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EScroogeJr (< 20)

Permabears at RGE



February 05, 2007 – Comments (4)

One of the bookmarks in my browser is pointing to Roubini's economic blog at

This popular site is an interesting place for a psychological study. It's a macroeconomic blog by a professor who keeps predicting an economic recession that will supposedly be caused by the eventual collapse of what he thinks is a housing bubble. It is also the last refuge of die-hard permabears who always believe that housing prices are overvalued and are set for a comeback.

I'm wondering what could cause supposedly rational people to ignore all the hard evidence year after year after year and cling to the same discredited belief whose "actualization" is always looming on the horizon like the global advent of communism used to do in the Soviet mythology. Is that some apocalyptic vision or fascination with end-of-the-world theories? Come on, folks, economics is not a religion! Or is it a simple disappointment of the lower-middle-class folks that the American dream is escaping from them? Well, I could certainly understand that motive, hey, I wouldn't refuse the chance to buy a house for $1 for myself. But I wonder if that's a sufficient reason to go against your better judgement and delude yourself that prices are falling when you see with your own eyes that they are rising.

A couple of months ago I posted several messages on their discussion board, pointing out (very politely) that the numbers didn't support the idea of imminent price reductions. Reading the responses, I felt like Mark Twain's hero who ran for the governer and learned new facts about his biography as the result. I found out that I was:

a) a moron

b) a homeowner

c) a desperate house flipper

d) a troll

e) a realtor

f) a part of the NAR $40 mln campaign.

Good guesses. Thanks, fellows, for reminding me who I am. How could I have forgotten? And, oh, by the way, who moved my paycheck from the NAR?

That was in December. Since then, it became clear that:

-Housing is not getting any cheaper

-Construction recession is not leading to an unemployment

-House equity loans are not disappearing

-Consumption is not dropping

-Interest rates are not getting any lower

-Mortgage rates are not getting any higher

-The stock market is not collapsing

-No slowdown happened in Q4

-No recession in Q1 2007

-No recession in Q2 2007

Must be really hard to beat the coin. At least, it's accurate 50% of the time.

What do we do when a spectre of recession that is looming on the horizon fails to materialize? Correct, we move the horizon. The recession is now expected to begin in the second half of the year. The rising prices of new homes are reinvented as falling. The interest rates is a taboo topic. And of course, the original call was correct. It was discounting at retailing stores or some other accidental factor like that that made Robini look foolish, while in fact he was right. If the theory is in disagreement with the experiment, so much the worse for the theory.

The members of the Roubini cult may sit through the expansion phase to eventually see the next recession and say "You see??? Didn't we tell you?" But I suspect they will have to wait for a long, long time.

4 Comments – Post Your Own

#1) On February 05, 2007 at 1:54 PM, wcwhiner (33.54) wrote:

NR's commenters are something else. He has tapped into the permanent community of vocal pessimists. As you note they are usually wrong (since historically, economies usually grow), but right just often enough (1990, 2001, etc) to have developed into the investing version of erstwhile millenarian movements. Since they are religions, it is not worth engaging them, but since their members can be obsessive collators of data, it can be worth reading their output and sifting it for useful insights. I was listening to them in '99, and while it was painful to be almost a year early, it was the right thing to do.

NR himself runs a business. He is not his commenters. He is right sometimes (residential investment has sucked for two straight quarters now, Q3 GDP was a disappointment), wrong sometimes (weak res investment has not affected the economy, Q4 wasn't bad at all). You can treat him as you would anyone in the business of making predictions: with measurement of his performance.

Your predictions are open to measurement as well. Of the set, I agree with some, but not with:

-Housing is not getting any cheaper

..I expect the real HPI (deflated by CPI ex-shelter) to be flat-to-down sequentially for most of the next ten quarters or so.

-Construction recession is not leading to an unemployment

..I expect construction employment to drop in 07H1.

-House equity loans are not disappearing

..I expect mortgage-equity withdrawals to show a big drop in 2007.

Also, one little note: you either believe both bonds and mortgage rates will be flat all year, or

-Interest rates are not getting any lower

-Mortgage rates are not getting any higher a contradiction.

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#2) On February 05, 2007 at 6:17 PM, EScroogeJr (< 20) wrote:

Why, the Fed is not reducing the rates from the current 5.25% or so, while mortgage rates remain as cheap as ever. This situation is known as "inverted curve", I believe.

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#3) On February 13, 2007 at 1:24 AM, wcwhiner (33.54) wrote:

The Fed is on hold for a little but, yes. Of course, the Fed only sets the Fed Funds rate, which runs overnight. The curve as a whole is a wee bit longer than overnight.

Are you making a curve prediction? Are you making a Fed prediction? All I know is I read your two points as contradictory, but I may have misunderstood.

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#4) On February 13, 2007 at 1:53 PM, EScroogeJr (< 20) wrote:

The way I see it is:

-The Fed is not lowering its funds rate because it likes the GDP figures, so its only concern is inflation.

-Morgtage rates are not getting any higher because there is enough liquidity in the market to keep them as low as they are now.

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