05-04-2002 22:38									#481
	Help yourself to an AD-FREE life

Are we talking about residential real estate bubbles? I thought pchang was talking about bubbles in general. At least, I was.

Besides, even if it’s just res RE, the broad lines I mentioned above aren’t different. The real-estate bubble in the UK, Japan and Scandinavia during the 80’s all set off with low interest rates, experienced a surge in prices and a deterioration of balance sheets. (lower savings, higher debt ratios, increased interest costs – sometimes at households, sometimes at business, sometimes both)
The bursting of a bubble doesn’t need to be “catastrophic” (your word Dan), it depends on the scope, the policy reactions and external factors how much it impacts the whole economy.

Pchang, the supply of building sites is variable, but if it is constant over time, all the more reason to suspect RE price increases of 50-100% over a couple of years. Surely the population has not begun to grow that much harder or become that much richer in just a few years?

	06-04-2002 04:54									#482
	Got spare money?

quote: Originally posted by DanS If so, then we have good examples of how a bust plays out. California had a real estate bubble popped some time ago. It wasn't pretty, but I don't think it was catastrophic.

Here in Blighty the fall-out from our asset bubble in the 1980's was not catastrophic.

We did have a recession, but not one that was hugely worse than much of the rest of the world.
However two factors mitigated against the 'bubble hangover' the first was a huge shift in the governments budget balance (which detriorated by ove 10% of GDP in 5 years) and a large fall in the value of our currency (over 20% in trade-weighted terms) which gave a great boost to our export sector.

One of the most telling things in 2001 was that the US suffered a big slowdown with practically no change in it's large current-account deficit, which now looks like growing even bigger.

quote: I also note that there were decades of appreciation in California before the bust. There's quite a lot of time to work out this stuff.

By 'appreciation' do you mean a rise in the house-price/earnings ratio or just a plain rise in prices.
If the latter then you have to remember that those 'decades' saw very high inflation overall.

	06-04-2002 09:14									#483
	Increase the size of your Attachments

I fail to see what is so bad about asset inflation or deflation. I talked about this a long time ago and the responses form the macro weeenies were the typical convoluted gobbledigook.

	07-04-2002 02:16									#484
	Avatar Enlargement: We've got the solution

"By 'appreciation' do you mean a rise in the house-price/earnings ratio or just a plain rise in prices."

ef: I think I mean a plain rise in prices due to a rise in demand--many California cities were growing at better than 10% per annum population-wise. Hard to keep up with that kind of demand, especially with a huge demand for suburban properties.

"The real-estate bubble in the UK, Japan and Scandinavia during the 80’s all set off with low interest rates, experienced a surge in prices and a deterioration of balance sheets. (lower savings, higher debt ratios, increased interest costs – sometimes at households, sometimes at business, sometimes both)"

Colon: All of these factors exist in US RRE. It's hard to know if we're in a "bubble" situation in many places, though.

	07-04-2002 16:52									#485
	Increase the size of your Attachments

Dan, it looks bubbly to me too, it’s worse in the UK, but it has the common features.

Actually, I’m unconvinced that the question whether it’s geographically concentrated in a few hot-spots makes much of a difference to the impact on the aggregate economy.
Firstly, some places may feel little impact or none at all, but other places may become seriously depressed, but I think that in the end, it should all be in proportion with the size of the bubble.
And, secondly, many of the actors on the RE market operate nationally, as Freddie Mac and Fannie Mae do, and the trade in mortgages and credit derivatives have also scattered the risks on the credit side across the US and outside. The good thing about this is that it could prevent a few from collapsing, but the other side of the picture is that everyone is hurt.

BTW, forgive me the DanSing, but you haven't replied on my latest e-mail yet.

Last edited by Colon on 07-04-2002 at 17:06

	08-04-2002 13:15									#486
	Support Apolyton, buy Call to Power 2

"I think Roland is saying there is a bubble in every asset class in the US, even Apolyton posters."

Stocks and real estate. Not sure about bonds.

