Dry,
I kinda meant that 4 percent inflation number to be rhetorical, but on further reflection I think it could be doable as long as the foreign baggie holders keep propping us up. China now controls 1.25 trillion of our debt...till they offhedge with derivatives. That day when the deliver out all of their positions is when the earthquake happens and we all wake up a lot poorer than the night before. Otoh- I don't really need much from china anymore, and I think that the next poor assembly plant de jure can take their place- Upper Volta anyone?
Anything that has an international market will immediately go skyhigh, but as long as they give the people cheap gas and cheap houses- all is well...
well, ominous. but then I am well aware that the day is coming.
Funny things is trying to get these points across to BdL got me booted off of his blog- but then Brad truly believes that he can get another chance before we go over the falls--- a position that I think is now guaranteed by the current set of treasury appartchiks/congressional ostriches/hacks at the fed.
The concept that the US is insolvent is not only begun circulating as a meme within the profession, but foreign central bankers are finally beginning the terrifying process of switching away from the king dollar.
That alone spells the end of the current american way of life-people may keep their half million dollar burgs, but that cheeseburger is going to be $55- with our special coupon.
Now, remember gresham's law and watch the pennies and nickels disappear in 2007. coinflation.com
That alone spells the end of the current american way of life-people may keep their half million dollar burgs, but that cheeseburger is going to be $55- with our special coupon.
I've though the same thing Allen. I have a friend who owns a small construction sub-contractor company - he currently does siding for large developments. Had about 30 employees at peak now down to about 6-8. Still profitable though because he downsized with the market - just a lot less gross.
Anyway I told him to focus on ways to make mini-McMansions affordable to people when the dollar goes kaputt - think energy & multiple occupancy. He laughed - but not too hard. This guy soaks everything up & stores it - might come a time.
On Gresham's law - zinc is now over $2/lb. Pennies are made of zinc (copper plated). A zinc die caster told me today the penney is worth more as metal than as a penny. If that continues look for pennies to disappear.
An argument can be made that these are special cases. But historically nonresidential investment follows residential investment - so this should be a warning flag.
OTOH, maybe if every company cut their capital spending plans, overall profits would look really good!
The FED has never turned off the spigot of liquidity despite all the fanfare of the 17 rate hikes- they have been merely a facade. The amount of easy money is abundant still- now that liquidity is flowing from housing into the stock market- after all it needs someplace to go. Seems like we are jumping from bubble to bubble- as Stephen Roach said a few years ago-'bubbles are forever'.
However this is setting us up for an even more dangerous situation.
Which in the end COULD spell a major disaster. We still have A basically uncorrected bubble in housing prices and another one now with increasingly rampant speculation in equities- The James Bond film when Rita Coolidge sang All time High' may seem right now for the 'soft landing crowd' but this could turn very soon to 'A View to A Kill'. The stock market is no longer cheap, and is very overbought- in the process of forming another deadly bubble. This could be the straw that broke the camels back- for both stocks and housing- easy money throughout history has always lead to a catastrophe, it will not be any different this time around.
At the end of the day I always come back to risk/reward. If we have a soft landing (3+% GDP in '07 is a pipe dream, first off) can the markets go higher? Yes, absolutely BUT lets not forget this bull market is already long in the tooth and the 2nd longest bull market that didn't have a 10% corection.
The VIX is back down near all-time lows and the world dismisses any bad news. Something doesn't make sense. Housing is going to get worse.
I don't find a 3%+ growth expectation as median estimate anywhere. Bloomberg's median estimates are for high 2s through Q3 of next year (no estimate yet for Q4). Fed staff looks for below-trend growth through 2007 and Fed officials are talking about a 1% growth loss due to housing.
