Recession Forecast?

Interesting WSJ Readers Poll: Will the U.S. economy enter a recession in the next six months?


Slightly more than half (51%) do not think we are heading to a recession. About half expect a recession, or say we are already in one (38+11%).

Note this WSJ reader’s Poll was taken yesterday (9/6/07), prior to today’s NFP data

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. KP commented on Sep 7

    We have been in one since 2000! Don’t be suckered by inflation!

    Due to the existing economic, industrial, and monetary imbalances existing in our new “Global Economy” the great sucking effect we are feeling here in America will continue until some sort of equilibrium is reached(which looks to be while from now)

  2. Pool Shark commented on Sep 7

    We don’t have recessions anymore…we just twiddle the numbers and make them go away.

    btw, don’t look now, but December gold to $115.00, and the US$ index under 80 (79.85).

    “Don’t worry, be happy.”

  3. ari5000 commented on Sep 7

    It’s only a recession for the bottom 90%.

    Fat cats are doing just fine.

  4. Owner Earnings commented on Sep 7

    Most Americans are in a recession right now.

  5. SPECTRE of Deflation commented on Sep 7

    The blowhards of CNBC out pimping a cut this morning. Kudlow and the former Labor Sec. to name a few. Russ Winter calls the Boyz of Wall Street “Pig Men”, but I think they need to be renamed “Hog Men”, as in, “pigs get fat, and hogs get slaughtered”. Welcome to the party elites of the world. Here’s hoping you all eat cake just like the little guy in 2000-2001.

  6. SPECTRE of Deflation commented on Sep 7

    The dollar at 79.92, and they still don’t get it, or more rightly they get it, but want there own asses saved. LOL!

    How you gonna lower rates with the dollar tanking?

  7. John F. commented on Sep 7

    Who cares? Inflation-adjusted growth or dollar index-weighted growth are more useful measures of economic health than nominal dollar growth.

  8. techy2468 commented on Sep 7

    i have posted this in another thread…but was wondering if i can get some answers here:
    I am not against rate cut, unless some one lists actual problems economy may face due to it.

    only bad effect of rate cut is inflation….but if that means we ward off recession…i dont mind inflation.

    dollar may decline…but i have my doubts…since no one wants to appreciate too much against the dollar anymore…since they are already hurting. I beleive that all central bankers are going to intervene such that their currency does not appreciate more than 5% from current level.

    so in other words rate cut is only bad news for people who are locked in cash…

    please tell me i am wrong.

    my logic is that consumers are debtors…but we need them to support our growth…hence all the exporters maybe willing to take the loss to support US consumers (india, china and other exporting countries are already doing that).

    no one is a winner if US goes into recession (except maybe russia’s politicians) and the only way out of recession maybe inflation(or more debt at cheap rates) to reduce the debt load of US consumers.

  9. Douglas Watts commented on Sep 7

    must not be wrong !!!!

    — bruce banner

  10. SPECTRE of Deflation commented on Sep 7

    Larry still jawboning insesently, and even turning red in the face. LOL! What’s a matter Larry? Your buds may take real losses? Poor dears.

  11. Paragon commented on Sep 7

    Job numbers are much worse than they appear when you consider the following:

    1) Illegal immigrant construction workers loss of jobs is not counted (large proportion of labor)

    2) RE Agents and Mortgage Brokers have not necessarily lost their jobs, only their income for the foreseeable future.

    Same impact on the economy as job losses, only less transparent in the numbers.

    Recession-Election 08, here we come!

  12. wunsacon commented on Sep 7

    It’s what y’all said!

  13. GerryL commented on Sep 7

    Goldilocks has left the building.

    Kudlow’s worst nightmare is a recession in 2008. The only thing he really cares about is the Republican party. If the country is in recession in 2008 the Republican party will be destroyed.

  14. SPECTRE of Deflation commented on Sep 7

    Barry…Barry…Barry, it’s all contained, and there will be no recession because it’s all contained. I have this from good authority including Hank, Benny and the Boyz:

    I posted a WSJ article the other morning concerning CITI, and mocked the BS from CITI. Down 17% to 20% says they are more full of crap than a Christmas Turkey. From FT…SIVs And CITI:

    In a letter seen by the WS Journal, Citigroup’s SIV overseers, Paul Stephens and Richard Burrows, said that:

    Quite simply, portfolio quality is extremely high and we have no credit concerns about any of the constituent assets… SIVs remain robust and their asset portfolios are performing well.

    But look at the filings with the London Stock Exchange, and you will see that Citi’s SIVs have seen declines in portfolio net asset value of 17-20 per cent in the past few months, which doesn’t quite sit comfortably with Stephens and Burrows assertion that “asset portfolios are performing well”.

  15. donna commented on Sep 7

    I would say WSJ readers do not represent a majority of the population, many of whom are already in a recession.

  16. kmoore88 commented on Sep 7

    “I would say WSJ readers do not represent a majority of the population, many of whom are already in a recession.”

    Exactly, and if the average consumer believes we are/or will be in a recession they will change (cut-back) their spending patterns accordingly….furthermore, in the case of a recession poll of the average US citizen (as opposed to WSJ readers) it shouldn’t be used as a “contrarian” indicator.

  17. Bob A commented on Sep 7


  18. pj commented on Sep 7

    All this data once in a while (These days more than once in a while) comes out and shakes up the markets. But somehow, even before the bear celebrations have started, it just moves up again. And again, and again.
    The final hand just doesn’t get played. Kind of uncertainty fatigue, if one may put it that way. Very sapping.
    Now onto Sep 18. Just continues..

  19. David commented on Sep 7

    No recession and no goldilocks, just plain old economic stagnation. Growth will slow down mostly do to demographic reasons. If the fed cut more then .25 you will see stagflation. “Stagflation” – the destroyer of the worlds, who has come to annihilate the rich and poor – through its low economic growth and high inflation. Beware stagflation.

