I think I have to give up now and be a good American. First thing in the morning I am going to get a prescription for anti-depressants and buy a Nintendo Wii.
All right, so what you are saying is that if housing continues down investors will unwind and interest rates will have to go up which will force housing down even further.
I like it but I don't understand why the unwinding of mortgage investors will cause interest rates to go up.
Unless rates go up to find someone who will invest? Have to pay to find an investor willing to take the risk?
Most people now seem to think that the Fed can simply jack interest rates up and down and magically keep us in a non-stop boom.
We have a trillion dollar war to nowhere, huge trade deficit, huge current account deficit, mind-numbingly huge unfunded pension liabilities, rising inflation, rising unemployment, loss of industrial base, negative savings rate...and on and on with a litany of economic red flags.
But forget all that. The magicians at the Fed just have to start cutting and cutting and the good times will keep on rolling. Ha!
Binko, they keep lying about the real rate of inflation so they can do waht they want. Has anyone here looked at the change in their food bill over the last few years?
Perhaps there is another stage to the vicious circle - inflation and oil prices.
with the lowering of interest rates, inflation will set to rise - because the $ is tanking, imports will rise in price and when the spaz fit in the stock markets ends and people realize their gains are being eaten away by REAL inflation (inc. oil and food) then, there will be a flight to gold, stocks down etc.
I think the oil scenario is going to see $100+, Iran is not meeting it's OPEC quota, Iraq I feel will descend into cival war and I do not believe that SAudi or Russia have enough excess capacity to take up the slack.
Thus, while the stock market is now cheering the Fed doing more than they had expected it remains to be seen if this Fed easing ends up being too little too late. Certainly in 2006-2007 like in 2000-2001 the Fed incorrectly assessed the risk of a hard landing and kept a tightening bias for too long before being forced by the real and financial facts to switch in a matter of a few weeks from a tightening bias to an easing bias and then to an actual 50bps cut. The Fed argued for too long that the housing recession would "bottom out", that its spillovers to other sectors and to private consumption would be "modest", and that the subprime problem was a "niche" and "contained" problem. Now the economic and financial facts have forced it to play catch up with reality. I thus remain of the view that 50bps is too little too late and that we will experience a hard landing.
o bail out, you need to get a credit card and buy a Nintendo Wii. Then when you run out of credit, just ask the government to pony up your living expenses. Ah, the easy life.
this diagram is wishful thinking as it leaves out the single most important factor: deflation imported from Asia.
mortgage meltdown only takes back some growth that was "hurried" in the past couple of years, maybe 0.5%/year.
the big fellow with the hood and scythe is called chinese inflation.
With all due respect to Dr. Roubini, I did not expect him to change his recession prediction based on the Fed's move. If God herself appeared to Roubini and offered him eternal paradise he would not stop predicting a recession.
If the US has anything going for it, it is that we clearly are too big to fail. The rest of the world has become addicted to our credit addiction. At least the "higher interest rates" part of the cycle can be attacked, but I don't think there is anything anyone can do about lower home prices and MEW.
And thanks for posting something to get us thinking again, rather than yelling or navel gazing.
Today's market reaction means that the market continues to believe that the problem is the level of interest rates. It isn't. Interest rates have been at historically reasonable levels. The problem has been overly lax credit standards.
Housing Novice, this is just a possibility - but it is a scary possibility. We are now on diagram 2 (There is no going back to the virtuous cycle in the near term).
The danger is if the economy slows, long rates will rise as foreign CBs stop buying (or even sell). And that would push housing prices down even further.
Good post. Treasury rates can go down while mortgage yields rise. This is a possible outcome if the economy is in recession and housing gets ugly enough.
this diagram is wishful thinking as it leaves out the single most important factor: deflation imported from Asia.
And currency manipulation from PBoC & BoJ. It will be very interesting to see what those two elect to do.
Also will Euro Zone be happy becoming the consumer of last resort after the US makes an attempt to fall back and let them take the lead & break the wind.
And if you don't think a cut like this and a weakening dollar won't put rice pressure on our importer friends - well then you don't know many. LOL. The one group gonna think this sucks worse than foreign investors will be foreign exporters importing goods into the US.
MNCs BTW are completely hedged - they have assets offshore which just increased in value balanced against those domestically that declined... that is against a basket of currencies, not just dollars.
I like CR's cycles but like all models participants will aggressively game it to uncertain outcome.
Lawmakers also passed an amendment to the bill offered by Frank that would raise the agency's loan limit from its current $417,000 to as much as $729,750.
Just called the bank and going to pick up some nickels today before the mint changes the metal content or discontiues them all together. Maybe some pennies too.
I want to reiterate my question from the earlier thread ---- if the rest of the world also goes into recession, which I believe it will, then won't interest rate differentials reverse and the dollar strengthen?
I would think not til the next growth cycle ?2009 2010? will the trend of the last 2 years vis a vis dollar/euro/ gold resume.
Come on folks, this doesn't require hire math.
First, you significantly define down inflation.
Then, you stop counting money.
Lastly, you appoint a FED Head who will do as he's told - keep the money presses printing full speed ahead.
My guess is, not one of these bozos on the FED has kids or grandkids he likes.
Shame on Bernanke, shame on every single person who was in that FOMC meeting room today!
Record high Short Interest appears to be high grade rocket fuel at least temporarily, regardless of the underlying fundamentals of the economy.
It seems as the markets reaction was a surprise to most forum particpants here. IMO, the opposite of what the Fed did today, i.e., nothing, would have generated a similar magnitude move in the opposite direction.
The issue to the masters appeared to be con...con...confidence. Since main street is mostly ill-informed at best, if there is anyway to restore the con...confidence game, even for a little while, I think this was a good shot.
I doubt that rate cuts will cause long rates to rise too far because this creates an opportunity to engage in the carry trade across the curve. This kinds of trades aren't as senstive to dollar value loss or inflation because they're done using borrowed money. Again, we can see this effect in Japan.
That doesn't mean a dollar crash can't occur. I would look to import prices more than long rates for evidence of this.
You can think anything you want, but the facts are the facts. The 10-yr treasury note had a higher interest rate in 5/04, with the Fed funds rate at 1%, than it did yesterday, when the Fed funds rate was 5.25%. Yet, the USD was weaker yesterday (Fed 5.25%) than it was on 5/07 (Fed funds 1%). There are a lot of other factors to consider.
REMEMBER: CR said recently that he wasn't nearly as negative on the US economy as most commentors on this blog were. He HAS NOT predicted a recession.
So we have just had another 10% correction in the S&P 500 - that's all it was. They are ALWAYS emotional - many people get very excited when these occur. But that IS NOT how a wealth distroying bear market begins.
There are still many very positive things happening in the global economy - like synchronized growth. Stay with a diversified portfolio like 50% Vanguard Total US Fund and 50% Vanguard Total Global Fund.
The retail investors should be easier to suck in after the all time highs are retraced - THEN start the sales pitch - the bagholders should be lining up by then!
In the mean time I hope they don't screw around about pumping the Dow in particular, I have some OTM Sept 140's for DIA as a bit of insurance (apologies to the regulars for talking my book).