As to a capital spending boom, that always seemed an odd call to me. The pattern of growth in this cycle, and more broadly since 1983-1984, doesn't support this notion. Worry over bad software on the way to 2000 produced a surge of investment that had to be digested, but the smoothest growth on record in this expansion doesn't seem the sort of thing to breed a late cycle boom in capital spending. It should be far easier to calibrate capital needs in this environment than in the past, so why would we have a capital spending shock? CEO surveys all suggest reduced capital spending in the next few quarters. Headlines, as our host shows, confirm what CEOs are saying in surveys.
I continue to be amazed at how sanguine most forecasts are. I think there's a lot of cognitive dissonance going on - things have generally gone well for the past 25 years, so why forecast anything beyond a contained slowdown? I can think of a number of reasons, but for the time being at least, this is a slow-motion trainwreck. It took the Japanese around two years into their 15 year debacle to clue into the fact that the sushi wasn't just a little whiffy, and even after enduring a 75% beatdown, the public still overpays for tech stocks. If you think we may be in for something a little (or a lot) worse than a mild slowdown, at least you've been given ample opportunity to get your house in order (so to speak) beforehand.
While I don't disagree that there is way too much liquidity out there, I do have to take issue with the idea that the stock market is overly expensive right now. In December of 2001 the S&P 500 PE ratio was 46. Now it is 17. Granted, this is still above the long term average, and I personally would not be surprised if it dropped below that (say to the 13-14 range). Nevertheless, a 23% drop in the PE ratio is a lot less painful than the 63% drop over the last 5 years.
All that being said, I do think liquidity needs to be reduced in an orderly fashion to reduce the risk of additional asset bubbles and/or value-destroying inflation. The Fed should stop sitting on its hands and get the rate up to 6-7%.
"...with the Fed comfortable to sit on the sidelines for the time being."
The fact is, the fed can only sit on the sidelines if it doesn't meet, and even that probably doesn't get it done.
The seeming inaction sends just as much of a signal, and is acted upon by the same players, as a raise or cut in the rate, it just appears to be nothing.
Dryfly,
I passed the idea of partitioning McMansions by a friend of mine a few months ago. His opinion is that each and every conversion would be a costly battle with zoning boards and neighbors.
I thought this was a better idea than my last one; making synthetic furballs for ceramic cats.
great comments, I have a strange feeling as a non economist that I agree with both skytrekker and Paul..in that there is excess liquidity and a bubble economy but also that stocks are not yet overvalued..which is why I tend to think the short term will be more benign than dire especially due to weakening oil prices... however I do believe that the % chances of a major financial panic/meltdown in the future continues to increase as the excess liquidity worldwide simply does not get squeezed out and the American habit of debt financing economy does also not die out.
Nolte Notes
Quiet Before the Storm?
by Paul J. Nolte, CFA
October 23, 2006
In what turned out to be a slow week for stocks, the economic and earnings data continued to flow, indicating a still chugging economy without the overhand of inflation. While the CPI and PPI core numbers came in line with expectations, the effect of significantly lower oil prices cut the headline numbers to levels not seen in years. The Dow managed to celebrate by crossing 12,000 for the first time in history and closing just above that mark on the week. The coming week, however, will be bereft of economic data that will move the markets. Although housing figures will be out, little is expected. Earnings season continues at a still rapid pace, and much of the stock movement may be attributable to company specific news. Our expectations are for a relatively quiet week as investors gear up for the heavier economic data the following week (employment and ISM data top the list). The elections will follow and then the yearend season begins. The markets have surprised to the upside over the past three months and may force money into the markets just to keep up, however with valuations still at high levels, we dont see too a new bull market taking off for a while.
The steady trajectory higher by the financial markets has begun to draw in the speculators, as money is being pulled from short funds and our weekly data is getting to the danger zone. Investors are betting the market continues higher, as they are buying much more in bullish funds vs. bearish funds. We have also noticed an increase in odd lot buying (small position buying) over the past few weeks. Our daily data has been in the danger zone for some time, however only recently has the weekly data gotten to the over bought territory, making the market ripe for a decline. Like a tornado forecast, conditions are ripe, but it doesnt mean that one will occur. We have long been believers in watching the valuation of the markets, and today the market (like last year) is expensive. Today the price to earnings of the SP500 is just over 18, slightly lower than a year ago when the market was 16% lower. As long as earnings continue to grow at double digit rates, the markets can stay expensive, however there will come a time (likely during a slowing economy) where that wont be the case, and the P/E, along with the markets, will be much lower.
