Final Installment: The Capital Commerce Debate
Our five part debate at US News & World Report comes to a conclusion. The follow up to this will be on Kudlow next week (Monday or Tuesday), where I square off against Don Luskin.
My biggest complaint is that this morphed into a battle between logic and rhetoric. I tried to stick to facts, cited sources, and logic. I thought Don became somewhat slippery in his arguments.
Read 'em all, judge for yourselves:
Round 5: The Recession's Lurking on the Grassy Knoll vs The Likelihood of Recession Is Real
Round 4: A Disingenuous Look at the Hard Facts vs Job Growth Is Weak, Savings Are Nil, and Debt Is Soaring
Round 2: Don’t Worry–Be Happy vs Worry a Lot–Housing Will Hurt the Economy>
Round 1: The Bullish versus Bearish Economic View
>
Saturday, April 14, 2007 | 07:19 AM | Permalink
| Comments (44)
| TrackBack (0)
add to de.li.cious | 
digg this! | 
add to technorati | 
email this post
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00d834f6b21853ef
Listed below are links to weblogs that reference Final Installment: The Capital Commerce Debate:
Comments
"My biggest complaint is that this morphed into a battle between logic and rhetoric."
Here, here. Sigh. While the exact linkage (econometrically speaking) is hard to define statistics presumes stability in the underlying system. In this case the whole point is that historically low rates created an anomoly and changed the parameters on the relationships. As you point out.
BtW - sidenote. Having helpded found FDX's logistics bizz and run IBM's supply chain solutions strategy I'll suggest that JIT, etc. is more talked about than implemented. Penetration is not at all what the headliners would think having learned the jargon but not checked the realities.
Posted by: dblwyo | Apr 14, 2007 10:24:27 AM
Quick questions: Luskin claimed early on in your conversation with him that when you take housing out of the gdp calculation, it shows robust gdp growth everywhere else. Do you know where his source for that gdp less housing data series came from and can you post some charts that shows GDP, GDP not including housing, and GDP attributed to housing. Or if you can point me to the solid data, I would be glad to post create the charts and post it myself.
Posted by: TrendWatcher | Apr 14, 2007 10:25:19 AM
TW,
BR had a graph of GDP less housing a couple posts ago. GDP has grown despite housing's kerfuffle, but the argument is that it is not enough to hold the economy.
Luskin is a dweeb, no question, but there is an argument for a bullish view of US stocks. As BR noted, this degenerated into a rhetorical debate. It's unfortunate USNews couldn't find a more worthy adversary to BR.
I'd like to hear a more reasoned assessment of the bull case; frankly I find Luskin too damn annoying to even read (let alone watch on TV).
Posted by: Grodge | Apr 14, 2007 10:53:55 AM
Yes, the MEW *could* be used for "asset allocation". So what would those other assets be?
Surely he means a second home or perhaps the equity markets. Now if we apply "econometrics" and perhaps a dollop of common sense and simple math, we can see how those assets have surely outperformed assets like the Euro, gold, Francs, etc. like Mr. Luskin and professor Dumbass suggest. So are they suggesting that Americans are so financially savvy that they took all that MEW and magically found and allocated it only to RISING assets?
Oh, wait a minute. All assets didn't really go up, did they? Did you all buy gold, euros and francs and that's where the assets/MEW went? Uh huh.
Savings is zero so MEW didn't go there. Where did it go? Don's not debating whether MEW existed is he? Did you all buy gold, euros and Francs and THAT's why the dollar is croaking? Me thinks not.
Does it matter whether MEW was spent on cheapass crap from Walmart or depreciating assets like homes, cars, or equites?
Unless it is in gold or the euro right now, it's LOSING VALUE.
Nevermind the shrinking currency in this shell game. Can't you SEE your equity liquidation value going up? More dollars means everything is going UP, don't you know that? Just ignore that your dollar only buys .80 worth of goods or services.
Poor Don, he's been duped by a simple childs game. You can't argue with that.