So we have just had another 10% correction in the S&P 500 - that's all it was. They are ALWAYS emotional - many people get very excited when these occur. But that IS NOT how a wealth distroying bear market begins.
I agree - if the Fed is cooperating with Wall Street, then the Dow 20,000 is easily attainable in the next few months.
However, I think it's important to reiterate that the wealth is an illusion that only exists on paper. Globally you have stock prices that are increasing 2x-10x faster than real wealth, depending on the country.
Businesses and consumers are spending in anticipation of receiving this wealth.
It simply becomes a matter of time until people begin to react to the fact that it's not a matter of "wealth destruction" but simply a realization that the wealth the paper represents does not exist to begin with.
As the dollar falls, one should expect longer rates to rise. When we have a large current account deficit, essentially we're the "capital junkie", well we know how it ends for the drug junkie.
If you take the view, as I do, that the consumer drives the economy and disposable income drives the consumer, and that the MEW portion of this income has disappeared, and that home equity that powered MEW is also shrinking because housing prices are shrinking, then the consumer's real disposable income and balance sheet are facing recession-like conditions. This is, of course, exactly what the polls and consumers indicate -- consumers already believe there is a recession precisely because their real disposable income -- and their wealth (mostly home equity) -- are in decline, regardless of what Bernanke does.
So is this going to make it easier for the SIV owners and holders of other "creative" investments to unload their unpriceable holdings?
Abso-f******-lutely.
It moves the NPV - interest rate - FV relationship a bunch. Any previously existing bond is worth more now... even discounted bonds.
That's what happens when the overall rate environment goes down... existing debt gets priced higher.
Now the question is... "Did the 50bip cut make the damaged bonds worth enough more so the banks can unload them... basically turn the piers back into bridges... or are they so damaged that they need even greater cuts to bring them to par so they can unload them without great loss?"
We'll see. I'd love to hear banker chime in on this one.
Yes, banker's take would be great to hear - though the ABCP issue is resolved only if the impairment is priced, and therefore needs to be known - isn't the bigger issue there they are dealing with uncertainty vs. risk?
LETS KEEP IT VERY SIMPLE: Over extended periods of time (decades), the world's population grows and their standard of living tends to slowly improve too. The value of owning a small portions of many companies (a diversified portfolio) will grow with population growth and with increasing living standards.
Just invest some savings from time to time and don't worry about the details. Most of the speculations in this blogs comments are just that speculations - and frequently by minimally informed individuals.
I don't see the node on the diagram where the economy goes careening, out of control, down the hill, at break-neck speed - hitting rocks, boulders, and innocent bystanders on the way. Shouldn't that scenario be on at least one of the charts?
As an earlier poster said: Hold my beer and watch this!
This all reminds me of "Union Station" (1950), a heist movie set in Chicago.
One of the baddies pursues a vicitim into the cattle yards. He aims and fires, but almost as soon as the deed is done the bulls begin to moan -- at first one, then another, and suddenly: panic. The next camera shot is of hundreds of hooves, the last thing that Ben...I mean, the villian...ever sees!
Hmm if most of the SIVs do get unloaded I'd love to know how much net cash the hedge funds and other holders actually lost due to the month long selling freeze. Not that we'll ever know.
If you take the view, as I do, that the consumer drives the economy and disposable income drives the consumer, and that the MEW portion of this income has disappeared,
Tennis sometimes those 'extended periods' take longer than others to net a gain. Consider the 30s and the 70s... it took decades to see meaningful gains. Lotsa folks don't have multiple decades to wait. Safer shorter investments make more sense for them.
Tennis - Welcome to the internet. If people didn't want to talk about it they wouldn't be here. Everything is speculation until events actually happen.
Im going to rent myself a house
In the shade of the freeway
Im going to pack my lunch in the morning
And go to work each day
And when the evening rolls around
Ill go on home and lay my body down
And when the morning light comes streaming in
Ill get up and do it again
Amen
Say it again
Amen
I want to know what became of the changes
We waited for love to bring
Were they only the fitful dreams
Of some greater awakening
Ive been aware of the time going by
They say in the end its the wink of an eye
And when the morning light comes streaming in
Youll get up and do it again
Amen
You need to work on your approach, man - one that is a bit more targeted to your audience - 'diversify and trust Wall St.' is definitely a non-starter here.
"Tennis sometimes those 'extended periods' take longer than others to net a gain. Consider the 30s and the 70s... it took decades to see meaningful gains. Lotsa folks don't have multiple decades to wait. Safer shorter investments make more sense for them."
Dryfly,
Don't be such a downer.. all one needs to do is get a magic potion so that they can stay relatively young for 100 years.. then they could be certain to enjoy all these great long term investment returns.
I'm sure the extended bull market that began in the early '80s (minus that nasty bump around 7 years ago) will just keep on trucking along.
This will all last forever!
(I know this is cheap hyperbole.. I just get tired of the 100 year stock market returns meme..)
Two yrs ago at their annual summit in Jackson Hole, the topic dujour was the sustainability of the burgeoning US deficits and debts. One question posed was what would the Fed do if foreigners pull the plug on financing US's debts? Two camps emerged -- an US-centric camp, Mankiw and alikes, argued that the Fed would bring out the printing press (a depreciating dollars, higher exports, foreign CB's defending their massive dollar reserves, a thus balanced accounts); while another camp with international flavor, argued for a gradual slow down in US consumption, a below-trend growth of sort for gradual unwinding of the imbalance, for bringing out the printing press certainly would lead to inflation spiraling out of control (dumping US dollars, T-bills,...). Today Fed's decision confirms the predicted action by a US-centric economists. In the next few weeks, let's sit back and see what the foreign CB's do. Interesting time!
energyecon - I didn't say anything about trusting Wall Street. I trust that being an owner of a small piece of many companies (both US and foreign) will let me participate in the increasing wealth of the global economy - and with less volitility than if I only owned a handful of companies.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
this diagram is wishful thinking as it leaves out the single most important factor: deflation imported from Asia.
And currency manipulation from PBoC & BoJ. It will be very interesting to see what those two elect to do.
...
dryfly | 09.18.07 - 4:03 pm
Dryfly, at the end of the last comment post I was speculating is going to make domestic inflation really boom in China, in addition to squeezing the margins of their exporters. That peg is going to be VERY hard to live with. The rest of the BRIC's will probably also soon start having a fun time of it. Lord, I hope we don't accidentally trigger a round of competitive devaluations if the ECB follows suit.
"The first true twenty-first century financial crisis?"
Excerpt:
The technology for addressing twentieth century financial crises arguably has two core components:
* Central banks that can act as a lenders of last resorts to the (regulated) banking system
* And securitizing bad loans to take them off banks balance sheets
The problem now is that the banks arent the only institutions that now need of liquidity in a crisis -- and central banks are still set up to act as a lender of last resort to the banking system.
"Lawmakers also passed an amendment to the bill offered by Frank that would raise the agency's loan limit from its current $417,000 to as much as $729,750."
10% of course! But I am a VERY long term investor. I expect fluctuations.
What were Warren Buffets losses in 2001 - 2003? BILLIONS! But you didn't find him selling Berkshire Hathaway. He is a VERY long term investor - as I am.
