Financial topics

[Matt1989]

What do the gray bars show?

Recessions.

John

That's what I thought too but it doesn't match up.

[Higgenbotham]

http://www.cnbc.com/id/28221716

"We are living through our first Blackberry recession where, literally, information is instantly disseminated around the world and people, in effect, respond to it, perhaps, often without any particular caution or attention." --Sam Zell

Yes, it's just another recession and it was cause by Blackberries.

--Fred

He would have made slightly more sense if he had said that people got overly stimulated by their Blackberries and that is what caused the bubble. Then when they accidently flushed some of their Blackberries down the toilet and came to their senses, the bubble popped. So if Zell wants to resurrect the bubble so he can unload his real estate, he should give everyone free Blackberries and cut off the water supply to their toilets!

Zell is also saying that real estate will rise again starting next year because the US population will rise and there will be more US growth. If so, Zell should also look into overturning Roe v Wade and then buying a bunch of condom manufacturing facilities and shutting them down. Then Zell can get the population increase he is looking for, prices will rise again, and he can unload his real estate.

Although population increase is one necessary ingredient for economic growth, it takes more than a population increase to create economic growth in the short and long term. After all, there was probably a population increase this year too.

Short term, economic growth requires access to credit. That ingredient is lacking and there is no reason I can see for that to change within the time frame Zell envisions.

Long term, economic growth requires access to more highly concentrated and easily produced sources of energy. We're moving in the opposite direction of that with renewables programs and more difficult to extract oil, as they require more energy, more capital investment and more labor than it used to take to pump light sweet crude oil straight out of the ground in East Texas or Saudi Arabia.

[Higgenbotham]

What do the gray bars show?

Recessions.

John

That's what I thought too but it doesn't match up.

Matt,

Use this as your reference:

http://www.nber.org/cycles.html

You will notice that the wikipedia article does not have the early 1980's data correct. The NBER split that into 2 recessions. That is why there are 2 gray bars on the graph around that time period, whereas the wikipedia artlicle only lists one recession.

[mannfm11]

Here is just a few posts I have written in the past and I am far from a known economist. I will write more in the next post as you brought up a lot.

http://www.depression2.tv/nwo/archives/000041.html this was may 26, 2004

I got this addy off the Prudent Bear page, where I am a poster. I will line out what I see. First of all, California housing has to be a bomb ready to go off. We got out of this last recession only because home equity was available to leverage private debt and not much else. It takes something in the tank to support an inflation of debt and we don't have what we need in the tank to soak up the cost of what has been expended and deflation is coming. The money elites won't give away what they have unless they get something back. We are going to be out of collateral the next time and the next time is around the corner.

I am looking at a market and an economy like we saw in Japan for the 1990's. If you look at the charts on that market, you will see it tried to rebound a few years after falling in the first 30 months or so of the 1990's. It peaked in 1996 and started falling from there. Unlike 2000, we now have a stock market bubble and a housing bubble and any move to stop inflation is going to collapse the housing market, depriving the next downturn and any upturn that follows of leveragable collateral and likely threatening the credit creating capacity of the banking system that has piled so heavily into mortgages this time around. Greenie has his back against the wall.

This time around we don't have the great strength we had as a country we had in the 1970's. At that time, credit was really expandable and we had been freed from gold and silver to limit credit. This time around, people are up to their neck in hock and they are out of the collateral that allowed the game to go on. We had our emerging markets in the 1970's and they fell on hard times after the trend ran out. China and the other emerging markets aren't exactly in fantastic financial shape. In fact, the situation in China, which is carrying the world economy right now and creating temporary shortages in commodities, isn't exactly rosy. Its infrastructure is not sufficient to carry what is going on there and going forward will be even more insufficient and could possibly collapse.

The only way to keep the credit structure intact is to continually deficit spend in greater amounts. I doubt this will be politically sustainable, but once we are in a position where the government is the only group that can create credit, we are frozen like Japan. Do we blow up the banks and start over, kicking the political power out of power? It will be easier said than done for the regulators to close operations like C and JPM.

