All: We have discussed that housing prices are falling, inventory is understated (typo fixed), and construction will most likely fall further. Bernanke just said the same thing.
Bernanke is still understating the probable impact on the general economy, but being optimistic is part of his job description. Read Bernanke's "downside risks" and that is probably the more likely outcome.
looks like you and the chief are on the same page: 3% or bust!
"But the indicators in hand suggest that real GDP growth this quarter is likely to be in the same general range that it was in the second and third quarters."
Pardon me, but where does Bernanke get the idea that business investment is still strong? The durables orders numbers are weak, the equip and sw investment numbers have been weak and erratic, and the moving average is heading downward. Sure, nonres bldg is up, but he knows damn well that after 07, thats heading back down, with the one year lag behind residential. Yeh, office space building will help a bit, but still, its 1/3 to 1/2 the size of residential. Also, what about capital spending trends of walmart, intel, etc, all saying they are starting to cut back.
If that is BBs idea of hedging the upside, we are in trouble.
CR - nice extract & compression, thanks. Pretty much inline with you and the comments here. What's missing as you point out are the downside risks - starting with housing. You've covered that so the other two are employment (also at risk ala construction) and capital spending. Notice when you did into the data that this 'recovery' has created the fewest jobs of any postwar recovery while business investment is not looking very rosy.
It would seem to me we have a slowing economy that, after all the pump priming, never made it back to self-sustaining growth with two sets of risks. The housing related ones you've analyzed so well and the organic growth ones that don't seem to have come up over anybody's horizons so far.
I think overall Bernanke "gets it". So it provides me some comfort that the Fed chairman seems to understand what's going on. I'm not sure other members do, though, especially the inflation hawks.
Ironically, it seems that the Feds assessment of Japan's situation in the 90s concluded that their Fed was overly hawkish, and the downturn was prolonged by excessively high interest rates. It seems that anti-inflation "peer pressure" could possibly be causing a similar situation in the US:
ac:
Japan in the early 90's did not worry about attracting capaital to pay it's debt service.
What the Fed chairman keeps saying in spite of the data is that, NO cut in overnight lending coming soon.IMHO
Ironically, it seems that the Feds assessment of Japan's situation in the 90s concluded that their Fed was overly hawkish, and the downturn was prolonged by excessively high interest rates. It seems that anti-inflation "peer pressure" could possibly be causing a similar situation in the US
From the research that I've done, what happened in Japan was far less the result of what the BOJ did, and way more the result of a huge shift in consumer behavior.
When consumers and firms start focusing on debt minimization as opposed to profit maximization, there is little a Central Bank can do to keep overvalued asset markets from collapsing.
After the real estate and stock market bubble of the 1980s, the Japanese did the right thing for economic survival: they started paying down debt as opposed to taking on more of it.
While this is clearly an oversimplification of events, this was the underlying cause of the 1990 to 2005 downturn in the Japanese asset prices and the economy.
Could some version of this Japanese experience happen in the U.S. today?
Yup, and there's not much the Fed can to prevent it.
I think that's an interesting question - will the Fed cut rates to stimulate the economy or keep rates high to attract capital?
I hear a lot of people actually predicting higher rates to keep up the capital inflows. Personally I don't see it because I think the threat of a serious recession, which would cause the US debt-to-income ratio to rise, outweighs the risk of reduced inflows. Also lowering rates could encourage demand for the higher yield treasuries that are out there and prevent a sell-off (if China started dumping treasuries it could be a disaster). All this stuff is fairly new to me, so it's wild speculation on my part (I don't really understand this stuff, I just like to talk about it), but I'd be interested in hearing other people's perspective.
In any case, I know how the homeowners feel now - I have quite a few long bonds so I have no tolerance for any claims that interest rates will increase, no matter how rational or empirically valid.
AC:
when CR gets his crystal ball then we can stop throwing darts.
Japan is in the mist of a population decline, going from `130M to 100M,the YEN was not the world's reserve currency in 1990 and they were facing a huge liquidity bubble,they also did not have gov't debt, very different then USA.
What keeps the mortgage business offering zero down, low interest loans is money from offshore, if you want to see a real slowdown in RE sales and refi just jackup the 10 and 30 year.
looks like you and the chief are on the same page: 3% or bust!
Ya LOL - I read that and almost pooped - seeing him 'agree' with me makes my confidence droop.
