Another View on the Economy

I'd like to thank Obama

I'd like to be the first to congratulate President Obama for fixing the economy.

The economy will eventually turn around despite government interference, not because of it. And the media will ballyhoo Dear Leader and declare him the savior of the global economy. They will print endless cover photos of him with a halo over his head, walking on water, etc.

So, I'd like to jump the gun and be the first in line to declare the global economy fully recovered, all thanks to President Barack Obama.

John of PA @ Jan 04, 2009 13:09:07 PM

Malinvestment

The housing bust is the result of banking regulations, tax policy and business lobbying directly too much investment into real estate. With inventories far beyond what buyers can consume for the foreseeable future, do not look to a housing recovery for 3-5 years--and that presumes that the economy has otherwise recovered to put people back to work. With sustained deep unemployment (10-12%), that 3-5 years could stretch out to 8-10 years before buyers could once again afford homes. That also assumes that the credit markets have fully recovered and that interest rates haven't skyrocketed due to a long bond price collapse spurred by the Fed's inflationary monetary policies. It also assumes that taxpayers aren't taxed into poverty by the broken finances of their cities, counties, states and federal government. Yep, there are truly many reasons to be optimistic about the housing market!

As to the stock market valuations, analyst earnings estimates have been dropping like stones for a year for both 2008 and 2009 S&P earnings. The last number I saw was $41+ for 2009, putting the current S&P 500 forward P/E at around 23 and the November 20 low P/E at 18. Now, does anybody actually believe that the market is going to bottom at a P/E of 18? Historically, the P/E at major market lows has been 12 (or an even lower 8-10) which would suggest an S&P 500 bottom value of 500--or another 47% down from Friday's close (or worse, but who would believe that the S&P 500 could sink to, say, 330?).

Batten down your hatches. This isn't over by a long shot in 2009.

PD Quig of CA @ Jan 04, 2009 11:04:02 AM

People who are saying we'll see a turn around by the middle of the year have their heads buried in the sand. We have a long way to go. Go and watch 60 Minutes from a few weeks back - there's a second wave of foreclosures coming just as potent as the one we're in now. James hit on the the statistical fact that employment didn't bottom out until two years after GDP bottomed out in the last two recessions. And all this stimulus is being financed with money we don't have. Basically what got us here in the first place.

One more thing - a depression is defined as a 10% drop in GDP from its peak. If the forecasts above prove accurate, then we're right on the cusp of one: 0.5 + 5.8 + 3.5 = 9.8% drop in GDP from its peak in Q2 2008.

That's what the Affirmative Action President faces. God help us...

Josh of GA @ Jan 04, 2009 10:46:09 AM

My numbers don't agree

My group has looked at the data and see a far different picture. While the incoming administration has promised to provide the construction unions with permanent employment, they are doing nothing to prevent housing price declines.

For example the government continues, inexplicably, to penalize 401k withdrawls used to save homeowners from foreclosure. In other words, the government is penalizing people if they stave off foreclosure using their available savings. Obviously, in normal times, we'd want to discourage people from using retirement funds to stave off foreclosure. But 6% GDP declines are not normal times.

So, the housing crisis has only just begun. The government, for example, continues to issue more building permits for new home construction than supply would suggest is prudent; flooding the already saturated market with new construction. This unnecessary supply makes the problem worse. Housing starts could be, and should be, temporarily limited to reduce housing stocks to sustainable levels.

On the demand side, the government has, inexplicably, refused to increase the number of immigrants it allows to become citizens each year. If you want to stop the housing crisis, you have to attack the problem both on the supply side, by limiting housing stock, and on the demand side, by increasing the pool of buyers. You increase the pool of buyers by increasing the number of Americans and there's only two ways to do that: tax incentives for Americans to have children (not going to happen), or increasing immigration.

The sad fact is that our government is too stupid. And in the areas where it is intelligent enough to understand the relationship between supply and demand, it is politically impotent. That will spell disaster as citizens come to realize that it is their government's policies which are impoverishing them.

readeratyourblog of LA @ Jan 04, 2009 07:48:24 AM

Which is worse?

Inflation means that you need more dollars to buy my house.

Deflation means I owe more than my house is worth.

It all depends on whether I am a buyer or a seller, doesn't it?

Neither a buyer nor a seller be is great advice if you live in the twilight zone.

HillbillyBill of TN @ Jan 04, 2009 06:22:47 AM

The coming collapse...

I wish that it was just the housing market... That is a minor problem and could have endured without government intrusion.

The collapse will occur "because of government" and will be severe! We are spending money we do NOT have to uphold companies to "save the economy"... What a joke, we are digging our own grave!

Not only will we collapse, but seems that we intend to take a few other countries down with us - call it a world wide major depression with major inflation...

of TX @ Jan 04, 2009 02:09:44 AM

Recover

I don't think you will see bottom of recession until the middle of 2010. The house market is getting worse just looking out the window and this is the beginning of 2009. It will take awhile to clean up this backlog. In the meantime we are just beginning to have job loss and this will continue for awhile. Likely some of these people will lose their houses but this will not take until the end of 2009 as they collect unemployment. Obama spending will do nothing but fill the hole created by raising unemploymemt. The recovery will be flat. If you can call that a recovery. How long that last may depend on a new technology taking place to push economy up. Don't look for a replay of the past.

Arthur Gittleman of AR @ Jan 03, 2009 17:40:50 PM

Following on

In a deleveraged economy, we will need housing, education and health care that people can actually afford. Houses at about 400 sq. ft. per person housed. Education offered via the internet and without sports teams and stadiums. Health care delivered to masses without any profit motive on the underwriting/financing side.

of @ Jan 03, 2009 11:29:30 AM