Well that was fun. Old habits die hard, and Macro Man tends to be so fixated on inflation as a medium-term macro theme that he sometimes focuses too much on price data and not enough on other stuff. So proved to be the case yesterday, when the focus was not on CPI but on yet another piece of horrible housing data.
Fed rate cut hopes, which as recently as yesterday morning appeared dormant, received a fillip from both the housing data and the Beige Book, which indicated a marked deceleration in activity in late September/early October. Somewhat surprisingly, stocks appeared to take relatively little comfort from these relatively dovish developments. Could this perhaps be a sign that a deeper correction is looming? That early session eurphoria in equities, emerging markets, and FX carry gave way to renewed weakness and a widening of credit (to the degree that someone actually mentioned the euro crossover index!) lends credence to the notion.
Going back to housing, it has struck Macro Man that perhaps a sense of perspective might be useful. The financial press and blogosphere is awash with doom-and-gloom stories facing homebuilders, house prices, and any structure on U.S. soil with four walls and a roof. While housing starts certainly do not tell the whole story, they do represent the most mechanistic impact of housing on economic growth, via residential construction.
The chart above shows monthly housing starts data going back to 1959. And what's immediately clear is that the anomaly is not the swift and steep decline in starts, which appears pretty standard for housing down-cycles, but rather the prolonged fifteen-year period of steady increases in hosuing starts. For that, of course, we have Easy Al to thank. His swift and deep rate cuts in 2001 propped up housing when the impact of the equity bubble bursting and the concomitant investment recession seemed likely to produce a downturn in housing. At least it seemed that way to Macro Man, who in late 2000 sold a property in Hilton Head- just as the party was getting started, as it turned out. In any case, this time (at least in terms of the deceleration in housing activity) doesn't appear to be different, after all. Will the same hold true for US household wealth?
Fed rate cut hopes, which as recently as yesterday morning appeared dormant, received a fillip from both the housing data and the Beige Book, which indicated a marked deceleration in activity in late September/early October. Somewhat surprisingly, stocks appeared to take relatively little comfort from these relatively dovish developments. Could this perhaps be a sign that a deeper correction is looming? That early session eurphoria in equities, emerging markets, and FX carry gave way to renewed weakness and a widening of credit (to the degree that someone actually mentioned the euro crossover index!) lends credence to the notion.
Going back to housing, it has struck Macro Man that perhaps a sense of perspective might be useful. The financial press and blogosphere is awash with doom-and-gloom stories facing homebuilders, house prices, and any structure on U.S. soil with four walls and a roof. While housing starts certainly do not tell the whole story, they do represent the most mechanistic impact of housing on economic growth, via residential construction.
The chart above shows monthly housing starts data going back to 1959. And what's immediately clear is that the anomaly is not the swift and steep decline in starts, which appears pretty standard for housing down-cycles, but rather the prolonged fifteen-year period of steady increases in hosuing starts. For that, of course, we have Easy Al to thank. His swift and deep rate cuts in 2001 propped up housing when the impact of the equity bubble bursting and the concomitant investment recession seemed likely to produce a downturn in housing. At least it seemed that way to Macro Man, who in late 2000 sold a property in Hilton Head- just as the party was getting started, as it turned out. In any case, this time (at least in terms of the deceleration in housing activity) doesn't appear to be different, after all. Will the same hold true for US household wealth?
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Click here for comments'In any case, this time (at least in terms of the deceleration in housing activity) doesn't appear to be different, after all. Will the same hold true for US household wealth?'
ReplySorry, macro man, you lost me in the last couple of sentences. Can you explain your closing conclusion/conundrum in simpler terms for my benefit?
Enjoy reading your blog. Minor point: for those of us w/out access to a Bloomberg, some of the acronomyns you use are a bit confusing.
Hello there. excelent posts, as always.
ReplySeveral things i wanted to ask. You are still long SPX and it does not look expensive on rates to PE.
Do you think that all doom and gloom from subprime is priced in to a certail degree? (I do).
And what is in your opiniton a trigger to exit longs? Sharp rise in yileds? China - US clash?
And what do you think of ex USSR markets? Many economies have high growth rates and stocks are relatively cheap.
And did you heard on Russian CB screwing the local debt market? It's really funny. Amid the credit crunch they put bids for local goverment bonds 2% above the market, injecting liquidity. And bought quite a size there. Now that the dust have settled they are selling it with a nice profit...
Anecdote
ReplyMy bank's allowing us to renegotiate our mortgage into Swiss Francs 100bp's below my fixed rate now ( in $)..... not your father's carry-trade anymore .... Easy Al ? also Easy Gunther and Easy Hiroshi I suppose
anecdotally, but OT
ReplyI've never been able to say "no" to a bargain, and so SNB has left me no choice but to book my skiing in the Land of The Sanitary Disinfectant Hand Wipe, from my usual Austrian haunt. The Swiss extend nowhere near the gemutlicheit of the Austrians, nor are their brown breads as appetizing, but everything has a price, and the EUR/CHF has crossed my indifference threshold.
As for house prices themselves, I reckon that nominal prices will not fall that much except in most extended markets and top-end of markets. Real house prices, to inflation and other asset classes, on the other hand will undoubtedly have a harder slog. While people (CNBC crowd) are looking at retail behaviour and the stock market and patting each other on the back, they miss the point that money flow mostly went out of stocks at the 2002 lows and leverage (refi etc.)into real estate mostly during the highs, more egregiously at the median, for large stockholders skew aggregate holdings data as % of household net worth. Median retail might have left certain 401k assets invested in Index funds or what have but the equity-real estate asset allocation trade was a classical demonstration of archetypical uninformed herd behaviour, which Issing would call a bubble, but which the Fed, still, is philosophically and semantically on the Fence.
starts mmean nothing..
