By The Tim on August 7, 2009
Here is your open thread for the weekend beginning Friday August 7th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.
Be sure to also check out the forums, and get your word in the user-driven discussions there!
Posted in Open Thread | Tagged open_thread
Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.
Since people here often compare this recession to Great Depression. Do people still think that:
1) There will be deflation haunting us. The Fed and govt will not be able to stop this.
2) The layoffs will increase even after the news today.
3) The real estate in Seattle will go down more than 20% from here.
4) This is just a bear rally with unemployment going down and recession easing (with regard to Dow)
Will the Q3 GDP for 2009 still remain negative as Dr. Roubini predicts or will it shoot up in the positive flat area as CNBC predicts?
I’ll be the first to admit Dr. Roubini hedges his optimisim for a 2010 stabilizing, assuming the debt doesn’t drag it all back down again in a “W” recession. He puts some emphasis on a jobs market shrinking with no comeback, but IMO too little emphasis. How can consumer spending spur growth with no job creation, irrespective of slower unemployment degradation? Its the million dollar question I get no answer from any of the economists.
My guess for GDP Q3 is negative, and Q4 negative too, as unemployment runs out for many by year’s end. Q1 2010 get’s more foggier; but I’ll hold to my 1st hunch, without job growth GDP will continue negative; irrespective of slower degradation.
RE: Trigger @ 1 –
This is GD II using historical GD I unemployment as the marker for today. To me, chronic unemployment getting worse and worse is the definition of a depression.
The GD I stocks did fall 50% and then rebounded 6 months later by 50% [25% of the old high]; very close to what GD II did today. in 2009.
See the chart for GD I, to possibly predict GD II:
http://creditwritedowns.files.wordpress.com/2008/10/dow-1928-1932.png
Population Growth and Chronic Unemployment Increases
The mixture of growth and job loss did not occur during GD I, but we have this plague today, a good article in part:
“…Furthermore, the loss of 6.5 million jobs over the 18 months of this recession dramatically understates the hole in the current labor market. To keep up with population growth, the economy needs to add around 127,000 jobs every month, so the labor market needed to grow 2.3 million jobs over this period. All told, the labor market is currently 8.8 million jobs below where it would need to be to maintain pre-recession employment levels. If there is any good news in this report, it is that despite the increase in job loss from May, the pace of losses still appears to be slowing from the enormous declines of earlier this year. In the first quarter of 2009, the economy shed 691,000 jobs per month, on average, but in the second quarter the losses averaged 436,000 jobs per month.
The continued losses, however, mean unemployment is still rising. This recession has set a new unemployment benchmark as unemployment has increased by 4.6 percentage points, higher than the rise of unemployment in the 1980s recession. Unemployment rose from 9.4% in May to 9.5% in June as 218,000 people were added to the jobless rolls. One of the reasons the unemployment rate did not rise more than it did in June was due to a shrinkage of the labor force of 155,000 workers, partially offsetting the labor force gain in May of 350,000 workers. There are now 14.7 million unemployed workers in this country, up 7.2 million from the start of the recession. The picture changes dramatically, though, when considering the broader measure of underemployment. If the ranks of the “marginally attached” (jobless workers who want a job but are not actively seeking work and so are not counted as officially unemployed) and “involuntary part-time workers” (those who want full-time jobs but can’t get the hours) are added to the mix, the figure rises to 25.9 million, which means nearly one in six U.S. workers (16.5%) is either un- or underemployed….”
The rest of the GD II URL:
http://www.epi.org/publications/entry/jobs_picture_20090702/
RE: Softwarengineer @ 4 –
We Lost a Quarter of a Million Jobs In July, Its Getting Worse
Then unemployment went down 0.1%….how’s that….well it acually may of only gone down 0.01%, because it was 9.46% [9.5% rounded off].
Also, the 9.4% anomaly could be moot point number manipulation during the July improvement [?] as follows:
“….One of the reasons the unemployment rate did not rise more than it did in June was due to a shrinkage of the labor force of 155,000 workers, partially offsetting the labor force gain in May of 350,000 workers….”