    “And it must follow, as the night the day, thou canst not then be false to any man”. Shakespeare

  20. ari5000 commented on Sep 7

    50% say no recession?

    I thought there were too many bears and the markets were climbing a wall of worry.

    Sounds like there are a lot of Hopeful Optimists out there waving the flag.

    There’s nothing ‘wrong’ with a market correction. It shakes out poorly allocated capital. It will result in hedge funds closing shop. It will provide bargains for the patience investor, just like the housing collapse will provide affordable homes to those who did not take foolish risks.

    Why is recession such a dirty word? If they intervene — it’ll just cause a painful depression so let the market work itself out. Nobody gets hurt by the wide-eyed optimists and leveraged HFs playing with OPM. Markets have been up for 4 years — throw the bears a bone.

  21. techy2468 commented on Sep 7


    recession is very painful for the comman man….and none of the governments want it on their watch….and they dont care about inflation.

    if things stay bad, i am expecting steep rate cuts starting on 18th sept (start with .25, and do it every month till inflation catches up).

    i wont be surprised if the rates go all the way to 3%

  22. stormrunner commented on Sep 7

    Exactly, and if the average consumer believes we are/or will be in a recession they will change (cut-back) their spending patterns accordingly

    I believe the reason we have averted serious recession thus far is middle aged Americans and older are the only ones that remember them and as for people like myself, late forties, my parents were the ones navigating the impact not me. So expecting the larger population to cut back remembering the scarcity of money effects of recession may take a while to sink in.

  23. Adam commented on Sep 7

    Isn’t elevated inflation without wage inflation a bad thing and just lead to a recession anyway?

  24. jds commented on Sep 7

    What comes first, the chicken or the egg? Do consumers who stop spending create the recession, or do they stop spending because they fear recession?

    I pick the former, as people almost never voluntarily stop spending; they stop because they don’t have discretionary income to spend anymore due to job loss, income cuts, medical expenses, stock market losses, and home equity window closed. Higher mortgage payments, real estate taxes, and energy costs are now showing their effects on the economy.

    We are going to be in for a worse recession than anyone in the MSM is banking on, (Pardon the pun). So many people have not seen a really nasty recession in their working lives and they have no idea what is coming. There will be terrible misery out there.

  25. muckdog commented on Sep 7

    They didn’t ask me, but I would’ve voted “NO” on the recession question.

    There are always people hurting in every economy. Nothing much has changed about that over the course of history.

    The economy is slower, which is more sustainable. Inflation is very low. Unemployment is low. The housing crisis only affects you if you have to sell your house. If you’re working and living your life day to day, you’re probably more concerned about your Fantasy Football line-up this weekend than any looming recession.

  26. Winston Munn commented on Sep 7

    If the U.S. enters recession (I make it about 75%/25% that it will – the problem is solvency, not liquidity), then conditions are ripe for a protracted and severe bear market.

    There are still billions of dollars in mergers and leveraged buyouts so far unfunded but still priced into the market. As the cash squeeze grows, these deals will come undone. We have also been able to ignore some fundamentals over the past few years, ignoring a company’s need to borrow frequently to continue growth. If the bear market unfolds, coinciding with a credit/risk squeeze, debt-to-equity ratios and cash flows will take on a whole new meaning.

    Someday, somewhere, someone is going to have to mark-to-market and when that happens there could be an unwind of unprecedented proportions – think chaos theory – one small bank in Italy marks-to-market and admits the losses and the next thing you know Continental Air is trading at $9 a share because it can’t refinance its debt and oil is $85 a barrel.

    China then goes into a tailspin because of falling U.S. dollar and less demand for T-shirts, poison dog food, and killer kid toys.

    With less consumption of foreign products, there will be fewer dollars to bid for treasuries – the Fed will have to monetize the difference if bid to cover falls below 1:1. With previously exported inflation coming home to roost and a market with fewer bids pushing yields higher, what can the Fed do?

    There is much more than this, but these are just some of the possible problems the future holds.

    It could get ugly.

  27. Bryan Franco commented on Sep 7

    regarding a fed rate cut: if it happens, it will be because they caved into the pressures of wall street. that’s the chief risk of being short up until the cut. kudlows assertion that a rate cut would strengthen the dollar is ridiculous because it’s predicated on our ability to add real incremental growth to the global economy; however, since we have become a nation of consumers (not investors), we won’t be able to generate the kind of growth that would offset the increase in the money supply. look at how we treated the last series of rate cuts; traders took on massive amounts of leverage and speculated with it across multiple asset classes and generated bubbles along the way. the dollar will collapse because the U.S. will fail to pull its weight amid any real boom within the emerging economies. china will learn to feed on its own growth, and europe, canada, japan, and south america will feed the real needs of the emerging economies going forward. companies like cisco, intel, and certain large cap industrials should continue to benefit, but this will be more than offset by the decline in the u.s. consumers’ purchasing power – and that alone would trigger a recession at home as import prices surge. the fed needs to let us endure a little bit of short term pain for longer term prosperity and let this bubble unwind on its own. a band-aid in the form of a rate cut will have dire consequences.

  28. Analyst For Hire commented on Sep 7

    The last two recessions were eight months each (1991 and 2001).

    How long do you think this one will last?

    I am a little bit concerned about too many people talking about a recession. Usually, when too many people expect it, it never comes.

  29. John Thompson commented on Sep 7

    Winston, oil going up in a depression like scenario seems a non-sequitor. Where’s the deflation there?

  30. Winston Munn commented on Sep 7

    Quote John Thompson: “Winston, oil going up in a depression like scenario seems a non-sequitor. Where’s the deflation there?”

    I’m only supposing the result of the fall in value of the dollar; if a recession scenario acted out with a non-decoupling, then it would be worldwide and oil would also suffer.

