration in profit growth over the next two quarters, before rebounding late in 2007. Ongoing weakness in corporate pricing power is the key driver behind the projected drop in profits, although firm energy prices and a flat yield curve are also partly to blame. Corporate bonds have been able to shake off the unprecedented acceleration in shareholder claims against cash flow so far, largely due to the strength in profit growth. They will not fare so well as profits sag, especially given that equity implied volatility has begun a cyclical uptrend. Along with an expected deterioration in ratings changes these factors will push investment grade corporate spreads significantly wider over the next six months
Stocks are rallying on the gremlins of past easy money chasing the trend like Pavlov's dogs at dinnertime. It is starting to look more and more like 1929 redux, though 1989 Japan is probably a better comparison for the likely outcome.
Calmo - you're probably right on that one, though if anyone actually looked at the balance sheet of a Chinese bank you'd be out buying ammo and canned goods, not stocks.
That maybe the sign of improving wealth, actually. Instead of buying a brush to do cuddle-puddling at home people just send the puddle to the local cuddle-puddling shop and they do it. So sales are down, services are up .
U.S. leading index growth rate at 3-year high-ECRI
Fri May 11, 2007 10:30 AM ET
NEW YORK, May 11 (Reuters) - A weekly gauge of future U.S. economic growth edged higher on stronger housing activity and lower jobless claims and interest rates, while its growth rate rose to a three-year high, a research group said on Friday.
The Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index increased to 142.7 in the week ended May 4 from 142.4 in the prior week.
Its annualized growth rate rose to 5.2 percent, a three-year high, from 4.4 percent the previous week.
"WLI growth has improved significantly of late; accordingly, the U.S. economic growth outlook is fairly optimistic in contrast with the more coincident sales figures recently released," said Lakshman Achuthan, managing director at ECRI.
A Commerce Department report on Friday showed U.S. retail sales unexpectedly fell 0.2 percent in April. Economists in a Reuters survey had expected a rise of 0.4 percent.
Achuthan said the current softness in retail sales is consistent with the growth-rate cycle slowdown predicted by the decline in the WLI last year.
-X-X-X-X-X-X-X-X-X-X-X-
I personally think that the two econ-meisters at ECRI are a bunch of salesmen and not true professionals because they keep spinning. They have used more than 40 different terms over the past few years to describe the prospects for the US economy.
Let us see, bankers have turned into salesmen (pushing debt), economists have turned into salesmen, accountants are willing to fudge, and so on.
It is the Morality, Stupid! (That will take down the US econo-political system; too many Money Whores in business to plunder the population; and what would be left after the middle-class is mostly plundered?).
I am thinking the market is again anticipating a rate cut. Think fuel costs are high now factor in another spike on a rate cut. But, it doesn't matter since skyrocketing oil, the ultimate tax, isn't inflationary.
What's troubling is imports from China & Japan don't inflate on a US rate cut since their currencies are rigged. I saw a Congressman yesterday on Kumblow (DEM, can't recall the name) who is co-sponsoring a bill to give the administration the authority to impose tarriffs on goods that are artificially deflated. A pretty good idea given how impotent Paulson is. The Chinese are having a good time jerking Paulson around.
He made Kumblow sound like an idiot. Kumblow thinks currecy manipulation and price supports are a wonderful thing - if they result in lower US consumer prices and a hobbled US manufacturing base. Funny that he claims he's a "free market capitalist".
Yal - that's a good article. I worked in Asia during the late 90's crisis, and it's truly shocking how fast boom can turn to bust. As far as MBS go, not really my world but fairly quiet as far as I can tell. If I had to guess, today's price action has all the earmarks of a sizable petro-dollar diversification bid.
Our model of S&P 500 operating earnings currently predicts a sharp deceleration in profit growth over the next two quarters, before rebounding late in 2007
So is that the Vista rally finally taking off?
Straight talk version:
Profits? What profits? We'll let you know what's happening in the market after we get back from the Hamptons after Labor Day.
--
My comments on divorce rate were strictly related to the Fundamental Demand for housing, an area where CR and I have clear disagreement. (BTW, I have great respect for CR and love his data presentations).
What CR is missing are the details of the latest housing boom -- Single Women being disproportionate buyers (homes as substitute for men in terms of financial security!). Single women are more likely to take in roommates to meet the payments (I know of quite a few anecdotal cases in SoCal; I also know of one woman, in her 30s with a brand new Beemer, who bought a house for $560K, at the peak, jointly with her father and they both moved into that house). This reduces the Fundamental Demand for housing units. No?
I don't know about the rest of the country, but the weather here in Boston was just lousy during April: wet, chilly, and not the sort of thing that makes you want to run out and do your spring shopping, because it wasn't clear whether spring was really coming. I expect retail sales have jumped healthily here in the past two weeks.
I am impressed by Walmart's "worst showing in 28 years," though. That seems like a bad sign.
Why do I hear all of these calls for a rebound in late '07? Many CEO's and "economists" have said this very thing, but there is no evidence whatsoever that a rebound is in the cards for late '07. With the housing bust just getting started, I see little impetus for any kind of a rebound until 2012 or so. These things take a long time to play out. Is this like a market watcher calling for a renewed bout of investor enthusiasm circa 1930, only to discover, after the fact, that they were looking at another 15 years of hell? There is still a pretty good chance that 2000 was the actual start of the bear and that the action between 2003 and 2007 was a counter-trend rally, built on nothing but hot air injections and currency trashing via Greenscam & co.
If you look at the indicators NBER follows to call recessions, more are still up on the year and the quarter than are down. There is certainly the possibility that revisions will change that, but for now, it is hard to see NBER calling a recession based on the data.
The weather in the spring last year in New England was horrific. It rained continously.
So if the weather was "bad" this year and bad last year they're realitively comparable, no?
Credit card use is rising for the first time in years....heloc use is falling...heloc's have cheaper rates than credit cards so why wouldn't the heloc debt continue to increase, credit card debt continue to fall, if things in housing and the economy in general were "good"?
Heloc's are tapped out. Credit cards are a last resort, not a sign of an improving economic picture. Both relate to spending at the margin which is declining (regardless of the weather).
Darth Toll said: "Why do I hear all of these calls for a rebound in late '07? Many CEO's and "economists" have said this very thing, but there is no evidence whatsoever that a rebound is in the cards for late '07. With the housing bust just getting started, I see little impetus for any kind of a rebound until 2012 or so..."
People are really missing the point by asking why the market is rallying. The market has developed an internal speculative momentum and it will continue to rally until something threatens to forcibly end the party.
Any data that doesn't pose an immediate threat to the stream of liquidity flooding the market will be brushed off and the good times will roll on.
Also understand that with all the leverage out there the market has to go up or the carry on these leveraged positions will force people out of the market.
Sebastian, The tapped out consumer, as evidenced by declining retail and housing sales, is about to face a deluge of rate resets through the remainder of this year and into the next. Coupled with declining RE values and tightened credit, what might happen? Is that consumer going to spend more are the year progresses?
Didn't you learn anything after you bought NEW at $18 in its final gasp before plunging under $5?
Could the sharp decrease in April retail sales be in some way related to the Credit Suisse 'Tsunami of resets' that will be rolling in during May?
I would imagine that getting a letter in the mail in late March or April informing you that your mortgage rate will now double on your ARM caused many an "Ohhhhhhhhhhhhhhh CRAP I didn't realize it was this year/month...I thought the rate would adjust lower!" moment around the country.
OT: On a housing board I am watching the tide change quickly.
There is a new thing called "Group Lowballing"
It is where one person puts in a low bid to purchase a home and then others follow with even lower bids. It seems to be working to bring the buyers to lower their home price ad accept the first offer. I won't go into to much detail but there are groups forming around the country doing this because it is fully legal.
jus me asked: "Sebastian - so you do expect a bust, just not yet?"
To be more precise, I think there'll be a recession, just not yet. When that happens, the widespread economic weakness will lead to important job-loss, which in turn will lead to meaningful drops in housing prices...but probably from a higher level than the one we're at now.
As to a "bust" in the housing market, I'm not convinced there was ever a "bubble" except (possibly) in isolated markets.
The reason the bulls are calling for a second half of '07 rebound is because, as we all know..wink wink, the stock market is "forward looking" and is usually 6 months ahead of the game.....in theory.
The truth is that the stock market is more "reactive" than forward looking. Just look at TOLL's chart, the stock peaked in June of 05, exactly when the housing market peaked. Not six month prior...(hat tip itulip.)
I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?
KBH gets an offer for its French subsidiary that it has been shopping around, well below what the shares are trading for, and that's cause for a 5% pop. This is the only unit that has been performing (if you can believe their financial reports).
If there was no "bubble" sebastian, what in the world is causing this massive wave of forclosures? Rates are as low as they have ever been, unemployement is at all time lows, stock market is rising......what in the world, other than prices above fundamentals can cause this?
Don't blame the subprime mess, since that was a RESULT of problems, not the cause.
April forclosures in San Diego hit 604. The highest prior number ever was 589 in 1996. This was with much higher rates and was at the tale end of massive layoffs due to General Dynamics leaving town.
It took 5 years to get this high from 1991 when the rise in Forclosures began.
This time it went from the low 100's throughout 06, to 500-600 in only FOUR MONTHS! In the middle of this economy! If that doesn't confirm a bubble then there can NEVER be a bubble in Real Estate, since how else would it look?
what in the world, other than prices above fundamentals can cause this?
In the markets that did not experience "bubble" price increases, the increase in foreclosure rate is more directly died to the increase in home-ownership. Looser lending allowed more people to take on the debt to buy homes.
So the question we need to keep asking is "what is the natural rate of home ownership when lending standards are rational?" The answer to that question probably dominates the intermediate term outlook for housing.
Note that the "bubble" did extend to staid Omaha in that this area got over built and new entrants piled into the home builder market right at the end.
Agree, loose credit was a major factor, fueled by emotional buying since big beautiful houses to show off to friends was worth the "cost" and were "in style".(can you say extreme home makeover?). Combine that with the "get rich quick" "real estate never goes down" mentality, and people were WILLING to overpay, and convienently ABLE to overpay at the same time. A deadly combination.
KBH executives probably want that last bonus before leaving the company and spend the recession on golf courses. Well, I hope I'll spend the recession in the office.
In this case, petro-dollar bid = investing excess US$'s held by the mid-east and Russia in something other than US$ bonds, which explains why bonds are being sold and stocks are up on a day where the opposite should be happening. As an aside, mid-east stock markets have been more or less tanking for over a year now, so it wouldn't surprise me if petro-dollars started being recycled into the US stock market in a big way last fall, which also conveniently explains a very bid stock market despite a weakening economy.
Average Joe asked: "I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?..."
At the risk of sounding harsh, I don't know or care.
Over the past few years I haven't touched my (steadily increasing) home equity. I've been paying down my consumer debt, and soon my (affordable) mortgage will be my only long-term debt obligation.
Me and people like me will pick up the slack of your reduced spending, because we'll have a large, untouched pool of home equity, and because we'll be consumer-debt free we'll have plenty of disposable income, too.
ac, Funny thing, this year I trimmed my exposure to allstate by switching to another insurer. This was after approaching them for 3 years about their persistent increases. They were telling me that rebuilding my home would cost them more and more each year. I went back to them this year and said now I need a 20% premium decrease since it would cost me substantially less to rebuild. They said no and I voted with my feet. They keep sending me notes asking for my business back that end up in the trash.....
The glaring hole in your explanation Sebastian is that people who are inclined to manage their finances prudently during a boom are highly unlikely to loosen the purse strings during a bust. In fact, I'd say they're likely to save even more rather than increase spending.
Robert said: "...So the question we need to keep asking is "what is the natural rate of home ownership when lending standards are rational?" The answer to that question probably dominates the intermediate term outlook for housing..."
Just kicking it around here, but the point you raise reminds me of another point.
Looking at the absolute prices of housing sheds a little light on what's happening.
For example, a median-priced home in California is around $545,000. In my neck of the woods it's less than half that.
Now, the home ownership rate in CA is somewhat lower than in my state. Also, prices in CA are pretty soft, while I'm still seeing price appreciation.
I think that prices are trying to find an equilibrium point somewhere in the middle of the "too high/too low" of absolute prices. That would go a long way towards actually explaining why some housing markets are strong and some are weak...and that the CA housing market isn't representative of the entire nation.
I too have been "responsible", in that I have borrowed in the last 5 years, over $200,000 to pay off nice cars, fix up the house, get out of other debt etc. I owe $380,000 on a house I originally paid $180,000 for in 1995. My family income is $170,000. I have no other debt besides the house (which according to comps in value in the mid $500,000 range). So, in relation to most, my DTI is very reasonable, and I still have tons of home equity. However, I, and anyone like me will NOT tap that equity in a flat and/or falling market again..especially if rates go UP!
I forgot during the "frenzy" what my parents always told me, to not finance short term stuff with long term debt ("why pay on a couch for the next 30 years?").
I am just glad I didn't move up to a bigger house like everyone else around me. The paradigm shift has changed. Those in McMansions and Hummers are "successful" they are debtors. My wife and I don't want a bigger house, we feel and appear "smarter" in a smaller one. Big houses, expensive cars were as much a FAD as anything.
I will have plenty of spending money like you Sebastion, but the economy will have $200,000 less from me over the next 5 years than it had over the previous 5 years....and I am one of the "responsible" ones.
I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?
I'm not Sabastian and I don't play him on TV.... Where are you going to get your hands on that kind of money again? It's called savings. Home equity is not savings. Reminds me of that SNL skit about the radical new get-out-of-debt plan. The announcer says that you should buy things with saved money and Steve Martin gets a quizical look on his face and says "Savings?! Where do you get this savings?"
IMO a bubble is indicated by any market that detaches dramatically from historic norms beyond any fundamental justification. Housing certainly qualifies on several counts: a) absolute prices; b) rent/buy costs; c) homeownership rates; d) multi-home ownership rates; d) non-traditional purchaser rates; etc.
Average Joe said: I too have been "responsible", in that I have borrowed in the last 5 years, over $200,000 to pay off nice cars, fix up the house, get out of other debt etc.
Can you explain this get-out-of-debt-by-borrowing plan?
I owe $380,000 on a house I originally paid $180,000 for in 1995.
youch.
My family income is $170,000.
OK, Average Joe, you don't sound so average anymore.
Here's my story of responsibility:
Bought 3BR/2BA 1400 Sq Ft house in 1990. Paid off the mortgage in 1999. Still live there. Still driving the car I bought new in 1987 (hey, it gets 32MPG which isn't that bad and it still runs fine). Completely debt free. Never took out a home equity loan because borrowed equity isn't savings; you have to pay it back.
...but I must admit, I considered getting a HELOC back in 2003 after a long bout of unemployment. Fortuneatly, the credit union said no (you've gotta have a job to get a HELOC - who'dda thought).
$200,000 divided by 5 is $40,000 a year for the last 5 years that I spent. $170,000 income, plus $40,000 equity equals $210,000 a year.
As far as the economy is concerned I went from a free spending consumer earning $210,000 a year, to a debt paying saver earning $170,000 a year (20% paycut). Multiply me times ALOT.
Turbo said: " The glaring hole in your explanation Sebastian is that people who are inclined to manage their finances prudently during a boom are highly unlikely to loosen the purse strings during a bust. In fact, I'd say they're likely to save even more rather than increase spending..."
And the glaring hole in your counter-argument is that responsible people like me are delaying consumption permanently, when we might actually be conserving money now for something much larger and more important in the future that won't be put off by a "bust." A child going to college is an example that springs to mind.
Also, someone who's responsible with their money during booms will have some available to pick up "bargain" investment during "busts."
my point was that DTI says I'm "responsible", but I don't feel responsible. You are an exception to the rule.
If I stayed within my means and still borrowed and spent $200,000 over the last few years, What does that say about everyone else, including those who borrowed above their means? There are alot of us that can service our debt, won't show up in forclosure numbers, yet our change in behavior will have a dramatic effect on the economy.
I am a cop. My wife is a probation officer. That is average. $170,000 is alot of taxpayer money I know. It is amazing how many of us out here are making a good income and buying everything we have with taxpayer money. A necessary evil of course but I still understand that all those entrprenuers and business owners out there are doing the heavy lifting.