Replyaffordability is what matters and with tighter credit prices have to come down not on new homes but ALL homes
the pain is yet to come..
the US consumer household has a serious mark to myth problem.. the bigger fool is halfway out the door!!!!!!!!
Anonymous sa: What I mean is that the downturn in housing starts looks no different from in prior housing downturns. Another feature of previous housing downturns is the lack of an obvious and durable shock to household wealth. So I am wondering if the much-ballyhooed destruction of household wealth will actually occur; if so, this time really IS different.
ReplyOn your new mortgage, you´ve now joined most of Central Europe as a holder of a CHF mortgage!
flipper: The SPX (sorry, anon, old habits die hard) position is maintained until the trailing earnings yield is 2% below the 10 yr Treasury yield. Right now,we´re nowhere near that trigger. Yes, I followed the dislocation in Russian fixed income markets, which did afford a buying opportunity for the brave.
The RT$ index fared very well over the past few years, but less so recently. I´m not really sure why, but it´s enough to make me nervous without digging much deeper.
C, I am surprised you don't opt for France, given cost and other connections you have there. Enjoy the raclette.
Point taken though on stock market wealth being unevenly distributed. However, income remains far and away the most important determinant of consumption, and to date there are few signs of income growth cratering in the macro data (and even the Beige Book.)
Thanks for the answers. I aslo saw that you really like gold.
ReplyI see you remeber i'm from Russia. We have here two stocks which are valued at aroung 83$ for an oz of prooven reserves - HGM LN equity and PLZL LI equity. Most analyst think PLZL will 100% aquire Sukhoy Log deposit making it the biggest reserve holder in the world.
While they have clearly problem with cashflow for now(PLZL even showed a loss for the first half due to one-off for managment options) i think long term it's dirt cheap. Ofcourse long term in Russia is to much a concept:), but it may be considered as an high-risk option(year i know that it is a real option, etc...)
Once again thank you for the blog and good luck.
i don't have comment. i have question. i hope you can explain it to me. one thing confuses me. its the difference between earnings growth and corporate profits. i though its the same thing. apparently not. in wsj economic survey is shown that in 2006. corporate profit rose 21.4%, in 2005 12.5% and forecast for 2007 and 2008 are at 4.1% and 4.0%
ReplyS&P earnings growth in 2005. was 13% and in 2006. 14.7% hmmm????
if you talk about snp earnings - this is not an american economy representative anymore.
Reply>50% of snp500 companies come from outside US.
global growth is strong so that's why earnings are growing at higher rate that US GDP.
But they are growing faster that World GDP and it's a open question if it will continue.
Also earnings are nominal and GDP growth is reported in real terms, ex inflation.
The downtown in starts isn't different.
ReplyBut Shiller's history of real prices shows something massively, massively, massively different. That's why he's predicting a 50 % drop.
flipper : but that doesn't make any sense. if s&p 500 was growing 14.7% in 2006. because of global growth how come that american corporate profits were growing even faster- 21.4% ?
ReplyMM - regarding consumption, I think you need to consider that the saving rate has dropped to near zero for a while now. This is different! Without rising housing, I think a lot of consumers may suddenly be playing catch-up.
ReplyEM has lagged this selloff in a big way. I think it is only a matter of time before the selloff occurs.
ReplyAny thoughts about it Marco Man?
There are two differences between NIPA corporate profits data
Replyand S&P 500 earnings growth. One is the universe of enterprises captured- the S&P is obviously only 500 companies, while the NIPA profits data captures all of the businesses, large and small, in the economy. A second difference is the accounting standard used in the two measures. Overall, they tend to be correlated in terms of direction, but do not necessarily show the same rate of change.
Over very long periods of time, nominal profit growth should be equivalent to nominal GDP growth, though over more intermediate periods of time changes in the relative advantage of corporations to other economic actors can produce periods of outstanding or poor profit growth relative to GDP.
Ajh, in a simple two factor (income and wealth) model of consumption, the error term correlates very well with changes in the saving rate. The problem with saying "it cannot go any lower" is that for the past ten years it has, only to be subsequently revised higher, as was the case recently.
Banker, yes I have similar concerns, and have been quite surprised by the resilience of EM in the latter portions of this week. Chagrined, as well, given that I cut a load of my EM risk earlier in the week!
macroman thanks!it seems that from investors point of view S&P earnings growth is much more important than national corporate profits. today in globalized world bigger percentage of earnings for S&P companies( domestic and foreign )comes from abroad than 10 or 20 years ago.
Replyso in a long run, corporate profits can be in line with nominal GDP growth and we can still have bigger(S&P) earnings growth.
and there is one other thing. for example coke in france is produced in france. and that is not U.S. export so it isnt part of U.S GDP, right? but in Coca cola earnings there are earnings from selling coca cola that was made in france.
and corporate profits as a share of GDP doesnt count this.
Yes...which is one of the "relative economic advantages" I referred to that can take corporate prfits growth to a higher rate than nominal GDP over finite periods of time. Cointinued ad infinitum, you'd arrive at a situation where US corporate profits are great than nominal GDP, a situation that obviously ain't gonna happen...
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