I live in the USA and I am concerned about the future. I created this blog to share my thoughts on the economy and anything else that might catch my attention.
Dr. Strange Move or How I Learned to Love the Bill
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After a couple of years of disinflation, the Fed changed directions and
started lowering rates. By most measures, the economy had been humming
along near a...
NVIDIA Revisited
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On August 26, 2023, 5 days before it a new closing hi at 493.55, I wrote a
critical post about NVDA - the stock, not the company. After that, the
stoc...
Stay away from popular tech stocks, part II
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Last August, I wrote a blog post arguing that largest technology and
internet companies -- Amazon, Apple, Facebook, Google, Microsoft -- would
never grow i...
So, Where Have I Been?
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Well, of course, I have been where I am!
It's been a good few years away from this blog. I do miss some folks
terrible, and I sort of miss things financial...
Those Whom The Gods Wish To Destroy ...
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they first make mad. Still true!!!
*(Note: this post, and probably several others to follow, are actually
about the US dollar and relative currency trends....
The S&P 500 closed today at 1186.68 . Can't you just feel the excitement in the air? Once we cross 1200 for the23rd time, there's probably no turning back.
The S&P 500 closed today at 1191.36 . Can't you just feel the excitement in the air? Once we cross 1200 for the22nd time, there's probably no turning back.
That would imply that investors expect 1.99% inflation per year over the next 5 years.
There's a bit more to the story though.
The 5-Year Note auction amounted to $42,000,023,300. Of that a mere $127,631,300 was bid noncompetitively. That's 0.3% of the total.
The 5-Year TIPS auction amounted to $11,000,030,700. Of that $342,625,700 was bid noncompetitively. That's 3.0% of the total.
I am a small investor and I bid noncompetitively. I participated in the 5-Year TIPS auction. I did not participate in the 5-Year Note auction. Apparently I was not alone.
I am clearly running with the "small investor" herd. If I am wrong to do so, then we should expect less than 1.99% inflation per year over the next 5 years. That's the only way that nervous small investors can do worse than brave institutional investors.
As a saver, I am fine with that. I have embraced safety. Even in TIPS, inflation never helps me. Small investors who have embraced risk elsewhere (for the third time in just one decade) might not be similarly pleased though.
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
In my opinion, that paragraph is playing like a broken record and will continue to play like a broken record. The record will be especially broken if China's "treadmill to hell" fails.
China is “on a treadmill to hell” because it’s hooked on property development for driving growth, hedge fund manager James Chanos said in an interview this month. As much as 60 percent of the country’s gross domestic product relies on construction, Chanos said.
April 27 (Bloomberg) -- U.S. stocks tumbled, sending benchmark indexes down the most since February, as credit-rating downgrades of Greece and Portugal spurred concern Europe's debt crisis will derail the global economic recovery.
“Approval of our first-day motions sets the Company on a very strong footing. This relief ensures that normal operations will continue at all Fuddruckers restaurants,” Fuddruckers CEO Peter Large said.
That's very refreshing.
Even though things are down a little bit right now, he seems very positive about the future. He must believe in the direction the economy is headed.
"Even though things are down a little bit right now, we're very positive about the future," he says. "We believe in the direction the economy is headed."
I've taken the average weekly wages for production and nonsupervisory employees in the most recent employment situation report and multiplied it by 52 to come up with an average annual wage of $32,727.24. I've then taken that wage back in time (adjusted for inflation) to get a crude look at the income taxes in the past.
I'm ignoring all deductions and exemptions. The overall net tax rate is therefore lower (often much lower) than what it shows in the chart.
It has been brought to my attention that I am just a "lame blog author" who has not factored in the tax codes of the 1970s into my analysis.
It was my conclusion that locking in a 28% tax rate was a bad idea for the majority of taxpayers. It was an anonymous commenter's opinion that I was a fool.