"A child going to college is an example that springs to mind."
So, you aren't consuming now or in the near future...and when you do decide to consume it won't be with more borrowed money but with money you've saved.
I too believe we're in a cyclical bull within a secular bear, recent DOW records notwithstanding. Classic EW2 behavior -- the bulls simply don't want to let go, and government does everything it can to postpone the inevitable. The parallels to '29 are stunning, too.
I am bearish on the near term economy because the average joes and sebastians of the world will not be spending over the next 5 years like they have over the last 5 years. Either by choice or because they can't.
So far Sebastion, everything you've said backs this up.
tj & the bear said: "...How else can these phenomena be explained?"
I'm going to take a chance and assume this is a real question.
Say you're a manufacturer of a consumer product for which there is proven long-term future demand, a real product with honest demand.
Interest rates are a big cost for you, but you hit the jackpot one day: Interest rates fall to a lower level than you've ever seen in your life.
Being a rational businessman who sees an opportunity to lower his long-term costs and knowing that there will ultimately be demand for your product even if you build inventory, you build inventory.
This is a rational argument for building a temporary oversupply of houses.
my point was that DTI says I'm "responsible", but I don't feel responsible. You are an exception to the rule.
I suppose if everyone were as frugal as my wife and I are the US would already be in the midst of a depression... And maybe that wouldn't be such a bad thing.
Average Joe said: "So, you aren't consuming now or in the near future...and when you do decide to consume it won't be with more borrowed money but with money you've saved.
And how exactly is this "bullish" for stocks?..."
Multiply me by a lot. My household income and the value of the home I live in is far more representative of the "average" than yours is.
Now spread that spending out over the years, for people like me who are sending kids to college this year, next year, and whatever year mine goes.
All that spending will drive the economy, drive stocks. And that's only a small portion of what we'll be buying.
Our resident bull, Sebastian, has stated his case by confirming that he, the average joes, and the bofiz's of the world have no intention of major spending in the near term. In other words, those who can won't, and the rest just can't.
In addition, he said that those who continued to build houses had rational arguments to do so, yet has not given any rational arguments as to whether this was actually a GOOD IDEA.
So while I sit on the sidelines and feel I certainly must be missing something as the market continues to go up. I take comfort in the fact that, just like the rise in housing prices, there is no rational reason for it. And those apparently doing the buying can't explain it either.
The question is how much real honest demand is there for the product. Obviously there is some, but it does not seem to be all of the apparent demand we saw on the way up. Demographics should start to turn very negative for housing over the next few years. Many people watched the rise in their home equity (not just the pay down of the mortage "forced savings" but the appreciation) and saw that as a big part of their retirement nest egg. Bought the house in Rye in 1975 for $60k, now its worth $1 mil, gonna sell it when I hit 65 and move to NC or something. Kids are all gone, and dont need the 5 bedrooms anymore anyways. Well there are lots of people who will be turning 65 soon, and that will continue to depress the market. A big chunk of the demand on the way up were the speculative flippers and the 2nd home market. They are gone and not likely to return anytime soon.
This is a rational argument for building a temporary oversupply of houses.
That's not an answer, since it didn't address any of the factors I listed. Besides, you're putting the cart before the horse; the demand far preceded the supply, hence the price distortion.
Being a rational businessman who sees an opportunity to lower his long-term costs and knowing that there will ultimately be demand for your product even if you build inventory, you build inventory.
This is a rational argument for building a temporary oversupply of houses
1st off, the only rational actors are economists and sociopaths.
So now you're stuck with overvalued raw land that generates zero value, the houses you've built can't catch a bid, you're staring cancellations in the face, what does the "rational" actor do?
The rational actor never would've gotten in that deep, would've taken his money off the table.
But man is an animal. That's why bubbles form, that's why they always end badly. A growing China & India helped extend the party beyond levels we ever could've imagined, but the party always ends.
So Sebastian says it's rational to build a "temporary oversupply" of houses because the interest rates, etc., were so low. The problem is, I think, that houses aren't a widget you can stick on the back shelf for 5 years and have it still be fine. Vacant houses deteriorate FAST. I believe it is also true that the business models of the various developers depend on selling houses and using the money to build more houses, not on sitting on massive amounts of inventory.
I find locally, here in Colorado, that when the weather is lousy (snow, rain, cold), the malls are packed! Absolutely packed! Parking difficult to find and once you get inside, it is a zoo. Whether they are buying is a different story.
Now, in good weather, the mall is less crowded as people would rather spend the day outside in the parks or whatever.
I would like numbers on the relative numbers of Average Joes, Sebastians, and the really irresponsible people. Most arguements really hinge on these numbers. I can't say I have found anything reliable on this. Just anecdotes.
I disagree with Sebastian's take on things, but I could be wrong. I can say this for a fact though: I am currently a renter with a substantial savings. Based on what I have researched, I think the economy is going to tank in a big way the next few years and starting this year. Whether I am wrong or not, I am not planning on spending the next two years and eagerly await the bargains Sebastian mentions years out from now. If I am wrong then I will have savings but no bargains.
My current philosophy regarding investments is to minimize loss, not to maximize gains. Why? I am too cowardly to sit at the poker table when I don't know who the sucker is.
Needless to say, this defensive behavior will not bouy the economy.
Robert said: "...So the question we need to keep asking is "what is the natural rate of home ownership when lending standards are rational?" The answer to that question probably dominates the intermediate term outlook for housing..."
We (I) did this exercise a few months back in the comments. The long term ternd of increases in homeownership is very roughly 4% above trend. If we merely revert to trend than 4% of 83m DUs is 3 million. That's just reverting to trend over the next several years. Restoring the trend extant since the 1950s would require 4 million familes to revert to renters.
I'd say this dominates every time aspect of housing going forward.
Right on Denzel, here in New England, people don't shop when the weather is nice. We're all outside stunned and enjoying the good weather. Its absurd to blame retail on bad weather.
wally/pill, it might be a lot easier to make money in the market if there wasn't so much private equity LBO money chasing after overpriced stocks. That too will end once the funds get sufficiently burned but until that happens logic doesn't apply...
Everybody's pooh-poohing the weather as an excuse, but considering the nature of the Nor'easter, this time it's a factor.
The rain in New Jersey was so bad that access into NYC via the Holland tunnel was restricted for almost a week, The shopping malls in Paramus and Wayne were shut for extended periods, as were entire sections of the Raritan River valley.
So, shops closed, transport issues for a business week in the #1 market in America.
Lou Barnes has a decent weekly commentary on the mortgage market. He is very data driven and gives his flavor, his tone has been much more negative recently though.
I'd love to see the Credit Suisse report he is talking about below, anyone have it?
"The newest housing reports give me pause. They are awful. The April run-down on home building from Credit Suisse is an off-the-table affair, and their study is one of the few hard-data pieces. In 37 metro areas, April conditions deteriorated in 18, and improved in one. In CS' alpha scoring system, the best grade in the United States was a B- in Salt Lake City, eight in the C range, 18 Ds and 10 Fs -- including the entire states of California and Florida. This is a home-building report, not resale, but carry this thought: builder weakness is not a sign of builders pulling back; these guys are desperate to sell enough houses to keep the engine going ... and they are failing.
One of the very best housing sources, utterly dispassionate, is the market guidance by mortgage insurance companies to their underwriters. MGIC's newest quarterly analysis shows not the slightest sign of bottom: of 73 metro areas, seven are strong, and 27 are weak, soft or softening. Changes of condition from the prior quarter, as of April: six softening, three weakening, none improving.
The mortgage bankers' weekly measure of loan applications is steady, but I can't get good information about pull-through to closing. New mortgage-derivative issuance (CDOs) cratered 46 percent in April; partly structural pull-back, partly a shortage of loans.
Of Credit Suisse's April survey respondents, 72 percent testified that mortgage credit was tougher (no kidding ... What religion is the Pope? What do bears do in the woods?) One can argue that no-go applicants are weeded out in the pre-app process and never hit the "application" count, and the approval/application ratio is as-was ... but one can also argue that an army of starving mortgage pushers are taking apps from anyone breathing (and some not), turndowns and cancellations rising. We'll see. "
Hey, why don't we rename this blog to "Sebastien talks about Sebastien's world" and be done with it. Conversation only exists when both parties are open to changing their mind based upon reasonable arguments. Lacking this, masturbation should always be done in private.
Average Joe neatly sums up why an economic contraction is inevitable after the popping of the credit bubble.
The corresponding asset contraction is being delayed by all those LBO's (borrowing money to buy stock) but won't hold the dam forever (and neither does it help the basic cause for the economic contraction: less debt being taken on by families).
Red Pill said: "I would like numbers on the relative numbers of Average Joes, Sebastians, and the really irresponsible people. Most arguments really hinge on these numbers. I can't say I have found anything reliable on this. Just anecdotes..."
And yet the lynchpin of the bears' argument is that the anecdotes about the extremes are representative of everyone's behavior, or that the impact of the most-irresponsible among us overwhelms the impact of everyone else's more-responsible actions.
Which absolutely isn't true.
There's not an actual database of "Financially Irresponsible, by region, income and occupation" but there's definitely other data showing that foreclosures are very low by comparison with total mortgages outstanding, that subprime mortgages are highly concentrated by region and demographics, and that mortgage equity overall is much higher than among those irresponsible few who are now "upside-down."
Jag, the weather in New England last year was the worst during May rather than April ... remember the Mother's Day storm?
Denzel, people in Colorado must have more sense than people in Boston. I work across the street from a shopping mall, and the nicer the day is, the harder it is to maneuver through that place for a cup of coffee, or pick anything up at CVS. It always leaves me scratching my head. I do my shopping when the weather is lousy, because I get the place practically to myself.
I did put off buying new running shoes last month because the weather was so lousy, so it seemed to me that other people might have been doing the same. I'm not a big shopper in any month, but I have bought 2 pairs of shoes this month. Just doing my share ...
"Hey, why don't we rename this blog to "Sebastien talks about Sebastien's world" and be done with it. Conversation only exists when both parties are open to changing their mind based upon reasonable arguments."
Let's not chase Sebastian away. I still get in discussions with family who are tirelessly bullish.
Stress is building and positions will harden. For example, the housing market is now in a zero-sum game phase between buyers and sellers. Expect people on both sides to get angry. It's also why I don't tell recent home buyers at parties I am waiting to buy until I have a better idea how bad this housing bust is going to be.
I would like numbers on the relative numbers of Average Joes, Sebastians, and the really irresponsible people.
One of the key elements to my argument of impending doom is that of homeowner's equity (which CR has previously detailed). Despite the historic increases in home values, homeowner's equity as a percentage of value has decreased. That means every dime of increased equity (and more) has been spent.
I'd say the irresponsible spenders are a huge percentage of the population, if not an outright majority.
Enough with the Sebastian beating. He is not a troll, he is simply clearly stating the reasonable contrary argument. We should value his persistence on this board and willingness to respond because it improves the overall thoughtfulness of the discource. Since the "market" agrees with him (much to the chagrin of my CFC puts), them maybe we ought to carefully consider why he is in the majority.
Remember that he is not arguing that the economy will not decline, he is simply arguing that the preponderance of indicators put that the decline is some time further in the future the most of this list. My continued reminder that it is hard to have a recession when the rest of the world is helicoptering in and distributing $3 billion a day falls in that camp.
Red Pill said: "I still get in discussions with family who are tirelessly bullish."
Just a small point of clarification: I may be tiresomely bullish but I'm not tirelessly bullish, like it was an opinion or a "posture." When the data turns bearish, I can be plenty bearish.
As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine, there won't be any resolution, there can't be.
"Fannie Mae plans to tighten its underwriting guidelines on certain loans especially where risk layering is involved. A spokesman confirmed to National Mortgage News that changes are coming in regard to high loan-to-value ratio mortgages and "very low" downpayment loans. He noted the idea is to prevent consumers from getting into trouble "
"Here's to Bank of America for taking out a big full-page ad in The Wall Street Journal on Tuesday promoting its "No Fee Mortgage PLUS." BoA is boasting that the loan has no application fee, no closing costs, no private insurance, and is offering a "close-on-time" guarantee." Here's what I say: with all those no's there's probably no profit either. No wonder why Angelo Mozilo thinks BoA should outsource its entire mortgage operation to Countrywide "
Not from the article: Interesting note from watching the broker boards, it seems that Countrywide has loosened up some of its underwriting again.
sebastian, Which of the follow do you need help understanding:
RECORD AND INCREASING INVENTORY MUCH OF IT VACANT
RATE RESETS HEAVILY SKEWED TO THE BACK END OF THE YEAR INTO 08
CREDIT TIGHTENING
REOs/DEAULTS AT RECORD LEVELS AND INCREASING
DEMAND PULLED WAY FORWARD FROM 03-06
MEW IS HISTORY
RE is a market that IS made on the margins. The pullback is evident and the marginal buyers/investors/speculators are out of trying to get out. It matters little if there are some financially responsible people left. They already bought overpriced RE a long time ago. This is an EPIC RE BUST.
"There's not an actual database of "Financially Irresponsible, by region, income and occupation" but there's definitely other data showing that foreclosures are very low by comparison with total mortgages outstanding, that subprime mortgages are highly concentrated by region and demographics, and that mortgage equity overall is much higher than among those irresponsible few who are now "upside-down.""
Sebastian,
I read (on CR) that about 30% of homes are paid off. Also, the average amount of equity over all homes is approaching 50% including the paid off ones. These equity numbers are historically low even after an epic real rise in home values according to the Shiller index (and these values may decline). The recent MEW decline is ominously correlating with rapidly rising revolving credit AND falling retail. This at a time when debt to GDP ratios are at levels not seen since the Great Depression (but we were on a gold standard then). We have had 2 years of a negative savings rate.
Is that 30% conservative enough to keep the equity in their home going to step up and spend?
Anecdotal evidence abounds on both sides of this discussion, but the above not so indirect evidence makes me quesy. I'm hunkering down.
Another anecdote. I recently renewed my rental lease ( ) with my landlady who was born in 1925. The family has owned this house for over 50 years. I asked if she remembered the great depression. She said only vaguely but she knew her family would have been in big trouble if the house hadn't been paid off. She talked about friends who recently took out a mortgage on their house (after it had been paid off) to help their children with debt.
I said to her that I thought my generation (defining it broadly) was about to learn a hard lesson. She agreed.
As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine...
BWAHAHAHAHAHAHA!!! Thanks for the laugh, Sebastian. FTR, the only poster consistently presenting any remotely bullish "hard data" has been Steve.
"As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine, there won't be any resolution, there can't be. "
Funny thing. My perception of the discussion/arguement is completely opposite.
As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine...
Someone needs to tell CR and Tanta to start writing posts with hard data, they obviously haven't been listening to Sebastian.
That equity thing we both mentioned is scary as hell, isn't it? You know that phrase "Debt is fact, but equity is a matter of opinion"? We're going to find out what happens when there's suddenly over $4T in debt backed by non-existent equity.
Not just homes, either. Historically high credit card balances, negative equity on financed autos, etc. -- J6P is seriously strapped.
If incomes are not (significantly) increasing and the ability to borrow (in any form) is decreasing I find it difficult to imagine much growth in an economy facing this trend.
At the margin, a huge amount of recent spending was via heloc. Incomes didn't increase much during the last five years and savings actually decreased. Now this positive, spending scenario is REVERSING.
Heloc's and other mortagages are resetting HIGHER. This means LESS money available for consumption.
Where is the money going to come from, already with fairly low 4.6% unemployment, to SUSTAIN spending much less increase it? Maybe there's a new economic engine out there, a new technology I'm unaware of or some breakthrough in gas mileage about to emerge.
Sorry Sebastian. I don't see how, absent such a dramatic economic development, a recession can be avoided. Borrowing pushed spending up beyond fundamental income growth and it was accessed (on ludicrous terms) to massive borrowing at that. That juice is gone and if you believe that, as people see home prices around them decline 20% (as I have in my middle class Boston neighborhood) that it will not have a behavioral impact going forward, then we'll have to agree to disagree.
