Household Assets as a Percentage of GDP

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.

Look no
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.

Dubya’s Dilemma
Barron’s, MONDAY,  DECEMBER 5,  2005

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What's been said:

Discussions found on the web:
  1. me commented on Dec 3

    You forgot to add “Its different this time”.

  2. Fritz commented on Dec 3

    What about those Jobs, man! 215,000 new jobs. Perhaps I’m missing something but I though we needed 250,000 new jobs a month to keep up with the population?

    I guess when you’re living in 1999, there’s always a reason to party.

    BR: Actually, the number is more like 150,000 per month

  3. spencer commented on Dec 3

    Jobs are better, but the hours worked data appears to be weakening.

    Hours worked is a much better leading indicator as jobs are actually a lagging indicator.

  4. Emmanuel commented on Dec 3

    Bobby McFerrin should get back in the studio and record “There’s Such a Thing Called a Free Lunch.” He can have the entire WSJ editorial staff as his backup singers. And, for his set, well, the CNBC studio will do just fine, thank you! (He can have a duet with Maria Bartiromo.)

    What I’d like to know is how much more dissavings households can sustain before hitting a wall. I want to believe that Joe Average knows when to quit his nonstop jihad on fiscal prudence, but are consumers really that dumb? Common sense dictates that this behavior should have abated sometime ago, yet there are few signs of such prudence. At this rate, only bankruptcy will force Joe Average into refuting Dubyanomics.

  5. angryinch commented on Dec 3

    There’s probably a middle ground here: hope for the best, prepare for the worst. Or something like that.

    I ran a biz in SF during the dotcom daze. I can recall the ‘party like it’s 1999’ attitude—probably because it was 1999.

    Them wuz the days. PR people who called themselves “chief master blasters” (on their business cards no less) phoning me all day long with the breathless stories of their can’t-miss dotcoms.

    Commercial vacancy rates at 0%. Rents doubling every six months. Yeah, that was sustainable. LOL.

    At first, being of sound mind, I was perplexed…then angry. Ultimately, though, I thought that the best revenge would be to sell my co. for cash to a dotcom. So I did…in March 2000.

    I’ve also been through a few Calif housing ‘booms’ and was able to capitalize by selling into them. In fact, we sold much of our investment prop here in Calif in late 2004.

    So be happy, by all means. Just make sure to sell ahead of the rest and get liquid. No need to stick around ’til closing time. Too many cops out at that hour anyway.

  6. Lord commented on Dec 3

    The bears will be blamed as they always are. Don’t worry, be happy, for bargains are headed your way. It’s getting to feel more like Christmas every year!

  7. Bruce Sherman commented on Dec 3

    >>”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.”

    OK, what DOES one do with one’s inverstments to prepare?????

    Bruce Sherman
    Oakland, Oregon

  8. BC commented on Dec 3

    It’s only in the downturn that people will discover what we have done wrong.

    All the money in the world is just little bits of paper and numbers in computers.

    What is real is the infrastructure that society has built in order to support itself and keep itself happy.

    When there’s a big downturn, suddenly millions of people discover that they’ve spent a big portion of their lives building things that aren’t needed anymore, and in hindsight, collectively, people should have been building different things for their futures.

    Houses are a good thing. If everything goes to hell, at least you can still live in the house you own. But one really has to question whether the massive investments in interstate construction, big box retail developments, and the expansion of suburbia are really going to look so good ten years into the future.

  9. Jack K. Miller commented on Dec 4

    You guys are 4 or 5 years early. Housing always is overbuilt during an economic recovery and then there is a business economic expansion. During the expansion, house financing gets crowded out for a few years but employment and wage increases are strong enough to gradually work off the over building. Finally, again maybe 4 years from now, non-inflationary capacity restraints are hit and the FOMC must raise rates very high to kill inflation.

    The recent mid-cycle bumping of rates is simply to take away the stimulus that was needed to spark the recovery. The numbers this week are going to show again that inflation is not bad. The FOMC is close to being done. The next time around, again, several years from now, will be a different story. The FOMC will have to raise rates enough that a recession will be likely.

