Morgan Stanley's Roach: Two-Engine Slowdown
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CalculatedRisk on Mon, 11/20/2006 - 8:38am (76 comments)
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And from The Times on Europe: The deflation threat facing Europe
"[I]nvestors ... biggest economic worry at present [is] the housing-related slowdown in the American economy ... More recently, there has also been concern about the unexpected weakness of consumer demand in Japan. Much less widely noticed, but arguably more important, especially for British business, are newly published European statistics that show growth slowing sharply in Germany and coming to a standstill in France. The first official guesstimate for the whole eurozone for the third quarter, issued last Wednesday, showed a slowdown to 0.5 per cent from 0.9 per cent reported the quarter before. Forward-looking indicators of economic activity have been falling even faster."
Like Roach and Roubini, I think the decoupling view is flawed.
Best to all.
Like Roach and Rougini, I think the decoupling view is flawed.
You are so polite.
Thanks CR - I think this is getting to the nut of the issue. This liquidity 'dry up' will have spill over effects far greater than average people realize... RE being just one of the more visible & immediately quantifiable effects.
contraryinvestor has an excellent discussion of the dollars and sense of the current credit cycle:
bits and link below:
"Here's a little perspective for you. On a YTD basis through early October, US equity mutual fund inflows to both US centric funds and ETF's totaled $32 billion. Inflows to foreign focused funds totaled $125 billion. And inflows to bond funds totaled $45 billion. Collectively that's roughly $202 billion. As of August month end (latest available data), foreign purchases of US financial assets totaled $672 billion. Get the picture as to just how important the US credit cycle, trade deficit and foreign purchases of US financial assets feedback loop has become? "
"Believe us, in their collective heart, the Fed really isn't afraid of popping an equity bubble or a residential real estate bubble at all. But they have to be deathly afraid of potentially popping the macro credit bubble, or at worst slowing its ongoing expansion. Stepping back a bit, it's not about the bubble nature of any one asset inflating at any point in time, it's all about the entire credit cycle moving forward at all points in time that's the important issue. The Fed knows this.
"link:http://contraryinvestor.com/mo.htm
why isn't rampant inflation (cpi etc) showing up because of this enormous liquidity..
i think due to globalization (wage arbitrage), liquidity is only showing up as hyper inflated asset only..pricing power is weak as majority of the population is not benefitting from it (as well chinese etc oversupply)..
So the liquidity is showing up as enormous wealth for the top 1% of the pop..
I think one must eye the synchronous property booms occuring around the world with a bit of suspicion.
I see them as a symptom and suspect that the underlying malady is excess liquidity world wide (i.e. a global credit bubble).
That said, perhaps its possible that a global economy reduces the risk and enhances the rewards of taking on more debt via more diversified markets, etc.
But until there's more evidence to support that position, I'm going to assume there's a global "credit bust" laying somewhere in the near future.
That is a great point ac. A similar view was expounded back in 2005 by one of the Morgan Stanley economists based out of Hong Kong, I think his last name was Xie...
Basically, his opinion was that with the globalization of manufacturing occurring in the early 1990s, a dramatic increase in global liquidity caused a fundamental change in the historical relationship of central bank monetary policy to inflation and liquidity. Basically, the old rules for setting the prime rate were out of date, and needed to be higher to avoid bubble making, but national Central Banks didn't catch on until too late. Voila! the global housing bubbles...
An interesting theory, but I haven't seen any formal academics expounding on the topic.
why isn't rampant inflation (CPI etc) showing up because of this enormous liquidity..
It HAS resulted in inflation... asset & commodity price inflation. Check out real estate, stock prices and metals & oil over say the last 10 years. Even agricultural commodities are way up.
These inputs just aren't accurately captured in the CPI... that and the labor component has been driven down by labor arbitrage so that overall consumer product based CPI isn't that high.
The interesting thing about the wealthy getting wealthier is they are very heavily weighted in exactly those assets & commodities that have appreciated most - RE, stocks & metals. If there is a big reversal they will be hit from a 'percentage' point of view harder than the rest of us mere mortals.
This is exactly what happened in the Depression - the wipe out from the stock & real estate crash was what leveled wealth inequality FAR more than FDR reforms.
However people have to remember that while most of the rich were humbled & leveled - the rich still ate & had a roof over their head. Not so with many of the workers who were middle class in the 20s and living the life of Steinbeck's Grapes of Wrath in the 30s.
If the credit cycle moves into a down phase due to a slowdown in world wide growth how will that affect the cost of money?
Basically, his opinion was that with the globalization of manufacturing occurring in the early 1990s, a dramatic increase in global liquidity caused a fundamental change in the historical relationship of central bank monetary policy to inflation and liquidity.
I remember Andy Xie's work back then - he caught an awful lot of heat ('Who is this Xie guy and why should I care!')...
In short I think you summed it up correctly... the CBs worldwide have lost the ability to control 'money'... what is & isn't money and how it gets formed.
Somehow I have a sneaking suspicion that hedge funds are at the center of this story - either as root cause or as the world's luckiest opportunists.
Bob Dylan from 'Idiot Wind' off 1975 album 'Blood On The Tracks':
Someone's got it in for me, they're planting stories in the press.
Whoever it is I wish they'd cut it out quick but when they will I can only guess.
They say I shot a man named Gray and took his wife to Italy, she inherited a million bucks and when she died it came to me.
I can't help it if I'm lucky.
