One Eyed Guide

Edmunds' Unrealistic Forecasts Hurting Auto Industry

I had a nice chat with an auto writer from a major newspaper and he pointed out that I failed to mention why the Edmunds forecasts were wrong. They based them on nonpromoted vehicles which are luxury and large suv sales. These move very differently than the total auto market so they ended up with a forecast that NADA said was wrong.

I did not actually make a forecast, just pointed out a more accurate basis in retail sales ex-auto. I'll fix this with another post that compares the different cost estimates, Edmunds, NADA, and CEA.

All forecasts are bad, some are just worse than others.


On Nov 05 07:54 AM jfb wrote:

> I think your forecast is less accurate than Edmunds.com's. You failed
> to lay sufficient background work supporting your theory of auto
> and retail sales following the same long term pattern. Edmunds.com's
> forecast is more believeable since there is recent historical evidence
> that a short term promotion doesn't do much more than pull-ahead
> sales from future months. Future month's sales are thereby negatively
> impacted by those that were pulled ahead. Just ask any marketing
> person from Ford, GM or Chrysler how this works. A suggestion to
> you is that you shouldn't spout off about subjects you know little
> about.

Were Fannie and Freddie the Real Enablers of the Housing Bubble?

Bruce,
Look at the break point in 2004 when F/F suddenly went from 70% of mortgages to less than 50%. The non-agency securitization was all the junk that could not qualify for F/F and it added maybe 20 or 30% to market demand - turning what was a normal bubble into a super bubble.

F/F helped make a normal bubble that would not have collapsed the system. Non-agency securitization turned it into a super bubble spread throughout the economic system.

Regulation of non-agency securitization would have stopped the super bubble. F/F were improperly managed (managed like for profits rather than gov. agencies) which caused the original bubble.


On Oct 28 08:14 AM Bruce Krasting wrote:

> I am not sure how you can reach your conclusion looking at this graph.
> In 08 F/F were 70% of the total market. Today they have slacked off
> a bit but Ginnie may has grown tremendously.
>
> So far in 2009 the D.C. lenders have 90% of the new mortgage market.
>
>
> Without F/F the insane things that happened in 2005 - 2008 would
> never have happened. The D.C. lenders are responsible for the mortgage
> mess.

Housing Litmus Tests: Good News, Bad News, and a Black Swan

According to NAR foreclosures through sheriff's sales and similar forced auctions are not included. From the NAR website:

Does Existing Home Sales data track foreclosures?

A: Our existing home sales data includes some foreclosures but not all. A property must be listed with a Multiple Listing Service (MLS) by Realtors® to be included in our inventory, and sold through an MLS to be included in our sales figures. When a foreclosure sale is not successful, the numbers of sales do not increase and it will get counted in our inventory figure.


On Oct 25 10:20 AM Dave Wrixon wrote:

> Don't existing sales include foreclosures and aren't these on the
> rise?

The Muddle Through Economy, R.I.P.?

Hmm? Where does this multiplier nonsense come from?

"By the way, that research about multiplier effects has also been done by Christina Romer, the chairman of the current President's Council of Economic Advisors, and further explored by European economists. There is general agreement on these facts."

Could you post exactly where Romer said the multiplier was effect was zero (or 1, which is what I think you meant)?
In a simple Google search, it is easy to see there is no agreement on multiplier effects. In fact, Romer specifically believes that the multiplier effect on tax cuts and spending is the same and variable dependent on the current situation. They both lead to deficits so why would they be different? (gold star if you can answer this without asking a Keynesian or behavioral economist. Hint: How do consumers behave?)

Barro's research on multipliers has no validity because he either excluded all the periods that had a positive multiplier or average long periods to hide it. Don't ask me why, he must know what he is doing as he is a Harvard Prof and is widely criticized by the academic community for this.

Romer's research shows that tax increases to eliminate an inherited deficit have a positive multiplier so the answer to the debt problem is to raise taxes once the economy is approaching full employment (not before so this means that banks need to be cleaned up before raising taxes. Raising taxes without fixing the banks is another Japan mistake.)