Posted by: Craig | Apr 14, 2007 11:00:23 AM
Barry,
I really think you need to start presenting information like an irrational perma-bull. Lets see some statistics where you remove the best performing elements in a data set. Examples would be to exclude government spending and see how GDP is doing, or strip out PC's prices and see how CPI is doing or strip out healthcare jobs and see how NFP growth is doing.
Mind you nothing will be even close to the impact that housing has as any rational individual can plainly see, but the results sure would paint a far different picture.
Posted by: Sammy20 | Apr 14, 2007 11:10:16 AM
Then I would be a charlatan, hack, or politico
None of those titles appeal to me
I'll stick with strategist, analyst, or my favorite epithet that someone hurled at me -- an economic theorist
Posted by: Barry Ritholtz | Apr 14, 2007 11:22:45 AM
In the final round, Donald Luskin says:
"I keep asking Barry why it is that- if
mew is such a powerful force behind consumption,consumption growth didn't surge when MEW surged after 2002, or for that matter,why consumption did surge in the late 1990's when MEW wasn't doing anything in particular" End quote.
Perhaps some of this could explained because after the stock market declines we saw in 2000-2002, along with numerous job losses, a drop in capex, MEW just kept the economic ball rolling, not really showing any huge spike in consumption. Also, perhaps consumption did surge in the late 1990's for reasons related to the stock market boom, capex, tech hiring, y2k, etc. It seems the wealth effect can cut both ways. Donald Luskin goes on to say:
"There really have been higher energy prices. There really is a record trade deficit. There really has been record MEW, and now that has pulled back. But the economy and the stock market just keep going" End quote.
I'm glad to see that Mr. Luskin can see potential problems and cross currents in the economic picture.
Posted by: mcg | Apr 14, 2007 11:43:52 AM
NEWS & INSIGHTS
By Michael Mandel
What Spending Slowdown?
Forget those antiquated government statistics. U.S. corporate investment is booming—just take a look overseas
http://www.businessweek.com/magazine/content/07_17/b4031048.htm
Posted by: flipper | Apr 14, 2007 11:46:57 AM
All in all... the debate was too long I think.
The subject probably only needed opening remarks, one initial rebuttal, and then a closing rebuttal.
I too am surprised that Luskin was not more academic, but he made his points effectively enough.
Final analysis: Unfortunately, you have to knock the champion down or out as a challenger with no title. This recovery still has steam, albeit under falling pressure, and employment has not given us any tangible evidence of declining yet. So Luskin is in the champion's corner, and that's where the title is that you weren't able to take away.
My guess is we're in the late rounds of a match that won't be won with a knockout. It could end up being a split decision with both sides claiming a win.
All I can say is that the upcoming few months will be the most interesting macroeconomic experiment that anyone could devise even with computer modeling.
Basically the question will be: Can the American economy simply will itself to surmount every obstacle and not to fail? Late in his tenure, Greenspan made a similar observation, claiming that in all of his experience over the years of many times wondering just how it might happen, the U.S. economy had just seemed to (paraphrz) "always manage to somehow muddle through."
But, Barringo, beware of the Kudlownians Monday or Tuesday. “Yon Cassius has a lean and hungry look.” I think the Kudlownians figure you got clocked in the debate. They're laying for you, and you're fixin' to get a sucker punch.
If you don't have something new... better than MEW... you're screwed.
Posted by: Eclectic | Apr 14, 2007 11:59:44 AM
One thing I've noticed is that people are so quick to point out that we could be headed for a recession because of potential drags (consumption, capex, etc.) going forward.
That's certainly possible, but it's telling that you rarely hear these same people talking about one of the most powerful drags on GDP beginning to lift.
Residential investment won't subtract 1.2% off of GDP in Q1, as it did in Q3 and Q4 of 2006. And it will likely be even less of a drag in Q2 and beyond.
So, I think it's fine to talk about potential drags on growth going forward, but a more balanced outlook would acknowledge that one of the major existing drags is likely abating.