Thanks anon | 09.18.07 - 4:51 pm | for that review.
Tis early for such considered thoughtful opinions, esp when we consider the 16 increments that crested at 5.25%. Do mortgage rates come down in response to this bite? Will there be more "loosening" until it does? Will the CBs continue to support the dollar to maintain their export led economies? even with a US consumer that might be spent?
I can wait for it.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
Tennis_8 | 09.18.07 - 4:51 pm | #
Will you be selling tomorrow? BTW: I'm 48, and svelte.
Also will Euro Zone be happy becoming the consumer of last resort after the US makes an attempt to fall back and let them take the lead & break the wind.
Maybe the Euro Zone will like the currency conversion so well, they'll come over to the US for holiday. That would help the US and hurt the other tourist destinations.
Tennis_8s buy and hold, diversified approach is good investment advice, but continuing population growth is not a promising prescription for our beleaguered Mother Earth.
Hang in there then - regardless of inflation adjusted returns you will be in a better position than someone without assets in the market - I understand that works very well in Zimbabwe.
PEOPLE, PEOPLE, HOW CAN YOU ALL HAVE MISSED WHAT IS GOING ON!
CRs virtuous circle is incorrect in that it needs to be expanded.
Everyone on this blog is so busy talking about the housing bubble that you are failing to see the next big bubble forming in equities.
The equity bubble will inflate now, and become a source of Equity Withdrawal which will spur real economic activity which will keep GDP high.
By the time the Equity bubble is ready to pop, real estate will be a bargain! Rinse and repeat.
A few new laws lowering margin requirements on equity accounts would really help here. Please write your congressman regarding stock market deregulation, ASAP.
The summit took place when these SWF's, where foreign reserves are parked, were not spotted on the radar. Perhaps, foreign CB's will continue to finance our debts under the condition that some of the dollar reserves be diversified into purchases of US's other assets, such as energy co., high-tech corps, banks, ... To continue our too-big-to-fail strategy (asset-dependent economy), we may have to give up something valuable. We still have many valuable assets that foreigners desire, but can't acquire b/c of national interest issues. Will the threat of rampant inflation be considered in the national interest to defend against? Interesting time!
(These government-controlled entities,SWF's, are not the same as those Japanese's conglomerates of the 80's that were burned with purchasing inflated U.S assets.)
Watson - There are 100s of millions of people in the developing world quite happy to be entering the middle class, thank you. Try to look outside the US and you will find really positive changes.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
Tennis_8 | 09.18.07 - 4:51 pm | #
Tennis_8, you assume that the past extrapolates predictably into the future. But what time-frame does the "past" consist of? And what are the geographic boundaries of your relevant data?
A century ago, Argentina had one of the most successful economies in the world. A millenium ago, China had the most successful. A millenium before that, Rome ruled the world, and before that Greece, Iraq, and Iran. Over "an extended period of time" virtually every investment made in those economies was lost.
Or consider the flourishing economy of North America pre-1492, which had a growing population already greater than that of Europe. What happened there? A cataclysmic destruction of both the population (about 95% loss) and the economy (also probably 95%).
Stuff happens. Your model is only a model, and works only as long as its assumptions hold true. You are still in the mainstream view. Commenters on this site, however, are starting to suspect that that mainstream model may be seriously broken.
So am I Tennis, and I'm shorting the dollar and have been for several years. When the US eventualy loses it's reserve currency status the empire will crumble, it's coming and deservedly so.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
I'm mostly long too and have no idea how much I made today - a lot though, hope inflation doesn't eat it all. But by the time I'm 66 I expect to be a whole lot shorter. If you went long in 1933 you didn't see a gain until 45. Similar thing in the late 60s to 82.
The best bet is diversify - debt & equities and even commodities & metals if you know how to play them (I don't & stay a way). Long when your young and progressively shorten up as you get older though never do either extreme at either end - alway some of both.
sippn said: "Tennis_8 - all the sympathy you will ever get here follows: I was once in your shoes."
And I was once in yours. Having gone the full route myself, I can tell you for a fact that Tennis_8's simple but surprisingly-profitable philosophy is one of the few winning ones over the long term.
Another simple fact is that the conditions under which it's a big loser are very few and far between. I've identified them, and we ain't even close.
Recession probability in the next 12-18 months is below 25%, and it'll be even lower with today's rate cut.
unirealist said: "Tennis_8, you assume that the past extrapolates predictably into the future. But what time-frame does the "past" consist of? And what are the geographic boundaries of your relevant data?..."
In many cases the past does extrapolate predictably into the future, if the starting conditions are similar.
Waxing literary, Pearl Buck said it very well. The whole of human history is simply a small handful of stories re-told over and over.
The Vietnam War and the Iraq War are blindingly-obvious examples of how similar conditions, even separated by decades, can cause similar results. It was absolutely possible to predict the course of the Iraq War even from before the invasion actually began, based on the course of the Vietnam War. Hell, the British knew the difficulties involved with governing Iraq 80 years ago, and they're the same ones.
We can run the same exercise with the economy and the stock market. There's not going to be any replay of the Great Depression because the key conditions aren't the same. There's not going to be a replay of the high inflation rates of the 1970's and 1980's because the key conditions aren't the same.
And there's not going to be any replay of the 1990's real estate bust any time soon, either. The conditions aren't the same.
"There's not going to be any replay of the Great Depression because the key conditions aren't the same. There's not going to be a replay of the high inflation rates of the 1970's and 1980's because the key conditions aren't the same."
Kevin made an interesting comment about the US ceasing to become the reserve currency - what effect will this have? What will be the most likely replacement? The Euro? I guess the key question to ask in what currency will Oil and Commodities be priced in?
What will be the most likely replacement? The Euro? I guess the key question to ask in what currency will Oil and Commodities be priced in?
My guess is we'll go through a period where there will be no one reserve currency - rather a diversified basket all arbitraged to each other.
Markets are flexible and nimble enough now to 'manage' that - arbitrageurs will keep them 'honest'.
Commodities might currently be 'priced' in dollars but believe me, if you show up in Saudi Arabia with a bunch of yen, they will sell oil to you at $82/bbl or 115 times that in yen - they don't care, they'll convert it in the forex with a couple key strokes.
I can easily see the reserve scheme going from a 'dollar monopoly' to a basket of currencies 'oligopoly'.
I am quite surprised it hasn't happened already. I think the biggest reason it hasn't is because Euro Zone & Japanese don't want 'reserve status'... the premium makes export growth problematic...
But man does monopoly reserve status make it easy to run deficits and over-consume!! WoooooHoooo, bring it on, baby.
In regards to the concept of recession, I'm wondering what the unemployment insurance claims numbers are - does anyone know where to look up this fact? Also, given that the US economy is really a two tier on - one split between those firms who are truly globalized and for whom the US$ tanking is not a bad thing and for those who are domestically focused with imports being a requirment of materials, basic pre-fab'd parts etc thus making the dollar tanking a nightmare - wouldn't the difference between the two be an indicator of recession here at home?
Your arrogance is incredible. You are literally selling free calls and puts all over the place! Thank you!
Tennis-
I love it when people quote Buffett. He doesn't advocate equity diversification AND he's playing a MUCH different game... he's in private equity. You are NOT.