Andy Xie was the morgan stanley economist and i must say i agree with most of his statement except the fact that CB's would've done something different knowing these facts. CB's are all pumping to keep their currency and hence economies competitive with their counterparts. It's a path of mutual destruction but it's hard to see the forest for the trees when you're in the thick of it.
dryfly: Percentage-wise, I think you're right. But those who were still liquid when the bottom was reached could position themselves very well indeed.
why isn't rampant inflation (cpi etc) showing up because of this enormous liquidity
I'm just speculating, but I think it makes a big difference as to whether inflation shows up in wages or just assets - I think inflation in incomes is needed to establish the feedback loop required to get long-term 1970s style inflation.
I think the sort of asset inflation that comes from excess liquidity is an entirely different thing since it lacks the sustainable feedback loop (e.g. MEW shuts down as soon as home prices fall) and therefore is likely to end in some sort of meltdown at the end.
So the inflation we had earlier this year was an entirely different sort than the inflation we had in the 70s and there's no coincidence that it's vanishing literally overnight.
The cycle is broken.
Hi everyone. As you all know, related to the liquidity issue is the fate of residential investment (RI) here in America. I found this letter from the SF Fed on forecasting downturns in RI:
Residential Investment over the Real Estate Cycle (2006-15, 06/30/2006)
Can you please comment on what the author, economist John Krainer, has found? Maybe CR can improve upon Krainer's findings? Thanks.
dryfly,
"Check out real estate, stock prices and metals & oil over say the last 10 years. Even agricultural commodities are way up. These inputs just aren't accurately captured in the CPI..."
Beg to differ. Some of those "inputs" are not and should not be inputs to CPI. Stocks and metals aren't consumer goods, though metals prices show up to the extent that metals are used in consumer goods. Oil is heavily represented in the CPI, in its various forms. Real estate is reflected in CPI in a kind of an odd way, but is in there. Home owners equivalent rent is a very big chunk of CPI.
The CPI could be done in any number of different ways. Accuracy isn't the problem. There simply is no one "right" way to measure inflation. That's why we have a multitude of measures. As the Cleveland Fed's median CPI measure shows, how one aggregates data into a composite index can have a big influence on what the index does. That doesn't mean the Cleveland index is better than official CPI measures, just different.
You seem to be asking for CPI to reflect asset prices, but there is no reason it should. Policy makers should take asset prices into account, but that doesn't mean we need to cobble together one, all-encompassing price measure that would satisfy every need. In fact, we cannot do that.
AC's point about where inflation shows up and why is quite congent here. Big asset price swings are not necessarily a good thing, but they are not the same thing - not by a long shot - as swings in consumer prices.
DeLong writes about a paper by Christina Wang that goes some way in showing that the linkages between real economic variables and financial variables are not all monetary. If the linkages aren't all monetary, then we need to avoid asserting that there is some single thing called "inflation" that involves the price of everything.
AdelaideNow... Inflation is world's key priority
The G20 reported the outlook was positive for economic growth around the world. Mr Costello, however, warned the big economies could not get too confident too early.
"The last time I saw general euphoria in the global economy was in 1997, three months before the Asian financial crisis," Mr Costello said.
"One has to be very wary of general euphoria. It can end very badly.
"Now, we do not want it to end badly."
Beg to differ. Some of those "inputs" are not and should not be inputs to CPI.
I don't care about the CPI - whether they are in there or not. Sam asked where's the 'inflation' and I said its in the assets & commodities & that's where it is, NOT in the CPI.
Likewise if we see a 'deflation' of those same asset prices going forward it might not be captured in the CPI either.
I'm not asking that the CPI be one size fits all, just pointing out that even though the CPI isn't exploding doesn't mean there isn't inflation. The metrics & reality don't have to match perfectly.
And it is mighty hard to look at the CPI and say... "See no liquidity problems here, everything is in control"... while standing in the shadow of 20,000 new debt fueled condos with asking prices 50-100% higher than just a half decade ago.
Sometimes people need to look up from their reports in front of them and walk around outside.
Charlie Stromeyer, I posted Dr. Krainer's excellent historical review of RI back in June.
I think an update to Krainer's figure 3 might be interesting.
Best Wishes.
Take a look at my market history & forecast report for Bakersfield, Los Angeles, Modesto and the US
http://homepricehistory.blogspot.com/. Reports that will published in a few days include Boston, San Diego, Las Vegas and Miami.
The 2005-Q3 peak in residential investment coincided with the peak in price-adjusted M3, and the evidence from Europe points to the same. It's about liquidity, plain and simple. So, why all the argument, theorizing, and hand-wringing over old news? Where's the number crunching?
Charlie Stromeyer- What's to say about Krainer's paper? The numbers suggest we've got a "recession-like" slowdown in residential investment. The 'average' recession-like slowdown is 7 quarters in duration, the months supply ratio doesnt peak until 7 quarters into the downturn, and new house prices begin to fall 3 quarters into the downturn. It means the current downturn has a long way to go before hitting bottom.
Did somebody mention....
.....REVOLUTION???
(if you didn't hear it, it's because your head is up your ass)
I don't know about this tricky thing called inflation everybody keeps talking about, but I do know that central bank reserves around the world are overflowing with dollars and nobody can reasonably afford a house.
Sounds like a job for an "elastic" currency!