I therefore wish to factor in the tax codes of the 1970s and see what changes. I've used the average weekly wages as seen in the latest BLS employment report to generate the expected taxes if our tax code was the same now as it had been in 1970. This math is based on a single filer.
Even if the tax structure of the 1970s repeats, 18.7% is still less than 28%. Note that this analysis does not even factor in deductions and personal exemptions. That income isn't even taxed at all.
This notion that taxes for most people will rise in retirement is one of the biggest scams of the financial industry. That was my conclusion when I wrote the original post and that's still my opinion now. The gravestone stands.
$24 billion in 13-week treasury bills. $25 billion in 26-week treasury bills. $44 billion in 2-year treasury notes. $42 billion in 5-year treasury notes. $32 billion in 7-year treasury notes. $11 billion in 5-year TIPS.
That's $178 billion.
As much as it pains me to say this, I will be buying some of the 5-year TIPS. I'll be getting a very poor interest rate. I just can't think up any safer place to park money that I know I will need in 5 years.
A related issue, which I'll assign for extra credit, is critical for the conduct of policy in the future. Some observers have attributed the bubbles observed in some asset prices in recent years to a decades-long downward trend in real interest rates. In this view, the decline in interest rates has caused investors to reach for yield by purchasing riskier assets with higher returns, driving the prices on riskier assets above fundamental values.
You think?
Many central bankers and economists, myself included, were a little complacent coming into the crisis. We thought we knew enough about the basic structure of the markets and the economy to achieve economic and price stability with relatively minor perturbations. And we thought we had the tools necessary to deal with liquidity shortages and maldistributions. The reality is that we didn't understand the economy as well as we thought we did.
I was toying with the idea of buying a 30-Month CD at a local bank. I've used them in the past. They have good rates. I looked them up onBankrate.combut they are now rated1 star out of 5. I've decided to pass.
While I was there, I decided to see just how common 1 star banks had become.
Among other things, our analysis reaffirms that capital adequacy, effective liquidity planning, and strong risk management are essential for safe and sound banking; the crisis revealed serious deficiencies on the part of some financial institutions in one or more of the areas.
“Achieving the appropriate balance between necessary prudence and the need to continue making sound loans to creditworthy borrowers is in the interest of banks, borrowers, and the economy as a whole,” said Bernanke.
In March of 2009 the CPI-U (not seasonally adjusted) was 212.709. In October of 2009 the CPI-U was 215.969. That's a 1.53% semi-annual increase. It's the same increase that's shown in the link above so there's a decent chance that I'm using the right data to determine it.
In aprevious postI estimated that the most likely new fixed rate would be 0.1%. It's just a guess though. In any event, that is my prediction.
We also should have enough information to determine the semi-annual increase in inflation to be announced on May 1st.
In March of 2010 the CPI-U was 217.631. That's a 0.77% increase over the CPI-U in October of 2009. Inflation has been very tame.
You may be wondering why we are using inflation data from March. We do not yet know April's CPI-U. The government doesn't either and won't know until the middle of May. We are therefore simply using the most recent inflation data that we do know.
Here's the math from the first link above. I'm using the new rate information estimates.
That's my best guess for the I-Bond Rate that will be announced on May 1st.
In summary, I am predicting a 0.1% fixed rate and a 1.64% composite rate. That's down from the current 0.3% fixed rate and 3.36% composite rate.
To put this in perspective, the 1.64% rate will still be a higher rate than bank savings accounts pay and it will still be comparable to the best rates on one-yearbank CDs.
If you are thinking of buying I-Bonds this year, then you could probably do worse than buying before the rates reset on May 1st. It's possible that inflation and/or interest rates will rise by the time I-Bond rates are announced in November, but a bird in the hand is often better than two in the bush.
Now, the real argument in China seems to be – the argument I think carries the most water for the China bulls – is somehow the government is going to be able to manage this. That they’re going to let the air out of the bubble gently. That 9 guys who sit on the central committee of the country who got us into this mess are going to get us out of this mess. I wouldn’t want to bet on that.
