Monday Open Thread (2009-09-21)

Here is your open thread for Monday September 21st, 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!

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About The Tim

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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

61 comments:

  1. 1
    The Tim says:

    591 Notices of Trustee Sale so far this month in King County. Looks like September is on track to hit 800-900, which is pretty much where we were in the months before the big spike in June from SB 5810.

  2. 2
    Trigger says:

    So The Tim – Are you still bearish on real estate in the Puget Sound? What are your estimates on how much lower will it go?

  3. 3
    Tim says:

    FTBK (Frontier Financial) huge volume trading starting around 9am PST this morning through the close. Open: .75cents/share. Close: 1.18 (up 53.25%)

    Ok saavy investors, classic pump and dump, again? Or?

  4. 4
    Kary L. Krismer says:

    I’m doing a CMA on property up in Marysville, and it’s a PITA because most of the mapping software isn’t up to date. I’m dealing with a 2006 house. That’s crazy a neighborhood that old isn’t mapped out.

    Google and Yahoo maps, Bing and my GPS are all out of date, and my GPS in King County can sometimes pull things that are not mapped. A number of listings I pull are not really in the area, but the agents didn’t fix the pin placement.

    I wonder if it’s the county’s fault, or whose?

    I wonder how much this affects values? When people are searching in an area and your listing doesn’t show up, you’re missing a potential buyer!

  5. 5
    David Losh says:

    I have a question. Over on the http://www.BloodHound.com blog a guy in New York was saying he thinks it’s about time for investors to take advantage of low prices and low interest rates.

    I don’t think so.

    Over the past six months though there have been some people making rather extreme moves in my opinion. More than a couple of people bought and flipped properties for a profit, one was a net of $90K if I figured it correctly. The fact properties are selling at these high prices today really surprises me.

    A second thing has been the move builders have taken to building apartment buildings. I can’t imagine buying into rental properties today. I have a friend who works for Trammell Crowe; a very large rental unit provider. They are concerned about high end condos that are now becoming rentals. I’m concerned about the growing number of for rent and lease signs I see.

    Another group that I know from California, guys in their thirties, came up to buy a commercial ware house for cash here in Seattle because the prices were so cheap.

    In terms of return on investment none of the numbers make sense to me. Especially if property values continue to decline 20% or more how would any one get whole from that? In my opinion these are dead dollars that will be out of the investment pool. Where is the return? What would be the motivation?

  6. 6
    softwarengineer says:

    Real Estate is Just a Roof

    When I hear of folks grabbing up cheap 2009 Seattle homes with 401K money, I’m horrified. Number one, the homes may have likely only lost half their losses since 2006. Number 2, home equity [if any] doesn’t buy a retirees’ hamburgers, it never did.

    When did housing wealth turn into retirement income? LOL

  7. 7
    AMS says:

    RE: Trigger @ 2

    I cannot speak for “The Tim,” but I can speak for myself.

    Let me cover the “when will it hit bottom” first.

    Let’s take a known recent bankruptcy failure: General Motors.

    I know a guy who purchased GM stock near the top at $70. He kept suggesting that the price had bottomed out. Five years ago I could have never predicted a BK ending, but I did hold that GM was not in the best of shape. I was bearish on GM all the way to the ultimate bottom. Over the approximate seven-year period, my friend lost about $150,000.

    It is really tough to call a moment in time that is bottom when so many indicators are negative.

    Next let’s deal with the price. Without knowing a moment in time, how can one begin to call a price? I guess there are methods, but since money has a time value, one must put it in the perspective of time. This reminds me of my friend who sold his gold “at a profit.” Without getting too technical, he purchased near 1980 for a price near $1,000. I received the call that he sold, “At a profit.” I call it 30 lost years.

    Then there is the whole reason prices are too high. It’s really tough to call a bubble–both beginning and end.

    Personally I’d rather buy when fundamentals are good, even if that means that I missed the bottom by a few months/dollars. Also I’d rather sell before the peak than after it, even if that means that I missed some opportunity.

    This assumes that you are buying strictly on financial motives.

  8. 8
    AMS says:

    Reply regarding trade and inflation:

    I guess the question is why do we do we produce so little and have a trade imbalance?

    I make the assumption, I suppose, that we are not producing enough. If we produced enough, we wouldn’t have a trade imbalance, so my theory goes.