Here's a Mon. morning perspective of a very shrill man. Over the weekend I looked at a nice house for sale, it provides an interesting picture. It's a SFR, 2500' a few blocks from the ocean in Metropolitan SoCal with no ocean view. Seller bt. the lot for high sixes about a year ago, razed it & built a nice 4 br, 2 1/2b, three story, 2 car garage with quality appliances. He put it on the market in June asking $1.7mm, & whined to me that he had two sales fall out of escrow & recently reduced the price to $1.45mm to "unload it". My guess is his breakeven is definitely under a million $. By the way, the person he bought it from paid $400k for it in 1999. (Interestingly, he shared this info. matter-of-factly, for him it had absolutely no relevance.) He showed no panic & no concern about the market. He & his realtor girlfriend have "flipped" 8 properties in SoCal in the past two years, making progressively more on each sale + her realty fees.
Meanwhile, I've been told VERY FEW SoCal homes in the $1-1.5mm asking price range are now selling. I don't believe any of these sellers is thinking about how irrational their expectations would be in "normal" times. No one's thinking about how little incomes have increased in 20 years or remembering how his price/gross income of 20 years ago equates to what he's asking for it today. Nobody's thinking about how few people there are in our economy who can actually pay the mortgage, taxes & maintenance on today's $mm home FOR 30 YEARS. Instead, sellers believe they "DESERVE" to get their ridiculous asking prices & that in time, they will. Real Estate always goes up & if the FED wouldn't let the stock market bubble pop, it's sure not going to let this housing bubble pop.
Times change, the only constant for the last 5+ years is our FED's free money/easy credit policy. For the moment they look like they could be right. This easy money/easy credit policy was ordained to "save" us from a much needed financial sector correction & has been fostered to encourage the world to deflate our dollar.
If any readers out there know BB, please tell him it was AG's bozo idea he's staking his reputation on, that AG has no kids & grandkids to worry about, & the ONLY thing this gambit's accomplished is to put our Country's economic future at real & growing risk! MONEY COUNTS, if the FED can't figure that out our kids & grandkids are in for a WHOLE LOT of trouble.
CR:
any information regarding the money currently being spent on debt sevicing both public and private?
bailey makes a very good point concerning Greenhole's lack of progeny. Does Ben Bernanke have children?
I wonder if he remembers the story of Anastasia Romanov?
He should probably review it.
Yeah, I think right about now is a good time for a history review.
(I'm just saying.....is all....)
If you look at the St. Louis Fed data, the narrow money supply in the US has been fairly flat all year, and the BoJ has slashed the Yen money supply by over 30%. Although China is still adding liquidity, this should have been enough to restrain the system, yet private credit is still being created at an extraordinary clip. This reminds me a lot of the situation in East Asia in 1997. All the warning signs were there, but they were ignored and the investment frenzy continued. Then literally one day it ended - badly, very badly. I just wish I knew when that day will be for this bank/hedge fund/private equity frenzy. I was originally thinking about now, but this party looks set to continue until the last raver staggers into the afternoon sun. And this time the sheer scope and linkages to the real economy will make the Asian/Russian/LTCM crises seem like a drop in the bucket in comparison. I hate being this negative, but it seems this can only end in crisis, rather than a managable reversion to the mean.
Like Dryfly said so well, the crash of the market did more to destroy the immense inequalities produced in the 20s then FDR's reforms in the 30's.
FDR was no raging liberal- and his reforms where basically very moderate.
When elected in 1932- his attempts to ease the depression brought no 'socialistic' reforms until the far left begin to eat his lunch in 1935- that is when he signed the social security act, and taxed the corporations and wealthy to the hilt.
I agree that liquidity is still flowing like Niagara Falls- and most of it has gone into asset bubbles and commodities- which supports primarily the rich. The global labor arbitrage has pushed down the cost of manufacturing of goods and wage increases for common workers.
Inflation has been rampant in housing, and health care- and the loss of economic security in American society currently is the worse since the 1920's.
But again; alas the liquidity has to go somewhere......
when the music stops though, who will be left dancing?
...this should have been enough to restrain the system, yet private credit is still being created at an extraordinary clip.
In today's mad mad world of financial innovation, how do you control this? Do you even want to try - instead clean up the mess afterward if they can (big if)?
I mean I understand the dangers of unbounded credit expansion & agree with the 'Austrians' on the potential for unhappiness... but just can't accept the 'well, shit happens' solutions they offer.
At the same time the regulators either are co-conspirators or asleep at the switch. At this pace dot-communist might get his wish.
I don't know about this tricky thing called inflation everybody keeps talking about, but I do know that central bank reserves around the world are overflowing with dollars and nobody can reasonably afford a house.
Now THAT is a quote so good it's worth repeating!
From B Setser...
For good or for ill, China is now sailing on uncharted water.
Ya and we've chosen to become stow aways with them. Great.
Good series of comments on Setser's threads
too.
On liquidity:
Barron's 10/23/06 Current Yield by Randall Forsyth:
"Even if the BOJ jacked up rates all the way to 1%, it still would be the cheapest money in the world."
Looks like a return to the yen-carry trade, or free money (0.25%) -> plenty of liquidity.
Charles Dumas of Lombard Research - London. Of the yen-carry trade:
"is the chief explanation of of Wall Steet's recent bull run." [of course a big drop in oil prices didn't hurt either].
But, if (when) USD falls (when econ. slows due to housing + auto sector contraction), yen rises, and end of yen-carry (again).
Japan needs to raise rates/stronger yen to kill the y-c trade, but don't want to kill their precarious economy. Sure the BOJ has withdrawn liquidity from their mkts., but it has just morphed back via the y-c trade reappearing again in the global mkts. Central banks - ugh!
Lets all remember that the austrians have never been in charge of an economy in order to test their theories. Their successes exist in complaining about folks that have been in hcarge.