Agreement: You're right that there is probably going to be a double dip recession but it is purely a result of bank balance sheets not being cleaned of toxic wastes so they can lend. We might avoid a "W" if the banks go bust fast enough but this is unlikely. Citibank's problems do give some hope of this.

5 Reasons Why This Market Still Has Upside Potential

bartpr:

Mid term I'm negative on the market and short term negative on NASDAQ banks (big banks are too hard to call short term.) I just don't want to be in the way of this market during earnings seasons as the momentum upside is too high. I'm prepared to jump in very negative in a leverage way as soon as it breaks down but I don't think that will be today despite the early morning collapse.


On Oct 16 08:04 AM bartpr wrote:

> you are forgeting that the consumer is about to take another bath
> on home ownership values. interest option arm will reset in 2010
> and 11, and it wil be ugly. more forclosures mean more retrenchment
> by comsumers. so far these sub sub primes have not been in the equation.
> any estimates of earnings on indexes is a crap shoot.

Updated Campbell-Shiller Regressions

Brad,

I'm pretty sure that if you did a forward look assuming that the S&P estimates were accurate (a big assumption) for the next year this chart would show a much more negative picture. If the S&P500 does not go up at all the PE calculated by the Shiller method will expand to 19.49 from today's 18.77 because of the drop in 10 year average earnings.
During most of the period in these charts PE's were expanding which is going to add a positive bias to the data. Going forward the charts will add more periods of declining PE so the negative return points (below the 0 line) in the 10 year charts will increase and average returns will decline. Eventually, the 20 year chart will show some negative points too.
In addition, the points below the 0 represent annual negatives. Over 10 years, a 5% decline means you lose 46% of your investment.
I don't think that comparing a risk free 3.34% to one with a potential negative return this large is appropriate. The fact that declines on the average return shown in this analysis are "baked in the cake" makes this even more inappropriate.
This does show that buy and hold is a poor strategy right now but buying on dips is probably going to be very profitable.

Don't Let a Journalist Evaluate Cash for Clunkers

Robert,

You are correct, I should have titled the article "Don't let an Editor evaluate Cash for Clunkers.

My apologies to thoughtful and detailed journalists.

However, I don't expand this apology to the Editors of the WSJ as this was clearly a poorly researched article that quoted an incomplete cost analysis and had poor trend analysis. Many current government actions have been poorly thought out and there are many fine analyses in the WSJ that point out these short comings. Unfortunately, this was not one.

One Eyed Guide

On Oct 06 09:55 AM RSchoenberger wrote:

> As a journalist who has written extensively about Cash for Clunkers,
> I would like to point out one major issue with this blog post.<br/>
>
> You refer to the WSJ report as it were a news article. It is an editorial
> on the Journal's opinion page. While the term journalist applies
> to both news and opinion writers, there are very distinct differences
> between the two jobs.

Don't Let a Journalist Evaluate Cash for Clunkers

MNCarGuy:

You're right that the length of time is too long at 13 years, but it would have more work than this article merited to estimate on how short the period should be or how much of the mileage increase is lost over time due to vehicle replacement. The Abrams et al article had it at 3 years with a cliff change but this seemed wrong to me. If the Gov. actually publishs the average age and mileage of the trade in populations a better estimate could be done.

On Oct 06 06:31 AM mncarguy wrote:

> There is a flaw in your argument. Certainly it could be argued that
> the life of the new vehicle is 13 years, but the savings assumes
> that if someone didn't buy a car under clunkers, they would keep
> driving the clunker for that lenght of time. That probably woldn't
> be the case as many of these vehicles were on their last legs and
> the owners would have purchased a new vehicle in the short term anyway.

Paolo Pellegrini and the Conviction to Benefit from Market Dislocation

Pellegrini is almost certainly right. The economic theories that predicted the crisis also predict inflation (but not how much) and a devaluation of the dollar to balance the trade deficit (but again, not how much or against all currencies.)
The question is when? Pellegrini makes his bets and waits. In the short term, the market almost always moves against him. You have to the courage of your convictions to play like Pellegrini.

