Sounds like this has been generating some economic concern behind closed doors.
I've seen arguments that though this may benefit the consumer, a lot of liquidity and corporate profits out there are dependent on high commodity prices.
Would such a decline in commodities be consistent with an economic downturn resulting from a debt driven asset boom going bust?
I sure hope you are correct. It feels to me that the market is very uneasy. Traders will be looking for direction from every number/statement. I expect alot of choppy markets ahead.
All: I posted some of Dr. Leamer's comments in December, but this is a link to his actual presentation.
ac, since I just turned bearish, it's easy to look for signs suggesting I'm correct. But we have to be especially careful with oil - it is an unusual market with the possibility of multiple price equilibriums. See this paper by Professor Krugman: THE ENERGY CRISIS REVISITED
"According to [Dr. Leamer's] model, the probability of a recession in one year rose to 86 percent in January 2006 and to 100 percent in March 2006, and has been stuck at 100 percent through October 2006. According to this (imperfect) predictive probability, a recession is a virtual certainty and likely to commence in the first quarter of 2007."
But Leamer is going against the models. It shouldn't be a surprise that some of us looking at the same data are leaning towards a recession in '07.
Advice from Leamer:
"Better to treat the model as a helpful companion, not an all-wise Delphic love-object. After all, accurate forecasting comes first from understanding that some things repeat and others do not, and second from recognizing that the line between the two is constantly changing. Models dont have access to that bit of wisdom, since they are necessarily built on the assumption that everything in them only repeats.
Electronic computers mindlessly project the past into the future. The organic computer that sits on your shoulders doesnt suffer from that psychological rigidity. Your brain is capable of a broad range of free-spirited thinking ranging from the insightful to the merely wishful.
Thus, when your mind tells you that your model is going astray, listen carefully. Eliminate the wishful thinking and all that remains are the insights."
It's different this time, he says. It appears his justification for saying so would be akin to saying in 2000 that the collapse of the IT bubble would only affect tech firms and those who'd invested in tech firms - everyone else wouldn't notice anything.
Let's see. He forgets the other directly involved parties - financial institutions of all stripes, insurance, that sort of thing. Of what I suspect is critical importance, he forgets that housing has a significant effect on property taxes. Then there all the second- and third- order connections - the people and businesses who collect what the builders and brokers spend, and their support networks. I recall reading that one person unemployed has an impact on as many as 20 other people. If true, that should be sufficient to dismiss the belief that it'll be different this time.
Exactly what I've been telling you boys for, what, two years or more?
Low Unemployment + Low Rates + Massive Liquidity = Zero Chance of a Housing Led Recession.
Add to that the current circumstances of bodacious corporate earnings, a raging and low p/e equities market, stampeding globalization, etc., etc. and you have even the most permbear cave dweller's waving the white flag on recession probabilty.
Shiller, Roubini, Ritholz, and Billy here are amongst a select few who remain cave-bound and huddled in Jellystone Park.
I think the yuan peg and its effect on long term interest rates is a wild card.
Were we to have 'normal' long term interest rates, home prices would suffer a very severe fall. Very low interest rates have supported escalating housing values. This can't continue, because rates are unlikely to go lower, and the current price levels stresses incomes. But prices won't collapse unless long term interest rates rise.
This puts the unwinding of the housing bubble squarely in the arena of unforeseeable world political/economic events.
It is possible that if prices dip a bit and stabilize, and in 5 years or so, there is a shift to more 'normal' long term interest rates accompanying a very slow adjustment to the yuan/dollar peg, that housing prices will hold fairly steady.
If the peg is dropped, if the dollar loses support, then I think we're in for a real housing shock.
Some of Leamer's points why he is willing to go against what his models say can be discounted:
- The low level of nominal interest rates offsetting a housing slump neglects the point that the debt service burden is higher now than it was in the early 1980s when interest rates were far higher. The fact that individuals have loaded up on debt means that we are effectively in the same situation despite low rates;
- While a credit crunch has not yet emerged it cannot be ruled out just because nominal rates are low. There are already worrying signs in the sub-prime market (see recent post on Nouriel Roubini's site);
- Because inflation is low shifts in housing demand will affect the nominal (sticker) price of houses more quickly than in the past when shifts in demand could be absorbed though house price inflation less than overall inflation. This is one reason I would guess why the year-over-year price change in existing houses sold has been negative for several months, a very rare occurrence. Falls in the nominal price of houses are likely to lead to a credit crunch despite low interest rates.
Exactly what I've been telling you boys for, what, two years or more?
Maybe, your time is up!
Low Unemployment + Low Rates + Massive Liquidity = Zero Chance of a Housing Led Recession.
Add to that the current circumstances of bodacious corporate earnings, a raging and low p/e equities market, stampeding globalization, etc., etc. and you have even the most permbear cave dweller's waving the white flag on recession probabilty.
We can only guess where you get your talking points. But, you are right until you are wrong.
US housing bust getting worse, warns Goldman
By Ambrose Evans-Pritchard
The US Federal Reserve will need to slash interest rates three times this year as the housing slump goes from bad to worse and the American consumer begins to buckle, Goldman Sachs has warned.
"Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005.
"We believe that housing will soon become the proverbial 'straw that breaks the camel's back'," said David Kostin, the investment bank's US strategist.
Goldman Sachs said homeowners had treated windfall gains from rising house prices as if they were "recurring income", using home equity withdrawls to subsidize over-stretched lifestyles. This artificial boost to spending has already dropped from 7pc to 4pc of GDP over the last year, and is likely to halve again in 2007.
Mortgage equity withdrawal will fall from 13pc of "discretionary household cash flow" in 2006 to 7pc this year, causing spending power to contract for the first time since the dotcom bust.
The bank predicted in its closely-watched global outlook that the US would stave off recession, notching up growth of 2.1pc in 2007. Interest rates will fall briskly from 5.25pc to 4.5pc by the end of the year.
Any opinions on what the recent dive in commodities means for the economy? Seems like it's still ongoing:
an excellent buying opportunity. commodities are still bullish and i expect emerging economies and more established export-driven ones like japan to continue to post solid gains in 2007. as to 2008, i'm less comfortable.
Wasn't Irving Fisher another well respected economic expert?
When 60 Wall St economic analysts predict a combined 238 quarters of positive growth for 2007 (one analyst predicted 2 -ve quarters) doesn't that give you pause?
Economists are just as likely to herd as all humans. That organic computer atop your shoulders that doesn't suffer from the flaws of computer models, has a limbic system that has been known to cause some problems of its own.
On non-oil commodities - something I know a little about since I'm in 'metals' - engineer & sell widgets made from aluminum, copper, zinc & steel.
There have been three big drivers on the price run ups... especially in copper & zinc...
(1) China - huge increase in demand over the last five years, some of which is due to OUR demand... some not. They were soaking up available supplies like a sponge.
(2) Production capacity... a number of zinc producers went out of business a few years ago plus there was a large labor strike in Chile... both resulted in a spike in prices that was quite extraordinary, I'd seen nothing quite like it in the 30 years I'd been around the biz (going back to when I was a kid hanging around foundries my father worked with).
Anyway the strike in Chile is over, plus a number of new zinc plants have come on line & supply is loosening up - the market expects price declines going forward.
(3) Speculation... spec's clearly & accurately anticipated the shortages & jumped all over it, exacerbating the price spike (price rationing if you will). From what I hear they are now exiting the market & as they race through the exits it is likely to over-shoot the opposite way.
A recession would clearly exacerbate a decline in commodity prices but I would not look at the current price drops as being indicative of a future recession. Coincidental if anything - right now.
Certainly not 'investment advice' just scuttlebutt from metal suppliers we work with. Hope it helps.
Are you saying you agree with HARM that there's a grand corporate conspiracy pulling the strings behind Anderson that's preventing them from revealing the truth?
a number of zinc producers went out of business a few years ago plus there was a large labor strike in Chile
The Chilean labor stoppage was at one of the worlds largest copper mining complexes & affected copper production & supply... I left that assumed like everyone would just know... sorry.
Straight from the mouth of one of Americas rulers. Of course, they always understate such things. So, the reality must be US housing bust will get nasty.
Low Unemployment + Low Rates + Massive Liquidity = Zero Chance of a Housing Led Recession. - d'n'd
Well, not to be picky but we can simplify that equations since 'low rates' is the effect of all that liquidity... kinda redundant d'n'd.