Posted by: Steve | Apr 14, 2007 12:10:00 PM
I really think you need to start presenting information like an irrational perma-bull. Lets see some statistics where you remove the best performing elements in a data set. Examples would be to exclude government spending and see how GDP is doing, or strip out PC's prices and see how CPI is doing or strip out healthcare jobs and see how NFP growth is doing.
Did you miss this chart?
Posted by: Steve | Apr 14, 2007 12:11:44 PM
Did everyone notice that bloomberg removed the housing story from the front page?
Shure we know that the worse is yet to come, but as Berstein's strategiest noted until there will be problems so severe that can not be ignored the markets will probably rise on buyouts, etc.
~~~
BR: EXACTLY
If US CapEX is slowing down here, but exploding overseas, what economies and markets do you think might be the beneficiary of that?
Its why I think investing in the Pacific Rim will generate better returns then the US.
Posted by: flipper | Apr 14, 2007 12:15:41 PM
Reading the dueling commentary reminds me of Harry Truman's demand that henceforth he be advised only by a one-handed economist. Even worse - in this case there were four hands furiously at work, agreeing on little.
And you guys wonder why it's called the "dismal science"!
Posted by: Nova Law | Apr 14, 2007 12:21:04 PM
Would it not be consistent with the data that most of MEW went into a reallocation of debt, rather than as an allocation of assets?
One of the earliest uses of refinancing was the simple expedient of taking advantage of lower rates to lower house payments - not extracting MEW - and the lowered house payments had the effect of freeing more disposable income.
As the housing freight train gathered speed, home prices rose, and in many cases MEW was used as a "bill consolidation" loan, swapping higher-priced, shorter term debt with lower-priced, longer term debt. Again, the net effect was more disposable income.
With MEW extraction falling and due to fall further and no longer available as a method to realign debt, it seems likely that the next phase of the consumer comsumption orgy will be a reversion to the mean, i.e., an increase in short-term, high-interest debt.
However, this well is not as deep and can run dry more rapidly.
Posted by: Winston Munn | Apr 14, 2007 12:26:51 PM
Winston Munn,
If MEW decreases, what will likely happen is consumer credit growth will return to levels prior to the housing boom.
Posted by: Steve | Apr 14, 2007 12:32:10 PM
The debate reminded me of Ali - Holmes, with Luskin as the mouthy Ali and Ritholtz as the disciplined Holmes.
From BoxingScene:
In the tenth round Ali was a shell and looked like a man half-asleep. Holmes to his credit, realizing Ali had nothing, pulled his punches and used mainly his jab to avoid hurting Ali.
Posted by: MAS (San Diego) | Apr 14, 2007 12:50:35 PM
Excellent point Winston. Funny how we tend to think in relation to our own situation.
Let's take your point and run it a little further.
Many of those refi's were to lower mortgage rates on existing housing, but it also was used by those with credit card debt to "consolidate" unsecured debt into longer term secured debt. My bet is that anyone running their finances that way wouldn't be your high FICO score borrower but is the definition of sub-prime.
So after they refinanced/zeroed the balance on their CC's they were ready for another round of spending. It probably looked pretty good with CC's at 4-5%.
Pray tell, what is happening to those mortgages and Credit Cards right now?
We are just seeing the sub-prime mortgages. Wait until CC's and cars make their entrance.
Posted by: Craig | Apr 14, 2007 12:52:20 PM
Barry
Is it possible to overlay or integrate money being released from:
Stock market appreciation
House appreciation
Credit card and other consumer finance
So that rather than just showing mew versus consumption you have these other factors somehow made into one factor
For example consumption while irratic rises to the Dow peak of 2000 and falls to the Dow low of 2003 and then rises again. To what extent is credit card etc debt now rising now MEW is declining?
The bear case is that the stock market boom was replaced by the housing boom as a driver of consumption and it now makes sense that the last leg is to max out on all available credit including cards before no more can be withdrawn and recession begins. So can that actually be plotted in a meaningful manner?
I agree that the other guy was obnoxious but it would be nice to see this nailed once and for all.
