Mike,
Here's an interesting post from one of the smart folks who post on LongWaves ...
It's a credible counterpoint for a rolling correction in the US economy vs. the big bad depression coming argument, which I think is also credible. It's well worth the reminder that there are other possible scenarios than a train wreck when we see this thing so obviously careening out of control.
Btw, I do believe there's absolutely no credible argument for a "new era" ... that's bubble think, and there's no avoiding a very significant correction to all sorts of asset values (equities, debt, and productive capacity) that are currently selling for prices that will never pay-out a reasonable risk-adjusted return ...
Peter
BK,
I think you are correct with your analysis that we entered Phase 1 of the
depression in 1990. Actually I would date it as the fall 1987 - the stock
market crash AND the change in tax code which caused the bubble to burst in
the US real estate balloon. Yes commercial real estate prices peaked in
Spring 1988, but that appears to me to merely be the momentum from the cash
flow of the LP's left over marketing efforts at the peak in the fall of
1987.
Dan and I had a series of posts on this issue in Sept/Oct 98 on this matter,
and while I generally don't like to put words in people's mouths, (I'll let
him correct any misunderstandings I may state), I would sum up both of our
opinions, that the collapse of the real estate bubble was the BIG COLLAPSE.
Dan and I do differ on what has to happen after that collapse though. I
believe there are other bubbles to be adjusted, he believes the major
adjustment is complete.
The big point that all of you stock traders are missing, that Dan has made
repeatedly, and that I firmly agree with him on, is that the stock market is
really not nearly the size of the real estate market. I am working on
taking Peter E's attack on my 1 trillion dollar estimate for Silicon Valley
area real estate, and using it to show just how large the real estate market
really is in this county. Stock people consistently underestimate the
amount of wealth stored in real estate. It is off of their radar screens.
To create the depressionary scenario some are forecasting you have to
destroy the wealth through a real estate collapse. The stock market, as big
as it is, just isn't big enough. Hopefully that post on real estate will be
ready for posting this PM.
THE BIGGEST LEVERAGE BUBBLE IN THE US HAS ALREADY COLLAPSED. REAL ESTATE,
1988.
For those of you predicting a multi year doom and gloom scenario, you have
to also be predicting a second real estate collapse at least one order of
magnitude bigger than the 1988-1992 bust in order to destroy enough wealth
to create your scenario. I don't see it in the cards.
I think what is confusing to most of the participants of this forum is that
they think the collapse of all asset classes must occur simultaneously and
suddenly. I disagree.
The Japanese bubble, which was much bigger than ours, is still shrinking,
and that shrinkage has been going on since Dec 31, 1989 (when the Japanese
Central Bank raised interest rates to prick their bubble). 9 Years
already!!! Almost the length of the Great Depression! Again; Who says the
collapse has to be sudden?
Like the US in '29, the Japanese are faced with the collapse of multiple
bubbles at the same time, including the largest, property. They still do
not have a mechanism in place to solve that bubble, though I will say that 9
years later there is finally a political recognition that they must wipe out
the excesses (it took the US only about than 9 months to reach that
consensus in AND put it into place). Until the Japanese finally put the
legislation in place to clean out the cobwebs of the real estate problem,
one can not give a final date for their shrinkage to end. (Maybe now just 3
or 4 more years?). (The Japanese real estate bubble was also/still is, a
bubble that was several magnitudes larger than that of the US real estate
bubble of 1988)
Because of a more sophisticated approach by the US Central Bank in
particular, the US political leaders, and a lot of luck, the US appears to
have moved to a rolling correction type of adjustment.
The biggest US correction, Real Estate, is done.
The next biggest US correction, consumer debt, is still to be faced.
The third biggest US correction, excessive speculation in financial assets,
is being unwound currently. AGAIN because of the biases of this group,
there has been a failure to recognize that the biggest speculation in
financial assets was in the bond arena, not the stock arena, and it is that
area that is currently being unwound, even as stocks go higher. The point
again is that not every bubble needs to collapse simultaneously throughout
the corrective process.
Dan is also correct, when discussing the current US stock market, that much
of the money currently in the market is locked up, no leverage, long term
money. The term for assets owned by that kind of money where I come from is
"Being in Strong Hands". That is the economic basis of the Dent argument
for a continuing period of growth right now. Money being saved for
retirement, and not currently needed, gives a good solid foundation to any
asset class it is invested in.
Don't misunderstand me, there is an excessive amount of speculation in the
Stock Market currently, separate and apart from the retirement moneys, which
makes the stock market subject to a correction. Because of my belief in the
rolling nature of the corrective process in the US, I also tend to concur
with Dan that the stock market correction, when it comes, may be more akin
to 1987 than 1929.
I wish to sincerely thank James D for his compelling arguments as to
why the creditor country can fare worse in the corrective process than the
debtor country. It also goes a long way towards explaining the slowness of
the Japanese to come to grips with their multiple bubbles, because part of
the solution is the unenviable task of telling savers/creditors that they
have lost their savings. A debtor obviously has no problem telling the
creditor he lost it all. The creditor has a problem telling himself he lost
it all.
If the world money supply shrinkage can be contained (my constant harping on
Eurodollar Money Supply), and excessive debts eliminated (not just
restructured-I say three cheers for the China approach, stick it to the
idiot investors), I see the world coming out of the current crises in
relatively short order (about 3 more years). I guess that places me
basically in Dan's camp on the structure of the LW, but with the important
caveat that the growth period is still sitting beyond some additional
corrections that must occur over the next 2/4 years. (Remember in 3 more
years the Japanese, the largest creditors, will have gone through 12 years
of shrinkage)
I am not attempting to ignore the arguable underlying issue of excess
capacity causing the current situation. While I do somewhat subscribe to
the basic argument, one must not forget that with 1/2 of the world's
population under the age of 18+-, there are plenty of potential consumers of
that excess capacity if the goods can be produced cheaply enough to be sold
to them.
It was Geoff, I believe, who made the observation about the debt problem of
the early 80's. Unlike the 30's, today there are existing models of how to
eliminate a great deal of third world debt very quickly, that have been
tried, and shown to work. Sort of an informal World Bankruptcy Court
pioneered by those 80's examples. Unfortunately the IMF and the Japanese
are still trying to recover loans, instead of writing them off, and are thus
delaying the recovery process.
The US is facing a recession, and the stock market is facing a correction.
But there is no US 1930's style depression on the horizon for the US baring
a cataclysmic natural catastrophe or world war. For the US this is a
rolling corrective process this time around.
The glass is still half full guys!!
Stephen S
An optimist, but one who's business actually makes more money in recessions
than in boom times believe it or not. |