    However, if decoupling occured, then the U.S. would be in recession with a falling dollar while world oil demand remained, forcing U.S. import prices to rise.

  31. The Dirty Mac commented on Sep 7

    I think we there is a recession right now. But when I read a comment such as that by ari5000 and see that nobody questions the statement, I am left to conclude that the intellectual atmosphere is such that there is no significant support for the pro-growth policies needed to not have a recession. IOW, I suspect the policies of Carter (although he favored more deregulation than is fashionable today) will prevail over the policies of Reagan over at least the short-term.

  32. Winston Munn commented on Sep 7

    The Dirty Mac:

    If I read you correctly, you are saying the policies of Reagan were pro-growth but not the policies of Carter?

    I guess in a way that is true – if you don’t care how much you borrow and spend you can throw one hell of a party.

  33. Eclectic commented on Sep 8

    I don’t know if there will be a recession, but cutting the FF rate won’t make any difference regarding whether there is one or not. Why?

    Because market participants behave according to my theory of: Subjective Liquidity Preference (you can read it all here, in my comments as ‘Eclectic’):

    Market participants will NOT respond to the liquidity stimulus of a potential FOMC FF cut because they are already otherwise able to s-u-b-j-e-c-t-i-v-e-l-y augment their perceived liquidity both from their stores of deferred liquidity and from other sources, all of which are not measurable by government econometric studies. Some are not measurable at all except possibly as some sort of diffusion index.

    The great majority of U.S. citizens would suffer little effect on their standard of living from a recession, even a pretty significant one. Essentially, they don’t need the additional Fed liquidity for income and, being newly and more intensely risk averse because of emotional triggers (an economic upset), they won’t commit the liquidity to capital expenditure on the same relationship of risk versus reward as before. This is the reason that interest rates on U.S. Treasuries are diving.

    This doesn’t just encompass the intentions of the consumer, but also of his lender. All are market participants, just on different levels and in differing relationships to the core equity that they all ultimately represent.

    All economic transactions are conducted in terms of perceived liquidity and have been since the dawn of mankind’s earliest cognition of the philosophical concept of money, and even before that time although I’ll leave the matter of pre-cognitive man’s potential conceptualization of money to another debate.

    The concepts I’m discussing here require an understanding of my definitions of money (Perceived Liquidity and Deferred Liquidity). You can get them when you read my work on The Perceived Liquidity Substitution Hypothesis, also found in the comments referenced in the above link.

    As Bernanke explained (although not in my defined terms of course or exactly as I do) in his Jackson Hole speech, market participants are still able to subjectively reclassify deferred liquidity represented by home equity as perceived liquidity. Because of the magnitude of home equity that has been built up in the country, it will likely continue for some time to be a buffer (also like the damping of mechanical devices or electronic circuits) for income as MEW is far more easily and continuously extractable than it is currently perceived to be by pundits who have declared it to be near exhaustion. It’s also not particularly sensitive to short-term rates that the Federal Reserve seeks to modulate to effect monetary policy.

    And it’s not even close to exhaustion… not even remotely close… witness all the commercials playing on television for reverse mortgage payment contracts… These are largely riskless transactions for the lenders involved, and the layers of equity available in the USA are still vast. These transactions are tantamount to the pre-executions of mortgage loans assumable at a later time by the heirs of retired homeowners, after an extended period in which those homeowners have no other means of augmenting current income than to make these contracts. This liquidity comes from the capital markets that are not affected by monetary policy. Read Mr. Bernanke’s speech.

    MEW is also extractable conceptually by the market participant even without the formality of obtaining a closing loan transaction or equity line of credit. The market participant simply extends his use of other sources of credit; he uses promissory credit, bartered credit, store credit, credit cards, etc. These sources of credit allow the market participant a sense of confidence when they are validly backed by real tangible asset value, such as home equity or stock market equity, since the market participant can be confident of being able to cover them if necessary.

    The only problem with the great bulk of subprime abuse is that the borrowers never had any equity to begin with, and now they’ll be faced with covering equity debits with further equity debit financing, if possible. Lenders have finally been forced to recognize this because of stalled real estate appreciation, and thus liquidity for these operations has all but ceased being available. Assets tradable as securities based on these subprime credits have nearly frozen the working capital of many mortgage companies, builders, and in some cases possibly the lenders to both of these industries.

    I’ve also explained that the augmentation of perceived liquidity by deferred liquidity may only require a mental transaction in which the deferred liquidity asset is marked-to-market in terms of its perceived value at that precise time*, and maybe ONLY at that precise time; it doesn’t even have to be sold.

    It’s possible that upon a later real requirement to conduct a formal sale, the deferred liquidity asset might no longer fully represent the market participant’s prior assumed marked-to-market value when it had been subjectively converted to perceived liquidity in order to augment income. It could even have dropped to zero and be unavailable for subjective conversion entirely. This is true for all investments, not just home equity. Market participants are free to ignore declining deferred liquidity asset values until such time that they are forced into a deficit of perceived liquidity. At that time deferred liquidity conversions are forced if available.

    When is simulative monetary policy most effective?… When perceived liquidity is forced low enough (and its augmentation by deferred liquidity sufficiently quenched) so that it is no longer substituted for nominal liquidity transactional demand. For those of you expecting a current FF rate cut and future cuts, I’ll tell you that the point I’ve described is nowhere in sight in the domestic economy.

    It wasn’t really low interest rates pushed low and held low too long by Greenspan that caused the real estate boom (although it was a major contributor to subprime abuse). It was the runaway securitizations market that fueled that boom, and that represents the capital markets, not the short-term rate market modulated by the FOMC.

    I have not intended here to take credit for the original description of the “wealth effect,” but merely to describe other attributes of money as I define them that relate to the wealth effect. My focus is on the market participant’s perception of his perceived liquidity that he uses to obtain goods and services in real time present value, and on the unique manner in which perceived liquidity is augmented by deferred liquidity. Except for my theoretical observations of that unique process in action, I fully acknowledge that it represents the wealth effect.