    Aside from that, we know that we have a large trade imbalance, where we send dollars to China. How long can this continue without some form of inflation?

    (Before we go too much further, I will also say that it is my understanding that our total exports is smaller than our imports, but a given measure must be established. Certainly by some measures we export far more than we import. It is also very tough to measure the dollar value of imports and exports; added value is another topic…)

    One more comment:

    What happened with Weimar? There was a high level of National Debt, and lower production to pay it back.

  9. 9
    Greg Perry says:

    By Tim @ 3:

    FTBK (Frontier Financial) huge volume trading starting around 9am PST this morning through the close. Open: .75cents/share. Close: 1.18 (up 53.25%)

    Ok saavy investors, classic pump and dump, again? Or?

    I heard through a listing agent who lost a short sale listing with FTBK as the underlying, that they got a huge shot of capital from a fund. LA relayed they took the property off the market to wait out better future prices as they now have cash.

    All above is hearsay and not verified.

  10. 10
    patient says:

    RE: AMS @ 8

    “Aside from that, we know that we have a large trade imbalance, where we send dollars to China. How long can this continue without some form of inflation?”

    The chinese like to hord(save) dollars. If we send them dollars and they hord them or spend them with chinese investments you are actually looking at reducing the dollars in active circulation and thereby it should counter inflation not spur it. At least that’s how I would see it on a glance.

  11. 11
    patient says:

    RE: AMS @ 8

    “What happened with Weimar? There was a high level of National Debt, and lower production to pay it back.”

    Didn’t they print money in order to try to pay the debt? Big mistake.

  12. 12
    AMS says:

    RE: patient @ 11
    RE: patient @ 10

    Once again, replying to both in one message.

    First of all, I agree that today we have no problem with excessive inflation. If anything, we have deflation, which is too low of inflation.

    Also, as long as the Chinese hoard dollars, you are right that we have no problem. This is a monetary approach, and I have said the same thing about the current housing crisis: As long as banks unloaded dumpsters full of cash onto houses, we would never have a problem.

    As long as the game is infinite, that is that the Chinese are actually tossing the dollars in burn barrels, or similar, then clearly there will never be a problem. As long as they never want to cash in, there will never be a problem. The same can be said for the run on banks in 1929. As long as the game continues another day, that’s another day without a problem. The game could go on for 100 years, or more. Who knows how long this will go on… But really I don’t think it is a question of if it will end, but rather when will the Chinese cash in?

    When debt becomes due in the United States, we fire up the printing presses to pay it off. Don’t kid yourself into thinking that debt won’t be paid simply by printing more money. Historically this has happened again and again. When you have a fiat currency, there is a great incentive to simply print when you don’t have the cash.

    The big difference between the US today and Weimar is the trust in the currency. There was little trust in the currency, so it was quick to fall apart. What was backing the currency? There was not much. Our US dollar, at least today, is still respected as something of value. In part it is because of the size of the US’s economy, even if there are plenty of cracks in the foundation.

    I’ll say it again: It’s not a question of if, but rather when will inflation become a problem. The big trick is going to be balancing inflationary pressures with other economic factors, such as employment.

    I have also suggested that this housing crisis, if I can call it that, was started in large part by the shift in demographics. Boomers trust the system to save them. Those in Generation X do not trust the system, and are much more leery of the established systems. Those in Generation Y are going to have it very rough for a long time, if you ask me. I am not sure about the generation behind Y, but I don’t think it is entirely promising.

    This is the foundation of the problem, in my opinion based on my personal observations, known demographics, general psychology of generations, and economic indicators: The boomers are looking to withdraw from housing to fund their retirement days. This demand for consumption today is shorting available dollars for housing investment. I have not proved this theory, nor have I sough to put it on firm foundation, beyond my own conjecture.

    This demand for dollars has created a deflationary condition, and has caused housing prices to fall. As long as boomers are not willing to put money in housing, we have a negative feedback loop. This negative feedback loop cannot be stopped, since it is based on individual life cycle, of expected time left until expiration. Boomers, who were more closely connected to the Great Depression, will continue to value cash more and more as long as the problem exists, and so the negative feedback loop goes.

    Without getting into trade theory, and the world value of the dollar, I don’t think Generation X is going to hold the same value of the dollar, but Generation X is closely connected to the boomers. Generation Y does not have the close connection to the boomers, generally speaking, and thus is going to have it the worst.