My reasoning for 3% in 4Q-06 is/was (1) noise (2) liquidity inertia and (3) X-Mas spending... I do not think we are on a 'flat' or 'rising' trajectory... just not diving as fast as Roubini does... not until the liquidity dries up. When that happens then the party is really over...
At this point, the Fed sees things as progressing pretty much in-line with their soft landing scenario. Most people posting to this site (myself included) see it differently, but clearly we'll have to already be in a hard landing before they react, which means that rate cuts won't be coming until the economy is well past the tipping point. Japan has a lot of issues, aging demographics and a declining population being at the forefront, but their real estate / banking bust is definately instructive as the US (and a lot of the rest of the world I would add) is really playing out as stage 1 (denial) deja vu all over again. It took two years before they realized they had a real problem in Japan. This is a slooow motion train wreck.
CR,
Back when I was in Internal Audit in the 90's, I found CEO's liked to overstate both Inventory AND Sales.
I guess my nit-picking explains why I've never made it into senior management.
Anybody know when GM and Ford people get that $140,000 to spend? Maybe they were the ones spending last Friday. Anybody know just how many are getting the $140,000? Should add up to a few Billion...
"With regard to the effect of a slowing housing sector on the U.S. economy and consumers, Greenspan said the fundamental question comes down to whether home mortgages are actually acting as a proxy for all other types of financing of goods that in any event would have been bought because of capital gains."
"We will probably be able to find that out within the next year," Greenspan
said.
The standard forecaster thinking is that point estimates are just short-hand for a distribution of likely outcomes. The point estimate, in most circumstances, is the center of that distribution. It is thus the most natural thing in the world for the forecaster (Bernanke), when given the opportunity, to describe the distribution of likely outcomes, as well as the point estimate. "Playing both sides of the argument" as you say. Greenspan and Rubin made "risk assessment" the centerpiece of their respective policies. That requires thinking about risks on both sides of the central estimate. In fact, in a way it means that you have to pile up all the risks in order to get to the central estimate.
Fed officials are in the habit now of describing the risks for growth as balanced around a slightly-below-trend central estimate. That's normal. The unusual thing is odd is describing inflation risks as skewed upward. Skewed upward is decidedly not "playing both sides against the middle." Bernanke and his crew really are putting it on the line. You just have to know their way of thinking to catch it.
My hope is that they are engaged in a virtuous lie. They understand that inflation falls after growth slows. They also understand that most of their audience either doesn't know that, or forgets it most of the time. By talking tough about inflation, they are trying to maintain credibility. Inflation is above target, and they have stopped hiking rates. That was the pattern through most of Greenspan's tenure. It is surely the right pattern, given what we know about monetary policy lags. Fed officials don't believe they can sell this notion to the public, so they talk tough and stay on hold. I hope.
TOKYO Japan has embarked on a path no developed nation has ever followed - of sustained and inexorable population decline.
Japan won't be alone, of course. Italy, Russia, South Korea and many others also will get smaller. The United States is the exception among advanced nations, and not only thanks to immigration; its overall birth rate is higher, too.
As a result, Japan's population, now about 128 million, is expected to fall to about 100 million by mid-century.
I seem to recall reading recent an opinion piece (by either Bill Gross or Paul McCulley of PIMCO I think) that stated that Bernanke and the Fed were probably engaging in a bit of verbal/psycological campaigning to try to 1) establish the new Chairman's and Fed's inflation fighting credentials and 2) break the back of any price increase expectations before they take root in the public psyche, using one of their other major policy tools -- the bully pulpit. This may also has the added benefit of supporting the value of the dollar so that any possible change trends are gradual and not sudden.
Probably that he'd better make as much money and fast as possible on the rubber chicken speaking circuit while anyone will still listen to him. After all Andrea is no cheap date.
dryfly: It looks like you and Chief
Bernanke against the world!