    *Be sure and review my thought experiment that demonstrates this concept. It refers to a market participant on a mountaintop as he is receiving bids on his uninsured house as a fire in the valley below slowly approaches it. Along with all my other writing on this subject, this thought experiment will assist you in understanding the concepts of Perceived Liquidity and Deferred Liquidity. These are mankind’s’ only two ways of classifying money. There are no others.

  34. Winston Munn commented on Sep 8


    Isn’t perceived liquidity transferred from deferred liquidity capped by present cash flows? If one held $100,000 in home equity but cash flow could only support extraction of $25,000, the additional $75,000 would seem to fall into the category of phantom deferred liquidity, as this liquidity is subject to the erosion of home price by deflation or increase in price by inflation.

    As Bernanke has expressed before his two major concerns are wage-price inflation and lowered consumer spending; however, without real wage increase how does one address the conundrum presented above that eventually cash flows determine perceived liquidity?


  35. harpoon commented on Sep 8

    “The last two recessions were eight months each (1991 and 2001). How long do you think this one will last?”

    Let’s see. What took us out of those recessions? The tech boom got us out of the 91 recession. The real estate boom got us out of 2001 recession. Now there is neither a tech nor real estate boom. Employment looks like it is slowing (according to last Friday’s reports) and if that happens, so will sales. Add the fact that credit is tight.

    I don’t know…

  36. Eclectic commented on Sep 8

    Winston, your question:

    “Isn’t perceived liquidity transferred from deferred liquidity capped by present cash flows?” end quote.

    There is a non-nominal cash component of perceived liquidity (see my definitions), and thus for that element nominal cash flows don’t even exist. Were the economy to suddenly experience a very radical increase in my Coefficient of Perceived Liquidity, such that non-cash liquidity would become much more important to market participants, we would be in a whole new world of difficulty. It would probably swamp any potential effects of monetary stimulus, almost totally obviating FOMC monetary policy.

    To the specifics of your question that relate to actual nominal cash exchanges, yes, there has to be liquidy in the money supply to facilitate the conversion of deferred to perceived. Somebody has to loan the money or settle a sale in good federal funds… but the securitizations industry is accomplishing the loaning process (when it is used), not from FOMC monetary policy which acts in short-term markets. Bernanke explained in his speech that the short-term money market basis for mortgage financing (the old system, or New Deal ‘pristine’ system) has long been functionally dead.

    Here are Bernanke’s remarks from Jackson Hole again:

    The speech found here (footnote references only available at the Federal Reserve’s Website publication):

    “My discussion so far has focused primarily on the role of variations in housing finance and residential construction in monetary transmission. But, of course, housing may have indirect effects on economic activity, most notably by influencing consumer spending. With regard to household consumption, perhaps the most significant effect of recent developments in mortgage finance is that home equity, which was once a highly illiquid asset, has become instead quite liquid, the result of the development of home equity lines of credit and the relatively low cost of cash-out refinancing. Economic theory suggests that the greater liquidity of home equity should allow households to better smooth consumption over time. [This smoothing in turn should reduce the dependence of their spending on current income, which, by limiting the power of conventional multiplier effects, should tend to increase macroeconomic stability and reduce the effects of a given change in the short-term interest rate.] These inferences are supported by some empirical evidence.10” end quote [brackets added for emphasis].

    There he is saying it in plain language.

  37. stormrunner commented on Sep 8

    Eclectic said: (about MEW)

    And it’s not even close to exhaustion… not even remotely close… witness all the commercials playing on television for reverse mortgage payment contracts… These are largely riskless transactions for the lenders involved, and the layers of equity available in the USA are still vast.

    Though this is true nominally as related to current pricing, I have reservations about the longevity of borrowing opportunities for a couple of reasons.

    Primarily MEW has recently been tapped by borrowers confident of the perceived value of their asset. The first asset auction in any neighberhood will produce a new comp, mark to market if you will, that will discourage any thing but purchases of necessary consumables, loan consolidations, the road to insolvancy or great deals, the road to depreciation. The people that need the liquidity will not be able to aquire it while the prudent people will be like vultures depreciating the value of all that is saleable. In this death spiral only a gambler would continue to use MEW to finance purchases, as opposed to investments also questionable in deflatioary enviro, till some sort of bottom becomes evident especially using ones residence. As the defaults drive rates higher regardless of FED intervention, the aversion to borrowing by all but the most confident should accellerate. This process could inevitably feed the spiraling deflation. Prudent people do not borrow to consume only to invest. This should also impact sales, leading to job cuts etc. you get my picture. The rate of acceleration of GDP increases based on MEW are already in decline.

    See the extent of this problem here

    And the inevitable mean reversion here

    In light of this barring some large scale inflation of both wages and prices, IMHO MEW’s days are numbered. With regard to the commercials, this is merely bankings last chance at the reckless and the bankruptcy laws will enforce the confiscations and a fare number of these people will be bankrupt to medical debt.

  38. Eclectic commented on Sep 8


    It’s tempting to agree with the supposed catastrophic outcome of those spiking MEW amounts. However, there is still a vast amount of untapped MEW.

    Most of my closer associates and most of my relatives (neither groups are circles of significant wealth) could easily take aggregate millions out in MEW and not even be a slight risk to their lenders were they to do so.

    Too, the MEW of those charts depict 100% of the MEW, and not 100% of it is at risk.

    Bernanke expects reforms in securitization, but low LTV MEW will always be a piece of cake to process. It’s even a type of securitization in which mortgage or equity line applicants could lie a bit and I wouldn’t worry the slightest about it.

    You think a mortgage company advancing a 65-year-old retiree $500-1,000 per month on a house fully owned and worth 175,000 – 225,000 or more offers any significant risk to the mortgage company?… None.

