GNP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 10

[el freako]

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.

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.

[TCO]

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.

[DanS]

"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.

[Colon™]

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.

[Roland]

"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....

[Sten Sture]

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!

[TCO]

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.

[pchang]

Wasted?

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?

[TCO]

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.

[Roland]

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.

[Roland]

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 ?

[pchang]

No crystal ball

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?

[Roland]

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.

[Roland]

"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.

[Colon™]

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?