Deutsche US Economic Outlook: Downward Revision. Our US economic team just lowered 06Q4 GDP from 1% to 0%. Please see Joe Lavorgna's original text:
In light of continued weakness in the economic data, we are cutting our fourth quarter real GDP growth forecast to zero from the +1.0% that we were originally predicting. This is largely due to weakness in durable goods shipments and orders, but also due to weak consumer spending. Core durable goods shipments, which are a direct input into GDP, declined 1.5% in October, and the level is down 8.2% AR compared to Q3. This is much weaker than what we had been assuming, and because the growth rate in capex has been slowing since Q1, we do not believe that we will see much if any bounce back in November or December. Furthermore, contrary to weekend anecdotes, we believe that the weekly measures of chain-store activity were unimpressive through the first four weeks of November. One survey that we track was actually down on the week. It is clear to us that consumer spending is not getting the boost from falling gasoline prices that many analysts anticipated.
ron, we might expect even further weakness in consumer spending because it tracks homebuilders' sentiment according to chart 21 of this letter from Gary Shilling about a coming crash in housing:
dryfly: It looks like you and Chief Bernanke against the world!
wow ron - I feel so, so dirty. LOL!
The durables took me a bit by surprise, though it shouldn't have - I sell parts to these folks & business has been slow.
HOWEVER business has been slow for a couple years now as we lost more and more component & subassembly biz to Asia... so we were slow even as GDP was plenty OK... so I'm thinking 'whats different?'
Either it sucks now in Asia too... OR they are bringing in the complete product & not 'ordering' anything here. Looking at what sold on Doorbuster Friday the latter seems more accurate.
I'll still have to wait & see though... meanwhile look up some new ways to cook crow.
BTW - I'm becoming a connoisseur of crow. Might have to publish a cookbook.
I thought the GOP would hold on to congress - at least the Senate for sure (again just based on my personal observations of a number of local battle ground states I travel in on business, Missouri being one of them... and the GOP gerrymandering).
Plus I've been expecting this RE driven recession for about 3 years... continued bad bet.
So maybe now when I throw in the towel it really will be a recession. How wrong way is THAT!
All: We have discussed that housing prices are falling, inventory is understated (typo fixed), and construction will most likely fall further. Bernanke just said the same thing.
Bernanke is still understating the probable impact on the general economy, but being optimistic is part of his job description. Read Bernanke's "downside risks" and that is probably the more likely outcome.
Best to all.
bernanke playing both sides of the argument..what's the point?
and didnot dwell on currency crisis?
dryfly:
looks like you and the chief are on the same page: 3% or bust!
"But the indicators in hand suggest that real GDP growth this quarter is likely to be in the same general range that it was in the second and third quarters."
Pardon me, but where does Bernanke get the idea that business investment is still strong? The durables orders numbers are weak, the equip and sw investment numbers have been weak and erratic, and the moving average is heading downward. Sure, nonres bldg is up, but he knows damn well that after 07, thats heading back down, with the one year lag behind residential. Yeh, office space building will help a bit, but still, its 1/3 to 1/2 the size of residential. Also, what about capital spending trends of walmart, intel, etc, all saying they are starting to cut back.
If that is BBs idea of hedging the upside, we are in trouble.
CR - nice extract & compression, thanks. Pretty much inline with you and the comments here. What's missing as you point out are the downside risks - starting with housing. You've covered that so the other two are employment (also at risk ala construction) and capital spending. Notice when you did into the data that this 'recovery' has created the fewest jobs of any postwar recovery while business investment is not looking very rosy.
It would seem to me we have a slowing economy that, after all the pump priming, never made it back to self-sustaining growth with two sets of risks. The housing related ones you've analyzed so well and the organic growth ones that don't seem to have come up over anybody's horizons so far.
CR
Did you mean "inventory is understated" in your note above?
I think overall Bernanke "gets it". So it provides me some comfort that the Fed chairman seems to understand what's going on. I'm not sure other members do, though, especially the inflation hawks.
Ironically, it seems that the Feds assessment of Japan's situation in the 90s concluded that their Fed was overly hawkish, and the downturn was prolonged by excessively high interest rates. It seems that anti-inflation "peer pressure" could possibly be causing a similar situation in the US:
http://www.federalreserve.gov/pubs/ifdp/2002/729/ifdp729.pdf
ac:
Japan in the early 90's did not worry about attracting capaital to pay it's debt service.
What the Fed chairman keeps saying in spite of the data is that, NO cut in overnight lending coming soon.IMHO
From the research that I've done, what happened in Japan was far less the result of what the BOJ did, and way more the result of a huge shift in consumer behavior.
When consumers and firms start focusing on debt minimization as opposed to profit maximization, there is little a Central Bank can do to keep overvalued asset markets from collapsing.