The rest of the URL:
http://www.epi.org/publications/entry/jobs_picture_20090702/
I think when the 9-10% low-ball unemployment calculation hits the top 5% of household incomes very soon, the MSM and Dem/Reps won’t be calling a quarter of million monthly job losses a reason to rejoice and break out the champaign. This MSM nonsense won’t have a willing mouthpiece anymore.
Even Obama Agrees With Me On Unemployment
Article in part:
“…The new Labor Department numbers show that employers cut 247,000 jobs in July, another job loss but also the smallest reduction of any month this year. The unemployment rate dropped marginally from 9.5 percent to 9.4 percent, although one of the reasons for that change is that hundreds of thousands of people left the labor force….”
The rest of the URL:
http://news.yahoo.com/s/ap/us_economy_obama
RE: Trigger @ 1 –
I’m seeing a pattern here that the majority of Americans don’t seem to be noticing.
“Late 90’s easy credit” + “Dot-com related stock prices can only go up!” mentality = Dot com bubble
“2003-2006 ultra easy credit” + “Housing prices will never fall, they can only go up!” = Financial crisis
“2009 unprecedented easy credit” + “Depression was averted and we bottomed! Prices can only go up!” = ??
Personally i’m not buying the long term deflation scenario. Evidence is in the recent GDP figures and programs like cash for clunkers that show inventories/production being slashed to meet demand. All these measures are inflationary. Housing will still see a downward correction but who knows what the next asset bubble will bring us.
RE: Flying Ape @ 7 –
Possibly Flying Ape
But its like that old saying, “you can’t get blood from a turnip”….meaning, with chronic depressionary [approx 20%] unemployment [calculated the old fashion way]; there aren’t many demand pocket books grabbing up your reduced supply. On the issue of cars though, its not just making the monthly payments, I believe stressed out consumers aren’t driving their cars near as much anymore…..they’re keeping milage off their odometers and making their scheduled maintenance stretch. This will make car sales even more dismal.
With world oil use down 42% since 2006, don’t expect commodities to flash pan inflation soon.
Even Roubini’s suggesting cash cans as the best investment.
Here’s one for the open thread.
I think the housing crash has killed the success path for an entire category of people, namely meat-heads. Real Estate money is meat-head money. It’s not doctor money, it’s not banker money, it’s not lawyer money, it’s not high-tech money. RE is the path to money for high school dropouts with good connections, aspiration, and some basic common sense.
Nothing about it is complicated, for agents or construction/developers. Demographic trends and government subsidy has put such a big upward bias in RE in the past century that makes it an easy game to win.
And so what happens to the meat-heads when they have no more role models, and gone are their dreams of driving a hummer to Whole Foods with one set of thick fingers wrapped around a 60-ounce trough of coffee and the other around their cell phone?
The meat-heads need to believe they have a fair shot. Will they be the first to turn against society?
Meat heads are the people out there that get things done. Most of the others can tell you how it should be done, but not have the ability to actually do it.
Meet heads typically can fair tough times better because what they do is more tangible than what egg heads do.
Often times you question what you are paying the egg heads for, but product that the meat heads provide is typically obvious.
I’d put lawyers in the same category as real estate agents. It’s an industry that has created it’s own demand. 80% of what lawyers get paid for could be removed with a more common sense judicial system.
And don’t get me started on bankers, aren’t they the biggest reason we are in this mess?
I have no problem with doctors making money, what most of them do is pretty outstanding.
“Nothing about it is complicated, for agents or construction/developers”
Sure it is if you want to actually be good at your job. I can be a General Practitioner with about one year of schooling, and google by my side, but that wouldn’t make me a good doctor. I mean really how hard is being a dentist? A woodworker has the same skill set as most of them.
“The meat-heads need to believe they have a fair shot. Will they be the first to turn against society? ”
No, they are actually the ones that have a fighting chance when the poop hits the fan.
By Racket @ 10:
With the possible exception of class action and derivative suits, the judicial system is pretty common sense. The problem is the people. No one ever wants to admit they’re wrong.
