Larry Kudlow (ever the optimist) has some thoughts, and advice for Republicans.
My biggest concern is that there’s still a big housing overhang, with adjustables coming due over the next year, which will continue to exacerbate the real-estate market and finance.
No.
I thought it was until the Office of President Elect promised 4 years of trillion dollar deficits. I’m not sure the dollar can take much more abuse.
Those adjustable mortgages still have three more years of re-sets. They sold them as recently as 2006, and they’re on a 5-year fuse.
The financial sector is still too big, and it won’t deflate to actual value until the government stops propping it up. Either Obama puts a stop to this madness and lets the banks that need to collapse do so, or we’re in for a decade of zombie banks a’la Japan.
This isn’t my first recession. In the past, I don’t recall a recession being caused by so many things going wrong at the same time like what’s happening now. My personal WAG is that this one will last at least a few years.
I tend to think that when the retail price of diesel is still falling but gasoline has gone up (as is the case where I live; YMMV), the economy probably still has a ways to go before improving.
Many commenters have failed to consider the commercial real estate sector which is even more overbuilt than the residential real estate sector; even more so now that commercial real estate absorption has gone negative. The bust has yet to scratch commercial real estate, but it will. Most of the loans in the commercial real estate sector were made by regional and local banks. It will be interesting to see if those same banks get a bailout.
Many commenters have failed to consider the commercial real estate sector which is even more overbuilt than the residential real estate sector; even more so now that commercial real estate absorption has gone negative.
Is it really? I doubt it myself. If commercial real estate were that overbuilt, we’d already have seen it. My take is that we will see a drop in commercial estate value for two reasons: first, a big drop in demand for that property from slower economic activity and second, because alternate uses, namely homes, have dropped significantly in value and will depress to some degree all real estate on the market.
I think this one is going to have a very long tail, possible decades. What we’ve got is an asset bubble popping. The problem is that the principle owners of assets, including particularly real estate, are the people in their 50s and 60s, i.e. boomers on the verge of retirement. They’re about to start trying to convert those assets into cash flow, and there are a lot of them. Meanwhile, they’re going to be cashing in their Social Security and Medicare IOUs from the gummint, another asset in their possession.
Plenty of folks have pointed to this oncoming train and suggested the result will be some massive bankruptcy as society tries to pay for the conversion of a huge chunk of the population from workers to comparitively wealthy retirees.
But I think that’s economically naive. It relies on the wholly unreasonable assumption that the real value of these assets is pegged to their accounting book value. Ha ha. Ask the oil speculators about that.
What will happen, I think, is that there will be a massive deflation of the value of the assets held by this cohort, coupled with a substantial inflation of the value of the labor of the younger cohorts, which the retired group will be trying to buy. That will balance the books, more or less by impoverishing the asset-holding boomer bulge at the expense of the Gen Z nurses, gardeners, plumbers and respiratory therapists they’re hiring in their 70s and 80s.
So I think it likely that the current asset bubble pop will segue into a long-term devaluation of assets driven by boomer retirement. The good news is, if your own principle “asset” is the value of your labor, you’re in good shape. If, on the other hand, you thought to retire by flipping your overpriced house, you’d better polish up your resume.
Damn. Another failure due to the lack of the preview feature. I meant “to the benefit of the Gen Z nurses et cetera.”
Anyway, it gives me the opportunity for a postscript, which is that this phenomenon, if it plays out, would be very good for the Republic. The United States has enjoyed its most productive and fruitful decades when labor was scarce and valued highly. It bespeaks opportunity, technological innovation, and social mobility.
I have entertained the same idea as Carl from time to time. The corollary is the assets will be had at rock bottom prices by our children and grandchildren. Good for them.
To the other Karl I present this article as one among many about the sad state of commercial real estate.
http://www.bloomberg.com/apps/news?pid=20601087&sid=azgge9HHWzZE
Commercial real estate takes longer to go into receivership than residential because it generates income unlike residential. It also has to experience negative income for a long while before it goes into default. It can have negative income for quite a while since the REIT or other group which owns it will be willing to cannibalize other parts of the business for a while to make the payments before letting the property go to the lender.
I suspect asset values will be saved from continuing decline by massive inflation. I very much worry about the value of the dollar. We could see a run on the dollar, and oil at $500/barrel (and all other imports similarly scaled).
In that sort of environment, talk will turn from what the government should spend money on, to simple survival of the country. All those products from manufacturing we’ve offshored would suddenly become unaffordable.
Jardinero1.
Those vacancy rates and store closings seem pretty low given the quality of the economic collapse. And rent doesn’t seem much affected. I expect to see some degree of failure in the commercial real estate. It always is overbuilt at the start of a recession.
Commercial real estate takes longer to go into receivership than residential because it generates income unlike residential.
Residential real estate houses people who generate income. It doesn’t generate income directly (unless someone is renting out), but people cling hard to their homes. My take is that people will hang onto homes in situations that a commercial business would not.
If Strauss & Howe are right — and they have not missed a major development in American society since 1990 — then 2009 is the new 1929. We have a long road ahead of us, including, probably, four years of utterly ineffectual leadership followed by at least eight years of only intermittent economic progress. It’s all about the crisis-fomenting tendencies of idealistic generations as they enter elderhood.
The only individual risk-management advice I have is: get out of debt, yesterday; and be prepared to help the unfortunate, because there are going to be a whole lot of them. I am painfully aware that, once again, the ants will be forced to feed the grasshoppers — I am not talking about the transfer-payment nonsense we will be (indeed, are already being) subjected to. Among all the rent-seekers and social parasites, there will be many truly needy people.
I suspect asset values will be saved from continuing decline by massive inflation
Depends on what inflates faster, Paul. There’s no rule that every price inflates at the same rate, you now.
Or rather, it depends on the relative rates of inflation. It’s perfectly possible — indeed, I think likely — that the price of an hour of car mechanic’s or RN’s labor will rise faster than the price of vacation houses or blue-chip stock.
I think the thing to bear in mind is that the nominal prices don’t matter. What matters is the real prices, for example, the value of a house measured in hours of labor required to buy it. What the dollar value of the labor or the house is, doesn’t matter very much.
For what it’s worth (nada) I actually disagree with all the bleakness.
Remember that it was bubbles that burst, the actual value of most things is exactly the same (which of course might still be of zero or negative real value, not that I think that applies to all too much).
I agree that there’s an “age bubble” in the waiting though (good riddance to it when it goes!).
Postscript: my last comment is also worth applying to, for example, Glenn Reynolds’ frequent alarms about public pension obligations. He speaks as if the citizens are somehow bound by some law of physics to fork out the present real value of those pensions, and will be beggared thereby.
Hardly. The real value of those obligations will be whatever the future citizenry is willing to pay. If necessary, wages outside the pension system will inflate enough to reduce the value of these pensions to something reasonable. There’s no doubt there will be economic dislocation due to strange changes in the prices of things. That’s the usual result of stupid pricing policies. But there’s no way, in a democratic Republic, that a minority not otherwise possessed of superiority (guns, brains) can impoverish a majority, regardless of what “ironclad” contracts or laws exist. It’s a mistake to think that the laws of men are superior to the laws of nature, and of economics.
If government does the right thing, I figure we’re about half way through a painful, but needed, correction. But if government does what I expect from the dunces in Washington, and continues to do the wrong thing, we could well be facing a repeat of the great depression.
The only individual risk-management advice I have is: get out of debt, yesterday; and be prepared to help the unfortunate
Agree