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Long period of frugality needed for the U.S. economy
LONDON: Looking for the foundations for the next bull market in U.S. stocks? Wait until you see consumers who save much more, have a lighter debt load and can actually sell their houses. In other words, bring a book: it may be a bit of a wait.
I offer the following book as a reading suggestion, although I must admit that I have not read it personally. I can say it is over 1,200 pages though.
War and Peace
...and disperse to find housing and supplies, then ultimately destroy themselves as they accidentally burn the city to the ground and then abandon it...
Then again, perhaps an escape from reality would be better.
"Dow, 30,000 by 2008" Why It's Different This Time
Much of the information contained in this book has been assembled from several decades of research on both the economy and stock market. Some of the conclusions will come into conflict with conventional opinions. However, each conclusion is supported by a "factual foundation" that rests on a body of historic evidence. These revelations could change the way investors think and the way they behave in the future.
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
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At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
11 hours ago
7 comments:
Here's an update to the War and Peace analogy.
The Decline Of Suburbia?
http://www.cbsnews.com/stories/2008/08/07/eveningnews/main4329746.shtml
Some developments are left half built while other homes look abandoned. Demand for suburban housing is dropping so fast that a recent study predicts that by 2025 there will be a surplus of 22 million large-lot homes in suburban areas.
Nichole can't afford the $800 in gas she burned each month commuting to her job, so she's selling her house for less than half what she paid for it.
It sounds hard to believe, but some experts are now predicting that this could be the beginning of the end of suburbia -- that far-flung neighborhoods could be tomorrow's slums.
Stag,
Here's a thought I've been mulling over. What if rents continue to rise as people move closer to urban areas out of economic necessity. Building rental apartments and houses is a breeze in the burbs, but that is not the case in dense cities. Look at Europe & Japan. They have countrysides, yet people are packed into tiny dwellings in the cities. An excess supply of suburban McMansions does not guarantee falling rents. Especially in a world with high fuel costs. Also, just how many jobs are near those gazillion condos in Las Vegas and Miami? I'd venture far fewer jobs than empty dwellings.
I know, I know. The Europeans, Asians and South Americans are going to buy all those units. But then, maybe they won't rent out the units. And maybe, if they go long real estate, they won't be buying our treasuries in the same amounts. That could be bad for interest rates. And maybe, if they own our real estate, we can't default on our debts through inflation. Whoa! Let me stop that negative feedback loop right now. Let's just leave it at foreigners buying our stuff. AHHHH! Much better. Wall street slogans really are great.
No worries.
MAB,
An excess supply of suburban McMansions does not guarantee falling rents.
I offered similar theories in another blog's comments about a year ago and the deflationists heckled me. I even pointed to an article that shows rents can rise as housing prices fall. (By the way, it is pretty much a miracle I managed to find this article yet again, lol.)
How Home Prices Can Be Hot but Inflation Cool
http://www.nytimes.com/2005/06/26/business/yourmoney/26view.html
CONVERSELY, when housing prices fall, a trend that most people would deem anti-inflationary, and renting becomes more attractive than owning, the index might process the information as evidence that inflation is on the rise. "We got a great deal of criticism that we were overstating inflation in the early 1990's, because housing prices were declining and rents were going up steadily," Mr. Jackman said.
I'm of the belief that most renters do not rent houses. I never did. Further, as it applies to headline inflation an empty house is a non-event. It must be occupied by a renter to count. Therefore, if an entire subdivision is vacant due to nobody living there then that isn't even considered deflationary in the minds of our government or more importantly in the calculation of the inflation rate, at least as it pertains to TIPS and I-Bond investing. Go figure.
All this talk that the CPI understates inflation is missing the point I think. I'm perfectly fine with the CPI tracking rental prices. It does so to avoid housing bubbles. I'd say half jokingly that it was mission accomplished.
One more thought on hedonics while I'm at it. I paid $53.99 for Soul Calibur IV for PS3 at Costco today. My first gut reaction was not good. That's a LOT more than games once used to cost. However, as a former game programmer I am blown away by how much more time and effort goes into them. In proportion to the cost to create them these days (huge teams of programmers and artists vs. just one guy working in his basement), the $53.99 is a bargain. I therefore am left with the belief that a $53.99 game today is worth a LOT more than the $19.99 game many years ago (more so than just the difference in price). I do consider that deflationary believe it or not. Put another way, how much could I resell that old $19.99 game for today? Not much. Therefore, dollars were a better store of value than an old video game. Unfortunately, the poor are finding the counterintuitive deflationary effect of higher video game prices to be quite unaffordable no doubt. That still doesn't mean we aren't getting more for our money though.