    Now, if you want to illustrate a 30% or greater overall reduction in real estate values nationwide, I might have to change my views… but that’s a bit much I think. My guess is that housing declines will accelerate to not much more than 5-8% down from here. We’ll see, but I don’t think that’s the Fed’s primary worry at present.

    Right now they’re concerned with keeping good federal funds liquidity to maintain the walking around economy, not housing and not other equity markets.

  39. stormrunner commented on Sep 8


    I know I’ve posted on this before, conservatively CA is the worlds 10’th largest economy the second link comprises the RE values which would suggest the 30% drop you would need to reconsider. Anecdotally my area’s median income is 68k, median home is 612K that 10X. Even with 20% down any median home purchase is in the jumbo catagory requiring 170K+ annual income. People in this bracket are past the blue collar realm. This means that only serious white collar pro’s can afford even a 1500 sq ft residence. I believe at least in this 10’th largest economy a 30% drop is a no brainer, — just gander the graph. I suspect demographhics of both coasts are the same.

  40. Eclectic commented on Sep 8


    I forgot that you were one of those guys from where, on TV from CA, they show people playing Flip-This-Shoebox, starting at $400,000 plus.

    Yes, I agree, there are areas in the country where there will be extreme pain. Who knows… it may toss the who U.S. economy into a sack. I don’t know, but I don’t think a FF cut will matter because of what Bernanke has accurately observed about the difference between capital markets response to monetary policy and the same for short-term money markets.

  41. stormrunner commented on Sep 8


    Other than the relief rally I don’t believe the FED can fix this either. The damage is done. It’s just I don’t honestly believe that there’s all this MEW out there either. CA AZ NV FL MA OH all these areas and more are suffering from increased foreclosure and the bulk of the resets remain, these comps they end up creating will kill MEW overall. Sure the slowly appreciating markets will be fine but this fiasco happened in most of the high density population centers. Boots on the ground seem to paint a different picture than the models of the economists.

    Of course this is all subjective reasoning and your posts as always are intellectually stimulating, ***It’s just I see DEBT people, and it haunts me.

  42. Eclectic commented on Sep 9

    Barringo, have you got any artist contacts out there?

    Imagine this as a cartoon… newspaper, political-type:

    “Curious onlookers gather on the street outside the Federal Reserve Building in Washington to watch a large multi-wheeled truck (like moving a building) that’s hauling what’s clearly evident to be a giant pile of steaming dog shit… with a long plug-in electrical cord run out from it. They’re maneuvering it near the Fed bldg with a crane assist to place it.” — Here’s the caption. One very surprised onlooker exclaims loudly while pointing at the activity:

    (Shit!…There’re gonna test it!)

  43. Eclectic commented on Sep 9


    All those colored graphs make me fear a coming “Night of the living DREAD” for So Cal:

    …I once told you your experiences were so far removed from mine as to be relatively from Mars in comparison. I’ll explain both for you and in support of points I’ve made in comments on this topic so that others might understand as well.

    I live in a 2,800 sq. ft. house, also with an 800 sq. ft. self-contained bungalow attached to a 3-car garage. I have a 5-stall horse barn with 3 tack rooms and a workshop and sheds that total approximately 3,000 sq. ft. It’s all on 20 acres with a pond. There are 2 HDs, 2 LOWs, 2 Targets and 5 Super Wal-Marts (and everything else imaginable)… all within an easy 30-min drive.

    I paid $225k 13 years ago… and I probably overpaid then by 15 or a little more. My property tax is under $400 a year and insurance under 2k (with a $2k deductible).

    In the overall U.S. there is a huge average real estate world between my experience and yours, and that world is nowhere near as badly overpriced or potentially economically threatening as your world convinces you at the moment it might be.

    Huge areas of the country have suffered the equivalent of an economic depression already. Large areas in Ohio and Michigan have probably been through two different depressions in the last 25 years. They did because they lost their sources of income and benefits as the auto and steel industries ratcheted downward, or as autos moved, ex-unions, southward or out of the country altogether.

    The Southeast is filling up with non-unionized auto mfg. plants. One of the world’s largest steel mfg. will likely soon build maybe the world’s largest modern steel mill on the Redneck Riviera.

    If the people of So Cal have a deep recession or depression, it’ll be because they lost their source of phantom wealth, a-f-t-e-r building that phantom wealth into their c-o-s-t of living.

    Frankly, it’s hard for me to understand how any young person could manage to build sufficient roots to l-i-v-e in So Cal unless they were born into wealth or just got there after graduating from the University of Oz with a degree in anything that might give them an income remotely close to $200k or higher, maybe much higher before it’s all over.

    It appears that the whole region of So Ca is rapidly approaching a point in which the supporting people of the economy (not just common labor, but medium-skilled, middle-class workers – upper-blue, light-white) won’t be able to afford to live there.

    It’ll be like on the Big Island, Hawaii, where all the working class work in the resort areas around Kona but have to live on the other side of the island in Hilo or high above Kona on the slopes of Mauna Loa and Mauna Kea and commute 1-3 hrs. or more round trip each day.

    It looks like it’s about time for the bullet trains to have their tracks built in So Cal to ship the support workers in and out of paradise every day, or soon even common labor workers will have to be paid $200k or more… or they won’t exist at all in the area.

    Those of you who may live and/or work in Manhattan must truly be laughing at my discussion. It is sort of funny, huh?

  44. Winston Munn commented on Sep 9


    If you don’t mind could you comment once again…it is a rehash but I am unclear.

    Suppose a fiscally responsible couple bought a house 10 years ago for $175,000 and now that house is valued at $$300,000.

    My previous point was that this couple’s ability to convert deferred liquidity into perceived liquidity is dependent upon their ability to service the increased monthly house payment. It is this ability to service the debt – the cash flows – that determine MEW extraction.

