Return to the Mean
Merrill Lynch just privately published to their clients a very scary report entitled, “The emperors’s new clothes in a post bubble society.” It picks up on some of the economic themes I talked about in “The Cost of Empire”, most specifically,
Regrettably, we have become a bubble society, always in search of the quick-fix strategy to build wealth – Tech, real estate, and now commodities (although though the latest action points to a break in corn and crude prices; corn is down 25% since the end of June!).
They then go on to make two predictions that are decidedly contrarian. The first, contrary to the belief of Morgan and some of our other hawks, is that market for bonds of good quality is going to skyrocket. There will be more demand than supply. Interest rates are not the problem.
Indeed, if there is another bubble around the corner, it is likely to be in bonds, and this will be particularly apparent once the commodity explosion reverses course. We are talking about fixed-income instruments that have an adequate level of credit quality and call protection to provide the type of income characteristics and capital preservation that will satisfy the needs of our society’s actuarial liabilities embedded in retirement portfolios, which represent the largest concentration of investment assets in the financial system ($17 trillion).
In other word’s retirees and pension planners appetite for risk has disappeared. ”Give me a 4% coupon and a government guarantee.” The Obama administration will have no problem funding the Keynesian stimulus needed to bring us out of Bush’s near depression.
The second theme is that the equity market cannot start an upward leg until the economy “returns to the mean” in key economic statistics. Three of the charts really jump out at you at which they show (the red line) where the “mean” is, and how far we have traveled in the latest bubble from the mean in corporate profits, consumer spending and real estate.
So corporate profit margins were “off the charts” since about 2004. They have a long way (maybe 50%) to fall to return to the mean. This means current multiples of the S & P 500 will be lower. We are not close to a bottom.
Next up is Consumer Spending. Holy Cow!
This chart backs up my contention that since Ronald Reagan was elected the average middle class consumer has gone crazy in the mall. We are so off the “mean” that Merrill Lynch thinks it’s going to be wrenching for the retail business, the car business, etc.
In the meantime, the economy is over the hill at this point, and the laws of physics dictate that once you are over the hill, you pick up speed. The $120 billion tax rebate is nothing more than a Band-Aid because this economy is not one iPod short of prosperity. In our view, it is too overstocked with monster homes, shopping centers and SUVs. Using temporary tax rebates only cushions the impact from the “need to get small”, as Japan found out in the early 1990s when the government attempted to fiscally reflate into a credit crunch. Using the Japan post-bubble experience of the 1990s as a benchmark for comparison purposes may not be such a stretch as many people think it is because this is increasingly looking like a very similar secular bear market in equities. We say this because there is no other way to characterize a backdrop, as aptly described by Rich Bernstein, in which the S&P 500 has generated a negative total return in real terms over the past ten years. Over that time period, cash has outperformed equities by 1,000 basis points and long bonds have outperformed by 6,000 basis points. If Rich believed these patterns were about to reverse course, he wouldn’t have boosted the bond weighting in his asset mix recommendation by 15 percentage points last month.
I promise you, this report was only released this morning, but it repeats my opening paragraph in Cost of Empire.
Finally, the killer–The Housing Market.
You get the point. Once again we are way off the mean, and will have to return there. This is going to be more painful than anyone realizes.
Can you link us to the full report?
Can you link us to the full report?
It’s a private report.
It’s a private report.
>_<
That really puts into perspective how far out of whack we’ve gotten.
The proctologist just snapped his glove. “This is going hurt” is an understatement.
>_<
That really puts into perspective how far out of whack we’ve gotten.
The proctologist just snapped his glove. “This is going hurt” is an understatement.
Jon, WHY do you think demand for bonds has anything to do with this? I don’t say there is a demand problem. I’m saying the US Government is not going to be able to deficit spend, because a) too much of our tax receipts got to service debt. b) inflation. Now is the time when we have to fight inflation… and that means deciding between either public or private (corporate) debt.
Corporate debt means economic growth. As does a low corporate tax rate. Expect deference to be paid to those.
So we still have this massive deficit problem and all that left is raising taxes and cutting spending. Expect both of those to happen.
What’s so hard for you to grasp here? Quit changing the subject.
You want to cut military spending. I say OK fine, now lets get serious and cut Medicare – I keep asking , and you keep dancing.
Please take the time, spend more than a few perfunctory sentences – discussing how we keep Medicare spending from increasing. I’m asking for specifics – who gets cut off when? How do we afford retiring baby boomers? We talked about empire, now let’s talk about replacing 1969 style greed, with something truly self-sacrificing for the next generation.
Jon, WHY do you think demand for bonds has anything to do with this? I don’t say there is a demand problem. I’m saying the US Government is not going to be able to deficit spend, because a) too much of our tax receipts got to service debt. b) inflation. Now is the time when we have to fight inflation… and that means deciding between either public or private (corporate) debt.
Corporate debt means economic growth. As does a low corporate tax rate. Expect deference to be paid to those.
So we still have this massive deficit problem and all that left is raising taxes and cutting spending. Expect both of those to happen.
What’s so hard for you to grasp here? Quit changing the subject.
You want to cut military spending. I say OK fine, now lets get serious and cut Medicare – I keep asking , and you keep dancing.