This ****ed-up US economy is quite fascinating....

Last edited by Roland on 08-04-2002 at 14:55

	11-04-2002 01:53									#487
	Support Apolyton, buy GURPS/ Alpha Centauri

There is too some extent a bubble in the bonds, too. But that bubble is not too severe and a direct result of government budget surpluses culling the need for external Treasury financing. The reduced supply of Treasury (US Govt direct) securities is a reversal of the increased demand for ultra-safe bonds. Non-ultra-safe bonds like corporates trade at a higher interest rate than US Treasuries and those spreads have widened, so there is not a broad market bond bubble, but a narrow Treasury bulge.

It may be of at least passing interest to note that five years ago an index of investment grade US bonds (ex-residential mortgages) would have contained around 70% Treasuries, and now the figure is less than half that weight. The "balanced" budget of the past few years is ruining my market!!

The good news about the financial bubble that we had in the late 90s was that it was the best kind of bubble. An short-term idea bubble based on a rapidly changing technology cycle. We redistribute a bunch of wealth that was lying around in relatively riskless assets and then when the day is done, it is just folded back into the rest of the economy. A real no-no from the Japan situation is having an intense bubble in long lived assets like housing. Oi-vey! The replacement cycle on software and especially vaporware is sooo much shorter than real estate. Thank the gods. The tech bubble was kinda like the moon landing in the late 60s. We spent billions and got a couple of rocks, but it was interesting and at least we got Tang orange drink out of it.

Is there a real estate bubble in the US? Probably, but it is localized and supported by some very interesting developments in the tax code (no capital gains taxes at all) and interest (short-term loan locks and deductable) rates. Is it a bad bubble? Not really. Unless we shut off immigration or something stupid like that.

So what is the course for the US economy this year? Probably much better than I had originally thought, since the decline didn't last very long at all. If we would have had a boring fall and restless spring, the jobs downturn could have started to impact the consumer housing market, but I guess 911 saved the economy from a more serious downturn. A little government spending here and there (and everywhere) sometimes can be a pretty good thing. The big move in GDP (fka GNP ) was from govy expenditures in the fall, then inventory rebuild here in the spring. Now we will probably have a couple of quarters of jobless recovery that doesn't feel very good, and in '03 we can go back to leveraging up our consumer arses til the cows come home.

Shiny Happy Consumer's Spending Money

Stay tuned for the debt service crisis, but don't be too surprised if we avoid it for ten or more years...

I've missed you all!

	11-04-2002 03:19									#488
	Increase the size of your Attachments

Hey Sten,

I'm reading Liar's Poker, about you bond weenies.

I would say that the .com money was not simply a wealth transfer (some of that sure) but actually wealth destruction. It's like drilling a dry oil well...wasted R/D funds.

	11-04-2002 03:29									#489
	Wasted? Support Apolyton or Terrorists Win

Drilling a dry oil well does nothing for the oil company. However, it does a great deal for the workers employed in the drilling and the drilling equipment makers. Can you really say wealth was destroyed and not transferred?

	11-04-2002 03:49									#490
	Inflate your Upload Space

pchang, the wealth transfer to workers would be the same if the well were not dry. But the company/society would have the benefit of a wet well. If all you want to do is transfer money, it makes more sense to do that directly...rather than to pay for wasted work.

Spending money on non-productive schemes is wasteful.

	11-04-2002 13:04									#491
	Browse Apolyton AD-FREE

Yihaaa Sten!

"But that bubble is not too severe and a direct result of government budget surpluses culling the need for external Treasury financing."

And it hasn't been adjusted to the fact that all those trillions of projected surplusses are gone.

"We redistribute a bunch of wealth that was lying around in relatively riskless assets and then when the day is done, it is just folded back into the rest of the economy."

I can't believe you really believe that.

"The replacement cycle on software and especially vaporware is sooo much shorter than real estate. Thank the gods."

Typical. Just looking at the demand side, Sten, what are you doing ?

"Is it a bad bubble? Not really. Unless we shut off immigration or something stupid like that."

