05-03-2003 14:01									#151
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"How do you guys like the EUR/USD rate?"

I'm wondering when it will make the US financial bubble implode.

On the related issue, I'm not the only madman raving about US structured finance:

http://www.fortune.com/fortune/inve...27751-1,00.html

Btw, do Sten, Dan & co still believe there is no housing bubble in the US?

	05-03-2003 14:11									#152
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Well the PPP rate for the Euro is €1=$1.12 and the ECU (which preceded the euro) tended to vary in a range with the PPP at roughly the midpoint.

That would suggest that the Euro still has a long way to climb against the dollar (maybe to as high as €1=$1.30).

However the ECU was more really a DM zone rather than a proper € zone, and as many of the countries that make up the euro zone (specifically Spain, Portugal & Greece) have traditionally had undervalued currencies (in relation to their PPP) then it seems likely that the range of the € will be lower (maybe with the PPP at the upper end of the range).


On a side note I just did a full anaysis of the discrepancies between reported growth and the change in GDP relative to the US (the spreadsheet has a breakdown for the discrepancy for the 1970's, 1980s, and 1990s).

Attachment: growth discrepancies.zip
This has been downloaded 0 time(s).

	05-03-2003 14:17									#153
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I'm still looking for 1.40.

	05-03-2003 14:20									#154
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Well if the € went as overvalued vs the dollar as it was recently undervalued then the peak would be €1=$1.48

	05-03-2003 14:29									#155
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Taking the euro back in time via the DM, it flactuated between 0.6 and 1.4 vs the $. Given the relative fall of the $ by PPP, and the unprecedented manipulation and distortions in the US economy, 1.40 is more like a low guesstimate.

	05-03-2003 14:48									#156
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Yes, but as I said before the € is not the DM - I think it's unlikely to behave in quite the same way.

I expect the € to be undervalued more often than it is overvalued - the opposite was true for the DM

	05-03-2003 15:32									#157
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I don't think that follows simply from "have traditionally had undervalued currencies (in relation to their PPP)". They also had inflationary policies.

	06-03-2003 01:56									#158
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quote: Originally posted by HershOstropoler On the related issue, I'm not the only madman raving about US structured finance...

btw - over the past ten years in my career, I have liquidated every derivative structure in every portfolio I have managed; written stringent anti-derivative policies at my various firms; and had people fired for using the stuff. In fact in my current job I was originally hired to unwind a derivatives portfolio.

For the record: I am anti-derivatives.

However, the vast majority of derivatives are totally fine, useful and necessary to offset risk. Most of the risk and therefore illiquidity is in what are known as exotics - a tiny portion of the derivative universe.


I still contend that there is not a widespread US housing market bubble. I continue to contend that there are localized bubbles (such as my market) and that general valuation is much too high, but that overvaluation is not much more than 20%, and so falls well short of what I would consider to be a bubble. The extent of the potential housing value decline will not be visible until mortgage rates rise with the rising economy later this year, but I am not expecting much more than a 10% decline in median home prices.

Median home prices are about 3x median incomes in the US, versus 4x in the UK and 6x in Japan - and it doesn't take an architect to tell you that you get more for your money in the States.


When the EUR went public it was 1.13 vs the USD. It sold off during conversion since it was viewed as a weakening of the DM and now it has recovered. Not a big deal. (but thanks for the nice total return from my OBLs at 0.86!)

	06-03-2003 02:35									#159
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Hehe derivatives are hardly inherently evil; they can be used to hedge or leverage........you can't blame the tools when you use a hammer to knock in a screw, and then the sh1t hits the fan.

I empathise though, one must always be cautious. In the UK we had the split capital investment trust shenanigan, in which the stupidity of the players involved boggles the mind.

	06-03-2003 02:55									#160
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Sten,

Your estimate for the housing market seems low, especially for SF. I'm gonna hold you to it. There has to be a bubble somewhere. I say it's in the housing market.

	06-03-2003 03:03									#161
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quote: Sten, Your estimate for the housing market seems low, especially for SF. I'm gonna hold you to it. There has to be a bubble somewhere. I say it's in the housing market.