Anyway I agree for now I find in almost unthinkable we have a near term recession given the flood of global liquidity.
But liquidity does dry up - it always has. I see no reason why this time it is different... I just don't know why or when.
Also as MaxedOutMomma always points out... just 'cause we have liquidity doesn't mean it is 'stimulative' unless there is some kind of plumbing to pump it out it to the masses to spend... remember our economy is mostly consumption & bubbly housing via MEW was an excellent conduit to get that liquidity cycling...
So break the MBS/MEW link and what replaces it? How does that link get by passed? What's the new vehicle?
My gut says if there is liquidity we will find a vehicle... there will be a way to get it to the consumer to spend... but I lack the imagination to see the path... from where I am here & now anyway.
His models are wrong -- the recession might come in Q1 08 -- well maybe. Not likely in 07 -- so his mind is correct in that respect. What does Roubini say?
"But in brief my view has not changed about the risks of a hard landing: I see a deepening housing recession that is spreading to non-residential construction, to the auto sector, to the manufacturing sector and that is now leading to a sharp inventory adjustment and a significant fall in real capital investment by the corporate sector; while the US consumer has not faltered yet and lower oil prices work as a positive supply shock I see a significant slowdown in consumption as the next leg of the US economic slowdown that will lead to a hard landing in 2007."
I still thinks he should do lunch more often with Brad Setser & chat... when Brad sees something to indicate the liquidity flows are backing off, that will be the time to yell 'FIRE'... JMHO.
"My gut says if there is liquidity we will find a vehicle... there will be a way to get it to the consumer to spend... but I lack the imagination to see the path... from where I am here & now anyway."
And what happens to the water supply when the water main bursts open? All that liquidity might be down the drain. I know that bubbleheads can never imagine anything ever going wrong within their lifetime.
Has it occurred to anyone that, if Leamer understood what was going on in the economy, he would be able to build a model that would reflect his understanding?
Thanks for those saucy posts doomsterin. Anybody make sense of the link to Krugman's post elaborating on Cremer and Salehi-Isfahani's paper? Multiple equilibria...?
And thanks dryfly for citing Maxedoutmamma's characterization of the problem: lots of cash but only in a few hands...Now what are the chances that doomsterin can splain this Marxist-lookin predicament to us?
"It's tightening up a lot," said Eddie Carmona, branch manager at Homewood Mortgage in Carrollton, a mortgage broker that deals with subprime borrowers.
"Almost every single subprime lender has done dramatic changes. It's all recent."
Gary Akright, a mortgage broker at Dominion Mortgage Corp. in Dallas, said tougher requirements for a down payment recently priced one of his credit-challenged clients out of a home purchase.
"The loan program was going to allow for 5 percent down, and they just came down with new guidelines to require 10 percent down," Mr. Akright said. "It took him out of being able to purchase."
Mr. Carmona said down payment requirements are the biggest change he's seen.
"Before, you didn't have to bring a down payment," Mr. Carmona said.
Other changes:
Higher credit scores. Previously, borrowers with a FICO credit score as low as 570 (out of 850) could qualify for a single loan financing 100 percent of their home purchase, Mr. Carmona said.
"Now, across the board, it's jumped up to a 600 FICO score for an 80/20 loan," Mr. Carmona said, in which a second loan has to be taken out to finance the remaining 20 percent of the home value.
Rising interest rates. Rates on subprime mortgages have risen about a full percentage point since September, Mr. Carmona said, while regular mortgage rates have been relatively steady.
More stringent savings requirements. "They want to see borrowers have at least three months of reserves in their account in case of an emergency," Mr. Carmona said. "They want to see it in your bank account saved for at least 60 days. Usually, subprime lenders didn't ask for that."
I think some of the pressure on oil prices has to do with alternate energy sources, particularly ethanol made from organic sugars and cellulose. In many cases natural gas and coal fired plants distill corn, sugarbeets, and sugar cane into ethanol. (In other words,energy from natural gas and coal can be indirectly used to run your auto.)
Here is the energy comparisons: Net energy yield of a fuel is commonly represented in the form of an input to output ratio of energy. The input reflects the energy required to create the fuel (including the energy employed to grow, harvest, transport and convert the feedstock into ethanol). The output represents the amount of energy the ethanol itself then provides as a fuel.
Sugarcane, at 1:8, yields about eight units of energy for every one unit invested to grow, harvest and convert the cane into ethanol. The fibrous cane material that remains after the sugar has been extracted (also known as bagasse) is used to provide heat (read: energy) in the distillation process. In most cases, this eliminates the need for energy from an external source. One unit of energy is used for every five units provided by the Miscanthus-based ethanol fuel. Switchgrass's net energy yield is slightly less, at about 1:4. Sugar beets yield nearly two units of energy for every one unit that is used to grow and convert the crop into ethanol. Corn lies near the very bottom of the list at 1:1.4.
Here is the link to this paper: CLEAN Energy- Cellulosic Ethanol: a greener alternative
trader, does wikipedia have it wrong then, that the corn et al alternative supplements to the traditional fuel are too small even if maximized to the fullest extent? (ie
Calmo good point. If you include the potential for cellulosic ethanol, I'm not sure. There are a lot of leaves, trees, aquatic plants, etc that could be converted to ethanol. Enzymatic conversation may require even less imput energy than free sugars.
But I guess you're right, presently and in the near future the amount of ethanol production is and will be relatively small.
I think some of the pressure on oil prices has to do with alternate energy sources...
I've seen some data that leads me to believe a lot of the increase in oil prices we saw last year was due to speculation in oil futures; likewise with the plunge (the warm weather merely being a trigger). Presumably this is all related to the abundance of leverage/liquidity out there especially as being employed by hedge funds.
This also makes me suspect that a similar mechanism is at work with other commodities (in part indirectly via the housing bubble).
IMO this commodity action could be a sign of problems developing in the global liquidity pool.
The best thing that I can say about this book is that it is one of the few books on an important topic.
The book describes "The Campbell Method" of real estate timing and it's application to the San Diego market. Although Mr. Campbell claims that he had "mathematical proof" [p48] that the market gives clear signals about it's impending changes, this proof is not provided to us. We only see the method applied sloppily to the San Diego market with no attempt to validate it against other markets.
Even it's application to San Diego is littered with mistakes and incomplete information. For example, in chapter 7 we are told "early 1997... was about 6-12 months after Vital Signs #1 through #3 gave 'buy signals'..." [p94] but the chart for Vital Sign #3 does not signal until April 1997. Nowhere in the whole book are we shown a chart that shows price trends - we are to take Mr. Campbell's word that the vital sign's signals in fact lead price changes.
Other problems:
* This book does not properly address the costs of buying and selling in it's discussion of timing
* A "real estate crash index" blend is introduced but never properly defined [p49]
* Buy and sell decisions are made in a way that lacks hysteresis - a series of buy and sell signals can occur batched closely together as a result
* Page 32 has an unclear example where a homeowner sells their home but the text later treats the sale as if the homeowner had given their lender their deed in lieu of foreclosure
* The appendix uses a '12 month exponential moving average' rather than a '12 month moving average'. No proper explanation is provided for what a '12 month exponential moving average' is or why it is used here
* The appendix is 40 pages of unnecessary tables. This should be trimmed down to just a few pages. Mr. Campbell can provide the full data on his website.
13 of 21 people found the following review helpful:
A short sloppy book full of immodest claims, August 30, 2005
Reviewer: bogonflux (San Francisco, CA USA) - See all my reviews
The best thing that I can say about this book is that it is one of the few books on an important topic.
The book describes "The Campbell Method" of real estate timing and it's application to the San Diego market. Although Mr. Campbell claims that he had "mathematical proof" [p48] that the market gives clear signals about it's impending changes, this proof is not provided to us. We only see the method applied sloppily to the San Diego market with no attempt to validate it against other markets.
Even it's application to San Diego is littered with mistakes and incomplete information. For example, in chapter 7 we are told "early 1997... was about 6-12 months after Vital Signs #1 through #3 gave 'buy signals'..." [p94] but the chart for Vital Sign #3 does not signal until April 1997. Nowhere in the whole book are we shown a chart that shows price trends - we are to take Mr. Campbell's word that the vital sign's signals in fact lead price changes.
