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本帖最后由 CoolMax 于 2009-8-5 19:34 编辑
by: Andrew Butter August 02, 2009 | about: IYR
 Andrew Butter
The big excitement this month was the tiny up-tick in the May S&P Case-Shiller Index. "Seasonally adjusted" the number was still down on April, but then it's not clear what's "seasonal" about a house-price crash. Right now the bulk of the market is driven by foreclosure sales and there is no evidence that is "seasonal".
These are the month on month numbers, (not seasonally adjusted):
click to enlarge
The dotted lines represent the prediction I made in January (with a bit of creative license):
that was 40% peak to trough (its 33% so far).
Just for the record, I also predicted 33% for UK and over there house prices rose month on month for four months straight after "bottoming" at 21%. Two months ago I declared that was "an illusion".
Maybe I'm wrong?
It's hard to admit but I've been wrong before, so that's always a possibility. I've been telling everyone "no hurry, vulture shopping is all about patience", but certainly the numbers in the UK do seem to suggest otherwise, and the direction of change in the US looks “positive”.
Last week the head economist at Nationwide (a UK mortgage company), declared (.pdf) that there could be a 20% bounce over there.
His story was that there is a backlog of qualified buyers, and that in the UK there isn't the excess inventory problem that there is in the USA, Spain and Ireland. Perhaps he knows something I don't, and perhaps that could happen in the USA too?
Certainly this is all uncharted territory for just about everyone. It's not every day of the week that the Keynesians get a chance to join hands with the Monetarists and see if they can create rampant asset-price inflation, and you would have thought that if they managed to do that by accident (before), now that they are trying to do it on purpose they might just succeed?
At what cost is of course another story, I saw a quip the other day that Gordon Brown has the choice of saving British housing, or saving the Pound, and given that there is an election coming up, and seeing how the Brits just love their house prices, guess which one he will go for?
Certainly if you have the credit score and you can put up the deposits, (the opportunities are not for ordinary people, this is just another chance for the rich to cream the poor...again), mortgages have never been so cheap. And one thing I know is wrong with my own model is that it doesn't take into account what looks to be an unnatural ratio between mortgage rates and long-term- interest rates.
And then just eyeballing the chart, there was a bounce in the rate of change just before Lehman blew up, and it makes sense that turned everything back. Now there is another bounce, but this time there is nothing like Lehman in the closet and stock markets are up; perhaps the Alt-As?
If I'm wrong I'm not the only one; Tim Iacono
wrote a very thorough analysis last week, and in a quote in the Washington Post Mark Zandi of Moody's (MCO) said this is just a blip, then Dominic Frisby pointed out that housing in the UK is still far from "affordable", particularly if you put the unemployment numbers in the mix.
But there again, as a matter of principle, when the experts all agree on something I get nervous.
The Dynamics of Bottoms:
In his article Tim Iacono put up a great chart of the way the Los Angeles housing bubble bottomed. Then there were two "false bottoms" before the real thing and eyeballing it, it looks like the slump was about as long as the bubble, which is consistent with my analysis.
Here is another one; this is the UK Nationwide Index for what happened after the "Lawson Boom" which was a dress-rehearsal for the credit crunch:
That looks like one dead cat and two suckers to me, and in those days there was rampant inflation, so in "real" terms the dynamic was more extreme.
But what about the economy?
Perhaps something else is going on? Perhaps the economy is turning by stealth, and the helicopter crews just didn't notice?
1: An interesting article by Todd Sulivan on Dow Chemicals (DOW) suggests that parts of the US economy are working. Perhaps it's just the lousy parts that created little or no economic value which are dying, if so then big deal, that's the way it ought to be.
2: The stock market keeps on going up, three months ago the wires were full of articles full of P/E ratios saying the rally was a dead-cat-bounce-sucker, but those guys are eerily subdued these days.
Could it be that the slightly improving GDP numbers are not telling the whole story?
The only certainty about economists is that they can be relied on to get it badly wrong; and that's "official".
