Compared to the trillion dollar deficits before, yes. But the debt still grows by a half a trillion a year. And that doesn't even count unfunded liabilities that grows at $5T+ a year.
-
Want to remove ads? Register an account and login to see fewer ads, and become a Supporting Member to remove almost all ads.
Seth Klarman's bearish thoughts on the current market climate
- Thread starter marvinat0rz
- Start date
-
- Tags
- TSLA
Compared to the trillion dollar deficits before, yes. But the debt still grows by a half a trillion a year. And that doesn't even count unfunded liabilities that grows at $5T+ a year.
That's entirely possible, but it's about fiscal policy, not monetary policy. The CBO projects that the deficit will be 3.0 percent of GDP this year. If (as many Republicans seem to wish) Congress immediately balanced the budget, there'd be a direct reduction in economic activity of 3.0%. Plus, each dollar of government spending has a multiplier effect. How big is the multiplier effect? Most estimates put it around 0.6, so that 3.0% reduction would likely cut economic activity by 4.8% in total. (I recommend scanning this slide deck from Harvard economist Barro about the multiplier effect.)
In any case, we're probably getting too close to politics here rather than investing.
JRP3
Hyperactive Member
There were two large factors in play in 2008 that I don't see this time, the housing bubble and a dramatic increase in oil pricing.
Got proof of that? I find Amazon's financials cryptic, frankly. There's so much money tied up in expansion and empire-building, it's hard to get any vision whatsoever of what the company will look like in a steady state. The P/E is meaningless for the same reason.
If they achieve monopoly status in the sales-and-distribution field and make it stick -- which they might, as it's a natural monopoly and they're quite good at it -- then they're going to turn into a reliable cash cow, regardless of what the nominal profit-loss looks like this year. Think the old AT&T, which ended up with a near-monopoly on telephone service.
Will the fees charged to individual sellers to list stuff on Amazon, or to warehouse it with Amazon, go up? Oh yeah. Can the sellers afford to go anywhere else? Probably not.
strider
Active Member
Thanks Robert. Your math backs up what I posted. That were it not for government deficit spending we would be around -2.3% GDP. I'm not going to argue whether the spending is good or bad as I agree the political minefields are enormous. I will just say that no country has ever fun fiscal deficits greater than real growth for any length of time. It always ends in tears. Now I have no idea when that will happen to the US but it will happen. Someday the bond markets will revolt and interest rates will rise regardless of what the Fed wants or does. At that point the elected government will face a crossroads. Allow a continuously growing portion of the budget to go towards servicing the debt as interest rates rise (they call this austerity and would involve cuts in services) or order the Fed to really monetize the debt and it's damn the torpedoes, full speed ahead. But that's a whole other thread for a whole other board...
That won't happen overnight of course but when interest rates do go up folks will rebalance as they will be able to get a decent return from the bond market and not have to chase yield into stock and asset bubbles.
The housing bubble 2.0 is alive and well. Securitization too. Hedge funds and other hot money have swooped in and are buying homes left and right, bidding prices right back up to and above where they were in some areas. Also, they are securitizing the income stream from the rentals and selling them to investors. Same thing they did int he last housing bubble. The Fed has kept interest rates too low for too long at the request of their political masters and so bubbles are being blown all over the place by people chasing yield.
Uhhhh AT&T was given its monopoly by the government and in return was regulated by the government. That's a little different from Amazon. Anyone can use the good old USPS to ship stuff and UPS, FedEx, etc offer warehousing services which will keep a lid on Amazon's ability to raise prices.
I realize that my attempt to focus on the fundamentals of a company's ability to make money (and return that profit to shareholders which is the whole point of owning shares, but I digress) is old-fashioned but looking at these valuations, it will take decades of profitability to support these prices. So at the end of the day, your only hope of making money from these companies is if you can find a greater sucker to pay you more for them. What happens when there are no more suckers?
@strider- in the areas I'm familiar with (Florida, Nevada, Arizona, Washington) we are no where near the bubble prices nor market behavior of the financial crisis housing bubble. Not even by half and the activity is way under those levels. The prices have come off the bottom for sure, but only to return to a more normalized level. The banks do continue to improperly securitize but no where near those former bubble levels in quantity and fervor from my view. In fact very recently prices have tempered and flattened. And if we are in a -2.3% GDP contraction, there simply is not enough under pinning energy to form the bubble we just witnessed. Just my opinion of course
JRP3
Hyperactive Member
I have to agree with kenliles, maybe there are a few select areas of housing speculation but nationwide data simply does not show this.
http://www.jparsons.net/housingbubble/
This and other charts seem to put us around 2002 levels, no where near bubble territory.
http://www.jparsons.net/housingbubble/
This and other charts seem to put us around 2002 levels, no where near bubble territory.