1. The long-term trend is not robust. Note the low correlation. That implies anything can happen. In spite of near record low real yields, I'm still leaning deflationary. That would mean that I think down is possible. I do.
2. If we do stick to the long-term exponential trend, then oil will exceed inflation by roughly 3.77% per year. Ouch.
3. If we do stick to the trend, then oil is currently expensive. It's roughly 33% higher than it should be.
4. If we do stick to the trend, then who exactly is going to be able to afford oil long-term? A billion low-paid Chinese? 15 million unemployed Americans? A few highly overcompensated CEOs? Who exactly am I supposed to be betting on again? Call me crazy, but I kind of need to know the particulars.
Special thanks to GYSC atEconomic Disconnectfor providing the funniest video I have seen in a long time!
The current rate is 0.3% above inflation and that is fixed for the next 30 years. However, for new purchases that rate is due to reset on May 1st.
Here's what we know or think we know.
1. 0.3% stinks. That's a given. 2. We can only buy so many I-Bonds in a given calendar year. 3. The rate is not determined by the free markets. 4. I-Bonds are tax-deferred investments that are tied to the inflation rate. If inflation gets out of control, both of these facts could be very important. 5. I-Bonds offer excellent deflation protection. They can never go down in value. During deflation, they are every bit as good as cash.
Here's what we'd like to know.
1. Will that 0.3% fixed rate go higher or lower on May 1st? 2. Is there any chance the rate could be higher when it resets on November 1st?
The 5-Year TIPS rate was 0.61% on April 15th. If that same rate is still here on May 1st and we also assume we are still in "crisis" mode, then that would imply the rate may reset to roughly 0.1% on May 1st.
The 10-Year TIPS rate was 1.49% on April 15th. If that same rate is still here on May 1st and we also assume we are still in crisis mode, then that would imply the rate may reset to roughly 0.1% on May 1st.
Both charts imply that 0.1% is the most likely rate on May 1st if we assume that we're still in crisis mode. The stock market may disagree with me, but I tend to think we're in permanent crisis mode now. I'm therefore not convinced that November's rate has a chance of being much higher.
I'm opting to take a bird in the hand and lock in this pathetic 0.3% rate on I-Bonds. I'll be making my purchase by the end of the month. I've stated earlier that I was thinking of waiting until November, but these charts do not imply that I should.
So what does a 0.3% real I-Bond rate mean? It means that if I hold it for 30 years that it will have grown by roughly 9% in inflation adjusted terms. All of that inflationary growth will be taxed and it will hurt. On the other hand, in 30 years I will no doubt be that much closer to being broke. My tax rate therefore might not be all that bad.
This is not the way to get rich clearly. Relatively high safety comes at a price. It is a price I'm willing to pay.
Even though I am locking in the 0.3% rate, I still hope that I-Bond rates go much higher in the coming years. I will be buying every year, just like I have since 2000. This is mostly just an exercise in timing. At what point in 2010 do I wish to buy? I've decided that the answer is now. Sigh.
Mish got 10 out of 16 right. I got 6 out of 16 right. Together we did no better than a coin toss.
Hey, at least I got the one with the police actually in the picture right though. Good grief!
Here's a comment from Mish's link.
12/16. I blew the first two, then had an "attitude readjustment". I assumed that reality and insanity were upside down - just like some homeowners will be when demand softens for copper and coal. - sotruth181
I definitely would have done better had I adapted, but the Illusion of Prosperity has standards to maintain.
There will be no swapping reality for insanity on this blog if I can help it. If the mansion looks like a crack shack, then the mansion looks like a crack shack.
This chart shows the median distribution in each month along with the median price in each month (as determined on the 15th or the next day the market was open in the event of a weekend or holiday). I have chosen median values over average values because the fund has only existed since 2003. This helps to remove the noisy outlying data points from the analysis.
