Thursday, August 30, 2007

blake, i'm not

Yesterday's post was a bit feeble, but what I meant to express, was that things are unhinged in all sectors. There are massive amounts of money-cum-credit floating around, and it is hard to tell the difference. I think that it tends more to be credit, and that is what I was getting at about "selling ourselves". I heard (or read) some time ago that credit is now the most dominant market and would continue to expand. As long as central banks keep propping up the sickness that pervades, that is easy to understand. Mutual funds, hedge funds etc. have been knee deep in extending credit, and trillions of dollars in bad loans got wiped out of peoples' portfolios. Who are the winners?

On another note, I wandered into charles hugh smith's - Two Irresistible Reasons Housing Will Retrace to 1997 Prices and ripped off what is below. I don't know just how he arrived at his conclusions, but the Japan graph is striking.

The one thing that is not often taken into account is world population. In 1950 there were about 2.5 billion people on earth, now we are heading for 7 billion. While billions of those are living in abject poverty, many are enjoying previously unknown prosperity. So, is it possible that historical ratios just don't apply any more? Is it really different this time? (Wikipedia suggests that in 1999 North America had 5.1% of the world population, and that will fall to 4.4% by 2050 - when the world population is projected to be 8.9B)

Nah. I don't think so. I don't reasonably expect 1997 prices before I buy (2017?), I want to watch trees grow, and I am not that cheap. I'll settle for 2003 prices.

Here's an excerpt of what chs has to say. Read the whole article at the link above. It's interesting.

Speculative bubbles in the stock market tend to shoot up and then plummet in relatively short time spans. Here we see that the dot-com era bubble in NASDAQ took a mere 3 years to reach euphoric heights in which risk was banished, and a roughly similar length of time to give up all the bubble's gains, and then some.

Real estate trends stretch out over much longer time spans, and as a result we can foresee a lengthy, painfully drawn-out decline in housing values over the coming decade.

Just as stocks break free of fundamental metrics of value in speculative manias, so too do houses. But just as stocks retrace to historical levels of price-earnings ratios, so too will housing retrace to historical levels of income-to-value ratios. Historically, this is about 3-to-1: long-term, houses cost about 3 times household income. Since the median household income in the U.S. is about $46,000, U.S. incomes would support house values of about $125,000 - $140,000.

As I have noted before, my parents/step-parents each bought houses in highly desirable locales in the early 70s (Honolulu and Pasadena) at 2:1 (twice annual income) and 4:1 (four times a schoolteacher's annual income to buy in highly desirable Manoa Valley in Honolulu.)

As recently as 1997, friends were purchasing small homes in very desirable S.F. Bay Area communities for $160,000 - $175,000--four times a modest (for this area) household income of $40,000.

In other words, to return to a normal trend line, one that was in place a mere decade ago, even the most desirable areas will command no more than 4 times median income. That would put house prices in Honolulu, the S.F. Bay Area, West L.A., Connecticut, Northern Virgina, etc. at about $180,000 - $200,000 -- not $600,000.

Thanks to cheap realty for the link to chs.


Aleks said...

I'll assume he's talking about real 1997 prices and not nominal, although he doesn't explicitly state it. However, I'm less and less sure what "real" amounts to. So-called "core" CPI may be running below 3% annually, but the inflation of the money supply is running in the double digits. That money has to go somewhere, and it would certainly explain a lot of what's going on in RE and the art auctions and even the stock market. And if you look at the cost of goods which are part of the CPI, but produced here rather than in China, they're inflating much higher than reported as well.

The scary part is that if inflation is actually 10% or more, it means that wages are not even remotely keeping pace, savings are being devalued and GDP is not growing, which means we're in a recession.

solipsist said...

Interesting thoughts to ponder aleks.

Food is about to go up by 5% (grain-based, anyhow). What will that do to CPI? They don't bother with housing and energy (one reason reported inflation is so low), but food cannot be ignored.

M- said...

On the topic of other assets bubbling in value, a few months ago I attended a presentation by one of ICBC's top collector-car specialists, who is an important player in determining the value of classic, vintage, or other specialty cars if they are damaged/destroyed in an accident.

One of his discussion topics was the rapid rise in collector-car prices over the last few years, far beyond reason. In my mind, I was thinking "wow, another asset class is bubbling up in value".

NM real estate said...

food is supposed to go up by 5% you say? Where did you hear that? I think milk has probably gone up 20% at least.

solipsist said...

food is supposed to go up by 5% you say? Where did you hear that?

Rising wheat prices will cause ripple effect through food chain as production expected to drop 20%

Aug 25, 2007 04:30 AM
Thulasi Srikanthan
Staff Reporter

Soaring grain prices triggered by lower-than-expected wheat harvests around the globe could mean prices for everything from bread and pasta to beef and pork will continue to climb, food-industry experts say.

High demand and shrinking harvests sent wheat futures up again on the Chicago Board of Trade commodities market yesterday.

Futures have risen 7.8 per cent since the beginning of week to $7.39 (U.S.) a bushel.

The increase comes on the heel of news this week that Canadian wheat production is forecast to fall to 20.322 million tonnes, down nearly 20 per cent from last year.

"Consumers better get used to higher grocery bills," said Larry Weber, a wheat-industry expert and head of Saskatoon-based Weber Commodities Ltd.

"It is not just confined to bread and cereals. You are going to see higher meat prices, because ... it is going to cost more to finish beef, more to feed chicken and more to feed pork."

Poor weather conditions, from droughts to floods, combined with high demand for ethanol-producing corn, have been among the key factors in the scarcity of grain and the resulting price rise.

Get ready for food-price spike
Sean Silcoff, Financial Post
Published: Saturday, August 11, 2007
Donald Coxe has a useful tip for investors. The global portfolio strategist for BMO Financial Group calls it the "Rule of Page Sixteen": Never invest on the basis of a story on Page One of the newspaper, but the one on Page 16 that is destined for page one.

The Page One story of this week was turbulence in the stock markets over concerns about exposure of banks to subprime mortgages and the global credit crunch that led central banks to flood markets with money.

The Page 16 story? Turn to last Wednesday's Wall Street Journal, page C6 actually. Buried inside an earnings round-up is one sentence about Dean Foods Co., the largest milk processor in the United States. Second-quarter profit fell 1.6% due to higher raw milk prices, the story said. What it failed to add was that CEO Greg Engles said Dean is "being challenged by the most stubbornly inflationary dairy markets in history," a global phenomenon that "feels like a perfect storm, and it isn't over."