Duncan - you will notice that I say there are some local bubbles like my market - which is San Francisco. I am paying $80,000 after tax in rent - you bet your ass that is a bubble!!

	06-03-2003 03:11									#162
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quote: Originally posted by Sten Sture I am paying $80,000 after tax in rent - you bet your ass that is a bubble!!

	06-03-2003 13:40									#163
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Sten:

"Most of the risk and therefore illiquidity is in what are known as exotics - a tiny portion of the derivative universe."

I doubt it is such a tiny portion. Also, were LTCM's troubles based on such exotic bets?

"... that general valuation is much too high, but that overvaluation is not much more than 20%"

I think that a 20-30 % range is about right. I'd also consider that a bubble in such a conservative asset category, esp when you have inflationary expectations and a highly artificial financing of that rise.

"but I am not expecting much more than a 10% decline in median home prices."

Would leave us about 10 % overvalued. Why not expect an overshooting on the downside?

Also, what would even just a 10 % decline, concentrated in the most bubbled areas, do to the mortgage market?

"Median home prices are about 3x median incomes in the US, versus 4x in the UK and 6x in Japan - and it doesn't take an architect to tell you that you get more for your money in the States."

Not sure what the point there is?

Duncan:

"There has to be a bubble somewhere."

I'm thinking about making that my sig...

	07-03-2003 01:19									#164
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Sten,

A 10% fall in the median house price can still do great damage.

After our housing bubble burst here in Britian in the 1990's the total price fall was only 9% - but that was enough to cause widespread damage to the economy.


Britian has again got a housing bubble - i'm expecting falls of around 15%-20% over the next 2-4 years, which will lead to sluggish growth for that period (below 2%) and at least a 10% fall in the value of the £.

	07-03-2003 01:47									#165
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I think more people own houses than stocks so a fall in real estate values should have an even greater effect on our economy than the recent effect of falling stock prices.

	07-03-2003 01:51									#166
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I am paying $80,000 after tax in rent

Holy freeholies.

	07-03-2003 01:56									#167
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edit: thanks for posting three times while I was writing this crap!!

quote: Originally posted by HershOstropoler I doubt it is such a tiny portion. Also, were LTCM's troubles based on such exotic bets?

The derivatives market is huge but most of the nominal value of the contracts are pretty vanilla, and fairly short term. They are a direct result of the internationalization of trade and investment.

Interest rate swaps and currency swaps are two of the largest catagories, and these are pretty simple. With Interest rate swaps an entity can borrow in the fixed rate market, but pay a floating rate of interest or vice versa. Given the typically positively sloped yield curve, periodic caps and floors, and the time decay of a maturity, it would take cataclysmic instantaneous change in the rate of inflation to impact most contracts.

Currency swaps are similar, I borrow from you for a year in Euros, but get the check from the bank in Dollars. The following year the bank's swap in the opposite direction matures and I pay them Dollars, which they use to settle their maturing EUR/USD swap and pay you back your Euros. The bank keeps the bid/offer spread of 0.001 or what ever.

LTCM used a lot of illiquid esoterics/exotics AND leveraged themselves up to 20:1. They simply didn't have the capital to wait out 3sigma events. When forced to liquidate illiquid positions - that everybody knew they were being forced to liquidate - they couldn't find a bid because no one wanted to step in front of their trainwreck until prices were really really compensatory. So the entire firm became illiquid, and everything they were able to sell just shocked the market more and wiped out more of their capital. They were too big. Finding a buyer for a million USD worth of rubles is difficult, finding an emergency buyer of a couple of Billion USD worth of rubles can cause a crisis.

quote: I'd also consider that a bubble in such a conservative asset category, esp when you have inflationary expectations and a highly artificial financing of that rise.

It does just become a question of the semantic difference between a bubble and an overvaluation.

Your 'highly artificial' financing is, I think overstated, but as long as there is popular encouragement for subsidizing home ownership, I don't envision the asset class becoming undervalued - hence my guess that the coming price decline will not overshoot to the downside.

quote: Also, what would even just a 10 % decline, concentrated in the most bubbled areas, do to the mortgage market?

