Financial topics

[vincecate]

“You could have flat nominal prices but still have it go down 20 percent,” Case said during an interview at the conference. “If house prices stabilize, they could still go down in real terms. If we had inflation, it’d be great, because it’d mask a 25 percent decline.”

This is one of the things that make me angry at these "experts" on television. He's saying that 25% inflation "would be great!!" because it would mask the 25% fall in housing prices. This is about as airhead a remark as one can imagine. In fact, a 25% fall in housing prices would mean deflation, not inflation.

What he is saying is that if the price of everything else goes up 25% over a period where the real price of houses went down 25% then the nominal price would hold the same. So a 25% fall in real prices could be masked in this way. A simpler way to say this is, if the price of everything else goes up 25% and house prices stay the same, then adjusted for inflation, houses have really gone down 25% in value. The reason he probably thinks it would be great is that less people will be "underwater" on their mortgages and so less people will walk away, and things will be easier on the banks.

real price = adjusted for inflation
nominal price = quoted price at that time

[Higgenbotham]

In yesterday's "World View," I repeated Robert Shiller's statement
that he wouldn't be surprised if housing prices fell an additional
10-25%.

The article that I referenced contains the following:

> While it would be a surprise to see prices fall steeply, it’s
> possible for homes to lose more value if inflation picks up, Karl
> Case, co-founder of the index, said today.

> Real Terms

> “You could have flat nominal prices but still have it go down 20
> percent,” Case said during an interview at the conference. “If
> house prices stabilize, they could still go down in real terms. If
> we had inflation, it’d be great, because it’d mask a 25 percent
> decline.”

> http://www.bloomberg.com/news/2011-06-0 ... e-me-.html

This is one of the things that make me angry at these "experts" on
television. He's saying that 25% inflation "would be great!!"
because it would mask the 25% fall in housing prices. This is about
as airhead a remark as one can imagine. In fact, a 25% fall in
housing prices would mean deflation, not inflation.

I've been listening to people predict (hyper)inflation for almost ten
years. We're now halfway through 2011, with no real inflation
anywhere in sight. Case's remark is what I mean when I say that
predictions of inflation are the same kind of wishful thinking as
comes from people who used to say that there was no real estate
bubble, and are now saying that the stock market will surge in the
last half of the year.

John

There's a lot that I'm not certain about. But one thing I am nearly 100% certain of is more inflation in food and energy will cause housing prices to fall more. Instead of falling 10-25%, they might fall 30-50%. In fact, it's already happening. It goes against all experience of recent decades, but it's similar to my recent comments on vehicle miles traveled. If consumers are squeezed too much by inflation in food and energy, they will buy fewer cars and drive less. That has been happening since 2007 and it has never happened before. Likewise, they will buy fewer houses and move in with relatives, etc. If they move in with relatives they will buy even fewer cars and drive even less because they can share vehicles, make trips to the store together, and don't have to drive to visit each other.

The bottom line is Karl Case is wrong. There isn't any way to support nominal house prices by increasing inflation. Increasing inflation will cause nominal house prices to fall more than they otherwise would. As you said, wishful thinking.

[vincecate]

The bottom line is Karl Case is wrong. There isn't any way to support nominal house prices by increasing inflation. Increasing inflation will cause nominal house prices to fall more than they otherwise would. As you said, wishful thinking.

I agree. In the short term higher interest rates result in higher monthly mortgage payments and so lower house prices to meet the buyer's budget. Eventually inflation would drive house prices up, but the first impact will be on interest rates and higher interest rates will result in lower house prices (and stock prices). So inflation will make housing crash worse before it starts to support nominal house prices.

The only way Case makes any sense is if it is over a long period, like 10+ years. Then the inflation could be gradual enough it might not drive up interest rates. I don't think events are moving that slowly any more.