"There's not going to be any replay of the Great Depression because the key conditions aren't the same. There's not going to be a replay of the high inflation rates of the 1970's and 1980's because the key conditions aren't the same."
OK, I've regained speech.
There's not going to be another Buddy Holly show like the one at Clear Lake, Iowa because the key conditions aren't the same.
There's not going to be a replay of the Francisco Franco regime because the key conditions just are not quite the same.
Also, given that the US economy is really a two tier on - one split between those firms who are truly globalized and for whom the US$ tanking is not a bad thing and for those who are domestically focused with imports being a requirment of materials, basic pre-fab'd parts etc thus making the dollar tanking a nightmare - wouldn't the difference between the two be an indicator of recession here at home?
Can be but some of the smaller domestics also have a lot lower overhead - so cost to produce is lower but they won't see the positive 'balance sheet' effects of appreciating offshore assets (due to dollar weakening). Appreciation can cause 'phantom profits'.
Also importing materials isn't that big of a negative comparative factor IF the material is globally priced... then the material component goes up by the same amount regardless of whether it is assembled here or assembled there. The exchange rate works the same either place.
The domestic labor content does become CHEAPER if the dollar weakens. That is where the big differences occur.
You really have to break down the cost drivers to know how significant the cost effects are. Local producers are sometimes disadvantaged and sometimes not.
Alas, a new day job leaves me little time for the blog, and puts me in Silicon Valley (alas??) where I'm hours behind in the comments even as the day starts.
But though probably few will read this, I'll point out anyway, regarding the subject of CR's post to which these comments are attached:
In a feedback regulated system having long delays in its feedback loop (like the real estate market), regular alternation between virtuous and vicious cycle modes is utterly predictable unless the controlling agency accurately anticipates the effect of its actions, rather than just reacting when the signals start to arrive.
There are many industrial processes that cannot be well controlled by pure feedback control algorithms, just because there is too much delay (dead time, in control engineering parlance) around the loop. To control such a process well, one must be able to construct a process model which will accurately predict the results of a control action (and how much delay there will be in the loop), and generate a synthetic feedback signal until the real one arrives.
In the context of the housing bubble, the economic equivalent would have been for the Fed and other bank regulators to predict the results of the interest rate cuts and begin to take corrective action in advance, rather than waiting for unambiguous feedback signals to appear in the data. When there's a long dead time in the loop, by the time the feedback arrives it's already too late.
Note that a fundamental flaw in many arguments of anti-regulation libertarians is that they implicitly assume that reactive adjustment by rational agents to the effects of their actions will inevitably lead to optimal functioning of society and the economy. But in many sectors the loop delays make that fundamentally impossible.
Systems with long dead times in their feedback loops don't stabilize -- they oscillate violently between whatever limits are set on them by external constraints.
Your virtuous and vicious cycles are the two halfs of the 50-60 year interest rate and inflation cycle.
Volcker presided over the transition from inflation to disinflation. Greenspan was lucky enough to operate in the disinflationary cycle with falling rates.
Bernanke is almost into the same dilemma that faced Jimmy Carter and Fed Chairman Miller. Cutting rates now stimulates underlying inflation and long rates go up, not down. Poor Ben. Poor us. But not to worry: property will go back up as soon as it changes hands. We ARE in inflationary times. We just need better hands holding the deeds and mortgages.
Hmmmmmm....
I still bet long rates go down.
Lets see if LIBOR follows the FFR. If it follows, I dont know if this would happen, if it stays high, then I think this circle will play out.
I don't think prices are going to go up no matter how low interest rates go. I still expect houses to come down.
I think I have to give up now and be a good American. First thing in the morning I am going to get a prescription for anti-depressants and buy a Nintendo Wii.
So, now that the dow is only 300 pts away from an all time high, the whole RE market and credit problems are obviously a no-issue economy wise?
Has Murdoch made you an offer yet?
I just realized my WSJ sits here ignored until you guys take your pm naps.
All right, so what you are saying is that if housing continues down investors will unwind and interest rates will have to go up which will force housing down even further.
I like it but I don't understand why the unwinding of mortgage investors will cause interest rates to go up.
Unless rates go up to find someone who will invest? Have to pay to find an investor willing to take the risk?
Thanks
So how screwed are we?
I think you could add "Foreclosures/Bankruptcies" to the "lower equity withdrawal" bubble in the Vicious Cycle chart.
Most people now seem to think that the Fed can simply jack interest rates up and down and magically keep us in a non-stop boom.
We have a trillion dollar war to nowhere, huge trade deficit, huge current account deficit, mind-numbingly huge unfunded pension liabilities, rising inflation, rising unemployment, loss of industrial base, negative savings rate...and on and on with a litany of economic red flags.
But forget all that. The magicians at the Fed just have to start cutting and cutting and the good times will keep on rolling. Ha!
Bob Toll is having drinks on us. Stock up over 7%.
LIBOR 1 month 5.49625
LIBOR 2 months 5.55375
LIBOR 3 months 5.5875
LIBOR 6 months 5.42
LIBOR 12 months 5.1125
Most curretn LIBOR, NO CHANGE! Kiss that BB!
CR - Makes sense and puts some meat on a feeling I had.
Question I am not clear on - what would you expect long rates need to be in order to me considered "normal"?
Thanks for the explanation. Always wondered what those terms meant.
Doesn't seem to be anything virtuous about a virtuous cycle, which just goes to show that you should never let economists play with English.
Binko, they keep lying about the real rate of inflation so they can do waht they want. Has anyone here looked at the change in their food bill over the last few years?
what's the point of doing the "right/responsible" thing anymore? We're rewarding people who are irresponsible and stupid.
I'm on strike.
Perhaps there is another stage to the vicious circle - inflation and oil prices.
with the lowering of interest rates, inflation will set to rise - because the $ is tanking, imports will rise in price and when the spaz fit in the stock markets ends and people realize their gains are being eaten away by REAL inflation (inc. oil and food) then, there will be a flight to gold, stocks down etc.
I think the oil scenario is going to see $100+, Iran is not meeting it's OPEC quota, Iraq I feel will descend into cival war and I do not believe that SAudi or Russia have enough excess capacity to take up the slack.
btw- my first post and I love this blog!
Cheers
Baoinvestor
Roubini continues:
Thus, while the stock market is now cheering the Fed doing more than they had expected it remains to be seen if this Fed easing ends up being too little too late. Certainly in 2006-2007 like in 2000-2001 the Fed incorrectly assessed the risk of a hard landing and kept a tightening bias for too long before being forced by the real and financial facts to switch in a matter of a few weeks from a tightening bias to an easing bias and then to an actual 50bps cut. The Fed argued for too long that the housing recession would "bottom out", that its spillovers to other sectors and to private consumption would be "modest", and that the subprime problem was a "niche" and "contained" problem. Now the economic and financial facts have forced it to play catch up with reality. I thus remain of the view that 50bps is too little too late and that we will experience a hard landing.
o bail out, you need to get a credit card and buy a Nintendo Wii. Then when you run out of credit, just ask the government to pony up your living expenses. Ah, the easy life.