[mannfm11]

http://thehousingbubbleblog.com/?p=1349 This was posted by someone, but written by me on August 10, 2006 on the Prudent Bear Chat page


There is mention of the housing market and the building inventories around the country. This is the tip of the iceberg. I am assisting my mother in her rental portfolio, of which I believe the peak income from which was about 2002. The recent vacancies have been tragic and the applicants we are getting are so beaten up credit wise that I am not seeing even honest applications. 3 of the last 5 applications I have taken have been people in certain stages of eviction. These are older homes, but they are in good shape in the North Dallas suburban region. They are not slum properties.

Everyone is all in. 10 years ago everyone was all in and they created a bunch more everyones by lowering the lending standards, eliminating down payments, coming out with high LTV B & C paper which served to fill the pockets of mortgage brokers, dilute the market and put more high risk people into homes.

What is left? What is left are people that can barely rent. Some of them make pretty good money, but it goes out the window to the point they cannot keep up their rental payments. There is a big storm brewing and the housing slowdown is only the tip of the iceberg.

But it is the iceberg as well. While the country could get through a typical housing slowdown, not this one. The industry is out of tricks. This industry funded the recovery we saw out of the bursting of the stock bubble and kept credit flowing. It stopped the deflation many of us feared was starting by creating collateral for more credit. But, the resale market is gone.

Who are they going to resale to? If they are expecting the people I am seeing apply to rent homes to step up and buy, they have another thing coming. If they are expecting the people renting to buy, they just might, but it will force the landlords to sell their property as well. This isn’t taking houses off the market, it is putting them on the market.

I checked the evictions posted on the JP courts dockets. Strangely enough, FNMA was posted as the plaintiff on several of them monthly. I find this interesting as FNMA isn’t shown to own that many homes in Collin County. But, what are they doing as landlord? Are the evicting foreclosures where people are refusing to move out? Or, are they evicting people on rental homes that socalled investors are letting go back?

As I started out, this is a deep subject. The next step is do people give up their homes or do they give up their nights out on the town? Do they pay their credit cards or their mortgage? The time of paying their credit card with their mortgage is behind us now and when these limits are maxed out, the card payment or the mortgage goes. We are about to see selling to get out from under a thing of the past, as few homebuyers put any money down as they didn’t have any money or at least the conventional down payment and thus are under water without roughly a 10% appreciation over what they paid. Here the new homes have stolen the market and I sense the new home builders can even cut their prices if things get dire. In fact, I sense we are going to see some wholesale discounting as builders are going to be forced to lessen their exposure and their debt levels.

There is a very small pool of available new buyers left. This is in housing and I think it is in other forms of real estate as well that are about to really be impacted as well. Remember, as someone already posted, we haven’t seen the 10 year bond rate move much from where it has been the past few years, maybe 75 BP from its mean of 2004/2005. I recall in the late 1970’s rates moving 75 BP in 2 or 3 days. This isn’t a rate induced slowdown, but a supply on the long run against demand on the long run slowdown. This is a market that is collapsing under its own weight.

You guys are about to see what real deflation is. Housing is by a massive amount the largest industry in the United States and probably the world. What is supplies is a huge portion of the ground up demand for the other goods and services bought and sold worldwide. You shut down housing, you shut down lumber, concrete, steel, copper, roofing and appliances to a great extent. Here then you shut down the industries that these industries are customers of. Realtors drive used Cadillacs instead of new ones. I recall seeing back in the 1980’s slowdown a long term realtor that was probably a millionaire at his peak sacking groceries at one of the local supermarkets, a guy that was a brand name in town when I was a kid. Others went just flat bust. The fringe business went down the drain. Mortgage banking, a huge business now that has hundreds of thousands of high paying jobs is threatened to where it has to shrink and those that are left are making a fraction of what they did.

