Terribly amusing:
High Churn, Big Front Load
March 14, 2007 8:05am by Barry Ritholtz
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First, my apologies to you Mr Ritholtz. When I read your earlier post about double bottoms and subsequent market recoveries, I assumed it was an example of using statistics to prove just about anything someone wants to prove.
I was wrong.
I should have kept my ears to the ground and listened to the background. A large number of tv investment managers wanted a double bottom to the extent that it became a self fulfilling prophecy.
The previous market decline could have also been forecast by using a ‘prevalence of opinion’ gage. What’s a good way to build one of those?
Barry,
During the last years’ correction, you were perfect about identifying the bottom.
Do you plan to do the same this time? Could you let us know when you think we are near the bottom?
I am concerned that this correction may turn into a bear market for a few years.
This time, there are just too many bubbles and excesses everywhere. I am afraid it may take a few years correcting all the mess.
What do you think?
Wally is the Man! My favorite Wallyism:
“My life’s goal is to transport large quantities of liquid from the coffee-maker to the urinal.”
Re the sub prime problem: I wonder if it is overblown. People would rather downsize their home than their lifestyle. People will live in smaller homes but they won’t stop spending if it does not allow them to keep up with their friend’s expectations of them.
Also, the people who are being foreclosed on are people at the low end of the economy. They don’t buy high end electronics, take expensive vacations, buy new cars, or the like. They spend on necessaries and a couple of small luxuries. Those who spend will downsize their homes and continue to spend.
Therefore, who is being hurt, other than a few lenders who assumed risk they probably shouldn’t have?
~~~
BR: The problem is that subprime buyers, along with Alt A (the next stepup) accounted for 30% or so of the home buyers over the past few years. With a 6 or 7 month supply of homes in inventory, and 1 out of 4 potential buyers out of the demand pool, its very likely that the Housing market will suffer further.
Remember, alot of economics takes place at the margins. In most markets, there is a rough balance between supply and demand, and it doesn’t take a whole lot to upset that balance one way or the other.
This has upset that balance . . .
thats a good point cinefoz.
I think it is the psychology of the consumer that is at risk here cinefoz. The “wealth effect” in reverse as folks watch the value of their homes and stock portfolios shrink and drop at the same time…kinda makes one want to pay off that credit card and hunker down.
One of the imbalances:
“A deficit of $856.7 billion in 2006 meant that the United States was borrowing more than $2 billion daily to finance its trade gap.”
It cannot continue like this forever. Pretending that the problem does not exist and telling everyone that this is the best story never told will not solve the problem.
Why our kids should suffer because the old farts in Washington and on TV continue ignoring the problem?
cinefoz,
It is much bigger problem than it seems to be. The main concern is the problems of subprime market widening and leading to a credit crunch. Liquidity and credit (leverage) are like the blood and oxygen for our economy, without them the economy will collapse.
VL,
You are correct that a credit crunch would be a hammer blow to the market and the economy. However, I don’t think the availability of money is a problem.
Maybe it is for people who can’t afford it. Do you have any evidence that credit is unavailable for the credit worthy? Or that the availability of money in general is getting tighter?
Last weekend, I was thoroughly annoyed by the huge crowds and heavy traffic around a shopping district in a town that is supposed to be ‘depressed’ economically. Everybody was getting in my way and it was hard to get around. That being said, I also think the March stats announced in April will reflect an ‘amazing turnaround’ at some level.
cinefoz, you can’t downsize your home if buyers can’t qualify to purchase it. Buyers, or demand for homes is dropping very rapidly. See Calculated Risk for more info.
Also, with the increased delinquencies and foreclosures, the supply of homes is going up. I wonder what the inverse of the wealth affect is when home prices fall.
Sounds like a hedge fund. I’M JOKING
Cinefoz said…
Also, the people who are being foreclosed on are people at the low end of the economy. They don’t buy high end electronics, take expensive vacations, buy new cars, or the like. They spend on necessaries and a couple of small luxuries. Those who spend will downsize their homes and continue to spend.
Do you seriously believe that people on the “low end of the economy” are as fiscally responsible as you say they are?
When I visit people who make 1/3 of what I do, they all have Plasma TV’s, an XBox 360, a new motorized toy (jetski, snowmobile, etc), just finished a trip to Vegas, and have a new car in the driveway. ALL financed from MEW. You’re stunningly out of touch or making a false assumption that the rest of the world is financially responsible like you are. Seriously, make some lower-income friends and you’ll know what I’m talking about.
Chuck Ponzi
http://www.socalbubble.com
Chuck Ponzi
http://www.socalbubble.com
Do you seriously believe that people on the “low end of the economy” are as fiscally responsible as you say they are?
Reply:
I was trying to be polite. The personal savings rate implies you are more correct than me. I also believe that it is human nature to stick someone else with the bill whenever someone can figure out how.
Thus, the low end lenders will take it on the chin. Consumer spending will hold up, more or less, and the housing slump will continue until excess homebuilder inventory is worked off. At this time, I think the US economy will slow but not stop.
Great cartoon, Barry!