After the real estate and stock market bubble of the 1980s, the Japanese did the right thing for economic survival: they started paying down debt as opposed to taking on more of it.
While this is clearly an oversimplification of events, this was the underlying cause of the 1990 to 2005 downturn in the Japanese asset prices and the economy.
Could some version of this Japanese experience happen in the U.S. today?
Yup, and there's not much the Fed can to prevent it.
Ron,
I think that's an interesting question - will the Fed cut rates to stimulate the economy or keep rates high to attract capital?
I hear a lot of people actually predicting higher rates to keep up the capital inflows. Personally I don't see it because I think the threat of a serious recession, which would cause the US debt-to-income ratio to rise, outweighs the risk of reduced inflows. Also lowering rates could encourage demand for the higher yield treasuries that are out there and prevent a sell-off (if China started dumping treasuries it could be a disaster). All this stuff is fairly new to me, so it's wild speculation on my part (I don't really understand this stuff, I just like to talk about it), but I'd be interested in hearing other people's perspective.
In any case, I know how the homeowners feel now - I have quite a few long bonds so I have no tolerance for any claims that interest rates will increase, no matter how rational or empirically valid.
AC:
when CR gets his crystal ball then we can stop throwing darts.
Japan is in the mist of a population decline, going from `130M to 100M,the YEN was not the world's reserve currency in 1990 and they were facing a huge liquidity bubble,they also did not have gov't debt, very different then USA.
What keeps the mortgage business offering zero down, low interest loans is money from offshore, if you want to see a real slowdown in RE sales and refi just jackup the 10 and 30 year.
lama, yes, I meant inventory is understated (I'll fix the comment). By extension that means reported sales have been too high.
Best to all.
looks like you and the chief are on the same page: 3% or bust!
Ya LOL - I read that and almost pooped - seeing him 'agree' with me makes my confidence droop.
My reasoning for 3% in 4Q-06 is/was (1) noise (2) liquidity inertia and (3) X-Mas spending... I do not think we are on a 'flat' or 'rising' trajectory... just not diving as fast as Roubini does... not until the liquidity dries up. When that happens then the party is really over...
But obviously I could be WAY wrong.
At this point, the Fed sees things as progressing pretty much in-line with their soft landing scenario. Most people posting to this site (myself included) see it differently, but clearly we'll have to already be in a hard landing before they react, which means that rate cuts won't be coming until the economy is well past the tipping point. Japan has a lot of issues, aging demographics and a declining population being at the forefront, but their real estate / banking bust is definately instructive as the US (and a lot of the rest of the world I would add) is really playing out as stage 1 (denial) deja vu all over again. It took two years before they realized they had a real problem in Japan. This is a slooow motion train wreck.
CR,
Back when I was in Internal Audit in the 90's, I found CEO's liked to overstate both Inventory AND Sales.
I guess my nit-picking explains why I've never made it into senior management.
Re: Japan's aging demographics
Can someone cite me some data on this matter?
U.S. demographics are aging, right?
Thanks.
Anybody know when GM and Ford people get that $140,000 to spend? Maybe they were the ones spending last Friday. Anybody know just how many are getting the $140,000? Should add up to a few Billion...
CR:
can you translate Greenspan's comment?
"With regard to the effect of a slowing housing sector on the U.S. economy and consumers, Greenspan said the fundamental question comes down to whether home mortgages are actually acting as a proxy for all other types of financing of goods that in any event would have been bought because of capital gains."
"We will probably be able to find that out within the next year," Greenspan
said.
Andiron,
The standard forecaster thinking is that point estimates are just short-hand for a distribution of likely outcomes. The point estimate, in most circumstances, is the center of that distribution. It is thus the most natural thing in the world for the forecaster (Bernanke), when given the opportunity, to describe the distribution of likely outcomes, as well as the point estimate. "Playing both sides of the argument" as you say. Greenspan and Rubin made "risk assessment" the centerpiece of their respective policies. That requires thinking about risks on both sides of the central estimate. In fact, in a way it means that you have to pile up all the risks in order to get to the central estimate.
Fed officials are in the habit now of describing the risks for growth as balanced around a slightly-below-trend central estimate. That's normal. The unusual thing is odd is describing inflation risks as skewed upward. Skewed upward is decidedly not "playing both sides against the middle." Bernanke and his crew really are putting it on the line. You just have to know their way of thinking to catch it.