I've studied economics and been in the investment business for 30 years. I've lived through and studied recessions and crazy markets (and their aftermaths). The unwinding of this borrowing binge is going to be very ugly for many people. Everyone is going to know someone who blows up.
Maybe you don't think that will have a sobering effect on spending. Me, I don't see how it possibly can't.
Negative savings rate doesn't leave a big cushion for lean times. My sense is there will be some relaxing of the 401k withdrawl penalties across the board, not only hardship cases. That should hammer the equities markets as selling is pulled forward.
I'm with jag. This is going to end badly for a lot of people...
The Company originated approximately $1.9 billion of mortgage loans in the U.S. and Canada during the quarter ended March 31, 2007, down 47%, from $3.6 billion for the comparable period in the prior year.
During the first quarter 2007, as previously disclosed, the Company sold approximately $3.5 billion in mortgage loans for cash. Of the $3.5 billion sold, approximately $800 million of loans were sold at a weighted average net price of 100.63% and $2.7 billion of loans, which included substantially all performing and non-performing loans in inventory on March 6, 2007, were sold at a substantial discount to par value and resulted in a pre-tax charge of approximately $160 million. During the comparable quarter of 2006, the Company sold $3.0 billion in mortgage loans at a weighted average net premium to par value of approximately 2.10%.
Thankfully none of the ARM's and cheap leading methods ever took hold up here in Canada to any degree whatsoever; so I decided to puchase a beautiful loft last July. While Canada's economy is extremely export driven, with USA being customer #1, our fundamentals and budget surplus bode much better for much stronger growth for years to come over our US counterparts. For the record I'll say the Canadian dollar with be valued ABOVE par with the USD within 3 years.
Red Pill said: "Funny thing. My perception of the discussion/argument is completely opposite."
That is funny.
A couple of points, in no particular order:
First, I'm sort of handicapped here. CR can post all the charts he wants using any data he wants. I can't, even though I might be able to offer a direct contradiction to his position, or at least demonstrate that he's not standing on firm ground.
Second, it's not that all the hard "bearish" data presented as evidence isn't true. The problem is that often there's not a proven long-term relationship between what the data says and what the bears say is going to happen as a result.
As an easy, close-to-hand example there's a bit of a "conundrum" about why there hasn't been a dramatic drop in construction employment given the dramatic drop in housing starts, even though there's been plenty of time for it to develop. There are varying theories about why but clearly it's not the "slam-dunk" case it was supposed to be, and the forecast keeps getting pushed-back.
Some of the bearish data is accurate and scary-sounding, but meaningless.
There was a poster here the other day who took issue with my position that the economy wasn't in bad shape. He made a big deal out of the fact that the NAR was forecasting the first year-over-year nationwide drop in housing prices since the Great Depression.
Now, the unemployment rate is currently around 4.5% and steady, near a historical low. The unemployment rate during the Great Depression was 20%+. So what does it mean if housing prices drop by the -1% figure the NAR forecast? Nothing, it's just a meaningless statistic because the conditions aren't the same.
Such subtleties are almost always lost here, but it's the difference between understanding what's happening and being bumfuzzled by what's happening.
"why there hasn't been a dramatic drop in construction employment"
There has been, Seb. It has just not shown up in the official numbers. The mystery is not the drop, it is the lack of reporting. Most people working in new residential construction can tell you about the amount of work out there... and drops in permits bear that out (about 50 down percent here in the Minneapolis area compared to one year ago, according to the local newspaper). So... where did all those guys go? I don't see them working at Walmart and there are no more taxis on the street than a year ago and most guys like that do not cross over into commercial work. Their remittances sent back home have dropped... where are those guys? They aren't out there working - I can tell you that because I visit jobsites a few times a month.
I was doing a little soul searching today, trying to figure why the economy held up better than I expected last fall. The best I can come up with is that gas prices are critical these days. A lot of consumers are living on the edge, and additional expenditures on gas limit their money for other purchases, and vice versa when gas prices go down.
I know increasing gas prices didn't hit the economy as hard as expected immediately after Katrina, but the savings rate went down around that time too. So we've had tax cuts followed by increased personal debt led by MEW. Now all that is behind us, and we are left with increasing debt service, sky rocketing health care and energy costs, and stagnating wages...
jag said: "If incomes are not (significantly) increasing and the ability to borrow (in any form) is decreasing I find it difficult to imagine much growth in an economy facing this trend..."
I don't agree with either premise, and would ask that you provide evidence that either one or both is true.
Incomes are increasing and only a small minority of less-wealthy people have had their borrowing curtailed. The wealthiest (prime and "super-prime" borrowers) who own a huge proportion of the assets already won't have their spending (or their borrowing) diminished that much.
I would also argue that there's no reason not to keep borrowing at these rates. If housing appreciates at a long-run rate of 6%/year, and it's possible to borrow money over the long-run at that rate, it represents a tremendous opportunity for consumers at the expense of the banks.
Same thing for stock buy-backs, btw. If corporations can buy back their stock at a rate below the long-term growth rate of earnings, they should be doing that.
"Negative savings rate doesn't leave a big cushion for lean times. My sense is there will be some relaxing of the 401k withdrawl penalties across the board, not only hardship cases. That should hammer the equities markets as selling is pulled forward."
If that doesn't happen within a couple of years, I'll be surprised. IRAs, too. There may be some restrictions -- must be 50 or over, or must be to pay for med or educational expenses, or whatever. But when times get tough, people will want to loot whatever piggy bank they have, and they will not want to pay a penalty for doing so.
If there is no particular collapse -- if things just continue for the middle class on the moderate downward course it's on now -- it'll just take a little longer.
Then everyone will look at the ruins of their retirement plans, look at each other, and say those grand words:
"SOAK THE RICH!"
Thing is, borrowing was a fraction of today's in 1968, and an unemployed person could not get millions in 2000.
So one point is that it will be hard to have a recession when anybody can get a wheelbarrow full of cash just by asking. There will be a time of reckoning, we just do not know when. The bears think soon and the bulls think not so soon.
Nope, Less Borrowing = BAD when you borrowed too much before.
More Borrowing = GOOD as long as it lasts, BAD afterwards (if for consumption).
Borrowing, unless for investment purposes, pushes forward consumption. If you antecipate it, you consume now but you can't consume later. That's why it is "GOOD" as long as it grows, and "BAD" once it stops growing.
In reviewing the conversation so far, it seems that one of Sebastian's main points is that a recession is not immanent, particularly given the mixed economic data, but he thinks one is in the offing in the future.
There's something to be said for this position, many bubbles have gone far longer than anyone expected. (I also understand that this is also one of the reasons why shorting can be dangerous and full of short squeezes as it is.) This is probably also true because the foreign CBs and the Fed have not taken the liquidity punchbowl away yet (although I'd argue that this is happening as we speak with the tightening of domestic lending standards and changing foreign direct investment flows).
However, that being said, I believe that most recessions are called with hindsight after we are well and truely in them. At this stage, it is probably anyone's guess, but there are some pretty strong headwinds. Hopefully our built-up debt karma catches up with us slowly so we can deal with it in an orderly fashion, and not with an economy rending bang. How this happens could make Sebastian right or wrong, but as of right now we don't know.
I'd also say Average Joe is right, there is probably going to be a spending pull-back by consumers - there's no where else for the cash to come from (not increasing income levels, savings, MEW, or increased debt levels). That's probably going to mean a retrenchment as the consumer is forced to stop spending and then finally start to have to pay down debts. (I'm not counting the 30% plus or so of folks that have paid off their houses or didn't take out equity to spend, as I understand that it is what happens to the folks at the margin that tends to set the tone for the market and economy - the economic "plankton" theory.) It's only after debt levels have been paid down (which I understand is a form of savings) will they be able to spend again. Hopefully this retrenchment is in the form of a long slow growth period or stagflation period, as the alternative debt working off forms could be nasty (Japan deflation or 70's/Paul Volker style inflation anyone?).
One of the things that keep me up at night however is what will the Fed do if we do slide into recession? Traditionally lowering rates works by making borrowing cheaper and, by most measures, the consumer is maxed out and at historically low rates already and housing and other assets are quite inflated. And if they do drop rates there could be a trade/forex crash if the dollar tanks.
"Incomes are increasing and only a small minority of less-wealthy people have had their borrowing curtailed. The wealthiest (prime and "super-prime" borrowers) who own a huge proportion of the assets already won't have their spending (or their borrowing) diminished that much."
Sebastian,
Based on what data are you making this assertion?
"See? This is what I mean. The unemployment rate got down to 3.9% in 2000...recession, but no Depression."
I don't think he was suggesting a 3.9% rate would predict a depression. His point was, as you point out, stating the current unemployment rate is not a good predictor of either good future growth (his arguement) or depressions (your arguement). It's a lagging indicator.
"Same thing for stock buy-backs, btw. If corporations can buy back their stock at a rate below the long-term growth rate of earnings, they should be doing that."
Aahhh, the assumption of future earnings. What do they always say in the prospectus they send me? Something about past performance not predicting future earnings? The debt is a sure thing; the future earnings are not.
I'm a j6p myself. No real expertise. The question I have, given this week's economic data and the lack of a "rational" market reaction, is can the stock market successfully decouple from the day to day economic reality of US small business, labor and consumers?
A couple of posts have led me to discussions of the huge inflationary increase in M3 and suggested that this is what is driving asset bubbles. Successful players, including corporate money managers seem to be using the leverage to take advantage of one asset bubble after another: tech stock to housing to hedge funds to ???.
One commenter over on NR's blog indicated that "tightening money supply (...may not work as money flow is now globalized)."
It seems that the perceived control that policy makers have is based on control of the money supply in a closed system, e.g. the US economy.
With US investments in overseas assets up $1 trillion+ since 1998, and appreciating foreign currencies increasingly buying into US assets it does appear that financial flows have gone global.
So the question is, under these conditions will the US real economy that produces real products and feeds ordinary people respond as expected to Federal Reserve policy moves? Will the stock market? And, for big fish leveraged investors, does it really matter? What control does the Fed really have over these global financial flows?
I mean if US indicators are bad, and the Fed loosens credit and increases monetary supply, why would anyone choose to to use that leverage to invest in the US economy?
Oh, and to not sound completely gloomy Sebastian , I'd also have to say it is possible for things to muddle through while the consumer debt backlog is worked off and savings brought back to average. In other words, if we're lucky we could be just fine. The problem I think everyone here is focusing on is that, like being in Colorado avalanche country in mid-winter, there is a lot of economic snow built up on the top of the mountains right now. It's anyones guess if it will stay stable and melt off in the spring or come crashing down given the right trigger.
"Less borrowing=Bad, because less spending
More borrowing=Bad, because more borrowing
That's the gist, right?
What a fatalistic group, "We're all just screwed, helpless to do anything to save ourselves, with no escape.":)"
Sebastian, you oversimplify our position in an attempt to make us look silly. We are, of course, not suggesting that it is always the case that the decisions for more or less borrowing are simultaneously bad. It is "history dependent" as the physicists would say. All that is being suggested is that when you are sitting on top of a gargantuan credit bubble (that's history) then you have to take your medicine.
For awhile consumer spending was income + debt expansion - debt servicing (good earnings). Soon consumer spending will be income - debt servicing - savings(bad earnings). Assuming no job losses and distruction of wealth because of defaults.
Well, I enjoyed the hell out of this dialogue today. Time for some biking.
stock market doesn't reflect the us economy anymore its the global economy.
why is it that people disregard the data as presented when it doesn't meet their hypothesis but accept anecdote when it does? and vice versa?
increased savings leads to increased investment somewhere along the way. more S more I i believe is the equation.
contrary to popular belief not everyone went on a debt binge recently. just lots of people. hard to say if its even a majority.
we have clients who are still sitting on all their equity waiting to do renovations and remodels.
subcontractors in my area are getting harder to get a hold of lately - word on the street is that the market is heating up. could be seasonal. who knows.
market clearing ratio in DC is 4.5 months right now.
as far as i know china still wants peasants in the coastal factories. until that changes keep watching those 0% apr cc's coming in the door. you know, its irrational not to use that free money for purchases today. seriously.
this here is a self-selected group of people obviously, but how many of you are heloc'ed to do death and facing a mortgage reset you can't refi out of?
how many of you are pinching pennies and won't be buying stuff or going places this summer?
the carnage is on the margins.
how many of you feel your jobs are threatened (sorry dryfly)?
my point is there are lots of things you can point to to be optimistic for the next couple of years.
I am done trying to teach sebastian how to read. It's pointless and frustrating. He needs glasses that have the rose color scratched off.
Steve on the other hand makes valid points based on data & based on reason that I normally disagree with. I think Steve would agree there are just fewer of them every day to make a bull case here.
BB cutting rates is the last straw. What is that likely to accomplish after a single day 300pt jump in the DOW? Even weaker dollar, immediate gas price jump and inflation at least equal to the rate cut. Makes banks' basic business model a little sounder perhaps? Stimulating consumption may take another run down to 1% which doesn't leave any bullets for a true shock to the financial markets - 9/11...
I see all this discussion re the unemployment rates. Such as the latest 4.5% figure. Actually, this rate is grossly distorted. The real unemployment rate is much higher. Something like 8.2% (U6) for this month I think. And I've read elsewhere that even this rate is off the mark.
Whenever I read someone saying the unemployment rate is say 4.5% and quote it as gosple (so to speak) and expect it to be considered as a rational explanation (or a valid discussion point), I automatically and totally discount that argument.
dc1000 makes a valid point about the DC market but lots of beltway bandits skated blithely through the early '90s recession, barely noticed it. That's the great thing about DC, it's a wonderful little countercyclical port in any storm.
I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?
I don't know about you, but I am going to Disney land.
I too have been "responsible", in that I have borrowed in the last 5 years, over $200,000 to pay off nice cars, fix up the house, get out of other debt etc. I owe $380,000 on a house I originally paid $180,000 for in 1995. My family income is $170,000. I have no other debt besides the house (which according to comps in value in the mid $500,000 range). So, in relation to most, my DTI is very reasonable, and I still have tons of home equity. However, I, and anyone like me will NOT tap that equity in a flat and/or falling market again..especially if rates go UP!
I forgot during the "frenzy" what my parents always told me, to not finance short term stuff with long term debt ("why pay on a couch for the next 30 years?").
I am just glad I didn't move up to a bigger house like everyone else around me. The paradigm shift has changed. Those in McMansions and Hummers are "successful" they are debtors. My wife and I don't want a bigger house, we feel and appear "smarter" in a smaller one. Big houses, expensive cars were as much a FAD as anything.
I will have plenty of spending money like you Sebastion, but the economy will have $200,000 less from me over the next 5 years than it had over the previous 5 years....and I am one of the "responsible" ones.
DC is definitely another world. Uncle Sam is $8T in debt, on the hook for another $60T, and spending $2B/day more than it takes in. Obviously DC is fat city.
All things end, though. Those bills are coming due soon, and J6P won't have the extra tax money to save DC. It will be ugly!
You talk about things happening on the margins. Well, that's where everything happens. Housing prices, opinions, fashions, revolutions...
Make hay while the sun shines, 'cuz it won't shine forever.
how many of you feel your jobs are threatened (sorry dryfly)?
My job has been threatened for 20 plus years. The difference between me and the rest of the 'working stiffs' is I know it and act accordingly. There isn't a day that goes by that I don't realize how vulnerable my income is...
T.J - That is true but somethings end soon & some hang around like glaciers... there was once a glacier a mile thick over where I am now, it didn't all melt in a day but it did eventually melt.
Always disassociate fundamentals from technicals... the timing thing is always the bitch... I've learned that mistake the hard way myself.
And this isn't anything new, its as old as civilization & empire...
In ancient Rome there were factions constantly complaining & writing about Imperial waste & debt & corruption... and they were fundamentally right, waste debt & corruption were all there.
Yet the Empire lasted (and actually continued to grow) for another 300 or so years after a lot of this was penned. They didn't take into account how much wealth was available & sucked in from the peripheral provinces to support Rome.
A great case in point is that '$60T' you throw out... that's spread over half a century of outlays... and who knows what $60T will be worth anyway.
A better question to ask is will we have the excess productive capacity to produce the goods to consume or trade for goods we consume, equivalent to a dollar input of $60T spread over a half century?