TIP's distributions are tied to the non-seasonally adjusted CPI. The CPI is affected by seasonal factors though. Therefore TIP's distributions are affected by seasonal factors. Since TIP's distributions are affected by seasonal factors, so is its price.
Note that TIP's price tends to be higher in the parts of the year when the distributions are generally lower. This is pretty much what efficient market pricing should do. If it didn't happen this way then investors would simply own TIP from April to September, scrape off the hefty distributions, and find somewhere else to park the money in months that generally don't offer decent distributions. That would basically allow them to get a free lunch. No free lunches here.
Here's another look at that same data.
This does not imply that TIP's price is generally lower when distributions are higher though. That is certainly not the case as seen in the following chart.
This chart shows all of the distributions plotted against all of the prices. It is no longer sorted by month and therefore all seasonal information is lost. In general, the market seems to like higher distributions. It seems to know the difference between seasonally higher distributions (as seen in the first and second charts) and sustainably higher distributions though (as seen in this third chart).
Disclosure: I am long TIP in my retirement account. I did sell TIP outside of my retirement account in November at$105.401though. I thought it was overpriced then and still do at today's $104.65. I've missed $1.10 in distributions so far but that's offset by a $0.75 drop in price. I'm therefore $0.35 underwater on the trade. That's roughly offset by interest earned in my online savings account though. It's pretty much a wash.
Actually, I am doing a bit better than that. 14% of the money has been spent directly in a 10-Year TIPS auction in January. I'm flat on that trade. 21% was spent on the 30-Year TIPS auction in February. As of today, I'm up 5% on that trade. No joke. It's like everyone got fearful long-term all of a sudden.
I continue to wait with my remaining cash for what I hope will be a better re-entry point in TIP. If not, so be it.
It's just another one of those days when my forehead wants to come in contact with the top of my desk. Repeatedly. The individual investor is continually fed information from the trough. Slop it up.
You will note that many distributions are missing from the data. I would point to the sizable August and September distributions in 2009 in particular. This also throws off most of the adjusted close historical information (that adjusts for dividends and splits).
I went directly to the iShares site to get the distribution information in my previous analysis, so these errors probably don't affect anything I have done here.
Shame on Yahoo for providing bogus information. Bogus information is worse than having no information.
One bright day in the middle of the night One dead stock still stood upright Back to back it faced disaster Hedged some time by shorting another
It was blind but still could see Did it bribe officials as referees? Its blind trust was the one "sure thing" As retail investors shouted, "Bling! Bling!"
But paralyzed wise men passed them by For fear of bad bets in disguise Would the profits both rise and fall? Or would a dry spell drown them all?
A deaf SEC finally heard the noise And thought to accuse those sinful ploys If you don't believe this lie is true Ask Goldman Sachs, did they bet they'd lose too?
Just look at those bubbles. By my count, we're working on our third stock market bubble in one decade. Just how many does it take?
Let's use the average ratio of 1.18 to generate a trend line for the following chart.
The trend line represents the wages and other labor compensation times a fixed 1.18 to come up with some sort of reasonable fair value estimate for the stock market. If this theory has any merit, then the value of equities and mutual funds were 41% overvalued in the 4th quarter of 2009. The S&P 500 is up another 7% since then.
I wonder what would happen if we actually spent some time below that trend line to offset some of the time we spent above it? That's what makes an average after all.
The nation’s publishers bring out a new crop of investing books, as they have started to do recently.
Among the new books, at least two are intriguing.
The first, by a couple of Yale professors, calls for investors — especially young ones — to borrow or go into debt to buy stocks, to have a longer investing timeline.
The second, by the best-selling author Phil Town, says it is virtually impossible to become wealthy by buying mutual funds, so you should concentrate your investment efforts on finding the best individual stocks.