    Based on all of this, I expect many years of lackluster economic conditions. I honestly believe we have lived the “roaring 20s” in the last 15 years, plus or minus a few years. I could go as far as to say we have lived in a great economic expansion over the last 25 years.

    Just like in housing, the debt will come due, and how will we pay the Chinese back?

  13. 13
    Herman says:

    I’ve said it before, we’re going to inflate and pay it back with a lower standard of living. Everything that isn’t originated here in the US will be more expensive. This will NOT result in a commensurate pay increase for American workers. US housing prices will stagnate even as goods become more expensive.

  14. 14
    AMS says:

    RE: Herman @ 13

    This is simple: Inflate the dollar, but the dollar falls on the world market even more than the rate of inflation. (There are some measurement issues here, but the basic concept is that the value of the dollar at home falls, but falls faster internationally.) Imported goods, such as oil, will thus become far more expensive.

    I am not suggesting that this will happen, but it is a possibility.

  15. 15
    patient says:

    AMS I think we are pretty much agreeing on the mechanisms and status the difference is that as much as I think Bernanke is incompetent, corrupt with a god complex I do believe he will not allow high inflation and I think Tim Geitner has been walking the line with he Chinese in his emergency meetings to ensure they continue to fund our bailouts by promising that their investments are and will be safe from significant inflation.
    Inflation ismuch easier and chepaer to control than deflation, deflation you can fight with low interest rates but it ends at zero and by lending money to pump into the system but that also has a limit where lenders says enough and it carries a high price in terms of debt that neeeds to be paid off. Inflation o the other hand can be fought with higher interest rates alone, there is really no limit on how high. I think Sweden once raised the rate to 500% for a day or so. Pretty efficient way of halting money velocity if you get 500% interest on your savings or have to pay 500% on borrowed money…

  16. 16
    AMS says:

    RE: patient @ 15

    “I think Bernanke is incompetent, corrupt with a god complex I do believe he will not allow high inflation and I think Tim Geitner has been walking the line with he Chinese in his emergency meetings to ensure they continue to fund our bailouts by promising that their investments are and will be safe from significant inflation.”

    Oh, yes, I do not disagree. I do agree that if Bernanke is the best person, we are in trouble! Big trouble!

    And, I do agree that inflation is not going to happen anytime soon. I chanted that the housing market was over-priced for about 10 years. It took 400 years to forgive Galileo. Often it’s not a question of if, but rather when.

    I’d like to see *some* level of inflation rather than deflation, but I don’t see that happening any time soon.

    Retirees definitely don’t want inflation…

  17. 17
    patient says:

    RE: AMS @ 16 – Some salary inflation is kind of nice for motivaion, it’s a motivator higher than price deflation for most. And I want to correct my statement that even if I think Bernanke is an $%# I don’t believe he will allow rampant inflation. That’s the limit even for him, at least I hope so. All in all I think we are pretty close in our arguments and view of these things.

  18. 18
    AMS says:

    RE: patient @ 17

    Inflation is good for consumption because it gives everyone an incentive to buy today, rather than wait.

    Under normal conditions: The cost of a new car is $25,000 today, and $25,000 plus inflation tomorrow.

    What we are getting into is the cost of a house is $400k today, and less tomorrow. When do you want to buy?

  19. 19
    Herman says:

    RE: AMS @ 14 – I am suggesting that is precisely what will happen.

  20. 20
    Scotsman says:

    Another epic fail:

    Edmunds.com reports that “September’s light-vehicle sales rate will fall to 8.8 million units … the lowest rate in nearly 28 years, tying the worst demand on record. After the cash-for-clunkers program boosted August sales to their first year-over-year increase since October 2007, demand has plunged. In at least the last 33 years, the U.S. seasonally adjusted annual rate has only dropped as low as 8.8 million units once — in December 1981 — with records stretching back to January 1976.”
    “Many people regard February as the darkest month of the recession, but even then (sales were) higher, at 9.1 million units,” adds Edmunds.com statistician Zhenwei Zhou.
    Thanks to the glories of federal bureaucracy, it’s a double whammy on the dealers’ end:
    “It was probably, in the end, a complete waste of taxpayer money,’’ said John Wolkonowicz, a senior auto analyst at IHS Global Insight, Lexington forecasting firm. “The dealers, who were supposed to be the primary beneficiaries, many were forced into cash flow problems because the government didn’t pay them in a timely fashion.’’…

  21. 21
    patient says:

    RE: AMS @ 18
    “When do you want to buy?”

