Dr. Bill Conerly

Bonds, reits, long only, macro
Dr. Bill Conerly
Bonds, REITs, long only, macro
Contributor since: 2008
Company: Conerly Consulting LLC
Gayle, I'm pondering "Surveys are bogus true facts as just reported by U.S. Census ..." The U.S. Census report on homeownership is a survey; it's exactly the same survey that reported the increase in occupied housing.
Ben Gee, yep, you're in the ballpark. That means average growth will be strong for that period of time. Hopefully along the way their governance will improve and they can go to 75% of US per capita GDP.
Shn, I'm not an investment advisor; I was trying to provide the building blocks that others could use for business and investment decisions. But here are a couple of thoughts. First, if markets are efficient, then everyone knows what I wrote, and that growth is priced into asset prices today. That's an extreme assumption, but a good starting point. Second, Chinese stocks that produce globally-traded commodities probably don't get much benefit from the country's economic growth. Third, companies that serve the growing Chinese middle class will most benefit. But returning to the first point, that does not guarantee investment returns. Look at China Life (LFC) as an example; stock price is mostly sideways last 8 years despite selling a middle-class product in a rapidly-growing economy.
thanks for your comments.
The fact that other markets are falling does not tell us more about the future. Like the U.S. market, others may come back in the coming days, months, years.
The statement "Commodity prices are approaching long term lows due to lack of demand" is easy to test. The CRB spot commodity index has certainly declined in the last year and a half, but it is about four times higher than the long-term low. (You can download the data from Freelunch.com).
You might also check out the World Bank's commodity price data, a handy spreadsheet that covers 74 internationally traded commodities ranging from bananas to zinc. The weakest seems to be sunflower oil, trading just 50 % higher than its long term low. The average is about 8 times long-term low.
Thanks for your comment.
Shn's question is very important. I think that shale is more common in North America, though it does appear on other continents. The biggest issue in adoption of all oil technology is government oil companies. In most of the world, oil reserves are owned by the government. Even in countries where land is privately owned, the government often owns the mineral rights. Thus, use of new technology is a political decision. It usually requires large up-front expenses for future benefit. Political leaders tend to be focused on short-term benefits and avoid short-term costs. An obvious solution is to bring in foreign oil companies to front the money for capital expenses, but that exposes the politician to charges of selling out to foreign corporations. In short, I think it's a political problem on top of a geological problem.
thanks for your comment.
E.Anon asks a good question, and the short answer is that I don't know. I assume that the assets in the Greek banks are okay; they cannot be great given the economy, but they could certainly be decent. In that event, the banks have a liquidity problem: their liabilities are short-term but their assets are long-term. A temporary help would be enough. However, it's hard for an outsider to know the quality of a bank's assets. And having sat on a bank's committee looking at asset quality, I know it's even hard to know asset quality on the inside.
For the questions about loans being paid back, every loan is made under a legal structure. If loans can be abandoned through bankruptcy, that's a known risk to the lender. It's a disappointment, but it's something that the lender understood going into the deal.
Similarly, the lenders to the Greek government (first banks, later major European government organizations) knew that default was a possibility. They took the risk with eyes wide open.
Thanks for all your comments.
Dave, total non-farm jobs are up 1.7 percent (or about 2.2 million jobs). Data are from bls.gov, but easiest way to look it up is http://bit.ly/RJPPi8
Drew, thanks for the contribution. The economy in the oil patch and the Internet patch are up wildly more than the national average. (I can never convince New Yorkers or Texans that there's a world outside their neighborhood. :) )
coindog, if it's so clear that the market will fall when the Fed starts to taper, then why doesn't the market fall now? Foreseeable events should be priced into current stock prices, don't you think?
Sleek, I'm not talking about crowding out.
Right now there is demand for U.S. Treasury bonds from foreign governments that want to hold dollar-denominated reserves. If those governments changed their minds and decided to hold less dollar-denominated reserves, then demand for U.S. Treasury bonds would fall, the price of the bonds would fall, meaning the interest rate would rise.
Atmit, I didn't mean to disagree with Rogowsky, just offer a different perspective.
Alpine, I enjoyed reading your customer-centric questions. Another good perspective.
Others, I've found Bing to be a good search engine, but I don't think you knock off the market leader by being "just as good as." However, I heard a local radio station running a quiz contest, telling the caller to "Bing it." I assume that Microsoft was paying to get Bing mentioned. Though the company's trademark attorneys probably had strokes over "Bing it" rather than "conduct a search using the Bing search engine."
thanks for all your comments.
I think your story is not that "interest rates can't rise," but that "the U.S. government cannot afford to let interest rates rise." Those are two very different things. The Fed can be pressured by Congress and the White House to keep overnight interest rates low, but the markets determine intermediate and long-term rates. If investors think U.S. debt is unsustainable or inflation likely, then interest will have to rise to get someone to buy it. There's not much the government can do to stop it. The interest rates of late 1970s and early 1980 show that.
Aristophanes, sorry but I'm not smart enough to understand your comment.
Time and Silk, good questions. Every field is different. I've had a dickens of a time asking petroleum geologists about average decline rates; they keep saying that every case is unique. So I'm relying on some high-level analysis. I do know that many of the new techniques could be used elsewhere in the world, but not everywhere.
thanks for your comments,
The spreads are not negative. The negative number in the spreads chart shows that more banks are narrowing their spreads than are widening their spreads. So a majority of banks are accepting less profit per dollar lent, in order to increase total lending.
Banks are, indeed, taking on more risk. However, at today's extremely low interest rates, banks cannot cover their costs without taking on some risk.
Thanks for the comment, David.
Nice discussion, my friends.
