This is a draft from Josh Rosner; I am quite sympatico to much of his analysis:


Reproduced with permission

Category: Real Estate, Think Tank

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6 Responses to “More Structural Change, Changes the Dynamic”

  1. tsetsaf says:

    I know his name tends to be scoffed at by intellectuals but this report basically repeats everything Harry S Dent has preached for the last several years. Basically that economists are wholly wrong because they do not look at the underlying force driving consumption, demographics. If you are not investing in industries that serve old farts you are in the wrong arena.

    As for the report linked above I especially enjoyed the chart of existing versus new home sales. The wild swings in existing home sales after the crash almost look like the same wild swings of equity markets post crash. All of it a direct result of government intervention in the markets.

    On a personal note my parents who are boomers sold their home and moved to a mountain community in ’06. They ignored my advise and bought a home for $350k. Last week a similar model down the road was sold by Fannie Mae for $119k. As for shadow inventory, while visiting them a few months ago we went for a walk through the community and they pointed out that more than half of the homes were abandoned. Oh and the guy that bought the home for $119k, he is a government worker.

  2. kwsmith2 says:

    The only STRUCTURAL change I see in this report is household formation, though what evidence do we have that this is a permanent detrend.

    None of the other stuff is structural it is all financial. People being cash poor or not having savings is not a structural issue.

    Structure is tastes and technology. Something deep about the ability to combine capital and labor into goods and services that people want to consume has to have changed. Not simply that you have some unfortunate financial or fiscal dynamics.

  3. auden5 says:

    The SF Fed Reserve echoed these sentiments, which gave mainstream credence to what was previously a “Harry Dent” fringe idea:

    Although the issues raised are not new, they continue to get major play-time because few obvious and workable solutions exist. As a younger investor, the Baby Boomer retirement issue keeps me up at night and makes me want to shift my S&P 500 allocation into a emerging market bond fund and GNMA bond fund–until I realize that bonds are not going to do well over the next 7 to 10 years, either.

    Yet, even Grantham is suggesting that the S&P 500 will be a poor investment choice over the next 7 years, so whom does an investor listen to? Grantham or the great John Bogle, who said, “Talk to any Nobel laureate who has ever won the economics prize, they are going to tell you [to] index. Paul Samuelson recently described the creation of the first index fund as the equivalent of the wheel and the alphabet. That’s pretty strong stuff, by the way; I don’t think it’s quite that good. But ask college professors in finance what they do and what you should do. They’ll tell you [to] index. Then ask them what they do, and they’ll say, ‘I index.’ But you can’t crank this low return to the financial system, high return to the investor into the mainstream of American investing, because we have dreams of glory. We all think we are above average, and we have a mutual fund industry that has become a giant marketing system [where] the idea is to bring in the most money by fair means or foul.”

    When 401(k) plans and IRAs were introduced, Wall St seemed to believe that most Americans would be able to handle the basics of investing and take ownership of his/her retirement. Of course, the assumption was also that Americans would save 15% of their income and receive an average 7% rate of return over 25 to 30 years (which Mr. Bogle points out is actually 8% due to mutual fund expenses). I am someone who takes pride in saving money and keeping up with his investments. And yet, I simply do not know what to do when I read about these intractable issues. I hear the wise men telling me that American stocks will not do well for several reasons. So I increase my exposure to non-Japanese, non-European international equities and follow the diversification mantra. I calendar a day each year to re-balance my investments. And I still feel, after doing all the right things, that if the idea of retirement is to provide security to Americans, especially Americans who save diligently, that something is not quite right.

  4. kwsmith2 says:

    The stuff in the SF Fed report about equity return though is not new at all.

    This was talked about a lot in the early 90s. I think the academic community lost interest after the dot-com bust but at the time it as all under the heading “Sell to Whom” which was essentially the idea that there was no underlying demand or production to support equity prices.

    In part also I think the globalization of the S&P 500 has also allayed some of these fears.

    However, the take away is *not* that stocks are poor investment. It is that real rates of return are falling. In a truly aging world there simply is no investment that will pay you the returns that you came to expect in a young world.

  5. ConscienceofaConservative says:

    Scary stuff, The baby boomers are set to retire just as the Fed is engaged in a ZIRP policy meant to discourage savings and encouraged both consumption, and taking on of risk debt(by both debtor and lender). In short the solution seems to be to encourage the same risky behavior that got us in this mess in the first place.

  6. ConscienceofaConservative says:

    Read your piece again, It’s clear that the residential market is changing. The new model is less owner occupants, less 2nd homes and more investor properties. This will clearly have social ramifications. And as far as baby boomers retiring and living off savings, this is one of the most presented and ignored realities out there. The stock market will have great difficulty going up if one of the most important holders of equities are expected to be net sellers.