Countrywide presentation at BofA conference.
http://about.countrywide.com/presentations/docs/BofA%20ARM%20Presentation%20FINAL%20slides%20for%20webcast.pdf
this diagram is wishful thinking as it leaves out the single most important factor: deflation imported from Asia.
mortgage meltdown only takes back some growth that was "hurried" in the past couple of years, maybe 0.5%/year.
the big fellow with the hood and scythe is called chinese inflation.
With all due respect to Dr. Roubini, I did not expect him to change his recession prediction based on the Fed's move. If God herself appeared to Roubini and offered him eternal paradise he would not stop predicting a recession.
If the US has anything going for it, it is that we clearly are too big to fail. The rest of the world has become addicted to our credit addiction. At least the "higher interest rates" part of the cycle can be attacked, but I don't think there is anything anyone can do about lower home prices and MEW.
And thanks for posting something to get us thinking again, rather than yelling or navel gazing.
Today's market reaction means that the market continues to believe that the problem is the level of interest rates. It isn't. Interest rates have been at historically reasonable levels. The problem has been overly lax credit standards.
Housing Novice, this is just a possibility - but it is a scary possibility. We are now on diagram 2 (There is no going back to the virtuous cycle in the near term).
The danger is if the economy slows, long rates will rise as foreign CBs stop buying (or even sell). And that would push housing prices down even further.
This is just a possibility ....
Best to all.
Good post. Treasury rates can go down while mortgage yields rise. This is a possible outcome if the economy is in recession and housing gets ugly enough.
Gold over $735- oil near $82 wow!
this diagram is wishful thinking as it leaves out the single most important factor: deflation imported from Asia.
And currency manipulation from PBoC & BoJ. It will be very interesting to see what those two elect to do.
Also will Euro Zone be happy becoming the consumer of last resort after the US makes an attempt to fall back and let them take the lead & break the wind.
And if you don't think a cut like this and a weakening dollar won't put rice pressure on our importer friends - well then you don't know many. LOL. The one group gonna think this sucks worse than foreign investors will be foreign exporters importing goods into the US.
MNCs BTW are completely hedged - they have assets offshore which just increased in value balanced against those domestically that declined... that is against a basket of currencies, not just dollars.
I like CR's cycles but like all models participants will aggressively game it to uncertain outcome.
Lawmakers also passed an amendment to the bill offered by Frank that would raise the agency's loan limit from its current $417,000 to as much as $729,750.
Euro now a hair from $1.40. $1.50 by end of 2008?
And if you don't think a cut like this and a weakening dollar won't put rice pressure on our importer friends
Errr... that should have been PRICE pressure... but you get the idea.
Toll pushing over 9% up.
$1.50 by end of 2008?
Why 2008? Why not end of 2007?
Just called the bank and going to pick up some nickels today before the mint changes the metal content or discontiues them all together. Maybe some pennies too.
I want to reiterate my question from the earlier thread ---- if the rest of the world also goes into recession, which I believe it will, then won't interest rate differentials reverse and the dollar strengthen?
I would think not til the next growth cycle ?2009 2010? will the trend of the last 2 years vis a vis dollar/euro/ gold resume.
Faber says rate cuts will trigger recession:
Rogers, Faber Say Fed Rate Cuts Will Spur a Recession (Update4) - Bloomberg.com
Come on folks, this doesn't require hire math.
First, you significantly define down inflation.
Then, you stop counting money.
Lastly, you appoint a FED Head who will do as he's told - keep the money presses printing full speed ahead.
My guess is, not one of these bozos on the FED has kids or grandkids he likes.
Shame on Bernanke, shame on every single person who was in that FOMC meeting room today!
Are the Europeans happy with the Euro being so much higher than the dollar?
Is the Fed willing to let the dollar slide? (well continue it's slide)
Is Asia able to survive a US recessions?
Does a Fed rate cute really affect any of the above answers?
Record high Short Interest appears to be high grade rocket fuel at least temporarily, regardless of the underlying fundamentals of the economy.
It seems as the markets reaction was a surprise to most forum particpants here. IMO, the opposite of what the Fed did today, i.e., nothing, would have generated a similar magnitude move in the opposite direction.
The issue to the masters appeared to be con...con...confidence. Since main street is mostly ill-informed at best, if there is anyway to restore the con...confidence game, even for a little while, I think this was a good shot.
My guess is, not one of these bozos on the FED has kids or grandkids he likes.
Anyone on a fixed income got screwed today, too, barely. So maybe they have parents or other retired relatives they like even less?
I doubt that rate cuts will cause long rates to rise too far because this creates an opportunity to engage in the carry trade across the curve. This kinds of trades aren't as senstive to dollar value loss or inflation because they're done using borrowed money. Again, we can see this effect in Japan.
That doesn't mean a dollar crash can't occur. I would look to import prices more than long rates for evidence of this.
Look for the ECB's to be cutting soon.
You can think anything you want, but the facts are the facts. The 10-yr treasury note had a higher interest rate in 5/04, with the Fed funds rate at 1%, than it did yesterday, when the Fed funds rate was 5.25%. Yet, the USD was weaker yesterday (Fed 5.25%) than it was on 5/07 (Fed funds 1%). There are a lot of other factors to consider.
Bernanke was beaten by his parents at a young age. This is his passive-aggressive way of getting back at them.
REMEMBER: CR said recently that he wasn't nearly as negative on the US economy as most commentors on this blog were. He HAS NOT predicted a recession.
So we have just had another 10% correction in the S&P 500 - that's all it was. They are ALWAYS emotional - many people get very excited when these occur. But that IS NOT how a wealth distroying bear market begins.
There are still many very positive things happening in the global economy - like synchronized growth. Stay with a diversified portfolio like 50% Vanguard Total US Fund and 50% Vanguard Total Global Fund.
From Americas #1 Lender, Countrywide:
"Increased staffing levels in India for home retention and loss mitigation efforts, shifting additional costs to an area with lower
labor expense"
Lending to America by firing Americans.
Money leaves the bond market now for stocks forcing yields higher?
Tennis_8,
The retail investors should be easier to suck in after the all time highs are retraced - THEN start the sales pitch - the bagholders should be lining up by then!
In the mean time I hope they don't screw around about pumping the Dow in particular, I have some OTM Sept 140's for DIA as a bit of insurance (apologies to the regulars for talking my book).
Look for the ECB's to be cutting soon. - Dead Emperor
They probably will have to else the
euro goes to to the moon & Euro Zone is far more dependent on exports than Dollar Zone.
Tennis - I like CR's style and site but he's not the grand high determinator of what is about to happen. I'll keep preparing for hibernation thanks.
Tennis_8, sorry, but that isn't correct. I think a recession is the most likely scenario (over 50%).
Best Wishes.
While rationality appears to be a well represented quality on this forum, irrational exuberance struck back and struck back hard today.
REMEMBER: CR said recently that he wasn't nearly as negative on the US economy as most commentors on this blog were. He HAS NOT predicted a recession.
Turns out the Fed was though, whooda thunk it.
Sorry, CR, I didn't mean to mis-quote you. I must have missed that day. Time will tell.
The bulls now own a drawer full of soiled shorts.
So how screwed are we?
stealth4 | 09.18.07 - 3:44 pm,/i>
What do you mean "we" Lone Ranger?
