The $6 Trillion Bubble

[clifp]

Sorry it was joke, I thought the and the random special relativity reference would make it obvious.

But you may have one uped me with the nuclear bomb in London quote. pretty funny.

 

[cute fuzzy bunny]

Well, it is nevertheless true that Twaddle was a housing bear way before this all started

And a broken clock is right twice a day.

It didnt take much to realize that something that goes way up, far past any reasonable value metric...will either come back down or go sideways for a long time.

In the meanwhile, I'm in the camp of thinking that very little wealth was destroyed. Some first time home buyers got tanked, as did some people who refi'd and bought toys, and some that bought way up from where they were.

Maybe a few folks who bought a new house without selling the old one in a timely manner.

I'm going to bet that since most of it was first timers and small time refi's, that only a small percentage was "loss", and its mostly on paper.

I still havent heard any explanation as to why $9B was "lost" in the 2000-2002 crash and why that didnt have any lasting effect on any aspect of the economy. In that case, I'm betting a lot more wealth actually WAS destroyed.

 

[twaddle]

I still havent heard any explanation as to why $9B was "lost" in the 2000-2002 crash and why that didnt have any lasting effect on any aspect of the economy.

Are you asking for math help? OK, first "B" means billion and "T" means trillion.

Now, you might want to figure out a few things:

1) How much the stock market really lost (clue: it wasn't $19 trillion, nor was it $9 trillion, nor was it $9 billion).

2) How much of that was owned by households as opposed to institutions and companies.

3) Once you calculate that number, you'll see how a much smaller loss led to a fairly significant recession.

4) Now try to understand how the potentially $6-7 trillion lost in housing wealth also might lead to losses in other markets, add those numbers up, and tell us what you think the effect on the economy might be.

Then we can move on to harder stuff, like division.

 

[al_bundy]

Maybe if you have gone over to the other side. But here on earth we don't have perpetual balance sheets. If I have $2 million from stock trading, but I sold BRK years ago, is my balance sheet equity actually minus $200 million?

If so, why can I still go out and borrow agains the $2 million?

Huge amounts of wealth are wiped out when equity quotes go down. If they go back up again, that wealth is re-created. This would even be true if no trades were made. Say a nuclear bomb is exploded in London while our US markets are closed. Likely they would not open the following morning. But do you think that you could find a private buyer for your shares at anywhere near the price ahowing prior to the blast? Maybe if your shares were all armaments makers, but otherwise good luck. And do you think that this is just a temporary problem? I think it very much depends on your definition of temporary. You could run out of resources, or out of lifespan before things righted themselves.

HA

so how exactly does the money vanish?

one day idiot #1 buys Yahoo at $1000 a share and spends say $100,000 giving it genius A who sells close to the top.

Genius A now has $100,000 in the bank from that sale and keeps it there since he thinks the Naz is toast

2 years later idiot #1 finally parts with Yahoo at $10 a share and loses a lot of money.

Genius A still has the money earning 2% a year because he is thrifty.

they money idiot#1 spent on Yahoo still exists, just not in his possession.

multiply this by millions of people and wealth being concentrated in less hands than before and too many people suddenly don't have money to spend.

banks meanwhile have cut back on lending to reduce risk to Genius A's money is safe in the bank not being lent out. Once the Fed reduces rates the bank lends the money to someone and this starts to get the economy moving again by having money change hands

or to put it another way, the money the suckers spent buying up bank stocks 6 months ago when the bank bulls in that thread were saying how cheap the stocks were still exists in the CEO's pocket since it was his stock you bought after he exercised his options. Only he doesn't need to spend the $400 million he has in the bank so it just sits there and you are out a lot of money. but then again he might buy another mercedes to replace his current one. CNBC filmed him driving in to work when BAC bought the preferred stock and he might want a new retirement car

 

[cute fuzzy bunny]

Are you asking for math help? OK, first "B" means billion and "T" means trillion.

