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Author Topic: No Virginia, Alan Greenspan isn't Santa Claus
rasmus
malcontent
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posted 31 August 2002 10:46 AM      Profile for rasmus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Now that the housing bubble has replaced the stock bubble as a destination for irrational investment, Alan G. has been talking up the real estate market and rationalizing its inflated values. Meanwhile, Pollyanna "analysts" from corporate institutions and government, who all have a vested interest in saying the economy won't get any worse, have been pooh-poohing the idea of a double-dip recession, even though:

  • Every recession since WW II has been a double-dip recession
  • The recession we've just had was the mildest recession since the war
  • The financial excess that preceded it was the most severe in history

It doesn't add up. Well now the chickens are coming home to roost.

On Thursday, the Financial Times reported that insider trading data show that housing executives have been selling off their stock like crazy in the last month or two. Usually, insider trading of this nature presages a drop in stock price two months later. Obviously, their estimate is that the housing market has peaked. If stocks fall further, or if there is greater unemployment, then demand for liquidity will increase relative to supply, and you'll start to see houses sold off. Which will eventually crater the market.

Further, July was the heaviest month in investment fund outflows in God knows how long: $50 billion were withdrawn from funds.

Some say that companies are sitting on mounds of cash now and could buy undervalued stocks, but the question is, are stocks undervalued? Not on historical measures, and besides, everyone knows corrections overshoot on the downside, and this hasn't happened yet.

Yesterday, we found out that Personal income has stopped growing in the US, adding to fears of a double-dip recession. Meanwhile, jobless claims in the US are on the rise again.

If you add it all up, it's not a pretty picture.

[ August 31, 2002: Message edited by: rasmus_raven ]


From: Fortune favours the bold | Registered: May 2001  |  IP: Logged
Michelle
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posted 31 August 2002 10:58 AM      Profile for Michelle   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Isn't that strange, Rasmus, because I've been thinking lately that instead of trying to save up for retirement with RRSPs and mutual funds, that I would buy a house instead (and maybe another house as an income property) so that at least I can have something solid that feels like security.

And now housing is going to become the new bubble with overinflated prices so by the time I'm in the market for a mortgage, housing is going to either be out of my reach or so inflated that I'll have to pay much, much more than the house is worth.

Maybe I'll just buy a tent, find a plot of land that will grow vegetables, and say goodbye to civilization.


From: I've got a fever, and the only prescription is more cowbell. | Registered: May 2001  |  IP: Logged
josh
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posted 31 August 2002 12:03 PM      Profile for josh     Send New Private Message      Edit/Delete Post  Reply With Quote 
Housing prices in my area are insane. We bought our house a little over a year ago and now someone on my block has an asking price 33% higher than what we paid.

It's ironic because normally housing is one of the first things to collapse in a recession.


From: the twilight zone between the U.S. and Canada | Registered: Aug 2002  |  IP: Logged
DrConway
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posted 31 August 2002 04:00 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Yes, but land prices rise in inflationary eras, and we have a case of unusually cheap credit compared to the 1980s. Given also that the USA has showed a 30-year peak of inflation every third decade since the 1870s, and it's been 30 years since the 1970s, when land prices rose by 10 to 15 percent per year, and I'd say that the land price and real estate boom portend another inflationary spasm due to hit this year or next.

There is also nothing to prohibit the idea of an inflationary recession. Look at 1974-75, or 1979 to 1983.

[ August 31, 2002: Message edited by: DrConway ]


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
josh
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posted 31 August 2002 04:08 PM      Profile for josh     Send New Private Message      Edit/Delete Post  Reply With Quote 
But couldn't it also portend a deflationary era?
There's very little inflation elsewhere in the economy. And the rise in housing prices, prices have actually been high for several years, could be attributed to people putting money into housing because no other assets have been providing any return the last two years?

When people realize there's nothing to sustain the high real estate prices, other than speculation, won't a deflationary crash follow?
(See NASDQ).


From: the twilight zone between the U.S. and Canada | Registered: Aug 2002  |  IP: Logged
DrConway
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posted 31 August 2002 04:16 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
I've been reading everywhere of an odd accleration in the pace of home buying, and a general rise in house and land prices. I'd say that this isn't generally true in deflationary eras because home buying is generally associated with a lot of debt, and debt becomes very difficult to service in deflationary times, since dollars become more valuable, not less valuable, over time. (In effect, incurring debt is a function of the fall in the value of money)

I grant that there's little inflation right now relative to the 1970s, but inflation rates have picked up in Canada a bit since the 1990s, and in fact the last two years have averaged at 2.6% per year, up from a 1990s average of 1.9% per year.