    Even then, the next real estate recession may not be such a tough one. Certainly, I have been selling properties and redeploying the assets, but existing home prices will not “collapse” with 78 million baby boomers in their prime earnings years. The real problem begins in about 5 years when significant numbers of boomers begin to retire. This timing is consistent with the cycle of real estate. Real estate recessions come about every 20 years; something like 1952, 1973, 1990 and 2010.

    The correct investment move now is into large cap stocks that have steady earnings growth. Sure the market is over-bought but that fact does not necessarily call for a correction. When the market breaks through long term resistance it is typically not the time to play around trying to catch the dips.

    This market is the epitome of the Ken Fisher “bucking bronco”. It is time to climb on and hold on. American Airlines is up about 80% this year and the recovery in airlines has just started. Continental is up maybe 45% and is expected to earn 2 or 3 bucks next year. Hotel room rates across the country are soaring. Vegas is the leader with room rates jumping like a Calabarus frog.

    You don’t have to believe me, all you have to do is open your eyes and look at the markets. The ECB raised rates this week for the first time in 5 years and the European markets broke to 4 and a half year highs the same week. Don’t tell me there are not signs clearly showing world wide economic strength when the ECB raises rates in the face of average Euro-land unemployment still over 8.3%!

    Yes the increase was to combat the headline inflation being exported by a strong US dollar but the core Euro inflation rate is only 1.8% and the headline is only 2.9% in the face of falling oil prices!

    I just love the comment that bargains are headed our way and its beginning to look a lot like Christmas. The market is stampeding and you guys are going to sit around waiting for Christmas bargains; so sorry, you will probably be waiting a very long time.

  10. Larry Nusbaum, Scottsdale commented on Dec 4

    Posted by: Jack K. Miller | Dec 4, 2005 7:31:46 AM: The correct investment move now is into large cap stocks that have steady earnings growth.

    LMAO! Is that a prediction Jack? We are in an extended tangible asset cycle and you want to buy large cap stocks? OK. Make sure that they are in gold and silver mining, steel, cement, coal, land, real estate, hotels, construction, lumber etc. We may have hit the peak in the real estate (housing) cycle, but we remain in an expansion period.

  11. Larry Nusbaum, Scottsdale commented on Dec 4

    By Ruth Simon
    From The Wall Street Journal Online

    The cheap mortgage that helped pump up the housing boom is finally in retreat.

    Demand for so-called option adjustable-rate mortgages has dropped 25% in recent months, according to estimates by UBS AG. Just this summer, these loans accounted for more than 30% of jumbo mortgages, UBS says. Option ARMs carry teaser rates of as low as 1% and give borrowers multiple payment choices, but can lead to a rising loan balance.

    At Washington Mutual Inc., option ARMs accounted for 29% of mortgage volume in the third quarter, down from as much as 40% a year earlier. IndyMac Bancorp says option ARMs fell to 31% of its loan volume in the third quarter from 39% the previous quarter.

  12. Lord commented on Dec 4

    Four to five years would be a little long; perhaps three instead, but otherwise I agree with Jack. As the expansion matures, more speculative large cap growth will dominate.

  13. Jordan commented on Dec 5

    The correct investment is precious metals and the respective stocks. $510-$520 is the last resistance for gold before the old highs. It will be a vertical run from $520-$700 and this will likely occur in the next 12 months.

  14. Idaho_Spud commented on Dec 5

    Nearly all commodities are going up in price. It’s difficult to tell whether this is due to monetary inflation, overseas demand, or a combination of the two.

    As Larry mentioned, precious metals and energy are up – way up. Base metals are also up. Steel and copper are at multi-year highs. Energy (coal, oil, natgas) doesn’t even need to be mentioned. Katrina was just a neat trick to make you think $2.30 gas is a bargain.

    Of the above commodities, precious metals seem to be the last one to see accelerated prices. Then again precious metals demand in the production-based economy is fairly flat, so any price increase will be due to infationary fears, rather than demand for use. Therefore it should peak later and drop a lot further after the inflationary fear passes.

  15. stephen commented on Sep 27

    bla bla bla bla bla

Read this next.

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