A group of them from the LSE recently wrote a letter to Her Royal Majesty The Queen of England apologizing for their collective incompetence. That is of course comforting, a bit like the navigator of the Titanic confessing that he can't read a map, half way across the Atlantic.
But at least now we know that we don't know where we are, which is a start.
The first step in finding your way out of the woods is typically the realization that you are lost. My point? Simply that it is quite possible that all is not what it seems.
Taking the components:
30-Year Treasuries
Conventional wisdom says that Long Term Interest rates (i.e. the 30-Year Treasury), are set to rise; that's dictated by supply and demand and logic says that so long as the Treasury is selling, then prices will go down (and yield will go up). Or will they?
If deflation is what's in store, yields will go down not up, and regardless of the volumes of eloquent economic arguments that hyperinflation is just around the corner, yields just aren't going up much. With all the new supply coming on line, it looks as if perhaps the market is pricing in deflation, regardless of what the economists are saying, (or some of them); economics we learn, is not an "exact" science...now you tell us.
That reminds me of the days when I learnt to dive, they taught us how to figure out where was up (you look at the bubbles).
I remember thinking, "how asinine is that?" But if you are diving in sludge at night, it's good to know which direction is up and which is down, particularly when you are running out of air. Clearly economics is not such an exact science that you can figure that one out so easy.
It could be that these days hardly anyone is "originating and distributing" asset-backed-securities (ABS), or what are fondly referred to as toxic assets. Those are (or used to be) considered just like a US Treasury (but with a better coupon rate - perhaps that was a clue).
Here is an interesting chart that I pulled from Mark Zandi's presentation to the House Financial services Committee on 21st July 2009.
From 2005-7 the "shadow central bank" sold an average of
about $2.75 trillion of those a year, in 2005-2007; they sold $1 trillion. So net-net if you consider that less than a trillion of the $4 trillion of bail-outs plus stimulus deployed so far got any further than covering the bad loans that the genius bankers made, the supply of investment grade debt (which generates real money on the street), is down, a lot; and it's likely to stay down until securitisation is fixed, so net-net, perhaps yields will go down?
Perhaps also what's happening now is that companies who "made" money out of inflation by borrowing at less than the rate at which the assets they held or the products they sold went up in price, are going to the wall. But is that a bad thing?
Those types of business add no real economic value, they just feed of the economic value created by others, and good riddance. If you can't make money without inflation you shouldn't be in business;
I just wish someone would tell that to the Fed who seem to be convinced that 2.1% inflation is "ideal", although where they got that number from (and how they measure inflation), is anyone's guess.
Is it possible the economy is growing and no one noticed?
Granted unemployment is going through the roof, but that's a lagging indicator; and it's not as if the mandarin economists have a track record of noticing what's going on until it slaps them in the face, perhaps now is no exception?
Measuring the size of an economy is hard at the best of times; during times of radical change (like now) it's quite possible the measurements were wrong.
For example: financial services add economic value (or at least they are supposed to). A banker lends money, he makes a margin, that's economic value added, then he reports a profit and pays salaries and bonuses; those get reported to the economists measuring economic activity and added to GDP.
But what if he didn't make money, what if he was "mistaken". Just because FASB says you made a profit, doesn't mean you did, it just means you can legally defer the day of reckoning, and pay bonuses today.
What if the person the banker lent money to didn't pay it back, and instead spent it buying a gas guzzler and gizmos from outside USA that have no hope of generating economic value with which he can repay the loan?
That's negative economic value added, it's no different from making tractors without wheels like they used to do in the Soviet Union; then the State (i.e. taxpayers) paid for those, then salaries and suppliers were paid and that was booked as GDP, and then the tractors just sat rusting in the yard.
That's pretty much what happened in USA. Wall Street manufactured a lot of ABS, they proved to have a utility value not much better than a tractor without wheels, and the State paid for them. It's exactly the same business model as the Soviet Union; I imagine Stalin is doing a jig in his grave.
The point is when exactly did the incompetent banker actually lose money?
Was is (a) when he handed it over to the person who had no intention of paying it back (and didn't), or (b) when the realization finally dawned in his thick skull that he wasn't going to get the money back?