So is this going to make it easier for the SIV owners and holders of other "creative" investments to unload their unpriceable holdings?
Seems to me they're still screwed.
So we have just had another 10% correction in the S&P 500 - that's all it was. They are ALWAYS emotional - many people get very excited when these occur. But that IS NOT how a wealth distroying bear market begins.
I agree - if the Fed is cooperating with Wall Street, then the Dow 20,000 is easily attainable in the next few months.
However, I think it's important to reiterate that the wealth is an illusion that only exists on paper. Globally you have stock prices that are increasing 2x-10x faster than real wealth, depending on the country.
Businesses and consumers are spending in anticipation of receiving this wealth.
It simply becomes a matter of time until people begin to react to the fact that it's not a matter of "wealth destruction" but simply a realization that the wealth the paper represents does not exist to begin with.
As the dollar falls, one should expect longer rates to rise. When we have a large current account deficit, essentially we're the "capital junkie", well we know how it ends for the drug junkie.
Faber says rate cuts will trigger recession
Faber thinks Britney's VMA performance will cause a recession.
If you take the view, as I do, that the consumer drives the economy and disposable income drives the consumer, and that the MEW portion of this income has disappeared, and that home equity that powered MEW is also shrinking because housing prices are shrinking, then the consumer's real disposable income and balance sheet are facing recession-like conditions. This is, of course, exactly what the polls and consumers indicate -- consumers already believe there is a recession precisely because their real disposable income -- and their wealth (mostly home equity) -- are in decline, regardless of what Bernanke does.
ac,
Combine that with accelerating debt loads that need to be serviced...
So is this going to make it easier for the SIV owners and holders of other "creative" investments to unload their unpriceable holdings?
Abso-f******-lutely.
It moves the NPV - interest rate - FV relationship a bunch. Any previously existing bond is worth more now... even discounted bonds.
That's what happens when the overall rate environment goes down... existing debt gets priced higher.
Now the question is... "Did the 50bip cut make the damaged bonds worth enough more so the banks can unload them... basically turn the piers back into bridges... or are they so damaged that they need even greater cuts to bring them to par so they can unload them without great loss?"
We'll see. I'd love to hear banker chime in on this one.
"Look for the ECB's to be cutting soon. - Dead Emperor
They probably will have to else the
euro goes to to the moon & Euro Zone is far more dependent on exports than Dollar Zone.
dryfly | 09.18.07 - 4:23 pm | #"
Indeed. The great reflation has now begun.
CR - it's not just a possibility that long rates will rise. IT HAS ALREADY HAPPENED, TODAY.
That's capital flight. Whee!
As the dollar falls, one should expect longer rates to rise.
But this may be offset by the decline in short rates which allows speculators to buy long bonds with positive carry.
Speculators will buy literally anything these days, so I doubt they'll turn away from this opportunity.
dry,
Yes, banker's take would be great to hear - though the ABCP issue is resolved only if the impairment is priced, and therefore needs to be known - isn't the bigger issue there they are dealing with uncertainty vs. risk?
LETS KEEP IT VERY SIMPLE: Over extended periods of time (decades), the world's population grows and their standard of living tends to slowly improve too. The value of owning a small portions of many companies (a diversified portfolio) will grow with population growth and with increasing living standards.
Just invest some savings from time to time and don't worry about the details. Most of the speculations in this blogs comments are just that speculations - and frequently by minimally informed individuals.
I don't see the node on the diagram where the economy goes careening, out of control, down the hill, at break-neck speed - hitting rocks, boulders, and innocent bystanders on the way. Shouldn't that scenario be on at least one of the charts?
As an earlier poster said: Hold my beer and watch this!
This all reminds me of "Union Station" (1950), a heist movie set in Chicago.
One of the baddies pursues a vicitim into the cattle yards. He aims and fires, but almost as soon as the deed is done the bulls begin to moan -- at first one, then another, and suddenly: panic. The next camera shot is of hundreds of hooves, the last thing that Ben...I mean, the villian...ever sees!
Hmm if most of the SIVs do get unloaded I'd love to know how much net cash the hedge funds and other holders actually lost due to the month long selling freeze. Not that we'll ever know.
Dewey defeats Truman
Mission Accomplished
Heck of a job Brownie
Fed cuts rate by half a percentage point
The Great Re-wind (attempt) has begun!
Can the intrepid central bankers inflate the currency faster than the asset depreciation of the US Housing Market?!
Stay tuned campers - which way will Mr. Toad's wild ride take us next?
If you take the view, as I do, that the consumer drives the economy and disposable income drives the consumer, and that the MEW portion of this income has disappeared,
MEW is not income.
Tennis sometimes those 'extended periods' take longer than others to net a gain. Consider the 30s and the 70s... it took decades to see meaningful gains. Lotsa folks don't have multiple decades to wait. Safer shorter investments make more sense for them.
Tennis - Welcome to the internet. If people didn't want to talk about it they wouldn't be here. Everything is speculation until events actually happen.
MEW is not income.
It is to the the guy who receives it when the homedebtor spends it. Just ask Best Buy.
Im going to rent myself a house
In the shade of the freeway
Im going to pack my lunch in the morning
And go to work each day
And when the evening rolls around
Ill go on home and lay my body down
And when the morning light comes streaming in
Ill get up and do it again
Amen
Say it again
Amen
I want to know what became of the changes
We waited for love to bring
Were they only the fitful dreams
Of some greater awakening
Ive been aware of the time going by
They say in the end its the wink of an eye
And when the morning light comes streaming in
Youll get up and do it again
Amen
Tennis,
You need to work on your approach, man - one that is a bit more targeted to your audience - 'diversify and trust Wall St.' is definitely a non-starter here.
"Tennis sometimes those 'extended periods' take longer than others to net a gain. Consider the 30s and the 70s... it took decades to see meaningful gains. Lotsa folks don't have multiple decades to wait. Safer shorter investments make more sense for them."
Dryfly,
Don't be such a downer.. all one needs to do is get a magic potion so that they can stay relatively young for 100 years.. then they could be certain to enjoy all these great long term investment returns.
I'm sure the extended bull market that began in the early '80s (minus that nasty bump around 7 years ago) will just keep on trucking along.
This will all last forever!
(I know this is cheap hyperbole.. I just get tired of the 100 year stock market returns meme..)
Two yrs ago at their annual summit in Jackson Hole, the topic dujour was the sustainability of the burgeoning US deficits and debts. One question posed was what would the Fed do if foreigners pull the plug on financing US's debts? Two camps emerged -- an US-centric camp, Mankiw and alikes, argued that the Fed would bring out the printing press (a depreciating dollars, higher exports, foreign CB's defending their massive dollar reserves, a thus balanced accounts); while another camp with international flavor, argued for a gradual slow down in US consumption, a below-trend growth of sort for gradual unwinding of the imbalance, for bringing out the printing press certainly would lead to inflation spiraling out of control (dumping US dollars, T-bills,...). Today Fed's decision confirms the predicted action by a US-centric economists. In the next few weeks, let's sit back and see what the foreign CB's do. Interesting time!
energyecon - I didn't say anything about trusting Wall Street. I trust that being an owner of a small piece of many companies (both US and foreign) will let me participate in the increasing wealth of the global economy - and with less volitility than if I only owned a handful of companies.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
this diagram is wishful thinking as it leaves out the single most important factor: deflation imported from Asia.