Please take the time, spend more than a few perfunctory sentences – discussing how we keep Medicare spending from increasing. I’m asking for specifics – who gets cut off when? How do we afford retiring baby boomers? We talked about empire, now let’s talk about replacing 1969 style greed, with something truly self-sacrificing for the next generation.
Hi Jon,
Regards “chart 5″, did the report give a breakdown on other asset classes for households? Why the drop from ’85 to ’00 and what impact did that have on the US economy?
I see this chart as being somewhat misleading as it looks scary but the the variation for real estate is only 8% of total household assets (24% at the bottom to 32% at the top).
cheers!
Hi Jon,
Regards “chart 5″, did the report give a breakdown on other asset classes for households? Why the drop from ’85 to ’00 and what impact did that have on the US economy?
I see this chart as being somewhat misleading as it looks scary but the the variation for real estate is only 8% of total household assets (24% at the bottom to 32% at the top).
cheers!
This report is by one of their super bears who has been negative for 20 years–he is not in the mainstream and while he may be right he has been mostly wrong–I had dinner with him 3 weeks ago and saw the same charts– I also thought that they were scary–there were maybe 10 others equally as bad– msot economists agree that we are in a clear downturn but see us somehow getting through without a depression–just a long slow sideways decline before reaching a bottom–this will not occur untill housing is fully discounted and the financials are cleaned out–then we can rebuild– probably it will be bad but not as bad as he forecasts– I also believe that he needs tot take extreme positions to be recognized in his professions and stand out from the pack—doug
This report is by one of their super bears who has been negative for 20 years–he is not in the mainstream and while he may be right he has been mostly wrong–I had dinner with him 3 weeks ago and saw the same charts– I also thought that they were scary–there were maybe 10 others equally as bad– msot economists agree that we are in a clear downturn but see us somehow getting through without a depression–just a long slow sideways decline before reaching a bottom–this will not occur untill housing is fully discounted and the financials are cleaned out–then we can rebuild– probably it will be bad but not as bad as he forecasts– I also believe that he needs tot take extreme positions to be recognized in his professions and stand out from the pack—doug
Economics is partially a branch of History, and partially a narrow branch of Philosophy. This view helps account for their interesting track record: laser like hindsight, not so good at real time.
The problem is that compared to the Japanese bubble we are so over leveraged in all respects, that your super bear may be an optimist.
Economics is partially a branch of History, and partially a narrow branch of Philosophy. This view helps account for their interesting track record: laser like hindsight, not so good at real time.
The problem is that compared to the Japanese bubble we are so over leveraged in all respects, that your super bear may be an optimist.
Do you have the title of the report?
Do you have the title of the report?
Doug- I agree that David Rosenberg has been a bear, and quite frankly think hes been right for the last 24 months when all the cheerleaders were saying the S & P was on the way to new highs. That being said, I hear guys on CNBC all day saying we are near the bottom. I don’t think its true.
Jonathan S. – The report title is “The emperor’s new clothes in a post bubble economy” by David Rosenberg, published 25 July, 2008
Doug- I agree that David Rosenberg has been a bear, and quite frankly think hes been right for the last 24 months when all the cheerleaders were saying the S & P was on the way to new highs. That being said, I hear guys on CNBC all day saying we are near the bottom. I don’t think its true.
Jonathan S. – The report title is “The emperor’s new clothes in a post bubble economy” by David Rosenberg, published 25 July, 2008
Adam- The correction in household balance sheets from 1990-1998 was highly beneficial, as people were making more money in the real economy and had not started using their home equity as an ATM. The releveraging of the home market started in 2000 and then the sub prime house flipping seminar business really kicked in.
BTW-the 8% variation in a $10 trillion home economy is real money
Adam- The correction in household balance sheets from 1990-1998 was highly beneficial, as people were making more money in the real economy and had not started using their home equity as an ATM. The releveraging of the home market started in 2000 and then the sub prime house flipping seminar business really kicked in.
BTW-the 8% variation in a $10 trillion home economy is real money
Morgan- I hate to have to give you an economics 101 lesson so publicly here, but your misundertanding of the principles of inflation is quite startling. Everything in these charts says that within a year our problem will be deflation not inflation. The prices of homes, cars,gas, clothing and even food will befalling as demand dries up.We drove 40 billion fewer miles in the last quarter!!.
You are trying to create a scare tactic around a subject you know little about. I know if amuses you to take the walker away from the 88 year old granny, but you are posing a false choice and I refuse to engage in such a stupid argument.
The US as a society, with the right tax structure has access to all the capital it needs to fund a decent heathcare system and a decent education system. In addition the desire on the part of Pension funds for high quality municipal, state and federal bonds to fund infrastructure will be huge.
Morgan- I hate to have to give you an economics 101 lesson so publicly here, but your misundertanding of the principles of inflation is quite startling. Everything in these charts says that within a year our problem will be deflation not inflation. The prices of homes, cars,gas, clothing and even food will befalling as demand dries up.We drove 40 billion fewer miles in the last quarter!!.
You are trying to create a scare tactic around a subject you know little about. I know if amuses you to take the walker away from the 88 year old granny, but you are posing a false choice and I refuse to engage in such a stupid argument.
