Does a Falling Money Stock Cause Economic Depression?

Thread revival ping.

Richard W.

The country is still generally in denial--"the stock market bottom is in"; "real estate has real value and can't go down"; "recovery in the second half"; denial that the real problem is an imbeded deflation resulting from excess levels of debt.

You cant call statements like that "denial" when empirically, they are no false statements. They are predictions.

It is quite likely that, indeed the stock market bottom of late 2002 is behind us for a long time, perhaps forever. Even 9000 is a fairly decent valuation on the dow, wich earnings-ratios well above interest rate levels for may solid companies and with earnings able to accelerate in future years.

"So my point is, ok, what does it take to make the denial analysis work--what makes the stock market go up; keep the real estate bubble from collapsing; and see a general economic recovery? What would you expect to see if the denial argument was going to be correct? And one of the things you would see very early is increasing tax revenues at the state, local, and federal income tax levels. "

Tax revenues are a trailing indicator ... the *LEADING* indicators would be: Investment levels (so the stock market level is a 'temperature reading' on that, so is VC activity); margin improvement (so a tax cut is a *leading indicator* of improved conditions) and margin levels at businesses (ie profitablility, often businesses cut spending until the margins are better, then they start hiring); unit demand (ignore the $ numbers, what about unit demand?).

Some of those numbers are turning around

"Fact we are not seeing those revenues is the most important indicator that those in denial will not be correct." Wrong. as a trailing indicator, tax revenues are only telling you how bad 2001 and 2002 were. you will have to wait for 2005 to find out how 2003 and 2004 stack up. Far better to use *leading* indicators, not trailing ones.

I don't know why Richard picks today to bring this thread back to life but I am up for it.

"The country is still generally in denial--"the stock market bottom is in"; "real estate has real value and can't go down"; "recovery in the second half"; denial that the real problem is an imbeded deflation resulting from excess levels of debt."

"You cant [sic] call statements like that "denial" when empirically, they are no [sic] false statements. They are predictions."

In context, the point of that text was not predictive at all--rather to suggest that the investor and personal use real estate owner does not recognize the risk that the "real values" analysis does not protect real estate pricing at current levels nor recognize the fundamental economic proposition that underlies the deflationary trend in pricing of all other durable goods.

We have deflation which is caused by the commitment of an excessive share of periodic liquidity flows to payment of existing debt, precluding new financial commitments in current transactions.

Consumers and stock market investors continue to expect a "recovery in the second half"--my observation was not predictive that one would not occur but rather an observation of the general state of denial of the possibility that it would not.

Under circumstances where there are no facts that imply a second half recovery and many real estate statistics in most real estate markets have topped, I think the characterization as a "state of denial" is reasonable.

Predictive? In fact, there won't be any second half recovery of any character. And the real estate bubble is about to pop, even in California.

" It is quite likely that, indeed the stock market bottom of late 2002 is behind us for a long time, perhaps forever. Even 9000 is a fairly decent valuation on the dow . . . . "

May not have noticed that the Dow is not above 9000 any more. More predictive? I don't know what you would characterize as a "long time"--in the case at hand, sixty days may not be long enough. My own fearless forecast--new lows will be seen well before Thanksgiving.

I don't see tax revenues as leading indicators. However as a guage of current conditions, tax revenues in various categories will give you some idea of what is happening. Given the large share of the overall economy represented by government spending (other than federal), the curtailment resulting from legal prohibitions on deficit spending is signficant as an indicator of future local government activity.

Margins are not better. Direct labor productivity has increased some because a smaller work force is putting out comparable levels of production but prices are going down fast enough that gross margins are also down. Unit demand at lower prices is not positive at all--I would love to have a new Porsche if I could get one for $10,000; I just can't afford one at $108,000.

My real point was not intended so much as predictive, although I have now reached the point where I am prepared to make some predictions but rather to ask the rhetorical question, what conditions would you have to see to believe that in fact there is going to be an economic recovery in the second half of 2003 (or are you giving up on 03 and now looking for 04), and what has to happen to hold real estate prices up.

There is some finite limit on how much current liquidity flow can be committed to debt payment. That limit is not subject to arithmetic calculation. But there is a basic level of minimal economic commitment, food, clothes, gasoline, etc. that will be met before debt service. At the point liquidity flow is fully committed, consumers and real estate buyer will not commit to additional debt to buy the next house or car.

Further, in the real estate market, liquidity flow requirements are going up independent of prices--insurance prices are up; real property taxes are up; utility bills are up significantly; all in a market where jobs are disappearing and incomes are threatened. Very difficult for me to see how prices can remain at current levels.

