Where the economy is at

[Kurt_and_Hunter]

A short-term panic that began in September is coming to an end. That is good news.

That short-term panic was an event within a broad decline so its termination is not an economic green-light but it is much better than the alternative. (Six consecutive months like December-January would have put us solidly in or past Great Depression category.)

In historical terms, we are probably past the waterfall stage of the Crash of 1929 or the 1989-1990 Japanese sell-off and, as in those cases, lacking a fundamental argument to go higher. Some things will find a less panic-depressed level, but that level will itself be disappointing because the former value of assets was not real so there is no reason for anything to go up much. Stocks are not really very cheap and housing continues to be badly over-priced. Just less than previously.

Many adjustments in asset price will be due to reduction of priced-in risk. All stock prices contain the possibility that the Dow might hit 1,000. The odds of Dow 1000 in 2009 were always low but are are much, much lower today than in January. Taking utter short-term collapse off the table helps. Similarly, housing will not decline 50% this year. Nobody was predicting it would, but it was possible and is now much less possible. So that helps.

Lagging indicators like unemployment and non-residential construction will continue to decline from this point no matter where we are. That happens in even a shallow garden-variety recession.

The dreaded "L-shaped" recession is still roughly as likely as before. I would expect that something like 1990s Japan is still likelier than not.

But since we were running toward something notably worse than 1990s Japan one takes good news where one finds it.


A stay of execution is always welcome. On the other hand, it ain't a pardon.


IMO.

[Clio the Leo]

1. And new housing construction is up....

... I dont care if it's because of warmer weather and what kind of houses they're building, it's up, even more than expected. Up is ALWAYS better than down.

http://www.nydailynews.com/money/2009/03/17/2009-03-17_commerce_depts_good_news_on_housing_star.html

[SemiCharmedQuark]

2. I beg to differ with that point. If this crisis has taught us anything it is that numbers going up

don't necessarily mean that everything is even OK, much less great.

[Clio the Leo]

3. But what are the odds that THESE new homes are are being purchased by folks who cant afford them?

THIS time?

The odds are small to quite small I'd imagine.

It's all about the spin and I'll take it where I can get it. :)

[grantcart]

4. whatever it will look like it will not resemble Japan 1990's

1) The real estate bubble in Japan was much larger than our subprime bubble.

2) The fundamental reason that the Japanese recovery was so slow was that the Japanese government actively conspired with banks to hide the real fact of bank insovlency and not allow banks to fail. While bankruptcy is more brutal in Japan (I could not send my friend a Christmas card)the government will also ensure that key blue chip companies don't fail.

3) It is already completely different. Japan never went in on a Friday morning and took over a bank like Washington Mutual and had it operational the next Monday. By trying to cushion the blow the government slows down the 'fall' and severly retards the recovery. They try to maintain the standing of equity holders, a more centralized part of the population than the US - and political partners with the ruling political parties. Graft in Japanese politics is part of the structure. Every Japanese member of Parliment requires $ 1 million of campaign 'contributions' a year in order to maintain the 'face' of his office, as every member of Parliment is expected to send an expensive bouquet of flowers to every funeral in his district and an expensive gift to every social wedding, and that is the start. Bankers are major political donors.

4) I don't know of any studies down but I would guess that the US has in the last 6 months wiped out more equity capital in banks than Japan did the entire decade.

5) The US system is much more brutal on the way down but also ensures a much faster return.

6) Yes I know that our famous Nobel economist made a reference to the similarity of the situations but I do not believe that the statistics or the analysis back it up. Only the size of real estate bubble was similar. The banking systems and the support they get from their political partners is completely different.

[Kurt_and_Hunter]

5. I am merely roughly differentiating 1982, 1990 and 1929-1932

We are not Japan.

But there are three ways we can go:

Sturdy rebound
Continued stair-step declines for several more years
L-shaped stagnation at low levels.

For convenience people discuss those in terms of '82, Japan and '29 respectively.

And I think "Japan" is where we are headed. And that's optimistic.

I don't think the causes and events are similar, just the prognosis.

What the second two have in common is a bubble collapse. I fear '29, hope for Japan.

(How much of stock valuation depends on pricing in the possibility of a stock bubble in the next decade? If prices are at all rational, a LOT. Simply taking the dream of more bubbly goodness off the table seems to mandate stagnation going forward in all assets. Even if we returned to the same GDP and same corporate profits stocks will not return to previous prices associated with those levels because the priced-in upside is lower. Same for houses. Just my intuition.)

I suspect the role of monetary policy and bank solvency are over-stated in these things because that's what economists feel they can control. (If your only tool is a hammer...)

But all our bank problems, monetary problems etc. flow from the central fact that tens of trillions of asset valuation disappeared. And since they never represented durable value there's just no fix for that.

Our bubble was way bigger than Japan's, absolute or relative. I retain my central thesis that there was a US-led but global asset bubble 1995-2007 and whether the instruments of it were stocks, houses or baseball cards is secondary to the gross loss of capital/collateral and the psychological induced aversion to assets.

So I agree that we are not equivalent to Japan and that there are fewer speciffic policy lessons there than it may appear.

But, on the other hand, it's the only recent major economy bubble-collapse that featured real estate as a key asset in play, so there are probably some instructive broad similarities.

I do think we could use some real inflation to shift the burden from mortgage holders to mortgage lenders (who are already practically wards of the state) as a triage measure. So I find a certain columnist's writing about inflation inducement vis-a-vie Japan intriguing. But not gospel.