Yet Another Finger of Instability

Great article.
There is two concepts of Minsky you did not mention that has investment implications and also says that current deficit spending may be OK.
The first is that "We can, so to speak, stabilize instability" in the economy just like we do in other naturally unstable systems, for example, by using retaining walls to stop sand avalanches.
Second is that ""the shape of the business cycle has changed; inflation has replaced the deep and wide trough of depressions." You believe that the inevitable inflation that follows today's massive deficit spending will be catastrophic.
Minsky theories do not assume that inflation is bad but are concerned with the lack of economic stabilizing mechanisms. Without new rules and regulations we will have a catastrophic outcome: it will not be from the deficit but rather from the continuation of market instability.
In any case, there will be an increase in inflation after we exist from the current liquidity trap which prudent investors should be aware of. If nothing is done to fix problems causing instability in the markets, this inflation could cause serious problems.. or it could be some other grain of sand...we just don't know which one will bring down a system that continues to be unstable.

Is Arthur Laffer Setting Up Another Debt Bomb?

I can't resist it: Clinton increased taxes before he cut taxes.

Taxes were cut in 1997 because too big a surplus was being generated, which, according to Keynes, could be predicted to slow growth and was the primary cause of the recession of March 2001.

The fact that capital gains were cut instead of the income tax is due to the incorrect application of Laffer Curve and caused the tech bubble to accelerate. Private debt probably would have been paid off if income taxes had been cut instead of the capital gains tax. The decrease in the capital gains forced more money into the tech bubble. However, it did result in increased tax revenue and budget surplus from the increased speculative churn. This "Laffer Curve" effect was a net drag on the economy if you understand even neoclassical economics.

Clinton did what he had to do to get anything through a Republican Congress. The fact that the economy went basically sideways (or down) after he left shows he was guiding things, not Republicans. In 8 years there should have been a strong recovery from the 2001 recession, instead we are in the Great Recession (or the Greater Depression for fans of Doug Casey.)

Welfare reform as done by Clinton was outline by him in the 1980's and is similar to Minsky's Keynesian based recommendations, not Republicans, who wanted to cut support for the poor, not reform welfare.

Finally, internet usage in the U.S. has gone up 130% since 2000 so Bush benefited the most from the productivity growth due to the internet.

Is Arthur Laffer Setting Up Another Debt Bomb?

After reading all the comments above, I think it is time to go thermonuclear:

Clinton managed to shrinking government, increase GDP, increase income, decrease the deficit in spite of raising taxes which should be impossible under Laffer, Monetary and Supply Side theories.

How do you deal with reality?

Is Arthur Laffer Setting Up Another Debt Bomb?

Zen Bucket Master Sr.

Please explain the debt bomb if not an aspect of a poorly taught Laffer Curve. In your explaination of the wisdom of the great Laffer and mighty Reagan, debt should not have taken off like a rocket but remain controlled. The great senior Bush (BA Economics Yale) looked at what Laffer and Reagan had wrought and called it "Voodoo Economics". Still looks that way to anybody who knows economics. (Note Bush I leveled out the debt rocket until his son came back and reinstituted Laffer economics.)

Awaiting enlightenment
Humble Student Bucket Jr.

On Sep 29 02:44 PM W.E. Heasley wrote:

> One Eyed (Bucket Junior):
>
> Apparently I have your attention. Apparently you are doing more research
> on the Laffer Curve (good!). However, even the many posters above
> pointing out the flaws in your argument leave you undaunted.
>
> Moreover, you apparently have seen your unwise ways of posting an
> article accusing Art Laffer of a Debt Bomb without proof. However,
> you've posted it for all the world to see and its on the web FOREVER!
>
>
> Lets go back over this subject one more time:
>
> (1) does the Laffer Curve display a trade off between tax rates and
> tax revenues? Yes.
>
> (2) along the curve there is an equilibrium that generates maximum
> tax revenue? Yes.
>
> (3) does exceeding equilibrium reduce taxes as the economic effect/economic
> behavior trumps the mathematics of ever increasing tax rates supposedly
> generating ever increasing tax revenue? Yes.
>
> Bucket Junior, in the 1970's and at other times the tax rate has
> exceeded equilibrium as described in the Laffer Curve.
>
> Moreover, when you exceed tax rate/tax revenue equilibrium then disposable
> income is out of equilibrium as well as taxes become disincentives
> to economic behavior.
>
> Hence the argument in the 1970's was that a movement back to equilibrium
> along the Laffer Curve would increase disposable income as well as
> increase tax revenue.
>
> Bucket Junior, did the major economic malaise, stag-flation, etc.
> of the 1970's end in the 1980's? Yes.
>
> Did the malaise, in part, end due to tax cuts? Yes.
>
> Bucket Junior, knowing you would be unhappy in the future, Ronald
> Reagan had a crystal ball and covered your future Keynesian needs
> by using Keynesian Deficit Spending as well. However, Reagan elected
> to use the super Shovel Ready conduit of Military Spending. The military
> always has 500 projects ready to go in a moments notice. Plus due
> to national security, most of the items had to be made by American
> contractors, producers, ect. which cleverly avoided the protectionism
> argument as the existing law stated the use American items due to
> National Security.
>
> Signed,
>
> Bucket Sr.

