One of the themes we seem to be hitting a lot at TBP is compromised actors in the market/economic system. We had the Analysts in the iBanking scandal after the dot com bubble unwound, then ratings agencies in the sub-prime debacle.
The latest group to be looked at askance: Economists.
Suggestions of inherent structural bias was put forth by several BP readers who work at bulge bracket firms. They have made the following (somewhat persuasive) argument: iBanks, Brokers and Money Center Banks live on some revenue combination of asset based and transactional fees. They make more revenue in bull markets than bear markets. Further, most of their clients are similarly compensated. Hence, their research and commentary tends to look on the (Monty Pyrthonish) bright side of life.
Perhaps. My view is the discipline is not particularly good at what it is supposed to do, it is too narrow, manages somehow to ignore human nature, has become way over-politicized, and last, conceptualizes the world in an absurd way.
But inherently biased works too. And that leads us directly to today’s discussion: According to a recent WSJ survey, Wall Street economists almost put the odds of a recession at almost 50/50. Better than even chance of no recession:
"On average, the survey’s 52 respondents put the odds of a recession at 49%, up from 40% in the January survey and 23% in June. Moreover, if a recession does materialize, they gave 39% odds that it will be worse than the past two recessions . . .
On average, the economists, who were surveyed between Jan. 31 and Feb. 4, predicted the nation’s gross domestic product — or total output of goods and services — will expand at a 0.6% annual rate in the first three months of this year; that is down from the 1.2% pace predicted in the previous survey. In fact, they lowered their growth estimates for every quarter of 2008. The economy grew a slim 0.6% in the fourth quarter of 2007, a sharp deceleration from the third quarter’s 4.9%.
If there is a downturn, the economists said, there is a better than 1-in-3 chance it will be worse than the one in 2001 or the one that ended in early 1991."
The most fascinating tidbit about Wall Street economists: As a group, they have never forecast a recession in advance. Never. Some get it right, but overall, the group has been consistently late in recognizing contractions.
Not so Dismal Science after all . . .
Economists Raise the Odds of a Recession to 49%
Bernanke’s Ratings Slip, Despite Effort To Reignite Growth
WSJ, February 6, 2008; Page A4
Today’s WSJ had a run of Real Estate related articles that quite frankly, were rather surprising in their gentle naiveté.
The first is the somewhat surprised acknowledgment that speculators were involved in the run up and subsequent deflation of Housing prices.
Of course, every asset class attracts speculators when prices rapidly rise. Its why every big boom ends in a final blow off top — that’s the impact of late-to-the-party speculators — followed by the inevitable spectacular collapse.
The latest after-the-fact revision (see our discussion on "predatory borrowing") has a new name: occupancy
This new nonsense word is a way to duck responsibility for failing to do appropriate due diligence prior to lending out money. Here are the details:
"As lenders pore over their defaulted mortgages, they
are learning that the number of people who bought homes as investments
is much greater than previously believed. Such borrowers turn up frequently in analyses of loans
that defaulted within months after origination. In many cases, these
speculators lied on loan applications, saying they intended to live in
the homes in order to obtain more favorable loan terms or failed to
provide the requested information.
Roughly 20% of mortgage fraud involved "occupancy
fraud," or borrowers falsely claiming they intended to live in a
property, according to an analysis by BasePoint Analytics, a provider
of fraud-detection solutions in Carlsbad, Calif. Another study, by
Fitch Ratings, looked at 45 subprime loans that defaulted within the
first 12 months even though the borrowers had good credit scores. In
two-thirds of the cases, borrowers said they intended to live in the
property but never moved in."
Speaking of fraud — I am curious about these lenders, now claiming they were defrauded by speculators. How many of them asked the following questions, and then did the due diligence to verify the data:
- Do you presently own your primary residence?
- Is your home currently listed for sale? Or, are you in contract ?
- What is the asking price? Who is your real estate agency?
- RE Agent name? What’s their phone number?
Of course, none of these questions were asked, and no due diligence was performed, as these lenders were
whoring clerking out loans as fast as they could process them. After the fact, this lack of due dilly has become "Occupancy Fraud."
If there was any genuine interest in not lending to speculators, its easy enough to verify . . .
One of the themes we have been hearing of late is that stocks, 10% off of their all time highs, are fully reflecting a recession.
That statement turns out to be, um, a tad less than accurate, as was shown by the most recent ISM non-manufacturing Index. Headlines such as Services Data Blindsides Market reveal how little the market actually had priced in even a mild recession, much less a deeper and longer one.
The ISM’s non-manufacturing
index reflects almost 90% of the economy, according to Bloomberg. Consensus expectations of 53% were dashed, as the index plummeted to ~41.0%. to the lowest level since October 2001. If we exclude 9/11, this was the weakest reading since the data began in 1997.
In response, all 10 industry groups in the S&P 500 declined, and the Dow dropped 220 points.
Across the board, the data released was surprisingly weak:
Business Activity Index at 41.9% (consistent with a recession historically)
New Orders Index at 43.5% (fell 10 pts)
Employment Index at 43.9% (An 8 point fall, matching the lowest on record).
Prices Paid remained elevated at 70.7
This is particularly surprising, as we recently learned from the WSJ OpEd pages that The U.S. Economy Is Fine (Really). I haven’t figured out why those pages insist on denying reality, but its their option to live in an alternative universe (Iraq has WMDs, economy is great, etc.)