[aedens]

Local housing numbers to date. People are leaving the area who can and earlier speculation was rental spaces. That has ceased to a degree. Condo prices went from 68K average to 40K in many cases. Flat, ugly and ongoing in our immediate area. In terms of real dollars CPI we have a ways to go and may run some numbers later but that will be late fall. Cash labor is all time high for work in area IMO I have noted. The Churches are keeping people alive with food so many can survive in a home. Meanwhile the crayon chewers with red and blue colors fill in the map for the election process. It is beyond words how disconnected things are in the press. We are out of time very soon and careless direction has sealed the fate more than they even realize as we speak today.
http://www.chicagotribune.com/business/ ... 5550.story

kgraph.png (7.54 KiB) Viewed 4014 times

[OLD1953]

Been travelling and reading bits from John's dailies to various military I'm with. Mostly approving nods, occasional surprise.

General agreement though is that we are in for a helluva time.

[John]

> Been traveling and reading bits from John's dailies to various
> military I'm with. Mostly approving nods, occasional surprise.

> General agreement though is that we are in for a helluva time.

Did anyone say anything along the lines of, "What he said there
is completely wrong"?

John

[John]

World's Largest Trader: "We're On The Verge Of A Great, Great Depression"--"Near Panic"

Peter Yastrow - World's largest libor trader

[vincecate]

World's Largest Trader: "We're On The Verge Of A Great, Great Depression"--"Near Panic"

Peter Yastrow - World's largest libor trader

He says we are on the verge of a great depression but that people should not short the S&P. He thinks the earnings on stocks is better than bonds or other options. Does he also think earnings will not go down in a great depression? If interest rates are at record lows, doesn't he think they will be going up? Seems like he is has not thought this through all the way.

[Higgenbotham]

World's Largest Trader: "We're On The Verge Of A Great, Great Depression"--"Near Panic"

Peter Yastrow - World's largest libor trader

He says we are on the verge of a great depression but that people should not short the S&P. He thinks the earnings on stocks is better than bonds or other options. Does he also think earnings will not go down in a great depression? If interest rates are at record lows, doesn't he think they will be going up? Seems like he is has not thought this through all the way.

I noted the time that interview was posted on his blog as the morning of June 1. The S&P fell 80 points in a straight line in only 9 days from the time he spoke.

Bill Gross has said the same type of thing - that investments should be made in dividend paying staples like Procter and Gamble.

I used to work for a consumer products company in the manufacturing plants (food processing). Generally, this information should be freely available but I can tell you the advertising and other non manufacturing related costs are a larger percentage of the price tag on the shelf than the manufacturing cost itself. The company sold finished product for about $3 per pound, of which overhead was about half, manufacturing cost about 30 percent and profit about 20 percent. The manufacturing cost included all processing and packaging to the point of transport.

Seems to me that in the next great depression entrepreneurs will find ways to bulk manufacture and deliver things like laundry detergents for a fraction of what the large consumer products manufacturers are able to.

I think the problem a lot of these guys like Yastrow and Gross and Bernanke have is they have never manufactured anything and have no concept of how overheads can be shaved to the bone by private entrepreneurs in such a way that publicly traded companies will see none of the profit whatsoever. Given that it wouldn't take much of a reduction in sales (less than 40 percent, I would think) to render a behemoth like Procter and Gamble nonprofitable, I think any investment in even a supposedly safe company like that is extremely risky.

For Procter and Gamble,

Period Ending Jun 30, 2010 (All numbers in thousands)

Total Revenue 78,938,000
Cost of Revenue 37,919,000 (48%)
Selling General and Administrative 24,998,000 (32%)
Operating Income 16,021,000 (20%)

Cost of Revenue (or Cost of Goods Sold) is generally considered to be manufacturing cost.

P&G doesn't have as much overhead and income as the company I worked for (52% vs 70%) but private competitors still have a healthy chunk to go after and consumers have a healthy chunk of potential savings to realize. This company is a sitting duck in my opinion.

[John]

Bill Gross this morning on CNBC:

Becky, this country has a present value debt level of nearly
$100 trillion, and that includes Medicaid, Medicare, Social
Security, and other obligations. To think that we could reduce
that within the space of a year or two is not a realistic
assumption. To compare the 100 trillion, if in fact that's the
right number, to our GDP at around $15 trillion, that's a
six times number. That's much more than Greece, much more
than almost any other developed country.