Over the past 12 years or so, I've been repeatedly astonished at the tendency of investors to do things that they should have known to avoid simply with the use of a calculator and basic arithmetic. We've used numerous metrics during this period to show that the estimation of long-term market returns (7-10 years and beyond) doesn't require calculus or statistics, but fairly direct methods to normalize earnings, plus a bit of arithmetic. Rich valuations are predictably followed by sub-par returns. As a result, investors have earned an average annual total return of just 2.4% in the S&P 500 over the past 12 years, while enduring two separate instances where they have lost about half of their money as part of the ride. Essentially, we have gone nowhere in an interesting way. At present, investors have priced the market at a level that makes a continuation of this experience likely for several years to come.
Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?
The chart uses the power of hindsight to offer a few answers to Alan Greenspan's questions.
Let's hope the Chinese Style of spotting bubbles is vastly superior. I have my doubts though. They already missed thefirst one. One down, one to go?
These differences, to my eyes, suggest that prices aren't as out of control as is often is suggested. Furthermore, the Chinese government has tremendous authority to intervene in the markets to ensure a soft landing. Its ability to do that will help the China growth story play on for many years to come.
See? Prices aren't that out of control. The Chinese government will no doubt provide the same soft landing for their real estate market that they provided for their stock market (currently 48% off its high). If there is one thing the governments of the world have mastered, it is price control. Always works!
The primary criticism leveled against price controls is that by keeping prices artificially low, demand is increased to the point where supply can not keep up, leading to shortages in the price-controlled product.
Of course artificially low doesn't work. That's a given. Artificially high works like a charm though! This crazy notion that supply will increase to the point where demand cannot keep up and that in turn leads to gluts in the price-controlled product is purely a myth. Have we not proven it with our own real estate market? Um, we did prove that didn't we? I've been living in a cave for the past few years. I probably should read the headlines.
You know what else always works? Sarcasm! Love that stuff.
In previous posts I attempted to show a link between the cost of durable goods and the market price of real estate. I think one exists but after further thought I think there is a more direct link that explains what's going on even better.
I'm going directly to the source now. Let's bring in wages. It's ultimately all about jobs, jobs, jobs, and jobs.
I've used the average ratio to generate the trend line in the following chart.
The replacement-cost value of durable goods have clearly been tied to wages. So let's attempt to tie the market value of real estate to wages and see what we get.
We've been continually sold the idea that the real estate market could appreciate faster than our ability to pay for it. Let that idea represent the upwardly sloping linear trend line in the chart above.
The reality of the situation is that we can only afford what we can afford. Let that idea be represented by the flat "average" ratio in the chart above. If you make X amount of money per year, then you can afford to buy a house that is X times some constant. In this case, that constant might be 2.15.
Now let's use that 2.15 constant to create the trend line in the following chart.
In my opinion, real estate is still overpriced. There is some risk that we will actually dip below the red trend line. You can't exactly have an average if you don't spend as much time below the average as you do above it.
We can speak of extremely low interest rates all we want. If real sustainable jobs don't appear soon, watch out below. That's especially true if the price of oil cannot be contained.
As a side note, I have no more interest in investing in the stock market now than I did when I exited it in 2004. It is trying to price in a return to normal. In my opinion, the return to normal is still in the other direction though.
The world sure does seem to want to use a lot more natural resources these days. It seems it really started during our dotcom bust. Go figure.
Let's put this in perspective. There were 6.68 billion people on this planet in 2008.
The world produced 2.84 billion metric tons of cement. That's 937 pounds of cement for every man, woman, and child.
The world produced 1.33 billion metric tons of steel. That's 439 pounds of steel for every man, woman, and child.
The world produced 39 million metric tons of aluminum. That's 13 pounds of aluminum for every man, woman, and child.
The world produced 15.4 million metric tons of copper. That's 5 pounds of copper for every man, woman, and child.
