George Soros, speaking at a meeting organized by The Economist, warns all those who are throwing their money into the equity pit, that "the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis." Advice from Soros or from CNBC. You decide. Reuters reports that Soros said "the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned." We hope all those who are buying stocks have very tight stop loss triggers.
“The success in bailing out the system on the previous occasion led to a super bubble, except that in 2008 we used the same methods,” he told a meeting hosted by The Economist at the City of London’s modern and impressive Haberdashers’ Hall.
“Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing a yet larger bubble.
“We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount.”
The one thing allowing those invested to sleep at night is the observation that it took 10 years between the 1998 Asian crisis and the 2008 credit crisis. "If the pattern is repeated, it should at least mean we have another 8 years to go before the next crash."
We would take the under on that. In 1998 and all the way through 2008, developed countries as a percentage of their GDPs were at most half of where they are now. At this point the entire credit house of cards continues to exist only so long as credit conditions for US sovereign debt can be massaged by the Fed enough that the world forgets there are is $10 trillion in debt issuance on deck over the next decade (a conservative estimate). It is a virtual impossibility that the money printer of even what may still be considered the reserve currency (although that distinction is rapidly shifting back to gold once again) can withhold a multi-trillion issuance onslaught and a multi-trillion corporate/CRE refi wave with 10 Years at under 4%. The next crisis will, as Soros points out, begin in the sovereign debt arena. In fact, it has already begun. Net result - add another $560 billion in public leverage to the system.
This is important as it will cause the values of all debts, including mortgage backed securities to go through another period of uncertainty which leads to higher rates.
Friday, April 16, 2010
Monday, April 12, 2010
Housing Recovery? Not according to Robert Shiller
By ROBERT J. SHILLER
MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?
The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Correcting for seasonal effects, home prices as measured by the S.&P./Case-Shiller 10-City Home Price Index increased each month from June 1995 to April 2006, then decreased almost every month to May 2009. Since then, they have risen through January, the latest month for which data is available.
So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so?
If only it were that simple.
Home price booms and busts do end, sometimes quite suddenly, as was the case for the boom of 1995 to 2006 and the bust of 2006 to 2009. Today, we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market.
Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.
The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.
But why? Unfortunately, it is hard to pinpoint causes for a change in demand for housing. The factors clearly include government economic policy, like interest-rate changes and tax credits. But these moves don’t line up neatly with major turning points in the market.
Sociological processes may be driving these changes. Trends in news media coverage, for example, generate conversations in barbershops and hotel lobbies, which in turn alter the conventional wisdom about investing.
Consider how that process might have worked during the run-up to the 2006 turning point in home prices. In May 2005, two months before the peak in the N.A.H.B. traffic index, Consumer Reports magazine had a cover article, “Your Home: How to Protect Your Biggest Investment,” that conveyed a very bullish sentiment.
“Despite years of dire warnings from some economists that the housing boom is about to end, it hasn’t,” the magazine said. “Indeed, last year prices rose even more — about 11 percent nationally.”
The article went on to give advice: “You can no more time the real estate market than you can the stock market,” it said. “If you need a house, and can afford one, go ahead and buy.”
The article extended to the housing market the conventional wisdom that then prevailed about the stock market — namely, that it was quite efficient, without identifiable bubbles and bursts. According to this theory, there was an identifiable profit opportunity: buy and hold stocks, and by extension, housing, and watch your wealth grow.
But as 2005 continued, the conventional wisdom began to change.
Some people in the United States were by then aware of the 2004-5 home price decline in Britain. Some were learning a new lexicon: “housing bubble,” “housing crash” and “subprime mortgage.” Newspapers and magazines began to include some derisive reviews of a March 2005 book by David Lereah, “Are You Missing the Real Estate Boom?” And accounts began to appear of the risky behavior of an army of real estate flippers.
In May 2005, I included in the second edition of my book, “Irrational Exuberance,” a new data series of real United States home prices that I constructed, going back to 1890. I was amazed to discover that no one had published such a long-term series before.
This data revealed that the home price boom was anomalous, by historical standards. It looked very much like a bubble, and a big one. The chart was reproduced many times in newspapers and magazines, starting with an article by David Leonhardt in The New York Times in August 2005.