Now, you might want to figure out a few things:

1) How much the stock market really lost (clue: it wasn't $19 trillion, nor was it $9 trillion, nor was it $9 billion).

2) How much of that was owned by households as opposed to institutions and companies.

3) Once you calculate that number, you'll see how a much smaller loss led to a fairly significant recession.

4) Now try to understand how the potentially $6-7 trillion lost in housing wealth also might lead to losses in other markets, add those numbers up, and tell us what you think the effect on the economy might be.

Then we can move on to harder stuff, like division.

Right, it was nine trillion lost from the nyse and nasdaq from the peak to the trough. My bad.

"As of September 24, 2002, the Dow Jones Industrial Average had lost 27% of the value it held on January 1, 2001: a total loss of 5 trillion dollars. It should be noted that the Dow Jones had already lost 9% of its peak value at the start of 2001, while the Nasdaq had lost 44%. At the March 2000 top, the sum in valuation of all NYSE-listed companies stood at $12.9 trillion, and the valuation sum of all NASDAQ-listed companies stood at $5.4 trillion, for a total market value of $18.3 trillion. The NASDAQ subsequently lost nearly 80% and the S&P 500 lost 50% to reach the October 2002 lows. The total market value of NYSE (7.2) and NASDAQ (1.8 ) companies at that time was only $9 trillion, for an overall market loss of $9.3 trillion."

As far as the rest, its amusing how the full weight and bearing of everything applies to the housing "loss" while all sorts of caveats apply to the actual market losses. :

Oh, and while you're dividing, the bust was never actually counted as a true recession, since the GDP never stopped growing. Much of the serious loss occurred not because of the nasdaq bust but rather the general malaise caused by the screwed up presidential election, the frauds at Enron, Worldcom, Tyco, AIG and others, and 9/11. That hit far more investors than the moronic late 90's internet investing gamblers that came late to the party.

Real money was lost by lots of real people. Not some faux real estate valuation that most people watched go up, come down, and end up right where it was a couple of years prior.

Of course, anyone that waited around and did nothing with their investments for 2 years in 2000-2001 was amply rewarded. I think that people who didnt do massively stupid things like buy extra homes at the peak, or buy in too high as a first timer will find very little badness happening to them by 2009-2010...

 

[twaddle]

As far as the rest, its amusing how the full weight and bearing of everything applies to the housing "loss" while all sorts of caveats apply to the actual market losses. :

Ah, the "caveats" are these:

1) Consumer spending represents 70% of GDP.

2) Consumers own $21 trillion worth of houses. They own less stock. A lot less.

I guess these things don't matter. Whew -- that's a relief. Would somebody please tell the market. It's all been a terrible misunderstanding.

 

[barbarus]

The enormity of the housing bubble disaster has been apparent for several years. I learned about it rather late, thanks to a few blogs, about 2 years ago after it was well under way.
The information is archived and easily accessible.

People on this blog are pilloried as "tin hats" if the introduce concepts that deviate from the comfortable fantasies so prevalent here. And posters on this blog are virtual sophisticates compared to "da little guy on da street", to whit, J6P and Jason Winecooler, who are starting to resemble pole-axed steers.

Worldwide, housing fraud is so pervasive and extensive that we are presented with the potential for a fundamental financial dislocation. There are many strengths remaining in our economy, but their ability to sustain is about to be shaken to the roots.

Other than that, have a nice day.
Love ya guys!!

 

[cute fuzzy bunny]

Oh. My. God.

So you mean that people who sold their overpriced homes and bought other overpriced homes are just SOL? What about the people who downsized?

As soon as I see a credible source that shows actual transaction counts of homes that were bought and sold or refi'd and the cumulative actual losses, this is a bunch of smoke and poofery.

Just what you're famous for!

I'm betting the actual "losses" to be in the billions, not the trillions. Over all US homeowners and average holding periods, its practically lost in the economic noise. But what does count is when people get all worked up about what they THINK is a problem (that isnt) and react and overreact to nonexistent hoo hah.