Speaking of more for our money, I saw Tropic Thunder recently. Hedonics would not have been kind to the experience. The theater turned the volume up to painful levels. Contrary to possibly popular opinion, more is not always better. They charged us $10 each for a deafening experience. My personal hedonics calculation would subtract $1 per excess decibel. The movie was a guilty pleasure though overall. I found myself laughing quite a bit.
Lest you think it was just me, it was my friend who actually brought the volume up and very nearly went to tell someone to turn it down. It was almost as "bad" as the time I saw Judas Priest in concert many years ago and couldn't tell my car was started afterwards. I just kept grinding the starter not knowing. As far as my ears could tell, the battery must have been dead. It took a few moments for reality to set in, lol.
Maybe Bernanke should look into using sound the next time he drops money from helicopters. A REALLY loud Apocalypse Now soundtrack would really set the "1979" mood.
Stag,
I offered similar theories in another blog's comments about a year ago and the deflationists heckled me.
I had the exact same experience much more recently. I certainly sympathize with the excess supply argument. But most people just don't under stand the the way the housing component of CPI is calculated. I'm certainly no expert either. That said, Detroit, Trenton, Camden, Philly, Pittsburgh, Toledo, Cleveland and a slew of other cities have had a LOT of vacant homes for years, yet CPI rents continued to rise. The system is bit counterintuitive to supply & demand.
I'm perfectly fine with the CPI tracking rental prices. It does so to avoid housing bubbles.
Whoa there chief. IMO, this was a major policy blunder - by Volcker no less. Tracking ONLY rental prices ignores housing bubbles. It certainly does NOT avoid them (except in CPI measures). I'd posit that tracking only rents encouraged the bubble. Unaffordability was viewed as wealth - I'll never understand that logic.
It was almost as "bad" as the time I saw Judas Priest in concert many years ago and couldn't tell my car was started afterwards
I had a college roomate (in a rental apartment) that peeled the paint off the walls with Judas Priest. I'll add that I think I suffered some permanent hearing loss at an AC/DC concert. I had a ringing in my ears for almost a week! That show rocked.
MAB,
I'd posit that tracking only rents encouraged the bubble.
Yeah, my point was not whether or not the way the CPI is calculated encouraged the housing bubble or not. I was simply pointing out that it isn't affected as much by the housing bubble as it once would have been.
A better debate might be whether or not tracking consumer prices is the best way to track inflation in the first place. I tend to think tracking the vast amount of dollars sloshing around the world might be better. Perhaps there's a temptation to blame the wrong messenger (the CPI measurement tool).
MANY things encouraged the housing bubble. Most of them had actual mouths, worked in the finance industry, worked in the real estate industry, and/or had access to monetary printing presses though. The CPI isn't quite that capable. It's simply a measurement tool. To the best of my knowledge, the CPI didn't once advertise a negative amortization loan on the radio nor did it talk up the usefulness of adjustable rate mortgages like Greenspand did.
In other news, I've only been to two rock concerts in my life. The other one was just a few years ago. It was an AC/DC concert. My girlfriend knew they are/were my favorite band and got me tickets. :)
Triumph's Allied Forces very nearly killed my roommate in college (I somewhat exaggerate for dramatic effect). I came in to the dorm room and saw that one of my fairly heavy speakers on an upper shelf had crawled its way into a leaning posture directly over my roommate's bed. I suspect he had at most five more minutes before it made a giant leap onto him. It did not get into that position in a low volume environment either, but you could have probably guessed that.
We played the music so loud one of those speakers finally gave up and died. We took the other one to someone with a louder stereo system and ran 200w through it. I figured it would probably be lonely by itself. It was sort of a Romeo and Juliet moment, lol.
Stag,
We took the other one to someone with a louder stereo system and ran 200w through it
200w! I thought 11 was powerful.
http://www.youtube.com/watch?v=akaD9v460yI
The CPI isn't quite that capable. It's simply a measurement tool
True. And your views certainly have merit. You've nailed things so far. But it doesn't make sense, at least to me, to distort the largest cost (housing) most people face throughtout their lives.