That's just 4 materials out of many and my share is already up to 1,394 pounds. That's in just one year. Mind boggling. I didn't even mention lumber, drywall, food, toilet paper, and so on, and so on.
Ever get the sense that the world's exponential growth engine is peaking? I do. I thought I was stagflationary but it is very difficult to embrace the commodity story right now.
Just look at that growth in cement production. Is it our intent to just pave over the entire planet? Look at aluminum. It's even worse. I thought we recycled that one.
These were the prices as of 2008. Gold was already the clear winner at $28 million per metric ton. It now trades at $37 million per metric ton ($1151.70 per troy ounce). That puts it at well over double its average inflation adjusted price from 1950 to 2008. Some say it will even reach its previous bubble's peak. It's certainly in striking distance. Then what? Everyone panics again?
What are you shorting? There are ways to play Chinese companies outside of China. Either they trade in Hong Kong or New York. Probably more important from an investment point of view, this has implications for the people selling stuff to China—cement, glass, copper, steel.
The chart shows the Consumer Price Index: All Items divided by the Producer Price Index: All Commodities.
As seen in the chart, the 1910s (World War I), 1930s (The Great Depression), 1940s (World War II), 1970s (Oil Crisis), and 2000s (The Great Recession) all shared something in common.
If you are spending more and more of your time thinking about commodities, debt, and wars (currency, trade, and/or military), then you are probably spending less and less of your time thinking about actual prosperity.
"With so much change and growth going on in our industry, we wanted to bring together self storage leaders from across to country to talk about trends and challenges and discuss ways that we can move our businesses forward," said Dean Jernigan, CEO of U-Store-It Trust.
Irene Pilien, manager of Sparky's Self Storage, has the pulse on tough times.
She sees it in the faces of customers who store their valuables at Sparky's Self Storage along Interstate 10 at Monterey in Thousand Palms.
Some have lost their homes, scaled back businesses or furnished rental properties purchased when houses could be had for zero interest and, by some accounts, 53 people a day clocked into the Coachella Valley.
The goods behind Doors A, B and C used to be bountiful, too.
It's time for the big show. I will combine the market value of real estate, corporate equities, mutual funds, and the equity in noncorporate business as seen in previous posts and will compare that to the replacement-cost value of durable goods. We're looking for a fixed ratio that will help us make sense of all of this.
We'll now apply the average ratio to the following chart's trend line.
The trend line is simply the replacement-cost value of durable goods times a fixed average ratio of 7.34.
The following was my basis for doing these charts and it also is my conclusion.
Government meddling in the free markets will not create prosperity. At best, it can only create a temporary illusion of prosperity, much to the dismay of those who felt it was real. In response to the malinvestments of the dotcom bubble, government meddling helped create an even bigger real estate bubble.
The good news is that we're back near the trend line. The bad news is that we're taking on an unprecedented amount of debt just to make things appear stable.
NEW YORK (CNNMoney.com) -- The United States dropped a record $220.9 billion further into the red in February, the Treasury Department reported Wednesday.
This is an extension of my last two posts. You might want to read them first (see below). Please forgive me for blatantly copying and pasting previous commentary, but if the shoe fits...
Let's start with a theory that there is a constant ratio between the equity in noncorporate business to the replacement-cost value of durable goods. No matter what the government tries to do, this ratio cannot be altered. It can be temporarily distorted but it cannot be permanently changed.
Unlike my previous posts, the linear trend line seems to be down. Hello Wal-Mart? Goodbye mom and pop?
That said, let's use the average ratio to make a trend line for the following chart.
The trend line is simply the replacement-cost value of durable goods times a fixed average ratio of 1.87. According to the chart, we fell off that trend line when the replacement cost-value of durable goods reached about $1.2 trillion. That happened in 1984. Perhaps George Orwell wrote the wrong book.
There was a brief glimmer of hope at the height of the recent real estate bubble, but unfortunately that was just an illusion. Is it any wonder small businesses are struggling?