    The other side of the loan-coin you wrote about is that no reasonable person is going to place their house at risk of respossesion for a fraction of its value, meaning that those safe loans won’t be made unless the borrower is comfortable with his ability to pay the increased monthly payments.

    As median income has not risen for the last 6 years, how does one extract MEW on $125,000 in equity when cash flows only support a $175,000 initial note?

    A few years back I lived in Las Vegas and there was a large inflow from each coast, retirees who sold homes and relocated to a much less expensive area of the country (at that time). These folks could sell their coast home for $300K and replace it in the desert for $150K, while adding the rest to retirement funds. This is a true wealth effect – but it required selling the asset.

    Fast forward to today. Who can buy the retirees house now with tightened lending and an additional $100K of inflated price built in? What good would it do a retiree to assume a mortgage to extract equity when that adds monthly cash flow obligations? The advantage to paying off a house note is reverting to what it has been in the past – a reduction in monthly cash flow obligations. When there is no wage growth, the only real method to increase consumption power is to reduce cost of living – monthly obligations.

    So although there may be a great deal of MEW available, unless it is extracable it is somewhat worthless to consumption – and extracable would include both ability to service the increased debt as well as demand to do so – those in the best situation to take advantage of MEW are those who have the least reason to do so.

  45. Eclectic commented on Sep 9

    Fabulous opportunity you’ve given me to make additional points, Winston. I’ll “quote you” and possibly disassemble your paragraphs and then ***respond my usual way.

    “Suppose a fiscally responsible couple bought a house 10 years ago for $175,000 and now that house is valued at $$300,000. As median income has not risen for the last 6 years, how does one extract MEW on $125,000 in equity when cash flows only support a $175,000 initial note?”

    ***I’ve never said that TOTAL equity withdrawal is always available and not fully tapped in the U.S. On the contrary, I expect any loan that reasonably exceeds 80% of equity won’t be easily obtained anymore, if at all, without private mortgage insurance and the insurers will have a sharper pencil.

    “My previous point was that this couple’s ability to convert deferred liquidity into perceived liquidity is dependent upon their ability to service the increased monthly house payment. It is this ability to service the debt – the cash flows – that determine MEW extraction.”

    ***Wel-l-l-ll-l, not exactly. Their ability to convert it is based almost entirely on the ratio of LTV. I realize the point you’re getting at with the numbers you’ve used, but let’s ratchet up your illustration a bit. Suppose the very same couple had been fortunate enough to land in a house 10 years ago at 175 that’s now worth 1.5 mil. With absolutely unchanged circumstances of income and thus capacity to service a note of, say, 250 (left on the original amortization) plus another 125 for a total of 375 (or adjust the numbers as you will), from the perspective of the mortgage company the lender is not particularly concerned about the couple’s capacity to service 375, no differently than a broker worries about the income level of a customer that has a margin account worth 1.5 mil and a margin balance of 375.

    ***Now, let’s go the other way. Assume a cash strapped 65-year-old retired widow, one needing another $500-1,000 per month just to get by in reasonable dignity without selling her house that’s worth, say, $225. She can’t service ANY note… but the lender of a reverse mortgage won’t even begin to sweat until her MEW approaches their limits, and those limits vary. I’m not recommending a reverse mortgage to anyone, but here is publicly available information from HUD:

    ***Quoting it: “For example, based on a loan with interest rates of approximately 9%, and a home qualifying for $100,000, a 65-year-old could borrow up to 22% of the home’s value; a 75-year-old could borrow up to 41% of the home’s value; and, an 85-year-old could borrow up to 58% of the home’s value. The percentages do not include closing costs because these charges vary.” End quote.

    ***Thus our fictional retiree, taking $500 per month won’t begin to approach her limits of 22% (maybe 28k) for several years. An 80-year-old might take out 100k as a gift to children or grandchildren, maybe for college expense, etc. Whether this whole process is advisable or not, I’ll tell you that it’s an almost bottomless river of potential MEW with the aging Baby Boomers. Bernanke’s words from Jackson Hole should begin to loom even larger for you now. In fact, a reduction in short-term rates might even accelerate the use of reverse mortgage lending and lead to another form of irresponsible borrowing and lending… and in the balance not stimulate GDP very much, because the hoped-for stimulus would just assist in converting deferred liquidity to… (you guessed it, Winston!) the perceived liquidity of my theoretical work.

    ***Let’s go one final step toward the subjective conversion of deferred liquidity to perceived liquidity. In the above example of a retiree using MEW in a reverse mortgage, let’s name her “Betty” and her son, “Bob.” Bob is 45 and hasn’t awakened to the reality that his next 10-15 years of productivity and income along with his saving habits (now almost zero) will dictate what his financial future holds. Maybe mom’s net worth including house, land and other assets totals $350k. At every opportunity that Bob has to realize it’s time to make changes, to act frugally, he avoids it because of a reliance on inheriting Betty’s property someday. Real estate is going up and mom is in pretty good shape (Betty may even be 80+) and not requiring a lot of medical expenditures. Bob has expectations about inheritance that because of Betty’s income shortfalls and the need for reverse MEW, may not pan out the way he anticipates. Consequently, he may be induced to be more sprendthrifty today. In a sense then he’s using a sort of phantom deferred liquidity to augment REAL perceived liquidity that he’s using every day for c-o-n-s-u-m-p-t-i-o-n. He may anticipate paying off debts made today with his future inheritance. On an aggregate basis that’s likely to keep Mr. Bernanke’s observations about smoothed income requirements facilitated by MEW pretty accurate. Bob will keep spending until he has no choice about the matter… and at the present he doesn’t anticipate that he’ll arrive at a point where he has no choice. He’s converting deferred liquidity to perceived liquidity ever so much as his own mother could do, and is doing, with reverse MEW.

