Replies

We're pretty much on the same page. I'm with you on the dollar. The dollar has been undergoing an adjustment since mid-2001 (against the Euro, I don't track the trade weighted index). It's so obvious at this point that virtually everyone who wants to short the dollar has long since gone short. We could see that coming from a long way off with the bubble burst and 911. That adjustment won't continue forever, so, at some point, the market starts to discount whatever macro issues are going to happen next and all the big players hand off their positions to Johnny-come-lately types.

Asset bubbles - bad, very bad. You describe the situation very well. It is the drag-along economic activity combined with the asset feeding frenzy that creates the "virtuous cycle" that IS the bubble. Ed Yardeni used to provide a very nice web site that include data on household balance sheets, debt levels, income, just about everything I could think of. He went off line for a while and I've lost track of the data. If we are really seeing speculation start to drive the real estate market then we are all in it deep.

The last data I saw on household balance sheets (a year or two ago) indicated that people were surprisingly able to afford their mortgages. My HOPE is that business investment will recover in time to take some heat off the real estate market by providing an income (GDP) source beyond the interest rate induced housing "multiplier". The thing I take some comfort in regarding real estate, versus say stocks or tulips, is that the interest rate induced activity creates permanent, valuable, hard assets. The stock market bubble was pure vapor. Billions of dollars were literally being thrown at ideas based on the religion of the day ... new economy concept. Even the massive amounts of fiber that was run by telecom companies was predicated on enormous growth from all those vapor products.

As those overextended households at the margin get squeezed out of their homes, or as those REIT's get squeezed out of their apartment / condo complexes, and as prices drop, there is a large pool of dual income families who will buy houses and soften the blow. When the stock market started down there was no bottom. The NAZ lost something like 80% of its value because it was all vapor. The key question is 'just how big is that group at the margin?'. If they're not really the margin anymore then we're in big trouble. If they are indeed the margin then I have hope that the bulk of wage earners could absorb the assets of the weak and prevent a calamitous blow out.

Well, I believe that the household debt-to-equity numbers are telling a rather convoluted story. Is this improvement caused by the consumer reducing his debt, or the value of his house going up? Obviously, it's the latter, for aggregate debt levels are increasing. So, this statistic only looks good as long as real estate values are escalating. However, once they start going down, debt-to-equity ratios will increase, correct?

To a certain extent, using household debt-to-equity ratios as a sign of consumer health in the middle of a real estate bubble is akin to looking at net worth data in March 2000. Aren't both numbers being dramatically skewed by the asset bubbles of their day?