The US as a society, with the right tax structure has access to all the capital it needs to fund a decent heathcare system and a decent education system. In addition the desire on the part of Pension funds for high quality municipal, state and federal bonds to fund infrastructure will be huge.
The NYT reports today that, “Merrill expects to record a write-down of $5.7 billion for the third quarter. Such an outcome could push Merrill into the red for a fifth consecutive quarter if revenue remains weak and would bring its charges since the credit crisis erupted last summer to more than $45 billion.”
So where is this going for them? It certainly seems they haven’t hit bottom.
The NYT reports today that, “Merrill expects to record a write-down of $5.7 billion for the third quarter. Such an outcome could push Merrill into the red for a fifth consecutive quarter if revenue remains weak and would bring its charges since the credit crisis erupted last summer to more than $45 billion.”
So where is this going for them? It certainly seems they haven’t hit bottom.
Jon, when you say something that can be learned I’ll learn it. Until then, stop making shit up.
1st – I’ve never even implied this:
“The first, contrary to the belief of Morgan and some of our other hawks, is that market for bonds of good quality is going to skyrocket.”
So either edit it, or provide proof.
As to Econ 101 – the FED manages money supply for twin goals: low unemployment / low inflation.
2nd – this is what I’m talking about:
http://money.cnn.com/2008/07/28/news/economy/deficit_record_candidates/index.htm
3rd – Jon, you aren’t being honest, answer the actual point being made, the the US Debt is TOO HIGH. Repeat: the deficit is TOO HIGH. There’s an exact moment when we aren’t all Keynesian’s – it is when the government has run out of rope.
And guess what? They are out of rope. Rates are going up. You disagree? The government is going to cut spending, you disagree?
Those cuts will come from entitlements. We’ve been here before. See Clinton ending Welfare. See Robert Reich screaming and yelling. See Carville pissed. See, “we have to balance the budget.”
You aren’t arguing with me, you are arguing with history.
Jon, when you say something that can be learned I’ll learn it. Until then, stop making shit up.
1st – I’ve never even implied this:
“The first, contrary to the belief of Morgan and some of our other hawks, is that market for bonds of good quality is going to skyrocket.”
So either edit it, or provide proof.
As to Econ 101 – the FED manages money supply for twin goals: low unemployment / low inflation.
2nd – this is what I’m talking about:
http://money.cnn.com/2008/07/28/news/economy/deficit_record_candidates/index.htm
3rd – Jon, you aren’t being honest, answer the actual point being made, the the US Debt is TOO HIGH. Repeat: the deficit is TOO HIGH. There’s an exact moment when we aren’t all Keynesian’s – it is when the government has run out of rope.
And guess what? They are out of rope. Rates are going up. You disagree? The government is going to cut spending, you disagree?
Those cuts will come from entitlements. We’ve been here before. See Clinton ending Welfare. See Robert Reich screaming and yelling. See Carville pissed. See, “we have to balance the budget.”
You aren’t arguing with me, you are arguing with history.
I’m not so sure about inflation turning to deflation just because demand slumps. The U.S. Treasury is printing money/bonds to finance the $800 billion annual trade deficit and the $500 billion annual budget deficit creating domestic money supply inflation.
Wholesale inflation will continue for at least the rest of this year and retail prices will go higher even with slowing demand. If the government is going to strip out volatiles on the way up, then when housing goes down, that won’t offset energy and food. Nor will it stop the import of inflation from Asia and the EU as the dollar gets weaker and weaker.
Energy is not coming down and even if it does, the demand in China and India for energy will continue to force prices higher in the long term. When, not if, Iran is attacked, that will be the fulcrum of all the pent-up pain that the Federal Reserve has been bailing out.
The U.S. has been defying the laws of economics for a long time and the bill is coming due.
I’m not so sure about inflation turning to deflation just because demand slumps. The U.S. Treasury is printing money/bonds to finance the $800 billion annual trade deficit and the $500 billion annual budget deficit creating domestic money supply inflation.
Wholesale inflation will continue for at least the rest of this year and retail prices will go higher even with slowing demand. If the government is going to strip out volatiles on the way up, then when housing goes down, that won’t offset energy and food. Nor will it stop the import of inflation from Asia and the EU as the dollar gets weaker and weaker.
Energy is not coming down and even if it does, the demand in China and India for energy will continue to force prices higher in the long term. When, not if, Iran is attacked, that will be the fulcrum of all the pent-up pain that the Federal Reserve has been bailing out.
The U.S. has been defying the laws of economics for a long time and the bill is coming due.
[...] July 29th, 2008 · No Comments This post from Pew regarding the Four Middle Classes had me thinking about the historical origins of the term, the formal definitions, the view of the Congressional Research Service, the tale of the middle class in the last thirty-or-so years, recent developments, the current state of affairs (and some subtext as to why it has benefited conservative reactionaries), and some thoughts about the future, particularly the changing perspectives and possible outcomes. [...]
[...] July 29th, 2008 · No Comments This post from Pew regarding the Four Middle Classes had me thinking about the historical origins of the term, the formal definitions, the view of the Congressional Research Service, the tale of the middle class in the last thirty-or-so years, recent developments, the current state of affairs (and some subtext as to why it has benefited conservative reactionaries), and some thoughts about the future, particularly the changing perspectives and possible outcomes. [...]