    For me the inflation discussion regarding our economy as a whole is separate from housing. Housing is such a huge commitment of funds compared to any other item and it’s not a neccessity to own. Both of those gives me great pause and consideration before acting. If orange juice if $4 today and $3 or $5 next week matter little to me, I’ll buy it today anyway. And if gas is $4 a gallon today and $2 or $6 gallon next week and my tank is empty I’ll fill up for $4 today and so on. But I will not commit half a million dollars with a mortgage that will have a huge impact on my finances and spending power for 30 years if there i a good chance I can get away with $400k by waiting say two years. I’ll wait until there is a solid stabilization or prices gets much closer to the cost of renting, thank you very much.

  22. 22
    AMS says:

    RE: patient @ 21

    Let’s discuss capital goods, rather than goods with a very limited shelf life.

    When do you want to buy tools, furniture, cars, and so on, during a period of deflation?

    Why buy today, when it costs less tomorrow? Computers are a good example of this, at least when it comes to performance per dollar. Sure a computer will cost $1,000 today and tomorrow, but the performance is better tomorrow, or the same system will cost less. Unless you have some need for the improved performance, generally computer purchases are put off until later.

  23. 23
    Scotsman says:

    RE: Herman @ 19

    Agreed. AMS states:

    “I’ll say it again: It’s not a question of if, but rather when will inflation become a problem. The big trick is going to be balancing inflationary pressures with other economic factors, such as employment”

    That’s been the traditional trade-off, but we won’t see it this time around.. A collapsing dollar, rising interest rates, high continued unemployment and the ongoing destruction of wealth will leave us in a downward spiral for years.

    While we are monetizing at a pretty good clip, it still doesn’t come close to replacing the lost asset values that really backed up the monetary system. The last forty years of growth were based on asset bubbles and the credit expansion they fueled, not the traditional concepts of fiat money and fractional lending. Freshly printed greenbacks are a poor substitute for the trillions of collateral/assets that have disappeared from the system. They can’t run the presses fast enough to replace the wealth that is and will be lost, let alone work that new currency into the system. Remember “pushing on a string?” That’s where we’ll be for the next couple of decades. And inflation won’t be part of the picture.

  24. 24
    patient says:

    RE: AMS @ 22 – Same thing, I’ll buy when I need/want it. It’s cash purchases which I can recover in a short time. I don’t borrow money for anything except housing. The deflation of this type of goods is largely in the single thousands at most, not 10s or 100s of thousands like a home. It makes a difference.

  25. 25
    Scotsman says:

    Whoa- this could be big!

    A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

    http://www.opednews.com/articles/LANDMARK-DECISION-PROMISES-by-Ellen-Brown-090921-894.html

  26. 26
    Kary L. Krismer says:

    By AMS @ 22:

    RE: patient @ 21 – Sure a computer will cost $1,000 today and tomorrow, but the performance is better tomorrow, or the same system will cost less. Unless you have some need for the improved performance, generally computer purchases are put off until later.

    Actually, computers probably refute the argument. It has always been true that you can buy more computer later for less, but despite that, computers keep selling, often when major changes are about to occur. People are rather spontaneous.

  27. 27
    AMS says:

    RE: patient @ 24

    I guess you don’t represent the buying behavior of the general population…

  28. 28
    Kary L. Krismer says:

    RE: Scotsman @ 25 – There have been a number of cases like this for about two years. I think you’re reading way too much into it. Someone has standing. Also, there are evidence concerns raised by these type of cases with assigned mortgages.

    Over the years creditors have gotten rather sloppy at presenting their evidence, and every once in a while people call them on it.

  29. 29
    AMS says:

    RE: Kary L. Krismer @ 26

    My claim is that consumers would upgrade sooner if prices were rising on computer equipment. In other words, if the current average upgrade frequency is currently three years, it would be less than that if prices were expected to rise.

    Cars drive forward down the freeway, but if there are a couple of cars going slow, it can cause a long backup. That slowdown is what happens to purchases when prices are falling. There is a traffic jam of those who slow down. In the worst case scenario, all purchases would be delayed… In the case of traffic, you still arrive at your destination, but it takes additional time.