There's definitely an up-swing in real estate prices; the gold-standard is the Case-Shiller index (S&P/Case-Shiller 20-City Composite Home Price Index - S&P Dow Jones Indices) which controls for quality better than other indexes. I'm not particularly concerned because I still see banks maintaining high underwriting standards.
strider
Active Member
As they say, history doesn't repeat itself but it does rhyme. As regulators are good at fighting the last war, you're not going to see a return of NINJA loans to individual homeowners as regulators are watching for that now. So it has moved on to rental income securitization. No regulation there. http://dealbook.nytimes.com/2014/01/29/wall-streets-new-housing-bonanza/?_php=true&_type=blogs&_r=0
No comments on the last paragraph in my previous post?
No comments on the last paragraph in my previous post?
JRP3
Hyperactive Member
Might that turn into an issue some day? Possibly. Is it anywhere near what we were looking at in 2008? Not even close. So I'll stick with my initial premise that two major factors of 2008 are not in play at this point in time.
You are absolutely correct that the *ability* to make money is key. To date in his long and successful career, Elon Musk has demonstrated an uncanny ability to make money, and the platform of Tesla Motors seems to my eye to be yet another success story. Is the stock price "too high"? That depends entirely upon your view of how the future plays out. The Goldman Sachs report lays out several scenarios, the majority of which make the stock appear undervalued today. It all depends on the weight you give different scenarios.strider said:
To date, though, no one has lost money putting their chips on Elon Musk. People have lost a lot betting against him. I think I'll hold my long position, thank you.
CapitalistOppressor
Active Member
This is just mistaken. The action you are seeing as a "bubble" is just investors rushing in to fill a vacuum, and most of the really "strong" price increases you are seeing are something of an illusion because they are coming off of a highly depressed base.
If you take a large number "x", subtract 50% to get "y" then add 50% to get "z" you'll find that "z" is still pretty flipping low compared to "x". That is even more the case when you are talking about money after a half decade or more of inflation. That's why home prices are still at very affordable levels despite the supposedly strong growth over the last year or so.
More to the point, if there were an actual bubble then we'd see it in new construction as home builders rushed to cash in on a tight market. Instead we see this -
Note that the current builder confidence levels of 47 is below the break even point of 50, which means their current expectations for the market are negative. And actual building permits are still at Depression levels, which is pretty much the opposite of what you would expect to see in a bubble, and in fact it is the opposite of what we DID see in the ACTUAL bubble.
At best the hot money is sopping up underutilized assets and propping up the market for existing homes. And since I'm here, might as well post the entire data set -
See the bubble? I don't.
And since it only adds 5 working minutes to research and add the home affordability index -
This is not home prices per se, since it is actually looking at monthly payments and so factors in the low interest rate environment. But it just points to how dramatically depressed the housing market really is right now. Note that 100 is affordable for the median income, and the index is at 174.2(!!!) right now.
Again, you would expect to see this decline in a bubble (which you can see in this chart). The decline doesn't look dramatic compared to the early 80's, but the key factor is that rates were at ~13% or more in the early 80's, vs ~5% pre-bubble, so most of the decline you see in the graph is a result of "skyrocketing" home prices.
EDIT -
Here is the explanation for the affordability index that the graph I posted is based on (from Robert.Boston's link) -
When I copied the image for the graph I accidentally cropped out the explanation, and looking back at it its just not clear at all what it means, lol.
Last edited:
Excellent analysis. What happens to housing when interest rates start to rise when the Fed stops buying bonds? I have to believe QE is keeping the ten-year below 3%. We would see mortgage rates climb to 6% affecting affordability.
Last edited by a moderator:
Somewhat counter-intuitively, the Housing Affordability Index cited above is set up so that high numbers mean that housing is more affordable. See Metro Areas See Solid Home-Price Growth, Some Markets Facing Affordability Issues | realtor.org
CapitalistOppressor
Active Member
Correct, a high number is more affordable. I didn't even think about it not being intuitive, but I could see someone not being aware of how the chart is formatted might think it is showing extremely unaffordable housing, when its showing the exact opposite (ie, housing is incredibly "affordable" right now, in fact far, far more so than at any time in decades).
This is a market that is very far from being overheated, and when you consider that new construction is still close to its historic lows it should be obvious that to the extent that there are price increases its mostly a matter of short supply in existing homes (because huge numbers of people are still underwater and stuck in their homes and not putting them on the market), combined with historically tight credit keeping huge segments of the population from being able to enter the market, and also with an associated problem from younger folks coming out of college for the last 6 years and being forced to flip burgers and live at home because there just aren't jobs.
Talk of a bubble in housing just seems divorced from the facts that I am aware of.
EDIT -
Here is the explanation for the affordability index that the graph I posted is based on (from Robert.Boston's link) -
When I copied the image for the graph I accidentally cropped out the explanation, and looking back at it its just not clear at all what it means, lol. I'll also add to the original post.
- - - Updated - - -
That is correct. As mortgage rates go up, affordability goes down, which reduces the universe of potential buyers (assuming the banks are doing their job). Same thing happens when real prices go up.
