patrick.net

Tainted pot roast.

DinOR says:

I don’t know exactly what to call this “abortion that lived” but I suggest we all get used to hearing realt-whores talking out of both sides of their mouth for some time to come.

Very funny. What's amazing about the LAY "interview" is that she not only admits to trouble ahead, but has to say, "“I’m sorry I ever made that comment,” she said Thursday. “When I get my new term, I’ll let you know.”

It almost sounds like she's been caught off-guard and is at a loss right now. Imagine a realtor spokesperson without prepared sound bites to soothe the realtor/homedebtor masses!

You have the greatest asset bubble in history staring you in the face,

This isn't true by even a longshot. It may be one of the bigger asset bubbles in terms of absolute adjusted dollars, but it is far from the biggest in terms of percent of GDP (or whatever bounding variable you like).

The sucky part is that a soft-landing could well mean a protracted period of flat or negative real returns on home prices. This doesn’t help homedebtors. This doesn’t help bubblesitters. It only helps the ethereal macro economy and GDP.

Perhaps this is exactly what the Fed wants. No true crash = incumbents can probably stay in office and keep the status quo, and we avoid overt recession. This gives the smart money enough time to readjust portfolios as well. What are your thoughts about what happens to toxic loans in the setting of flat or negative real home appreciation? Are these guys going to just continue to build principal owed on their mortgages indefinitely?

"what happens to toxic loans"

I spoke briefly with a realtor from LV yesterday and he said they are already starting to see specuvestors walk away from their inv. prop. It's hard to vision it will be different any where else. As for accruing equity and continued payment, well I think we can dismiss that even from where we're at chronologically.

Well there's the Tulip Mania and the South China Trading Company. Then of course there's the little known "clay tablet bubble" in Phoenicia back in the day......

Yeah Randy H, what gives? When have we had a bubble that affected this large a swath of the population?

The Great Depression was pretty huge, right? That was probably the first major credit based bubble.

The question is, how can we prevent the Great Depression from becoming Great Depression I?

I read somewhere, that even if people declare bK some of their debts will still follow them - i.e. HELOC loans, credit cards because of the new BK laws. Does anyone know more about this?

This why "Conor" gets paid the "big bucks".

Toxic loans and how increasing default rates will affect credit markets is a worry. It is possible that the true risks aren't adequately priced in. But, a lot of the investors in these markets are foreign, and they may have the risk priced in already in terms of a weak dollar. This kind of stuff is beyond my expertise beyond conjecture.

The asset bubble of the 20s was so large that it was actually larger than the entire "real" economy. We're very far from that today. During the late 20s asset price growth rates were 1000X the rate of GDP growth. The worst of this bubble is maybe 100X, which isn't something to boast about, but nowhere near the "worst".

The South Seas asset bubble is a historical example of international nature. The Mississippi Company bubble is a historical example of a single company in which the assets become so inflated they exceeded the total amount of government debt.

These are just US-related examples. If you dig into European history you find more extreme examples. If you include the colonial & mercantile eras, you find many dozens more.

Davis_Renter,

Gary Watts does not yet know the meaning of "miserable"!

Oh but he WILL!

Conor,

Your thesis omits real growth, which has been the highest from 2002-2006YTD as any period since post WWII, and will almost surely exceed that by Q3. This has been real growth, not inflationary growth or asset price growth or illusionary growth. It is an increase in capital stocks and productivity.

I recommend a reread of the Solow model. If you've discovered a model which succeeds that model and re-explains Golden-Rule Capital levels, then please share.

Davis_Renter,

Can't say as I have but it does sound interesting. Here in Oregon "partial shares" are very popular on the coast. Some people like summer sun, others dramatic winter storms. Some homes/units belong to firms and they dole them out to associates. Shared expenses, shared profits. I'd have to know the other people invlolved before I did any thing though.

only that it could be much worse than the moderates on this board suspect.

Someone is always predicting the end of the world. One day, someone will be right, though not of their own unique ingenious insights. But instead, good old fashioned (and ironic) luck.