I'd be a lot less concerned about that $60T due over that period IF I knew for a fact our national productive capacity was growing sufficiently to carry that demand... than I would be if we owed ZERO debt going forward but had shrinking productive capacity.
Heck I'd rather have the debt & capacity than SAVINGS and reduced capacity... you can't eat money (whether paper, electronic or metal based).
Imbalances can't continue forever but they can remain in a stable imbalance as long as interested parties agree to prop them up & we all have - the whole world has.
Sebastian:First, I'm sort of handicapped here. CR can post all the charts he wants using any data he wants. I can't, even though I might be able to offer a direct contradiction to his position, or at least demonstrate that he's not standing on firm ground.
I'm a true spartan economic soldier. I love NOT spending money !
I won't bore everyone with my obsessive frugality ... but I literally get palpitations if I have to spend more than $100 at one shot.
I even converted my wife who once spent money like a drunken sailor. I got all warm and fuzzy when she got home from shopping for our two daughters summer cloths.
I said: 'How'd it go?'
Wife said: 'OK ... I guess. I got these 6 outfits for $80.'
I said: 'You've done better ... get 'em next time champ.'
I mean if US indicators are bad, and the Fed loosens credit and increases monetary supply, why would anyone choose to to use that leverage to invest in the US economy? - ecoshift | 05.11.07 - 7:21 pm
I think a lot of this depends on the dollar exchange rates relative to our competition. If the dollar continues to weaken & their currencies strengthen... you'll see foreign producers investing in US capacity similar to how US companies invested abroad when the dollar was strong.
This swill be a mixed blessing - it will all but guarantee a strong job market... but it will also mean we 'work for less' in terms of goods we import... not a disaster since most of what we buy we COULD make here... with one noticeable exception: oil.
Drfly said:
'My job has been threatened for 20 plus years. The difference between me and the rest of the 'working stiffs' is I know it and act accordingly. There isn't a day that goes by that I don't realize how vulnerable my income is...'
Ditto ... I pity the fools who show up late, leave early, call off constantly, resist change, do as little as possible, expect large raises for nothing, search the internet all day, IM the entire free world, gab on the phone, stretch lunch, sneak in a 3rd smoke break ... and look cross eyed at those that don't !
Regarding the Credit Suisse report, it's just the credit-tightening sh*t hitting the fan. It is phase 2, realized long ago by anybody with critical thinking skills able to infer causal relationships. Here come the non-linear dynamics, getting ready to stomp all over your linear regressions. The hair-pin corner is coming up after a long straightway and everybody that hasn't raced this track before is doing 90 mph into the turn. Expect phase 3 to start once the banks finally realize that reworking convenants is like jumping in and trying to save a drowning man with a large anchor tied to his ankle.
I think somebody asked for a list of bottom callers a few threads ago. I scraped this off the bottom callers thread. It would be nice if we had a wiki for long-lived info. If everybody tags CR:bottom on delicious you should be able to find them all by doing a global search on delicious (assuming CR:bottom is globally unique enough). Many hands make light work.
dryfly:This swill be a mixed blessing - it will all but guarantee a strong job market... but it will also mean we 'work for less' in terms of goods we import...
Good thing for that good ole Dual Mandate over at Benny's place where the motto is
If housing appreciates at a long-run rate of 6%/year...
Yale finance and economics professor Robert Shiller, author of Irrational Exuberance, and upon whose work the Case-Shiller Home Price Index is in part based, has researched U.S. housing costs back to 1890. Over the past 116 years, he has found that the mean rate of return on single family homes was about 3%.
It's already here, and I don't mean hybrids. You just have to accept some relatively minor performance trade-off.
When I was in the UK in 2001 my rental car was a Peugeot 406 HDI, with air-conditioning and manual gearbox. A 5-seat sedan about the same size as a Honda Accord.
I averaged 18 kilometres per litre of diesel for a month, which would be about 42 miles per US gallon.
Both engine and gearbox technology has progressed significantly in the last 6 years, so I would imagine it would be relatively easy today to get that mileage in a similar size and weight car with an automatic shift.
The manual Volkswagen Polo TDI (which I will admit is a small car) on sale here in Australia has a claimed combined-cycle fuel consumption close to 50 miles per US gallon, and my experience with a similar sized car indicates you can improve that by about 20% if you have relatively easy driving conditions.
Oh, and I don't disagree with jag's post at all, just that one point.
I find it truly amazing (and not a little disquieting) that almost all the improvements in engine technology over the last 40 years have gone into increasing the performance of ever-heavier vehicles.
When I first got my driver's license, anything over 2 tons (in Australia) was defined to be a commercial vehicle and had to be driven with a truck license and log books. I actually remember some controversy when the first 'normal' vehicles crept over that limit (I think the Range Rover and/or the Mercedes S-Class), and professional-type people started getting told they needed truck licenses to drive them.
Needless to say the law was quickly changed, and all of a sudden light trucks and things like Toyota Coaster 25-seat buses could be driven on a normal license. (A bad thing IMHO, they do not have the same road behaviour as normal cars, even normal SUV's.)
Don't push your luck funnyboy ("am i really that lucky?")
And it comes from the complacency and appearance, not practice, of diligence when it comes to responsibility and accountability.
Such a mouthful of big words, but consider the Invisibile Hands at work with the publicly announced (ie the real figures about the regulated, not unregulated, HFs) profits for HF managers...and that WSJ piece claiming that 11M undocumenteds had tax removed from their paychecks (suggesting that the IRS was able to track 90% of the " 12M illegals"? --I don't think so.)
On the Morgan Stanley Global Economic Forum pages, Roach posts fascinating comments about his testimony at a House hearing on Currency Manipulation and Its Effects on US Businesses and Workers.
Alas, a currency undervalued 30% has the same effect as a 30% across-the-board tariff combined with a 30% across-the-board subsidy for exports.
The outcomes from such policies are predictable -- in the short term, an export boom, in the medium term, a bloated export sector addicted to the subsidy-tariff combo drug, in the long term, trading partner retaliation.
re: VW TDI: my wife owned one for a few years. it really got 50-60mpg. then we got two kids and now we're mini-suv'ing it and she nearly had a heart attack when it cost $70 to fill up.
lucky for us we drive about 200 miles a month so its not a big deal.
regarding the currency comment above:
that really only applies if you believe in PPP. which i don't and i think most normal people don't. once you throw PPP out the window, currencies can move and prices stay the same - especially when here is where they need to sell...
i've been saying this over and over again -
the currency is the release valve. lucky for us most of the world still needs to sell to the US and because of it their goods in dollar terms will not go up.
there are perhaps other better forums for this discussion but -
when you owe the bank a million bucks its your problem.
when you owe the bank trillions, its their problem
selling dollars now would not serve the FCB.
who knows in the long term
in grad school a professor was giving this long explanation about real inflation rates due to currency changes and interest rate differentials and at the end i got him to admit that PPP, the fundamental basis for the theory, was questionable at best.
They don't have to sell... all they need to do is NOT buy as much. As long as we continue to run trillion dollar CADs we need them supply the cash... else we learn in a hurry how 'theoretical' PPP is.
My guess is its halfway between 'zero effect' and '100%'... stuff that truly is import/export sensitive goes through the roof... think energy (which we import at globally determined prices) or food & other commodities (which we export at globally determined prices)... Housing & services which aren't easily 'tradeable' will see little effect.
Most of the article is upbeat about global decoupling from slow US growth, soft landing etc. with a note about recoupling if there is a real recession. Points out that housing is a local US problem. True enough, it's one of the few things we can't import.
But I thought the phrasing was interesting. "US equity markets decouple from US economy"
Strong overseas investments by US firms, strong growth in China, India, Brazil. Income from foreign sales for US affiliates. US at 20% of all imports. That means 80% go somewhere else.
Maybe the parts of the overall stock market really are adequately hedged against poor US performance... or moving in that direction.
yes, commodities depending on their own cycles should inflate along with local services, while imported manufactured goods and intellectual property should decline.
funny - the global race to the bottom in wages could be lead by the plunging dollar and not labor market globalization as we thought could be before...interesting
and RE: equity markets: i've been saying this til i'm blue in the face around here. DJIA is a global market with global companies. further, all other things equal, as the dollar goes down the DJIA should go up.
and yes dryfly, even slowing purchase of dollars now would have an impact.....
like a plunging dollar, since we all know interest rate differentials don't mean anything anymore...or do they?
regardless, not 'propping' the dollar (some job they're doing of it now!) would be just as bad for FCB anyhow.
for today at least, 4.6% is good enough to get the cash for ten years isn't it?
thats a real negative interest rate according to some people here isn't it?
and if so, then isn't it entirely rational for the US to continue to borrow this money both through the current account deficit and the fiscal deficit?
negative real interest rates means they pay you to borrow the money.
sounds like quite a deal to me!
(PS: but not if you spend it on entitlements and / or flat screen tv's)
i remember being on setser's blog back when we were all realizing that the bond market wasn't telling truth. what a moment that was. or at least that it was telling a different truth than we all had thought.
Or, maybe, the lower than expected growth in retail sales during April had something to do with a stealth boycott-this was a warning shot not covered by the usual media for obvious reasons. We calculated participation in the one week boycott at over 3 million consumers-watch out for Christmas.
This report only covers durable and non-durable goods, correct? I wonder if there is a typical relationship between consumer spending on those and spending on services.
With variances in the Full Report like this:
Retail trade sales were down 0.2 percent (±0.7%)* from March 2007, but were 3.0 percent (±0.8%)
I find myself distracted by the ants making off with one of their kin across the kitchen floor.
"Unless the seller can buy TVs at less than wholesale, this is an odd proposition, don't you think?"
It's a truly ominous proposition! That's why we gather here, mostly. The point I was making from a marketer's perspective is how flimsy the notion of value is after a boom. In the long march back to "utility value" a lot of TV's are going to get sold for less than cost, which is why it was posted I suspect. If you are one of the unlucky, props emphasizing utility may well be the new "thing"...along with stairstep commisions.
Along the same line (I think) that calmo is taking, note that there were decent upward revisions to February and March sales. If we look at levels, sales came in 0.3% below what was expected, rather than the 0.6% miss that one would gleen from comparing the result (-0.2%) to the median estimate (+.04%).
When it comes to the implication for GDP, much will depend on whether the upward revision to prior month's retaill sales will be accompanied by upward revision to prior months personal consumption spending, and the extent to which soft core retail sales spending is due to soft prices (core PPI was flat again in April), as well as the strength of service spending, as Kevin suggests.
Preliminarily, some bank forecasters have pulled their estimate of Q2 GDP below 2% (the median in May surveys was 2.2%) in response to the retail sales data. Note that inventory data released today point to a further downward revision to Q1 growth, but that may be good for Q2.
Oops. The median estimate was 0.4%, not .04%.
--
Hello CR,
With the Trade data the Q1 GDP is below 1% annual rate. April data is quite weak. Don't these give credence to the forecast that the recession could have begun in March?
I am sticking with my forecast that the recession would be found to have begun during Mar-May of 2007. I like my chances based on the data for the past two months. The home sales reports for April and May will seal the prediction.
Thanks.
Jas
PS: Bloomberg just reported that the divorce rate is the lowest since it peaked in late 1970s. One more reason that you are dead wrong on your estimate for the Fundamental Demand for housing, currently, in the US. BTW, high home prices have forced many people to share housing and reduce the Fundamental Demand. I realize that you will stick to your estimate of 1.7M no matter what the data suggest. Adding 1.2M to Vacant Units, Year Round, in 12 months is evidence enough that you are on some wrong track from which you can't get off. This is a common problem.
Ben B are you listening now? (fingers in ears "la la la")
Also, maybe we should encourage divorce to prop up housing. Econometric modelers - what variable do you attribute to this change? Try the little blue pill!
I think the point of all this is that the stock market responds to good news by going up: soft landing, and to bad news by going up: lowered interest rates.
Add in that no one wants to miss the train as it leaves the station, and the market has a long way to go up.
Once you have defined out of existence bad news, I don't know what's next.
1929?
Such a fascination with divorce, Jas, no matter what the data suggest. Don't take your marital bliss out on us...of course Sippn is right: time to kick your partner out into one of those many vacant homes just waiting for some grass cutting attention.
The conditions are perfect for a replay of 1929, or 2001. Couldn't be more obvious as far as I'm concerned. Details are important but should not obscure the big picture which is clear -- economic growth is slowing while financial markets are exploding...
Calmo - good point and how do we know all those homes are "vacant".
Honey, I got to go check the "vacant" home and see if the plumbing is "OK"
arbogast
We are overdue.
Sales negative and inventories lower. GDP weaker than expected. What does that say about how much producers are producing?
PPI came in low and fuel costs are soaring (at least partly because of a weak dollar).
Greenspan again says 1/3 chance of recession. We could easily already be in one.
UK raising rates and dollar is, well, weak already.
Stocks are rallying. On what???
Our model of S&P 500 operating earnings currently predicts a sharp deceleration in profit growth over the next two quarters, before rebounding late in 2007. Ongoing weakness in corporate pricing power is the key driver behind the projected drop in profits, although firm energy prices and a flat yield curve are also partly to blame. Corporate bonds have been able to shake off the unprecedented acceleration in shareholder claims against cash flow so far, largely due to the strength in profit growth. They will not fare so well as profits sag, especially given that equity implied volatility has begun a cyclical uptrend. Along with an expected deterioration in ratings changes these factors will push investment grade corporate spreads significantly wider over the next six months
BCA Research
http://www.www.faas.biz/credit-card
http://www.financesolving.info/citibank
http://www.yougeek.info
Stocks are rallying. On what???
barely | 05.11.07 - 11:31 am
On the news that China will allow their banks to invest overseas.
Stocks are rallying on the gremlins of past easy money chasing the trend like Pavlov's dogs at dinnertime. It is starting to look more and more like 1929 redux, though 1989 Japan is probably a better comparison for the likely outcome.
the MM are conditioning every retail for large swings : One day down one day up.
So far the down days are low volume. the up days are higher volume.
Once people get used to the swings the down days will have higher volume as well.
MM want people to buy on the dip so that when the decline starts they can continue to unload thos conditioned buyers to more "bargin hunting"
Calmo - you're probably right on that one, though if anyone actually looked at the balance sheet of a Chinese bank you'd be out buying ammo and canned goods, not stocks.
Turbo:
Asia Times Online :: China Business News - June 4 for Asian stocks
how are MBS doing ?
That maybe the sign of improving wealth, actually. Instead of buying a brush to do cuddle-puddling at home people just send the puddle to the local cuddle-puddling shop and they do it. So sales are down, services are up .
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BAD NEWS FOR RECESSION FORECASTERS:
U.S. leading index growth rate at 3-year high-ECRI
Fri May 11, 2007 10:30 AM ET
NEW YORK, May 11 (Reuters) - A weekly gauge of future U.S. economic growth edged higher on stronger housing activity and lower jobless claims and interest rates, while its growth rate rose to a three-year high, a research group said on Friday.
The Economic Cycle Research Institute, an independent forecasting group, said its Weekly Leading Index increased to 142.7 in the week ended May 4 from 142.4 in the prior week.
Its annualized growth rate rose to 5.2 percent, a three-year high, from 4.4 percent the previous week.
"WLI growth has improved significantly of late; accordingly, the U.S. economic growth outlook is fairly optimistic in contrast with the more coincident sales figures recently released," said Lakshman Achuthan, managing director at ECRI.
A Commerce Department report on Friday showed U.S. retail sales unexpectedly fell 0.2 percent in April. Economists in a Reuters survey had expected a rise of 0.4 percent.
Achuthan said the current softness in retail sales is consistent with the growth-rate cycle slowdown predicted by the decline in the WLI last year.
-X-X-X-X-X-X-X-X-X-X-X-
I personally think that the two econ-meisters at ECRI are a bunch of salesmen and not true professionals because they keep spinning. They have used more than 40 different terms over the past few years to describe the prospects for the US economy.
Let us see, bankers have turned into salesmen (pushing debt), economists have turned into salesmen, accountants are willing to fudge, and so on.
It is the Morality, Stupid! (That will take down the US econo-political system; too many Money Whores in business to plunder the population; and what would be left after the middle-class is mostly plundered?).