Morgan by implying that interest rates would go up, you are saying that demand for US securities would be low, since interest rates on bonds move in the opposite direction of price.
It’s not hard to grasp, if you weren’t so tied to Milton Friedman. You are not understanding the import of the Merrill Lynch report. They are saying that something essential has changed in the US investor psychology. Equities are out, bonds are in. That means prices of bonds go up and interest rates go down. If as we cut back on Military spending we reallocate dollars to US infrastructure, the market will be there to finance such a move. Because essentially it would me that the current account deficit would begin to shrink. We still might owe just as much money, but we wouldn’t owe to the Chinese and the Russians, we’d owe it to ourselves.
Morgan by implying that interest rates would go up, you are saying that demand for US securities would be low, since interest rates on bonds move in the opposite direction of price.
It’s not hard to grasp, if you weren’t so tied to Milton Friedman. You are not understanding the import of the Merrill Lynch report. They are saying that something essential has changed in the US investor psychology. Equities are out, bonds are in. That means prices of bonds go up and interest rates go down. If as we cut back on Military spending we reallocate dollars to US infrastructure, the market will be there to finance such a move. Because essentially it would me that the current account deficit would begin to shrink. We still might owe just as much money, but we wouldn’t owe to the Chinese and the Russians, we’d owe it to ourselves.
The ‘which-flation’ debate is confusing because we’ve got powerful forces pulling in both directions at the moment. What happens when an irresistible force meets an immovable object? Do they simply balance out, or does one or the other prove to be stronger than the other?
We hardly noticed any inflationary effect from the enormous growth in credit in recent years because it was being spent to pay our import bill from overseas and our vendors cautiously socked that money away in our bond markets rather than splash it around in consumer spending of their own. It’s almost as if we were printing money which the Chinese simply stuffed under a mattress.
China’s bankers don’t want to admit the dollars they are holding have substantially less value (ie. allow their currency to appreciate) so they continue to collect more of them.
Meanwhile, much of the recent “printing” (not technically printing just yet, but just wait) of money by the Fed is really a process of taking the embarrassingly worthless (or greatly impaired) assets off the books of the banking sector. That isn’t expanding the credit available to the consumer, or even the corporate sector, it’s just a reluctance to admit our economy is shrinking — or to do so too abruptly. I’m no more certain of the result than anyone else, but I suspect gentle deflation is the most likely result. What makes this confusing is that there may continue to be substantial price increases in some areas. That’s price pressure to adapt to considerably changed circumstances — and some degree of declining relative wealth — not simply debasement of the currency.
The solution isn’t really that complicated. We need to raise the government revenue required to fix our crumbling infrastructure, which will put people back to work and limit the damage to consumer spending. In parallel we need to start investing seriously in real R&D — mostly by eliminating incentives that promote off-shoring. The “free traders” too often are in fact defending policies that actually promote unfair trade to the advantage of foreign countries. A real “free trade” policy would address the “externalities” — the abuse of “free” resources like water and air quality.
Btw, the old shibboleth about “more money for education” is a distraction which Obama should put aside. (This from a pretty hard-core Democrat). I’m not sure he’s got it all together, but Clayton Christensen of Harvard Business School makes some good points in Forbes.
Republicans usually can’t get education right either because the real problem is over-management (abetted by codependent unions) and Republicans must never criticize management! But Christensen is right about the need for disruptive change and that technology is a likely vector for the major case of reality “virus” that needs to infect the school system.
The ‘which-flation’ debate is confusing because we’ve got powerful forces pulling in both directions at the moment. What happens when an irresistible force meets an immovable object? Do they simply balance out, or does one or the other prove to be stronger than the other?
We hardly noticed any inflationary effect from the enormous growth in credit in recent years because it was being spent to pay our import bill from overseas and our vendors cautiously socked that money away in our bond markets rather than splash it around in consumer spending of their own. It’s almost as if we were printing money which the Chinese simply stuffed under a mattress.
China’s bankers don’t want to admit the dollars they are holding have substantially less value (ie. allow their currency to appreciate) so they continue to collect more of them.
Meanwhile, much of the recent “printing” (not technically printing just yet, but just wait) of money by the Fed is really a process of taking the embarrassingly worthless (or greatly impaired) assets off the books of the banking sector. That isn’t expanding the credit available to the consumer, or even the corporate sector, it’s just a reluctance to admit our economy is shrinking — or to do so too abruptly. I’m no more certain of the result than anyone else, but I suspect gentle deflation is the most likely result. What makes this confusing is that there may continue to be substantial price increases in some areas. That’s price pressure to adapt to considerably changed circumstances — and some degree of declining relative wealth — not simply debasement of the currency.
The solution isn’t really that complicated. We need to raise the government revenue required to fix our crumbling infrastructure, which will put people back to work and limit the damage to consumer spending. In parallel we need to start investing seriously in real R&D — mostly by eliminating incentives that promote off-shoring. The “free traders” too often are in fact defending policies that actually promote unfair trade to the advantage of foreign countries. A real “free trade” policy would address the “externalities” — the abuse of “free” resources like water and air quality.