What works is when you KNOW its hoo hah and can make money off of the sheep. Sheepherding does not, however, pay very much.

Oh shoot, I forgot...
twad·dle (twdl)
intr.v. twad·dled, twad·dling, twad·dles
To talk foolishly; prate.
n.
Foolish, trivial, or idle talk or chatter.

 

[cube_rat]

Well, it is nevertheless true that Twaddle was a housing bear way before this all started, and in fact followed his own advice and got rid of an extra house he was holding. Similar moves were made by several other posters.

It is hard to realize now, but being bearish on housing while living on the West Coast was quite a feat in and of itself. Even now here in Pugetopolis many cannot bring themselves to believe that prices are headed down. I accept it intellectually but resist it emotionally, and I have much more to gain from price drops than I have to lose from gains

Ha

I was one of those bearish defectors from the SF area. If you bought real estate pre-2001 with a 30/yr fixed, you're most likely okay, provided you did not use your property as an ATM. If you bought between 2003-2005 with no money down with an adjustable rate or used negative amortization, you're probably screwed.

 

[HFWR]

"Paper losses" in housing or in stocks wouldn't be so bad if most people didn't rachet up their spending and expectations based on the "paper gains"...

 

[twaddle]

twad·dle (twdl)
intr.v. twad·dled, twad·dling, twad·dles
To talk foolishly; prate.
n.
Foolish, trivial, or idle talk or chatter.

Thanks for that service. I knew you would compensate for the lack of math skills somehow. (Is somebody named "cute fuzzy bunny" really making fun of my username?)

FWIW, I'm not really touting my prediction-making ability. Anybody could look at the data and draw the same conclusions I did. I'm just amazed at how the "official" economic predictions have unfolded. My 2006 prediction is now mainstream, and that surprises me on several levels.

 

[danm]

barbarus - brilliant. I too don't understand the bluff and bluster with non consensus discussions here. I like to talk to people who disagree with me - sometimes I change my mind.

 

[danm]

Here too. The house I sold is going to fund my early retirement. Those monies are up 20% YOY too - because they were placed in bearish investments.

I was one of those bearish defectors from the SF area. If you bought real estate pre-2001 with a 30/yr fixed, you're most likely okay, provided you did not use your property as an ATM. If you bought between 2003-2005 with no money down with an adjustable rate or used negative amortization, you're probably screwed.

 

[cute fuzzy bunny]

I love non consensus discussions where there are actual facts involved, or even reasonable opinions. But I dont suffer fools gladly, especially the ones who have opinions with no data or where the data contradicts the opinion.

Nobody is criticizing your seer-like ability Wab. Its obvious prices went up too far too fast, just like they did in '98 and '99, and any reasonable person would have known better than to overpay for a house. Yet there is that same ridiculous mentality in RE that there is in equities, where everyone wants to overpay when prices are skyrocketing, and nobody wants to buy when everything is on sale.

The question is, what was the actual damage done. The answer is that we dont really have any flaming idea, but its most certainly not the entirety of the peak value minus the current value, just like the actual stock market losses in 2000-2002 werent peak to valley either.

My point was, the impact is probably similar. Highly emotional and minimally economic. Short term in nature and very trade-able.

I just cant figure out how the heck I bought a house in 2002 and sold it for a profit in 2007 in one of the most inflamed real estate regions in the country...and then bought a nicer bigger house with cash from all my RE profits from the last 15 years...

 

[twaddle]

Well, the problem with predictions is that the world isn't static, and markets don't have a physics. So, we really don't know what will happen.

But this isn't the first housing bubble, and many of them have fully corrected historically. Maybe it'll be different this time.

And houses are different than stocks. Home equity extraction. Speed of corrections. Share of consumer's net worth. All different.

The only place that had a bubble of similar magnitude is Japan, but Japan is different in many ways, so we won't know until we know....