Jas
I am thinking the market is again anticipating a rate cut. Think fuel costs are high now factor in another spike on a rate cut. But, it doesn't matter since skyrocketing oil, the ultimate tax, isn't inflationary.
What's troubling is imports from China & Japan don't inflate on a US rate cut since their currencies are rigged. I saw a Congressman yesterday on Kumblow (DEM, can't recall the name) who is co-sponsoring a bill to give the administration the authority to impose tarriffs on goods that are artificially deflated. A pretty good idea given how impotent Paulson is. The Chinese are having a good time jerking Paulson around.
He made Kumblow sound like an idiot. Kumblow thinks currecy manipulation and price supports are a wonderful thing - if they result in lower US consumer prices and a hobbled US manufacturing base. Funny that he claims he's a "free market capitalist".
Where does that leave US agricultural products?
Yal - that's a good article. I worked in Asia during the late 90's crisis, and it's truly shocking how fast boom can turn to bust. As far as MBS go, not really my world but fairly quiet as far as I can tell. If I had to guess, today's price action has all the earmarks of a sizable petro-dollar diversification bid.
Our model of S&P 500 operating earnings currently predicts a sharp deceleration in profit growth over the next two quarters, before rebounding late in 2007
So is that the Vista rally finally taking off?
Straight talk version:
Profits? What profits? We'll let you know what's happening in the market after we get back from the Hamptons after Labor Day.
--
My comments on divorce rate were strictly related to the Fundamental Demand for housing, an area where CR and I have clear disagreement. (BTW, I have great respect for CR and love his data presentations).
What CR is missing are the details of the latest housing boom -- Single Women being disproportionate buyers (homes as substitute for men in terms of financial security!). Single women are more likely to take in roommates to meet the payments (I know of quite a few anecdotal cases in SoCal; I also know of one woman, in her 30s with a brand new Beemer, who bought a house for $560K, at the peak, jointly with her father and they both moved into that house). This reduces the Fundamental Demand for housing units. No?
Jas
I don't know about the rest of the country, but the weather here in Boston was just lousy during April: wet, chilly, and not the sort of thing that makes you want to run out and do your spring shopping, because it wasn't clear whether spring was really coming. I expect retail sales have jumped healthily here in the past two weeks.
I am impressed by Walmart's "worst showing in 28 years," though. That seems like a bad sign.
"before rebounding late in 2007"
Why do I hear all of these calls for a rebound in late '07? Many CEO's and "economists" have said this very thing, but there is no evidence whatsoever that a rebound is in the cards for late '07. With the housing bust just getting started, I see little impetus for any kind of a rebound until 2012 or so. These things take a long time to play out. Is this like a market watcher calling for a renewed bout of investor enthusiasm circa 1930, only to discover, after the fact, that they were looking at another 15 years of hell? There is still a pretty good chance that 2000 was the actual start of the bear and that the action between 2003 and 2007 was a counter-trend rally, built on nothing but hot air injections and currency trashing via Greenscam & co.
If you look at the indicators NBER follows to call recessions, more are still up on the year and the quarter than are down. There is certainly the possibility that revisions will change that, but for now, it is hard to see NBER calling a recession based on the data.
ECRI includes the stock market in their model. No wonder everything is so rosy in their eyes.
Who came up with this great idea that "only core rate counts"
Food prices has a hugh impact on people and energy to a lessor degree and they go up every month.
real inflation is 7%-9%
most likely even higher as many items are not counted.
in the UK they once did there CPIs:
for 20-something who live with their parents
for 40s
for 60+
the CPI for 60+ was about 13% a year.
Thanks Turbo.
"earmarks of a sizable petro-dollar diversification bid" - sorry I don't understand.
Apparently people have short memories.
The weather in the spring last year in New England was horrific. It rained continously.
So if the weather was "bad" this year and bad last year they're realitively comparable, no?
Credit card use is rising for the first time in years....heloc use is falling...heloc's have cheaper rates than credit cards so why wouldn't the heloc debt continue to increase, credit card debt continue to fall, if things in housing and the economy in general were "good"?
Heloc's are tapped out. Credit cards are a last resort, not a sign of an improving economic picture. Both relate to spending at the margin which is declining (regardless of the weather).
Darth Toll said: "Why do I hear all of these calls for a rebound in late '07? Many CEO's and "economists" have said this very thing, but there is no evidence whatsoever that a rebound is in the cards for late '07. With the housing bust just getting started, I see little impetus for any kind of a rebound until 2012 or so..."
Standard & Poor's estimates reflect this, too.
http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
You're assuming that the "imbalances" in housing are going to get resolved all in one go, on this particular cycle (or "sub-cycle", if you will).
The economy isn't under any particular stress, so there's no reason for that to happen right now. The "bust" you expect will be years away.
Sebastia
Stocks are rallying. On what???
People are really missing the point by asking why the market is rallying. The market has developed an internal speculative momentum and it will continue to rally until something threatens to forcibly end the party.
Any data that doesn't pose an immediate threat to the stream of liquidity flooding the market will be brushed off and the good times will roll on.
Also understand that with all the leverage out there the market has to go up or the carry on these leveraged positions will force people out of the market.
Sebastian, The tapped out consumer, as evidenced by declining retail and housing sales, is about to face a deluge of rate resets through the remainder of this year and into the next. Coupled with declining RE values and tightened credit, what might happen? Is that consumer going to spend more are the year progresses?
Didn't you learn anything after you bought NEW at $18 in its final gasp before plunging under $5?
SOme might call you an optimist. I prefer idiot.
From the BCA report: "...equity implied volatility has begun a cyclical uptrend."
What are they talking about? The VIX Index is near its lows for the last 20 years - what can they be looking at?
Sebastian - so you do expect a bust, just not yet?
Could the sharp decrease in April retail sales be in some way related to the Credit Suisse 'Tsunami of resets' that will be rolling in during May?
I would imagine that getting a letter in the mail in late March or April informing you that your mortgage rate will now double on your ARM caused many an "Ohhhhhhhhhhhhhhh CRAP I didn't realize it was this year/month...I thought the rate would adjust lower!" moment around the country.
Or maybe it was just a statistical anomaly.
OT: On a housing board I am watching the tide change quickly.
There is a new thing called "Group Lowballing"
It is where one person puts in a low bid to purchase a home and then others follow with even lower bids. It seems to be working to bring the buyers to lower their home price ad accept the first offer. I won't go into to much detail but there are groups forming around the country doing this because it is fully legal.
jus me asked: "Sebastian - so you do expect a bust, just not yet?"
To be more precise, I think there'll be a recession, just not yet. When that happens, the widespread economic weakness will lead to important job-loss, which in turn will lead to meaningful drops in housing prices...but probably from a higher level than the one we're at now.
As to a "bust" in the housing market, I'm not convinced there was ever a "bubble" except (possibly) in isolated markets.
Sebastia
The reason the bulls are calling for a second half of '07 rebound is because, as we all know..wink wink, the stock market is "forward looking" and is usually 6 months ahead of the game.....in theory.
The truth is that the stock market is more "reactive" than forward looking. Just look at TOLL's chart, the stock peaked in June of 05, exactly when the housing market peaked. Not six month prior...(hat tip itulip.)
I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?
KBH gets an offer for its French subsidiary that it has been shopping around, well below what the shares are trading for, and that's cause for a 5% pop. This is the only unit that has been performing (if you can believe their financial reports).
Burning the furniture to heat the house.
If there was no "bubble" sebastian, what in the world is causing this massive wave of forclosures? Rates are as low as they have ever been, unemployement is at all time lows, stock market is rising......what in the world, other than prices above fundamentals can cause this?
Don't blame the subprime mess, since that was a RESULT of problems, not the cause.
April forclosures in San Diego hit 604. The highest prior number ever was 589 in 1996. This was with much higher rates and was at the tale end of massive layoffs due to General Dynamics leaving town.
It took 5 years to get this high from 1991 when the rise in Forclosures began.
This time it went from the low 100's throughout 06, to 500-600 in only FOUR MONTHS! In the middle of this economy! If that doesn't confirm a bubble then there can NEVER be a bubble in Real Estate, since how else would it look?
AJ, loose credit inflated the bubble to its unprecedented proportions. A lot of downside to this national bubble...
what in the world, other than prices above fundamentals can cause this?
In the markets that did not experience "bubble" price increases, the increase in foreclosure rate is more directly died to the increase in home-ownership. Looser lending allowed more people to take on the debt to buy homes.
So the question we need to keep asking is "what is the natural rate of home ownership when lending standards are rational?" The answer to that question probably dominates the intermediate term outlook for housing.
Note that the "bubble" did extend to staid Omaha in that this area got over built and new entrants piled into the home builder market right at the end.
Barely,
Agree, loose credit was a major factor, fueled by emotional buying since big beautiful houses to show off to friends was worth the "cost" and were "in style".(can you say extreme home makeover?). Combine that with the "get rich quick" "real estate never goes down" mentality, and people were WILLING to overpay, and convienently ABLE to overpay at the same time. A deadly combination.
KBH executives probably want that last bonus before leaving the company and spend the recession on golf courses. Well, I hope I'll spend the recession in the office.
In this case, petro-dollar bid = investing excess US$'s held by the mid-east and Russia in something other than US$ bonds, which explains why bonds are being sold and stocks are up on a day where the opposite should be happening. As an aside, mid-east stock markets have been more or less tanking for over a year now, so it wouldn't surprise me if petro-dollars started being recycled into the US stock market in a big way last fall, which also conveniently explains a very bid stock market despite a weakening economy.
When it rains it pours:
Allstate Corp. will stop writing new homeowners policies in California beginning in July, the company said Thursday.
An Allstate spokesman said the move was to help control its catastrophe exposure in the state, which is prone to wildfires and earthquakes.
Allstate has also trimmed coastal exposure in other states that are prone to natural catastrophes...
Allstate to stop insuring Calif. homes - U.S. business- msnbc.com
Average Joe asked: "I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?..."
At the risk of sounding harsh, I don't know or care.
Over the past few years I haven't touched my (steadily increasing) home equity. I've been paying down my consumer debt, and soon my (affordable) mortgage will be my only long-term debt obligation.
Me and people like me will pick up the slack of your reduced spending, because we'll have a large, untouched pool of home equity, and because we'll be consumer-debt free we'll have plenty of disposable income, too.
Sebastia
ac, Funny thing, this year I trimmed my exposure to allstate by switching to another insurer. This was after approaching them for 3 years about their persistent increases. They were telling me that rebuilding my home would cost them more and more each year. I went back to them this year and said now I need a 20% premium decrease since it would cost me substantially less to rebuild. They said no and I voted with my feet. They keep sending me notes asking for my business back that end up in the trash.....
The glaring hole in your explanation Sebastian is that people who are inclined to manage their finances prudently during a boom are highly unlikely to loosen the purse strings during a bust. In fact, I'd say they're likely to save even more rather than increase spending.
There is a new thing called "Group Lowballing"
Ministry of Truth: sounds fun. Do you have a link to some of these housing boards?
Robert said: "...So the question we need to keep asking is "what is the natural rate of home ownership when lending standards are rational?" The answer to that question probably dominates the intermediate term outlook for housing..."
Just kicking it around here, but the point you raise reminds me of another point.
Looking at the absolute prices of housing sheds a little light on what's happening.
For example, a median-priced home in California is around $545,000. In my neck of the woods it's less than half that.
Now, the home ownership rate in CA is somewhat lower than in my state. Also, prices in CA are pretty soft, while I'm still seeing price appreciation.
I think that prices are trying to find an equilibrium point somewhere in the middle of the "too high/too low" of absolute prices. That would go a long way towards actually explaining why some housing markets are strong and some are weak...and that the CA housing market isn't representative of the entire nation.
Sebastia
Agree turbo,
Nice try Sebastian,
I too have been "responsible", in that I have borrowed in the last 5 years, over $200,000 to pay off nice cars, fix up the house, get out of other debt etc. I owe $380,000 on a house I originally paid $180,000 for in 1995. My family income is $170,000. I have no other debt besides the house (which according to comps in value in the mid $500,000 range). So, in relation to most, my DTI is very reasonable, and I still have tons of home equity. However, I, and anyone like me will NOT tap that equity in a flat and/or falling market again..especially if rates go UP!
I forgot during the "frenzy" what my parents always told me, to not finance short term stuff with long term debt ("why pay on a couch for the next 30 years?").
I am just glad I didn't move up to a bigger house like everyone else around me. The paradigm shift has changed. Those in McMansions and Hummers are "successful" they are debtors. My wife and I don't want a bigger house, we feel and appear "smarter" in a smaller one. Big houses, expensive cars were as much a FAD as anything.
I will have plenty of spending money like you Sebastion, but the economy will have $200,000 less from me over the next 5 years than it had over the previous 5 years....and I am one of the "responsible" ones.
I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?
I'm not Sabastian and I don't play him on TV.... Where are you going to get your hands on that kind of money again? It's called savings. Home equity is not savings. Reminds me of that SNL skit about the radical new get-out-of-debt plan. The announcer says that you should buy things with saved money and Steve Martin gets a quizical look on his face and says "Savings?! Where do you get this savings?"
bofiz,
So, the "spending" over the next few years will come from "savings". So, are we going to be spending or saving, which is it.
IMO a bubble is indicated by any market that detaches dramatically from historic norms beyond any fundamental justification. Housing certainly qualifies on several counts: a) absolute prices; b) rent/buy costs; c) homeownership rates; d) multi-home ownership rates; d) non-traditional purchaser rates; etc.
How else can these phenomena be explained?
Average Joe said: I too have been "responsible", in that I have borrowed in the last 5 years, over $200,000 to pay off nice cars, fix up the house, get out of other debt etc.
Can you explain this get-out-of-debt-by-borrowing plan?
I owe $380,000 on a house I originally paid $180,000 for in 1995.
youch.
My family income is $170,000.
OK, Average Joe, you don't sound so average anymore.
Here's my story of responsibility:
Bought 3BR/2BA 1400 Sq Ft house in 1990. Paid off the mortgage in 1999. Still live there. Still driving the car I bought new in 1987 (hey, it gets 32MPG which isn't that bad and it still runs fine). Completely debt free. Never took out a home equity loan because borrowed equity isn't savings; you have to pay it back.
...but I must admit, I considered getting a HELOC back in 2003 after a long bout of unemployment. Fortuneatly, the credit union said no (you've gotta have a job to get a HELOC - who'dda thought).
$200,000 divided by 5 is $40,000 a year for the last 5 years that I spent. $170,000 income, plus $40,000 equity equals $210,000 a year.
As far as the economy is concerned I went from a free spending consumer earning $210,000 a year, to a debt paying saver earning $170,000 a year (20% paycut). Multiply me times ALOT.
So, the "spending" over the next few years will come from "savings". So, are we going to be spending or saving, which is it.
sounds like you won't be spending near as much.
Turbo said: " The glaring hole in your explanation Sebastian is that people who are inclined to manage their finances prudently during a boom are highly unlikely to loosen the purse strings during a bust. In fact, I'd say they're likely to save even more rather than increase spending..."
And the glaring hole in your counter-argument is that responsible people like me are delaying consumption permanently, when we might actually be conserving money now for something much larger and more important in the future that won't be put off by a "bust." A child going to college is an example that springs to mind.
Also, someone who's responsible with their money during booms will have some available to pick up "bargain" investment during "busts."
Sebastia
Ummm... by definition a "bargain" is something for which you spent less money.
Bofiz,
my point was that DTI says I'm "responsible", but I don't feel responsible. You are an exception to the rule.
If I stayed within my means and still borrowed and spent $200,000 over the last few years, What does that say about everyone else, including those who borrowed above their means? There are alot of us that can service our debt, won't show up in forclosure numbers, yet our change in behavior will have a dramatic effect on the economy.
I am a cop. My wife is a probation officer. That is average. $170,000 is alot of taxpayer money I know. It is amazing how many of us out here are making a good income and buying everything we have with taxpayer money. A necessary evil of course but I still understand that all those entrprenuers and business owners out there are doing the heavy lifting.
Sebastian you are confusing me.
"A child going to college is an example that springs to mind."