All I am asking is a perspective check.

Manias usually surround goods with short term supply inelasticity. They seem to be broken by the long term supply elasticity. This one seems to fit right into that pattern.

I see where Randy is going with the soft landing scenario. All the previous bubbles have been in gold standard economies, so the government doesn't have a lever to soften the blow. The Asian financial crisis and the Latin American financial crises of the recent years happened in economies where there was little currency control and quite a bit of IMF meddling. The Fed should have a lot more control over the situation, if they wish.

Anyone here worried about what's happening in Lebanon? It might just be my paranoia veering its head, but damn it has a way of looking like a potential start to WWIII.

Much of that “global” growth has been in the countries that sell stuff to us,

Interesting. I guess the productivity numbers, which most economists believe to be understated, were all fictional.

How do Chinese goods sold to US consumers increase the US capital stock?

Randy H Says:

Your thesis omits real growth, which has been the highest from 2002-2006YTD as any period since post WWII, and will almost surely exceed that by Q3. This has been real growth, not inflationary growth or asset price growth or illusionary growth. It is an increase in capital stocks and productivity.

Corrected post (wrp italics):

Randy H Says:

Your thesis omits real growth, which has been the highest from 2002-2006YTD as any period since post WWII, and will almost surely exceed that by Q3. This has been real growth, not inflationary growth or asset price growth or illusionary growth. It is an increase in capital stocks and productivity.

Problem is, this growth is not reflected in wage growth, ie, real buying power for the masses, hence the absurdity of home price appreciation of late. Most of this growth seems to go to line the pockets of CEO’s and corporations (and their hangers-on), ala the increasing disparity between the ultra-rich and the “rest of us” in the US.

Randy,

I admit that I am paranoid minded. Past human civilizations that progressed to our level of sophistication (and imbalance) tend to quickly crash down to a bloody end. I'm not sure our current level of technology sophistication is sufficient to save us from all the looming problems. Those problems include rogue nuclear warheads, drastic climate change, hobbled social welfare states, dissatisfied 3rd world countries, etc.

This housing bubble may not kill us, but tons of threats loom around to either partially or completely destroy human civilization as we know it. I don't see sufficient political leadership or popular awareness out there to save us from ourselves.

Astrid,

And to add to that, the Asian Currency Crisis, which actually expands to the currency flu + Russian default + collapse of LTCM (and many others less well known) didn't cause depressionary deflation. In fact, it didn't cause much real damage beyond dramatically increasing volatility in the markets for a while.

If I am underestimating the "interdependency" effect to the negative, then Conor is underestimating the same to the positive. After all, shouldn't the Russian default have toppled Germany's economy, most of east Europe, caused rampant Euro (yes the state currencies were coordinated and fixed by that point, only not denominated in Euros yet) inflation and brought the whole system down? Why didn't it? Why didn't the currency flu spread to the Yen-Dollar and carry trades?

skibum,

I mostly agree, except for one point. The "unholy" deal with China does result in increased purchasing power for US consumers. It isn't a pretty way to accomplish it, but nonetheless, people can buy more for the same $ than they could from other sources. This is, in fact, a shifting of inflation away from the US and into China. A less advantageous deal is seen in the offshoring of high-skill jobs to India. Here, there is less direct advantage to US consumers but much advantage to Indian consumers.

Astrid,

I think you hit on an important point. The high-probability risks are all around us, and they aren't found in economic or financial places.

Conor,

I agree with you, up to a point, but I'm not so sure about the solution.

I think the low risk premium in the stock and bond market is a function of the lack of confidence in non-commodities pegged currencies. We live with the possibility that our dollars could debase by either a little or a lot everyday. That inflation risk has prompted investments into other forms, which, while risky, seems like the only chance to fight the possibility that our dollars will widdle onto nothing.

The question is, can we correct for this situation at all without going back into an impossibly inadequate commodities based currency situation? I don't think the gold standard can possibly come back and that modern economies are inherently going to see lower risk premiums as a function of the underlying currency instability. We may just have to live with the consequences, since there really aren't alternatives.