As well, energy prices continue to be higher than in the 1990s.

Addendum:

Recall your 1970s history. Post- the 1969-70 recession and the 1972-73 run-up and quick letdown, land prices began to really get going while the stock market piddled along.

People couldn't get a return on the stock market because the high inflation rates back then eroded any gains they made, so they turned to an asset that would gain faster than the inflation rate - land.

Seems oddly familiar, doesn't it?

[ August 31, 2002: Message edited by: DrConway ]


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
josh
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posted 31 August 2002 04:49 PM      Profile for josh     Send New Private Message      Edit/Delete Post  Reply With Quote 
But now people can't get a return in the stock market because of a collapse in prices, not because of inflation. People are investing in land because it's the only "action" around.
I still think, sooner or later, that bubble will pop and lead to further weakness in the economy, not to inflation.

From: the twilight zone between the U.S. and Canada | Registered: Aug 2002  |  IP: Logged
DrConway
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posted 31 August 2002 04:54 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
It's not exactly identical, but it is an interesting similarity - recall that it doesn't matter how your stocks fail to bring you returns if they don't bring you returns. A fall in the value of money can erode your share returns just as much as generally anemic performance of the stock market absent inflation.

It *is* to be noted that inflationary spirals are often causes and effects of different components within them.

Land goes up, so people pay more property tax, so they get higher wages, and they sell to someone else who needs higher wages to pay the higher interest on their new debt, which drives up land prices as the original person seeks other property elsewhere, which...

Anyway, you get the idea. Anything can spark it off. Last time it was a sharp increase in the price of oil. This time it could be a sharp increase in land prices and a devaluation of the US dollar, which would indirectly drive up oil prices and the price of many critical imported products.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
rasmus
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posted 31 August 2002 08:26 PM      Profile for rasmus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Yes, it's a housing bubble-- check out the latest commentary on itulip.com! Be sure to click through to the continuation of the commentary. It's pretty funny.
From: Fortune favours the bold | Registered: May 2001  |  IP: Logged
rasmus
malcontent
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posted 31 August 2002 08:32 PM      Profile for rasmus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
This commentary is pretty cool too!
From: Fortune favours the bold | Registered: May 2001  |  IP: Logged
Michelle
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posted 31 August 2002 09:24 PM      Profile for Michelle   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Anyone have any idea on how people should prepare for retirement if you can't save your money or spend it on real estate?

I'm getting depressed here.


From: I've got a fever, and the only prescription is more cowbell. | Registered: May 2001  |  IP: Logged
DrConway
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posted 31 August 2002 09:56 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Government bonds.

Why?

Because the yield on bonds rises as inflation rises, so if you stick to one-year bonds until the inflationary surge hits, you'll be in good shape when the time comes to buy a whole batch of 15% bonds.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
Michelle
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posted 31 August 2002 09:58 PM      Profile for Michelle   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Good point. But will I be able to buy a house anytime soon? You know, to live in? Should I save up as much money as possible in bonds and then pay cash for a house after this bubble bursts, or should I buy a house now (well, after I get out of school of course) and carry a mortgage instead of paying rent even though the housing prices are going high?
From: I've got a fever, and the only prescription is more cowbell. | Registered: May 2001  |  IP: Logged
Pogo
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posted 31 August 2002 10:02 PM      Profile for Pogo   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Michelle,

If you haven't a penny to invest, then the best way to prepare for retirement is to reign in your lifestyle, before retirement does it for you. There is lady in Seattle who publishes the "Simple Living Journal". I used it to remind myself that I was not only living beyond my means, but that my needs were actually wants (there is a person in Oregon attempting to live on $650 per year). You can also check to see what requirements are needed to be a Walmart Greeter, they seem to hire seniors.

If you are capable of putting miniscule amounts away, look at 'labour sponsored investments'. The actual funds vary from province to province. The Federal government gives a credit of 15% and most provinces match this. My wife and I did this 7 years ago out of desperation (didn't have money to buy anything else). With the Fed 20%, the BC 20% (the credit was bigger back then) and the RRSP return we got most of our money back (we will have to pay taxes on whatever we take out). We were able to invest $5000 with about $500 worth of our dollars after the tax return. Remember also GST tax credits and Child tax credits increase when RRSP investments reduces your taxable income.