Maybe the risks of a recession are rising, if one is to believe the inversion of the yield curve as a precursor to a recession. Since the end of July, the t-bill rates have consistently traded with a yield above that of the 30-year bond (an inversion), with last weeks difference higher than all but two weeks in the last 14. The curve has yet to invert by more than a quarter of a percent, unlike the last recession, when the curve was inverted by more than 25 basis points for six months (getting to over 50 in t
I passed the idea of partitioning McMansions by a friend of mine a few months ago. His opinion is that each and every conversion would be a costly battle with zoning boards and neighbors.
Everything is possible given time & necessity. We have neither the need now nor has enough time passed, wait.
I don't disagree that some stocks are perhaps overpriced, but compared to the lunacy of 6 years ago, it seems more in line with the natural ebb and flow around the long-term average. There are plenty of stocks that I think are reasonably priced, given the fact that they are making real products and services, and actually selling them for real money. Naturally, if the economy goes into recession, then, yes, stocks would be expensive at today's prices.
I'm pretty comfortable with either scenerio, though. Until we see the extent of the housing bust, it'll be hard to judge just how deeply the stock market will be affected.
I think Bailey hit right with his comment over at Altig's... it's all about excess liquidity.
Until somebody turns off the spigot we'll have consumption (or even more bubbles) somewhere.
My prediction is for a 20%-40% haircut. But I'm not saying whether that's for home sales, prices, or the GDP.
It's going to be a surprise.
Dry,
I kinda meant that 4 percent inflation number to be rhetorical, but on further reflection I think it could be doable as long as the foreign baggie holders keep propping us up. China now controls 1.25 trillion of our debt...till they offhedge with derivatives. That day when the deliver out all of their positions is when the earthquake happens and we all wake up a lot poorer than the night before. Otoh- I don't really need much from china anymore, and I think that the next poor assembly plant de jure can take their place- Upper Volta anyone?
Anything that has an international market will immediately go skyhigh, but as long as they give the people cheap gas and cheap houses- all is well...
well, ominous. but then I am well aware that the day is coming.
Funny things is trying to get these points across to BdL got me booted off of his blog- but then Brad truly believes that he can get another chance before we go over the falls--- a position that I think is now guaranteed by the current set of treasury appartchiks/congressional ostriches/hacks at the fed.
The concept that the US is insolvent is not only begun circulating as a meme within the profession, but foreign central bankers are finally beginning the terrifying process of switching away from the king dollar.
That alone spells the end of the current american way of life-people may keep their half million dollar burgs, but that cheeseburger is going to be $55- with our special coupon.
Now, remember gresham's law and watch the pennies and nickels disappear in 2007. coinflation.com
That alone spells the end of the current american way of life-people may keep their half million dollar burgs, but that cheeseburger is going to be $55- with our special coupon.
I've though the same thing Allen. I have a friend who owns a small construction sub-contractor company - he currently does siding for large developments. Had about 30 employees at peak now down to about 6-8. Still profitable though because he downsized with the market - just a lot less gross.
Anyway I told him to focus on ways to make mini-McMansions affordable to people when the dollar goes kaputt - think energy & multiple occupancy. He laughed - but not too hard. This guy soaks everything up & stores it - might come a time.
On Gresham's law - zinc is now over $2/lb. Pennies are made of zinc (copper plated). A zinc die caster told me today the penney is worth more as metal than as a penny. If that continues look for pennies to disappear.
Remember how business investment was going to rescue the economy?