Then there’s also the legislatures. How many lawyers do you think will be employed because of the 1,500 page health care bill if it gets enacted? Or the 500 page Cap & Trade bill? We’re getting to the point where we’re being buried up to our necks in legislation and won’t be able to do anything without violating some statute.
Ok, that’s a pretty good response.
My question is not who adds the most value to society relative to their wealth. Clearly lawyers do not. The question is about who has access to a path to wealth in this society. I’m proposing that the meat-heads have lost theirs, and as a result they will rebel.
Your response I think is that society will continue to degrade, and this will result in a shift of opportunity toward the people who provide the most tangible value. And you assert that this is the meat-head. It seems as though this will require a big shift in the framework of our society. But your point seems valid.
By Kary L. Krismer @ 11:
Not to open this can of worms, but I’m going to. What really is common sense? If you really think about what common sense is, a lot of people feel, “When I’m told something, I think, oh that’s so obvious.” The real problem is there’s no definition of it. It’s just whether it made sense to a bunch of people.
Now I’m injecting IMHO. There are two problems to common sense. One, no one seems to follow it (i.e. they do what they want and look out for numero uno). Two, to create common sense (i.e. come up with a new idea that is generally accepted as common sense) is actually quite tough. Common sense is born from a lot of experience and creativity. Experience to filter out that which isn’t common sense and creativity because that’s what you’re doing. Creating anything that lots of people accept as awesome is never easy, akin to art.
Off my horse, lawyers are necessary because no one follows common sense. I admit; I knowingly don’t follow ‘common sense’ a portion of the time. To say that we could get rid of certain people would be utopia where everyone is looking out for each other (just imagine the efficiency if we all could just get along).
Justin
By Kary L. Krismer @ 11:
By Herman @ 12:
Well once “ObamaCare” gets going, are doctors going to have a path to wealth? Or is it going to be like in Canada well the brightest and most brilliant ending up doing boob jobs, and hair plugs.
It’s not an easy task to develop a skyscraper, or neighborhood. Most of these people who have done these things over the years have been very intelligent people.
We have seen a recent phenomenon where as everyone is a GC/Developers, but that was simply just because demand was high, and the good intelligent ones were spread very thin.
This can be the case as well in the white collar sector where, when there is huge demand the best are taxed, so you have to goto the B team to try to fill the void. Demand goes down, and the B team is unemployed.
I like to think of myself as renaissance man, Meat heads will call me an egghead, and eggheads will call me a meat head.
By Justin Louie @ 13:
And that’s why the law changes over time. It will hopefully never be what fringe elements think it should be, but it does slowly move towards what most people think it should be.
Our concepts of consumer protection or civil rights would have seemed pretty fringe 100 years ago. The law evolves to society.
RE: Herman @ 9 –
You mean the people who work for a living.
Real Estate is a hard work business. Real Estate development became a Science Degree along with Financial Engineering. That’s when the problems started.
First it was the idiot architects who wanted more engineering in the codes. Then is was planned development. After that came the Financial Engineering of the credit markets and Bob’s you uncle.
The meat heads work. In many cases they turn out a good product at a fair price. You are talking about wealth like it’s a gawd given right.
The meat heads clean up the mess of the wealthy.
Doctors, lawyers, bankers, and high tech are the problem, world wide, hands down. It’s called elitism. The same as monarchs, kaisers, pharoahs, and royalty needed to be moved aside we need to get rid of the intellectual elitists. So I guess you are right. The meat heads will rebel.
I’d suggest you do something to be productive, and do it quickly. The meat heads are going to get tired of paying for you.
RE: Kary L. Krismer @ 11 –
“No one ever wants to admit they’re wrong.”
There is a God.
The barn door swings wide open…..
“By their own mouths they shall be proved fools”
Irony so thick you could cut it with a knife….. ;-)
By Flying Ape @ 7:
An overhang of excess capacity is not inflationary. US car plants are about 40% utilized right now – the lowest since records have been kept. They can crank up production in a week.