Sorta like the creationists that find fault in evolutionary theory and then attempt to make a science from finding fault.
Being libertarians in practice, they'd have no objection to the creation of money by private parties. Not much different than the creation of money by deritives and asset based securities currently causing problems.
Maybe they'd close down the CBs but that function could still be screwed up in the same way by private parties.
In the past, currency had to flow, so private banks issued their own notes with disasterous results.
You might want to have a gold based currency, but I'd love to see the body that enforces this.
When it finally dawns on the generations X Y and Z that the boomers have effectively spent their future earnings for the boomers to live it up in their heydays and 'retirement', the boomer day of reckoning will be here, and it won't be pretty.
Hard to care about the aging boomer being comfortable when no one else is.
BOOMER BEWARE!
Social security? For who? The irresponsible klepto boomer? HA!!! I predict boomer blood will flow.
And THAT is what the fed fears the most.
Previous class revolutions were tame compared to what is coming.
Better bring those troops home soon to try to protect your (cl)ass. Oops, since the bankers have been screwing them over upon their return as well, I guess you elites better find another protector. You wouldn't want those trained sharp shooters to start aiming at you, eh Mr. Greenwich banker?
A million pissed off Oswalds. All going after Jack Banker.
uh-huh...
Glad the commies are still around. Comic relief is a good thing.
Nobody can resonably afford a house? Home ownership in the US is at an all-time high. Ahem.
Roach is a serious guy and his analysis re: liquidity is I think on target. That is the key to all of this. Of course, it almost always is. Nothing new there.
I wonder what Roach's take on the increased US real wages this year and its impact will be?
banker,
Home ownership in the US is at an all-time high. Ahem.
Excuse me, but I think you meant home 'ownership'. Mortgage debt is the all-time high, not ownership, you shill.
You were right about one thing, comic relief is a good thing, and the joke is you.
Why was Edmund Safra whacked?
Do you really still think his nurse-killer will never tell? What if it's already too late?
Sleep well, Jack.
The history of England makes it very clear that a gold-based currency is meaningless. Parliament required in 1850 or so that the Bank of England hold gold in a 1 to 1 relationship with banknotes. The result? The private banks issued their own notes, but the Bank of England could never act as lender of last resort because it was constrained by the gold requirements. So we get the worst of both worlds. We get rampant money printing and credit generation on the one hand. But on the other hand, because the printing is being done by private banks, bank crises are possible.
The situation wasn't actually that bad in practice in Britain, for several factors: cultural conservatism made banks hesitant to go to extremes, Britain was so rich that no one ever really thought they could break the big banks. In the US, it was a different story. The saving grace in the US was that the economy was so primitive prior to 1900 that most people (most people were farmers living in a near-subsistence economy) were unaffected by bank crises.
Combine private banking with modern hedge funds looking around for squeeze possibilities and you have a recipe for one banking crisis after another. Eventually, people lose all confidence in banks and we something like what the Islamic world accomplished by outlawing interest. Namely, an economy with a hopelessly crippled financial sector. That has really worked out well for the Islamic countries, now hasn't it?
Name's not Jack,
Home ownership is at an all-time high. More Americans own homes than ever before. Mortgage debt is also at an all-time high. So is GDP. So is consumer spending. So is median household net worth. And on and on and on. Real incomes are up, horrors!
The Revolution is coming! Beware! Didn't you know? Safra got whacked by the same people who killed Malcolm X, Che Guevera and Huey Long.
Just ask Lyndon Larouche.
Shill
P.S. Um, by the way, who am I shilling for? I can never keep it straight. I know it's THE MAN, I just forget which one. Little help?
Stephen Roach has been a widely-quoted bear these last few years.
Anyone have data on how his predictions have done?
Then why did you answer?
I don't think Lyndon knows, but I'll bet that Sandy Weill and Bob Rubin do (and they wish they didn't).
Nice attempt to undermine my comments without answers, so Rovian. Must be a conspiracy-nut, right?
You know, people (stupid as you think they are) are actually starting to catch on to that game, JACK.
Meanwhile, Hugo is laughing in your face and winning new friends every day. Oh, that's right, you thought China was America's friend. Chile (Bachelet got Friedman's old chum by the balls), Bolivia, Brazil, Argentina, now Nicaraqua, almost Mexico, do you realize what you disregard?
Oh, yeah, I forgot your little fairy tale, that Communism is dead.
Of course, since you don't genuinely interact with the lower classes, I guess you really couldn't know what they're thinking now, could you, Jack? You better enjoy your feather bed as long as you can, cause you might find yourself in a dirt one sooner than you think, Jack.
Funny thing in America, the lower class people seem to own more guns and know how to use them moreso than the upper classes.
Now THAT's a conundrum to ponder, Jack!
Banker,
Why do you think homeownership is at all time highs while affordability is at all time lows? And don't you think this relationship is disturbing looking FORWARD?
Nothing to do with mortgage lending practices/products that grew out of FED's "free money" days?
You are very bright, so please don't tell me its beacuse we are still in "massive short supply of housing" like you have penned before. Be serious.
Almost forgot:
Um, by the way, who am I shilling for?
Whoever will keep your credit scam afloat. Money whores don't care who the pimps are, just that they keep the game going.
Snakes are loyal to no one.
Goose - Roach has been 'wrong' so far - wrong if you mean the wheels have fallen off yet. I'm not so sure he's been wrong at all about describing the economic landscape.
But in that sense he's kinda like a bad bearing, it makes lotsa noise but doesn't seem to fail... That is until it does - then the wheels DO fall off & big time.