    ***I’ll close it up by taking Bob into the future. Suppose Bob finally gets to that moment of recognizing the errors of his lifestyle of failing to plan and save. If he has some fearful episode of recognition that really sets off the lightbulbs inside his head, desperation may cause him to totally flip-flop regarding consumption. He may move to aggressively cut consumption, and then… here’s the other aspect of perceived liquidity you’ll find explained in my work: At such time he may flip the switch to a higher reliance on himself (strange as that may seem). He may develop and hone skills, work for himself in many ways instead of paying for goods and services, become a budgeting guru, and gain an enhanced sense of the value of nominal cash that exceeds it’s stated nominal value (interested persons should read all my work). These are the non-cash elements of an increased Coefficient of Perceived Liquidity that would in the aggregate work to the detriment of monetary policy by obviating Classical Theory’s dependence on a linear relationship persisting between the aggregate money supply and GDP. I’ll reproduce my Perceived Liquidity Substitution Hypothesis:

    (I) The sum total of all money in an economy is held in only two forms; (i) perceived liquidity, and (ii) deferred liquidity, and market participants hold these forms subjectively and interchangeably.

    (II) Perceived liquidity is always greater than conventionally held nominal liquidity measured at the same time, regardless of economic state.

    (III) Perceived liquidity is at the steady state equal to nominal liquidity multiplied times a hypothetical terminal low coefficient of perceived liquidity that is always greater than 1 (one).

    (IV) Perceived liquidity is at all times substitutable for nominal liquidity transactional demand at a rate of substitution that is always greater than zero, and the rate of substitution varies in direct proportion to variations in the coefficient of perceived liquidity.

    (V) Upon an upset to the steady state the coefficient of perceived liquidity will increase to some higher but not unlimited value, and the increase will be proportional to the severity and speed of the upset.

    (VI) An increased coefficient of perceived liquidity can not resume its former steady state value until economic conditions resume the steady state.

  46. stormrunner commented on Sep 9

    Eclectic said:

    …I once told you your experiences were so far removed from mine as to be relatively from Mars in comparison.

    Agreed and what I am proposing here is that my area, seemingly other worldly stats, are more common to most major population aggregates than statistitians would have us believe. I once heard, “that the solution for polution was dilution”. I believe this is the tool that economic reporting is using to mask the extent of the problem. Not being a statistician, and just applying critical thinking, if CA is 1/10 of world eco. probably extrapolates to 1/5 – 1/7 of US out of 50 states. I have also listed some of the other states with problems making a 5 – 8% overall decline statistically possable but seemingly very conservative.

    Eclectic said:
    Frankly, it’s hard for me to understand how any young person could manage to build sufficient roots to l-i-v-e in So Cal

    Exactly and this is the reason most individuals I work with, live in the “Inland Empire”, you know the one Cramer thinks should get plowed under, their appreciation though starting from a smaller base is identicle and their commute is 45 min to > 1 hour. (admin gets it and is holding fuel down to make transition to lower house prices orderly) I believe this stituation is more prevalent nation wide than is preceived.

    In light of this and considering the graphs linked previously, if one accepts as illustrated the effect on GDP that the wealth effect has imparted. Graphically this is already in decelleration and this graph is National as opposed to the RE Values which are regional.

    Following this line of reasoning I am inclined to think like Winston:said

    So although there may be a great deal of MEW available, unless it is extracable it is somewhat worthless to consumption.

    I previously stated:

    In this death spiral only a gambler would continue to use MEW to finance purchases, as opposed to investments also questionable in deflatioary enviro,

    and interject that I have my doubts as to the duration this MEW will even be available given the necessary correction in home pricing it will take to make these regions economically sustainable. The defaults are already wreaking havoc with the credit markets, a jumbo rate is 7.6 as opposed to a conforming of 6.2 as of this week in the OC. Implied implication here is that just as lending fed the frenzy of escalating prices it will also feed the demise. People will undoubtedly drop their asking prices to allow purchasers the conforming rate in the absence of creative financing. It’s hard to accept the official numbers especially in light of the recent employment numbers and subsequent revisions.

    Personally given that I rolled into my current residense and currently maintain a 3 fold equity cushion, my losses will be mostly confined to paper, and given my retirement plans are 18 – 20 years out, time should mitigate. So I do not opine from a position of fear, so much as from a position of uncertainty, as to the sanity of surfing this wave as the crest atop begins to roll over.

  47. Winston Munn commented on Sep 9


    Well done. That is an aspect of perceived liquidity of which I had not conceived, i.e., the inherited deferred liquidity. Interesting observation how that IDL can influence current perceived liquidity and hence consumption.

    I had been aware of reverse mortgage extraction but did not comment as thus far that aspect of MEW has been such a small part.

    Lastly, your observation that Classical theory depends on a linear relationship between money supply and GDP is revealing and interesting. I am coming more to the impression that economics is a dynamic non-linear system and thus best analyzed by chaos theory.

  48. Winston Munn commented on Sep 9

    This is an example of one of the problems with MEW extraction:

    From “Yet, in the period between 2003 and 2007, wage gains for median workers, male and female, as well as high school and college workers have all been flat or falling.

    Not so for workers at the highest end of the wage scale. At the 95th percentile, real wages have risen 9.4 percent since 2000 and 5.1 percent since 2003.”

    I don’t recall home prices being “flat or falling” during that same time period.

    What are the methods for MEW extraction?
    1) Sell the asset
    2) Refinance the asset
    3) Reverse Mortgage the asset

    This is somewhat interesting, as it only now occured to me that this “wealth effect” of mortgage equity is essentially a derivative, and its value is determined by ability of others to purchase and willingness of lenders to loan.

    What we are seeing now due to the stagnation of wages and tightening lending standards is a depreciating value of the equity derivative. This increases the risk of lending based on this phantom equity as its nominal value versus its real value cannot be known until the derivative expires – the selling of the propery.