The other end is the flow of funds from housing to enable people to buy other goods. Remember, housing was the credit card that allowed many to float through the last downturn and made the last downturn hardly a downturn at all. What happens when people have to shop at Walmart or pay their house payment? If they don’t go to Walmart, the associated overstocked manufacturers worldwide have their goods stack up. If they don’t pay their housepayment, the banking sectors and GSE’s have to tighten their credit standards to absorb the losses and most likely start by tightening up credit they can pull in, mainly credit cards. This shuts Walmart and its associated overstocked suppliers as well.

People are all in this game. Look at the tape of the stock market. I wrote about the Dow a few months ago. I believe at that time 21 out of 30 stocks were under their price at the peak. Of the 9 that were over, I think 4 or 5 of them are starting to break down in the form of MMM, BA, CAT and most likely C. Despite high oil prices, XOM hasn’t done that well. Watch companies like LU, SUNW, CSCO, ORCL, MSFT, INTC, GE and a few others that made up the top 10 to 20 highest cap value stocks and see where they stand. That was what the holders of mutual funds were holding when this thing started down in 2000. You know I can name more and I know you can too, but this small group of stocks made up probably 30% of the portfolios of all mutual funds combined and the stocks that have done well weren’t even in the portfolio. These people are stuck and they have been joined by even more fools trying to push a peanut up a mountain with their nose.

How broken is the stock market. John Templeton said a few years ago it was broken and I agree. Until valuations change, it is permanently broken, as the real rate of return on the broad market is at best 1% above inflation. These earnings growth projections are foolhardy and false if one wants to take them as a trend. The excess of the past few years, some of which was due to every company in the world taking their write offs when things were bad, thus having the natural snap back, but the rest is going to be snapped back as well. How can someone sell out with a 90% loss in so many stocks?

There are a lot of dominos lined up. Maybe the rest of the world does well swapping their dollars back and forth between themselves while the US languishes. At some price, money comes to buy property in the United States and that property will be purchased in dollars. But I sense the banks will draw in the money and those countries will be left without exchange as well. I doubt many people can get signature loans on their credit outside of the typical credit card. I doubt if housing goes the way I think it appears to be going, the mortgage insurance business is going to stand and it will take with it all the derivative postions that are used to support it. So will FNMA, JPM, WFC and FHLMC. And what about the Mexican labor that has been employed to build so much of this stuff? Do they starve in a country they went to find work or do they go home? If they stay here, maybe the government feeds them, maybe not. If they go home, that leaves even more vacancies in the housing market. That might solve the illegal alien problem that congress cannot agree to solve.

Long run supply in any product is the marginal cost of building one more unit. Once the bidding war stops, prices fall to the level of marginal cost. This leaves a lot of open shops that go unvisited, kind of like the small town merchant when Wal-Mart came to town. We are going to see a situation where land prices fall, dropping marginal costs even lower, leaving those that held lots that were so dear at the top with overpriced building sites they need to unload. This is a $10 trillion wreck in a group of assets that are very illiquid, unmovable and only marginally useful in the sense that you can only live in one at a time.

[mannfm11]

My point isn't so much to blow my own horn, but to back up what John said about Roubini. Roubini was years behind laymen like me and I was reading about a lot of this stuff before I started writing about it. It took me a long time to realize how the Dow fell almost 90% in 1929-1932 and as far as that goes, how it went up 400% in 4 or so years prior to 1929 (1993 to 2000 it did the same). Few people and that includes Mr. Roubini have a clue how a debt bubble works. You can't understand the market in terms of PE's or dividends when something like this comes along. The government can't fix it or Japan would have been out of it 15 years ago. I would venture that cement and steel are probably not over $200 billion industries combined in the US, so how is Obama going to fix the economy creating demand for something that can't be supplied? In any case, how are they going to fix a debt bubble by creating more debt? It is an absurdity and we have a guy that is clearly a political economist who doesn't have a clue being given a platform by mainstream press because I would venture eventually he is going to get another government job and will be useful for propaganda purposes. Give me a day and I can produce a list of scores of people that were writing about this 5 years before Roubini got into the act.