We have had two events in recent memory that give me some guidence on the impact of local bubble pops on the mortgage market.

In the 80s, when the securitized mortgage market was just starting, Texas and Oklahoma were smacked around by the oil market. At that time, Texas and Oklahoma exposed paper traded at a small discount to the broad market - about a point (one percent). Individually traded mortgage pools at that time were significantly smaller then than they are now. Some of those deals were a couple of million original face versus todays deals that can be a couple of billion, so the geographic diversification was weaker then.

The other regional event was the very weak California economy in the early 90s. Pools with a high percentage of California paper traded a quarter to a half percentage point behind other pools. Those pools were larger than the early Texas pools, but still in the 10 - 100 million range.

If we are heading for a depression, then the 20% equity minimum for conventionals may prove to be a problem, but that would require a ~40% move in hot urban prices and a 20% move across the board - and you would still be looking at ~90% payout on existing pools.

If that type of scenario developed, then there would certainly be a Resolution Trust type of structure put together to provide liquidity to homeowners so they wouldn't have to liquidate tertiary assets like 401ks and personal property, etc. into an illiquid market and screw up the general markets even more.

quote: "...3x US, versus 4x UK, and 6x in Japan..." Not sure what the point there is?

My point here is that on a purchasing power basis, the US market is still not as overvalued as some others, and could defy the odds and continue to appreciate, very much to my chagrin. If that $1,000,000 piece of crap house next door goes up to $1,500,000 (and that would have been tax free to me) I will be certifiably one pissed hombre.

Cheers!

	07-03-2003 02:09									#168
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el freako - I concur on your statement about the impact, and trust your opinion about the English housing market.

DuncanK - I agree. Not a great reason to be optimistic about the pace of our economic recovery is it.


DanS - tell me about it. If we had a palace I could maybe make an exception, but it is just a single floor apartment 1200 sq ft, 3/2. I don't know where the people come from that can swing this. (we are here temporarily)

	07-03-2003 02:12									#169
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quote: Originally posted by DanS I am paying $80,000 after tax in rent Holy freeholies.

hehe, never took Spanish did you? It's frijoles

	07-03-2003 02:20									#170
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quote: Originally posted by Sten Sture My point here is that on a purchasing power basis, the US market is still not as overvalued as some others, and could defy the odds and continue to appreciate, very much to my chagrin. If that $1,000,000 piece of crap house next door goes up to $1,500,000 (and that would have been tax free to me) I will be certifiably one pissed hombre. Cheers!

As housing is not traded internationally then I think that comparing housing costs in differing countries with differing legal systems, lending requirements and even something as basic as popualtion density - therefore any comparison would be pretty meaningless (at least in terms of how high or low house prices can go).

What you should do is compare over time - could you point me to an index of the median house price in the US ? (preferably one going back at least 20 years).

I will then make a forecast about how much the fall is likely to be.

	07-03-2003 02:22									#171
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quote: Originally posted by Sten Sture My point here is that on a purchasing power basis, the US market is still not as overvalued as some others, and could defy the odds and continue to appreciate, very much to my chagrin. If that $1,000,000 piece of crap house next door goes up to $1,500,000 (and that would have been tax free to me) I will be certifiably one pissed hombre. Cheers!

Population density has to come into play when comparing housing prices in the US to that of UK and Japan. There may still be a bubble in Japan, but we should expect real estate to be more expensive there because they have a greater population density.

	07-03-2003 02:29									#172
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I don't think there is a bubble in Japan.

At it's peak in 1990 that ratio was over 10 for japan so 6 is a very large fall.

	07-03-2003 02:34									#173
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quote: Originally posted by el freako I don't think there is a bubble in Japan. At it's peak in 1990 that ratio was over 10 for japan so 6 is a very large fall.

No, probably not.

	07-03-2003 02:44									#174
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Directly comparable? probably not, to be sure.

Nevertheless, housing is a very real expense/asset.


Here is the National Association of Home Builders annual data for existing and new homes.

http://www.nahb.org/generic.aspx?se...icContentID=509

	07-03-2003 03:13									#175
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Well, using that data and relating it to Disposable income per head (which is what I used to make the forecasts for the UK)....