Btw, the old shibboleth about “more money for education” is a distraction which Obama should put aside. (This from a pretty hard-core Democrat). I’m not sure he’s got it all together, but Clayton Christensen of Harvard Business School makes some good points in Forbes.
Republicans usually can’t get education right either because the real problem is over-management (abetted by codependent unions) and Republicans must never criticize management! But Christensen is right about the need for disruptive change and that technology is a likely vector for the major case of reality “virus” that needs to infect the school system.
Jon, if we did transfer the spending (while cutting back a bit…) over to infrastructure, I’d guess that in ten years after that move started in earnest, we’d find ourselves in pretty damned good shape, and in twenty, we’d be in fabulous shape. This would be an investment in the United States of our dreams.
For an example of what not investing in infrastructure does, just think about a city…New York, for instance, where the streets are riddled with pot holes. Nobody wants to spend their tax dollars fixing the streets, but everybody seems to have to spend their dollars replacing shock absorbers, blown tires, bent rims, etc. from the damage done to the cars from driving on those crumbling streets. It’s a variation of the Tragedy of the Commons. Expand that out to America today, and you have bridges falling down, electrical grids failing (they sure do here when we have wet winters), levees breaking, overuse of emergency medical care, etc. Why? Because too many folks don’t see that their tax dollars are going to stupid uses…a war in Iraq where we spend 5 million bucks per to kill each enemy soldier…and not to uses that will directly benefit them. Hence you get the Morgans who cannot imagine a better use for their money than killing people. You want lower taxes? Help get us the hell out of hell.
Jon, if we did transfer the spending (while cutting back a bit…) over to infrastructure, I’d guess that in ten years after that move started in earnest, we’d find ourselves in pretty damned good shape, and in twenty, we’d be in fabulous shape. This would be an investment in the United States of our dreams.
For an example of what not investing in infrastructure does, just think about a city…New York, for instance, where the streets are riddled with pot holes. Nobody wants to spend their tax dollars fixing the streets, but everybody seems to have to spend their dollars replacing shock absorbers, blown tires, bent rims, etc. from the damage done to the cars from driving on those crumbling streets. It’s a variation of the Tragedy of the Commons. Expand that out to America today, and you have bridges falling down, electrical grids failing (they sure do here when we have wet winters), levees breaking, overuse of emergency medical care, etc. Why? Because too many folks don’t see that their tax dollars are going to stupid uses…a war in Iraq where we spend 5 million bucks per to kill each enemy soldier…and not to uses that will directly benefit them. Hence you get the Morgans who cannot imagine a better use for their money than killing people. You want lower taxes? Help get us the hell out of hell.
Jon,I invite you to call in one of your expert friends.
We don’t set interest rates to drum up bond sales because we need money to spend.
We set interest rates to control the money supply with two goals, keeping unemployment low and keeping inflation from happening.
There could be a line out the door to buy bonds, and it means nothing to setting interest rates. Inflation / Unemployment. Those are the two numbers that will determine Fed Policy in 2009.
If economy is slow, expect there to be an either or choice, THE SAME CHOICE Clinton got handed to him. New dollars int he economy either go to public spending or private borrowing.
Cutting spending and raising taxes to reduce the Federal Deficit is the plan.
Jon,I invite you to call in one of your expert friends.
We don’t set interest rates to drum up bond sales because we need money to spend.
We set interest rates to control the money supply with two goals, keeping unemployment low and keeping inflation from happening.
There could be a line out the door to buy bonds, and it means nothing to setting interest rates. Inflation / Unemployment. Those are the two numbers that will determine Fed Policy in 2009.
If economy is slow, expect there to be an either or choice, THE SAME CHOICE Clinton got handed to him. New dollars int he economy either go to public spending or private borrowing.
Cutting spending and raising taxes to reduce the Federal Deficit is the plan.
the big risk is deflation a la Japan–we aren’t seeing it yet because we are in a commodity bubble–but as the world declines prices will go down—-oil seems to have turned over–as people slow down buying the fear is that prices will decline–it took WWII to get us out of the last big deflation–
the big risk is deflation a la Japan–we aren’t seeing it yet because we are in a commodity bubble–but as the world declines prices will go down—-oil seems to have turned over–as people slow down buying the fear is that prices will decline–it took WWII to get us out of the last big deflation–
Yeah, and then WWII set up another bubble in that lie that war is good for the economy. Wage war on crumbling infrastructure, poverty, lack of education, and being held up for energy, and you’ll see a war do some permanent good.
Yeah, and then WWII set up another bubble in that lie that war is good for the economy. Wage war on crumbling infrastructure, poverty, lack of education, and being held up for energy, and you’ll see a war do some permanent good.
