K&C, Mankiw Post Mortem

Tuesday, March 09, 2004 | 10:31 PM

Before I get into the details (ala Mankiw) a quick word about tonite's appearence:

This was my first "remote site" showing -- and they are terrible. I have a new found respect for anyone who does these regularly.

When you do a show live (or live to tape), its informal and comfortable -- just a couple guys/gals arguing over economics and markets. In the remote set up, you sit in what is essentially a dark closet. There are a pair of klieg lights in your face. Despite the dark, you squint from the lights. They are damn hot, so right through the pancake makeup, you sweat. And, you cannot see yourself on the monitors, or anyone else on the show. You simply stare into space a the point where they said the camera was -- not that you can see it.

Hot, squinty, shiny, awkward, sweaty, alone in the dark -- not the pefect formula for great interaction. It's worth the ride to Jersey to avoid that set up. (A friend emails: "On the other hand, you didn't have to deal with Cramer" . . . Yeah, but I've never had a problem with the guy, caffeine and all).

Okay, on to Mankiw:

He certainly seems like a nice enough guy -- I'll bet he was a terrific Harvard Prof. He had his own segment (a perc of being the President's Cheif Economic Advisor). And in all fairness to him, he is right about free trade and correct about outsourcing. Perhaps a bit of a political tin ear when it comes to the subject, but essentially correct when he says protectionism and tariffs will not work over the long run. Global trade creates wealth on both sides of the ocean.

But three things were said (don't recall by who) during his interview which need to be clarified:

1) Family Net Wealth is at an all time high:
This is technically true. However, family wealth is at all time highs because the single biggest asset of most American families -- their home residence -- has just spiked up in value due to interest rates being at 45 year lows. If and when these ultra low rates vanish, a huge chunk of that "Paper Wealth" will also disappear. After the '87 crash, the Fed cut rates aggressively. The NY Real Estate market topped out in 1989 -- about 18-24 months after the last rate cut. Baclk of the envelope calculation suggests the real estate market tops out sometime in late 2004 to mid 2005.

Home Ownership, at about 68%, is also at record levels, is also contributing to this surge. Again, credit low rates. Broad Home Ownership is a very good thing for communities, for the economy, and the country as a whole. As long as mortgage defaults stay low (there have been some predatory lending problems in select regions, like Philly) and of course, people maintain their incomes to pay their mortgage, this is a positive.

Just put the "paper wealth" into perpsective.

2) Total Mutual Fund Valuation is at an all time high:
The reason for this, once again is interest rates. On top of the 20 year Bull market in Bonds, we saw a new rally cycle start with all the Fed deflation chatter.

As I mentioned last year, the Pimco Total Return Bond Fund surpassed Vanguard's S&P500 Index fund in October 2002 to become the largest mutual fund in the world. So what has happened is that one asset class became a bubble, and investors piled into another asset class, potnetially crating a second bubble. That's hardly a cause for celebration or a sign of economic growth . . .

3) The Household vesus Payroll Survey:

I was most disappointed to see a Harvard prof trot out this tired old excuse. He knows better -- damn, even Greenspan trashed that meme in front of Congress last week.

But regardless of which survey data you want to rely on, the numbers are still terrible when compared with previous recession/recovery cycles:

Source: The Economic Policy Institute

That's the update -- nothing too insane this time.

Tuesday, March 09, 2004 | 10:31 PM | Permalink | Comments (0) | TrackBack (0)
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