Other problems:
* This book does not properly address the costs of buying and selling in it's discussion of timing
* A "real estate crash index" blend is introduced but never properly defined [p49]
* Buy and sell decisions are made in a way that lacks hysteresis - a series of buy and sell signals can occur batched closely together as a result
* Page 32 has an unclear example where a homeowner sells their home but the text later treats the sale as if the homeowner had given their lender their deed in lieu of foreclosure
* The appendix uses a '12 month exponential moving average' rather than a '12 month moving average'. No proper explanation is provided for what a '12 month exponential moving average' is or why it is used here
* The appendix is 40 pages of unnecessary tables. This should be trimmed down to just a few pages. Mr. Campbell can provide the full data on his website.
"The organic computer that sits on your shoulders doesnt suffer from that psychological rigidity. Your brain is capable of a broad range of free-spirited thinking ranging from the insightful to the merely wishful."
Yea thats pretty good. Don't forget the same young MBA candidates that have been feeding the econometric models are the same ones that ran the IRR models that told public builders to pay platinum for land....
The econometric world is a lot more complex than we've been able to model...I'll go with gut.
On de model thing, while maybe at times the hunch part of the human brain works better than the math part, most times it don't. Personal economies finely planned and modeled can be derailed by a single woman.
The problem in this case, however, is that the models only work if the reality underlying the models is working. Which it don't appear to be.
On de model thing, while maybe at times the hunch part of the human brain works better than the math part, most times it does no. Personal economies finely planned and modeled can be derailed by a single woman.
The problem in this case, however, is that the models only work if the reality underlying the models is working. Which it does not.
At a gut level, you have a nominal capitalist economy running like some sort of a casino economy and a socialist economy taking advantage of it.
I do not thnik the models say "recession". Yes, Jas Jain's rule of thumb based on the Spread says "recession" (but the spread was below -0.5 during only two months..). Besides other models (more sophisticated?) assess a lower probability (see the Qual-Var Model of recession Is a Recession Imminent? (2006-32, 11/24/2006) , my recession index (404 Not Found or ECRI's diagnosis... If we believe that Markets are the best predictor so we should maybe rely more on probabilities that are extracted from them as Wolfers and Zitzewitz suggest (see http://www.tradesports.com/aav2/search.jsp?z=1169025392577&searchText=recession)
To make it short : all these models (including a corrected Wright's model) are around 20/25%... this is singificant, but not alarming. Up to now...I do not see models signaling a recession.
Two of the most historically accurate leading indicators say recession: new home sales and the yield curve. They haven't been perfect, but taken together they've got a darn good track record. Also, take a look at these from Mish's site:
I'm a small biz guy too & you gotta have 'gut feel'... 'sniff test' whatever you call it. There the individual & organizational goals parallel pretty close (unless the entrepreneur is schizo)...
Big organizations (>1000 employees, multi-site) can't do that... too many empire builders in the big organization who could care less about the organization's goals as long as his/her empire thrives. I think we've all seen that enough to recognize it in our sleep.
Really good organizations build excellent business & forecasting models independent of overwhelming influence from the various internal empires (influenced but not controlled)... then at the end the wise & benevolent 'leader' of the organization looks at the model results & asks... "Does this really make sense?" His minions better be able to show how the model dovetails with observed reality... if not have reasons why not.
I think - to his credit - Leamer is trying to do that. He might be right or wrong but at least he didn't waffle in why he says he believes model does not follow his gut.
I personally think he is right - not because I'm so bullish on everything but because I think there is too much inertia to fall into an 'official' recession in the next 2-4 quarters.
However, pull out the FCB driven liquidity & I believe that can change in a quarter. I just don't see that happening that fast.
Like vader... Halo is messing with my mind... what I saw when I hit publish:
Unable to save comment: INSERT INTO HS_incoming_comment_log SET user = 'calculatedrisk', name = 'dryfly', email = '', url = '', message = 'I like gut feel.rnrnSippin - I sort of agree.rnrnI'm a small biz guy too & you gotta have 'gut feel'... 'sniff test' whatever you call it. There the individual & organizational goals parallel pretty close (unless the entrepreneur is schizo)...rnrnBig organizations (>1000 employees, multi-site) can't do that... too many empire builders in the big organization who could care less about the organization's goals as long as his/her empire thrives. I think we've all seen that enough to recognize it in our sleep.rnrnReally good organizations build excellent business & forecasting models independent of overwhelming influence from the various internal empires (influenced but not controlled)... then at the end the wise & benevolent 'leader' of the organization looks at the model results & asks... "Does this really make sense?" His minions better be able to show how the model dovetails with observed reality... if not have reasons why not.rnrnI think - to his credit - Leamer is trying to do that. He might be right or wrong but at least he didn't waffle in why he says he believes model does not follow his gut.rnrnI personally think he is right - not because I'm so bullish on everything but because I think there is too much inertia to fall into an 'official' recession in the next 2-4 quarters.rnrnHowever, pull out the FCB driven liquidity & I believe that can change in a quarter. I just don't see that happening that fast.
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I think there is too much inertia to fall into an 'official' recession in the next 2-4 quarters.
See, I think this kind of thinking is actually essential to having recessions.
In other words, if more people believed they were coming then the phenomenon would more likely manifest as a gradual slowdown than the sudden fall off that usually characterizes recessions.
The lowest interest rates in decades were not enough to support home prices in the 2003-2006 period. We had to "artificially" lower them even further by extending mortgage terms to 40 (even 50) years, quit requiring principal, quit requiring full interest payments, and then discounting ARM start rates down to 1.00%. Occasionally on the same loan.
You can tell me that "rates are very low and there is no evident credit crunch on the horizon," but you can't make me drink. Even a small tightening of credit terms in this specific circumstance is, in effect, a rate hike from the perspective of new loan origination. A rate hike is, in effect, a death sentence for the loans we originated last year. At the margins we're looking at here, the magnitude doesn't have to be much. My head has a habit of using a definition of "credit crunch" based, of course, on experience, like everyone else's head does. I submit that we might want to redefine "crunch," because the sensitivity is different this time around, too. It won't take requiring a 20% down payment (yeah, right) to create a credit crunch when 100% financing isn't enough without faking the interest rate (as well as the income docs). It will take requiring a 5% down payment, which probably isn't anyone's working definition of "credit crunch" as they played out in the past, but maybe should be.
The lowest interest rates in decades were not enough to support home prices in the 2003-2006 period. We had to "artificially" lower them...
Tanta, I would go one step farther and argue that the positive carry we've had on housing in the past few years effectively created negative interest rates on mortgage loans - people lined up to borrow money because they basically got paid to do so. And the more they borrowed the more they got paid.
Also as MaxedOutMomma always points out... just 'cause we have liquidity doesn't mean it is 'stimulative' unless there is some kind of plumbing to pump it out it to the masses to spend... remember our economy is mostly consumption & bubbly housing via MEW was an excellent conduit to get that liquidity cycling...
Thats something I have been pondering for a bit. If the housing slowdown continues which it certainly will, and even if the prices stay flat (believe will continue going down) resulting in a MEW not available to tap in to, how will the extra liquidity get to the masses? How does the average joe get it? I still see several credit card offers a week in the mail many with ZERO interest for 6 and more months and its easer then ever to get other retail related credit but for how long can this help out the maxed out, over leveraged consumer? Sure, Americans, in general I believe will continue shopping like there is no tomorrow until they max out any available credit but how long can they hold out? Are we going to see sales numbers going down? how soon? Everywhere I look, malls, friends, coworkers, I see MASSIVE spending, much fueled by MEW and CC and the illusion of wealth but to what end?
For those of you who don't care for that Bloomberg page ac just kindly linked to--I know, you either love Bloomberg or you hate it--I like Bond Heads. Besides the yield graphic (with history) there's all those news links and all that Bond Snark. You will either love it or hate it.
If the housing slowdown continues which it certainly will, and even if the prices stay flat (believe will continue going down) resulting in a MEW not available to tap in to, how will the extra liquidity get to the masses?
The Extra Liquidity will have to start buying houses instead of buying loans on houses, that's how. I expect it any day now.
You have to consider the degree of the inversion, which was quite a bit steeper in those previous cases.
Further, the yield curve has been flattening of late, not becoming more inverted.
A lot of people considered the shallow degree of the yield curve inversion back in 2000 and concluded that the inversion was likely a result of foreign inflows and not impending recession. Paul Kasriel admitted the he himself "embarrassingly" took up this position last time around.
It's certainly possible that we won't have a recession this time, but I don't see a good case for the inversion being less relevant than it has been in the past.