  30. 30
    Kary L. Krismer says:

    RE: Scotsman @ 25 – You can find the actual opinion here: http://livinglies.wordpress.com/2009/09/16/kansas-supreme-court-sets-precedent-key-decision-confirming-livinglies-strategies/

    It doesn’t deal with what the article claims at all. Clicking the link “about the author” I was shocked to read that she is actually an attorney.

    The case isn’t one of the type I thought at all, or of the type described in the article. It deals with whether MERS is a “necessary party” to a foreclosure action. It has nothing to do with standing. It has nothing to do with who can foreclose a mortgage. Because MERS is merely a nominee of the real owner(s), the court held that it is not a necessary party. IMHO the only mistake that the Kansas Supreme court made was not hitting MERS attorneys for sanctions for raising a frivolous argument.

  31. 31
    AMS says:

    RE: Kary L. Krismer @ 28

    It could be the case that the situation is so messed up that it is very difficult, maybe well beyond cost effective, to determine who has standing. There are also those rare cases where the title insurance just pays because the situation is so messed up.

  32. 32
    David Losh says:

    RE: AMS @ 14

    I’ve said it many times that inflation is what I based my strategy on. It won’t happen the way it has in the past. Property prices are already way over inflated.

    This bubble, all the bubbles we have seen in the past fifteen years, are credit driven. Wages have stagnated, people bought with credit, the debt created paper profits and inflated, over inflated, the price of everything, especially stocks. Investor dollars are chasing these paper profits as though there is something tangible related to those profits other than the borrowers promise to pay.

    When people stop paying debt the entire system collapses. You would need to have higher wages, real dollars chasing real goods, to have inflation at this point. That is a big ship to turn going forward.

  33. 33
    AMS says:

    RE: David Losh @ 32

    “You would need to have higher wages, real dollars chasing real goods, to have inflation at this point.”

    What you describe is demand-pull inflation.

    What about cost-push inflation?

    There is a theory that college graduates demand more pay because the majority has debt to service. I am not suggesting this is a legitimate argument, and there are always situations here and there, but the majority of college graduates have debt to service and the majority demand higher pay.

    I will say, however, that excessive bankruptcy increases the value of the dollar (deflationary)–dollars magically disappear from the system (monetary deflation). Those who expected to be paid back now must operate on fewer dollars, the same way the increase at the gas pump was deflationary.

    We have not seen much demand-pull inflation in quite some time, and similarly, we have not seen much cost-push inflation.

  34. 34
    Kary L. Krismer says:

    By AMS @ 33:

    We have not seen much demand-pull inflation in quite some time, and similarly, we have not seen much cost-push inflation.

    I would say much/all of the inflation during the Ford years was cost-push, related to the cost of oil.

  35. 35
    AMS says:

    By the way, I hope there is little dispute that there was the whole theory of:

    “Buy today or forever be priced out of the housing market.”

    Essentially the argument made is that the rate of housing price appreciation will always be greater than any increase in income.

    My claim: The perceived inflating of home prices caused people to purchase sooner rather than later. Of course the people who bought into this idea also had the idea that prices never go down, so you will get “locked in” to increasing prices.

    Now that we are in a deflationary period, at least when it comes to housing prices, people have slowed their purchases down. That’s not to say that the purchases have stopped, but rather slowed.

  36. 36
    patient says:

    RE: AMS @ 35 – I think I understand your point AMS and for housing I think it’s valid. I.e. you have a level of positive feedback between falling prices and lower demand. For the average consumer though I think it starts and stops with housing due to the uncomparable size of the purchase and the huge debt most often involved. For other goods I think the feedback is minimal and lower demand is instead driven by the factors that caused the deflation to start, burst of a bubble, war or whatever it is and not the falling prices.

  37. 37
    AMS says:

    RE: patient @ 36

    How large the impact is another topic. The point remains, however, that inflation encourages sooner rather than later purchases. A small level of inflation promotes sooner consumption.

    To the extreme again, those in the Weimar inflation tried to buy things as soon as possible, because by afternoon it might cost a lot more, and this included a loaf of bread.