What about the GSE bonds ? I'm really curious how this will play out....

"So what is the course for the US economy this year? Probably much better than I had originally thought, since the decline didn't last very long at all."

An unfinished recession. The real one is yet to come. Not a single imbalance has been cured in this "recession".

"but I guess 911 saved the economy from a more serious downturn."

On that I agree. It helped immensely to dealy the final reckoning.

	11-04-2002 13:07									#492
	Support Apolyton, buy Civilization III: Complete

For the apologists for Alan and his economy:

Tell me one thing: The imbalances that usually get corrected in a recession... they only stopped expanding in 2000/2001, and the US took a nosedive. Now we have 1.75 % on the fed funds, which is 4-5 %age pts below neutral policy, supposed to stay there for long, and the economy is not taking off. How much more testimony do you need that this economy is severely ****ed up ?

	11-04-2002 18:53									#493
	No crystal ball Support Apolyton buy from Amazon

quote: Originally posted by GP pchang, the wealth transfer to workers would be the same if the well were not dry. But the company/society would have the benefit of a wet well. If all you want to do is transfer money, it makes more sense to do that directly...rather than to pay for wasted work. Spending money on non-productive schemes is wasteful.

Of course, one can't know until one tries. Anyway, now we are really talking about efficiency. At first, it seemed there were only two states - 0% and > 100%. Now, it appears there are a continuum of states.

BTW - Perhaps someone can explain why a Fed Funds rate of 5.75% - 6.75% is considered neutral. Can you really put an absolute range on such things?

	11-04-2002 19:17									#494
	Got spare money?

Sloppy phrasing of my part. Better:

"which is up to 4-5 %age pts below longterm neutral policy"

The real short term interest rate over time is 2.5 % in Germany. In the US it's a bit more difficult with erratic Fed policy and regular bailouts and busts, but with the generally higher interest rate levels, should be 3-3.5 %. Add core inflation at 2.5-3 %, and you have your guesstimate.

	11-04-2002 19:23									#495
	Inflate your Upload Space

"Drilling a dry oil well does nothing for the oil company. However, it does a great deal for the workers employed in the drilling and the drilling equipment makers. Can you really say wealth was destroyed and not transferred?"

If they know before that it's dry, they have transferred income from the shareholders to the workers. But they have also wasted resources of capital and labour that could have gone to a productive undertaking.

	11-04-2002 20:54									#496
	Get a bigger avatar today!

Sten,

If you’re talking about the money European telco’s spend on 3G licences I’d agree, this was an almost pure capital transfer, with relatively little costs attached to it. (like auction costs’, market studies, promotion etc) Of course, if they spend dozens of billions building the networks and it turns out people are just sticking to GSM we’ve got a real waste.

But the TMT bubble in US constituted plenty of real waste as well IMO. You’ve to think of opportunity costs, billions are tied into telco networks that won’t be used for many years to come and the capital could have been used for pressing needs, like improving and expanding the electricity grid or expanding oil refinery capacity. Lots of capital was also invested into man-hours that have been wasted, as many IT-workers, managers, consultants and financiers (some of the best) invested their time and energy into internet-projects that were doomed to fail.

It’s not just that there was such waste, but also that money was lend for it and the borrowers have to repay it, so there’s less capital left for other (hopefully more worthwhile) projects.

I also think you’re far too optimistic about consumers, because the financial situation of households hardly improved during the downturn. How much more debt can they run up before they hit a concrete wall?

	11-04-2002 21:04									#497
	Support Apolyton buy from Amazon

To me, the tragedy of the .com boom was not the Ponzi scheme wealth transfer (although that wasn't GOOD), it was the waste of labor time, equipment, executive attention, etc. on BS trendy ideas.

Imagine if those resources had been put against some projects with higher payoffs.

Pchang, of course there is a continuum. Becuase projects have a continuum of returns. I can still use the terms wasteful or productive.

	11-04-2002 21:21									#498
	Got spare money?