So, you aren't consuming now or in the near future...and when you do decide to consume it won't be with more borrowed money but with money you've saved.
And how exactly is this "bullish" for stocks?
Sebastian
"In my neck of the woods it's less than half that."
Which state is your neck of the woods in?
Darth,
I too believe we're in a cyclical bull within a secular bear, recent DOW records notwithstanding. Classic EW2 behavior -- the bulls simply don't want to let go, and government does everything it can to postpone the inevitable. The parallels to '29 are stunning, too.
I am bearish on the near term economy because the average joes and sebastians of the world will not be spending over the next 5 years like they have over the last 5 years. Either by choice or because they can't.
So far Sebastion, everything you've said backs this up.
tj & the bear said: "...How else can these phenomena be explained?"
I'm going to take a chance and assume this is a real question.
Say you're a manufacturer of a consumer product for which there is proven long-term future demand, a real product with honest demand.
Interest rates are a big cost for you, but you hit the jackpot one day: Interest rates fall to a lower level than you've ever seen in your life.
Being a rational businessman who sees an opportunity to lower his long-term costs and knowing that there will ultimately be demand for your product even if you build inventory, you build inventory.
This is a rational argument for building a temporary oversupply of houses.
Sebastia
my point was that DTI says I'm "responsible", but I don't feel responsible. You are an exception to the rule.
I suppose if everyone were as frugal as my wife and I are the US would already be in the midst of a depression... And maybe that wouldn't be such a bad thing.
"This is a rational argument for building a temporary oversupply of houses."
Tell that to the guys at Toll. They'll be happy to hear that what they're doing is rational.
Sounds like "Build it and they will come" to me.
Enron, Global Crossing, New Century....companies full of "rational arguments".
Can "rational arguments" cover debt payments, pay HOA fees, and mow lawns on all this "inventory".
Tanta! Is it Beer Thirty yet?
Average Joe said: "So, you aren't consuming now or in the near future...and when you do decide to consume it won't be with more borrowed money but with money you've saved.
And how exactly is this "bullish" for stocks?..."
Multiply me by a lot. My household income and the value of the home I live in is far more representative of the "average" than yours is.
Now spread that spending out over the years, for people like me who are sending kids to college this year, next year, and whatever year mine goes.
All that spending will drive the economy, drive stocks. And that's only a small portion of what we'll be buying.
Sebastia
Im ranting today but have one more post.
Our resident bull, Sebastian, has stated his case by confirming that he, the average joes, and the bofiz's of the world have no intention of major spending in the near term. In other words, those who can won't, and the rest just can't.
In addition, he said that those who continued to build houses had rational arguments to do so, yet has not given any rational arguments as to whether this was actually a GOOD IDEA.
So while I sit on the sidelines and feel I certainly must be missing something as the market continues to go up. I take comfort in the fact that, just like the rise in housing prices, there is no rational reason for it. And those apparently doing the buying can't explain it either.
The question is how much real honest demand is there for the product. Obviously there is some, but it does not seem to be all of the apparent demand we saw on the way up. Demographics should start to turn very negative for housing over the next few years. Many people watched the rise in their home equity (not just the pay down of the mortage "forced savings" but the appreciation) and saw that as a big part of their retirement nest egg. Bought the house in Rye in 1975 for $60k, now its worth $1 mil, gonna sell it when I hit 65 and move to NC or something. Kids are all gone, and dont need the 5 bedrooms anymore anyways. Well there are lots of people who will be turning 65 soon, and that will continue to depress the market. A big chunk of the demand on the way up were the speculative flippers and the 2nd home market. They are gone and not likely to return anytime soon.
This is a rational argument for building a temporary oversupply of houses.
That's not an answer, since it didn't address any of the factors I listed. Besides, you're putting the cart before the horse; the demand far preceded the supply, hence the price distortion.
Being a rational businessman who sees an opportunity to lower his long-term costs and knowing that there will ultimately be demand for your product even if you build inventory, you build inventory.
This is a rational argument for building a temporary oversupply of houses
1st off, the only rational actors are economists and sociopaths.
So now you're stuck with overvalued raw land that generates zero value, the houses you've built can't catch a bid, you're staring cancellations in the face, what does the "rational" actor do?
The rational actor never would've gotten in that deep, would've taken his money off the table.
But man is an animal. That's why bubbles form, that's why they always end badly. A growing China & India helped extend the party beyond levels we ever could've imagined, but the party always ends.
So Sebastian says it's rational to build a "temporary oversupply" of houses because the interest rates, etc., were so low. The problem is, I think, that houses aren't a widget you can stick on the back shelf for 5 years and have it still be fine. Vacant houses deteriorate FAST. I believe it is also true that the business models of the various developers depend on selling houses and using the money to build more houses, not on sitting on massive amounts of inventory.
I find locally, here in Colorado, that when the weather is lousy (snow, rain, cold), the malls are packed! Absolutely packed! Parking difficult to find and once you get inside, it is a zoo. Whether they are buying is a different story.
Now, in good weather, the mall is less crowded as people would rather spend the day outside in the parks or whatever.
I would like numbers on the relative numbers of Average Joes, Sebastians, and the really irresponsible people. Most arguements really hinge on these numbers. I can't say I have found anything reliable on this. Just anecdotes.
I disagree with Sebastian's take on things, but I could be wrong. I can say this for a fact though: I am currently a renter with a substantial savings. Based on what I have researched, I think the economy is going to tank in a big way the next few years and starting this year. Whether I am wrong or not, I am not planning on spending the next two years and eagerly await the bargains Sebastian mentions years out from now. If I am wrong then I will have savings but no bargains.
My current philosophy regarding investments is to minimize loss, not to maximize gains. Why? I am too cowardly to sit at the poker table when I don't know who the sucker is.
Needless to say, this defensive behavior will not bouy the economy.
There's a proper economic term for when happens when temporary oversupply conditions become pervasive in the economy, otherwise known as a recession.
Rational is relative.
Lets take a home builder that was 'rational' and quit building, he left money on the table.
Or the builder that 'rationally' built until the market crashed and lost a bunch.
Both are rationally taking action on incomplete information.
"I am too cowardly to sit at the poker table when I don't know who the sucker is."
Sounds pretty courageous to me. It's the first rule of making money. Don't lose what you already have.
Robert said: "...So the question we need to keep asking is "what is the natural rate of home ownership when lending standards are rational?" The answer to that question probably dominates the intermediate term outlook for housing..."
We (I) did this exercise a few months back in the comments. The long term ternd of increases in homeownership is very roughly 4% above trend. If we merely revert to trend than 4% of 83m DUs is 3 million. That's just reverting to trend over the next several years. Restoring the trend extant since the 1950s would require 4 million familes to revert to renters.
I'd say this dominates every time aspect of housing going forward.
Red pill,
Exactly. Same here.
Right on Denzel, here in New England, people don't shop when the weather is nice. We're all outside stunned and enjoying the good weather. Its absurd to blame retail on bad weather.
wally/pill, it might be a lot easier to make money in the market if there wasn't so much private equity LBO money chasing after overpriced stocks. That too will end once the funds get sufficiently burned but until that happens logic doesn't apply...
Everybody's pooh-poohing the weather as an excuse, but considering the nature of the Nor'easter, this time it's a factor.
The rain in New Jersey was so bad that access into NYC via the Holland tunnel was restricted for almost a week, The shopping malls in Paramus and Wayne were shut for extended periods, as were entire sections of the Raritan River valley.
So, shops closed, transport issues for a business week in the #1 market in America.
No, that wouldn't hurt GDP at all.
You are not patriots there in New England. Besides, why you didn't rename your un-patriotic "New England"?
Lou Barnes has a decent weekly commentary on the mortgage market. He is very data driven and gives his flavor, his tone has been much more negative recently though.
I'd love to see the Credit Suisse report he is talking about below, anyone have it?
Housing opinion likely to annoy everybody | Real Estate and Technology News for Agents, Brokers and Investors | Inman News
"The newest housing reports give me pause. They are awful. The April run-down on home building from Credit Suisse is an off-the-table affair, and their study is one of the few hard-data pieces. In 37 metro areas, April conditions deteriorated in 18, and improved in one. In CS' alpha scoring system, the best grade in the United States was a B- in Salt Lake City, eight in the C range, 18 Ds and 10 Fs -- including the entire states of California and Florida. This is a home-building report, not resale, but carry this thought: builder weakness is not a sign of builders pulling back; these guys are desperate to sell enough houses to keep the engine going ... and they are failing.
One of the very best housing sources, utterly dispassionate, is the market guidance by mortgage insurance companies to their underwriters. MGIC's newest quarterly analysis shows not the slightest sign of bottom: of 73 metro areas, seven are strong, and 27 are weak, soft or softening. Changes of condition from the prior quarter, as of April: six softening, three weakening, none improving.
The mortgage bankers' weekly measure of loan applications is steady, but I can't get good information about pull-through to closing. New mortgage-derivative issuance (CDOs) cratered 46 percent in April; partly structural pull-back, partly a shortage of loans.
Of Credit Suisse's April survey respondents, 72 percent testified that mortgage credit was tougher (no kidding ... What religion is the Pope? What do bears do in the woods?) One can argue that no-go applicants are weeded out in the pre-app process and never hit the "application" count, and the approval/application ratio is as-was ... but one can also argue that an army of starving mortgage pushers are taking apps from anyone breathing (and some not), turndowns and cancellations rising. We'll see. "
Hey, why don't we rename this blog to "Sebastien talks about Sebastien's world" and be done with it. Conversation only exists when both parties are open to changing their mind based upon reasonable arguments. Lacking this, masturbation should always be done in private.
Alec,
Of course it matters. It mattered in March when weather was better than usual and it mattered this month when weather was worse than typical.
This thread pretty much went as I predicted last month from the March retail sales thread.
Average Joe neatly sums up why an economic contraction is inevitable after the popping of the credit bubble.
The corresponding asset contraction is being delayed by all those LBO's (borrowing money to buy stock) but won't hold the dam forever (and neither does it help the basic cause for the economic contraction: less debt being taken on by families).
Red Pill said: "I would like numbers on the relative numbers of Average Joes, Sebastians, and the really irresponsible people. Most arguments really hinge on these numbers. I can't say I have found anything reliable on this. Just anecdotes..."
And yet the lynchpin of the bears' argument is that the anecdotes about the extremes are representative of everyone's behavior, or that the impact of the most-irresponsible among us overwhelms the impact of everyone else's more-responsible actions.
Which absolutely isn't true.
There's not an actual database of "Financially Irresponsible, by region, income and occupation" but there's definitely other data showing that foreclosures are very low by comparison with total mortgages outstanding, that subprime mortgages are highly concentrated by region and demographics, and that mortgage equity overall is much higher than among those irresponsible few who are now "upside-down."
Sebastia
Actually the LBO's will make things worse in time: all those newly leveraged companies will cut capex and employment.
Jag, the weather in New England last year was the worst during May rather than April ... remember the Mother's Day storm?
Denzel, people in Colorado must have more sense than people in Boston. I work across the street from a shopping mall, and the nicer the day is, the harder it is to maneuver through that place for a cup of coffee, or pick anything up at CVS. It always leaves me scratching my head. I do my shopping when the weather is lousy, because I get the place practically to myself.
I did put off buying new running shoes last month because the weather was so lousy, so it seemed to me that other people might have been doing the same. I'm not a big shopper in any month, but I have bought 2 pairs of shoes this month. Just doing my share ...
"Hey, why don't we rename this blog to "Sebastien talks about Sebastien's world" and be done with it. Conversation only exists when both parties are open to changing their mind based upon reasonable arguments."
Let's not chase Sebastian away. I still get in discussions with family who are tirelessly bullish.
Stress is building and positions will harden. For example, the housing market is now in a zero-sum game phase between buyers and sellers. Expect people on both sides to get angry. It's also why I don't tell recent home buyers at parties I am waiting to buy until I have a better idea how bad this housing bust is going to be.
I would like numbers on the relative numbers of Average Joes, Sebastians, and the really irresponsible people.
One of the key elements to my argument of impending doom is that of homeowner's equity (which CR has previously detailed). Despite the historic increases in home values, homeowner's equity as a percentage of value has decreased. That means every dime of increased equity (and more) has been spent.
I'd say the irresponsible spenders are a huge percentage of the population, if not an outright majority.
Enough with the Sebastian beating. He is not a troll, he is simply clearly stating the reasonable contrary argument. We should value his persistence on this board and willingness to respond because it improves the overall thoughtfulness of the discource. Since the "market" agrees with him (much to the chagrin of my CFC puts), them maybe we ought to carefully consider why he is in the majority.
Remember that he is not arguing that the economy will not decline, he is simply arguing that the preponderance of indicators put that the decline is some time further in the future the most of this list. My continued reminder that it is hard to have a recession when the rest of the world is helicoptering in and distributing $3 billion a day falls in that camp.
much to the chagrin of my CFC puts
Notice that I have entered the disassociative phase. I am not chagrined, my puts are.
Red Pill said: "I still get in discussions with family who are tirelessly bullish."
Just a small point of clarification: I may be tiresomely bullish but I'm not tirelessly bullish, like it was an opinion or a "posture." When the data turns bearish, I can be plenty bearish.
As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine, there won't be any resolution, there can't be.
Sebastia
http://data.nationalmortgagenews.com/columns/hearing/
"Fannie Mae plans to tighten its underwriting guidelines on certain loans especially where risk layering is involved. A spokesman confirmed to National Mortgage News that changes are coming in regard to high loan-to-value ratio mortgages and "very low" downpayment loans. He noted the idea is to prevent consumers from getting into trouble "
"Here's to Bank of America for taking out a big full-page ad in The Wall Street Journal on Tuesday promoting its "No Fee Mortgage PLUS." BoA is boasting that the loan has no application fee, no closing costs, no private insurance, and is offering a "close-on-time" guarantee." Here's what I say: with all those no's there's probably no profit either. No wonder why Angelo Mozilo thinks BoA should outsource its entire mortgage operation to Countrywide "
Not from the article: Interesting note from watching the broker boards, it seems that Countrywide has loosened up some of its underwriting again.
sebastian, Which of the follow do you need help understanding:
RECORD AND INCREASING INVENTORY MUCH OF IT VACANT
RATE RESETS HEAVILY SKEWED TO THE BACK END OF THE YEAR INTO 08
CREDIT TIGHTENING
REOs/DEAULTS AT RECORD LEVELS AND INCREASING
DEMAND PULLED WAY FORWARD FROM 03-06
MEW IS HISTORY
RE is a market that IS made on the margins. The pullback is evident and the marginal buyers/investors/speculators are out of trying to get out. It matters little if there are some financially responsible people left. They already bought overpriced RE a long time ago. This is an EPIC RE BUST.
CPI Tues & Housing Starts Wed.
I expect starts to plunge. How should the market react? My sense is neutral - no reaction.
"There's not an actual database of "Financially Irresponsible, by region, income and occupation" but there's definitely other data showing that foreclosures are very low by comparison with total mortgages outstanding, that subprime mortgages are highly concentrated by region and demographics, and that mortgage equity overall is much higher than among those irresponsible few who are now "upside-down.""
Sebastian,
I read (on CR) that about 30% of homes are paid off. Also, the average amount of equity over all homes is approaching 50% including the paid off ones. These equity numbers are historically low even after an epic real rise in home values according to the Shiller index (and these values may decline). The recent MEW decline is ominously correlating with rapidly rising revolving credit AND falling retail. This at a time when debt to GDP ratios are at levels not seen since the Great Depression (but we were on a gold standard then). We have had 2 years of a negative savings rate.
Is that 30% conservative enough to keep the equity in their home going to step up and spend?
Anecdotal evidence abounds on both sides of this discussion, but the above not so indirect evidence makes me quesy. I'm hunkering down.
Another anecdote.
I recently renewed my rental lease ( 
) with my landlady who was born in 1925. The family has owned this house for over 50 years. I asked if she remembered the great depression. She said only vaguely but she knew her family would have been in big trouble if the house hadn't been paid off. She talked about friends who recently took out a mortgage on their house (after it had been paid off) to help their children with debt.
I said to her that I thought my generation (defining it broadly) was about to learn a hard lesson. She agreed.