I'd feel a lot more reassured that Roach was FOS if somebody from the other camp could make a reasonable & logical case that the issues Roach points to - the imbalances in current accounts and reserves & debt - were beneficial to us & them. You know long term win-win. I haven't seen any - not one - only argument I see from your likes is 'it hasn't been bad yet so situation A-OK forever, no change needed'.
You want to try and tell me why our debt & current account deficits are a good thing? I'm all ears. I'm sure I'm not alone.
And America just elected its first ever SOCIALIST senator.
Funny stuff!!
Seriously, 50% of Mexicans (more, likely) voted to elect a socialist.
And 44 years ago you were afraid of Cuba. Can't have 'em next door, eh, Jackie?
Knock, knock.
Who's there.
Next door neighbor.
Next door neighbor who?
....
Next door neighbor who.
...
knock back.
...
hello?
The comedy is endless...
Funny thing in America, the lower class people seem to own more guns and know how to use them moreso than the upper classes.
Doesn't matter - professionals know how to put away amateurs in a heart beat even if the amateurs have guns.
And the upper classes can always buy the professionals & usually do. When they can't that's when they are in trouble & not one minute before.
When does a revolution succeed? When the revolutionaries stop dividing their own & focus on the top they are trying to over-throw. That makes it very difficult for those elite bought troops to pull the trigger on their parents & siblings. We are getting there in Iraq now.
The Boomer-X-Y division is classic divide & conquer strategy which is why the upper class in America have nothing to fear even if the economy turns ugly. If that doesn't work then there is always race - proven track record.
Look at the Iranian or Cuban Revolutions as prime examples - in both cases it was when the middle classes bailed on the established elites that the systems crumbled - the poor had already been hostile for generations and got nowhere. It takes a critical mass; divide & conquer makes sure that mass is never reached.
BTW - you want to be a real revolutionary dot-communist? Join the military & in particular 'special forces'. That's the only way you learn the skills to be successful - if you can cut it.
A girl from my high school told me that when she got back from a stay in Argentina (it was the late 70s). She had made friends with leftists while there in college - was turned in and interrogated. She had the cigarette burn scars on her arms to prove it. The pro's went through that group of 'revolutionaries' like a hot knife through butter. Those troops were the equivalent of our special forces with intelligence officers helping out - probably from the School of the Americas.
She was enormously lucky she didn't just disappear. If things get ugly here - folks won't be so lucky.
I enjoy the tough talk though.
banker, consumer spending is 70% of the U.S. economy and historically the primary driver of this spending has been real average hourly earnings. Are these hourly earnings up this year because of wage increases?
CR, you posted that growth is slowing in Europe. A European economist warns that a housing slowdown is coming there because he has found that European housing follows U.S. housing by an average of 18-24 months:
http://www.realtor.org/rmodaily.nsf/pages/News2006111707
I don't know the reasons for the lag but I hope to short European housing when it peaks.
No more 'hungry' Americans: US government says.
"The US government has tweaked its terminology in referring to the nearly 11 million Americans who face a constant struggle with hunger to refer to them as people with "very low food security."
Breitbart.com
Lots to respond to,
CMAD,
Not sure who you're talking to as I have never claimed a "massive short supply of housing."
As for housing affordability going forward? Incomes are starting to move, no surprise, and I think the huge capital gains oriented tax-advantages of real estate ownership (Cap gains shield, 1031 exchanges etc)as compared to other asset classes make RE a preferred class. What do I think we'll see with regards to prices? Flattish nominal prices (measured nationally) over the next several years.
What I am still trying to figure out is the disconnect between the equity markets and the housing bust thinkers. They can't both be right, even with a ton of liquidity...can they?
Charlie Stromeyer,
Real employment cost is up this year as are wages. Here's an article Yahoo! 404 - Page Not Found
Commie,
Great yuks! I got guns and training and dogs. Bring it!
BTW, the US doesn't elect Senators, states do. Bernie Sanders has been around VT forever. Nothing new there either. But really, keep it up.
Signed,
Banker, er, shill, er, snake with no loyalty, er, credit scammer...wait how about this, when you finally settle on a name let me know ok? Until then I've got to go take the usurious interest payments due on outrageous back rents I am getting from illegal immagrints living in my 15 to a room hellholes to my Cayman Islands Bank on my Gulfstream. Then I'm off to visit my sweatshops in Brazil, supported of course by chopping down the rainforest.
Oh yeah, I'm traveling with friends from the Carlyle Group and the Trilateral Commission.
The blogosphere can be fun.
dryfly, nice post (except for the special ops suggestion
I may be mostly talk, but that doesn't mean it isn't coming. The 'riff-raff' I interact/commiserate with (not all poor, really, mostly middle class) are getting restless. I don't personally promote division of generations, but I absolutely think it will move in that direction. And I think the day will soon come when the bleeding divisions will unite and change will happen. The common enemy will be found, and I don't think the bought protection will continue to protect. I think they will turn, and they already are. Indeed, Bill O'Reilly's ratings are dropping weekly. The duped are starting to feel it.
When police officers can't buy houses in cities they are paid to protect without neg am mortgages, the time may well be nigh. The banker 'helping' him keep his home with another new 40-year I/O mortgage likely won't really pacify him.
Also, the independents today define this country's policies. The now-fractured Republicans are trying desperately to hold their collapsing base of evangelicals (God bless you Ted Haggard Yahoo! 404 - Page Not Found ), and most people don't really trust the power Democrats, so independent socialists like Bernie Sanders can get elected (Bernie thinks the Dems are too wealth-friendly). The power elites control the media of the elections, but the greed of the media will not deny a rising star figure, even if he/she is a socialist promoter. The 2-party system of control is faltering.