Where guys like Roubini are going to miss the stock market is they can't see how important having continued money to push up prices (Mr. Madoff can tell you about not having continued cash flow) and continued borrowing to push earnings and corporate receipts. The world isn't falling all over itself to make 125% home equity loans as Ditech used to advertise. In fact, we haven't seen the end of this stuff.

There is nothing going on right now, but an attempt to sweep it all under the rug as we saw in Japan. One of the things that Japan was criticized for was not recapitalizing their banks, but the truth was they hoped time would take care of the shortfall. Does anyone really believe TARP and the $25 billion or so they gave the big banks going to paper over this stuff. The hole in Citi is 20 times the hole in GM and so is the hole in BAC and JPM and WFC and most of the other enterprises. AIG just got caught on the wrong side of an obvious mishap that was plain for all to see, but they aren't the only ones. How many of you think that Madoff is the only counterparty that can't deliver?

I have gone on the page of predicting a 1000 Dow or lower. I know John is in the 3000-4000 range and that is my minimum. I can't figure out looking at charts where we don't reach those levels, but I am at a loss to describe how we get to 1000? I might just be trying to outdo the next guy, but it is an Elliott Wave GSC target. There is about 1100 points in terms of summed dollar value in the 30 Dow stocks with a Dollar worth about 8 Dow points. This means the Dow has to become a market of $4 stocks on average, which seems all but impossible. But, C was about an $60 at one time and it would have gone to zero without a bailout. AIG was close to $80 not long ago and it was under $4 when they replaced it with Kraft. They clearly had to raise the divisor on that change. GM is probably the next stock to come out of the Dow and it will maybe be replaced with another stock repeats what it has done. GE was close to $60 at its peak and is now being propped at around $15. MSFT was $60 at its peak, now about $19, INTC was over $70, now about $15, BAC was up there somewhere, now about $16. I can go on and on. XOM looks to me to be a stock that could really go in the crapper along with its sister, CVX. Those 2 oils tally about $155 in value if my memory serves me and represent 1/7th of the Dow. Neither has moved down much with the fall in oil. You might compare the collapse in Rio Tinto (RTP), Freeport McMorRan (FCX) or BHP Billiton (BHP) with their corresponding commodity collapses. I think people are trading on XOM's and CVX's backward earnings and the market markers have been using them to support the market. I am reading where RTP might be hopelessly in debt and bankrupt if this slowdown last long. In any case, what looks so doubtful also looks possible.

Roubini and others refuse to even believe they can't stop a depression. This would fly in the face of everything their political economics stands for and probably dispel the entire socialist economic theory developed by Keynes. It is almost a conspiracy to have it paraded in front of us over and over again that the solution to this hangover for the long term is more of the hair of the dog that bit us. Pure and simple, only one thing besides natural disaster causes depressions, too much debt. We won't get the party going again without the tools that got us to the end of this rope, namely derivatives, CDS's, CDO's, credit cards, HELOC's, subprime mortgages and other ridiculous financing tools and not only will we need them, the level of absurdity surrounding them will have to reach even higher heights. The stunning size of the bailouts is just the tip of the iceberg. Japan spent its government out of its credit rating and it had the US bubble to prop it as it deflated. This time there won't be any big breeze coming from anywhere and in the end the government will have to let it collapse to save itself.

[Barion]

This is my first post here, but I've been lurking for months, reading up on Generational Theory and the various articles, as well as perusing the forum. John, I want you to know that I think you've got some good stuff here, and it's really opened my eyes. I'm a history buff and so it's always interesting to gain some new perspective on historical forces at work. I just have a few, relatively minor, quibbles.

