I read a pretty simple, cursory chart-comparing paper that suggests
1) Financial crises seem have **roughly** the same shape in a lot of ways.
2) If the above holds true for this crisis, it's going to be a lulu.
There are other, less-well-established ways of documenting a financial crisis, but by every measure I know about, the American real estate meltdown is just getting started and it is going to be horrendous.
While every mortgaged homeowner *should* anticipate at least a year or two of having negative equity in their home, I would venture to say that most Americans do not even understand that negative equity **can** exist.
That's going to be a hard lesson.
More fundamentally, it seems to me that all these analyses are based on a flawed view that markets move in a Gaussian "random walk". But it seems to me that Mandelbrot has long ago disproved this and quite simply: if Gaussian economics worked as theorized, we wouldn't have all these crises even to read about.
So if Patrick Bond is going to critique "multicollinearity" problems, he should go all the way and accept that this crisis is just as normal as any other "fat tails" result from a multifractal system. The "what goes up must come down" rule here is not a result of the absolute or even relative departure from some norm, but the shape and character of the run-up itself.
Thus we could be seeing a bubble on top of a plain, old run-up or we could be seeing a REALLY big bubble. We won't know until the anti-bubble has played out, but my guess would be that it's a matter of a year or two and not much more that negative "herding" behavior will predominate in U.S. real estate.
What really concerns me is that this real estate bubble comes so close on the heels of the Internet stocks bubble. Several bubbles in a row might threaten to create a currency bubble and that would be very, very bad (if the currency in question was the U.S. dollar). We don't even know or understand how bad that might be.
And that's because the final problem in all this, because we are talking about a financial crisis in a world where world GDP is growing (unevenly, but still growing - at least so far as I know). BUT, since we have to value world GDP in terms of fiat currencies which may prove unstable, greater material wealth may not translate into continued growth and improvement in living conditions.
On Jan 13, 2008 3:24 PM, Michael Pollak <mpollak at panix.com> wrote:
>
> On Sun, 13 Jan 2008, Julio Huato wrote:
>
> > Maybe it's my eyesight, but Michael's interpretation of R&R's paper is
> > not clear to me. I don't see much of the connection between R&R's
> > claims and Doug's views.
>
> <snip>
>
> > Just as I don't understand Patrick's qualms with the paper.
>
> <snip>
>
>
> > Patrick's reply confuses me because, as evidence has piled up, Doug
> > has (it seems to me) adjusted his gradually shifted his expectations
> > in Patrick's direction. I feel that Doug is now (as opposed to early
> > in the fall) much more inclined to entertain the notion that a serious
> > U.S. economic downturn may be coming -- if we're not already in its
> > midst.
>
> And I don't understand either of your objections. You and Patrick seem to
> be objecting that R&R is being pollyannish because they don't think there
> is going to be a big downturn. But that's the whole point of R&R's paper.
> They think a big downturn is coming because when they compare it to what
> they consider similar crises in the past, they were all followed by big
> downturns. And compared to them, we haven't barely started our downturn
> yet. And compared to them we went farther off course in the first place,
> which usually indicates a bigger downturn.
>
> Doug made a similar argument in his article "After the Bubble" in LBO 116.
> At the bottom of page 4, column one, he says, using similar rough, back of
> the envelope chartist logic:
>
> <quote>
>
> Speculative markets are about time as well as price, and the recent bubble
> has no peers on longevity. AS the table on p. 7 shows, prices rose for
> almost 12 years. Its closest rival was the 1980s boom, which lasted 7
> years. The earlier busts on that chart lasted almost as long as their
> preceding booms, and gave back around half the upwave's gains.
>
> <quote>
>
> If you add that statement to the chart on page 7 (I'm sure you're all
> following at home because I'm sure you're all subscribers) that's a pretty
> stunningly gloomy suggestion. It suggests that we'll be in bust *for nigh
> on a dozen years* since this bust is only a year old according to his
> chart, starting in the fourth quarter of 2006. And since we gained 74.5%
> between 1995 first quarter and 2006 fourth quarter, *and we only gave back
> 1.3% in the first two quarters of 2006* (when his article was written)
> that suggests that by far most of the damage was yet (and is still yet) to
> come.
>
> And IMHO a similar feeling of vertigo is induced by looking at the R&R
> chart on p. 6.
>
> So I have no idea what either of you guys are talking about. It sounds to
> me like you won't take yes for an answer.
>
> Sorry I brought it up!
>
> Michael
>
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