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An update on the housing market from someone who actually knows what they are talking about

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September 05, 2008 – Comments (3) | RELATED TICKERS: ITB , IYR , XLF

Happy Friday everyone.   I have been going into greater detail on a number of my "Fearless Forecasts" lately.  This morning I want to talk about #6, "The U.S. economy will be a mess, with several quarters of low to negative GDP growth, but it will never completely fall off of a cliff." 

Anyone who is more optimistic than this about the current state of the economy and where it is headed needs to take a look at the following amazing interview with Yale professor and MacroMarkets chief economist Robert Shiller.  If his name sounds familiar, it is probably because he helped to create the "Case Schiller" housing price index...which has rapidly become one of the most watched statistics on housing.

Mr. Schiller has an unbelieevably impressive resume.  In addition to developing the housing price index, he called the pop of the tech bubble in his book "Irrational Exuberance."

Here are a few highlights from the following interview on his new book "The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It"

-  "Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around."

-  "There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending)."

-  "The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money."

The bottom line here is that house prices probably are not be finished declining and when they do eventually hit a bottom there will not be a quick recovery.  This reverse wealth effect will have a significant negative impact on consumer spending, and in turn the U.S. economy. 

I am still optimistic that the government will be able to add enough liquidity to the system in the form of low interest rates and printing money that the economy will be able to avoid falling off of a cliff, but I do not expect a quick recovery and I am still staying far away from consumer discretionary stocks. 

Currency strength is probably most directly correlated to the state of countries' economies and their interest rates (with additional influence from current account surplus / deficit and national debt).  When the dust settles, I think that we will see that investors have been overly bullish on the state of the economy in the U.S. and the dollar. 

I am still optimistic that the U.S. economy will continue to slowly, but steadily decline rather than fall off of a cliff and that it is highly unlikely that the Federal Reserve will be able to raise interest rates in 2008.  In fact, I am starting to think that it might not even be able to do so until late 2009, if at all next year.  Time will tell.

Deej 

3 Comments – Post Your Own

#1) On September 06, 2008 at 6:46 AM, AnomaLee (28.76) wrote:

Deej,

Good stuff from Robert Shiller... However, I'm going to share some of my ideas on your own comments otherwise there's no point of blogging.

"This reverse wealth effect will have a significant negative impact on consumer spending, and in turn the U.S. economy. 

This is very true, but you need to replace the U.S. economy with global economy.

I am still optimistic that the government will be able to add enough liquidity to the system in the form of low interest rates and printing money that the economy will be able to avoid falling off of a cliff, but I do not expect a quick recovery and I am still staying far away from consumer discretionary stocks."

Expanding money and credit encourages but does not equal economic expansion. One thing I've concluded but never studied in economics is that an economy or economic expansion is best described as the velocity of resources.

As of now I think I'm more aligned with David Walker former Comptroller of the GAO in the fact that today's problems are solvable, but the very actions you mentioned will push this nation over a cliff. The global economy needs to suffer a severe global recession. Remember it took 10% unemployment during the beginning years of the Reagan administration to offset the inflation woes of the 1970's and 1960's.

Currency strength is probably most directly correlated to the state of countries' economies and their interest rates (with additional influence from current account surplus / deficit and national debt).  When the dust settles, I think that we will see that investors have been overly bullish on the state of the economy in the U.S. and the dollar.

Sure, investors are overly bullish on the dollar today, but currency strength has little to do with interest rates. If this were true then the Rupee and/or Chinese Yuan should be worth 2-4x more than the U.S. dollar and the Kuwaiti dinar should be more closely equal to the Euro.

I need to continue repeating this like a broken record since Forex is full of huge misconceptions fed by propaganda. There's no such thing as a short squeeze rallies in the Forex market. Exchange rates have very little to do with interest rates, surpluses, money base, but has everything to do with the transactions of global prime dealers.

Interest rates have little to do with central banks and everything to do with the health of prime dealers who control the central banks. Prime dealers control completely interest rates and the Forex market and the environment for stocks is determined by prime dealers.

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#2) On September 11, 2008 at 4:34 PM, jester112358 (28.96) wrote:

And I might add, the prime dealers for currency settlements are just those firms slated for protection from "naked shorting".   Deuche Bank is one of the main market makers for FX contracts. Though the evidence for such shorting of these stocks is not good and I am very skepical regarding the claims that speculators and manipulate all global markets.  The global central bankers fear that if a major currency market maker (the prime dealer) fails, there will be no market or liquidity in that currency.  The implications are severe-just as failure of the NYSE would imply little or no liquidity in equities-just like ARSs are currently illiquid (non-tradable) assets.  Then, you'll get to see what real panic is all about.  Supposedly, the global authories won't let this happen and that's what all these bailout actions are all about.  If a major set of market makers do collaspe, nothing, money market funds, bonds etc. will be worth anymore than the notional value on a piece of paper and you certainly won't be able to trade it for cash.  Then you better own real physical commodities: gold, silver, food, guns, oil, materials like wood and metals etc.  Its also unlikely forward contracts would be honored on any commodity in this scenario.

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#3) On September 22, 2008 at 3:18 PM, griderX (95.42) wrote:

Can someone (Robert Shiller) do something about the NYC metro area housing prices..they are not going down with the rest of the US!  Sadly I'd love to buy one with my wife but it makes no sense at the current prices...we need a 50% haircut ;)

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