The yield curve has been a good predictor and it is definitely relevant. I just think it's a bit too simplistic to say that 6 of the last 7 recessions were preceeded by an inverted yield curve and leave it at that. The degree of inversion definitely matters. That's why the Fed model tries to assign probabilities. Not all inverted yield curves are created equal.
The credit crunch happens (obviously) when the number of people unable/unwilling to pay back their loans is large enough the lenders have to notice. While all the fuzzy words matter, one is critical.
How big is 'large enough'? My guess is it's when - for whatever reason - it makes profits lower than they were last time (quarter or year). Shuffle all you want, but when the people who get regular income from you (be they employee or shareholder) get less than they did before, they expect to know why. And if "why" is "we made a mistake", they expect something to happen to the mistake maker. Loaning to people who cannot repay happens. Loaning to so many that you lose money is a mistake.
Regardless of the (more or less, so far) legal accounting tricks used, there are three relatively uncontrollable factors which together will force the issue. On the rejiggering side we've got foreclosures and bankruptcies. On the smokescreen side we've got sticky house prices.
The loans' collection shortfall can be danced up to a point - even through the 'intent' phases of foreclosure and bankruptcy. But the actual event changes the books in fashions that cannot be hidden (legally). Court orders tend to do that, doncha know. (A severe digression: I anticipate seeing a lot of banks as landlords simply to recover SOMETHING from those properties they own.)
And as for sticky prices - people who don't want to reduce their selling price - when it's perceived as too high people won't want to buy. And if they're not buying, they're not borrowing. And if there are no new sources of income to balance the growing losses, then there is a finite limit to how long the profit margin can be maintained by cutting employees and other assets.
And so I return from the theoretical to the practical. Foreclosures are up - significantly - nationwide, as are declarations of bankruptcy -- and submissions of intent for both indicate we're quite a ways from the top of that business. Several lenders have closed their doors, and a lot more have announced reductions in anticipated profits -- and a lot more have had "staff realignments".
The credit crunch is in sight. Not less than a month but not more than a year is my guess - but it's incoming regardless.
The Extra Liquidity will have to start buying houses instead of buying loans on houses, that's how. I expect it any day now.
Halo doesn't want me to comment on that... keeps eating entries & telling me to 'go away'... Halo's pretty smart.
But I'm stuborn... I'm seeing a lot (and I mean as much as I saw in the S$L run up) of leveraged equity fund buyouts of companies with the intention of dressing them up to flip.
Result is not just change of ownership at higher basis but also the corporate industrial equivalent of 'granite counter tops', 'home theater systems' and 'vanity bathrooms'...
This is resulting in quite a lot of employment activity - more on the equity fund/service side than mfg because its easier to 'automate' a foundry or machine shop than a room full of Wharton MBAs - but it is creating activity like crazy. I see it... had phone conversations just about an hour ago with one.
They have astonishing amounts of money to play with... compared to the 'bootstrapping' we did in the 90s... this is 'cowboy high style' let me tell you... horns on the Cadillac and everything.
This credit/debt bubble is NOT over yet. There is an awful lot of money yet to burn. Good thing Bennie & the CBs got lots more of that stuff.
VERY GOOD IDEA! I don't have caps big enough for that one.
If this thing goes south, having cash & minimal exposure means you eat your competition & their young. Nice.
If not - you still have the cash to expand though a little late in the game... okay, learn from others mistakes & be smarter, finish harder.
The risk of letting it all hang out all the time is suicidal... like playing Russian Roulette over & over & over.
If more firms knew when to reel it in a bit they probably would never have to reel it in lot later... I wouldn't be such a sour bear... I probably wouldn't even lose a nights sleep worrying over recessions. Seriously. Be kinda like catching a cold... but when heavily leaveraged it's like catching a cold and having seriously compromised immunity - not good.
Keep comin' around sippn - keep us posted. We simple lefites like to know there still are rich entrepreneurs out there,somewhere... we might get hungry ya' know.
Very good. It took me an awful long time to get even a small grasp of what is going on there - and I do not claim to know even a fraction of what there is there.
I also do business w/ companies very active in Asia so see a little of the sausage being made... but I wouldn't grasp any of it w/out some of the material I read here or on Setser's site.
But between this site & Setser's I think you see the 'shadows' of the forces affecting our economy... the drivers behind the liquidity on one end (in Asia & OPEC) & the 'consumption' of that liquidity on the other (RE/MEW driven consumption here)... with all the rest of us peons in between trying to squeeze a little bit out for ourselves.
Dryfly - no I haven't but thanks for the link. Now that you pumped my head up..
Just my gut feeling that since we stopped using sails, the stuff moves across the pond faster and faster.
Also my gut feeling that the "flat earth society" shouldn't have a corner on econometric modeling.
Its been less than 100 years (somebody knows the number) the US has dominated the world economy and controlled its own destiny - if one of these potentially large economies gets traction in the next 20 years, we may only have memories of the Fed controlling interest rates.
Any opinions on what the recent dive in commodities means for the economy? Seems like it's still ongoing:
Bloomberg.com:
Commodity Futures
Sounds like this has been generating some economic concern behind closed doors.
I've seen arguments that though this may benefit the consumer, a lot of liquidity and corporate profits out there are dependent on high commodity prices.
Would such a decline in commodities be consistent with an economic downturn resulting from a debt driven asset boom going bust?
I sure hope you are correct. It feels to me that the market is very uneasy. Traders will be looking for direction from every number/statement. I expect alot of choppy markets ahead.
All: I posted some of Dr. Leamer's comments in December, but this is a link to his actual presentation.
ac, since I just turned bearish, it's easy to look for signs suggesting I'm correct. But we have to be especially careful with oil - it is an unusual market with the possibility of multiple price equilibriums. See this paper by Professor Krugman: THE ENERGY CRISIS REVISITED
Best Wishes.
On the Models:
"According to [Dr. Leamer's] model, the probability of a recession in one year rose to 86 percent in January 2006 and to 100 percent in March 2006, and has been stuck at 100 percent through October 2006. According to this (imperfect) predictive probability, a recession is a virtual certainty and likely to commence in the first quarter of 2007."
But Leamer is going against the models. It shouldn't be a surprise that some of us looking at the same data are leaning towards a recession in '07.
Advice from Leamer:
"Better to treat the model as a helpful companion, not an all-wise Delphic love-object. After all, accurate forecasting comes first from understanding that some things repeat and others do not, and second from recognizing that the line between the two is constantly changing. Models dont have access to that bit of wisdom, since they are necessarily built on the assumption that everything in them only repeats.
Electronic computers mindlessly project the past into the future. The organic computer that sits on your shoulders doesnt suffer from that psychological rigidity. Your brain is capable of a broad range of free-spirited thinking ranging from the insightful to the merely wishful.
Thus, when your mind tells you that your model is going astray, listen carefully. Eliminate the wishful thinking and all that remains are the insights."
Best to all.
But we have to be especially careful with oil...
It seems much more broad based though... e.g. copper et. al.
And, once again, it seems to fit a bearish picture of the future that some people painted over a year ago:
Housing bust, followed by declining commodity prices, followed by declining asset prices, followed economic decline.
I think the commodities are interesting because it looks like "another piece of the puzzle" falling into place "as advertised".
It's different this time, he says. It appears his justification for saying so would be akin to saying in 2000 that the collapse of the IT bubble would only affect tech firms and those who'd invested in tech firms - everyone else wouldn't notice anything.
Let's see. He forgets the other directly involved parties - financial institutions of all stripes, insurance, that sort of thing. Of what I suspect is critical importance, he forgets that housing has a significant effect on property taxes. Then there all the second- and third- order connections - the people and businesses who collect what the builders and brokers spend, and their support networks. I recall reading that one person unemployed has an impact on as many as 20 other people. If true, that should be sufficient to dismiss the belief that it'll be different this time.
Re: commodities
Maybe the upcoming BOJ rate-raising possibility has some carry-trades unwinding.
Wasn't the downdraft in commodities & emerging markets last spring also presaged by BOJ sabre-rattling?
inquiringMind
It's different this time, he says.
It is different this time.
The US consumer and lending industry have never been so deeply invested in the fate of the housing market.
I guess that means this time around a housing downturn is less likely to lead to recession.
The Empire survey is down.
http://www.ny.frb.org/research/regional_economy/empiresurvey_overview.html
Exactly what I've been telling you boys for, what, two years or more?
Low Unemployment + Low Rates + Massive Liquidity = Zero Chance of a Housing Led Recession.