 

[cute fuzzy bunny]

Not really very fair Ha. You often have a well reasoned "non consensus" opinion, usually with some background in data and experience, and I for one listen to that very closely and have occasionally taken investing action based on your opinions. For example, when you dove into ISM, I figured that was the last straw, I oughta buy some too. Uh, maybe a bad example...

Not very many people have been banned here. A guy who threatened the board operators grandkids. A couple of people who injected their single noted wonderness into every single discussion thread they could, to the distraction of good discussion. A couple of people who seemed to post only to annoy other people and rarely with any value.

I havent seen a well reasoned person with good opinions and good data get called a troll and run off. Ever.

But yeah, unfounded bearishness and people who read a book and think they're an expert in all matters arent often well received by people who live or plan to live on their investments.

 

[haha]

so how exactly does the money vanish?

I will assume that is a real question. The answer lies in the fact that prices, thus capitalizations, are made at the margin. On the day that Mr. CEO nailed down a huge profit, and all the people who bought from him (and all the subsequent owners taken together as a group) nailed down loss, there were many more holders who did not trade. Eventually all these stockholders as a group got hosed, and there was no counterparty to gain. (This is because unless the corporation buys in the stock and retires it, somebody will always own it.)

Value at the top is created by the price that the marginal buyer will pay. It may be a trade of only 100 shares.

Value at the bottom is created by the price the marginal seller is willing to take. Again, it may be only 100 shares.

All the rich people who owned a $500 Roman candle stock surely thought they had wealth. They could sell it (as long as not too many others had the same idea), they could margin it for cash loans, or they could just brag about it on an internet board.

But when they saw it go into bankruptcy, or find a semi-permanent resting spot around $10, could they still sell it for $500? Could they still margin it and borrow $250 per share?

So this is where the wealth went. It vaporized.

For all the sober talk about allocations and returns and stuff, most of us would be well served to remember that really this just another casino.

Ha

 

[barbarus]

We are indeed just expressing opinions, but there are facts to be had to back them up, for and against. Would the readers of this blog gladly suffer a list of references like those at the end of an article published in a refereed journal?
Which academic style should we chose? Will footnotes be required? How many pages? Is there any way I can get extra credit?

Here is just one hint of things to come.

Old Ben Bernanke, the Jedi master, said last week we might be in for a little slow down, giving the spin that there is not much to worry about. At the same time he's virtually pleading with Congress to stimulate the economy.
Now, after a series of inflationary rate cuts, he makes a virtually unprecedented 75 basis point emergency cut at an off-session time, just as the US stock market is beginning to turn turtle in a big way.
He's scared. Rather badly too. His actions are much more telling than his verbiage. Like a ravening drug fiend, the market is demanding even more slashing at the regular Fed meeting next week and soon more thereafter.
"Easy Ben" can not cut any more than 350 further basis points, unless he has created some sort of negative interest.
As it is, inflation is headed through the roof, waving at the dollar as it passes by sinking through the floor. These are easily accessible numbers it would behoove us to follow. As some other sites say: Got popcorn?

 

[haha]

Not really very fair Ha. You often have a well reasoned "non consensus" opinion, usually with some background in data and experience, and I for one listen to that very closely and have occasionally taken investing action based on your opinions. For example, when you dove into ISM, I figured that was the last straw, I oughta buy some too. Uh, maybe a bad example...

Not very many people have been banned here. A guy who threatened the board operators grandkids. A couple of people who injected their single noted wonderness into every single discussion thread they could, to the distraction of good discussion. A couple of people who seemed to post only to annoy other people and rarely with any value.

I havent seen a well reasoned person with good opinions and good data get called a troll and run off. Ever.

But yeah, unfounded bearishness and people who read a book and think they're an expert in all matters arent often well received by people who live or plan to live on their investments.

You are right. I was just shooting off my mouth.

I'll take the post down.

Ha

 

[twaddle]

Value at the top is created by the price that the marginal buyer will pay. It may be a trade of only 100 shares.

