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The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
Some further clarification on the housing wealth effect. As expected, it turns out that the MEW was a big component of consumer spending
http://blogs.wsj.com/economics/2009...tion-housing-bubble-fueled-consumer-spending/
So the original authors seem to be correct that housing wealth is not net wealth as renters and future buyers are not pleased to see prices rise. Also, they claim, the majority of homeowners NEED a house so quotes and transactions on similar homes in their area should have little impact on their lifes
That however has only a modest impact on the idea that housing going down hurts the economy as the MEW financing goes away and banks suffer more losses and cut credit growth. Plus the MEW helped to lever up the consumer who now is repairing
http://blogs.wsj.com/economics/2009...tion-housing-bubble-fueled-consumer-spending/
So the original authors seem to be correct that housing wealth is not net wealth as renters and future buyers are not pleased to see prices rise. Also, they claim, the majority of homeowners NEED a house so quotes and transactions on similar homes in their area should have little impact on their lifes
That however has only a modest impact on the idea that housing going down hurts the economy as the MEW financing goes away and banks suffer more losses and cut credit growth. Plus the MEW helped to lever up the consumer who now is repairing
Heres a Greenspan column on Ft.com
http://www.ft.com/cms/s/0/e1fbc4e6-6194-11de-9e03-00144feabdc0.html
Some points he makes
1)Recovery could be reflexive. If share prices continue to rise this will repair people's balance sheets, enable corporations to raise equity, banks to raise capital. Keep people with a cheerful moods. He essentially says the green shoot lunacy could became a self feeding reality. Although this is true it seems he might be taking this a bit too far, the lunacy is based on actual beliefs by stock buyers on what the economy will look like, those outcomes are quite unlikely to be met(2-3% GDP growth in 2010, stress test scenario not playing out). The lunacy helped banks raise capital and will help the economy perform better than otherwise but stocks are still valued on a multiple to profit, and realistic profit expectations to 2010 show this market is overvalued. More lunacy might raise the profit number but what will feed the lunacy?Better than expected and the 2nd derivative as already been priced by the markets
http://www.ft.com/cms/s/0/e1fbc4e6-6194-11de-9e03-00144feabdc0.html
Some points he makes
1)Recovery could be reflexive. If share prices continue to rise this will repair people's balance sheets, enable corporations to raise equity, banks to raise capital. Keep people with a cheerful moods. He essentially says the green shoot lunacy could became a self feeding reality. Although this is true it seems he might be taking this a bit too far, the lunacy is based on actual beliefs by stock buyers on what the economy will look like, those outcomes are quite unlikely to be met(2-3% GDP growth in 2010, stress test scenario not playing out). The lunacy helped banks raise capital and will help the economy perform better than otherwise but stocks are still valued on a multiple to profit, and realistic profit expectations to 2010 show this market is overvalued. More lunacy might raise the profit number but what will feed the lunacy?Better than expected and the 2nd derivative as already been priced by the markets
2)Confirming my bet he says fed will only tighten conditions 'when it perceives that the unemployment rate is poised to decline, will presumably start to allow its short-term assets to run off, and either sell its newly acquired bonds, notes and asset-backed securities or, if that proves too disruptive to markets, issue (with congressional approval) Fed debt to sterilise, or counter, what is left of its huge expansion of the monetary base.Thus, interest rates would rise well before the restoration of full employment, a policy that, in the past, has not been viewed favourably by Congress'
Quote from Daal:
Some further clarification on the housing wealth effect. As expected, it turns out that the MEW was a big component of consumer spending
http://blogs.wsj.com/economics/2009...tion-housing-bubble-fueled-consumer-spending/
So the original authors seem to be correct that housing wealth is not net wealth as renters and future buyers are not pleased to see prices rise. Also, they claim, the majority of homeowners NEED a house so quotes and transactions on similar homes in their area should have little impact on their lifes
That however has only a modest impact on the idea that housing going down hurts the economy as the MEW financing goes away and banks suffer more losses and cut credit growth. Plus the MEW helped to lever up the consumer who now is repairing
IMO this is just further evidence that economics is a pseudo-science, little better than astrology. Can you imagine two physicists or chemists looking at the same data, crunching the numbers, modeling the phenomenon under study and then arriving at *totally opposite* conclusions?