Add to that the current circumstances of bodacious corporate earnings, a raging and low p/e equities market, stampeding globalization, etc., etc. and you have even the most permbear cave dweller's waving the white flag on recession probabilty.
Shiller, Roubini, Ritholz, and Billy here are amongst a select few who remain cave-bound and huddled in Jellystone Park.
I think the yuan peg and its effect on long term interest rates is a wild card.
Were we to have 'normal' long term interest rates, home prices would suffer a very severe fall. Very low interest rates have supported escalating housing values. This can't continue, because rates are unlikely to go lower, and the current price levels stresses incomes. But prices won't collapse unless long term interest rates rise.
This puts the unwinding of the housing bubble squarely in the arena of unforeseeable world political/economic events.
It is possible that if prices dip a bit and stabilize, and in 5 years or so, there is a shift to more 'normal' long term interest rates accompanying a very slow adjustment to the yuan/dollar peg, that housing prices will hold fairly steady.
If the peg is dropped, if the dollar loses support, then I think we're in for a real housing shock.
Some of Leamer's points why he is willing to go against what his models say can be discounted:
- The low level of nominal interest rates offsetting a housing slump neglects the point that the debt service burden is higher now than it was in the early 1980s when interest rates were far higher. The fact that individuals have loaded up on debt means that we are effectively in the same situation despite low rates;
- While a credit crunch has not yet emerged it cannot be ruled out just because nominal rates are low. There are already worrying signs in the sub-prime market (see recent post on Nouriel Roubini's site);
- Because inflation is low shifts in housing demand will affect the nominal (sticker) price of houses more quickly than in the past when shifts in demand could be absorbed though house price inflation less than overall inflation. This is one reason I would guess why the year-over-year price change in existing houses sold has been negative for several months, a very rare occurrence. Falls in the nominal price of houses are likely to lead to a credit crunch despite low interest rates.
Distrust the models that have the best records and trust the economists who have the worst record?
the housing slump will be confined to that sector.
And when was the last time that that happened?
When Wish Becomes Thought! (Title of a book by an eminent American sociologist)
Even more comfortable with my recession forecast.
Jas
--
The Economists' Voice
Housing Collapse? Bring It On!
Abstract
Aaron Edlin confesses his selfish reasons to root for a collapse of housing prices and explains why many who worry should not.
Recommended Citation
Aaron S. Edlin (2007) "Housing Collapse? Bring It On!," The Economists' Voice: Vol. 4 : Iss. 1, Article 2.
Available at: The Economists' Voice
-x-x-x-x-x-x-x-x-x-x-x-
When an economist says Dont Worry, start worrying!
Jas
Interesting marketwatch article:
Credit quality weakens at big U.S. regional banks
"It's finally happening," said David Hendler, an analyst at CreditSights Inc.
Empire State Index down, failure of sub-prime lenders spreading, increased risk spreads, hmm, no signs of trouble here.
Exactly what I've been telling you boys for, what, two years or more?
Maybe, your time is up!
Low Unemployment + Low Rates + Massive Liquidity = Zero Chance of a Housing Led Recession.
Add to that the current circumstances of bodacious corporate earnings, a raging and low p/e equities market, stampeding globalization, etc., etc. and you have even the most permbear cave dweller's waving the white flag on recession probabilty.
We can only guess where you get your talking points. But, you are right until you are wrong.
Jas Jai
US housing bust getting worse, warns Goldman
By Ambrose Evans-Pritchard
The US Federal Reserve will need to slash interest rates three times this year as the housing slump goes from bad to worse and the American consumer begins to buckle, Goldman Sachs has warned.
"Americans have shown a complete lack of self-control. The personal savings rate is at its lowest point ever, and has actually been negative since April 2005.
"We believe that housing will soon become the proverbial 'straw that breaks the camel's back'," said David Kostin, the investment bank's US strategist.
Goldman Sachs said homeowners had treated windfall gains from rising house prices as if they were "recurring income", using home equity withdrawls to subsidize over-stretched lifestyles. This artificial boost to spending has already dropped from 7pc to 4pc of GDP over the last year, and is likely to halve again in 2007.
Mortgage equity withdrawal will fall from 13pc of "discretionary household cash flow" in 2006 to 7pc this year, causing spending power to contract for the first time since the dotcom bust.
The bank predicted in its closely-watched global outlook that the US would stave off recession, notching up growth of 2.1pc in 2007. Interest rates will fall briskly from 5.25pc to 4.5pc by the end of the year.
US housing bust getting worse, warns Goldman - Telegraph
The models say recession; the mind says no way. Im going with the mind.
I think what Dr. Leamer meant to say was this:
"The models say recession; UCLA's corporate benefactors say no way. Im going with our corporate benefactors."
HARM,
These corporate benefactors haven't prevented Anderson Forecast from predicting past recessions.
But I guess since you don't agree with them now, it must be due to some nefarious plot to keep the truth hidden.
By the way, ECRI, another well-respected forecasting organization also doesn't see a recession ahead.
Corporate benefactors again?
Dear Steve, follow the money.
Corporate benefactors again?
Wow. I didn't expect anyone to actually answer: yes.
Corporate benefactors again?
Wow. I didn't expect anyone to actually answer: yes.
Steve, you didn't read what I wrote. I wrote "follow the money." I'll add: you never know what you may find.
an excellent buying opportunity. commodities are still bullish and i expect emerging economies and more established export-driven ones like japan to continue to post solid gains in 2007. as to 2008, i'm less comfortable.
Steve,
Wasn't Irving Fisher another well respected economic expert?
When 60 Wall St economic analysts predict a combined 238 quarters of positive growth for 2007 (one analyst predicted 2 -ve quarters) doesn't that give you pause?
Economists are just as likely to herd as all humans. That organic computer atop your shoulders that doesn't suffer from the flaws of computer models, has a limbic system that has been known to cause some problems of its own.
On non-oil commodities - something I know a little about since I'm in 'metals' - engineer & sell widgets made from aluminum, copper, zinc & steel.
There have been three big drivers on the price run ups... especially in copper & zinc...
(1) China - huge increase in demand over the last five years, some of which is due to OUR demand... some not. They were soaking up available supplies like a sponge.
(2) Production capacity... a number of zinc producers went out of business a few years ago plus there was a large labor strike in Chile... both resulted in a spike in prices that was quite extraordinary, I'd seen nothing quite like it in the 30 years I'd been around the biz (going back to when I was a kid hanging around foundries my father worked with).
Anyway the strike in Chile is over, plus a number of new zinc plants have come on line & supply is loosening up - the market expects price declines going forward.
(3) Speculation... spec's clearly & accurately anticipated the shortages & jumped all over it, exacerbating the price spike (price rationing if you will). From what I hear they are now exiting the market & as they race through the exits it is likely to over-shoot the opposite way.
A recession would clearly exacerbate a decline in commodity prices but I would not look at the current price drops as being indicative of a future recession. Coincidental if anything - right now.
Certainly not 'investment advice' just scuttlebutt from metal suppliers we work with. Hope it helps.
Eventhorizon,
Are you saying you agree with HARM that there's a grand corporate conspiracy pulling the strings behind Anderson that's preventing them from revealing the truth?
a number of zinc producers went out of business a few years ago plus there was a large labor strike in Chile
The Chilean labor stoppage was at one of the worlds largest copper mining complexes & affected copper production & supply... I left that assumed like everyone would just know... sorry.
It is OFFICIAL: US housing bust getting worse
Straight from the mouth of one of Americas rulers. Of course, they always understate such things. So, the reality must be US housing bust will get nasty.
Jas
Low Unemployment + Low Rates + Massive Liquidity = Zero Chance of a Housing Led Recession. - d'n'd
Well, not to be picky but we can simplify that equations since 'low rates' is the effect of all that liquidity... kinda redundant d'n'd.
Anyway I agree for now I find in almost unthinkable we have a near term recession given the flood of global liquidity.
But liquidity does dry up - it always has. I see no reason why this time it is different... I just don't know why or when.
Also as MaxedOutMomma always points out... just 'cause we have liquidity doesn't mean it is 'stimulative' unless there is some kind of plumbing to pump it out it to the masses to spend... remember our economy is mostly consumption & bubbly housing via MEW was an excellent conduit to get that liquidity cycling...
PBoC->MBS_markets->MEW->WalMart->MNCs_importers->China_suppliers->PBoC... repeat.