In short, a public case began to be built that we really were experiencing a housing bubble. By 2006 a variety of narratives, taken together, appear to have produced a different mind-set for many people — creating a tipping point that stopped the growth in demand for homes in its tracks.
THE question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don’t believe it has.
Since that turning point, most public discourse on housing has not been about a new long-term view of the market. Instead, it focused initially on whether the recession was over and on the extraordinary measures the government was taking to support the housing market.
Now we’re shifting into a new phase. The recession is generally viewed as being over, and those extraordinary measures are being lifted.
On March 31, the Federal Reserve ended its program of buying more than $1 trillion of mortgage-backed securities, and the homebuyer tax credit expires on April 30.
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.
Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.
MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?
The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Correcting for seasonal effects, home prices as measured by the S.&P./Case-Shiller 10-City Home Price Index increased each month from June 1995 to April 2006, then decreased almost every month to May 2009. Since then, they have risen through January, the latest month for which data is available.
So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so?
If only it were that simple.
Home price booms and busts do end, sometimes quite suddenly, as was the case for the boom of 1995 to 2006 and the bust of 2006 to 2009. Today, we need to worry about strong headwinds, as the government begins to withdraw its support of a still-troubled lending industry and as foreclosures are dumping millions of homes onto the market.
Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.
The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.
But why? Unfortunately, it is hard to pinpoint causes for a change in demand for housing. The factors clearly include government economic policy, like interest-rate changes and tax credits. But these moves don’t line up neatly with major turning points in the market.
Sociological processes may be driving these changes. Trends in news media coverage, for example, generate conversations in barbershops and hotel lobbies, which in turn alter the conventional wisdom about investing.
Consider how that process might have worked during the run-up to the 2006 turning point in home prices. In May 2005, two months before the peak in the N.A.H.B. traffic index, Consumer Reports magazine had a cover article, “Your Home: How to Protect Your Biggest Investment,” that conveyed a very bullish sentiment.
“Despite years of dire warnings from some economists that the housing boom is about to end, it hasn’t,” the magazine said. “Indeed, last year prices rose even more — about 11 percent nationally.”
The article went on to give advice: “You can no more time the real estate market than you can the stock market,” it said. “If you need a house, and can afford one, go ahead and buy.”
The article extended to the housing market the conventional wisdom that then prevailed about the stock market — namely, that it was quite efficient, without identifiable bubbles and bursts. According to this theory, there was an identifiable profit opportunity: buy and hold stocks, and by extension, housing, and watch your wealth grow.
But as 2005 continued, the conventional wisdom began to change.
Some people in the United States were by then aware of the 2004-5 home price decline in Britain. Some were learning a new lexicon: “housing bubble,” “housing crash” and “subprime mortgage.” Newspapers and magazines began to include some derisive reviews of a March 2005 book by David Lereah, “Are You Missing the Real Estate Boom?” And accounts began to appear of the risky behavior of an army of real estate flippers.
In May 2005, I included in the second edition of my book, “Irrational Exuberance,” a new data series of real United States home prices that I constructed, going back to 1890. I was amazed to discover that no one had published such a long-term series before.
This data revealed that the home price boom was anomalous, by historical standards. It looked very much like a bubble, and a big one. The chart was reproduced many times in newspapers and magazines, starting with an article by David Leonhardt in The New York Times in August 2005.
In short, a public case began to be built that we really were experiencing a housing bubble. By 2006 a variety of narratives, taken together, appear to have produced a different mind-set for many people — creating a tipping point that stopped the growth in demand for homes in its tracks.
THE question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise, I don’t believe it has.
Since that turning point, most public discourse on housing has not been about a new long-term view of the market. Instead, it focused initially on whether the recession was over and on the extraordinary measures the government was taking to support the housing market.
Now we’re shifting into a new phase. The recession is generally viewed as being over, and those extraordinary measures are being lifted.
On March 31, the Federal Reserve ended its program of buying more than $1 trillion of mortgage-backed securities, and the homebuyer tax credit expires on April 30.
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.
Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.
Tuesday, April 6, 2010
Housing and Inflation!