RE: David Losh @ 17 – That’s the thing about the meat-heads. They’re not very smart.
We’ve been able to keep them down easily with credit and debt, and infomercials about rising to the top by flipping houses. Suckers. Trouble is, it’s getting harder to wield those tools due to obvious recent events. But rest assured we can find a new one. They are meat-heads, after all. We can always put a gay marriage agenda out there to distract them while we come up with something.
They’re not really that hard working, either, they just think they are.
Have a look at any construction site or government road crew. A third of them are sitting around killing time. A third of them are working. Another third of them you don’t see, because they had a fight with their old lady last night, had a few drinks, and took the day to try to get themselves back together instead of coming to work.
Tile, framing, electrical, finish work, flooring… I have yet to meet a contractor that does the job as well as I do it myself. And I have no experience, just a brain and a work ethic and some pride in it. RE agents have limited value. Their network of connections isn’t useful in this era, and most don’t know how to negotiate.
Like I say, the best of them could, in times past, aspire to become a property developer or landlord. Simply choosing to lock up their earnings in home equity kept it safe from their wasteful meat-headed exploits like motor boats and new custom rims. A few lessons learned from the trade can avoid the big mistakes. Beyond that, the natural appreciation of property over the past decades took all the thinking out of it.
I’ve heard a couple good arguments, but no, I’m not going to bet on the meat-heads.
RE: Scotsman @ 18 – And maybe that will mean something someday if you ever prove me wrong. When I am wrong I admit it.
My arrogance and belief in my beliefs is far out shadowed by your own.
Yes Trigger, I do believe in the deflation scenario, and think that prices of almost everything are going to fall significantly over the next 5 to 10 years.
The efforts of policy makers to avoid deflation are actually exacerbating the situation. All the stimulus spending is most borrowed, which simply sucks money out of the broader economy. The extensions of easy credit to various institutions, and extremely low interest rates, further creates debt which must be repaid.
This is the key thing to keep in mind: debt is deflationary, and our modern economy is built on debt. The fact that the world economies are based on fiat currencies makes it highly likely we are going to experience deflation on a scale far greater than in the first “Great Depression”. There are limits to how much credit can be created when currencies are backed by gold. Fiat currencies, by contrast, allow the growth of virtually unlimitted credit.
Deflation is everywhere, just ask anyone looking for a job these days. In almost every profession the salaries on offer are significantly less than just a year ago. If wages don’t rise, neither will prices.
As I’ve said on this forum many times before, I expect average Seattle area real-estate prices to drop at LEAST 80% from peak by the time this depression reaches bottom, and prices on commodities and most other things will fall substantially as well. We are merely experiencing a bear market rally right now that will peter out sometime late this year, or in early 2010, and deflation will grip the global economy even more firmly, driving asset prices far lower than they were early this year.
Now it’s time for the obligatory plug for my podcast outlining the case for deflation:
http://surkanstance.blogspot.com/2009/01/deflation-101-podcast.html
By Sniglet @ 22:
The money they suck out of the economy by borrowing they immediately pump back in through spending. At the same time, the paper they issue to represent the debt is liquid enough to be treated as cash. The net effect is additional spending plus the replacement of cash by something that is effectively the same as cash. That would be inflationary, but is currently offset by falling property values.
RE: Herman @ 20 –
You are one eloquent son of a birch. You make excellent points.
Real Estate is a level playing field. The most successful Real Estate Investors I know are not that smart. They buy it and never sell it. All of the fancy Art of the Deal stuff is for the suckers who buy the books. The meat heads just buy and pay it off. They’re just not smart enough to do anything else.
This is where you’re going to have a hard time convincing people that the guy driving the truck will be to one who will struggle to survive. He’s just not that smart to know he’s in trouble. He will continue to buy and build.
Now about the union guys standing around. They are always a target. The tile guy is always the target. They are probably why we have a recession, or depression. If those people would just do something then everything else would be all right. All the smart people know that. The meat heads have a different excuse.