Thanks Jon – so the key negative is the flow through impact of the “home equity ATM” disappearing. That’s something which is rarely used in Australia, so I find getting a “gut feel” for the impact of such a shift is a challenge
Thanks Jon – so the key negative is the flow through impact of the “home equity ATM” disappearing. That’s something which is rarely used in Australia, so I find getting a “gut feel” for the impact of such a shift is a challenge
In my parents generation…home owners of the 50s and 60s…the idea was to pay off the mortgage. They did, and they didn’t have or use credit cards. So that was pre-home equity loan for frivolity days…pre-bubble. Then sometime in the late 1980s or so it became “stupid” to tie up a lot of dough in home equity. You weren’t letting your equity work for you to build wealth. Then in the ’90s, if you didn’t spend that wealth on stupid crap, you were considered really square and hopeless. And then I started to hear about folks with negative equity in their homes in LA. Oops…
In my parents generation…home owners of the 50s and 60s…the idea was to pay off the mortgage. They did, and they didn’t have or use credit cards. So that was pre-home equity loan for frivolity days…pre-bubble. Then sometime in the late 1980s or so it became “stupid” to tie up a lot of dough in home equity. You weren’t letting your equity work for you to build wealth. Then in the ’90s, if you didn’t spend that wealth on stupid crap, you were considered really square and hopeless. And then I started to hear about folks with negative equity in their homes in LA. Oops…
Jon,
Your condescension toward Morgan is funny, but unwarranted. He seems to have a good grasp of the issues to me. The bond market may benefit from baby boomers moving their wealth to safe havens, but as long as the deficit remains large I don’t know why anyone would expect demand for bonds to skyrocket. If Merrill Lynch is so smart why are they on the verge of going under?
Jon,
Your condescension toward Morgan is funny, but unwarranted. He seems to have a good grasp of the issues to me. The bond market may benefit from baby boomers moving their wealth to safe havens, but as long as the deficit remains large I don’t know why anyone would expect demand for bonds to skyrocket. If Merrill Lynch is so smart why are they on the verge of going under?
STS-Let’s assume that the $7 trillion of US pension funds increase their asset allocation to bonds by 15% as Merrill suggests. Thats essentially $1 trillion of new money into the bond market. Even though Morgan (who as a libertarian should know better) thinks the Fed sets interest rates, rates are set each week at the Treasury auction of 10 year bills. If the demand at the auction increased, the interest rate would go down.
I think You, Rick Turner and I are in complete agreement of what has to be done. Even to your point of blowing up the education management bureaucracy which Hugo has been railing about for months on these pages.
What I hoping (and BTW Steve, Morgan knows I don’t condescend) is that our libertarian buddies will get off this one note song they learned from Grover Norquist. They thought they were so smart. They would spend all of the baby boomers retirement funds on building up the military. Then there would be so little money left for social policy that they “could drown the Federal Government in a bathtub”. So even if they lost power, the progressives would have no money to fund a reinvention of the American Dream.
What’s so important about this Merrill report is that it shows what would happen if we “returned to the mean”. There would be more domestic savings because less money would be tied up in McMansions and mall fever. Those savings would flow into the bond market, especially favoring high quality government bonds. That money could then be used to rebuild the country, raising employment levels at a crucial time and providing the productivity improvements that could then give us the next boost.
STS-Let’s assume that the $7 trillion of US pension funds increase their asset allocation to bonds by 15% as Merrill suggests. Thats essentially $1 trillion of new money into the bond market. Even though Morgan (who as a libertarian should know better) thinks the Fed sets interest rates, rates are set each week at the Treasury auction of 10 year bills. If the demand at the auction increased, the interest rate would go down.
I think You, Rick Turner and I are in complete agreement of what has to be done. Even to your point of blowing up the education management bureaucracy which Hugo has been railing about for months on these pages.
What I hoping (and BTW Steve, Morgan knows I don’t condescend) is that our libertarian buddies will get off this one note song they learned from Grover Norquist. They thought they were so smart. They would spend all of the baby boomers retirement funds on building up the military. Then there would be so little money left for social policy that they “could drown the Federal Government in a bathtub”. So even if they lost power, the progressives would have no money to fund a reinvention of the American Dream.
What’s so important about this Merrill report is that it shows what would happen if we “returned to the mean”. There would be more domestic savings because less money would be tied up in McMansions and mall fever. Those savings would flow into the bond market, especially favoring high quality government bonds. That money could then be used to rebuild the country, raising employment levels at a crucial time and providing the productivity improvements that could then give us the next boost.
The sad thing is, Jon, that the crap that most people buy with their dwindling equity bucks isn’t even stuff made here in the US…unless it’s SUVs. The major push has been to outsource consumer goods overseas, so the equity bucks have been flowing back to Japan, then Korea, then Indonesia, now China. And the stuff we’ve been buying quickly becomes toxic landfill.
I think I’ve mentioned this before, but back in the day…when my folks were paying off their home…they had two telephones that each lasted a good 20 years plus. Worked fine. Only got replaced when the phone company changed from dial phones to touch-tone phones. Quality. Quality is energy efficient and saves money in the long run. What do we buy these days that lasts for 20 years? Well, I try to, and I try to make things that will last and be useful for ten times that.
The sad thing is, Jon, that the crap that most people buy with their dwindling equity bucks isn’t even stuff made here in the US…unless it’s SUVs. The major push has been to outsource consumer goods overseas, so the equity bucks have been flowing back to Japan, then Korea, then Indonesia, now China. And the stuff we’ve been buying quickly becomes toxic landfill.