Posted by: Worried | Apr 14, 2007 1:12:19 PM
Trendwatcher -- you can get the data on real gdp growth less housing from bea.gov in the quarterly gdp release.
Technically you can not add the components of gdp growth, but people do it all the time.
the data shows that for the last four years --
2003-2006 -- real gdp growth average 3.4% and the contribution of housing was 0.2 percentage points so that real gdp excluding housing was 3.2%.
Over the last three quarters it was.
RGDP......2.6....2.0....2.5
housing..-0.7...-1.2....-1.2
gdp x h... 3.3... 3.2....3.7
Now Luskin calls the 3.3%, 3.2% & 3.7% growth --an average of 3.4% --robust.
This is a word game the administration apologists get away with all the time. The long term growth rate of the US economy has been 3.5% so the past four year --and three quarter --record of 3.4% real gdp growth is just average or mediocre by historic standards. But they call it a boom or strong growth and get away with it because nobody calls them on it. Economic reporters should be ashamed of their selves for letting them get away with it.
Posted by: spencer | Apr 14, 2007 1:18:15 PM
Barry,
Could you please do a post on the huge amount of dollar reserves the ROW continues to accumulate, especially China, and what are the potential consequences for the US. I think its an underreported story in the financial community.
Thanks
Posted by: Shrek | Apr 14, 2007 1:44:46 PM
Barry,
I thought the debate was pretty good until round 4 when Luskin started with, "Ah, the "appeal to authority"–citing respected sources to back up one's point when one doesn't really have the facts on one's side." Since he went on the offensive against your MEW argument in round 3 by saying, "First, there are no authoritative statistics on MEW;"
First he attempts to disprove your argument by saying there is no authoritative source for your data, but when you "cite respected sources", that means you're dodging the issue because the facts aren't on your side. Well, Luskin can't have it both ways, so which is it?
Then Luskin provides a list of sources that he considers authoritative in the very next paragraph! I.e. he was appealing to authority to prove his argument via the lack of data from them! I'm really surprised you didn't call him out on that.
Thanks for posting links to the debate. The above notwithstanding, it was a good read.
Posted by: bodanker | Apr 14, 2007 1:45:11 PM
Is not this GDP argument biased in that for a true comparison one must also subtract housing during the time when housing contributed to growth of GDP? How about backing out housing for all quarters the past 5 years and making a comparison?
And even then it is silly to re-add housing's negative to show real GDP as the housing decline has influenced and will continue to influence areas outside of housing.
However, I'm sure that will be the next "big thing": GDP ex-housing.
Posted by: Winston Munn | Apr 14, 2007 1:49:30 PM
However, I'm sure that will be the next "big thing": GDP ex-housing.
Hell, why not? We've already got GDP ex-MEW.
Posted by: Steve | Apr 14, 2007 2:04:01 PM
I think it's going to be something like this: Peter Schiff vs Art Laffer.
http://www.europac.net/Schiff-CNBC-8-28-06_lg.asp
Posted by: Aaron | Apr 14, 2007 2:06:13 PM
Don Rishkin has this in one of his articles
http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20070413
"First, this whole thing is based on a fallacy that somehow MEW represents money in the economy that wouldn't have existed otherwise. But since MEW, by definition, is produced by mortgage debt, then the money must have already existed. Someone had to have it initially in order to lend it to the mortgage borrower."
New Debt more or less creates new money where no money existed before. Be it credit card debt or mortgage debt around 9 times a banks cash deposits can be created by the bank when it offers a loan if the fractional reserve requirement is that high. It can be much lower.
In the case where a remortgage results in one tenth of the remortgage money being deposited with the bank then no prexisting cash deposit at all would need to exist to create all of the money released to the customer. The money is created simply by typing the amount into the ledger
The money comes from nothing and returns to nothing when the loan ends. In this way rising assett prices create money released into the economy in an uncontrolled manner if bankers dont require customers to account for all receipts to prove the money spent was spent on the mortgage assett.
Posted by: Worried | Apr 14, 2007 2:51:49 PM