The reality is (a). Perhaps at some point the GDP numbers for 2004 to 2007 need to be re-worked, because over $1 trillion of economic value added got booked as (+) when in reality it should have been booked as (-), and that's not including the trickle-down.
I heard a British accountant's joke about that..."what's on the left (assets) isn't left, and what's on the right (liabilities) isn't right"; well if it wasn't right then it should be corrected.
The reality is that then the bankers and their accomplices were destroying economic value hand-over-fist. Now, they stopped doing that (one would hope), in which case in reality GDP might be growing (relative to back then).
Equally if you have a business unit that is destroying economic value (like the tractor factory in the Soviet Union), by closing that down and firing the workers, you actually create economic value, simply by not destroying it, although insofar as GDP is concerned the accumulated losses of yesterday get booked today, so the economic value you create is shown as a negative in the GDP numbers.
I wonder how much "real" economic value could be created if they closed down Citi and BOA (BAC)?
GDP is a funny thing, here is another example:
The "contribution" to GDP of treating sick people in America is huge; it's a world leader in that field. So how about this for an idea, perhaps as a patriotic gesture the NRA should introduce a "National Shoot Yourself In The Foot Week"? That would certainly boost GDP tremendously.
The reality is that America's medical bills have a lot to do with pesticide residues, and hydrogenated (trans) fatty acids in the food chain.
McDonald's (MCD) only just agreed to stop lacing its products with trans fatty acids (and only in the USA), yet it's been known for years that those are as unhealthy as smoking, probably worse in fact. (Japanese don't eat that sludge and they smoke and drink like crazy, and they live forever and they don't get Cardiovascular Disease, Type Two Diabetes, Auto-Immune Diseases or Alzheimer's), but the intake of that particular poison is huge in the USA, I think they can still call it "vegetable oil" on the label, and vegetables are good for you, yes? Umm...not if they got hydrogenated...sometimes everything is not what is seems.
So a good proportion of medical bills are self-inflicted, just like shooting yourself in the foot except in slow motion; that's no different from interest payments on debt, and no one has (yet) suggested that interest payments by the government on the national debt, adds to GDP.
Same story for military expenditure, going to war to chase imaginary threats and saving the world from dictators who are rude to you, doesn't necessarily create economic value for the country, that's unless you bring back "spoils", which used to be the whole point; but nowadays going to war is all about "World Peace".
Jim Quinn remarked recently that over the past ten years the USA spent $7 trillion on "defense", achieving exactly what? So if that hadn't been spent the national debt would be $4 trillion not $11 trillion. He also remarked that what destroyed Rome was a chronic current account deficit plus a bloated "defense" budget - sound familiar?
One lesson from the recent debacle is that all is not necessarily what it seems.
When to slam on the breaks?
Although pumping liquidity and low interest rates into an economy is guaranteed to create "ignition" at some point, that's if (Big If) the economy is humming along nicely; it's rather like a foot on the gas. But that doesn't necessarily work when the timing is shot.
That's like trying to get an old car with a manual choke going. If you flood the engine all you get is black smoke, loud bangs and if you're lucky, a jerk-bang-jerk trajectory forwards. But then when the sucker finally gets going, it does with a roar, which can catapult you through the garage door; which is what all that talk of hyperinflation is about.
The trick is to ease off the gas as soon as the engine starts running on at least four cylinders, the problem is how to know when.
That was the mistake Chairman Greenspan made, and the real mistake was that he didn't understand that Wall Street had created a "shadow central bank" churning out and selling "Treasury-look-alikes", like a sort of unseen supercharger.
One advance warning might well be whenever house prices really turn because (as explained here) the fundamental driver of that is the "real" nominal GDP (that's what is real without taking away some fantasy inflation number).
If house prices continue going up for another three months in the USA, that could be a sign for Casey Jones to "watch his speed".
And in case that happens, if you read about some poor soul that got pecked to death by a bunch of vultures - that would be me. |
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发表于 2009-8-5 05:16 PM
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