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Re: Deflation ?
Old 09-08-2006, 12:42 PM   #21
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Re: Deflation ?

Ah, he taunts me still, now with graphics ...

Good answer, we've got a basis to start from. Why did money become cheap? To save thread space I'll answer for you, obviously the Fed lowered interest rates to an unbelievable low, something we haven't seen in (OK I haven't checked this) I believe a century. Why did they do that? What were they trying to prevent?

OK, a washout in stocks after the dot.com fun. But in the past easy Al would just lower a few points after a debacle, and that's all it took. This time they really went all out, and housing, as we might reasonable expect, responded in kind. I mean, we're so used to bubbles we don't think about it, but step outside of yourself and ponder the immense size of this housing bubble, which doesn't take somebody as smart as easy Al to see, is already in free fall. As a going away present, he was willing to create what probably is the biggest asset bubble in history. It's tremendous! But, here in the U.S., we just see this as normal.

Do you recall any of the Fed discussions at the time? You can poke around the Bank of International Settlements site to get an idea, and the various Fed sites. Tell me, what is the exact reason the Fed risked (and got) the (probable - I haven't checked this, but back of the envelope it's a reasonable guess) biggest asset bubble in history?

(I have to go offline for the rest of the day, but I can check later to see if this topic is still alive)

Quote:
Originally Posted by brewer12345
If you aren't interested in this discussion, why do you keep posting on this thread?

I think we had a housing bubble because the Fed flooded the US with unprecedented amounts of liquidity. This meant that money became very cheap and also encouraged stupid risk taking because spreads became vanishingly thin. So what?
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Re: Deflation ?
Old 09-08-2006, 12:45 PM   #22
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Re: Deflation ?

Quote:
Originally Posted by danm
Hi Ha,

Buffet was the right investor born at the right time, but he obviously didn't study US economic history. The U.S. democracy has regularly enjoyed periods of deflation, always after tech booms (railroads and canals for example) .
I am open minded on this, but to invest one has to take a stance.

Markets as they now stand are showing an odd picture. Gold oil and commodities are up, CPI both core and complete are up. Yet long term treasury interest rates are quite low.

Not only do these not go together very well, just sticking with the bond market shows several oddities. Inverted yield curve and low long term treasury rates suggest possible deflation or business slowdown, yet credit spreads are relatively benign, which suggests clear sailing for the economy.

Folks, it's a conundrum. *

Regarding illustrations from the 19th century-- IMO US experience during the gold standard and prior to the founding of the Federal Reserve is not likely*to be applicable to the present.

Ha
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Re: Deflation ?
Old 09-08-2006, 12:48 PM   #23
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Re: Deflation ?

You slanted it heavily, but the main points of your description are more or less accurate. *I think that our housing bubble pales in comparison to what happened in Japan in the 1980s (ask Nords about what the Japanese were doing in Hawaii). *I also note that there was a big run-up in housing in the UK and Australia, and I fail to see signs of deflation there.

I agree that we will be seeing some economic fallout from the housing bubble deflating, but it is hard to believe it will be bad enough to cause a deflationary spiral a la Japan or the Depression. *If we do start to see serious economic fallout from housing, I think you will see the Fed ease a bit, but that will pull the USD down further. *The faster and farther the USD falls, the more we will be importing inflation. *So I can envision a nasty stagflationary scenario, but I am still not seeing deflation.
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Re: Deflation ?
Old 09-08-2006, 02:42 PM   #24
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Re: Deflation ?

Quote:
Originally Posted by brewer12345
I think that our housing bubble pales in comparison to what happened in Japan in the 1980s
By what measure? The only comparable measurements of magnitude I've seen are the value of total housing stock relative to GDP.

I believe Japan peaked at 140%. US housing is currently at 170% of GDP.

In any case, there are a lot of variables to consider. It's hard enough to get the direction right, so I'd be very suspicious of anybody who thinks they know the magnitude of the correction, economic impact, and inflation/deflation impact.
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Re: Deflation ?
Old 09-08-2006, 02:48 PM   #25
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Re: Deflation ?

Quote:
Originally Posted by wab
By what measure?* *The only comparable measurements of magnitude I've seen are the value of total housing stock relative to GDP.

I believe Japan peaked at 140%.* *US housing is currently at 170% of GDP.

In any case, there are a lot of variables to consider.* *It's hard enough to get the direction right, so I'd be very suspicious of anybody who thinks they know the magnitude of the correction, economic impact, and inflation/deflation impact.
I guess you pays your money and you takes your chances. I am convinced that the bubble will take at least a few years to deflate and it will be painful, but manageable. If it pops too quickly and does too much damage, interest rates will drop serving to partially reinflate the bubble.