Value at the bottom is created by the price the marginal seller is willing to take. Again, it may be only 100 shares.

Bingo. I don't recall the exact figure for houses, but in a given year, I believe it's something like 5% of houses are for sale. Those are the sales that define prices.

Right now, 3.5% of the houses in California have had a Notice of Default filed against the owners. Combine that with the already high inventory and dearth of buyers, and the direction of prices should be clear to all.

Calculated Risk: Record California Foreclosure Activity in 2007

 

[barbarus]

Good post Ha.

To extend the nuclear reference, a convenient working model is that real wealth can neither be created or destroyed, only changed in form.

Money, on the other hand, can be printed ad infinitum, by the presses of the Federal Reserve, (actually the Treasury under the influence of the Fed), resulting in an inflation devastating to fixed-income people, but eminently useful to a profligate government.

 

[haha]

We are indeed just expressing opinions, but there are facts to be had to back them up, for and against. Would the readers of this blog gladly suffer a list of references like those at the end of an article published in a refereed journal?

Just try us

"Easy Ben" can not cut any more than 350 further basis points, unless he has created some sort of negative interest.

He has. See your very next statement for how.

As it is, inflation is headed through the roof...

Nominal interest rate minus inflation rate equals real interest rate. We already have negative real rates, and he is just getting started. I think after this little scare goes away at least some asset classes are going to really like this situation.

All old Ha is interested in is figuring out which pigs are going to get the lipstick.

Ha

 

[twaddle]

All old Ha is interested in is figuring out which pigs are going to get the lipstick.

That's a good question. We should probably start by asking who will have access to all that cheap capital. Not many consumers since credit underwriting is tight. Not many leveraged companies.

Basically, that leaves people like us who will probably mortgage our homes to buy index funds. So, there's your answer.

 

[Running_Man]

so how exactly does the money vanish?

one day idiot #1 buys Yahoo at $1000 a share and spends say $100,000 giving it genius A who sells close to the top.

Genius A now has $100,000 in the bank from that sale and keeps it there since he thinks the Naz is toast

2 years later idiot #1 finally parts with Yahoo at $10 a share and loses a lot of money.

Genius A still has the money earning 2% a year because he is thrifty.

At the point where the idiot is buying Yahoo for $100,000 I would say that both the idiot and the Genius had $100,000 in net worth for a total of $200,000. At the bottom only the Genius has any wealth and the combined value is now only $100,000 after commission costs and a couple of iced coffees at McDonald's.

 

[armor99]

We are indeed just expressing opinions, but there are facts to be had to back them up, for and against. Would the readers of this blog gladly suffer a list of references like those at the end of an article published in a refereed journal?
Which academic style should we chose? Will footnotes be required? How many pages? Is there any way I can get extra credit?

Here is just one hint of things to come.

Old Ben Bernanke, the Jedi master, said last week we might be in for a little slow down, giving the spin that there is not much to worry about. At the same time he's virtually pleading with Congress to stimulate the economy.
Now, after a series of inflationary rate cuts, he makes a virtually unprecedented 75 basis point emergency cut at an off-session time, just as the US stock market is beginning to turn turtle in a big way.
He's scared. Rather badly too. His actions are much more telling than his verbiage. Like a ravening drug fiend, the market is demanding even more slashing at the regular Fed meeting next week and soon more thereafter.
"Easy Ben" can not cut any more than 350 further basis points, unless he has created some sort of negative interest.
As it is, inflation is headed through the roof, waving at the dollar as it passes by sinking through the floor. These are easily accessible numbers it would behoove us to follow. As some other sites say: Got popcorn?

Wow...... so negative!!! I tend to look at this with an optimist point of view. My retirement horizon is at least 15 years away. This is a time to buy! A time to plan. A good time to buy a car, or maybe that investment property I have been thinking about. Even in a down market there are ways to succeed, if you dare to try. You seem to have a vested interest and desire for things to fail that I just cannot fathom....