1. I don't subscribe to determinism/fatalism. While I believe that GD has a lot of merit, it's best used to understand what has happened before and a general guideline of what can happen in the future. But to accept that what has happened before must happen again is a logical fallacy. Just because something happens over and over again doesn't guarantee it will happen again. Will the sun rise tomorrow? Probably. One day it won't. Eventually GD will fail because human societies evolve. Until then, though, it's a good model to use, but one thing I take issue with is the notion that, because, for example, it's highly probable we're headed for a generational panic and crash, that there's no point trying to fight it. History has shown there are always anomalies that defy expectation, and to accept defeat without even trying, because it's pointless, is something I can't abide for myself. It's called defeatism. Sure, maybe all attempts to prevent the panic and crash will fail, but one day, somewhere, a solution may be found. I'm an optimistic realist. I may know doom is coming, and I'll try to prepare for it as best I can, but I'll still also hold out hope, and I'd rather go down swinging.

2. You mention the so-called Law of Mean Reversion. As a student of statistics and research methods (specifically a grad student in experimental psychology), I must admit that it drives me a little batty to see this fallacy over and over again. There is no such law. It's really something called Regression to the Mean. Regression doesn't require that something that exceeds the mean for a given time must inevitably spend an equivalent amount of time at the same distance on the other side of the mean. All it means is that when something exceeds the mean, it is statistically probable that later scores will revert back toward the mean. It may rebound completely back to the mean, or regress below the mean. Similarly, anything below the mean will also, subsequently, regress up toward the mean. It's a statistical model and also used to explain various experimental results, but by no means at all is this a law. This article sums it up nicely:

http://www.ddnum.com/articles/index.php

Otherwise, keep up the good work and I'll keep reading what everyone has to say. Incidentally, I'm a Gen-X'er and I totally see how my generation fits into the Nomad category. While I prefer the company of Millennials, I must admit to having a nihilistic streak and a tendency toward disrespect for Boomers (and a begrudging respect for Silents and awe of the GI Generation folk).

Finally, I'm very curious to see how this huge financial mess will ultimately impact me. As a grad student, I live off financial aid (basically Stafford loans) and the income from a full time job as a security guard. I'm hoping that the loans won't dry up (Stafford loans are guaranteed by the federal government) before I get my master's degree, after which I'll probably then go for my Ph.D., and that my own job won't go anywhere (I work security at a business park, and even if all the tenants leave/go out of business, the property management will still need security to prevent vandals/squatters/etc.). I have no investments, I have some consumer debt, and I've been living fairly comfortably, albeit month-to-month, for the past several years. I rent an inexpensive apartment, own my car, and otherwise I'm doing ok. I can see myself actually making it through the recession/depression just fine as long as something apocalyptic doesn't happen (all bets being off in the face of WWIII, for example), like a nuclear explosion in Los Angeles, where I live. All in all, it's hard not to feel a certain morbid fascination watching this global financial meltdown unfold, knowing that eventually it may also swallow me up in its gaping maw.

[John]

> You mention the so-called Law of Mean Reversion. As a student of
> statistics and research methods (specifically a grad student in
> experimental psychology), I must admit that it drives me a little
> batty to see this fallacy over and over again. There is no such
> law. It's really something called Regression to the Mean. ...
> This article sums it up nicely:
> http://www.ddnum.com/articles/index.php

I'm glad that you're studying "experimental psychology." Perhaps you
could do a study on how feeding misinformation like this to airhead
investors causes them to do stupid things.

Mean Reversion and Mean Regression are two completely different
things, almost totally unrelated. Mean Regression applies to
independent random variables. Stock indexes are not independent random
variables: The DJIA on Tuesday is not independent of the DJIA on
Monday.

I have to laugh at the article you referenced. It calls one a
"law" and the other a "model," because one is "statistical" and the
other is "probabilistic." It sounds like this person is trying to
justify his stock market investments during the bubble. My guess is
that the author is just another airhead investor.

Both of the concepts are probabilistic, and both of them are derived
from the the Law of Large Numbers in Probability Theory. In
practical terms, both concepts depend on the same assumption: That
the average in the future will equal the average in the past. This
is certainly true of P/E ratios.

An airhead investor reading the kind of misinformation that you're
providing would say, "Oh! Oh! The P/E ratio was 60 in 2003, and now
it's just 18, so it's regressing to the mean, so everything's OK!!!!"