We’re all independent actors. Are YOU confident enough to buy a house today? Are you confident enough to put your assets into stocks? Everything else is talking out of our asses, frankly. None of us know for sure.

I will buy a house when the cost of such is less or equal to the utility I gain from it. You don't know my utility, nor I yours.

I have quite a few assets in stocks. Even more so now that I've been repeatedly reaping profits off of the unfortunate folks who keep getting scared into gold and commodities only to get caught over and over again by the futures market makers' trend-traps.

As an aside, I set up the "defensive" portfolio (MVO'd) recommended by DeoV many months back...sort of the first Conor. As of now my TradingSolutions system shows it's return on a hypothetical $100,000 at -44%, leaving just over half the equity in tact. Applying the prevailing risk-free rate and you'd have well less than half your money left today, only 6 months after sinking it into a "defensive" portfolio of commodities, international growth, and anti-dollar bets.

All day, every time of think of the LAY all I can hear is the theme music to:

Welcome Back Kotter?

Picture LAY totally demoralized, villified by the press..... an outcast in CA. Utterly defeated she goes back to....... some place awful to rediscover her "roots". She's teaching RE Licensing 101 to Katrina refugees in a makeshift classroom outside of Cairo, IL. Little does she suspect that all of her "students" are actually former CA FB's!

Welcome Back

I don't think the "unholy" deal btwn US and China is really so bad for either countries. So what if it ended. A lot of Taiwanese businessmen will be utterly crushed. But what else?

Americans will have to live without so many useless knick knacks and be more careful about where they spend their money. The Chinese will have to devote their infrastructure and manpower towards more useful productions geared towards the Chinese hinterlands, rather than towards cargo containers in Guangzhou or Shanghai.

A lot of the capital wealth spent on China went in the form of expertise and IP. China will certainly keep much of it around regardless of the export market. The Chinese assembly plants are not leaving much money for the Chinese anyways, since they're very thin margin businesses. So I'd say, so what if those foreign capital investments leave? It's high time the Chinese started to move to higher margin areas in services and R&D.

Randy H Says:

I mostly agree, except for one point. The “unholy” deal with China does result in increased purchasing power for US consumers.

However, the effect you describe only concerns consumables. The only ways I can see how this can affect housing affordability is by shifting spending away from consumables to housing payments, or to decrease material costs for homebuilding. The latter would mean that home prices should therefore be even more expensive, which is hard to imagine, or that we should conclude that prices are not based on fundamental costs of building (almost certainly true). Regarding shifting of spending from otherwise more expensive consumables to housing, I suppose this is possible, although I'm not certain how big and impact this has.

Conor,

The key lies in "disclosure". Even if you're a Series 55 you can still trade your own account and it can actually be custodied at another firm. You just have to disclose that to your compliance officer. (It's usually best not to wait for the annual compliance review) but I don't think it should be an issue.

There are no options on those ETFs yet. The day ITB and XHB get options will be interesting, but it's a ways off. You could always write naked calls if you have the fortitude.

DinOR, his firm may have policy beyond SEC & NASD disclosure rules. I know guys who work in wealth management firms who can't do so much as reallocate their 401k without violating policy and risking termination.

This is why you all need to migrate to the dark side...you know, the "self regulated" side where the cut is higher and the personal risks are lower. I dare not utter those two ugly words in this company, though.

IMO there will be no place that is both ‘easy’ and ’safe’ place to invest for the better part of the next decade….except for puts on the house builders.

Ironically, I just bought long term calls on DHI this morning. The sentiment on wall street is overwhelmingly negative. Although I am as bearish as anyone on the housing bubble, I just don't see *all* of the homebuilders going bankrupt. DHI is the biggest builder and one of the most profitable. Currently selling for 4x earnings. Yes, the earnings will get slammed. Yes, there will be a lot of defaults. And yes, housing is cyclical. Still, 4x peak earnings is extraordinarily cheap unless you think DHI is going to go bankrupt.