[ August 31, 2002: Message edited by: Pogo ]


From: Richmond BC | Registered: Aug 2002  |  IP: Logged
DrConway
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posted 31 August 2002 10:12 PM      Profile for DrConway     Send New Private Message      Edit/Delete Post  Reply With Quote 
Labour sponsored venture funds have been targetted by Jim Stanford as a prime example of how to abuse the tax system's generosity.

Anyway, the one thing is that if you do it right, you can come out ahead on a mortgage if you lock in just before the inflationary surge hits so that the interest you pay on the loan is less than the inflation rate. For as long as that happens, the fall in the value of money benefits you more than the bank, since your wages may go up and your bond yields will rise.


From: You shall not side with the great against the powerless. | Registered: May 2001  |  IP: Logged
Michelle
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posted 31 August 2002 10:34 PM      Profile for Michelle   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Nah. I can't put any money away right now. Not only don't I HAVE any to put away, but if I did save up money, I would just be penalized on my student loans, or on my subsidized day care. So there's not much point.

After I'm done school, I was thinking of doing that voluntary simplicity thing by choice (I do it somewhat now, but by force!) and see whether I am happier. I think I probably will be.

But I still want to own a house. That's the one thing I really want. I want a place where my grandchildren can come to visit me, and a place where I will never be turned out (if I own it) when I'm old and possibly alone - after all, you never know what reversals of fortune might come as you get older.


From: I've got a fever, and the only prescription is more cowbell. | Registered: May 2001  |  IP: Logged
Pogo
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posted 31 August 2002 11:35 PM      Profile for Pogo   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
First, double check what numbers are used to judge your ability to receive subsidy. In BC 6 years ago, it was not Net Income, and RRSP contributions actually lowered it, giving us more subsidy.

quote:
But I still want to own a house. That's the one thing I really want. I want a place where my grandchildren can come to visit me, and a place where I will never be turned out (if I own it) when I'm old and possibly alone - after all, you never know what reversals of fortune might come as you get older.

Easiest option is to get into a coop. As your membership shares are equity in the coop, you have ownership of your unit (not freehold or strata, but you still own it). As long as you are an acceptable neighbor (and the tolerance is usually very high), your security of tenure is as secure as a freehold/strata home. The coop where I live recently had a third generation family get accepted for a suite, and there is nowhere better than a coop to raise a family (or grandchildren).

If traditional ownership is necessary, RRSP's are the best vehicle (the Homebuyers Plan is imperfect, but does let you use before tax money as a downpayment). But prior to that, paying down debt is equally as important, and is probably okay with childcare subsidies.


From: Richmond BC | Registered: Aug 2002  |  IP: Logged
meades
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posted 01 September 2002 05:38 AM      Profile for meades     Send New Private Message      Edit/Delete Post  Reply With Quote 
I have a question- what affect will this have on the not-quite-recent federal government's sort-of-almost-barely commitment to social housing? Does this mean the little money that's been allocated so far will do even less now?

And over what time frame do you expect this to play out over? I'm so totally depressed now...


From: Sault Ste. Marie | Registered: May 2001  |  IP: Logged
rasmus
malcontent
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posted 03 September 2002 11:13 AM      Profile for rasmus   Author's Homepage     Send New Private Message      Edit/Delete Post  Reply With Quote 
Even CNBC is talking about deflation, here and here

What time span? Fairly long, I would think -- 6 to 8 years? We've just been through the greatest financial excess in history. We won't get out with a mild, short recession.

If you think about the trader's rule of thumb, that a bear market lasts half as long as the bull market that preceded it, then you would expect the stock market to pick up in 2009. Because the bull market went from 1982-2000. The stock market generally picks up before the real economy shows signs of revovery, so...

2007-2008 might be a good time to buy more stock. If we haven't abolished the stock market by then.


From: Fortune favours the bold | Registered: May 2001  |  IP: Logged
josh
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posted 05 September 2002 11:36 AM      Profile for josh     Send New Private Message      Edit/Delete Post  Reply With Quote 
Dr. C:

Per our discussion about housing, I thought you might be interested in this article:

http://makeashorterlink.com/?F2BA113B1


From: the twilight zone between the U.S. and Canada | Registered: Aug 2002  |  IP: Logged

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