I think I’ve mentioned this before, but back in the day…when my folks were paying off their home…they had two telephones that each lasted a good 20 years plus. Worked fine. Only got replaced when the phone company changed from dial phones to touch-tone phones. Quality. Quality is energy efficient and saves money in the long run. What do we buy these days that lasts for 20 years? Well, I try to, and I try to make things that will last and be useful for ten times that.
Dear friends,
I just hope that the War machine would transform itself in a active production of ideas
for the survival of our spaceship.
R&D , all the economy should be geared towards R&D, because thats where the money is: Solutions.
Put 10 billions in R&D.
Have a mind will travel.
Bernard
Dear friends,
I just hope that the War machine would transform itself in a active production of ideas
for the survival of our spaceship.
R&D , all the economy should be geared towards R&D, because thats where the money is: Solutions.
Put 10 billions in R&D.
Have a mind will travel.
Bernard
Jon, the FED sets short term interest rates, which governs what businesses get loans at. THUS, again I let me warm up my one note trumpet: Demand for T Bills, your $1T demand for conservative investments from the pension funds, is not a response to my point.
INFACT, your T-Bill market makes it incredibly important that there is little or no inflation. Yes, you say, don’t worry deflation is around the corner, but if you are wrong, your T-Bill demand theory takes on water. Certainly, we do enjoy those Sovereign funds lining up each week to buy up bonds, for fear that if they don’t – their currency reserves inflate to worthless. Have to keep up appearances and all.
Ok here’s my trumpet’s YALP…
Jon, maybe you misunderstand me, I keep saying this, but let me try again. I’m not some Grover Norquest minion, I’m just unemotionally doing the logic.
The deficit dooms Keynes. He OK’s deficits, but only if the you get rid of them when times are good. Right? We agree on that. Right?
OK. Stop.
That’s it, you see it now, I know you do. When you add politics, Keyne’s ideas work IF both parties accept and agree to SAVE $ when the times are good.
Dem’s didn’t do that. They went out and bought votes. It pissed off Republicans. So in 1980, they stopped playing fair. They said, fuck it, let’s deficit spend when times are good. And, there’s no response to that, other than – cut the deficit when Dems are in office.
You know all of this could end, if you (the liberals) just demanded a Balanced Budget Amendment. Then tax policy would be totally dependent on riling up the poor to vote. If you poor people want free shit, we gotta own Congress, so we can soak the rich. I SWEAR that’s your best strategy. Deficits are not your friend. They are the friend of Republicans.
——-
Recently I have read that since 1950, US Government tax receipts EVERY single year has been 19.5% of the GDP – all the same – 19.5%.
Also, I have read that every decade, since 1960 – the annual average growth of GDP has been 3.07%
These are good numbers I think to work with, no matter what you do with policy:
1. Expect GDP to grow 3%.
2. Expect government receipts to be 19.5%
Now you can try and take less from the poor, and take more from the rich, but you are always only going to take in 19.5% of GDP. So why not, live within that chunk? Set a Balanced Budget Amendment, and make the entire notion of politics, about who pays that 19.5% and what you spend it on… stop getting beat by the game.
Jon, the FED sets short term interest rates, which governs what businesses get loans at. THUS, again I let me warm up my one note trumpet: Demand for T Bills, your $1T demand for conservative investments from the pension funds, is not a response to my point.
INFACT, your T-Bill market makes it incredibly important that there is little or no inflation. Yes, you say, don’t worry deflation is around the corner, but if you are wrong, your T-Bill demand theory takes on water. Certainly, we do enjoy those Sovereign funds lining up each week to buy up bonds, for fear that if they don’t – their currency reserves inflate to worthless. Have to keep up appearances and all.
Ok here’s my trumpet’s YALP…
Jon, maybe you misunderstand me, I keep saying this, but let me try again. I’m not some Grover Norquest minion, I’m just unemotionally doing the logic.
The deficit dooms Keynes. He OK’s deficits, but only if the you get rid of them when times are good. Right? We agree on that. Right?
OK. Stop.
That’s it, you see it now, I know you do. When you add politics, Keyne’s ideas work IF both parties accept and agree to SAVE $ when the times are good.
Dem’s didn’t do that. They went out and bought votes. It pissed off Republicans. So in 1980, they stopped playing fair. They said, fuck it, let’s deficit spend when times are good. And, there’s no response to that, other than – cut the deficit when Dems are in office.
You know all of this could end, if you (the liberals) just demanded a Balanced Budget Amendment. Then tax policy would be totally dependent on riling up the poor to vote. If you poor people want free shit, we gotta own Congress, so we can soak the rich. I SWEAR that’s your best strategy. Deficits are not your friend. They are the friend of Republicans.
——-
Recently I have read that since 1950, US Government tax receipts EVERY single year has been 19.5% of the GDP – all the same – 19.5%.
Also, I have read that every decade, since 1960 – the annual average growth of GDP has been 3.07%
These are good numbers I think to work with, no matter what you do with policy:
1. Expect GDP to grow 3%.
2. Expect government receipts to be 19.5%
Now you can try and take less from the poor, and take more from the rich, but you are always only going to take in 19.5% of GDP. So why not, live within that chunk? Set a Balanced Budget Amendment, and make the entire notion of politics, about who pays that 19.5% and what you spend it on… stop getting beat by the game.