Small and midsize business owners across Pennsylvania aren’t expecting any uptick in expectations for sales, profits and hiring over the next six months compared to projections they made last fall, according to an economic outlook survey released Thursday.
In my last post, I came up with a theory that used the replacement-cost value of durable goods to describe the inner workings of the real estate bubble.
Let's see if it also works on stock market bubbles.
Let's start with a theory that there is a constant ratio between the market value of corporate equities and mutual funds to the replacement-cost value of durable goods. No matter what the government tries to do, this ratio cannot be altered. It can be temporarily distorted but it cannot be permanently changed.
The linear trend line actually partially supports this theory. If not for the two most recent bubbles I think that trend line actually would be flat. Therefore, let's use the average value of the ratio in the chart above to generate a new trend line in the following chart below.
The trend line is simply the replacement-cost value of durable goods times a fixed average ratio of 1.94.
First came the dot-com bubble. It was followed by an equally impressive echo bubble. Investors sure are a glutton for punishment. As of Q4 of 2009, assuming this theory has any merit at all, then stocks are once again expensive. Can they get even more expensive? Sure. Would I buy them at these levels? Not really.
Behold the power of durable goods. Too bad we outsourced them.
Here's some more bad news.
The red trend line is an exponential growth curve. We're no longer on it. If the replacement-cost value of durable goods is no longer following the exponential growth curve, then neither stocks nor housing are probably following it either. Is it any wonder that Ben Bernanke feels the need to fight deflation? Is higher priced oil really going to solve our problems though?
These are just my opinions. This is not investment advice.
Let's start with a theory that there is a constant ratio between the market value price of real estate assets and the replacement-cost value of structures. No matter what the government tries to do, this ratio cannot be altered. It can be temporarily distorted but it cannot be permanently changed.
The linear trend line does not support this theory but let's give it a try anyway. Let's use the average value of the ratio in the chart above to generate a new trend line in the following chart below.
The trend line is simply the replacement-cost value of structures times a fixed average ratio of 1.45.
That is one interesting chart to me. I'm liking this theory.
Let's come up with a new theory that expands on this theory. What if there is a constant ratio between the replacement-cost value of structures to the replacement-cost value of durable goods?
Once again, the linear trend line does not exactly support this theory but let's give it a try anyway. I am once again using the average ratio to generate the trend line in the following chart.
The trend line in the chart is the replacement-cost value of durable goods times a fixed ratio of 2.41.
I know what you must be thinking. Mark, you are an idiot. We are being swamped with cheap overseas goods. How could this ratio be a constant? I would counter with this. Where are our durable goods jobs going? Without jobs, how can we afford high priced real estate?
Okay, now let's come up with a grand unifying theory of real estate malinvestment. First we assumed that there was a constant ratio between real estate market prices and the replacement-cost of structures. We next assumed that there was a constant ratio between the replacement-cost value of structures and the replacement-cost value of durable goods. It doesn't take a great leap of logic to therefore assume there must be a fixed ratio between real estate market prices and the replacement-cost value of durable goods.
It's sort of my way of saying that the value of the car you park in front of your house is in some way related to the actual price you should be paying for the house. I know. This sounds like heresy, but let's try anyway.
Once again, the linear trend line does not support this theory. Something truly amazing is about to happen though. We're going to plug that 3.53 average ratio into the following chart.
The trend line is simply the replacement-cost value of durable goods times a fixed 3.53.
Wow. Can anyone say reversion to the mean? If this theory is true, then our economy has been an illusion of prosperity since 1997, because that is the year we first started deviating from the trend line.
You will note that I didn't once have to mention credit, the apparent "lifeblood" of our economy. Debt is the main event of our economic freak circus. This was simply a side show. Next up, a few words from the bearded lady.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.
I hope you enjoyed this post. I've been working on this puzzle for nearly a week. I experienced more than a few "Aha!" moments while doing it.
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