There will be a slow, grinding, downward adjustment of all dollar prices

The National Investor/The American Spectator ^ | 2001 | Jude Wanniski

[JNB]

You are very arrogant, and while you may not be a Limbaugh devotee, you spew the same nonsense that he does. I gave you reasons why the intrest rates have gone down in the last 3 weeks, it is not a normal situation, but a situation brought on by emergency measures by the FED in a effort to "rate cap" and the Bank of Japan(BOJ) in a all out effort to prop up the dollar against the Yen. What I said about the dollr going in deceline of value, causing commodities to go up in price while financial assets to go down is not a contradiction, but in fact, it is what has taken place in Japan in the last decade, and the US experienced a whiff of this in the 93-94 period.

As for actual numbers prediction, I refuse to play those games, yes, minipulations make predictions difficult, but its far more difficult to hide problems in the real economy.

This is what I speculate. The bond yeilds going below 3.75% on the 10 year bond has ignited a new leg to the re-fi and real estate boom, this will keep the economy afloat for another 3-6 months. That said, the job situation will not get any better, with industrial capacity around 73% right now, and first time unemployment claims firmly above the recessionary 400K a week now for 4 months. So consumer spending still holds up, doesnt grow as quickly as it did when the re-fi boom picked up steam 2 years ago because consumers are now more worried about jobs.

As for exchange rates, the dropping dollar along with dropping bond yeilds is a situation that is tempoary. It will not last, a dropping dollar makes dollar dominated assets less appealing for foreigners to hold. Do not know what the trigger event will be, but as the dollar continues to drope(and no reason why this should stop because of a massive trade gap), US tresuries will be under increased pressue because of a greater supply of tresuries being sold by the tresury, and less demand from foreigners going forward(BOJ for now being a exception). Once the bond yeild on the 10 years gets above 4%, heading towrds 4.5%, and remains up there, it will be game over for the re-fi boom, and this will deny the main source of extra money to consumers that thgey have so depended on for the last 2 and a half yearsm, and will finally set into motion stagnation in housing prices because of higher intrest rates. This will set into motion a domino effect that first affects the housing industry, then financial firms, then the consumer, and a new downturn in the economy. Another complication is the extreme level of incentives from the auto industry has pulled a large amount of demand forward, but going forward, the auto industry is running into the law of diminishing returns, and have allready announced production cutbacks, further casting a grim pall to the employment picture.

Unlike you, I do not predict when things will happen, I simpily look at past economic events and other economies and look at future scenarios. Let me ask you this, with the S&P 500 having a GAAP trailing P/E of above 30, many companies having problems with pricing power, a decline in the dollar that makes US tresuries and US equities less attractive to foreigners(If a European bought dollar denominated assets last year he would be behind 25%), sluggish economic growth whose only pillar of support is the housing market, do you think this sets the stage for a new bull? Let me turn this around to you, what do you think will ignite a new bull? What are the growth industries that will pull the economy forward, that will re ignite employment? From what I see, the pickings are slim. The debt racked up during the Clinton bubble years has yet to really even be adressed. You go ahead and and crow all you want, but give real reasons, not just political rhetoric that you have been dropping. If you do not give real economic reasons for why you are bullish, then again, you are no better than a typical DUer who says "Bush is a moron" while not giving any reason why he thinks that way. Its your turn to step up to the plate "kid".

[Southack]

"What I said about the dollr going in deceline of value, causing commodities to go up in price while financial assets [e.g. houses] to go down is not a contradiction, but in fact, it is what has taken place in Japan in the last decade"

Let's ask someone who knows. AIT, have the prices on commodities such as food and computers gone UP in price while housing prices have gone DOWN in Japan in the last ten years, or does JNB need better sources?

[Centurion2000]

bump

[Southack]

"You go ahead and and crow all you want, but give real reasons, not just political rhetoric that you have been dropping. If you do not give real economic reasons for why you are bullish, then again, you are no better than a typical ..."

Reasons to be Bullish?!

The War in Afghanistan is over.
The War in Iraq is over (and cost only $29 Billion instead of $69B).
Interest rates are low.
Inflation is dead.
The Dollar is dropping in value overseas, making U.S. exports more cost competitive, and making foreign imports to us more expensive and therefore less competitive.
Productivity is up.
We've got two tax cuts kicking in.
The accounting scandals are past us.
The dot com boom has already burst.
Oil will soon drop in price (Nigeria, Venezuela, Iraq).
And then there is the real kicker, all of the money that is sitting on the sidelines.

