Barron’s Alan Abelson revisits a previously discussed issue: Housing as a Percentage of GDP.
Before getting into the details, I would like to bring one caveat to
your attention. The prior mention of this was back in March 2005,
and at that time, the same source — Merrill Lynch’s Economist, David
Rosenberg, via Barron’s — was admonishing people to "Be Wary of Anything approaching 140% of GDP"
Now, Household Assets are 150% of GDP.
What does this mean? I find this provides a two important takeaways:
a) Macro-Economics is not a market timing tool: The chart below is
surely an example of Macro at its best, and is evidence that strutural imbalances exist. Its also proof that economics
makes for a rather poor market timing tool. As we have noted
previously, you can and should use it to determine your longer term persepctive — but no one has advised using it as a method to time your entries and exits.
For that, I find that sentiment and quantitative
data ("the voodoo stuff") is much more timely — at least in terms of positioning real
b) Don’t Worry, Be Happy: The early warnings that have yet
to yield a cataclysm actually serves as a tool of complacency. Someone warns of a problem — Global Warming, a Real Estate dependent economy, the Dot.Com bubble — and when the sky doesn’t fall or the markets don’t collapse the next day, its proof of being wrong.
further than yesterday’s WSJ Op Ed by Brian Wesbury (Pouting Pundits of Pessimism) as proof positive of this. Whenever I see folks of this nature on TV, I secretly pray that CNBC runs a certain music in the background.
Here’s the chart of Household Assets as a Percentage of GDP:
Chart courtesy of Barrons
Here’s Abelson’s take:
By this time, it’s no secret that behind the profound indisposition to
save is the remarkable eagerness by ravenous consumers to use their
houses as cash cows. David Rosenberg, Merrill Lynch’s crack economist,
notes that equity cashouts so far this year have weighed in at a tidy
$160 billion. Ask not, then, where the dough is coming from to fuel the
great spending boom — a mighty chunk of it is coming not out of
people’s pockets (which aren’t especially full) or paychecks (which are
pretty darn skimpy), but their houses. Those marvelous castles, whose
value appreciates by quantum leaps every year, a stimulating trend
that, of course, is destined to continue ad infinitum.
Which leads us to the accompanying chart, which we’re also indebted to
David for. As the subheading explains, that single line rising toward
the heavens depicts the share of household real-estate assets as a
percentage of gross domestic product. It’s a graphic (in every sense of
the word) description of the fantastic rise of the housing bubble. And
it’s eerily reminiscent of the charts that frequently enlivened this
space at the top of the bull market in the late ‘Nineties portraying
the enormity of the equity bubble. As David warns, "Caveat emptor
whenever anything approaches 150% of GDP."
There are, as we may have pointed out before in discussing housing, any number of reasons to be wary. Among them: Affordability is at a 14-year low; the sales of new and existing homes are leveling off or worse, even as prices continue to rise; inventories of unsold homes are more than ample; mortgage applications are running some 20% below the summer’s high; and even a few — make that a very few — home builders insist that business is as good as it gets, but could get better.
My friend Cody Willard had this to say about my Macro laments:
You can keep your "realism." At some point that "realism" will happen to coincide with a downturn in the economy. Good luck getting the timing right this time, because you’ve been way off with these macro laments for a long time. Realism indeed. I’ll stick with reality. It is what it is, man.
So despite warning signs up the wazoo, those who don’t buy into the happy talk
are pessimists, perma bears, or worse. Until, of course, the worst
happens, and then the spin will start, and something else will get
I disagree. The structural problems are quite real. Whether its Gold at $505, or the incredible minus 1.5% savings rate for Q3, or any one of a dozen other problems out there, we have a developing situation. Understanding it, preparing for what will eventually come, looking for signs that the cracks in the foundation are getting worse is the only prudent thing to do.
Of course, there is always the other option:
Don’t worry. Be happy.
UP AND DOWN WALL STREET
Barron’s, MONDAY, DECEMBER 5, 2005