Nayhow, as for a better method, I tend to believe limiting money supply in conjuction with a more constant basket of goods would be a surer method of controlling inflation. But it's clear the PTB don't really want that kind of absolute ceiling on inflation. Inflation is their ace in the hole.
Under Nixon, we completely abandoned a gold standard and adopted an inflation standard. Ever since, you could bank on inflation. And we did, with ever increasing leverage. I would argue that the results have been poor for the majority - real growth did not increase, yet real wages declined. That's a raw deal. Seriously, active work is taxed, while passive investments compound via inflation tax deferred. Those are some backwards incentives.
Going forward, I still expect inflation to be a problem. We continue to create piles of unproductive money - almost $1 trillion for Iraq, $150 billion tax refund, $500 billion yearly fiscal deficit, unfunded liabilites, etc. All that money in foreign central banks isn't going to disappear either - the fannie & freddie bailouts make that clear and seriously weaken the credit destruction arguement.
The optimists point out that economic policies work with a lag. I agree. That said, there is no way I can believe we've worked through the "lag" of the last 13 years - creating money at 9% a year against nominal growth of 6%/year.
I still believe the bulls have it wrong. And I still see too much hope.
MAB,
But it doesn't make sense, at least to me, to distort the largest cost (housing) most people face throughtout their lives.
It makes some sense if you subscribe to the substitution effect. Is a house really worth what you pay for it or is it worth what it would cost to rent? I tend to lean towards the latter. There was a point a few years ago where I was tempted to sell my house and become a renter. I was looking to substitute. High transaction fees to buy and sell a home prevented it. Well, that and the huge pain in the you know what moving can be.
Further, housing bubbles happen even under a gold standard.
There are reports of Palm Beach land bought for $800,000 in 1923, subdivided, and resold in 1924 for $1.5 million. By the following year the same land sold at $4 million. At the top of the boom there were 75,000 real estate agents in Miami, one-third of the entire population of the city. - A Random Walk Down Wall Street
Bubbles seem fueled by OPM (Other People's Money, which probably should be pronounced "opium"). There doesn't seem to be a limit on how much the average person will pay when they can borrow money from someone else. What I don't quite yet get is what the "someone else" was thinking.
Seriously, active work is taxed, while passive investments compound via inflation tax deferred. Those are some backwards incentives.
It is almost like the governmental powers that be have a lot of passive investments "lying" around (or laying around, depending on how honest you think the system is). Heck, I still can't believe I was sent a tax rebate check. I'm not a believer in the we'll print fresh money for everyone and therefore everyone will be better off theory.
The optimists point out that economic policies work with a lag. I agree. That said, there is no way I can believe we've worked through the "lag" of the last 13 years - creating money at 9% a year against nominal growth of 6%/year.
Yeah, the lag I worry about most is the one going back to the point where we fell off the gold standard in the 1970s. That's some serious lag.
That being said, something is still amiss. Either gold is too expensive or toilet paper is too cheap. Eventually, the relative prices should converge again. Eventually. That's one long-term chart I'd REALLY like to see. It would help establish a long-term equilibrium point, should one exist. That being said, maybe they've already converged. Perhaps gold was merely in an anti-bubble for a few decades and that's now been corrected. Who knows!
You've nailed things so far.
I tend to fight the easy battles though. Spain really comes to mind. When a government is telling me that I cannot speak of a crisis I not only want to speak of a crisis but heckle it too. Maybe that's just me though.
Markets are constantly in a state of uncertainty and flux and money is make by discounting the obvious and betting on the unexpected. - George Soros
I would add that heckling "the obvious" hasn't earned me so much as a penny. Fortunately, betting on the unexpected has worked out okay. The deflation everyone (including myself to some degree, but not enough to actually bet on) keeps expecting keeps being postponed.
Speaking of pone...
Pone
http://dictionary.reference.com/search?db=dictionary&q=pone
Also called pone bread. a baked or fried bread usually made of cornmeal.
I had no idea that pone was even a word until I looked it up. Our bread (cash?) is baked-in and this somehow relates to corn (ethanol?). Yeah, I think that actually works.
I'll take Poner Economy for the win, assuming today's stock market is any indicator.
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