And currency manipulation from PBoC & BoJ. It will be very interesting to see what those two elect to do.
...
dryfly | 09.18.07 - 4:03 pm
Dryfly, at the end of the last comment post I was speculating is going to make domestic inflation really boom in China, in addition to squeezing the margins of their exporters. That peg is going to be VERY hard to live with. The rest of the BRIC's will probably also soon start having a fun time of it. Lord, I hope we don't accidentally trigger a round of competitive devaluations if the ECB follows suit.
A good article from Setser, on CR's RSS feed:
"The first true twenty-first century financial crisis?"
Excerpt:
Tennis,
And what were your losses in August?
So when you say just invest 'some' of our savings...
Do you assume that I/we/Society have 'some' savings to invest?
Shorter Tennis8:
Let them eat cake!
"Lawmakers also passed an amendment to the bill offered by Frank that would raise the agency's loan limit from its current $417,000 to as much as $729,750."
IS THIS TRUE OR JOKE ????
Jesus CR,
You stick to your theory, and the reality follows it (for now)!
Of course I am not P. Krugman but this is also my reference blog for housing.
Keep your excellent job!
"And what were your losses in August?
energyecon"
10% of course! But I am a VERY long term investor. I expect fluctuations.
What were Warren Buffets losses in 2001 - 2003? BILLIONS! But you didn't find him selling Berkshire Hathaway. He is a VERY long term investor - as I am.
Thanks anon | 09.18.07 - 4:51 pm | for that review.
Tis early for such considered thoughtful opinions, esp when we consider the 16 increments that crested at 5.25%. Do mortgage rates come down in response to this bite? Will there be more "loosening" until it does? Will the CBs continue to support the dollar to maintain their export led economies? even with a US consumer that might be spent?
I can wait for it.
Question:
When do Merget Monday LBO mania resume ??
BX up 4% and GS over 7%....
Tennis_8 - all the sympathy you will ever get here follows: I was once in your shoes.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
Tennis_8 | 09.18.07 - 4:51 pm | #
Will you be selling tomorrow? BTW: I'm 48, and svelte.
Don't let 'em wear you down, Ten-8. Most of them have been hoping for a depression.
Drop kick me, Benny, through the goal posts of wealth.
Also will Euro Zone be happy becoming the consumer of last resort after the US makes an attempt to fall back and let them take the lead & break the wind.
Maybe the Euro Zone will like the currency conversion so well, they'll come over to the US for holiday. That would help the US and hurt the other tourist destinations.
Lending to America by firing Americans.
If the dollar tanks, won't it make offshoring jobs more expensive ?
Tennis_8s buy and hold, diversified approach is good investment advice, but continuing population growth is not a promising prescription for our beleaguered Mother Earth.
And although more and more people have cell phones and TVs, its debatable that standards of living are improving. Take a look at Planet of Slums, Amazon.com: Planet of Slums (9781844670222): Mike Davis: Books.
Tennis,
Hang in there then - regardless of inflation adjusted returns you will be in a better position than someone without assets in the market - I understand that works very well in Zimbabwe.
Tennis_8
Census stats say you'be only got 11 years if your a US male citizen.
and a 2% pop gaining 84g's puts your net VAR 1.6mm
You may as well start spending it.
PEOPLE, PEOPLE, HOW CAN YOU ALL HAVE MISSED WHAT IS GOING ON!
CRs virtuous circle is incorrect in that it needs to be expanded.
Everyone on this blog is so busy talking about the housing bubble that you are failing to see the next big bubble forming in equities.
The equity bubble will inflate now, and become a source of Equity Withdrawal which will spur real economic activity which will keep GDP high.
By the time the Equity bubble is ready to pop, real estate will be a bargain! Rinse and repeat.
A few new laws lowering margin requirements on equity accounts would really help here. Please write your congressman regarding stock market deregulation, ASAP.
calmo,
The summit took place when these SWF's, where foreign reserves are parked, were not spotted on the radar. Perhaps, foreign CB's will continue to finance our debts under the condition that some of the dollar reserves be diversified into purchases of US's other assets, such as energy co., high-tech corps, banks, ... To continue our too-big-to-fail strategy (asset-dependent economy), we may have to give up something valuable. We still have many valuable assets that foreigners desire, but can't acquire b/c of national interest issues. Will the threat of rampant inflation be considered in the national interest to defend against? Interesting time!
(These government-controlled entities,SWF's, are not the same as those Japanese's conglomerates of the 80's that were burned with purchasing inflated U.S assets.)
Watson - There are 100s of millions of people in the developing world quite happy to be entering the middle class, thank you. Try to look outside the US and you will find really positive changes.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
Tennis_8 | 09.18.07 - 4:51 pm | #
Tennis_8,
Do you have son named Sebastian, by chance?
Yes ;~)
I'll post you guys at the end of the year and see how we are all doing.
Best Wishes, as they say here.....
Tennis_8, you assume that the past extrapolates predictably into the future. But what time-frame does the "past" consist of? And what are the geographic boundaries of your relevant data?
A century ago, Argentina had one of the most successful economies in the world. A millenium ago, China had the most successful. A millenium before that, Rome ruled the world, and before that Greece, Iraq, and Iran. Over "an extended period of time" virtually every investment made in those economies was lost.
Or consider the flourishing economy of North America pre-1492, which had a growing population already greater than that of Europe. What happened there? A cataclysmic destruction of both the population (about 95% loss) and the economy (also probably 95%).
Stuff happens. Your model is only a model, and works only as long as its assumptions hold true. You are still in the mainstream view. Commenters on this site, however, are starting to suspect that that mainstream model may be seriously broken.
"He is a VERY long term investor - as I am."
So am I Tennis, and I'm shorting the dollar and have been for several years. When the US eventualy loses it's reserve currency status the empire will crumble, it's coming and deservedly so.
By the way dryfly, I am 66 years old and 95% long equities. Made the most I ever made in one ON PAPER today: $84,000.
I'm mostly long too and have no idea how much I made today - a lot though, hope inflation doesn't eat it all. But by the time I'm 66 I expect to be a whole lot shorter. If you went long in 1933 you didn't see a gain until 45. Similar thing in the late 60s to 82.
The best bet is diversify - debt & equities and even commodities & metals if you know how to play them (I don't & stay a way). Long when your young and progressively shorten up as you get older though never do either extreme at either end - alway some of both.
"MEW is not income."
It is if you don't intend on paying it back and you qualify for Chapter 7.
sippn said: "Tennis_8 - all the sympathy you will ever get here follows: I was once in your shoes."
And I was once in yours.
Having gone the full route myself, I can tell you for a fact that Tennis_8's simple but surprisingly-profitable philosophy is one of the few winning ones over the long term.
Another simple fact is that the conditions under which it's a big loser are very few and far between. I've identified them, and we ain't even close.
Recession probability in the next 12-18 months is below 25%, and it'll be even lower with today's rate cut.