  38. 38
    patient says:

    RE: AMS @ 37 – I don’t think you can downsize the behaviour in a situation of hyperinflation to a more normal inflationary environment. In a more normal environment people also expect their salary, savings and investments to inflate faster than prices and thereby it negates most of the argument to buy sooner than later.

  39. 39
    AMS says:

    RE: patient @ 38

    Where is a point of discontinuity between hyperinflation and normal inflation?

  40. 40
    AMS says:

    RE: patient @ 38

    One more point: “In a more normal environment people also expect their salary, savings and investments to inflate faster than prices and thereby it negates most of the argument to buy sooner than later.”

    If goods are relatively cheaper in the future relative to today, then that is deflationary. I guess this gets to the money supply. If there is a constant number of dollars, then not everyone can expect their salary, savings and investments to inflate faster than prices…

  41. 41
    patient says:

    RE: AMS @ 39 – From wikipedia

    “Definitions used by the media vary from a cumulative inflation rate over three years approaching 100% to “inflation exceeding 50% a month”

  42. 42
    patient says:

    RE: patient @ 41 – I don’t think there is a strict line between “normal” and “hyper” you probably have many flavours of “high” in between. I’m not sure where normal starts and ends but I would guess some where between 2% and 6% annual rate.

  43. 43
    patient says:

    RE: patient @ 41 – I don’t think there is a strict line between normal and hyper, there are probably many levels of high in between. I’m not sure of the definition of “normal” but I would guess somewhere between 2% and 6% annual rate.

  44. 44
    AMS says:

    RE: patient @ 42

    I would suggest that inflation is continuous, at least in time. Time is considered continuous, but money is discrete, so to get inflation to be continuous, I must place it in time. In large enough sums, money approximates continuity, but generally speaking, one can always find a small gap between pricing. There are no gaps in time.

    With that in mind, I very much doubt that there is a point of discontinuity “some where between 2% and 6% annual rate.” What happens is that current consumption is promoted more and more as inflation increases, on a continuous basis in time.

    (There is one more technicality here: What I really should say is “expected inflation.”)

  45. 45
    patient says:

    RE: AMS @ 44 – Interresting discussion and I think we will endup with different views. I think it’s to narrow to look at the consumer behaviour based on inflation of prices. As inflation goes up so does interest rates which promotes savings and less consumption, there are a few strong opposing factors and I think it pretty much evens out. Discretionary income is probably the main driver for the average consumer and not the level of inflation.

  46. 46
    AMS says:

    RE: patient @ 45

    Oh, yes, we can separate the population into different levels of expected inflation. What I have been discussing is society on aggregate, which, interestingly enough, is definitely finite, and therefore can only be discrete. Since society is rather large, it approximates continuity, but it is clearly finite. (Population growth is often studied on a continuous basis, such as the growth of bacteria, but once again, bacteria is clearly finite. This gets to difference equations versus differential equations.)

    If we start to look at individuals, there will be different levels of expectations. Lenders had a very low expectation about inflation, but consumers had a very high expectation about housing price appreciation. This put cheap money into a market where consumers expected high rates of price inflation.

    There is another case that happens: Lenders expect high inflation, but consumers expect deflation. This essentially stops credit markets.

  47. 47
    AMS says:

    RE: patient @ 45

    By the way, I just arrived back from the grocery store, and I have found a perfect example of a consumer seeking to buy today for an item that will go up in price essentially tomorrow. To be fair, the price will increase next week. The consumer was looking for some product, the store employee said, “We are out right now.” Customer, “I have a coupon that expires next week, so I need to find it by then.”

    Then there are the so-called “sales.” People buy at sale prices today because they expect the price to be higher tomorrow.

    Using your theory, sales prices would never promote earlier sales, as consumers would be just as willing to pay a higher price next week.

  48. 48
    AMS says:

    RE: patient @ 45

    I just realized that I made a major purchase recently all because I knew the price would be higher later: My CFC purchase (Cash For Clunkers).

    I took the $4,500 in Obama money back in July, knowing that I’d probably never get a lower price in the future. I have written about it here before. I drove away with a brand new 2009 Pontiac Vibe (Toyota Matrix) (auto, air, power windows, power locks, keyless entry, cruise) for $9,534, including factory incentives, taxes, title, dealer fees, etc. The MSRP is $19,480. My price today is probably closer to $15,000 for the same vehicle. I could have put the purchase off–my old clunker was just fine.