When (not if) people start disappearing here, the divisions will unite faster than Jack can say 'gas-up-for-Bermuda.' Indeed, Joe McCarthy is not considered a hero in America anymore. Even the terrorist propaganda is failing, as a Muslim was elected to congress for the first time (in your state, I believe). People will not look aside when THE MAN starts kidnapping those who they know are not Islamic terrorists.
A Muslim and a Socialist, first time ever, 2006. And still THE MAN doesn't acknowledge his grip is weakening.
[For the record, I interact with many upper classholes as well, funny thing, they usually think I like 'em!!]
BTW, the US doesn't elect Senators, states do.
Oh Jack, you really are pathetic.
Did I make some spelling mistakes as well that you can correct to imply how superior you are?
when you finally settle on a name let me know ok
here's another one for you: IDIOT!!
What's really funny, is that someone with such incredible social status as you feels the need to defend your ego anonymously on a blog through juvenile attacks. You really must be superior [sic], IDIOT!
JACK,
Answer the original question....how do we get 80% NATIONAL home price gains in 5 years with anemic wage and wealth gains? Nothing to do with 1% money and unreg growth in mortgage exotics etal?
Nahhhhhh, too contrarian for you "follow the trend" geniuses......
If you have real data to back up your view, I would love to hear.....
"Despite a cooling housing market where prices have fallen slightly, affordability continued to worsen in most California markets during the third quarter of 2006, the California Building Industry Association says." -- CA Building Industry Association, 20NOV06
Central Valley Business Times
"Flattish nominal home prices" sounds awfully optimistic from where I sit in the world's seventh largest economy. I think we may have to ratchet up those wages a little more. How about: from each according to his ability, to each according to his need (or something like that) . . .
cmad, the Rovian method is to casually insult and degrade without actually answering the question at hand. In other words, don't expect a straight, cogent answer from Jack the IDIOT.
As I saw this relevant post, I just had to comment:
Unelected Mexican leftist claims office
Yahoo! 404 - Page Not Found
He claims fraud and dirty campaign tactics were responsible for Calderon's narrow victory in the July 2 vote, and his parallel government could spend the next six years calling for street protests that have already dented the economy and prompted travel warnings from the U.S. Embassy.
But don't you worry, free market capitalism already defeated that evil communism. C'mon, people, the Berlin Wall...hello.
Comic relief, indeed!
an excellent prudentbear.com write up on roughly the same issue
http://64.29.208.119/archive_comm_article.asp?category=Guest+Commentary&content_idx=59374
I think we are going to see a major shakeout in some of the smaller mortgage banks and lenders that held back riskier loans on their books as well as hedge funds investing in low grade tranches of debt. You are already seeing it start with Option One Mortgage, ECC Capital, Ameriquest cutting huge amounts of staff, same with Countrywide. This is just the beginning. These places will implode.
Cmad,
Who's Jack? And who are these "follow the trend geniuses?"
A bunch of possibilities in answer to your question. Tax preferences for RE is an obvious factor, real wage growth being understated due to CPI limitations, tougher zoning (especially on the coasts) and an investor preference based upon some or all of each of the above and the greater fool theory. Of course liquidity has a bunch to do with it (as I have said). But that's not just housing. Corporate America has also used lower rates to refinance themselves as well, creating extra free cash flow. A good thing, no?
For example, how have we seen the DJIA increase 15+ times since 1980 with, according to some, stagnant wages? My guess is that, to some degree, we are still using analytical tools built for an industrial economy when we no longer are one. Things don't always revert to the mean.
I think the real long term economic issues we face are things other than RE. Medicare has got to be cut back/means tested/age extended and other Fed spending has got to be curtailed. The other one is what is the current account deficit really telling us? Is it telling us that we are, as a nation, living beyond our means and that therefore over time the dollar must continue to fall, or is it telling us the US remains the best place in the world in which to invest? Some of each?
Of course the most important ingredient is keeping our economy dynamic and innovative, and that means lots of basic research and drawing the best minds from around the world to our shores.
Commie,
How do you know I have social status? Thanks for your confidence
Seriously is this how you normally hold discussions? Do you expect to bring someone to your side in this way? Remember who gets lined up when the revolution comes 
Banker:
Your lighting it up tonight!
LOL
Banker,
real wage growth being understated due to CPI limitations
Maybe for some.
http://www.frbsf.org/news/speeches/2006/1106aa.gif
Economic Inequality in the United States
Economic Inequality in the United States (11/6/2006)
The folks in Iraq are succeeding in their revolt mainly because of training from Iran and Syria with Russian possibly thrown in.
Generally young revolutionaries get dead. The government has agents out who incite illegal activity and then swoop into collect the budding revolutionaries and thus deter and terrorize.
A successful revolt almost depends on a division of the leadership elites or a dis-integration of government control due to economic collapse or military misadventure.
The US is in a state of 'revolt' as elites that formerly supported the GOP distance themselves. Military misadventure is part of the problem as well as economic problems. It will be fought out at the ballot box for some time.
Banker,
Of course the most important ingredient is keeping our economy dynamic and innovative, and that means lots of basic research and drawing the best minds from around the world to our shores.
doesn't look good.
Research and development spending (per capita) statistics - countries compared - NationMaster
Maybe money going for stock buy backs so the insiders can unload shares isnt going to cut it.
Of course part of that money came from subsides so what the heck.
