Posts filed under “Really, really bad calls”
“When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation?”
-Dave Rosenberg, chief economist and strategist at Gluskin, Sheff
It is taken for granted that a rising stock market stimulates the animal spirits, sending consumers off shopping.
The basic premise of the wealth effect is well known: As the value of stock portfolios rise during bull markets, investors enjoy a feeling of euphoria. This psychological state makes them feel more comfortable — about their wealth, about debt, and most of all, about spending and indulgences. The net result, goes the argument, is that consumers spend more, stimulate the economy, thus leading to more jobs and tax revenues. A virtuous cycle is created.
The rule of thumb has been that for every one dollar increase in a household’s net equity wealth, spending increased 2-4 cents. For residential RE, the increase is even greater: Consumer spending increases 9-15 cents (depending upon the study you use) for every dollar of capital gain.
The problem is, the theory is mostly nonsense.
I make this statement for two reasons: 1) the distribution of equities in the United States; and b) the classic causation/correlation issue.
Let’s start with equity ownership. The vast majority of Americans have a rather modest sum of cash tied up in equities. 401ks, IRAs, investment accounts — these are primarily the province of the well off. Ownership of equities is heavily concentrated in the hands of the wealthiest Americans. Start with the top 1%: They own about 38% of the stocks (by value) in the US. The next 19% owns almost 53%. That leaves the remaining 80% of American families with less than 10% stake in the stock market (See Federal Reserve’s Z.1 Flow of Funds report for the most recent info).
How is THAT going to cause a wealth effect? Especially when you consider the median family’s stock portfolio is worth well under $50k. These are the millions of families who are the principle consumers of cars, food, clothing, electronics, energy, health care, etc. To them, a rising stock market is nearly meaningless.
The biggest investment for the typical American household remains their home, with a median value of ~$200k. Put 20% down, and you see a 10 to 1 leverage. The impact of Real Estate on any wealth effect is much greater than the stock market. Unfortunately, homes remain somewhat overvalued — 10-15% by our measures — and are in a downtrend. They are not contributing to improvements in consumer spending in any meaningful way.
Our second factor is quite simple: The causation/correlation problem. In the 1990s, the Fed under Alan Greenspan look backwards, focusing on the stock market gains. But I suggest they would have been better off looking at the myriad factors impacting consumer’s psyches: Plentiful jobs, wage increases, economic expansion, labor mobility, modest inflation, and bountiful credit availability. These are sufficient to explain the behavior of consumers. Its not a secular bull market in stocks that causes the consumer spending — its all the other contemporaneous elements that are the prime drivers. [Update 06.26.12: In other words, the same factors that drive a healthy economy and make consumers feel positive also drives equities higher]
Regardless of your views of QE2 — if the Fed is doing it create a wealth effect, they are wasting their time and money.
The Wall St. Journal, and perhaps other outlets, published an open letter to Ben Bernanke pleading for the immediate discontinuation of QE2: We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The letter…Read More
One of the more annoying clichés of the past year has been ““The markets hate uncertainty.” You can always tell when you are listening to an empty-headed pundit when they trot out that old saw. This morning, I have a Bloomberg column on that exact subject, titled “Kiss Your Assets Goodbye When Certainty Reigns.” (or,…Read More
I’ve given up reading anything from the AEI. They are idiot savants, minus the savant part. Its a bore reading the same discredited, data-free memes: The CRA caused the crisis, Fannie Mae caused the crisis, the FHA caused the crisis. Its become embarrassing to read. Their latest release combines all three memes in one giant…Read More
Source: Red State > A friend writes: “What do you do when presented with a chart such as the one above?” My answer was simply that it depended upon who is showing you the chart: • If it comes from a hard core partisan, you laugh at the flaws in their wetware and say nothing….Read More
“We don’t want them to regulate capriciously, arbitrarily, without engaging in a cost-benefit analysis.” – Representative Jeb Hensarling, a Texas Republican > The statement above is representative of a misguided economic cost/benefits analysis that was dominant during the three decades incorporating 1980s-2000s. Its fatal flaw is that it fails to include the expenses and impact…Read More
> I frequently find myself disagreeing with Tobias Levkovich of Citigroup. That’s not surprising, given his firm and their investment posture. Where I really part ways is on anything housing related. Levkovich was part of the mainstream herd of strategists who, as the markets topped in October 2007, made the erroneous forecast that Housing would…Read More
Jason Zweig has an interesting piece in the Saturday WSJ about the bad advice investment advisors give: “Investment professionals are supposed to exercise independent judgment; in Warren Buffett’s words, they should be fearful when others are greedy and be greedy only when others are fearful. It doesn’t always work that way. Corporate pension funds had…Read More
Yesterday morning, I had The Misinformation Hour on TV as I got dressed for work. One of the comments that was made – “No one was wrongly thrown out of their home” — was repeated or ignored by hosts and guests alike. This is patently demonstrably false, and yet no one challenged it. The banks…Read More