Vuke suggested a longer term perspective. Here's a data source for gold prices: measuringworth.com/gold/. I wanted to compare with consumer prices. The Bureau of Labor Stats has them back to 1913 at www.bls.gov/data/home..... You can go back to 1800 at www2.census.gov/prod2/....
Here's a little calculation: In 1800, gold price was $19.39. If it had exactly matched inflation, it would have been $248.73 in 2010. Today's price looks really good, until you think about a 210 year compounding period. If you had bought gold back in 1800 (and lived through today), you would have earned an annual return equal to inflation plus 87 hundredths of one percent.
I agree that gold is a long-term inflation hedge, but you should have a really long time horizon. A decade or two is not long enough to guarantee keeping up with inflation, as my post stated.
The discussion of when do we know it's a bubble reminded me of the tech boom. I was very suspicious of tech stocks as early as 1995. Barron's magazine had a series of articles "Techs to Wrecks" poo-poohing the tech rally. The problem with being too early to call the bubble is that it can keep going a long time. At some point, early skeptics are tempted to throw in the towel and go in whole hog--just in time to get slaughtered.
If you tell me the gold rally could continue for another year or two, I won't argue--maybe it will. But ten years of gains from this point on? I'm highly doubtful.
Thanks for all the great comments.
bankval4 makes a good point. I had assumed that everyone in the business knew that many or most of the shorts were naked; that may not be the case. (It may not be the case that most shorts were naked; it may not the be case that most longs knew how many shorts were naked).
rangrrob, I'm not convinced that this is the sort of stuff that made the financial system fail. Two years ago I wrote a series of blog posts about the mortgage crisis (access here: businomics.typepad.com...). To the issues that I listed there I'd add the high leverage of the investment banks. Securitization was part of the problem, but other issues were major contributors as well.
Saintshawn29, I'd love to see more data, too, but the Fed only started the survey back in 1990. I met with Greenspan that year, feeling pretty cool to be with the Maestro, and he asked when banks would start lending again. Oops, that's the one question I couldn't answer. The survey was a result of his wanting to know about bank attitudes.
This has been an exceptionally good discussion (aside from the algebra). Here are my thoughts on the Keynsian, Austrian, monetarist controversy.
Keynes's work led to a mechanistic, mathematical approach in the hands of Sir John Hicks and others, exemplified by the IS-LM model. Yet Keynes's actual words sound--Austrian! He writes at length about decision-making under uncertainty. That business executives making capital investment decisions don't know what the price of their output will be in the future, but they must make decisions now. He channels (without crediting him) Frank Knight's distinction between risk (a game where we know the relevant probabilities) and uncertainty (a game where we don't know the probabilities). Keynes writes about what people do when they don't know the probabilities, which sounds a lot like modern behavioral finance: people do what seemed to work in the past and what others are doing now. I have no doubt that we live in a world with this uncertainty, which sounds Austrian.
(In the 1968 Axel Leijonhufvud wrote an insightful book called On Keynesian Economics and the Economics of Keynes which highlights the differences between the mechanistic view and the "true" economics of Keynes.)
What does this non-mechanistic, uncertainty-filled view mean for the macroeconomy? The economy will not be perfectly, smoothly functioning, even in the absence of government policy mistakes. That sounds pretty Keynesian.
However, this conclusion says nothing about the magnitude of the market failures. Will they be little missteps of neglible consequence, or massive depressions? To answer that question I like Milton Friedman's Monetary History of the United States, 1867-1960. I'm convinced that the greatest macroeconomic problems have been the result of policy errors, although I'll concede that private sector errors in decision-making have contributed to instability.
Finally, pointing at least some of the blame at the private sector does not prove that the public sector can save us. In the real world we have a Federal Reserve chairman who is tremendously afraid that we'll enter a depression on his watch. (I suspect, without any evidence whatsoever, that his advice to someone else would have been different than what he actually did as chairman.) We have a Congress that is totally focused on their own political power and the next election. We have a President who is also focused on political power and the next election. (And I could have written that at about Mr. Bush as well as Mr. Obama.) Can this political decision-making process give us policy action of the right timing and magnitude to stabilize the economy? How about to simply do more good than harm? I am not at all convinced of that.
My interest is mostly in how business leaders should adjust their plans to account for changes in the economy. One theme I'm emphasizing is that companies should dial up their economic contingency planning, because we'll continue to a more cyclical economy in the coming years.
My apologies; the chart's vertical axis should have been labeled "$ billion change, month to month." The definition of disposable income used is straight from BEA; subtracts from income taxes but not any spending at all; plenty of explanation at bea.gov. Also note that the data are at an annual rate. Quick calculation is that it comes out to an extra $128 per household per month.
You are right that this is not much, but the decline in consumer spending last fall was much smaller per household--but it had massive effects on the economy.
Thanks for the comments, folks. Here are some reactions:
JoeDirect and smalltownbanker are both right: a few markets are hugely disastrous, and the recovery will not start there. It's actually good for the country as a whole for the housing oversupply to be highly concentrated in a few states. The excess supply in Florida does little to lower demand in, say, Maryland. Once the states that are not hugely overbuilt get a bit of growth, then contractors go back to work and sawmills reopen. We can get some strength in total economic activity even with some pockets of weakness.
Regarding the housing vacancies, Griz's comments point up the importance of looking at true supply, which is best measured in the Census Bureau's vacancy stats. The usual measures, based on homes listed for sale, can be very misleading.
Thanks for the comments, friends.
Jplout: BLS publishes several alternative measures of unemployment, which might better reflect the underlying level. But they all show the same trend relative to past data.
iThinkBig: interesting decomposition into three camps. What's the data source for the split between megacorps and small business?
pepster: there's actually data on that from BLS Consumer Expenditure surveys. Spending on apparel is almost, but not quite, as large as spending on gasoline.