Is Arthur Laffer Setting Up Another Debt Bomb?

W. E. Heasley (AKA Bucket),

The issue with how Laffer taught the Laffer Curve is that a graduated Tax system should be charted in 3 dimensions rather than just one. The simplistic one dimensional analysis of taxes as shown in Laffers "The Laffer Curve: Past, Present, and Future" (www.heritage.org/Resea...) ignores any issue except overall tax rates. You can achieve the same overall tax rate with a much steeper graduated tax rate, get all the benefits and not lead to a debt bomb.

Note that Laffer even quotes Keynes as a proponent of the idea yet he ignores everything else Keynes cautioned about.

One Eyed Guide (AKA Bucket)


On Sep 29 12:15 AM W.E. Heasley wrote:

> No offense, but you trashed Laffer in the article with less than
> a very good Political-Economy argument. Absolutely no offense, but
> you need to go back and study Laffer more closely.

Is Arthur Laffer Setting Up Another Debt Bomb?

W.E. Heasley (does anyone call you Weasley?),

Thanks for the comments but I thought I said I agree with the Laffer Curve, just not the implementation? Was I not clear? My apologies.

Here it is clearer: Laffer had the right idea, he just did not teach people how to execute it right and it resulted in a debt bomb.

I'd also like to point out that there is no capital formation when capacity utilization is 68% like today so there can be no crowding out of private investment by government stimulus so there is no "leak in the bucket." As utilization increases due to stimulus and the economy approaches full employment things change and Keynesians believe that Government spending should be stepped down so that it does not crowd out private investment. As politicians have a hard time cutting back, when the economy is at full employment taxes should be raised if there is still an inherited deficit and research (by C. Romer, look it up) shows that this will have a positive multiplier effect on growth, possibly because of lower interest rates as the government is not competing for money and causing inflation.

I've got my bucket on and it looks good. Have you got yours on?

The Patch Man (Call me anything you want, just don't call me late for dinner) One Eyed Guide

On Sep 28 09:37 PM W.E. Heasley wrote:

> Patch Man, Laffer was trying to point out there is a “Equilibrium”
> along the Laffer Curve where a certain tax rate raises maximum government
> revenue. To go beyond equilibrium creates lower taxes as the “economic
> effect” trumps the “mathematical effect”. Further, Laffer will tell
> you he did not come up with the idea. It goes back to a 14th Century
> North African polymath Khaldun.
>
> Before you write another article outlining your view of Political-Economy
> regarding Art Laffer and The Laffer Curve, or basically any other
> Political-Economy subject, it might be a good guideline to get your
> facts straight.
>

> ... the increased Government Expenditures
> that attempts to fill the bucket is really draining the bucket simultaneously.
> Its counterintuitive. As the government increases spending, Private
> Capital Formation leaks out of the bucket. Hence you try and try
> to fill the bucket but it remains below the brim.
>
> Once you stop filling the bucket with Government Deficit Spending,
> you now must pay for the Deficit Spending. Hence Keynesians raise
> taxes. The taxes then create another leak in the bucket. Hence the
> bucket goes right back to the level that you began with before you
> started this wasted exercise.
>
> Patch Man, you should wear the bucket over your head.