I predict that there will be a lot of industry consolidation. The big, profitable builders (like DHI) will be in a good position to retrench and combine forces with other strong builders. The weak or overleveraged companies will get squashed and go out of business.

Eventually, DHI could very well be the WalMart of homebuilders. They will buy up the assets of their failed competitors and emerge stronger post-bubble. Right now, DHI has a $6.5 billion market cap. They could easily quadruple in size over the next ten years, housing bubble crash notwithstanding. They will use their size to obtain leverage over their suppliers. They will take advantage of the housing bust to retrench, buy back stock and scale down their operations. This is not Amazon at 100x earnings.

The builder stocks have already crashed because wall street has already "priced in" the bad news. The housing crash won't be nearly as hard on builders as the dotcom crash was on internet stocks, IMO.

*Not investment advice, of course.

Randy H,

You know, that may well be true. Many firms DO have policies in "place" it's just that I've so seldom seen them enforced? Wink, wink. To the degree that he can share what his position entails I can pretty much tell what you can and can't get away with.

Glen,

That may be true. It's gotten a lot tougher on smaller builders b/c of the expense of fighting zoning regs. etc. They just don't have deep enough pockets to play at that level. On the other hand, depending on litigation and other unforeseen factors there's no assurance all or any of these builders will survive. Just me, but I wouldn't even worry about 10 years from now. I made to Friday and for now, that's good enough.

I think without a crystal ball it's too early for me to look at homebuilders. I would mention that Pulte, Toll, and Lennar have similarly low PEs, and a quick search on the Fool pulls up articles suggesting PE is not a very useful indicator for these stocks.

TN: try debt collection firms.

Astrid: Israel is fighting a war on Hezbollah's terms, which is not a good thing for them. I doubt they'll have an easy win, so the likely outcome is occupation and a repeat of the last few decades. There's also no good reason for any other country to get involved, so I'm not expecting WWIII at the present time. People don't start wars for the fun of it though, so I'm wondering what other surprises are in store.

requiem,

A low PE (from recent highs) often indicates dismal outlook for future earnings. Some metal stocks have very low PEs right now. I bet the street is thinking a slowdown coming this way (hence lower demand for metals).

Historically, low PE stocks have done far better than high PE stocks.

The problem with such relationships is that, when they prove to actually be useful and predictive (even by a tiny amount), then they almost immediately become no longer useful or predictive anymore because "the cat's out of the bag". Isn't this why Fama & French had to modify CAPM. I believe that all these ratio-plays pretty much yield about random results at this point.

I just don’t see *all* of the homebuilders going bankrupt.

I think after the soft landing (in quicksand), there are going to be so many unoccupied houses that there won't be any need to build for years to come! That 70% ownership rate is just an illusion. We will all soon see what the TRUE ownership rate is.

The problem with such relationships is that, when they prove to actually be useful and predictive (even by a tiny amount), then they almost immediately become no longer useful or predictive anymore because “the cat’s out of the bag”.

This is why I "publicly" advocate the "market efficiency" theory. There is no point for everyone to search for the "holy grail", because if I find it I will deny it. :)

Real estate economist Gary Watts has revised his optimistic forecast for the Orange County housing market, telling an industry gathering this morning that he expects prices to go up 11 or 12 percent in 2006, and saying the gain could even be smaller.

Yeah, smaller like -11%. I don't see how a county can appreciate double digits and have massive foreclosures at the same time!

It’s pretty hard to know how much bad news is priced into the stock. I do not think enough has been, and they are setting up to be value traps for the Cramerites.

You will have to feel the sentiment of the market participants. I heard that a crytal ball may actually help clearing your mind. Anyone tried?

While I agree that stocks may mimic a "random walk" in the short run, I do not think it works so well over a longer time frame. If you have a sufficiently long time horizon, you can afford to wait until all the arbitrageurs have left the building.

If you have a sufficiently long time horizon, you can afford to wait until all the arbitrageurs have left the building.

In the long run, we are all dead.