So break the MBS/MEW link and what replaces it? How does that link get by passed? What's the new vehicle?
My gut says if there is liquidity we will find a vehicle... there will be a way to get it to the consumer to spend... but I lack the imagination to see the path... from where I am here & now anyway.
You want to enlighten us some more?
The models say recession; the mind says no way. Im going with the mind.
I think what Dr. Leamer meant to say was this:
"The models say recession; UCLA's corporate benefactors say no way. Im going with our corporate benefactors."
Steve I think what HARM is trying to say is...
'If you grab the balls, the mind will follow.'
His models are wrong -- the recession might come in Q1 08 -- well maybe. Not likely in 07 -- so his mind is correct in that respect. What does Roubini say?
What does Roubini say?
Shark - looks like he is 'doubling down'...
Why a Q4 GDP Growth Rebound Will Prove to Be Temporary
"But in brief my view has not changed about the risks of a hard landing: I see a deepening housing recession that is spreading to non-residential construction, to the auto sector, to the manufacturing sector and that is now leading to a sharp inventory adjustment and a significant fall in real capital investment by the corporate sector; while the US consumer has not faltered yet and lower oil prices work as a positive supply shock I see a significant slowdown in consumption as the next leg of the US economic slowdown that will lead to a hard landing in 2007."
I still thinks he should do lunch more often with Brad Setser & chat... when Brad sees something to indicate the liquidity flows are backing off, that will be the time to yell 'FIRE'... JMHO.
"My gut says if there is liquidity we will find a vehicle... there will be a way to get it to the consumer to spend... but I lack the imagination to see the path... from where I am here & now anyway."
And what happens to the water supply when the water main bursts open? All that liquidity might be down the drain. I know that bubbleheads can never imagine anything ever going wrong within their lifetime.
Larry Kudlow crowd here?
Jas Jai
Has it occurred to anyone that, if Leamer understood what was going on in the economy, he would be able to build a model that would reflect his understanding?
Leamer doesn't a clue.
Thanks for those saucy posts doomsterin. Anybody make sense of the link to Krugman's post elaborating on Cremer and Salehi-Isfahani's paper? Multiple equilibria...?
And thanks dryfly for citing Maxedoutmamma's characterization of the problem: lots of cash but only in a few hands...Now what are the chances that doomsterin can splain this Marxist-lookin predicament to us?
"It's tightening up a lot," said Eddie Carmona, branch manager at Homewood Mortgage in Carrollton, a mortgage broker that deals with subprime borrowers.
"Almost every single subprime lender has done dramatic changes. It's all recent."
Gary Akright, a mortgage broker at Dominion Mortgage Corp. in Dallas, said tougher requirements for a down payment recently priced one of his credit-challenged clients out of a home purchase.
"The loan program was going to allow for 5 percent down, and they just came down with new guidelines to require 10 percent down," Mr. Akright said. "It took him out of being able to purchase."
Mr. Carmona said down payment requirements are the biggest change he's seen.
"Before, you didn't have to bring a down payment," Mr. Carmona said.
Other changes:
Higher credit scores. Previously, borrowers with a FICO credit score as low as 570 (out of 850) could qualify for a single loan financing 100 percent of their home purchase, Mr. Carmona said.
"Now, across the board, it's jumped up to a 600 FICO score for an 80/20 loan," Mr. Carmona said, in which a second loan has to be taken out to finance the remaining 20 percent of the home value.
Rising interest rates. Rates on subprime mortgages have risen about a full percentage point since September, Mr. Carmona said, while regular mortgage rates have been relatively steady.
More stringent savings requirements. "They want to see borrowers have at least three months of reserves in their account in case of an emergency," Mr. Carmona said. "They want to see it in your bank account saved for at least 60 days. Usually, subprime lenders didn't ask for that."
News for Dallas, Texas | Dallas Morning News
| Dallas Business News | Dallas Morning News
Now if this ever gets to CA........
I think some of the pressure on oil prices has to do with alternate energy sources, particularly ethanol made from organic sugars and cellulose. In many cases natural gas and coal fired plants distill corn, sugarbeets, and sugar cane into ethanol. (In other words,energy from natural gas and coal can be indirectly used to run your auto.)
Here is the energy comparisons: Net energy yield of a fuel is commonly represented in the form of an input to output ratio of energy. The input reflects the energy required to create the fuel (including the energy employed to grow, harvest, transport and convert the feedstock into ethanol). The output represents the amount of energy the ethanol itself then provides as a fuel.
Sugarcane, at 1:8, yields about eight units of energy for every one unit invested to grow, harvest and convert the cane into ethanol. The fibrous cane material that remains after the sugar has been extracted (also known as bagasse) is used to provide heat (read: energy) in the distillation process. In most cases, this eliminates the need for energy from an external source. One unit of energy is used for every five units provided by the Miscanthus-based ethanol fuel. Switchgrass's net energy yield is slightly less, at about 1:4. Sugar beets yield nearly two units of energy for every one unit that is used to grow and convert the crop into ethanol. Corn lies near the very bottom of the list at 1:1.4.
Here is the link to this paper: CLEAN Energy- Cellulosic Ethanol: a greener alternative
Kevin: "Now if this ever gets to CA........"
Bingo. Game over.
I'm hearing discussions on the housing market and construction in the grocery stores. People here in SoCal are very, very nervous.
IMO, California is now experiencing its Wile E. Coyote Moment.
trader, does wikipedia have it wrong then, that the corn et al alternative supplements to the traditional fuel are too small even if maximized to the fullest extent? (ie
Calmo good point. If you include the potential for cellulosic ethanol, I'm not sure. There are a lot of leaves, trees, aquatic plants, etc that could be converted to ethanol. Enzymatic conversation may require even less imput energy than free sugars.
But I guess you're right, presently and in the near future the amount of ethanol production is and will be relatively small.
Walt
"Any opinions on what the recent dive in commodities means for the economy?"
It means a deflation scare is looming.
Long bonds will do well.
ext bubble?
PBoC/Gulf OilEx->Muni/state infrastructure markets ->Roads/water/power distr.-> welfare, projects, unemployment->WalMart->MNCs_importers->China_suppliers->PBoC... repeat.
maybe not major unless state's and local govmts get desperate.
I think some of the pressure on oil prices has to do with alternate energy sources...
I've seen some data that leads me to believe a lot of the increase in oil prices we saw last year was due to speculation in oil futures; likewise with the plunge (the warm weather merely being a trigger). Presumably this is all related to the abundance of leverage/liquidity out there especially as being employed by hedge funds.
This also makes me suspect that a similar mechanism is at work with other commodities (in part indirectly via the housing bubble).
IMO this commodity action could be a sign of problems developing in the global liquidity pool.
Just a theory.
ResCap cuts 1,000 jobs,cites tough mortgage market:
Bakersfield Bubble
Trust what you see, not what you think.
Robert Campbell
Infrastructure 'make work' could be the 'vehicle' FredW... it didn't work so great for the Japanese in the '90s, maybe we would do better.
One out of Five Stars review...
A short sloppy book full of immodest claims
August 30, 2005
Reviewer: bogonflux (San Francisco, CA USA)
The best thing that I can say about this book is that it is one of the few books on an important topic.
The book describes "The Campbell Method" of real estate timing and it's application to the San Diego market. Although Mr. Campbell claims that he had "mathematical proof" [p48] that the market gives clear signals about it's impending changes, this proof is not provided to us. We only see the method applied sloppily to the San Diego market with no attempt to validate it against other markets.
Even it's application to San Diego is littered with mistakes and incomplete information. For example, in chapter 7 we are told "early 1997... was about 6-12 months after Vital Signs #1 through #3 gave 'buy signals'..." [p94] but the chart for Vital Sign #3 does not signal until April 1997. Nowhere in the whole book are we shown a chart that shows price trends - we are to take Mr. Campbell's word that the vital sign's signals in fact lead price changes.
Other problems:
* This book does not properly address the costs of buying and selling in it's discussion of timing
* A "real estate crash index" blend is introduced but never properly defined [p49]
* Buy and sell decisions are made in a way that lacks hysteresis - a series of buy and sell signals can occur batched closely together as a result
* Page 32 has an unclear example where a homeowner sells their home but the text later treats the sale as if the homeowner had given their lender their deed in lieu of foreclosure
* The appendix uses a '12 month exponential moving average' rather than a '12 month moving average'. No proper explanation is provided for what a '12 month exponential moving average' is or why it is used here
* The appendix is 40 pages of unnecessary tables. This should be trimmed down to just a few pages. Mr. Campbell can provide the full data on his website.
nufsed
13 of 21 people found the following review helpful:
A short sloppy book full of immodest claims, August 30, 2005
Reviewer: bogonflux (San Francisco, CA USA) - See all my reviews
The best thing that I can say about this book is that it is one of the few books on an important topic.