    It would seem to be a self-perpetuating downward spiral until a future equalibrium is reached of affordability/finance.

  49. stormrunner commented on Sep 9


    Thanks for your candor, especially as it relates to you personally, this is not at all necessary but appreciated none the less as it puts a situational perspective to your thesis. It will take me time again to absorb the academic constructs you present.

    Noting your presentation of Bob’s self reliance in the future. Is this not the same as acceptance that Bob’s standard of living is in decline, in advanced age it is possable but not probable that Bob will learn any single skill which will alleviate his pain. Rather he will need to become a – jack of all trades with regards to necessities, construction, electic, auto, just to stay solvent, meanwhile the inheritance he may not have deserved is confiscated by bankers in a reverse mortgage while the state is elevating property taxes insuring greater degrees of confiscation. The economic condition you illustrate reminds me of the “Waltons” difference being health care in that era did not wipe out middle class acumulated wealth, catastophic job loss did so and people legally were not forced into advanced care situations. The social security and medicare deductions people have been led to believe would sustain them will be far off the mark. In an era with pensions all but gone, only the presently employed middle class will be allowed to remain. Just check a recent medical billing your ins provider is allowed to pay 1/3 what you would if paying cash. Why is this allowed if not to persuade people to remain gainfully employed and control their access to care. I realize this borders on a rant with regards to medical, but it is people in this type of desperation that would concede their property(reverse mortgage), maybe as Ron Paul suggests this is not the domain of the state and they shouldn’t have forced the deducts in the first place.
    This is a bit altruistic but I believe each generation should be leaving a better condition than their predesessors, I find this vision disturbing.

    Summarizing it would appear your modeling indicates modest housing depreciation in aggregate, having only growth recession implications (GDP +, but below trend), similar to FED prediction prospects.

    If you were to model CA as a economic singularity what would your prognosis be near and medium term contrasted to US aggregate near medium term. I concur with your Big Island assessment but I expect a 30% decline before foreign money comes in to clean house.

  50. Eclectic commented on Sep 9


    Your question:

    “What are the methods for MEW extraction?
    1) Sell the asset
    2) Refinance the asset
    3) Reverse Mortgage the asset” end quote.

    Actually selling the asset is not technically a use of MEW, since it removes the liquid funds (net of any debt) and might not return the funds to the capital markets. The money might go into Treasuries.

    Options 2) and 3) keep the money in the capital markets.


    I have no basis for having any objective opinion about CA real estate. Where I live, something that’s just now hitting the Discovery Channel has for some time already happened in CA.

    The popular sayings, “It’s so 90s or it’s so ______, or it’s so ______; those blanks are where I am. It’s not Wednesday where I live until about Friday afternoon.

  51. stormrunner commented on Sep 9


    Not to drag this out too much further and don’t worry I have no intention of rolling a dung ball by,

    But with all due respect your economic modeling though esteric in nature seems based on both the psychological and empirical components of societal order. Given that all US markets have fundamentally the same rules with different participants, in order to project an accurate assessment Nationally your modeling would need to hold regionally and CA, NV, AZ, NY, New England – which I spent 27 years, FL, these comprise a substantial component of the whole and would seem to be experiencing similiar dislocations, admittedly I have not the credentials to contradict but even smoothing the mean reversions in these areas by dilution without a substantial wage inflation component would seem to indicate the scope of the problem to be larger then just a growth recession without some external stimulas other than FFR cuts, isolating the graphs of CA as aberrational to the broad economy may be short sighted, just a thought. Hypathetically if 30% median correction occurred in the areas I’ve outlined how would this change your perception.

  52. stormrunner commented on Sep 9

    The links though amusing either indicate stupid or inappropriate question. Did enjoy “The Grapes of Wrath” also. I’m not really that much of the pessimist or I’d have cashed out by now especially with my wife pressuring me to relocate to free acreage at my Mother in Laws farm near Erie PA.

    I’ll finish by saying that such an outcome could take the markets into a significant correction which undoubtedly would have an effect on all those 401k accounts necessary to maintain the living standards of the boomers, hardly a non-effect. Modeling in order to be useful must be able to project outcomes of likely scenarios otherwise we get CDO mark to model like goldilox outcomes. The prudent man hopes for the best and prepares for the worst, 30% decline in the markets indicated is my hopeful subjective worst. Being that I have read your posts and largely agree with your assumptions related to economic theory, we’ll forgo the issuance usury dung ball, I’m trying to pick your brain for what I think is a likely worst case senario and your prognosis as to the impact those markets have to the overall economy.

    I did read your statement.

    “The great majority of U.S. citizens would suffer little effect on their standard of living from a recession, even a pretty significant one.”

    Just trying to see if that still holds in the scenario I have outlined.

  53. Eclectic commented on Sep 9

    C’mon Storm, just a little fun. I’m not remarking on the appropriateness of your questions.

    Recession?… I don’t know.

    Stock crash?… I don’t know.

    All I’ve ever been confident of is that we’ll eventually see a P/E of between 9 and 12, or lower.

    Whether that’s soon or in 5 years… or 20 years… I have no idea about. I just know it will happen.

  54. Vancouver real estate commented on Dec 7

    I don’t think there are many reasons for being optimistic. The real estate crisis is going to hurt customers spending and that will of course hurt the all economy. Mortgage houses are sitting on millions of bad loans, just because they sold loans to people, who apparently were not able to afford it. The result of this are thousands of foreclosures, where people were forced out of their houses repossessed by banks.

  55. J. Peter Van Schaik commented on Jan 12

    We are still calling for a recession of a minimum of two years. We’ve lived the high life too long without a true day of reckoning. The time has come. We can blame $100 oil, federal deficits, or the moon. It doesn’t matter. The recession became an eventual fact two years ago- for details see our April 2007 post at
    We will remain bearish until the S&P 500 bottoms below 600.

Read this next.

Posted Under