The issue is, what do you have to believe is happening to believe that stocks will go up; the real estate bubble won't pop; and that there will be a "recovery in the second half (of 2003 that is; or even in the second half of the first decade of the twenty-first century)".

I happen to be in the tax business so I can tell you from direct personal first hand experience that nothing in the Federal tax legislation is any kind of positive indicator of future economic activity--overall tax burden is up not down.

Margins are not improving and neither are profits. New cars are accumulating in every dealer storage facility. The available evidence is not for economic improvement at all--the economy is poised (as is the real estate market and the stock market) at the edge of the cliff.

Hi David, Richard,

Two months ago the main post was true and today it still is. Thanks for chimming in again David I still side with your valuations except for the speed and timing of the RE bubble.

I also see the dire consequences walking closer to my front door as the current policies have no effect on the economy and the good side effect on financial areas only takes one from the spring board up to the high dive platform. The diver is still going to have to take that plunge. Down does exist, not just up up up up.

Last week on Wednesday, the Fed drop of the overnight rates from 1.25% to 1.00% caused definite and distinct reactions in the markets, all went contrary to what should have happened. Most have stayed contrarian, i.e. the DOW and S & P 500.

The only one that popped back into line was mtg rates. On Friday they dropped. This was a really strange occurance because the bench mark for these rates took a steep spike up. These two have always followed one another and Fridays have always been a day for yields or rates to go up. This is a given standard with mtg rates because of the two weekend days of uncertainty and like I said, they actually dropped on Friday.

Let's see how strong the management forces are to bring the 10yr back into line with the mtg rates (trends that is, not spreads) and if the stocks go back up. This scenario being the standard FED policy plan. Or, could we be seeing the start of the Treasury blow-off.

" ... the investor and personal use real estate owner does not recognize the risk that the "real values" analysis does not protect real estate pricing at current levels nor recognize the fundamental economic proposition that underlies the deflationary trend in pricing of all other durable goods."

As a stock investor who thrived in the bear market, riding shorts down, I have become aware of when fear and greed are waxing and waning. And frankly, after years of not enough fear in the markets, today there is too much. Or rather, in october of last year was too much - now is a bit more balanced. tax cuts have helped open up the throttle quite a bit on the market. all investors burned in the past 3 years are FAR MORE cognizant of risks than they were before.

"Consumers and stock market investors continue to expect a "recovery in the second half""

One of the most useful sites for me for analyzing such trends is this one, ECRI, which predicted the 2001/2002 recession back in sept 2000 ...

recession is over
http://www.businesscycle.com/showstory.php?storyID=550

predicted growth at 4-year high
http://www.businesscycle.com/showstory.php?storyID=551

Consumers expectations may be right. there is reason to be optimistic not overly pessimistic.

If you really believe the stock market will dip 10% in the next 6 months, go ahead and buy some puts. I myself would take it as a buying opportunity, buy when the fear is high.

IMHO, your pessimism is a mistake, the market will retrace about 50% of recent gains and then move up, is my prediction (ie, no lower than 8600 on the dow).

"Under circumstances where there are no facts that imply a second half recovery"

see above. you are merely ignoring the facts that disturb your thesis. good polemics but bad empirical science.

"There was also 90% margin in the 1920's. And you could margin on top of margin. So if you bought $100 worth of stock with $10 (90% on margin credit), and the value went to $300, you could margin an additional $180 on the equity in the stock. So for $10 cash you could have $270 worth of borrowings for paper investments! Pretty crazy. You can't do that today.."

No, but a lot of people qualified for the 50% margin during the 90's. And as the margin calls rolled in during 2000-2002, they lost all of their stock, savings and in some cases more. Becaus their "broker" told them, hang on to the stock, things will get better. This is not much different. I realized that in 98 when the bag boy at the grocecry store started talking about the stock market. It was 1928, redux.

For one thing, the social fabric has changed - you've got changes in work ethic, familial and community interdependence, and the "trust" aspect...

I have considered this aspect for a long time. The depression generation was a different breed of american altogether. No, it wasn't all sweetness and light - but given today's whining "gimme gimme" attitude, it won't be pretty.

My Father always warned me about free alchohol-it was sure to cause greater harm than any purchased with one's own money.
Now I see one must avoid free money-I was always a little curious about that spontaneous birth of money, out of thin air. The family doctor never created children-he only assisted in their birth. Nixon did us great harm, even psychologicaly, by removing the gold-it informs one of a false premise & many dumb ideas follow.