As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine...
BWAHAHAHAHAHAHA!!! Thanks for the laugh, Sebastian. FTR, the only poster consistently presenting any remotely bullish "hard data" has been Steve.
"As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine, there won't be any resolution, there can't be. "
Funny thing. My perception of the discussion/arguement is completely opposite.
As long as the bears point to anecdotes and exceptional situations as proof of their position, while I point to the hard data and the typical situations as proof of mine...
Someone needs to tell CR and Tanta to start writing posts with hard data, they obviously haven't been listening to Sebastian.
If two independent parties live under a roof but both want their own house is there demand for two houses or one?
.........
Divorce rate may be the lowest but marriage rate is also the lowest... Does this change anything?
...........
Red Pill,
That equity thing we both mentioned is scary as hell, isn't it? You know that phrase "Debt is fact, but equity is a matter of opinion"? We're going to find out what happens when there's suddenly over $4T in debt backed by non-existent equity.
Not just homes, either. Historically high credit card balances, negative equity on financed autos, etc. -- J6P is seriously strapped.
If incomes are not (significantly) increasing and the ability to borrow (in any form) is decreasing I find it difficult to imagine much growth in an economy facing this trend.
At the margin, a huge amount of recent spending was via heloc. Incomes didn't increase much during the last five years and savings actually decreased. Now this positive, spending scenario is REVERSING.
Heloc's and other mortagages are resetting HIGHER. This means LESS money available for consumption.
Where is the money going to come from, already with fairly low 4.6% unemployment, to SUSTAIN spending much less increase it? Maybe there's a new economic engine out there, a new technology I'm unaware of or some breakthrough in gas mileage about to emerge.
Sorry Sebastian. I don't see how, absent such a dramatic economic development, a recession can be avoided. Borrowing pushed spending up beyond fundamental income growth and it was accessed (on ludicrous terms) to massive borrowing at that. That juice is gone and if you believe that, as people see home prices around them decline 20% (as I have in my middle class Boston neighborhood) that it will not have a behavioral impact going forward, then we'll have to agree to disagree.
I've studied economics and been in the investment business for 30 years. I've lived through and studied recessions and crazy markets (and their aftermaths). The unwinding of this borrowing binge is going to be very ugly for many people. Everyone is going to know someone who blows up.
Maybe you don't think that will have a sobering effect on spending. Me, I don't see how it possibly can't.
Negative savings rate doesn't leave a big cushion for lean times. My sense is there will be some relaxing of the 401k withdrawl penalties across the board, not only hardship cases. That should hammer the equities markets as selling is pulled forward.
I'm with jag. This is going to end badly for a lot of people...
First Fed - more from 10-Q: assets are declining.
yet stock goes up every day on buy backs (they took a 6.58% loan for it)
Some LEND info:
Expired
Originations
The Company originated approximately $1.9 billion of mortgage loans in the U.S. and Canada during the quarter ended March 31, 2007, down 47%, from $3.6 billion for the comparable period in the prior year.
During the first quarter 2007, as previously disclosed, the Company sold approximately $3.5 billion in mortgage loans for cash. Of the $3.5 billion sold, approximately $800 million of loans were sold at a weighted average net price of 100.63% and $2.7 billion of loans, which included substantially all performing and non-performing loans in inventory on March 6, 2007, were sold at a substantial discount to par value and resulted in a pre-tax charge of approximately $160 million. During the comparable quarter of 2006, the Company sold $3.0 billion in mortgage loans at a weighted average net premium to par value of approximately 2.10%.
Thankfully none of the ARM's and cheap leading methods ever took hold up here in Canada to any degree whatsoever; so I decided to puchase a beautiful loft last July. While Canada's economy is extremely export driven, with USA being customer #1, our fundamentals and budget surplus bode much better for much stronger growth for years to come over our US counterparts. For the record I'll say the Canadian dollar with be valued ABOVE par with the USD within 3 years.
Red Pill said: "Funny thing. My perception of the discussion/argument is completely opposite."
That is funny.
A couple of points, in no particular order:
First, I'm sort of handicapped here. CR can post all the charts he wants using any data he wants. I can't, even though I might be able to offer a direct contradiction to his position, or at least demonstrate that he's not standing on firm ground.
Second, it's not that all the hard "bearish" data presented as evidence isn't true. The problem is that often there's not a proven long-term relationship between what the data says and what the bears say is going to happen as a result.
As an easy, close-to-hand example there's a bit of a "conundrum" about why there hasn't been a dramatic drop in construction employment given the dramatic drop in housing starts, even though there's been plenty of time for it to develop. There are varying theories about why but clearly it's not the "slam-dunk" case it was supposed to be, and the forecast keeps getting pushed-back.
Some of the bearish data is accurate and scary-sounding, but meaningless.
There was a poster here the other day who took issue with my position that the economy wasn't in bad shape. He made a big deal out of the fact that the NAR was forecasting the first year-over-year nationwide drop in housing prices since the Great Depression.
Now, the unemployment rate is currently around 4.5% and steady, near a historical low. The unemployment rate during the Great Depression was 20%+. So what does it mean if housing prices drop by the -1% figure the NAR forecast? Nothing, it's just a meaningless statistic because the conditions aren't the same.
Such subtleties are almost always lost here, but it's the difference between understanding what's happening and being bumfuzzled by what's happening.
Sebastia
"The unemployment rate during the Great Depression was 20%+. "
Ahhh ... the unemployment right BEFORE the Great Depression was 3.9% !!!
Sebastian, the unemployment rate RIGHT BEFORE the Great Depression got started was 3.9 % ...
"why there hasn't been a dramatic drop in construction employment"
There has been, Seb. It has just not shown up in the official numbers. The mystery is not the drop, it is the lack of reporting. Most people working in new residential construction can tell you about the amount of work out there... and drops in permits bear that out (about 50 down percent here in the Minneapolis area compared to one year ago, according to the local newspaper). So... where did all those guys go? I don't see them working at Walmart and there are no more taxis on the street than a year ago and most guys like that do not cross over into commercial work. Their remittances sent back home have dropped... where are those guys? They aren't out there working - I can tell you that because I visit jobsites a few times a month.
I was doing a little soul searching today, trying to figure why the economy held up better than I expected last fall. The best I can come up with is that gas prices are critical these days. A lot of consumers are living on the edge, and additional expenditures on gas limit their money for other purchases, and vice versa when gas prices go down.
I know increasing gas prices didn't hit the economy as hard as expected immediately after Katrina, but the savings rate went down around that time too. So we've had tax cuts followed by increased personal debt led by MEW. Now all that is behind us, and we are left with increasing debt service, sky rocketing health care and energy costs, and stagnating wages...
jag said: "If incomes are not (significantly) increasing and the ability to borrow (in any form) is decreasing I find it difficult to imagine much growth in an economy facing this trend..."
I don't agree with either premise, and would ask that you provide evidence that either one or both is true.
Incomes are increasing and only a small minority of less-wealthy people have had their borrowing curtailed. The wealthiest (prime and "super-prime" borrowers) who own a huge proportion of the assets already won't have their spending (or their borrowing) diminished that much.
I would also argue that there's no reason not to keep borrowing at these rates. If housing appreciates at a long-run rate of 6%/year, and it's possible to borrow money over the long-run at that rate, it represents a tremendous opportunity for consumers at the expense of the banks.
Same thing for stock buy-backs, btw. If corporations can buy back their stock at a rate below the long-term growth rate of earnings, they should be doing that.
Sebastia
Incognitus said: "Ahhh ... the unemployment right BEFORE the Great Depression was 3.9% !!!"
See? This is what I mean. The unemployment rate got down to 3.9% in 2000...recession, but no Depression.
The unemployment rate got down to 3.4% in 1968...also no Depression.
Sebastia
Sebastian, borrowing by families has ALREADY fallen by HUNDREDS of billions (yearly rate).
You don't seem to pay ANY attention to ANY hard data (much like the market, in fact).
"Negative savings rate doesn't leave a big cushion for lean times. My sense is there will be some relaxing of the 401k withdrawl penalties across the board, not only hardship cases. That should hammer the equities markets as selling is pulled forward."
If that doesn't happen within a couple of years, I'll be surprised. IRAs, too. There may be some restrictions -- must be 50 or over, or must be to pay for med or educational expenses, or whatever. But when times get tough, people will want to loot whatever piggy bank they have, and they will not want to pay a penalty for doing so.
If there is no particular collapse -- if things just continue for the middle class on the moderate downward course it's on now -- it'll just take a little longer.
Then everyone will look at the ruins of their retirement plans, look at each other, and say those grand words:
"SOAK THE RICH!"
"See? This is what I mean. The unemployment rate got down to 3.9% in 2000...recession, but no Depression.
The unemployment rate got down to 3.4% in 1968...also no Depression.
"
Thing is, borrowing was a fraction of today's in 1968, and an unemployed person could not get millions in 2000.
That's what has changed. Back in 2005/2006 lending got as loose as that, and now it's tightened.
The market isn't reacting (yet) because borrowing sent directly to the market (LBO's, leveraged buybacks, etc) is still riding high, but not for long.
The underlying economy is ALREADY collapsing.
Thing is, borrowing was a fraction of today's in 1968, and an unemployed person could not get millions in 2000.
So one point is that it will be hard to have a recession when anybody can get a wheelbarrow full of cash just by asking. There will be a time of reckoning, we just do not know when. The bears think soon and the bulls think not so soon.
Robert, the time of reckoning is now, because the debt binge more or less ended (for families) at the tail end of 2006.
(the "now" is give or take a few months, of course)
Incognitus said: "Sebastian, borrowing by families has ALREADY fallen by HUNDREDS of billions (yearly rate).
You don't seem to pay ANY attention to ANY hard data (much like the market, in fact)."
Not true, I pay close attention.
Less borrowing=Bad, because less spending
More borrowing=Bad, because more borrowing
That's the gist, right?
What a fatalistic group, "We're all just screwed, helpless to do anything to save ourselves, with no escape.":)
Sebastia
Nope, Less Borrowing = BAD when you borrowed too much before.
More Borrowing = GOOD as long as it lasts, BAD afterwards (if for consumption).
Borrowing, unless for investment purposes, pushes forward consumption. If you antecipate it, you consume now but you can't consume later. That's why it is "GOOD" as long as it grows, and "BAD" once it stops growing.
In reviewing the conversation so far, it seems that one of Sebastian's main points is that a recession is not immanent, particularly given the mixed economic data, but he thinks one is in the offing in the future.
There's something to be said for this position, many bubbles have gone far longer than anyone expected. (I also understand that this is also one of the reasons why shorting can be dangerous and full of short squeezes as it is.) This is probably also true because the foreign CBs and the Fed have not taken the liquidity punchbowl away yet (although I'd argue that this is happening as we speak with the tightening of domestic lending standards and changing foreign direct investment flows).
However, that being said, I believe that most recessions are called with hindsight after we are well and truely in them. At this stage, it is probably anyone's guess, but there are some pretty strong headwinds. Hopefully our built-up debt karma catches up with us slowly so we can deal with it in an orderly fashion, and not with an economy rending bang. How this happens could make Sebastian right or wrong, but as of right now we don't know.
I'd also say Average Joe is right, there is probably going to be a spending pull-back by consumers - there's no where else for the cash to come from (not increasing income levels, savings, MEW, or increased debt levels). That's probably going to mean a retrenchment as the consumer is forced to stop spending and then finally start to have to pay down debts. (I'm not counting the 30% plus or so of folks that have paid off their houses or didn't take out equity to spend, as I understand that it is what happens to the folks at the margin that tends to set the tone for the market and economy - the economic "plankton" theory.) It's only after debt levels have been paid down (which I understand is a form of savings) will they be able to spend again. Hopefully this retrenchment is in the form of a long slow growth period or stagflation period, as the alternative debt working off forms could be nasty (Japan deflation or 70's/Paul Volker style inflation anyone?).
One of the things that keep me up at night however is what will the Fed do if we do slide into recession? Traditionally lowering rates works by making borrowing cheaper and, by most measures, the consumer is maxed out and at historically low rates already and housing and other assets are quite inflated. And if they do drop rates there could be a trade/forex crash if the dollar tanks.
As for the "helpless", well, there's some truth to it.
If Debt and Debt service grows at a rate faster than Income, at some point the shit does have to hit the fan in an "helpless" manner.
Nice recap of the weeks warnings-
Page not found- msnbc.com
(the "now" is give or take a few months, of course)
And the discussion on debt fueled growth revolves around the meaning of few months.
See How many is "a few"? - Yahoo! Answers for a discussion of how many is a few.
This link is definitive: it is 3 or 4: Agilent | Measuring Language
"Incomes are increasing and only a small minority of less-wealthy people have had their borrowing curtailed. The wealthiest (prime and "super-prime" borrowers) who own a huge proportion of the assets already won't have their spending (or their borrowing) diminished that much."
Sebastian,
Based on what data are you making this assertion?
"See? This is what I mean. The unemployment rate got down to 3.9% in 2000...recession, but no Depression."
I don't think he was suggesting a 3.9% rate would predict a depression.
His point was, as you point out, stating the current unemployment rate is not a good predictor of either good future growth (his arguement) or depressions (your arguement). It's a lagging indicator.
"Same thing for stock buy-backs, btw. If corporations can buy back their stock at a rate below the long-term growth rate of earnings, they should be doing that."
Aahhh, the assumption of future earnings. What do they always say in the prospectus they send me? Something about past performance not predicting future earnings? The debt is a sure thing; the future earnings are not.
I'm a j6p myself. No real expertise. The question I have, given this week's economic data and the lack of a "rational" market reaction, is can the stock market successfully decouple from the day to day economic reality of US small business, labor and consumers?
A couple of posts have led me to discussions of the huge inflationary increase in M3 and suggested that this is what is driving asset bubbles. Successful players, including corporate money managers seem to be using the leverage to take advantage of one asset bubble after another: tech stock to housing to hedge funds to ???.
One commenter over on NR's blog indicated that "tightening money supply (...may not work as money flow is now globalized)."
It seems that the perceived control that policy makers have is based on control of the money supply in a closed system, e.g. the US economy.
With US investments in overseas assets up $1 trillion+ since 1998, and appreciating foreign currencies increasingly buying into US assets it does appear that financial flows have gone global.
So the question is, under these conditions will the US real economy that produces real products and feeds ordinary people respond as expected to Federal Reserve policy moves? Will the stock market? And, for big fish leveraged investors, does it really matter? What control does the Fed really have over these global financial flows?
I mean if US indicators are bad, and the Fed loosens credit and increases monetary supply, why would anyone choose to to use that leverage to invest in the US economy?
Oh, and to not sound completely gloomy Sebastian
, I'd also have to say it is possible for things to muddle through while the consumer debt backlog is worked off and savings brought back to average. In other words, if we're lucky we could be just fine. The problem I think everyone here is focusing on is that, like being in Colorado avalanche country in mid-winter, there is a lot of economic snow built up on the top of the mountains right now. It's anyones guess if it will stay stable and melt off in the spring or come crashing down given the right trigger.
"Less borrowing=Bad, because less spending
More borrowing=Bad, because more borrowing
That's the gist, right?
What a fatalistic group, "We're all just screwed, helpless to do anything to save ourselves, with no escape.":)"
Sebastian, you oversimplify our position in an attempt to make us look silly. We are, of course, not suggesting that it is always the case that the decisions for more or less borrowing are simultaneously bad. It is "history dependent" as the physicists would say. All that is being suggested is that when you are sitting on top of a gargantuan credit bubble (that's history) then you have to take your medicine.
For awhile consumer spending was income + debt expansion - debt servicing (good earnings). Soon consumer spending will be income - debt servicing - savings(bad earnings). Assuming no job losses and distruction of wealth because of defaults.
Well, I enjoyed the hell out of this dialogue today. Time for some biking.
It's anyones guess if it will stay stable and melt off in the spring or come crashing down given the right trigger.