The drop in U.S. inflation since mid-2008 is not just a narrow reflection of housing market weakness but is rather a sign of broad economic slack, economists at the Federal Reserve Bank of San Francisco said Monday.
Housing Market
The finding, published in the latest Economic Letter from the regional bank, comes as Fed policy-makers weigh how much longer to keep short-term interest rates near zero, where they've been since December 2008.
Subdued inflation, along with other factors including high unemployment, warrant keeping rates exceptionally low for an "extended period," the monetary policy-setting Federal Open Market Committee said after its most recent meeting in March.
However, recently some top Fed officials have begun to question whether the "extended period" language continues to be warranted in light of signs that the economy is regaining its footing. The government's closely watched employment report released Friday showed U.S. employers created jobs in March at the fastest rate in three years.
As the debate over the Fed's accommodative policy gathers pace, the San Francisco Fed researchers' findings could help blunt concern the steep drop in housing prices may be masking inflationary trends that might otherwise trigger a change in monetary policy.
"Some analysts have raised the question of whether the unprecedented declines in house values, which have been the hallmark of the recent recession, might be artificially dampening core inflation readings," economists Bart Hobijn, Stefano Eusepi, and Andrea Tambalotti wrote in the Letter.
"However, a close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures."
The economists calculated the personal consumption expenditures core price index -- one of the main measures the Fed uses to track inflation -- excluding the housing component, and compared it to the index with the housing component intact.
They found that while housing prices did drag on inflation, the effect was small, and overall they were just one component of a broad-based decrease in inflationary pressures since the peak of the financial crisis.
The same was true when the economists made a similar calculation for the better-known consumer price index, or CPI.
"No matter whether housing is included or not, core inflation exhibits a noticeable disinflationary tendency since August 2008," they wrote in the letter. Such pressures are likely due to a large amount of slack in the economy, they said.
The findings bolster the case for continuing to use current measures of inflation, they wrote.
The FOMC next meets April 27 and 28.
San Francisco Fed President Janet Yellen, the leading candidate to replace soon-to-retire Fed vice chairman Donald Kohn, is typically seen as belonging to the Fed's more dovish wing -- that is, less likely to be the first to push for a rate hike.
Housing Market
The finding, published in the latest Economic Letter from the regional bank, comes as Fed policy-makers weigh how much longer to keep short-term interest rates near zero, where they've been since December 2008.
Subdued inflation, along with other factors including high unemployment, warrant keeping rates exceptionally low for an "extended period," the monetary policy-setting Federal Open Market Committee said after its most recent meeting in March.
However, recently some top Fed officials have begun to question whether the "extended period" language continues to be warranted in light of signs that the economy is regaining its footing. The government's closely watched employment report released Friday showed U.S. employers created jobs in March at the fastest rate in three years.
As the debate over the Fed's accommodative policy gathers pace, the San Francisco Fed researchers' findings could help blunt concern the steep drop in housing prices may be masking inflationary trends that might otherwise trigger a change in monetary policy.
"Some analysts have raised the question of whether the unprecedented declines in house values, which have been the hallmark of the recent recession, might be artificially dampening core inflation readings," economists Bart Hobijn, Stefano Eusepi, and Andrea Tambalotti wrote in the Letter.
"However, a close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures."
The economists calculated the personal consumption expenditures core price index -- one of the main measures the Fed uses to track inflation -- excluding the housing component, and compared it to the index with the housing component intact.
They found that while housing prices did drag on inflation, the effect was small, and overall they were just one component of a broad-based decrease in inflationary pressures since the peak of the financial crisis.
The same was true when the economists made a similar calculation for the better-known consumer price index, or CPI.
"No matter whether housing is included or not, core inflation exhibits a noticeable disinflationary tendency since August 2008," they wrote in the letter. Such pressures are likely due to a large amount of slack in the economy, they said.
The findings bolster the case for continuing to use current measures of inflation, they wrote.
The FOMC next meets April 27 and 28.
San Francisco Fed President Janet Yellen, the leading candidate to replace soon-to-retire Fed vice chairman Donald Kohn, is typically seen as belonging to the Fed's more dovish wing -- that is, less likely to be the first to push for a rate hike.
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