That's what makes them airheads.

Sincerely,

John

[Higgenbotham]

My point isn't so much to blow my own horn, but to back up what John said about Roubini. Roubini was years behind laymen like me and I was reading about a lot of this stuff before I started writing about it...

Japan spent its government out of its credit rating and it had the US bubble to prop it as it deflated. This time there won't be any big breeze coming from anywhere and in the end the government will have to let it collapse to save itself.

This is true. In the Soviet Union (SU), there were those individuals called "dissidents" who presented an alternative (and more accurate) view of reality from that carefully crafted by the State; they pointed out flaws and some even predicted the collapse of the Soviet system. In the United States (US), we have coined various similar terms such as "whistleblowers" for those who happen to exist within the State or corporate apparatus, or today's "bloggers" and others who exist outside the apparatus, all of whom present an alternative (and in most cases more accurate) view of reality. Dissidents and whistleblowers were/are treated with extreme cruelty as the SU and US government agencies and corporations are really advanced tribal and fascist systems where no dissent whatsoever is tolerated, and loyalty to the members within the tribe (and not to the public) is the overriding concern. Therefore, when reality becomes something that is obviously vastly different from that crafted and purveyed by the State, as in today's economic situation, the search is on for a loyal member of the "tribe" who "got it right" and it's a very difficult search in an environment where dissent is not tolerated. By definition, that person must come from a government or corporate institution, must be a member of the "tribe" in good standing and, therefore, the person who is annointed as the one who "got it right" with the associated Congressional appearances, etc., usually didn't even hit the target. In the meantime, the growing numbers of those outside the State and corporate apparatus who really did "hit the bullseye" are ignored because giving them any credence would delegitimize those within the tribal apparatus, further weakening and corrupting an already weak and corrupt structure.

[freddyv]

Quoted from the very end of the 60 Minutes interview:
"The same craziness that occurred in the mortgage market occurred in the commercial real estate markets. And that's taking a little longer to show. But there are gonna be big losses there. Credit cars, auto loans. You name it. So, we're still, you know, we're maybe halfway through the mortgage bubble. But we may only be in the third inning of the overall bursting of this asset bubble," Tilson says.

"Does that mean that the stock market is gonna continue plunging as we've seen the last several months?" Pelley asks.

"Actually we're the most bullish we've been in 10 years of managing money. And the reason is because the stock market, for the first time I can say this, in years, has finally figured out how bad things are going to be. And the stock market is forward looking. And with U.S. stocks down nearly 50 percent from their highs, we're actually finding bargains galore. We think corporate America's on sale," Tilson says."

It amazes me how someone can know all that he knows and then come to the conclusion he comes to...ABSOLUTELY AMAZING!!!

Right now for instance, every imaginable sign, both short term and long term, say that the economy is faltering and will continue to do so for a very long time. The fact that the stock market remains "strong" in the face of all this bad news is seen by many as the sign of a bottom having been reached. The simple fact is that even in the very worst of times (based on what we have seen so far in history) the market takes time to move downward and needs to stop and take a breather now and then. The 5 months after the crash of 1929 had a lot of people feeling pretty bullish, too...never mind that pesky unemployment problem or all the people defaulting on loans or the companies going out of business or...well, I don't want to even think about the debt from these bailouts.

It is clear that you have Generational Dynamics at work here. This guy has all the clues in the world but he still can't put the pieces together. I keep thinking of that line in Titanic, referring to the captain and how he will react to an iceberg, "Everything he knows is wrong", the same can be said for Tilson, and most everyone else on Wall Street.

Come to think of it, this whole year has been like watching a long, drawn-out version of Titanic. Right now I'd say we're still debating whether or not the unsinkable ship is actually going to sink, with lots more chaos to come...excuse me while I make some popcorn...

BTW, the first time the market stops for a breather and you don't hear Larry Kudlow claim a new bull market has started, now that's the time to go long again.

--Fred