Thursday, January 16, 2014

Economic Danger Signs - 2014

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Joke: a big investor asks his friends "How's business".  They smile and say "Couldn't be better!"  So, the investor sells all his stocks because if it couldn't be better - it can only get worse!

The current economic recover is pretty anemic nationwide relative to other historical recoveries and yet has some signs of (yet another) bubble.  Lost in all the discussion of increased development in Sunnyvale is whether all these new buildings will be filled.  It is quite a boom at the moment and after a boom you get an inevitable bust.  Some charts and discussion of where we are now below:

Standard 12-month Stock P/E (Price/Earnings ratio) going back to 1900 is in the upper range.
Chart of the Day

Yale economics professor Dr. Shiller is famous for his work on the Case-Shiller housing price index which is also back up:

(Begin update 1/22/2014) Are home prices in the SF Bay Area at unsustainable bubble prices?  I drew some crude trend lines on the above chart to determine very roughly the long term lower and upper bounds.  See below:

The lines diverge because the vertical axis is in normalized absolute values so a 20% drop in 1990-1995 doesn't look as dramatic as it does in 2008-2009.  The lines are crude but suggest that we may be at, or a little beyond, the upper bound for housing prices, though as 2005-2006 shows, they can certainly go higher. In the event of a decline, single family housing prices in south Sunnyvale will likely not drop as much as the overall SF Bay Area but they could take a while to rebound to their current value (the chart is NOT adjusted for inflation).  Note that someone buying an average house in the SF Bay Area at the peak in 1990 had to wait about 10 years for the price of their home to get back to what they paid for it - again NOT adjusted for inflation.  (end update 1/22/2014)

The most recent version of this chart for SF and 20 other cities is here:

Stock earnings adjusted for inflation are at 2007 credit bubble highs which were the highest since 1900:
Chart of the Day
Available at:

Yale economic professor Dr. Robert Shiller - best known for his book "Irrational Exuberance" predicting the 2007-2008 stock and housing collapse - won the 2013 Nobel Prize in Economics for his work in pricing assets (housing and stocks).  He said recently (December, 2013): "I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller told Sunday's Der Spiegel magazine. "That could end badly," he said.  "I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," he said, describing the financial and technology sectors as overvalued.

Dr. Shiller is famous among economists for his Cyclically Adjusted Price Earnings (CAPE) charts going back to the latter part of the 19th century.  His chart shows us very near bubble territory.  For more about Shiller, a graphic of his CAPE P/E chart, and a few other warning signs see here:

Shiller PE Ratio Chart
The most up to date Shiller P/E Chart:

Mid-term election years tend to be below average for stocks:
Chart of the Day

On the plus side, all the governments are on the lookout for any bubbles, and ready to act.  Whether they act sensibly or in time is another issue.  We could avoid a crash and just meander on in the current slow and anemic (some say jobless) recovery.

1 comment:

  1. Local housing tends to be very "local" in nature. Even in Sunnyvale, the recent real estate "crash" was barely felt in the southwestern side of the city. (It seems that sales volume dried up, but prices remained fairly constant.) On the north side, however, values experienced a drastic drop.

    I do think prices are heavily influenced by the stock market here. However, the influence is much more due to the local stocks, rather than the aggregate market. Over the past year, LinkedIn, Apple, Yahoo and Google have seen huge stock increases. All are located within 10 miles of 94087. Netflix and Facebook are also close. And there were a large number of local companies that have recently IPO'd (the largest IPO market since 2000). This is what fuels the local real estate market. The current frothiness of the market seems to combine some aspects of the housing bubble and dot-com bubble. However, with the high cost of housing, there will need to be a significant cash component to be able to afford housing, even with low interest rates.

    As for filling housing units, demand still outstrips supply, with both rents and house prices increasing. If housing gets built it will likely get filled. There may be a switch between owner-occupied and rental if it makes sense. However, there would be too much money to make to leave it vacant. We are lucky in that most of the new housing projects are moderate sized and being developed by different companies. Thus, it is less likely that we will see a repeat of the downtown Sunnyvale fiasco where one developer over-extended and stalled in development.