The book describes "The Campbell Method" of real estate timing and it's application to the San Diego market. Although Mr. Campbell claims that he had "mathematical proof" [p48] that the market gives clear signals about it's impending changes, this proof is not provided to us. We only see the method applied sloppily to the San Diego market with no attempt to validate it against other markets.
Even it's application to San Diego is littered with mistakes and incomplete information. For example, in chapter 7 we are told "early 1997... was about 6-12 months after Vital Signs #1 through #3 gave 'buy signals'..." [p94] but the chart for Vital Sign #3 does not signal until April 1997. Nowhere in the whole book are we shown a chart that shows price trends - we are to take Mr. Campbell's word that the vital sign's signals in fact lead price changes.
Other problems:
* This book does not properly address the costs of buying and selling in it's discussion of timing
* A "real estate crash index" blend is introduced but never properly defined [p49]
* Buy and sell decisions are made in a way that lacks hysteresis - a series of buy and sell signals can occur batched closely together as a result
* Page 32 has an unclear example where a homeowner sells their home but the text later treats the sale as if the homeowner had given their lender their deed in lieu of foreclosure
* The appendix uses a '12 month exponential moving average' rather than a '12 month moving average'. No proper explanation is provided for what a '12 month exponential moving average' is or why it is used here
* The appendix is 40 pages of unnecessary tables. This should be trimmed down to just a few pages. Mr. Campbell can provide the full data on his website.
"The organic computer that sits on your shoulders doesnt suffer from that psychological rigidity. Your brain is capable of a broad range of free-spirited thinking ranging from the insightful to the merely wishful."
Yea thats pretty good. Don't forget the same young MBA candidates that have been feeding the econometric models are the same ones that ran the IRR models that told public builders to pay platinum for land....
The econometric world is a lot more complex than we've been able to model...I'll go with gut.
!!!!TANTA ALERT!!!!
YOU GUYS ARE MISSING ALL OF THE ACTION ON TANTA'S THREAD!
SHE HIT ONE OUT OF THE PARK!
!!!!TANTA ALERT!!!!
There won't be any spillover because housing exists in a bubble!
On de model thing, while maybe at times the hunch part of the human brain works better than the math part, most times it don't. Personal economies finely planned and modeled can be derailed by a single woman.
The problem in this case, however, is that the models only work if the reality underlying the models is working. Which it don't appear to be.
On de model thing, while maybe at times the hunch part of the human brain works better than the math part, most times it does no. Personal economies finely planned and modeled can be derailed by a single woman.
The problem in this case, however, is that the models only work if the reality underlying the models is working. Which it does not.
At a gut level, you have a nominal capitalist economy running like some sort of a casino economy and a socialist economy taking advantage of it.
How you game that, I don't know.
Next year he'll be saying...
The models say depression; the mind says no way. Im going with the mind.
I do not thnik the models say "recession". Yes, Jas Jain's rule of thumb based on the Spread says "recession" (but the spread was below -0.5 during only two months..). Besides other models (more sophisticated?) assess a lower probability (see the Qual-Var Model of recession Is a Recession Imminent? (2006-32, 11/24/2006) , my recession index (404 Not Found or ECRI's diagnosis... If we believe that Markets are the best predictor so we should maybe rely more on probabilities that are extracted from them as Wolfers and Zitzewitz suggest (see http://www.tradesports.com/aav2/search.jsp?z=1169025392577&searchText=recession)
To make it short : all these models (including a corrected Wright's model) are around 20/25%... this is singificant, but not alarming. Up to now...I do not see models signaling a recession.
Quick note, haloscan replied that my first post failed to be applied.
Those models are fed by the same young MBA candidates who also fed the models that told the public builders to pay too much for land.
Sometimes when you build models, you sniff too much glue.
I like gut feel.
I do not thnik the models say "recession".
Two of the most historically accurate leading indicators say recession: new home sales and the yield curve. They haven't been perfect, but taken together they've got a darn good track record. Also, take a look at these from Mish's site:
Housing Permits and Recessions
Money Supply and Recessions (some modified version)
Yield Curve and Recessions
I like gut feel.
Sippin - I sort of agree.
I'm a small biz guy too & you gotta have 'gut feel'... 'sniff test' whatever you call it. There the individual & organizational goals parallel pretty close (unless the entrepreneur is schizo)...
Big organizations (>1000 employees, multi-site) can't do that... too many empire builders in the big organization who could care less about the organization's goals as long as his/her empire thrives. I think we've all seen that enough to recognize it in our sleep.
Really good organizations build excellent business & forecasting models independent of overwhelming influence from the various internal empires (influenced but not controlled)... then at the end the wise & benevolent 'leader' of the organization looks at the model results & asks... "Does this really make sense?" His minions better be able to show how the model dovetails with observed reality... if not have reasons why not.
I think - to his credit - Leamer is trying to do that. He might be right or wrong but at least he didn't waffle in why he says he believes model does not follow his gut.
I personally think he is right - not because I'm so bullish on everything but because I think there is too much inertia to fall into an 'official' recession in the next 2-4 quarters.
However, pull out the FCB driven liquidity & I believe that can change in a quarter. I just don't see that happening that fast.
Like vader... Halo is messing with my mind... what I saw when I hit publish:
Unable to save comment: INSERT INTO HS_incoming_comment_log SET user = 'calculatedrisk', name = 'dryfly', email = '', url = '', message = 'I like gut feel.rnrnSippin - I sort of agree.rnrnI'm a small biz guy too & you gotta have 'gut feel'... 'sniff test' whatever you call it. There the individual & organizational goals parallel pretty close (unless the entrepreneur is schizo)...rnrnBig organizations (>1000 employees, multi-site) can't do that... too many empire builders in the big organization who could care less about the organization's goals as long as his/her empire thrives. I think we've all seen that enough to recognize it in our sleep.rnrnReally good organizations build excellent business & forecasting models independent of overwhelming influence from the various internal empires (influenced but not controlled)... then at the end the wise & benevolent 'leader' of the organization looks at the model results & asks... "Does this really make sense?" His minions better be able to show how the model dovetails with observed reality... if not have reasons why not.rnrnI think - to his credit - Leamer is trying to do that. He might be right or wrong but at least he didn't waffle in why he says he believes model does not follow his gut.rnrnI personally think he is right - not because I'm so bullish on everything but because I think there is too much inertia to fall into an 'official' recession in the next 2-4 quarters.rnrnHowever, pull out the FCB driven liquidity & I believe that can change in a quarter. I just don't see that happening that fast.
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I think there is too much inertia to fall into an 'official' recession in the next 2-4 quarters.
See, I think this kind of thinking is actually essential to having recessions.
In other words, if more people believed they were coming then the phenomenon would more likely manifest as a gradual slowdown than the sudden fall off that usually characterizes recessions.
"Recipie for a Hard Landing":
1 Part Economic Woe
1 Part Denial
On low interest rates:
The lowest interest rates in decades were not enough to support home prices in the 2003-2006 period. We had to "artificially" lower them even further by extending mortgage terms to 40 (even 50) years, quit requiring principal, quit requiring full interest payments, and then discounting ARM start rates down to 1.00%. Occasionally on the same loan.
You can tell me that "rates are very low and there is no evident credit crunch on the horizon," but you can't make me drink. Even a small tightening of credit terms in this specific circumstance is, in effect, a rate hike from the perspective of new loan origination. A rate hike is, in effect, a death sentence for the loans we originated last year. At the margins we're looking at here, the magnitude doesn't have to be much. My head has a habit of using a definition of "credit crunch" based, of course, on experience, like everyone else's head does. I submit that we might want to redefine "crunch," because the sensitivity is different this time around, too. It won't take requiring a 20% down payment (yeah, right) to create a credit crunch when 100% financing isn't enough without faking the interest rate (as well as the income docs). It will take requiring a 5% down payment, which probably isn't anyone's working definition of "credit crunch" as they played out in the past, but maybe should be.
The lowest interest rates in decades were not enough to support home prices in the 2003-2006 period. We had to "artificially" lower them...