Describing Atlanta homeowners as a "control group" compared to San Francisco homeowners is ridiculous. To be a control group, *all variables except one* must be identical. Clearly there are numerous extra variables between Atlanta and San Francisco homeowners - possible thousands.
There is simply not enough evidence in the links cited for them to draw the conclusions they do. Their sole statement should be "as usual, the evidence was not statistically significant enough to form a conclusion".
You should not pass off this Dark Ages thinking as credible analysis, let alone scientific.
3)Inflation is the danger, Fed might have independance threatened. He is the guy who had to hear from congress people almost every year that rates should be lower. Now that the fed is lending to everyone with a citizenship and a pulse it seems inevitable that the government will think the Fed is their bitch. 30y will be the short of the century after this crisis
4)If his hypothesis that the green shoot lunacy by itself could get the world out of crisis is true then the opposite would be also true. If stock prices reverse this could send the world back into crisis. The lunacy has improved some of the economic data and peoples mood for sure but is it resonable to expect the lunacy by itself to go on forever and multiples to keep expanding?Since all bubbles end, this shows that markets eventually connect with reality, studies shows that humans have a lower chance of participating in a bubble after getting burned twice in a row(Montier study), they do however go into a third bubble(in a more cautius manner) if there is a massive expansion in liquidity. So far the massive expansion in liquidity has flowed through M1 and M2 only in limited quantities. In a 3 month basis it has been quite weak
So I'm not into this greenspan camp that recovery can by manufactured by the green shooters, for sure they can help the economy perform better and they are. But there is a reason the Rogoff research shows that after financial crisis, equity prices take 3.5 years and housing 5-6 years to stabilize, there is only so much that wishful thinking can do, particulary when government policy has been less than optimal
Rosenberg seems to be joining the long-run inflation no Japan camp
"As we said above, the desire for cash at all levels continues to run at an unprecedented rate. Alan Greenspan may be correct that inflation rears its head in 2012, but this cash hoarding is deflationary for the here and now, and making forecasts three years out is a mugâs game at best."
"So, calling for inflation three years from now begs the question, what happens between now and then because what we see is principally deflation risk, which is why income streams in client portfolios is so very important. Bracing for inflation now is akin to buying snow shovels in June or sun decks in December."
I agree with him on that, it doesnt do much good in terms of profit/loss right now to know that inflation will come down at some point, however it is a good exercise of macro thinking that can help one understand the world better and in turn make you money today by getting you to think correctly for the current scenarios
"As we said above, the desire for cash at all levels continues to run at an unprecedented rate. Alan Greenspan may be correct that inflation rears its head in 2012, but this cash hoarding is deflationary for the here and now, and making forecasts three years out is a mugâs game at best."
"So, calling for inflation three years from now begs the question, what happens between now and then because what we see is principally deflation risk, which is why income streams in client portfolios is so very important. Bracing for inflation now is akin to buying snow shovels in June or sun decks in December."
I agree with him on that, it doesnt do much good in terms of profit/loss right now to know that inflation will come down at some point, however it is a good exercise of macro thinking that can help one understand the world better and in turn make you money today by getting you to think correctly for the current scenarios
The ECB decision to lend one year cash at 1% shows a bit how central banks could influence long-term rates in a panic deflation/bank runs scenario if needed. The Fed could lend unlimited amounts of cash at 0.25% for 10 years with loose collateral requirements. This would send the 10y treasury soaring as people antecipate that the banks will be buying that note, this also would recapitalize the banks as they make the risk free spread, it might be a political bomb though