Amazon to Curtail Its Spending
Wal-Mart Will Slash Capital Outlay Rise; Profits Come First
An argument can be made that these are special cases. But historically nonresidential investment follows residential investment - so this should be a warning flag.
OTOH, maybe if every company cut their capital spending plans, overall profits would look really good!
Best to all.
The FED has never turned off the spigot of liquidity despite all the fanfare of the 17 rate hikes- they have been merely a facade. The amount of easy money is abundant still- now that liquidity is flowing from housing into the stock market- after all it needs someplace to go. Seems like we are jumping from bubble to bubble- as Stephen Roach said a few years ago-'bubbles are forever'.
However this is setting us up for an even more dangerous situation.
Which in the end COULD spell a major disaster. We still have A basically uncorrected bubble in housing prices and another one now with increasingly rampant speculation in equities- The James Bond film when Rita Coolidge sang All time High' may seem right now for the 'soft landing crowd' but this could turn very soon to 'A View to A Kill'. The stock market is no longer cheap, and is very overbought- in the process of forming another deadly bubble. This could be the straw that broke the camels back- for both stocks and housing- easy money throughout history has always lead to a catastrophe, it will not be any different this time around.
At the end of the day I always come back to risk/reward. If we have a soft landing (3+% GDP in '07 is a pipe dream, first off) can the markets go higher? Yes, absolutely BUT lets not forget this bull market is already long in the tooth and the 2nd longest bull market that didn't have a 10% corection.
The VIX is back down near all-time lows and the world dismisses any bad news. Something doesn't make sense. Housing is going to get worse.
Dear Host,
I don't find a 3%+ growth expectation as median estimate anywhere. Bloomberg's median estimates are for high 2s through Q3 of next year (no estimate yet for Q4). Fed staff looks for below-trend growth through 2007 and Fed officials are talking about a 1% growth loss due to housing.
As to a capital spending boom, that always seemed an odd call to me. The pattern of growth in this cycle, and more broadly since 1983-1984, doesn't support this notion. Worry over bad software on the way to 2000 produced a surge of investment that had to be digested, but the smoothest growth on record in this expansion doesn't seem the sort of thing to breed a late cycle boom in capital spending. It should be far easier to calibrate capital needs in this environment than in the past, so why would we have a capital spending shock? CEO surveys all suggest reduced capital spending in the next few quarters. Headlines, as our host shows, confirm what CEOs are saying in surveys.
I continue to be amazed at how sanguine most forecasts are. I think there's a lot of cognitive dissonance going on - things have generally gone well for the past 25 years, so why forecast anything beyond a contained slowdown? I can think of a number of reasons, but for the time being at least, this is a slow-motion trainwreck. It took the Japanese around two years into their 15 year debacle to clue into the fact that the sushi wasn't just a little whiffy, and even after enduring a 75% beatdown, the public still overpays for tech stocks. If you think we may be in for something a little (or a lot) worse than a mild slowdown, at least you've been given ample opportunity to get your house in order (so to speak) beforehand.
skytrekker,
While I don't disagree that there is way too much liquidity out there, I do have to take issue with the idea that the stock market is overly expensive right now. In December of 2001 the S&P 500 PE ratio was 46. Now it is 17. Granted, this is still above the long term average, and I personally would not be surprised if it dropped below that (say to the 13-14 range). Nevertheless, a 23% drop in the PE ratio is a lot less painful than the 63% drop over the last 5 years.
All that being said, I do think liquidity needs to be reduced in an orderly fashion to reduce the risk of additional asset bubbles and/or value-destroying inflation. The Fed should stop sitting on its hands and get the rate up to 6-7%.
You know I have to object to:
"...with the Fed comfortable to sit on the sidelines for the time being."
The fact is, the fed can only sit on the sidelines if it doesn't meet, and even that probably doesn't get it done.
The seeming inaction sends just as much of a signal, and is acted upon by the same players, as a raise or cut in the rate, it just appears to be nothing.
BTW, I'll take inflation talk seriously when wages start to rise.