Tanta, I would go one step farther and argue that the positive carry we've had on housing in the past few years effectively created negative interest rates on mortgage loans - people lined up to borrow money because they basically got paid to do so. And the more they borrowed the more they got paid.
Also as MaxedOutMomma always points out... just 'cause we have liquidity doesn't mean it is 'stimulative' unless there is some kind of plumbing to pump it out it to the masses to spend... remember our economy is mostly consumption & bubbly housing via MEW was an excellent conduit to get that liquidity cycling...
Thats something I have been pondering for a bit. If the housing slowdown continues which it certainly will, and even if the prices stay flat (believe will continue going down) resulting in a MEW not available to tap in to, how will the extra liquidity get to the masses? How does the average joe get it? I still see several credit card offers a week in the mail many with ZERO interest for 6 and more months and its easer then ever to get other retail related credit but for how long can this help out the maxed out, over leveraged consumer? Sure, Americans, in general I believe will continue shopping like there is no tomorrow until they max out any available credit but how long can they hold out? Are we going to see sales numbers going down? how soon? Everywhere I look, malls, friends, coworkers, I see MASSIVE spending, much fueled by MEW and CC and the illusion of wealth but to what end?
PS, Awesome blog and comments, read it every day
Two of the most historically accurate leading indicators say recession: new home sales and the yield curve.
The yield curve does not say recession. Go plug in the current data and check it for yourself here:
Political Calculations: Reckoning the Odds of Recession
It's saying only 34% chance of a recession.
The yield curve does not say recession.
Steve,
Six out of the past seven times the yield curve has inverted recession has followed.
The yield curve is currently inverted:
Bloomberg.com:
Government Bonds
For those of you who don't care for that Bloomberg page ac just kindly linked to--I know, you either love Bloomberg or you hate it--I like Bond Heads. Besides the yield graphic (with history) there's all those news links and all that Bond Snark. You will either love it or hate it.
Bonds and The Economy | The Bond Strategist | Bond and Financial News |
Bond Rates and Commentary
ac,
You have to consider the degree of the inversion, which was quite a bit steeper in those previous cases.
Further, the yield curve has been flattening of late, not becoming more inverted.
Here's another good resource:
The Living Yield Curve at SmartMoney.com
If the housing slowdown continues which it certainly will, and even if the prices stay flat (believe will continue going down) resulting in a MEW not available to tap in to, how will the extra liquidity get to the masses?
The Extra Liquidity will have to start buying houses instead of buying loans on houses, that's how. I expect it any day now.
ac,
You have to consider the degree of the inversion, which was quite a bit steeper in those previous cases.
Further, the yield curve has been flattening of late, not becoming more inverted.
A lot of people considered the shallow degree of the yield curve inversion back in 2000 and concluded that the inversion was likely a result of foreign inflows and not impending recession. Paul Kasriel admitted the he himself "embarrassingly" took up this position last time around.
It's certainly possible that we won't have a recession this time, but I don't see a good case for the inversion being less relevant than it has been in the past.
ac,
The yield curve has been a good predictor and it is definitely relevant. I just think it's a bit too simplistic to say that 6 of the last 7 recessions were preceeded by an inverted yield curve and leave it at that. The degree of inversion definitely matters. That's why the Fed model tries to assign probabilities. Not all inverted yield curves are created equal.
The credit crunch happens (obviously) when the number of people unable/unwilling to pay back their loans is large enough the lenders have to notice. While all the fuzzy words matter, one is critical.
How big is 'large enough'? My guess is it's when - for whatever reason - it makes profits lower than they were last time (quarter or year). Shuffle all you want, but when the people who get regular income from you (be they employee or shareholder) get less than they did before, they expect to know why. And if "why" is "we made a mistake", they expect something to happen to the mistake maker. Loaning to people who cannot repay happens. Loaning to so many that you lose money is a mistake.
Regardless of the (more or less, so far) legal accounting tricks used, there are three relatively uncontrollable factors which together will force the issue. On the rejiggering side we've got foreclosures and bankruptcies. On the smokescreen side we've got sticky house prices.
The loans' collection shortfall can be danced up to a point - even through the 'intent' phases of foreclosure and bankruptcy. But the actual event changes the books in fashions that cannot be hidden (legally). Court orders tend to do that, doncha know. (A severe digression: I anticipate seeing a lot of banks as landlords simply to recover SOMETHING from those properties they own.)
And as for sticky prices - people who don't want to reduce their selling price - when it's perceived as too high people won't want to buy. And if they're not buying, they're not borrowing. And if there are no new sources of income to balance the growing losses, then there is a finite limit to how long the profit margin can be maintained by cutting employees and other assets.
And so I return from the theoretical to the practical. Foreclosures are up - significantly - nationwide, as are declarations of bankruptcy -- and submissions of intent for both indicate we're quite a ways from the top of that business. Several lenders have closed their doors, and a lot more have announced reductions in anticipated profits -- and a lot more have had "staff realignments".
The credit crunch is in sight. Not less than a month but not more than a year is my guess - but it's incoming regardless.
The Extra Liquidity will have to start buying houses instead of buying loans on houses, that's how. I expect it any day now.
Halo doesn't want me to comment on that... keeps eating entries & telling me to 'go away'... Halo's pretty smart.
But I'm stuborn... I'm seeing a lot (and I mean as much as I saw in the S$L run up) of leveraged equity fund buyouts of companies with the intention of dressing them up to flip.
Result is not just change of ownership at higher basis but also the corporate industrial equivalent of 'granite counter tops', 'home theater systems' and 'vanity bathrooms'...
This is resulting in quite a lot of employment activity - more on the equity fund/service side than mfg because its easier to 'automate' a foundry or machine shop than a room full of Wharton MBAs - but it is creating activity like crazy. I see it... had phone conversations just about an hour ago with one.
They have astonishing amounts of money to play with... compared to the 'bootstrapping' we did in the 90s... this is 'cowboy high style' let me tell you... horns on the Cadillac and everything.
This credit/debt bubble is NOT over yet. There is an awful lot of money yet to burn. Good thing Bennie & the CBs got lots more of that stuff.
Finally read his paper and he certainly backs up his doubts... indicators wrong in 3 of last 10 recessions, both false pos and neg.
The older I get, the smarter this guy looks.
But I'm trying to get less leveraged anyway.
Anyway, how do the modelers account for the future and growing impact of other nations on our economy - both trade and money .... China, Mid East?
But I'm trying to get less leveraged anyway.
VERY GOOD IDEA! I don't have caps big enough for that one.
If this thing goes south, having cash & minimal exposure means you eat your competition & their young. Nice.
If not - you still have the cash to expand though a little late in the game... okay, learn from others mistakes & be smarter, finish harder.
The risk of letting it all hang out all the time is suicidal... like playing Russian Roulette over & over & over.
If more firms knew when to reel it in a bit they probably would never have to reel it in lot later... I wouldn't be such a sour bear... I probably wouldn't even lose a nights sleep worrying over recessions. Seriously. Be kinda like catching a cold... but when heavily leaveraged it's like catching a cold and having seriously compromised immunity - not good.
Keep comin' around sippn - keep us posted. We simple lefites like to know there still are rich entrepreneurs out there,somewhere... we might get hungry ya' know.
Anyway, how do the modelers account for the future and growing impact of other nations on our economy - both trade and money .... China, Mid East?
You read Setser's stuff?
Dr. Setser
Very good. It took me an awful long time to get even a small grasp of what is going on there - and I do not claim to know even a fraction of what there is there.
I also do business w/ companies very active in Asia so see a little of the sausage being made... but I wouldn't grasp any of it w/out some of the material I read here or on Setser's site.
But between this site & Setser's I think you see the 'shadows' of the forces affecting our economy... the drivers behind the liquidity on one end (in Asia & OPEC) & the 'consumption' of that liquidity on the other (RE/MEW driven consumption here)... with all the rest of us peons in between trying to squeeze a little bit out for ourselves.
Dryfly - no I haven't but thanks for the link. Now that you pumped my head up..
Just my gut feeling that since we stopped using sails, the stuff moves across the pond faster and faster.
Also my gut feeling that the "flat earth society" shouldn't have a corner on econometric modeling.
Its been less than 100 years (somebody knows the number) the US has dominated the world economy and controlled its own destiny - if one of these potentially large economies gets traction in the next 20 years, we may only have memories of the Fed controlling interest rates.
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