Since nobody can provide definitive econometric studies (there's a contradiction in terms) that prove the argument one way or the other, this is all so much marsh gas and speculation anyway. Mr. tinfoil hat-wearer seems so certain and smarmy about it that I an only conclude that he has been staring at the sun too long.
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Re: Deflation ?
Old 09-08-2006, 02:57 PM   #26
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Re: Deflation ?

Quote:
Originally Posted by brewer12345
I am convinced that the bubble will take at least a few years to deflate and it will be painful, but manageable.
I agree. It'll be similar in magnitude to the NASDAQ meltdown. I think investors lost about $6 trillion in value when that bubble popped. I calculated once that the housing market will lose about $7 trillion in value if we revert to the mean, and house prices are generally stickier than stocks on the way down.
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Re: Deflation ?
Old 09-08-2006, 03:06 PM   #27
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Re: Deflation ?

Quote:
Originally Posted by wab
I agree.* It'll be similar in magnitude to the NASDAQ meltdown.* *I think investors lost about $6 trillion in value when that bubble popped.* *I calculated once that the housing market will lose about $7 trillion in value if we revert to the mean, and house prices are generally stickier than stocks on the way down.
Stickier on the way down plus I think that we will see a significant divergence between the bubbliest of the coastal markets (LA, Boston, Miami, etc.) and the rest of the country. And unlike your dotcom stock, you can actually live in your house while you wait out the market crash.
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Re: Deflation ?
Old 09-08-2006, 03:17 PM   #28
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Re: Deflation ?

Quote:
Originally Posted by brewer12345
If it pops too quickly and does too much damage, interest rates will drop serving to partially reinflate the bubble.
It didn't work this way in Japan, though of course it may here.

Ha
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Re: Deflation ?
Old 09-08-2006, 03:23 PM   #29
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Re: Deflation ?

Wab and Brewer, you two point out the more severe side of a possible downturn. If we have a downturn in residential real estate equal to the NASDAQ meltdown, that'll be about 60%, which, given the leverage involved, will be much more severe than anything we've seen before nationwide.
Could happen in certain areas, but IMO only if there is a severe recession as well. As long as people have jobs, primary residences will be kept.
I still see a much greater risk of inflation that deflation. We have so much debt that and an apparent inability to cut our spending (governmental and personal) that inflating out of the debt burden is more likely than a deflation.
OTOH, I've been looking for my crystal ball and just can't seem to find it.
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Re: Deflation ?
Old 09-08-2006, 03:24 PM   #30
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Re: Deflation ?

Quote:
Originally Posted by HaHa
It didn't work this way in Japan, though of course it may here.
I've never seen a good post-mortem analysis of Japan-1990, but they did have two bubbles (stock and real estate) pop within a couple years of each other, and their fed didn't respond very quickly with increased liquidity.
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Re: Deflation ?
Old 09-08-2006, 03:27 PM   #31
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Re: Deflation ?

Quote:
Originally Posted by wab
I've never seen a good post-mortem analysis of Japan-1990, but they did have two bubbles (stock and real estate) pop within a couple years of each other, and their fed didn't respond very quickly with increased liquidity.
I think their fed had a little trouble with all the bad bank debt that the keiretsu were concealing bribing wishing away carrying around.

I'm gonna defer to Bpp's expertise, but I think Japan's banking problems make the U.S. S&L bailout look like chump change.
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Re: Deflation ?
Old 09-08-2006, 04:45 PM   #32
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Re: Deflation ?

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What are the odds ?
A: very slim
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Re: Deflation ?
Old 09-08-2006, 06:21 PM   #33
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Re: Deflation ?

Quote:
Originally Posted by danm


I expect you to roast me for saying this, but I'm not going to go through the data and discussion here. It's far too much material, and I'm not willing to give out free economic macroeconomic education anymore. Instead I'll offer some pointers, and you can draw your own conclusions.

o For a primer, study Gary Shillings books, and subscribe to his newsletter for a monthly view of the economic climate (www.agaryshilling.com) The newsletter is rather important, but it does cost money.

o Read what Mish has to say at http://globaleconomicanalysis.blogspot.com

o Read up on what Roubini has to say http://www.rgemonitor.com/blog/roubini/

o And read what our good John Mauldin has to say (the past year say) http://www.2000wave.com/gateway.htm

In particular I recommend contemplating historical economics (available from Shilling (INSIGHT 2004-present and the two books)), with a dash of demographic study, and a large dose of common sense, and simply looking around you at the actually happening in front of you (hint, look at durable goods (autos, fridges, water heaters and such), and airlines for starters). In the meantime, try to distance yourself from the consensus babble.

If nothing else, you will learn a lot of interesting and useful information.



Thanks for posting this.