Recently firms have been pumping enormous, and unprecedented, sums into share repurchase. In the first half, over $216 billion was spent by S&P 500 firms to buy back their own stock. The shrinks the number of shares outstanding and boosts the EPS growth rate.
Earnings Still Looking Strong
Monthly Insider Sell / Buy Ratios
Trailing 12-Months
http://insider.thomsonfn.com/tfn/tearsheet/market.asp?linkcode=7rdcg6divt9fsuu5awkj&tfnHeader=insider
Seriously is this how you normally hold discussions?
What do you mean, referencing current geopolitical realities that differ from the communism-is-dead-and-proven-a-failure declarations of pseudo free market capitalists? Why, yes, yes I do, actually. Your initial response to my comments was to ridicule and dismiss communism, and I responded with reference to Venezuela laughing at the American capitalists while breaking bread with China.
Considering that 3 American countries have just elected leftist leaders, I think your dismissal is rather premature. 4 with Mexico. (Just so you don't think you need to correct this, South and Central are Americas, too)
Your hollow answers show us all how you discuss. Tax preferences for real estate? Seriously? That's your answer? That justifies an 80% increase in 5 years as cmad asked? Wow, you are hollow. Or the wage increases? The first real wage increase since 1997? Thanks to Kevin for the SF fed links proving your theory as a crock.
Innovations.
Ah, yes, those incredible innovations. Maybe you should detail those innovations that you believe in so much. Credit default swaps? MBS products? Hedge funds? Options exchanges? Wow, those? Details, please. Just 'Research and innovations' is a rather hollow answer.
Like Kroszner's comments last week at the CATO on inflation. He must have mentioned those amazing innovations along with the 'credibility' of central banks a dozen times at least. A few too many times for such a short speech. No specifics, however. I guess he thinks saying it makes it so.
Funny, couldn't it be that worldwide inflation expectations are low because global deflation is expected? If every country's economies are so weak that every country starts cutting towards zero interest rate policies, a 4% return for 10-years out looks pretty great, no?
Nah, couldn't be, must be that astounding credibility of central banks worldwide, uh-huh, and, of course, those innovations that conquered inflation, hey, Randy? You'd better mention it a dozen times, so the 'Jack Banker' listeners get that mantra in their heads to repeat to all those CNBC and Marketwatch interviewers.
BTW, IDIOT, I never brought you in this, I initially said 'Jack Banker' like you say 'Joe Sixpack', and the 'Jack' was in conjunction with the Oswald reference, IDIOT. You are the IDIOT that replied, like I was talking to you, then said I shouldn't call you Jack.
Okay, IDIOT!!
So tell me, do you always degrade those who you try to hold discussions with? And do they all treat you with awe and respect when you insult them, IDIOT?
And Safra was whacked because the Bank of New York didn't like the NYFED bailing out the loser banks that trusted everything to LTCM, which was bailed out only by trickery and lies. Or maybe it was just a temporarily crazy jealous nurse's aide. You decide. ;-
Again, Kudos to Kevin for the great links. That R&D spending is FUGLY.
You mean the insiders are SELLING? NO!
And IDIOT, just for the record, the next time I refer to bankers, or Jack Banker, realize that I am not talking to or about you, IDIOT! If I capitalize IDIOT, however, your ears will ring.
Lost my tag, above is mine.
Are we channeling Ben's Blog this morning?
Kevin,
That's some pretty good data. Got any that excludes reloading?
Commie,
No I only degrade (maybe you mean denigrate? [ducks])those who use all caps!
You walk into a new place, meet people who seem smart and fun, have a really good time. You feel smart and fun too. You come back the next day and find some of the same people and things, really get excited about it. Soon you go every day, make sure you everybody sees what a good time it can be, and you feel like you are at the center. After a while you stop seeing some of the people who made it smart and fun. They disappear in small groups. It starts to seem like a dull place, but its familiar so you keep coming back. Later you see some of the old crowd walking into a different place and ask where they've been, and they say nowhere really, and not much else.
Moderation. YOu can wear anything out; for everybody.
Holy Proletariat, children, every time I have to take a sick day or two I come back and find you all have gotten fractious. I mean, this is the internet. Where did you all get the idea that rudeness is allowed?
Allow me to offer The Big Lembowski theory of economic commentary:
"This is not 'Nam. This is bowling. There are rules."
Dotcommunist, you need to stop calling Banker (or anyone else) IDIOT. Call him/her "banker." Having been a banker in the past, I at least accept a certain level of synonymetry therein, and if Banker doesn't, it's his/her handle, after all. I doubt Banker and I agree on much beyond the correct way to face bills and file MICR tickets, but he/she is here to represent a point of view, and we all spend a lot of time bitching--perfectly rightly--that we don't get enough serious representations of the bull case here. So when we get one that appears to be in good faith, let's just disagree like incorrigibly snarky but still basically adult interlocutors.
If this sounds to hopelessly bourgeoise, go read Walter Benjamin (I recommend starting with Illuminations and Antonio Gramsci (The Prison Notebooks)and Georg Lukacs (because a little literary criticism never hurt anybody, start with "Realism in the Balance"). Trotsky's History of the Russian Revolution remains the best theorization of revolutionary uses of humor ever written (and I am not kidding about that. If you don't know anything except the Obvious and Oft-Repeated Bad Things about Trotsky, find a library with a copy of Issac Deutscher's three-volume bio. I read it on the beach (yep) a long time ago, and it will make you cry in places.) Then get back to me on the subject of tough-talkin' pinkos who are prolier than thou more often than is good for them. And yes, I'm a boomer. You can hate us for lots of things, but, um, some of us did, um, read a lot during our occasional timeouts in the process of ruining the global economy for everyone too young to own a slide rule.