Ameritrade's CEO reported last month that 26% of all of his clients' funds are in cash.

Dick Grasso of the NY Stock Exchange reported last week that a full $6 Trillion, yes, that's half a dozen TRILLION Dollars, is parked on the sidelines in money market accounts.

You simply don't get market crashes when that kind of money is ALREADY out of the market waiting for a chance to get back in.

Most of the professional hedge funds are SHORT on the market, too. They are getting killed. The kids who run these monster-sized funds have watched the NASDAQ rise 35% since last October. Can you say "short squeeze" boys and girls?! I knew that you could. Watch them bleed (and bleed, and bleed).

Death to Shorts.

[JNB]

The price of oil and raw materials have not gone down in Japan, you do not seem to grasp that concept Southack, a weaker dollar means that imports of raw materials become more expensive.

[Southack]

"Once the bond yeild on the 10 years gets above 4%, heading towrds 4.5%, and remains up there, it will be game over for the re-fi boom, and this will deny the main source of extra money to consumers that thgey have so depended on for the last 2 and a half yearsm, and will finally set into motion stagnation in housing prices because of higher intrest rates."

Look, that's a compelling theory, but if interest rates truly determined housing prices as you claim above, then today's low interest rates would mean that houses in 1960 (when we had similar interest rates) would cost the same as today.

It clearly doesn't work that way.

Housing prices are determined by supply and demand, not by interest rates.

If you will remember, we had a huge wave of property price increases in the 1970's even though interest rates were skyrocketing. I can still remember one fellow bragging to me about his 11% ARM back then! He didn't care about the rate. What he cared about was getting into the house so that he could watch it increase in value. Two years later he sold it for double his purchase price. His story was repeated across the nation.

So if you want to preach doom and gloom, and need to convince people that housing prices are finally going to stagnate, you'll have to do much better than the old "high interest rate" argument (since it has been disproved since at least 1976)...

[Southack]

"What I said about the dollr going in deceline of value, causing commodities to go up in price while financial assets [e.g. houses] to go down is not a contradiction, but in fact, it is what has taken place in Japan in the last decade" -JNB

"The price of [commodities] oil and raw materials have not gone down in Japan, you do not seem to grasp that concept Southack" -JNB

That's what we're asking AIT. It's not a conceptual problem, it's just that I'd rather not take your word as my sole source.

[JNB]

Afganhistan and Iraq are going to be long term occupations, and the real cost in IRaq will be govrening and rebuilding it. Intrest rates low due to a large amount of fear the economy will slip into recession again with the allready mentioned minipulations of the FED and BOJ. Dollar going down in value long term is good, but short term it makes as I mentioned imports of raw materials more expensive and makes dollar denominated assets less attractive(a radpily falling dollar in 87 is what played a large part of rge stock market crash that year). Productivity in Q1 was up only 1.6% at a annual rate, and the "adjustments" done to calculate productivity were changed during the Clinton admin, and put far too much weight on things such as CPU clock speed in the economic calculations, while ignoring real world impacts(most PCs are used for word processing and web surfing, and for most PC users, a 400 MHZ PII will be little difference than a 1.6 GHZ PC). Another factor that is left out is the impact of illegel immigrants, who are not used in productivity calculations. The two tax cuts will give a short term boost, but they still are mostly back loaded rather than front loaded, also truth be told, a extra $330 billion over several years is not that impressive, also state and local govrenmnets are raising taxes and fees negates tax cuts at the federal level. The accoundting scandals are not behind us, and may get worse if derrivatives become a nasty problem. The dot.com bubble has long since bursted, but the real estate bubble is still growing, as for oil, many OPEC countries are opting to do business in Euros rather than dollars, and for money on the sidelines, I again ask where? Savings rates are still at historically low levels, and much of the money in MM funds is allready spoken for and comitted to MM funds, and for the Ameritrade CEO saying 26% of clients assets are in cash, big deal, those are small time retail clients, not large funds.


You
just simpily reposted the typical bullish propaganda. As for a bull market, lets just put it this way, Nasdaq may be up 35% since Oct, but it is still at levels that it first saw in mid 97, the S&P 500 is at levels first seen more than 5 years ago.

[Southack]

"You just simpily reposted the typical bullish propaganda."

Interest rates are low is "propaganda"?!

Inflation is dead is "propaganda"?!

You call it "propaganda" that the Dollar is dropping in value overseas, making U.S. exports more cost competitive, and making foreign imports to us more expensive and therefore less competitive?!

Productivity is up is "propaganda"?!