Bad analogy, because stability isn't an option.
stock market doesn't reflect the us economy anymore its the global economy.
why is it that people disregard the data as presented when it doesn't meet their hypothesis but accept anecdote when it does? and vice versa?
increased savings leads to increased investment somewhere along the way. more S more I i believe is the equation.
contrary to popular belief not everyone went on a debt binge recently. just lots of people. hard to say if its even a majority.
we have clients who are still sitting on all their equity waiting to do renovations and remodels.
subcontractors in my area are getting harder to get a hold of lately - word on the street is that the market is heating up. could be seasonal. who knows.
market clearing ratio in DC is 4.5 months right now.
as far as i know china still wants peasants in the coastal factories. until that changes keep watching those 0% apr cc's coming in the door. you know, its irrational not to use that free money for purchases today. seriously.
this here is a self-selected group of people obviously, but how many of you are heloc'ed to do death and facing a mortgage reset you can't refi out of?
how many of you are pinching pennies and won't be buying stuff or going places this summer?
the carnage is on the margins.
how many of you feel your jobs are threatened (sorry dryfly)?
my point is there are lots of things you can point to to be optimistic for the next couple of years.
who needs data when you got reality?
(thats a joke btw)
I am done trying to teach sebastian how to read. It's pointless and frustrating. He needs glasses that have the rose color scratched off.
Steve on the other hand makes valid points based on data & based on reason that I normally disagree with. I think Steve would agree there are just fewer of them every day to make a bull case here.
BB cutting rates is the last straw. What is that likely to accomplish after a single day 300pt jump in the DOW? Even weaker dollar, immediate gas price jump and inflation at least equal to the rate cut. Makes banks' basic business model a little sounder perhaps? Stimulating consumption may take another run down to 1% which doesn't leave any bullets for a true shock to the financial markets - 9/11...
I see all this discussion re the unemployment rates. Such as the latest 4.5% figure. Actually, this rate is grossly distorted. The real unemployment rate is much higher. Something like 8.2% (U6) for this month I think. And I've read elsewhere that even this rate is off the mark.
Whenever I read someone saying the unemployment rate is say 4.5% and quote it as gosple (so to speak) and expect it to be considered as a rational explanation (or a valid discussion point), I automatically and totally discount that argument.
dc1000 makes a valid point about the DC market but lots of beltway bandits skated blithely through the early '90s recession, barely noticed it. That's the great thing about DC, it's a wonderful little countercyclical port in any storm.
I don't pretend to be an expert. But I would like Sebastian to answer this. I, and every other working stiff I know, got their hands on huge chunks of cheap money over the last few years in the form of home equity. We bought things and employed people with it. Now, assuming that is gone and stays gone over the next few years.....where are we going to get our hands on that kind of money again?
I don't know about you, but I am going to Disney land.
Agree turbo,
Nice try Sebastian,
I too have been "responsible", in that I have borrowed in the last 5 years, over $200,000 to pay off nice cars, fix up the house, get out of other debt etc. I owe $380,000 on a house I originally paid $180,000 for in 1995. My family income is $170,000. I have no other debt besides the house (which according to comps in value in the mid $500,000 range). So, in relation to most, my DTI is very reasonable, and I still have tons of home equity. However, I, and anyone like me will NOT tap that equity in a flat and/or falling market again..especially if rates go UP!
I forgot during the "frenzy" what my parents always told me, to not finance short term stuff with long term debt ("why pay on a couch for the next 30 years?").
I am just glad I didn't move up to a bigger house like everyone else around me. The paradigm shift has changed. Those in McMansions and Hummers are "successful" they are debtors. My wife and I don't want a bigger house, we feel and appear "smarter" in a smaller one. Big houses, expensive cars were as much a FAD as anything.
I will have plenty of spending money like you Sebastion, but the economy will have $200,000 less from me over the next 5 years than it had over the previous 5 years....and I am one of the "responsible" ones.
Cheers!! Spoken like a true Average Joe.
dc1000,
DC is definitely another world. Uncle Sam is $8T in debt, on the hook for another $60T, and spending $2B/day more than it takes in. Obviously DC is fat city.
All things end, though. Those bills are coming due soon, and J6P won't have the extra tax money to save DC. It will be ugly!
You talk about things happening on the margins. Well, that's where everything happens. Housing prices, opinions, fashions, revolutions...
Make hay while the sun shines, 'cuz it won't shine forever.
how many of you feel your jobs are threatened (sorry dryfly)?
My job has been threatened for 20 plus years. The difference between me and the rest of the 'working stiffs' is I know it and act accordingly. There isn't a day that goes by that I don't realize how vulnerable my income is...
All things end, though.
T.J - That is true but somethings end soon & some hang around like glaciers... there was once a glacier a mile thick over where I am now, it didn't all melt in a day but it did eventually melt.
Always disassociate fundamentals from technicals... the timing thing is always the bitch... I've learned that mistake the hard way myself.
And this isn't anything new, its as old as civilization & empire...
In ancient Rome there were factions constantly complaining & writing about Imperial waste & debt & corruption... and they were fundamentally right, waste debt & corruption were all there.
Yet the Empire lasted (and actually continued to grow) for another 300 or so years after a lot of this was penned. They didn't take into account how much wealth was available & sucked in from the peripheral provinces to support Rome.
A great case in point is that '$60T' you throw out... that's spread over half a century of outlays... and who knows what $60T will be worth anyway.
A better question to ask is will we have the excess productive capacity to produce the goods to consume or trade for goods we consume, equivalent to a dollar input of $60T spread over a half century?
I'd be a lot less concerned about that $60T due over that period IF I knew for a fact our national productive capacity was growing sufficiently to carry that demand... than I would be if we owed ZERO debt going forward but had shrinking productive capacity.
Heck I'd rather have the debt & capacity than SAVINGS and reduced capacity... you can't eat money (whether paper, electronic or metal based).
Imbalances can't continue forever but they can remain in a stable imbalance as long as interested parties agree to prop them up & we all have - the whole world has.
Sebastian:First, I'm sort of handicapped here. CR can post all the charts he wants using any data he wants. I can't, even though I might be able to offer a direct contradiction to his position, or at least demonstrate that he's not standing on firm ground.
http://thumbsnap.com/v/b6ubR73g.png
I'm a true spartan economic soldier. I love NOT spending money !
I won't bore everyone with my obsessive frugality ... but I literally get palpitations if I have to spend more than $100 at one shot.
I even converted my wife who once spent money like a drunken sailor. I got all warm and fuzzy when she got home from shopping for our two daughters summer cloths.
I said: 'How'd it go?'
Wife said: 'OK ... I guess. I got these 6 outfits for $80.'
I said: 'You've done better ... get 'em next time champ.'
Am I a J40oz (or) J30pk
)
I mean if US indicators are bad, and the Fed loosens credit and increases monetary supply, why would anyone choose to to use that leverage to invest in the US economy? - ecoshift | 05.11.07 - 7:21 pm
I think a lot of this depends on the dollar exchange rates relative to our competition. If the dollar continues to weaken & their currencies strengthen... you'll see foreign producers investing in US capacity similar to how US companies invested abroad when the dollar was strong.
This swill be a mixed blessing - it will all but guarantee a strong job market... but it will also mean we 'work for less' in terms of goods we import... not a disaster since most of what we buy we COULD make here... with one noticeable exception: oil.
But stuff will cost 'more' & we will make 'less'.
Drfly said:
'My job has been threatened for 20 plus years. The difference between me and the rest of the 'working stiffs' is I know it and act accordingly. There isn't a day that goes by that I don't realize how vulnerable my income is...'
Ditto ... I pity the fools who show up late, leave early, call off constantly, resist change, do as little as possible, expect large raises for nothing, search the internet all day, IM the entire free world, gab on the phone, stretch lunch, sneak in a 3rd smoke break ... and look cross eyed at those that don't !
Regarding the Credit Suisse report, it's just the credit-tightening sh*t hitting the fan. It is phase 2, realized long ago by anybody with critical thinking skills able to infer causal relationships. Here come the non-linear dynamics, getting ready to stomp all over your linear regressions. The hair-pin corner is coming up after a long straightway and everybody that hasn't raced this track before is doing 90 mph into the turn. Expect phase 3 to start once the banks finally realize that reworking convenants is like jumping in and trying to save a drowning man with a large anchor tied to his ankle.
I think somebody asked for a list of bottom callers a few threads ago. I scraped this off the bottom callers thread. It would be nice if we had a wiki for long-lived info. If everybody tags CR:bottom on delicious you should be able to find them all by doing a global search on delicious (assuming CR:bottom is globally unique enough). Many hands make light work.
iwantmoredata's CR:bottom Bookmarks on Delicious
dryfly:This swill be a mixed blessing - it will all but guarantee a strong job market... but it will also mean we 'work for less' in terms of goods we import...
Good thing for that good ole Dual Mandate over at Benny's place where the motto is
We Fight Inflation*.
... AND CUE MISHKIN:
http://www.federalreserve.gov/boardDocs/Speeches/2007/20070410/default.htm
If housing appreciates at a long-run rate of 6%/year...
Yale finance and economics professor Robert Shiller, author of Irrational Exuberance, and upon whose work the Case-Shiller Home Price Index is in part based, has researched U.S. housing costs back to 1890. Over the past 116 years, he has found that the mean rate of return on single family homes was about 3%.
As to whether or not there was a housing bubble over the past few years...
Between 1980 - 1995, prices for single-family homes in America rose by a weighted average of 97.2% (page 4).(PDF) Over that same time period, inflation as measured by the CPI totaled 90%.
Between 1995 - 2005 prices for single-family homes in America rose by a weighted average of 187.5% (page 15).(PDF) Over that same time period, inflation as measured by the CPI totaled 32%.
Sources:
Office of Federal Housing Enterprise Oversight's House Price Index
The U.S. Department of Labor's Bureau of Labor Statistics' Consumer Price Index page, where there is an Inflation Calculator
.
"You are not patriots there in New England. Besides, why you didn't rename your un-patriotic "New England"?"
Maybe that is the heart of the problems happening in New York?
some breakthrough in gas mileage about to emerge
It's already here, and I don't mean hybrids. You just have to accept some relatively minor performance trade-off.
When I was in the UK in 2001 my rental car was a Peugeot 406 HDI, with air-conditioning and manual gearbox. A 5-seat sedan about the same size as a Honda Accord.
I averaged 18 kilometres per litre of diesel for a month, which would be about 42 miles per US gallon.
Both engine and gearbox technology has progressed significantly in the last 6 years, so I would imagine it would be relatively easy today to get that mileage in a similar size and weight car with an automatic shift.
The manual Volkswagen Polo TDI (which I will admit is a small car) on sale here in Australia has a claimed combined-cycle fuel consumption close to 50 miles per US gallon, and my experience with a similar sized car indicates you can improve that by about 20% if you have relatively easy driving conditions.
Oh, and I don't disagree with jag's post at all, just that one point.
I find it truly amazing (and not a little disquieting) that almost all the improvements in engine technology over the last 40 years have gone into increasing the performance of ever-heavier vehicles.
When I first got my driver's license, anything over 2 tons (in Australia) was defined to be a commercial vehicle and had to be driven with a truck license and log books. I actually remember some controversy when the first 'normal' vehicles crept over that limit (I think the Range Rover and/or the Mercedes S-Class), and professional-type people started getting told they needed truck licenses to drive them.
Needless to say the law was quickly changed, and all of a sudden light trucks and things like Toyota Coaster 25-seat buses could be driven on a normal license. (A bad thing IMHO, they do not have the same road behaviour as normal cars, even normal SUV's.)
i know you all must tire of this but:
how is it i can hear that its never different this time yet somehow DC is different this time?
am i really that lucky?
why hasn't everyone in the world moved here then?
I think the line, dc1000, is:
Don't push your luck funnyboy ("am i really that lucky?")
And it comes from the complacency and appearance, not practice, of diligence when it comes to responsibility and accountability.
Such a mouthful of big words, but consider the Invisibile Hands at work with the publicly announced (ie the real figures about the regulated, not unregulated, HFs) profits for HF managers...and that WSJ piece claiming that 11M undocumenteds had tax removed from their paychecks (suggesting that the IRS was able to track 90% of the " 12M illegals"? --I don't think so.)
Know that this is not lucky.
On the Morgan Stanley Global Economic Forum pages, Roach posts fascinating comments about his testimony at a House hearing on Currency Manipulation and Its Effects on US Businesses and Workers.
Alas, a currency undervalued 30% has the same effect as a 30% across-the-board tariff combined with a 30% across-the-board subsidy for exports.
The outcomes from such policies are predictable -- in the short term, an export boom, in the medium term, a bloated export sector addicted to the subsidy-tariff combo drug, in the long term, trading partner retaliation.
thanks calmo, thats funny.
re: VW TDI: my wife owned one for a few years. it really got 50-60mpg. then we got two kids and now we're mini-suv'ing it and she nearly had a heart attack when it cost $70 to fill up.
lucky for us we drive about 200 miles a month so its not a big deal.
regarding the currency comment above:
that really only applies if you believe in PPP. which i don't and i think most normal people don't. once you throw PPP out the window, currencies can move and prices stay the same - especially when here is where they need to sell...
i've been saying this over and over again -
the currency is the release valve. lucky for us most of the world still needs to sell to the US and because of it their goods in dollar terms will not go up.
Throw PPP out the window? Let's hope they still need us. If their CBs start selling dollars we won't even be able to buy their raw materials.
there are perhaps other better forums for this discussion but -
when you owe the bank a million bucks its your problem.
when you owe the bank trillions, its their problem
selling dollars now would not serve the FCB.
who knows in the long term
in grad school a professor was giving this long explanation about real inflation rates due to currency changes and interest rate differentials and at the end i got him to admit that PPP, the fundamental basis for the theory, was questionable at best.
selling dollars now would not serve the FCB.
They don't have to sell... all they need to do is NOT buy as much. As long as we continue to run trillion dollar CADs we need them supply the cash... else we learn in a hurry how 'theoretical' PPP is.
My guess is its halfway between 'zero effect' and '100%'... stuff that truly is import/export sensitive goes through the roof... think energy (which we import at globally determined prices) or food & other commodities (which we export at globally determined prices)... Housing & services which aren't easily 'tradeable' will see little effect.
U.S. Stocks Benefit From Global Growth - WSJ.com
"The U.S. equity market has decoupled from the U.S. economy," says Morgan Stanley's Mr. Jen.
U.S. Stocks Benefit From Global Growth - WSJ.com
Most of the article is upbeat about global decoupling from slow US growth, soft landing etc. with a note about recoupling if there is a real recession. Points out that housing is a local US problem. True enough, it's one of the few things we can't import.
But I thought the phrasing was interesting. "US equity markets decouple from US economy"
Strong overseas investments by US firms, strong growth in China, India, Brazil. Income from foreign sales for US affiliates. US at 20% of all imports. That means 80% go somewhere else.
Maybe the parts of the overall stock market really are adequately hedged against poor US performance... or moving in that direction.
yay! two people in a row that agree with me.
yes, commodities depending on their own cycles should inflate along with local services, while imported manufactured goods and intellectual property should decline.
funny - the global race to the bottom in wages could be lead by the plunging dollar and not labor market globalization as we thought could be before...interesting
and RE: equity markets: i've been saying this til i'm blue in the face around here. DJIA is a global market with global companies. further, all other things equal, as the dollar goes down the DJIA should go up.
and yes dryfly, even slowing purchase of dollars now would have an impact.....
like a plunging dollar, since we all know interest rate differentials don't mean anything anymore...or do they?
regardless, not 'propping' the dollar (some job they're doing of it now!) would be just as bad for FCB anyhow.
for today at least, 4.6% is good enough to get the cash for ten years isn't it?
thats a real negative interest rate according to some people here isn't it?
and if so, then isn't it entirely rational for the US to continue to borrow this money both through the current account deficit and the fiscal deficit?
negative real interest rates means they pay you to borrow the money.
sounds like quite a deal to me!
(PS: but not if you spend it on entitlements and / or flat screen tv's)
i remember being on setser's blog back when we were all realizing that the bond market wasn't telling truth. what a moment that was. or at least that it was telling a different truth than we all had thought.
Or, maybe, the lower than expected growth in retail sales during April had something to do with a stealth boycott-this was a warning shot not covered by the usual media for obvious reasons. We calculated participation in the one week boycott at over 3 million consumers-watch out for Christmas.