Sebastia
unirealist said: "Tennis_8, you assume that the past extrapolates predictably into the future. But what time-frame does the "past" consist of? And what are the geographic boundaries of your relevant data?..."
In many cases the past does extrapolate predictably into the future, if the starting conditions are similar.
Waxing literary, Pearl Buck said it very well.
The whole of human history is simply a small handful of stories re-told over and over.
The Vietnam War and the Iraq War are blindingly-obvious examples of how similar conditions, even separated by decades, can cause similar results. It was absolutely possible to predict the course of the Iraq War even from before the invasion actually began, based on the course of the Vietnam War. Hell, the British knew the difficulties involved with governing Iraq 80 years ago, and they're the same ones.
We can run the same exercise with the economy and the stock market. There's not going to be any replay of the Great Depression because the key conditions aren't the same. There's not going to be a replay of the high inflation rates of the 1970's and 1980's because the key conditions aren't the same.
And there's not going to be any replay of the 1990's real estate bust any time soon, either. The conditions aren't the same.
Sebastia
Sebastian
Wide Angle . The Empty ATM . Photo Essay: Argentina, from economic melt-down to political crisis | PBS
Da future hope your ready it be coming for you.
"There's not going to be any replay of the Great Depression because the key conditions aren't the same. There's not going to be a replay of the high inflation rates of the 1970's and 1980's because the key conditions aren't the same."
No comment. I'm speechless.
Kevin made an interesting comment about the US ceasing to become the reserve currency - what effect will this have? What will be the most likely replacement? The Euro? I guess the key question to ask in what currency will Oil and Commodities be priced in?
Cheers
Baoinvestor
What will be the most likely replacement? The Euro? I guess the key question to ask in what currency will Oil and Commodities be priced in?
My guess is we'll go through a period where there will be no one reserve currency - rather a diversified basket all arbitraged to each other.
Markets are flexible and nimble enough now to 'manage' that - arbitrageurs will keep them 'honest'.
Commodities might currently be 'priced' in dollars but believe me, if you show up in Saudi Arabia with a bunch of yen, they will sell oil to you at $82/bbl or 115 times that in yen - they don't care, they'll convert it in the forex with a couple key strokes.
I can easily see the reserve scheme going from a 'dollar monopoly' to a basket of currencies 'oligopoly'.
I am quite surprised it hasn't happened already. I think the biggest reason it hasn't is because Euro Zone & Japanese don't want 'reserve status'... the premium makes export growth problematic...
But man does monopoly reserve status make it easy to run deficits and over-consume!! WoooooHoooo, bring it on, baby.
Thanks Dryfly.
In regards to the concept of recession, I'm wondering what the unemployment insurance claims numbers are - does anyone know where to look up this fact? Also, given that the US economy is really a two tier on - one split between those firms who are truly globalized and for whom the US$ tanking is not a bad thing and for those who are domestically focused with imports being a requirment of materials, basic pre-fab'd parts etc thus making the dollar tanking a nightmare - wouldn't the difference between the two be an indicator of recession here at home?
Cheers
Sebastian -
Your arrogance is incredible. You are literally selling free calls and puts all over the place! Thank you!
Tennis-
I love it when people quote Buffett. He doesn't advocate equity diversification AND he's playing a MUCH different game... he's in private equity. You are NOT.
"There's not going to be any replay of the Great Depression because the key conditions aren't the same. There's not going to be a replay of the high inflation rates of the 1970's and 1980's because the key conditions aren't the same."
OK, I've regained speech.
Tennis,
"The biggest stock market gains are made by the public on paper...and that's where they stay."
--legendary trader Jesse Livermore
Still have global housing bubbles.
Still have huge government deficits.
My mother got her last SS check and I assume even though there is no money to pay it she will get her next one.
Then the 800lb gorilla in the room Medicare roughly 50 trillion underfunded.
Save some trees Ben break out the new 100000 dollar bills.
Always wanted to know what it was like to make a million dollars an hour. Hope I have enough money to buy gas to get to work!!!
Ministry of Truth,
Please buy a PSP or PS3. At least I get a couple bucks from that. ;^)
Also, given that the US economy is really a two tier on - one split between those firms who are truly globalized and for whom the US$ tanking is not a bad thing and for those who are domestically focused with imports being a requirment of materials, basic pre-fab'd parts etc thus making the dollar tanking a nightmare - wouldn't the difference between the two be an indicator of recession here at home?
Can be but some of the smaller domestics also have a lot lower overhead - so cost to produce is lower but they won't see the positive 'balance sheet' effects of appreciating offshore assets (due to dollar weakening). Appreciation can cause 'phantom profits'.
Also importing materials isn't that big of a negative comparative factor IF the material is globally priced... then the material component goes up by the same amount regardless of whether it is assembled here or assembled there. The exchange rate works the same either place.
The domestic labor content does become CHEAPER if the dollar weakens. That is where the big differences occur.
You really have to break down the cost drivers to know how significant the cost effects are. Local producers are sometimes disadvantaged and sometimes not.
Alas, a new day job leaves me little time for the blog, and puts me in Silicon Valley (alas??) where I'm hours behind in the comments even as the day starts.
But though probably few will read this, I'll point out anyway, regarding the subject of CR's post to which these comments are attached:
In a feedback regulated system having long delays in its feedback loop (like the real estate market), regular alternation between virtuous and vicious cycle modes is utterly predictable unless the controlling agency accurately anticipates the effect of its actions, rather than just reacting when the signals start to arrive.
There are many industrial processes that cannot be well controlled by pure feedback control algorithms, just because there is too much delay (dead time, in control engineering parlance) around the loop. To control such a process well, one must be able to construct a process model which will accurately predict the results of a control action (and how much delay there will be in the loop), and generate a synthetic feedback signal until the real one arrives.
In the context of the housing bubble, the economic equivalent would have been for the Fed and other bank regulators to predict the results of the interest rate cuts and begin to take corrective action in advance, rather than waiting for unambiguous feedback signals to appear in the data. When there's a long dead time in the loop, by the time the feedback arrives it's already too late.
Note that a fundamental flaw in many arguments of anti-regulation libertarians is that they implicitly assume that reactive adjustment by rational agents to the effects of their actions will inevitably lead to optimal functioning of society and the economy. But in many sectors the loop delays make that fundamentally impossible.
Systems with long dead times in their feedback loops don't stabilize -- they oscillate violently between whatever limits are set on them by external constraints.
I believe this plays out with my current outlook of how rates are currently being determined.
I think that the FRB is doing some economic game theory predictions.
Game theory - Wikipedia, the free encyclopedia
David Levine's Economic and Game Theory Page
By the way, I love your daily posts and housing analysis.
Your virtuous and vicious cycles are the two halfs of the 50-60 year interest rate and inflation cycle.
Volcker presided over the transition from inflation to disinflation. Greenspan was lucky enough to operate in the disinflationary cycle with falling rates.
Bernanke is almost into the same dilemma that faced Jimmy Carter and Fed Chairman Miller. Cutting rates now stimulates underlying inflation and long rates go up, not down. Poor Ben. Poor us. But not to worry: property will go back up as soon as it changes hands. We ARE in inflationary times. We just need better hands holding the deeds and mortgages.