    I have also written about how I have more than one clunker that qualified. I still have a clunker to drive, or my new Pontiac Vibe (Toyota Matrix). There was a limit of one per person; otherwise I would have purchased two vehicles under the CFC program.

    If I didn’t care about how much I paid, certainly I would not have purchased back in July.

  49. 49
    patient says:

    RE: AMS @ 48 – Haha…nice angle AMS, though I kind of see it as a bit of grasping for a straw. Coupons and discount drives are pretty different from inflation. The psychology is much more in your face and direct with a sales drive than inflation and thereby much more likely to impact the consumers timing. Kudos for the angle though.

  50. 50
    AMS says:

    RE: patient @ 49

    The bottom line is that the purchasing power of my dollar was stronger back in July. The price “inflated” on the given commodity.

    I am separating commodities the same way you separated purchasers/lenders.

    The dollar, itself, can go weak over all commodities and services, or we can look at individual commodities, such as housing. (Right now the dollar is getting stronger in housing)

    Call it “grasping for a straw” if you’d like, but it all seems the same to me.

  51. 51
    AMS says:

    RE: patient @ 49 – Oh, and let me remind you that there were about 700,000 other people who purchased cars under the CFC program. Now projections are that sales will go far lower for new cars (SAAR metric). Why is this? People buy sooner when the purchasing power of the dollar is going down (either by inflation or some ‘special deal’). Maybe it was easier for consumers to understand, but if consumers expect future inflation, they will always buy sooner rather than later, at least rational players.

  52. 52
    AMS says:

    RE: patient @ 49

    Note how this discussion relates to the options and futures markets. Last fall I had a friend who went to her fuel oil provider and purchased at the start of the season her estimated gallons at the then current price. This is a futures contract. It was her opinion that home heating fuel prices were going to go up, so she wanted to lock in at the lower price. She was not happy when she was delivered fuel in the future that she paid about $4 per gallon when the current price was between $1.75 and $2.50.

    Southwest, on the other hand, made some really good futures buys in the fuel market a few years ago. They purchased fuel at a low price to be delivered in the future. When other carriers were paying a high price, Southwest was locked in and delivered fuel at a low price. I can only guess what Southwest’s management was thinking, but I doubt it was that the prices were going lower in the future.

  53. 53
    Sniglet says:

    why do we do we produce so little and have a trade imbalance?

    The whole issue of the “balance of trade” is terribly misunderstood. A huge portion of America’s trade deficit has resulted from the fact that there is a great deal of foreign direct investment pouring into the USA. Every time a foreign investor buys US stock, real-estate, or bonds, this counts as part of the balance of trade.

    It is preposterous to claim that the US is somehow in a bad state of affairs when there are more foreigners who want to put their money into American assets than vice versa.

    Moreover, the countries with the largest trade surplusses are often basket cases. North Korea, for example, has a huge trade surplus (perhaps the biggest in the world in percentage terms). But this in NO way indicates that the North Korean economy is on a sound footing.

    In short, I believe the entire balance of trade statistic is too broad to have any meaning, and the obsession of so many economists and media on this measure is completely bonkers.

  54. 54
    AMS says:

    RE: Sniglet @ 53 – What countries trade with North Korea?

  55. 55
    Sniglet says:

    It is grossly innacurate to compare the current state of affairs with Weimar Germany. For one thing, almost no US debt (public or private) is denominated in anything but US dollars. By contrast, most of Weimar’s debts were in gold (those French were no dummies when asking for war indemnities). As we have seen played out over and over, it is nations that have a signfiicant amount of debt denominated in foreign currencies that wind up experiencing the worst inflationary shocks (Iceland anyone?).

    The other key thing to remember is that contrary to popular belief, the US government (and Federal Reserve) are not printing scads of dollars to bail out the economy. Instead, the US government is issueing vast sums of T-bills (i.e. debt) for which there is still a healthy demand.

    The Fed has been purchasing some T-bills on it’s own, which is a form of money “creation”, but this has actually been very limited in scope (and well less than $500 billion in the last year, which is nothing).

    Unfortunately, the policy maker’s hands are tied. If they opt to actually “print” any significant amount of money, interest rates would go through the roof, and they would no longer be able to borrow money. The government simply couldn’t survive if demand for T-bills vanished.