My hope is that they are engaged in a virtuous lie. They understand that inflation falls after growth slows. They also understand that most of their audience either doesn't know that, or forgets it most of the time. By talking tough about inflation, they are trying to maintain credibility. Inflation is above target, and they have stopped hiking rates. That was the pattern through most of Greenspan's tenure. It is surely the right pattern, given what we know about monetary policy lags. Fed officials don't believe they can sell this notion to the public, so they talk tough and stay on hold. I hope.
Robert:
TOKYO Japan has embarked on a path no developed nation has ever followed - of sustained and inexorable population decline.
Japan won't be alone, of course. Italy, Russia, South Korea and many others also will get smaller. The United States is the exception among advanced nations, and not only thanks to immigration; its overall birth rate is higher, too.
As a result, Japan's population, now about 128 million, is expected to fall to about 100 million by mid-century.
I seem to recall reading recent an opinion piece (by either Bill Gross or Paul McCulley of PIMCO I think) that stated that Bernanke and the Fed were probably engaging in a bit of verbal/psycological campaigning to try to 1) establish the new Chairman's and Fed's inflation fighting credentials and 2) break the back of any price increase expectations before they take root in the public psyche, using one of their other major policy tools -- the bully pulpit. This may also has the added benefit of supporting the value of the dollar so that any possible change trends are gradual and not sudden.
Has anyone else heard similar?
Thanks.
Bernanke's partner in crime - "Easy Al" Greenspan is at it again!
Greenspan: Worst Is Over for Housing
Expired
It's weird, what is he thinking?
It's weird, what is he thinking
Probably that he'd better make as much money and fast as possible on the rubber chicken speaking circuit while anyone will still listen to him. After all Andrea is no cheap date.
Alan might look crazy but he's crazy like a fox.
dryfly: It looks like you and Chief
Bernanke against the world!
Deutsche US Economic Outlook: Downward Revision. Our US economic team just lowered 06Q4 GDP from 1% to 0%. Please see Joe Lavorgna's original text:
In light of continued weakness in the economic data, we are cutting our fourth quarter real GDP growth forecast to zero from the +1.0% that we were originally predicting. This is largely due to weakness in durable goods shipments and orders, but also due to weak consumer spending. Core durable goods shipments, which are a direct input into GDP, declined 1.5% in October, and the level is down 8.2% AR compared to Q3. This is much weaker than what we had been assuming, and because the growth rate in capex has been slowing since Q1, we do not believe that we will see much if any bounce back in November or December. Furthermore, contrary to weekend anecdotes, we believe that the weekly measures of chain-store activity were unimpressive through the first four weeks of November. One survey that we track was actually down on the week. It is clear to us that consumer spending is not getting the boost from falling gasoline prices that many analysts anticipated.
ron, we might expect even further weakness in consumer spending because it tracks homebuilders' sentiment according to chart 21 of this letter from Gary Shilling about a coming crash in housing:
Safe Haven | The Coming Collapse in Housing
What predicts builders' sentiment, e.g. is it an increase in cancellations?
dryfly: It looks like you and Chief Bernanke against the world!
wow ron - I feel so, so dirty. LOL!
The durables took me a bit by surprise, though it shouldn't have - I sell parts to these folks & business has been slow.
HOWEVER business has been slow for a couple years now as we lost more and more component & subassembly biz to Asia... so we were slow even as GDP was plenty OK... so I'm thinking 'whats different?'
Either it sucks now in Asia too... OR they are bringing in the complete product & not 'ordering' anything here. Looking at what sold on Doorbuster Friday the latter seems more accurate.
I'll still have to wait & see though... meanwhile look up some new ways to cook crow.
BTW - I'm becoming a connoisseur of crow. Might have to publish a cookbook.
I thought the GOP would hold on to congress - at least the Senate for sure (again just based on my personal observations of a number of local battle ground states I travel in on business, Missouri being one of them... and the GOP gerrymandering).
Plus I've been expecting this RE driven recession for about 3 years... continued bad bet.
So maybe now when I throw in the towel it really will be a recession. How wrong way is THAT!
"BTW - I'm becoming a connoisseur of crow. Might have to publish a cookbook."
You're not the only one. I've been waiting for the "recession" almost as long as you.