The meat heads think that the smart people came up with a long complicated formula of return on investment that had smart people sitting around trading paper. I think the difference was that the meat heads were standing around and the smart people were sitting around.
In the mean time I think you are missing a point about the really dumb people who just work to pay bills and feed a family. Between the meat heads standing around and the smart people sitting around the people working will pay taxes to pay for it all.
Here’s the point: we’re in trouble. The meat heads will rebel. No one is going to pay for the financial mess that the smart people made. The meat heads and the really dumb people will turn on the smart people who made the mess. There is no doubt about that.
The longer you wait to be productive the quicker the change will happen. Smart people are in the minority. The doctors, lawyers, bankers, and tech will find themselves targets. They contribute nothing and want money. As they say 10% of the people get 90% of the money. That will change.
Herman,
Everyone else is stupid.
You are dangerously sharp.
Like a razor.
RE: Softwarengineer @ 3 –
Hello – Can sb enlighten me. In GD I – did GDP start going down less and less every quater? That is after falling over 5% for couple of quaters?
Did people in GD I – stop trading or put barriers for trading?
Did more banks fail in GD I – as it has now?
Did the Fed immediatelys start pouring cash onto the market to replace the lost monetary base?
To me this does not look to be sthg comparable to GD I……
I hope teh economy soon rebounds and we will start seeing unemployment going down to more realistic levels. I hope this happens over the next 5 years. And maybe in Seattle the real estate falls a bit to be inline with normal housing appreciation from before the bubble. Maybe even in 2011 it will be a good idea to buy sthg?
RE: deejayoh @ 19 –
I don’t disagree that ramping up production will lead to further deflation. But what i am saying is that the current 40% utilization can now be considered 100% utilized.(i.e. no more excess production) Unlike Japan we can reduce production dramatically by shedding jobs and bankruptcy can forgive obligations to counter parties and Unions. After production plants are closed (e.g. NUMMI) the remaining plants could be at 100%+ utilization rates. As long as production is lower than demand, inflation can creep in. If demand drops lower they can cut production further to keep inventory low. Deflation is the result of companies dropping their prices to clear out excess inventory/supply. We cant have deflation if they don’t have any inventory.
RE: Softwarengineer @ 8 –
I don’t disagree that growth will be non-existent. The 20% unemployment is a little high under my assumptions but i won’t disagree with that either. However there is still a “healthy” 80% economy that needs goods and services. If in the new economy companies are able to shed their production so dramatically and have it match demand deflation will not occur. We need to look at the production-demand gap. Why is oil prices going up when there is no demand? Oil companies cut production to reduce supply. I even heard that some left their inventories on ships to supress supply.
But i believe the main cause is easy credit and Americans unrelenting desire of risk. During Japans deflation, investors (banks/pension funds) were flocking to BOJ treasuries that were giving them less than 1% returns. Investors in US are spurring any sort of US Treasuries for equity/commodities/assets. (Even Mr. Bill Gross sans mustache) The combination of easy credit and risk appetite always seems to result in asset inflation.
RE: Flying Ape @ 27 – but I think you are taking a short term view. Yes you can have spot shortages like we are having now with in-demand car models spurred by the CARS program. But that does little to fix the fact that there is 1.5x the capacity that is currently being used available for expansion and at least 10% of the population looking for work. Until those issues are resolved there will be little pressure on prices.
And I would disagree with your definition of deflation. Most economists define it as a monetary phenomenon caused by a net decrease in money supply and credit.
RE: deejayoh @ 29 – But i am not disagreeing that demand will be suppressed. And yes high unemployment will push it down even further. What i am saying is the demand-supply gap in relative terms “can” be inflationary if supply is drastically reduced. Pricing pressure will not come from the demand side, it will come from drastic contraction of supply. Unlike socialist countries the US has tools to contract supply with layoffs, bankruptcies, etc. You assumption is that the US economy is not going to shed additional jobs and shut down auto factories to match demand.
And i probably chose poor wording for deflation. What i meant to say was a consequence of a deflationary spiral is companies dropping their prices to clear out excess inventory/supply.