... I'm forced to conclude that there is no bubble in US housing.

Here is s synopsis of the movements in House prices/disposable income relative to the level in 1970.

There was a generalized rise in the 1970's with the peak in 1979 at 20.2% above the 1970 level.
During the early 1980's recession this fell back to exactly the level it was in 1970 in 1985, but by 1989 a small boom had raised it to 13.4% above the 1970 level.
Again as recession struck the level fell back (to 0.9% above in 1995) since then it has been steadily rising (with a small setback in 2000-01) and was 5.0% above the 1970 level in 2002.

As such I can forsee no nominal price falls for the US as a whole for the foreseeable future.


There is still a bit of a bubble in 'equity withdrawal' (which is running at 4% of disposable income) but that is nowhere near as worrying as that plus overvalued house prices.

	07-03-2003 03:33									#176
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though I guess that if household disposable income is in a bubble, then a collapse in that measure could result in significant declines in the valuation of the housing stock....


In digging around I saw that the median price per square foot was $63.60 for the States in 1999, the most recent # I found. I wonder what the equivalent is in the UK, Japan and elsewhere? How is it quoted in Europe? Square meter??

	07-03-2003 03:58									#177
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Well the tax cuts have massively boosted disposable income over the last 2 years.

Real growth in household's: Total Income, Disposable Income

2001 1.3%, 1.8%
2002 1.6%, 4.5%

Of course the upshot of that is the rapidly deteriorating financial situation of the US government:

Net Lending as % of : total government receipts. GDP

2000: +4.7%, 1.4%
2001: -1.6%, -0.5%
2002: -12.6%, -3.5%

	07-03-2003 04:32									#178
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I agree that disposible income is the primary determinant, but there are other factors that could be important. Probably new home construction, the distribution of that income, and iterest rates are important. There may not be much of a bubble, but if the economy goes bad home prices could fall more than 10%.

	07-03-2003 14:19									#179
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Sten:

First about your rent - for an appartment??? Insane...

As for derivatives, sure they have their use. The big question is if they have created a situation where risk did not just get redistributed, but disregarded. Just as in the old flood insurance game, we won't know for sure until the next flood hits. I'm particularly curious how the GSEs use derivatives.

"LTCM used a lot of illiquid esoterics/exotics AND leveraged themselves up to 20:1."

Good ol' leverage... how much are the GSEs leveraged? How much are those holding the other end of derivatives leveraged/capitalised?

"Your 'highly artificial' financing is, I think overstated, but as long as there is popular encouragement for subsidizing home ownership, I don't envision the asset class becoming undervalued"

I'm not talking so much about the tax breaks, but about the artificially low interest rates.

As for regional busts, those earlier examples are almost from a different world, are they not?

"My point here is that on a purchasing power basis, the US market is still not as overvalued as some others"

Others have pointed it out already, it's just a matter of domestic cost structures. Scarcity of land is one factor, also resulting in a larger share of "urban prices". Building traditions are another - few people here like the cardboard type house, fewer than in the US, I assume.

"In digging around I saw that the median price per square foot was $63.60 for the States in 1999, the most recent # I found. I wonder what the equivalent is in the UK, Japan and elsewhere? How is it quoted in Europe? Square meter??"

m2, yes. That would be 700 $/m2, right? Just - for land, for construction cost, or the total per m2 of living space?

ElF:

"Well, using that data and relating it to Disposable income per head"

I don't think this is a good indicator, but what does the relation look like?

	07-03-2003 22:37									#180
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quote: Originally posted by HershOstropoler I don't think this is a good indicator, but what does the relation look like?

I wonder what indicator you would use?
wages - but surely if the tax take goes up that effects the affordability of housing.
after tax wages - good luck getting the statistics for any meaningful period of time/coverage of the population.


The relation is pretty good IMO, with a fairly obvious trend level (at least in the UK as US).
Prices tend to stay at around this level for a few years after a slump and then boom - they then fall back to a bit below this level and recover, then the cycle repeats itself.