    I think that Japan’s exprience over the last 20 years is highly instructive as to what is in store for the USA. The Japanese government has been borrowing like mad, spending many hundreds of trillions of Yen, in a futile effort to stimulate their economy. If Japan has been unable to inflate their currency, despite the ceaseless efforts of policy makers, I fail to see how the US will do any better.

    I believe that deflation will be absolutely pervasive and infect far more than housing. Just look at wages: they are going down across the board (just ask what salaries are being offered to anyone looking for a job these days). You CAN’T have inflation if wages are declining. It won’t happen!

    Further, if inflation were really in the offing, then we should be seeing interest rates start to rise (i.e. since investors would be demanding higher rates to own dollar denominated assets they believe will lose value), but this isn’t happening.

    We are embarking upon a deflationary depression that could last for 8 to 10 years.
    http://bit.ly/YlmXD

  56. 56
    Sniglet says:

    What countries trade with North Korea?

    I don’t know all the nations that trade with North Korea, but I know that South Korea and China are the largest trade partners. Also, keep in mind that the balance of trade includes outflows of capital. You’d better beleive that every North Korean aparatchik that manages to get their hands on cash does their absolute level best to squirrel it out of the country into a foreign bank somewhere.

    All that money leaking out of the country goes into the “positive” side for the balance of trade, giving North Korea a wonderful surplus.

    Maybe that’s the solution to the US trade deficit… Just scare Americans into getting their cash out of the country. Just watch how fast the balance of trade would become positive.

  57. 57
    AMS says:

    RE: Sniglet @ 55

    I am not suggesting that inflation is going to happen any time soon. In fact, I see deflation continuing on for some time. But I do not exclude that from happening.

    I agree that investors presently expect inflation will remain low, or negative, but if investors were always right, then this housing situation would have never happen.

    And for the record, I only used Weimar as an extreme example of inflation. I do not believe we are experiencing inflation, much less hyper-inflation Weimar style.

  58. 58
    David Losh says:

    RE: AMS @ 52RE: Kary L. Krismer @ 34

    We had a chance at inflation when oil went over $100 per barrel and beyond. It is exactly what I had anticipated and really thought we were out of the woods. It made sense to me that Bush being an oil man would use that commodity to inflate our way out of trouble.

    Oil is a pretty predictable commodity with winter heating oil and summer unleaded gas. It may not be sexy, but it works.

    Now we have a problem of demand. As it turns out China had a lot of demand for oil to run the factories. As demand for goods declines factories slow and the demand for oil declines. Transportation is a huge cost and that depends on oil. Fewer goods less transportation.

    Fewer foreign goods is a higher demand for local products, again less transportation. More local products keeps more dollars in the community. It can even mimic velocity if enough dollars trade hands in smaller circles of local economy. In theory farming communities could become fashionable again.

    Some one made an observation that they may start tearing down ware houses to put in more farm land.

    OK, that may be a little extreme. The farming community comment may be a little extreme, but the fact remains that the future will be radically different than what we are used to. All the normal predictives have changed with the shear amount of debt in the industrialized world.

    In my opinion a very good example is General Motors. I would like some one to tell me when they went from making cars to being in the finance business. I would like to know if the manufacturing sector was being bailed out or the financing sector.

    My tired refrain is that debt is everywhere in our economy and it needs to be eliminated. As debt is reduced the economy will shrink.

  59. 59
    AMS says:

    RE: David Losh @ 58 – Now this is something I know about. I have followed GM for years, and I have studied their history, including the founding principals.

    “In my opinion a very good example is General Motors. I would like some one to tell me when they went from making cars to being in the finance business.”

    Who started the finance business? Durant! Yes, believe it or not, Durant started the whole finance concept.

  60. 60
    patient says:

    If you haven’t seen this already it’s worth watching:

    http://www.youtube.com/watch?v=2I0QN-FYkpw&feature=related

    I like how convinced a unflappable he (Peter Shiff) is through the redicoule ( They laugh at him ). A stead fast man with integrity, knowledge and common sense. This is the kind of person we should have heading the FED and the Treasury. Oh yes, he said last week on cnbc that we have another 20% or so of home price declines coming, since “it has to happen”.

  61. 61
    David Losh says:

    RE: AMS @ 59

    So which did we actually bail out, manufacturing or finance?

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