"Imagine if those resources had been put against some projects with higher payoffs."

GP: What did you have in mind?

"You’ve to think of opportunty costs, billions are tied into telco networks that won’t be used for many years to come and the capital could have been used for pressing needs, like improving and expanding the electricity grid or expanding oil refinery capacity."

What makes you think that these projects were affected by the .com craze? Those have different risk profiles than dot coms.

edit: btw, I think it was more of a wealth transfer than you guys give it credit. For instance, hyped up IPOs did little for the company (indeed, it starved them for capital now when they most need it), but a lot for Wall Street.

Last edited by DanS on 11-04-2002 at 21:29

	11-04-2002 21:32									#499
	Suffering from ads?

Dan (flippant response): Paying me a couple hundred K to be a lab monkey.

(serious response): standard stuff...improved efficiency for heavy industry (better steel-making machines, etc.), new pharmacueaticals, new thin film deposition methods for the electronics industry, blablabla.

	11-04-2002 21:37									#500
	Support Apolyton

AAAAGGHHH!!!

Dan you are DanSing again!!

	11-04-2002 22:17									#501
	Tired of ads?

Dan,

Capital is a scarce resource and if it hadn’t been invested it in a telco network or an internet retailer, capital-costs (like interest rates) would have been lower for other projects.

It’s not the IPO itself that isn’t a capital transfer and constitutes waste (even though organising the whole deal has its costs), it’s the fact the money was used in projects that were worthless that constitutes waste, regardless of the question something physical resulted out of it.

	11-04-2002 22:32									#502
	Got spare money?

"capital-costs (like interest rates) would have been lower for other projects"

Isn't it true that capital costs were low across the board?

	11-04-2002 22:35									#503
	Support Apolyton, buy Alpha Centauri

Low relative to what?

	11-04-2002 23:20									#504
	Support Apolyton, buy Civilization III: Complete

quote: Originally posted by DanS ...more of a wealth transfer than you guys give it credit. For instance, hyped up IPOs did little for the company...but a lot for Wall Street.

Both the IPO firms involved and Wall Street were/are primarily human capital, so the IPO money that Wall Street took a cut of got paid out in salaries and bonuses, and the bulk of the IPO money went into wages as well. Both were pretty pure wealth transfers relative to other types of industrial activities.

Part of the reason the boom was so strong is the wage factor... a lot of the money went from investment accounts to wages. That doesn't happen with transportation systems, mining, real estate, etc.

	12-04-2002 16:46									#505
	Browse Apolyton AD-FREE

Anyone who wishes to comment on GE's plunge yesterday?

	12-04-2002 16:48									#506
	Support Apolyton, buy Civilization III: Complete

quote: Originally posted by DanS Isn't it true that capital costs were low across the board?

Yup. In this case, too low - ie, the interest rate (or capital returns in general) did not balance savings with investments. For a while you can paper over that by importing capital and inciting savings through the promise of speculative gains. But in the end, government price fixing does not work.

	12-04-2002 16:49									#507
	Support Apolyton

"Anyone who wishes to comment on GE's plunge yesterday?"

About time.

	12-04-2002 20:01									#508
	Put an end to popups!

The recent plunge is small compared to the drop over the last year or so.

So is GE fairly priced now? Or would you buy or sell if you were a trader?

	12-04-2002 20:17									#509
	Double Dip? Short Best Buy! Support Apolyton buy from Amazon

Anecdotally and from personal experience, the mid to high end home theater market is in a funk. It's a boutique market to be sure, but I can't help but think that other consumer markets are experiencing similar slowdowns...

Colon: Quite low in comparison to what these companies were able to obtain capital only three or four years ago. If anybody has Ibbottson's, I would be quite interested to see the average cost of capital for '95 through '01, for instance...

	12-04-2002 20:21									#510
	Put an end to popups!

quote: Originally posted by GP The recent plunge is small compared to the drop over the last year or so. So is GE fairly priced now? Or would you buy or sell if you were a trader?

scratch the trader remark. Insert investor.