Last edited:
Something that doesn't get noticed very much about these housing prices are how the different market price tiers are responding differently. Here in Boston, for example, we have a strong real estate market currently. As of December 2013, the overall housing prices are at 92% of their peak (9/2005). "High Tier" properties, though, are at 95% of their peak, "Middle Tier" at 90%, and "Low Tier" at 85%. My read on what's driving this gap is that the Low Tier stock was the most overheated: it hit 219.24 (relative to Jan. 2000 prices), while Top Tier only got to 169.61. Here's what it looks like nationally:
If you leave Atlanta and Denver out of the mix, the run-up between 2000 and 2005 was more for lower-end properties, often by a lot (e.g. LA and SF). It's primarily those properties that took a big loss in the past 9 years, but it's interesting to note that they've basically come back into line with the post-2000 price movement of High Tier properties in the same market. For example, at their peak in SF, Low Tier properties were at 276 vs. 191 for High Tier; now they're at 175 and 182, respectively.
It's also worth noting that some markets or tiers within markets are nearly back to their peak. High Tier Boston properties were at 96% of their peak value in December, and I can report that sales have been very strong since then; San Francisco High Tier are also strong. Denver is above its pre-recession prices in all tiers.
But I don't think that these robust prices in some areas is the result of over-heating, but rather strong local economies, low interest rates, and slow housing stock growth. Underwriting standards for mortgages is much higher than a decade ago, and I'm hoping that people are getting 15- or 30-year fixed mortgages.
So, bottom line: I don't see a housing bubble.
| Low Tier | High Tier | |||||
| Dec. 2013 | Peak | Ratio | Dec. 2013 | Peak | Ratio | |
| Atlanta | 90.03 | 138.08 | 65% | 119.72 | 138.41 | 86% |
| Boston | 186.64 | 219.24 | 85% | 163.06 | 169.61 | 96% |
| Chicago | 108.14 | 183.56 | 59% | 128.01 | 160.15 | 80% |
| Denver | 136.68 | 145.2 | 104% | 142.92 | 146.18 | 101% |
| Las Vegas | 123.43 | 243.94 | 51% | 130.93 | 230.5 | 57% |
| Los Angeles | 223.86 | 339.81 | 66% | 209.33 | 240.26 | 87% |
| Miami | 169.22 | 341.13 | 50% | 177.88 | 257.96 | 69% |
| Minneapolis | 141 | 187.68 | 75% | 136.42 | 165.92 | 82% |
| New York | 181.4 | 259.78 | 70% | 166.13 | 193.24 | 86% |
| Phoenix | 135.14 | 239.28 | 56% | 150.11 | 224.01 | 67% |
| Portland | 173.29 | 199.87 | 87% | 152.59 | 180.83 | 84% |
| San Diego | 212.74 | 296.81 | 72% | 183.59 | 224.43 | 82% |
| San Francisco | 174.6 | 276.13 | 63% | 181.91 | 191.29 | 95% |
| Seattle | 149.35 | 202.38 | 74% | 160.44 | 187.61 | 86% |
| Tampa | 144.47 | 279.74 | 52% | 157.83 | 224.68 | 70% |
| Washington DC | 205.73 | 296.75 | 69% | 197.57 | 223.03 | 89% |
It's also worth noting that some markets or tiers within markets are nearly back to their peak. High Tier Boston properties were at 96% of their peak value in December, and I can report that sales have been very strong since then; San Francisco High Tier are also strong. Denver is above its pre-recession prices in all tiers.
But I don't think that these robust prices in some areas is the result of over-heating, but rather strong local economies, low interest rates, and slow housing stock growth. Underwriting standards for mortgages is much higher than a decade ago, and I'm hoping that people are getting 15- or 30-year fixed mortgages.
So, bottom line: I don't see a housing bubble.
strider
Active Member
Where did I say we were at the peak of a (new) housing bubble? My contention is that the act of hedge funds and banks (guess they're the same thing these days) buying up properties with plans to securitize the rental income streams into bonds to be bought by investors has such a sharp echo to what happened just a few short years ago with mortgages that it seems plain to me that they are working to reblow the housing bubble for all the reasons I stated above (Fed keeping interest rates low forcing investor to reach for yield).
Robert's data reinforces my point. In many cities we are very close to prices that last occurred in what everyone agrees was a housing bubble. Have the fundamentals changed such that prices that were the product of a bubble are now supported by the fundamentals? Has employment, wages, etc increased since then to support these prices? No.
I would contend that the homebuilder confidence supports my view and not yours. They got burned bad last time and so they are looking at whether the fundamentals of the economy support their investment and they have obviously decided that is not the case. If your view was correct in that housing had returned to normal (yes we can debate what normal is but for now I'll use the metric of organic, sustainable, and non-speculative) and yet supply was still tight then they would be bullish no?
I would say that incomes in SF and NY have returned and are driving housing more than low interest rates. Lots of cash buyers too. Thanks to the high tech and other stock market bubbles. When they pop, then even SF and NY would be affected.
Similar threads