I completely agree with your definition of deflation and it is exactly the environment we are not in. I prefer to look at excess reserves as the potential money supply but neither money supply nor credit is going to decrease in the near future. Add to that environment irrational investors chasing risk/yield and you should have creeping inflation. Inflation + no growth = Stagflation, not deflation like everyone here is assuming.
By Flying Ape @ 30:
Better do a fact check that statement. Based on what I have seen, M3 (which includes all currency, demand deposits, reserve requirements, and credit) will go negative YoY by the end of 2009 and it is already shrinking on a MoM basis in a way that has not happened since the 70’s.
http://nowandfutures.com/images/m3b.png
RE: Flying Ape @ 27 You really lost me here.
Why would production be lower than demand? Are you saying Ford, VW, Honda, Toyota, and all the other global players all are going to collude to keep demand from being met, thus driving up prices? If GM can’t meet demand, I assure you that Toyota, Honda, Ford, VW, etc will. (and will be quite happy to take a few points of market share when they do).
Most modern plants are not being mothballed, they are just being underutilized. The capital investment to bring up a line is simply too great. Also, don’t write of NUMMI yet. Toyota very well may take the whole thing, especially since the state of California has started dangling some pretty attractive enticements.
RE: Trigger @ 26 –
There is no clear definition of a depression, assuming banks still are open….irrespective, the horrifying numbers of bank closures mount everyday [they are] like unemployment and remember, there’s only 2% of the money needed in the banks on any given day….meaning closing the banks is as easy as one day of panic. FDIC is moot, it doesn’t have even a small percentage of all the money needed if that suddenly happenned.
The big difference between now and then is we have no dust bowl, the super markets have expired food and the homeless eat for now.
The unemployment rate is pretty similar today as to 1930.
RE: Softwarengineer @ 33 –
You also asked when the bottom will hit?
Please read a comment to my own “Overpopultaion” website from Pete; he’s an author on books and visits my Overpopulation website frequently [you can find my website by googling "softwarengineer", look for "Overpopulation" in results]:
The biggest obstacle we face in changing attitudes toward overpopulation is economists. Since the field of economics was branded “the dismal science” after Malthus’ theory, economists have been adamant that they would never again consider the subject of overpopulation and continue to insist that man is ingenious enough to overcome any obstacle to further growth. This is why world leaders continue to ignore population growth in the face of mounting challenges like peak oil, global warming and a whole host of other environmental and resource issues. They believe we’ll always find technological solutions that allow more growth.
But because they are blind to population growth, there’s one obstacle they haven’t considered: the finiteness of space available on earth. The very act of using space more efficiently creates a problem for which there is no solution: it inevitably begins to drive down per capita consumption and, consequently, per capita employment, leading to rising unemployment and poverty.
RE: Softwarengineer @ 34 –
Update: Google from Yahoo….Google has me blocked…
RE: wreckingbull @ 32 –
I only brought up NUMMI since someone in an earlier post was defending his purchase of a Pontiac Vibe using cash-for-clunker.
Lets fast forward 18 months, a buyer in Michigan wants to buy a new 09-10 Vibe but now he now has to drive 45min to an out of town dealership since the local one was shut down by GM. He heard raving reviews and was intent on buying it BUT GM has discontinued Pontiac and Vibe production at the NUMMI plant so he will have to pay a premium for any scarce inventory. Purchasing a Matrix is out of the question for him since he is a Detroit guy. You just restricted supply and that person will pay a premium next year.
My original opinion is that “if” auto companies keeps contracting at its current pace deflation will not be our problem. I’m just saying why would these auto dealers keep churning out cars from 40% utilized companies if demand never picks up. They will either shut it down or face bankruptcy again.
RE: deejayoh @ 31 –
Yes i’m very aware of this chart. That’s why i stated excess reserves are the “potential” money supply. I have always been short term (< 2years) deflation/stabilization and long term inflation so i recognize credit is contracting. If you read my first post i am pointing out that if we continue this trend of easy credit, risk appetite, and supply contraction deflation is not our problem, inflation is.