I just began receiving John Mauldin's email articles
and just yesterday obtained a copy of Shilling's book,
Deflation.

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Re: Deflation ?
Old 09-08-2006, 07:27 PM   #34
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Re: Deflation ?

Quote:
Originally Posted by tio z
Wab and Brewer, you two point out the more severe side of a possible downturn.* If we have a downturn in residential real estate equal to the NASDAQ meltdown, that'll be about 60%, which, given the leverage involved, will be much more severe than anything we've seen before nationwide.* *
Could happen in certain areas, but IMO only if there is a severe recession as well.* As long as people have jobs, primary residences will be kept.
I still see a much greater risk of inflation that deflation.* We have so much debt that and an apparent inability to cut our spending (governmental and personal) that inflating out of the debt burden is more likely than a deflation.
OTOH, I've been looking for my crystal ball and just can't seem to find it.* *
By and large, I agree with you. I think the RE bubble popping will be extremely unpleasant in certain areas, but something of a minor event in the context of the mammoth US economy. But there will be certain idiot lender who will wish they'd never heard of an Option ARM...

Like you, I am a lot more worried about inflation that deflation. Accordingly, I own commodities, inflation-linked bonds, commodity producers, and companies that own tangible assets. Plus some financial institutions, just in case we do have falling rates.
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Re: Deflation ?
Old 09-08-2006, 08:00 PM   #35
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Re: Deflation ?

Unlike the Japanese, I don't think the American consumer can get into a deflationary spiral. They would rather have their products now than a year later at 5% cheaper. Us Americans got to have it now.
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Re: Deflation ?
Old 09-08-2006, 08:10 PM   #36
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Re: Deflation ?

Quote:
Originally Posted by danm

o Read up on what Roubini has to say http://www.rgemonitor.com/blog/roubini/



Deflation hits Wal-Mart ?


Here is a quote from the above referenced article:


Finally, if my argument that the housing bust will – together with the oil shock and the delayed effects of interest rate increases – lead to a sharp fall in consumption growth and an economy wide recession - as the wealth effects of the housing bust lead to a sharp fall in home equity withdrawal - you will see much broader effects on the economy and on employment with an overall fall in employment in most sectors of the economy. Indeed, the recent mediocre sales results of a number of retailers and other major US corporations (Wal-Mart, Target, Costco, Family Dollar, Federated, Starbucks, Home Depot, Lowe’s, UPS, Intel, Ford to name just a few leading firms) will soon trigger a more significant contraction in jobs and employment during the fall and winter.




Here is a link to an article about Wal-Mart cutting prices:


Wal-Mart aims for even lower prices

Wal-Mart CEO says the retail giant is 're-energizing' its discount programs
to offset gas prices, boost traffic.


http://money.cnn.com/2006/09/07/news...acks/index.htm

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Re: Deflation ?
Old 09-08-2006, 08:15 PM   #37
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Re: Deflation ?

Quote:
Originally Posted by Nords
I'm gonna defer to Bpp's expertise
Inadvisable.

Quote:
but I think Japan's banking problems make the U.S. S&L bailout look like chump change.
I think compared to the S&L bailout, you are right.

But from what I have been reading about the mess of bad loans that banks have gotten themselves into lately (like Washington Mutual), I am not so sure where the balance tips nowadays.

As for inflation vs deflation, I wouldn't be surprised either way. Neither one is much fun.
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Re: Deflation ?
Old 09-08-2006, 08:16 PM   #38
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Re: Deflation ?

Helena, Roubini is a sharp guy, but I think he is getting carried away. *I think that the scenario he paints is more likely to result in a nasty bout of stagflation, not deflation. *Consider: the USD is already ripe for a fall, given our large current account and fiscal deficits. *If the US economony looks a little wobbly and foreign central banks decide they'd rather buy something other than US treasuries, the USD could really slide against other major currencies. *In particular, we could see quite a slide vs. the yuan. *If that happens, everything we import will become more expensive, including stuff we cannot do without (like oil). *That means that we will see a lot of inflationary pressure even if growth is slowing/negative.
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Re: Deflation ?
Old 09-08-2006, 08:17 PM   #39
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Re: Deflation ?

Quote:
Originally Posted by bpp
But from what I have been reading about the mess of bad loans that banks have gotten themselves into lately (like Washington Mutual), I am not so sure where the balance tips nowadays.
Actually, loan quality is uniformly good and defaults are well below historical averages. Can't say how long that will persist, though...
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Re: Deflation ?
Old 09-08-2006, 08:23 PM   #40
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Re: Deflation ?

What investments in a diversified portfolio shine in a deflationary environment? For inflation we have TIPS, hard assets, and supposedly stocks. For deflation I can see long term bonds, but what else?
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