We've got two tax cuts kicking in, but that is "propaganda"?!

Oil is headed down, but that's bullish propaganda?!

Oh my...

[JNB]

The 70s and 80s were different times. In the 70s we had inflation at all levels, the cost of goods went up, wages went up and housing went up. Housing in the 70s simpilky tracked the inflation rate, the housing prices since 97 have gone up 2 to 3 times the Offical rate of inflation. As for intrest rates, yes,. they have propped up the housing market, even Greenspan said that a couple of months ago in congress. Low intrest rates has artifically stimulated demand for housing(along with FNM enabaling people with iffy credit histories to buy homes also stimulating demand), if you didnt know, lower intrest rates enable house payments to remain level while the price of a home increases. If housing was soley affected by supply and demand, prices would have peaked in early 2001, and housing would have followed the economy into a recession. If intrest rates were still 7.5%, the housing industry would have been in a nasty recession. The steadly decline in intrest rates since mid 2000 has helped prop up housing, despite the continued job losses.

[Southack]

"The 70s and 80s were different times."

BWAAAA Ha Ha ha haaaaa!

Oh, so it was just that it was "different" back then, not that your theory simply doesn't hold up to historical data?!

How convenient... (and funny)

[Southack]

"If housing was soley affected by supply and demand, prices would have peaked in early 2001"

That would only have a chance to be true if our population had declined since 2001.

It hasn't.

[JNB]

Southack, I saw all that "propaganda" on CNBC and saw a similar article on Yahoo finance. As for oil, its still around $25 a barrel, where it has been for most of the last 2 years. Again, I gave you replies for all of "your" points.

[JNB]

The population of the US went up in the 30s, albiet slowly, and housing declined all the way to the start of WWII. In any event, without good paying jobs, enabling people to afford homes, then there will be less demand. The decline in intrest rates since mid 2000 along with the Govrenment Sponsored Enterprises(GSE) such as FNM/FRE, have enabled housing to continue to go up in price despite job market losses. Housing traditionally has gone up with the economy and down when we have been in a recession, the fact it has continued to go up at rates not seen since the late 70s, this time unlike then far beyond the pace of inflation, indicates there is a housing bubble.

[Southack]

"The steadly decline in intrest rates since mid 2000 has helped prop up housing, despite the continued job losses."

Look, let me fill you in on a little secret: we are ALWAYS going to have job losses. Greenspan calls it "creative destruction". When the automobile industry replaces the buggy whip manufacturing industry, we have creative destruction. People who make the buggy whips get laid off. Their skills are no longer in demand. There is much gnashing of teeth. Gloom and doom pervades the land (unless, of course, you happen to be in a non-buggy-whip industry, happily enjoying the great boom in autos - or so the analogy goes).

Gee, people start trading stocks on-line and brokerages start using computers to trade bonds, so all of a sudden the demand for retail stock traders and wholesale bond traders falls. Oh no, who woulda thunk it?! Gloom and Doom! Gloom and Doom! The sky is falling!

Oh no, word processors put the type-setters all out of business. Quick, call the Pessimistic hotline!

New admin software is putting network gurus out of work. Oh no, not that! How will we ever survive without our network nannies?!

Except, when you look at the data, we've got less than 6% unemployed (oh I know, the stats must be rigged and the books must be cooked, go figure). Worse (for the gloomsters) yet, our national average salaries are INCREASING. Henny Penny, where are you?! We've got "continued job losses" but no one is listening to us cry out that the sky is falling!

[Southack]

"In any event, without good paying jobs, enabling people to afford homes, then there will be less demand."

Wow! How many misconceptions can you pack into one sentence?!

First of all, the average national salary in the U.S. is UP, not down.

Second, population density determines demand more than you might think. If one family can't afford a home that it thinks it has to have, then it will simply live with *another* family or three and share the cost, or get second jobs, or move. To wit: you'll find high-priced homes in areas such as Tehran, Beijing, and Moscow that have terrible paying jobs.

[A. Pole]

The War in Afghanistan is over.

Is it?

[Southack]

If there aren't B-52 air raids going on, then yeah, the war is over. Just because we have a mass media that hyperventilates everytime some fanatic fires an RPG doesn't mean that there is a hot war.

[Frumious Bandersnatch]

Jude is someone to listen to when it comes to finance. On everything else, he is consistently wrong. However, that said, I would say that anyone who believes that Farrakhan never spewed bile against whites should have all of their words taken with lots of salt. Anyone who can delude themselves in such a fashion is easily deluded in just about any fashion.