For everyone else, get a copy of Jerome K. Jerome's Three Men in a Boat (first published in 1889). It's short and hilarious. I hadn't read it since college, and took it to chemo yesterday. I was the only one having to keep stifling involuntary bouts of laughter, that's for sure. (All the other patients were watching television. Imagine. CNBC during chemotherapy. What, you're trying to make yourself feel worse?)
I am fine, thanks. Don't offer me a chili dog and we'll get along all day. And yes, I know perfectly well that people quickly ratchet down the mean-spiritedness whenever I bring up my health woes. I'm smarter than I look these days, that's for sure.
Banker, I'd love to hear you tell me how cap gains advantages do dog for moderate-income people on a bad cash-flow squeeze at a 40% or more HTI on the only residence they own in a market where existing home sales are getting harder to find than Marxist literary critics.
Name, you and I seem to be on the same wavelength this morning. I hope you've seen a doctor lately.
Tante,
I'm not actually sure I understand what you mean, but I'll try!
"Banker, I'd love to hear you tell me how cap gains advantages do dog for moderate-income people on a bad cash-flow squeeze at a 40% or more HTI on the only residence they own in a market where existing home sales are getting harder to find than Marxist literary critics."
I didn't claim cap gains benefits impact everybody. But at the margin, they have got to have an impact. Do you deny this? Wha other investment vehicle provides such a shield? For the person who only owns their own home, they probably won't be moving anytime soon (what's the average 6 years now?) so the unrealized gains or losses aren't a big deal in and of themselves, at least today. But when they do move, either they will be able to shield likely all their gains or if they have a loss, the home they are moving to is likely to be cheaper than today as well. Real wages are moving up, so that can be part of the answer as well.
BTW, I'm hardly a bull on residential real estate. What I am is thoroughly unpersuaded of the sky is falling thinking regarding RE and catstrophic spillover effects into the general economy. That's all. I'm hysteria challenged.
BTW Tante,
I'm new here and hope you are doing well. As far as Dotcommunist goes, he's pretty funny and I DID goad him somewhat, so I deserve some of what he laid out.
Man I just KNEW that when Mom got home, she'd be really pissed!!!
Hope the treatments did their magic tanta.
dryfly, I cherish you. I just do. I will try to control my impulse to tell everyone else to clean their rooms. But of course I won't promise a damn thing.
I am fine, but I mentioned chili dogs. So I've been . . . busy. But not on the keyboard. That's the important thing.
Banker, I shouldn't have called you "bullish" but I was at the end of a long rant and getting into shorthand. Of course you're only relatively bullish for this crowd, but therein lies some point or other. Anyway, here's my problem: you said, "But at the margin, they have got to have an impact. Do you deny this?" I don't deny the impact at the margin. But we are not at the margin, we made these loans under circumstances we should have known wouldn't be "at the margin" issues, and we deserved to get taken to account for it. A whole bunch of home loans got made as if they were "investment vehicles." That is the problem. Housing is housing for all but a privileged segment and some professional investors. If housing also ends up being an "investment" for the average borrower, that's great and I'm all in favor of it. But the psychosis of the exotic loan boom was, let's take products like IO which were designed for "investment management" or "private banking clients" or whatever and use them to put Joe Borrower in a home he can't afford. To talk about cap gains in the context of an environment where they won't make it for six years--have you seen the EPD numbers? The default rates of the 2005 vintage? People aren't making it for one year--strikes me as, well, beside the point in a way that borders on irresponsible.
Don't be fooled; I'm like this even when I'm not taking the heavy meds. Everyone here will tell you that. Let's hope dotcommunist will forgive me for the mom thing.
I agree with Banker that tax preferences given to homeowners have augmented the value of homes. The $500k exclusion, interest deduction (mitigated by low interest rates/ high principal) and capital gains rates have moved the value out. Once a preference is given, it's rarely taken away. At worst, capital gains will inch up and the $500k exclusion will amortize down with inflation.
I also think the new onerous bankruptcy law will force some people to take more extreme measures to keep up with their payments. Without an easy bankruptcy fix, people might take that 2nd or 3rd job, pack a lunch, not buy things they don't need, etc.
Third, I am hoping that many people will be opting out of ARMs into Fixed, now that the rates are comparable.
And lastly, some anecdotes: the restaurants near my home and work are still full, even with $3.40/gal gas, the highways were full of oversized cars headed to the lakes this summer. Maybe the economy is stronger than we perceive it.
Does this mean I'm bullish on housing? No way. But there are rational arguements for bulls and bears alike.
Lama is so balanced. Not all of us are so balanced and consider the strain of being a bull just too much.
I like the somewhat brave anecodotes of prosperity (against the tide of stats): a clogged highway and a line-up at the McD Drive-Thru. (Ok, maybe it was a high class joint where you had to make reservations 5 weeks in advance.)
You are right about the cars, not so much the traffic jams IMO, as a better source to gauge prosperity. Despite the meeting with the Big(Fatass)Three CEOs with w recently proclaiming that they did not need assistance (like they gave Chrysler some years ago), they do. As was evidenced a few days later by the announcement that $2000 incentives would be in place on all 2006 GM models to clear stock.
The hi-end (esp imports) sales are fine --unlike those little Fords.
I think the cars really do tell me that all is not as prosperous as it once was. The success of the drive-thrus for those too tired to cook confirms that picture.