Dryfly,
I passed the idea of partitioning McMansions by a friend of mine a few months ago. His opinion is that each and every conversion would be a costly battle with zoning boards and neighbors.
I thought this was a better idea than my last one; making synthetic furballs for ceramic cats.
great comments, I have a strange feeling as a non economist that I agree with both skytrekker and Paul..in that there is excess liquidity and a bubble economy but also that stocks are not yet overvalued..which is why I tend to think the short term will be more benign than dire especially due to weakening oil prices... however I do believe that the % chances of a major financial panic/meltdown in the future continues to increase as the excess liquidity worldwide simply does not get squeezed out and the American habit of debt financing economy does also not die out.
Paul
you say stocks are not expensive?
From Paul Nolte
Nolte Notes
Quiet Before the Storm?
by Paul J. Nolte, CFA
October 23, 2006
In what turned out to be a slow week for stocks, the economic and earnings data continued to flow, indicating a still chugging economy without the overhand of inflation. While the CPI and PPI core numbers came in line with expectations, the effect of significantly lower oil prices cut the headline numbers to levels not seen in years. The Dow managed to celebrate by crossing 12,000 for the first time in history and closing just above that mark on the week. The coming week, however, will be bereft of economic data that will move the markets. Although housing figures will be out, little is expected. Earnings season continues at a still rapid pace, and much of the stock movement may be attributable to company specific news. Our expectations are for a relatively quiet week as investors gear up for the heavier economic data the following week (employment and ISM data top the list). The elections will follow and then the yearend season begins. The markets have surprised to the upside over the past three months and may force money into the markets just to keep up, however with valuations still at high levels, we dont see too a new bull market taking off for a while.
The steady trajectory higher by the financial markets has begun to draw in the speculators, as money is being pulled from short funds and our weekly data is getting to the danger zone. Investors are betting the market continues higher, as they are buying much more in bullish funds vs. bearish funds. We have also noticed an increase in odd lot buying (small position buying) over the past few weeks. Our daily data has been in the danger zone for some time, however only recently has the weekly data gotten to the over bought territory, making the market ripe for a decline. Like a tornado forecast, conditions are ripe, but it doesnt mean that one will occur. We have long been believers in watching the valuation of the markets, and today the market (like last year) is expensive. Today the price to earnings of the SP500 is just over 18, slightly lower than a year ago when the market was 16% lower. As long as earnings continue to grow at double digit rates, the markets can stay expensive, however there will come a time (likely during a slowing economy) where that wont be the case, and the P/E, along with the markets, will be much lower.
Maybe the risks of a recession are rising, if one is to believe the inversion of the yield curve as a precursor to a recession. Since the end of July, the t-bill rates have consistently traded with a yield above that of the 30-year bond (an inversion), with last weeks difference higher than all but two weeks in the last 14. The curve has yet to invert by more than a quarter of a percent, unlike the last recession, when the curve was inverted by more than 25 basis points for six months (getting to over 50 in t
I passed the idea of partitioning McMansions by a friend of mine a few months ago. His opinion is that each and every conversion would be a costly battle with zoning boards and neighbors.
Everything is possible given time & necessity. We have neither the need now nor has enough time passed, wait.
skytrekker,
I don't disagree that some stocks are perhaps overpriced, but compared to the lunacy of 6 years ago, it seems more in line with the natural ebb and flow around the long-term average. There are plenty of stocks that I think are reasonably priced, given the fact that they are making real products and services, and actually selling them for real money. Naturally, if the economy goes into recession, then, yes, stocks would be expensive at today's prices.
I'm pretty comfortable with either scenerio, though. Until we see the extent of the housing bust, it'll be hard to judge just how deeply the stock market will be affected.
Paul
at this point I would think twice about putting a great deal of money into stocks- the risks are growing day by day.
My retirement money is in safe havens- the equity markets at this time are overbought and ripe for a correction-and sooner then many think.