Jon,
What will kill inflation expectations and spark the bond rally?
Krugman posted a great chart today illustrating the problem. So far the Fed cuts are helping to support bank profit margins, but virtually nothing else. Once people start deciding in large numbers that stocks are toast for another year or more, that inflation isn’t the real problem and accept “only” 6 or 7% from corporate bonds that are “safe enough”, we may see longer term interest rates decline (because of major reallocation into bonds).
But there is so much talk of inflation at the moment, it’s hard to guess what would suddenly change the mood. Maybe if the general retreat in commodities in recent weeks turned into a complete rout — “proving” that it was all a speculative bubble?
Jon,
What will kill inflation expectations and spark the bond rally?
Krugman posted a great chart today illustrating the problem. So far the Fed cuts are helping to support bank profit margins, but virtually nothing else. Once people start deciding in large numbers that stocks are toast for another year or more, that inflation isn’t the real problem and accept “only” 6 or 7% from corporate bonds that are “safe enough”, we may see longer term interest rates decline (because of major reallocation into bonds).
But there is so much talk of inflation at the moment, it’s hard to guess what would suddenly change the mood. Maybe if the general retreat in commodities in recent weeks turned into a complete rout — “proving” that it was all a speculative bubble?
Bernard, you don’t even have to do any R&D to do a lot of good in alternative energy right now. As I’ve said before here, just put solar hot water heaters…old, old technology…on every south facing roof in America to save millions of BTUs of energy a year. Start with that which already works. Yeah, boring, but effective.
Bernard, you don’t even have to do any R&D to do a lot of good in alternative energy right now. As I’ve said before here, just put solar hot water heaters…old, old technology…on every south facing roof in America to save millions of BTUs of energy a year. Start with that which already works. Yeah, boring, but effective.
[...] and his then-surrogate Gramm called America “a nation of whiners.” This rhetoric, despite predictions from analysts that our nation has not come close to rock [...]
[...] and his then-surrogate Gramm called America “a nation of whiners.” This rhetoric, despite predictions from analysts that our nation has not come close to rock [...]
Whatever convinced Merrill and other investment firms that single family mortgages were an acceptable investment? Walk in to any Merrill office and ask a broker what he thinks of single family mortgages as an investment?
Surely these mortgages do not qualify as an investment – “a successful investment must outrun inflation plus provide an after tax profit”.
Whatever convinced Merrill and other investment firms that single family mortgages were an acceptable investment? Walk in to any Merrill office and ask a broker what he thinks of single family mortgages as an investment?
Surely these mortgages do not qualify as an investment – “a successful investment must outrun inflation plus provide an after tax profit”.
Rick
The righ solution to human problems are the source of the economy thats why R&D are so important and the US is best recognized by its inventions.
Whats wrong is that such a vast amount of money cannot be dedicated to war or a least not as much.
Show me a new car out of GM that will put the Japonese behind , and instead of loosing 15 Billions…somebody is doing something wrong dont you think ?
Bernard
Rick
The righ solution to human problems are the source of the economy thats why R&D are so important and the US is best recognized by its inventions.
Whats wrong is that such a vast amount of money cannot be dedicated to war or a least not as much.
Show me a new car out of GM that will put the Japonese behind , and instead of loosing 15 Billions…somebody is doing something wrong dont you think ?
Bernard
It wouldn’t have taken a hell of a lot of extra R&D money at GM to stay relevant. It would have taken real vision, though. Instead they helped ram through legislation that designated SUVs as trucks and were therefore not subject to CAFE mileage standards. And then the idea that Hummers were good single person transportation? Gimme a break. GM didn’t want to do any serious R&D; they preferred to put the dough into marketing and advertising.
I’m one of those who thinks that the US auto industry deserves its fate. The writing was on the wall years ago…smart people wanted smaller, more fuel efficient cars, not autos as symbols of big penises. But no, it’s a NASCAR nation here. Vroom, vroom… doughnuts on the track and champagne to pour on the winner. Detroit pushed bling, and too many bought in.
Maybe GM will hit the right note with the Chevy Volt. But look at what they did with the EV-1…killed it dead.
It wouldn’t have taken a hell of a lot of extra R&D money at GM to stay relevant. It would have taken real vision, though. Instead they helped ram through legislation that designated SUVs as trucks and were therefore not subject to CAFE mileage standards. And then the idea that Hummers were good single person transportation? Gimme a break. GM didn’t want to do any serious R&D; they preferred to put the dough into marketing and advertising.
I’m one of those who thinks that the US auto industry deserves its fate. The writing was on the wall years ago…smart people wanted smaller, more fuel efficient cars, not autos as symbols of big penises. But no, it’s a NASCAR nation here. Vroom, vroom… doughnuts on the track and champagne to pour on the winner. Detroit pushed bling, and too many bought in.
Maybe GM will hit the right note with the Chevy Volt. But look at what they did with the EV-1…killed it dead.
[...] U.S. financial sector profits have deviated from the mean to the tune of $1.2 trillion and that a return to the mean would inevitably mean a give-back of that [...]
[...] U.S. financial sector profits have deviated from the mean to the tune of $1.2 trillion and that a return to the mean would inevitably mean a give-back of that [...]