Asymmetrical Information

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Is nothing sacred?

As a vacuum worshipper, I'd say yes.

Here in California things are looking distinctly bubbly. Again.

I think all it takes is a new infusion of young buyers who too young to have been paying attention to what happened last time.

If "Extraordinary Popular Delusions and the Madness of Crowds" were madatory reading before anyone was allowed to participate in certain kinds of transactions pehpas the cycles could be broken. Not that such a rule will ever be be put in place. I'm willing to bet I'' live to see another idiot stock bubble as bad or worse than the most recent.

I've slso written about housing vs. equity prices...
http://overspill.blogspot.com/2003_02_01_overspill_archive.html#89719304

Jeez, Luca, perhaps our good friends at classmates.com could hire you to pepper blogs with some links to their site. Drink Coke. Fly the friendly skies. I can't believe I read your whole comment (said with a grimace and a clutch of the gut).

Well, if you're saying that housing prices aren't likely to decrease by 70%, you're on pretty safe ground!

I'm not sure that's too much cause for comfort though....

I don't necessarily disagree with the original post or any comments, but no one has mentioned the issue of leverage in comparing the stock and housing markets. In good times leverage enables prices to be bid up more rapidly. In bad times, levered assets can be liquidated to pay the debt-holders, which causes values to drop faster.

It is quite likely that different levels of leverage exist/have existed in the two markets. I don't have the stats or the tie to track them down, but anyone who does would be able to add tremendously to the discussion.

I suspect that a generational phenomenon of some sort of boom/bust is normal in the stock market. They just keep happening. On the whole it's not really unhealthy, but yes, people need to be wiser about these things.

What' s weird is those who start lashing out, blaming politicians and everyone but their own shortsightedness.

Not that I was immune. But I was nowhere near as foolish as some. I know one man who retired at the age of 48 and kept all of his money in stocks, and hardly a dime in bonds, blue chips, money markets, or CDs. Now he's mad at Dubya and Cheney for ruining his early retirement.

What fools these mortals be.

It is interesting to note that if an investor had allocated 100% in zero coupons at the bond/equity trough in 1982, and had simply maintained that position in the subsequent 20 years, he would have significantly outperformed the investor who maintained a 100% position in the S&P 500. I wonder how many investors had the foresight to do so. Of course, at the bond market bottom, many people thought high inflation was a permenant feature of the American economy, which is why the bond market was bottoming out. Now, many people, perhaps some of the same people, think that the threat of deflation, or the absence of inflation, is a near permenant feature. I'll I know is that nothing is permenant, and that a lot of people will be suprised by what changes occur.

Nice "no made in France" graphic there. Seeing how the populace doesn't approve in, oh, pretty much every country on earth save the US and (maybe) the UK, you might just want to replace France's national flag with a globe.

Robert: I am not an economist, but leverage has a quite different effect in stocks and housing because of differences between margin and mortgage loans. Mortgage contracts do not allow the bank to call the loan (require immediate payoff or sale) If the value of a house slips below the value of the mortgage. Nor would the bank normally want to call the loan - they're usually better off if the homeowner keeps on making payments rather than sticking the bank with a repossessed house in a buyer's market and a deficiency judgement that's going to be very hard to collect. The danger there is that the value might keep on slipping until the homeowner gets out from under by bankruptcy, leaving the bank stuck with larger losses - but the housing market doesn't tend to stay down that long, and homeowners only take a loss on their house when they cannot find work locally...

On the other hand, when stocks drops, margin lenders are legally required to do whatever it takes to stay within the legal margins, or force an immediate sale. Even before those laws were written (after the 1929 crash), margin contracts did allow the lenders to call the loan whenever they got nervous. The effect of this is that too deep a dip in the stock market causes selling that drives it down even deeper. Stocks would be more volatile than houses even with no leverage at all, since savvy stock investors take their losses and move on, but leverage increases the volatility.

The legal margin limits are supposed to limit the effects of a deep dip in stocks. That is, with 50% or greater margins, you probably won't have banks going under too because of margin loans that couldn't be covered, or trying to raise cash by calling in loans on stocks that haven't crashed yet - but will when the owners are forced to sell to pay the loans. On the other hand, the margin regulations may cause more investors to leverage right up to the max (50%, IIRC) so that any drop at all will cause margin calls, while pre-1929 the lender could use their judgement as to how much margin could evaporate before calling.

I've got a problem with your timelines of analysis.

1982-1999 is almost definity a trough-to-peak analysis for stocks, and so would distort the perceived returns to stocks over that period.

Probably a timeline showing three- or five- year moving average of returns would be a better measure.

A better measure of what? If you are looking for an expected return then rolling returns do indeed help to eliminate endpoint bias in your analysis.

It would be difficult to define a bubble without picking a beginning and an end, and the cumulative performance of the assets in question during the period. Endpoint effects are sort of the whole point of a putative speculative bubble.

In North Dakota you can buy a livable house (at 30 below with a 20 mile wind)for $2000. Fixer-uppers are cheaper.

Sigh. The "Not" symbol has its bar running from the upper left to the lower right. (And it is supposed to be red.)

Here's facts from the trenches. I sell foreclosure listings for a nationwide concern. Four years ago when I was there we were contacted by 95% plus individuals trying to buy a home.

Get this: right now at least 25% of the calls are by investors. Now you can't buy most government foreclosures if you are an investor. So these people are working through beards who live in the homes tile the investment group is ready to unload. The high prices of homes right now is directly due to this crowd, which is the exact same crowd that drove the NASDAQ to insane heights. They are dodging the law. When they get burned, and they will get burned again, it could cause a depression. These horrible people will just "walk away" from a loser and stick the poor slob who is living in the home with a mortgage payment he can't make.

This going on right now. Nobody is doing anything to stop it.

Nice "no made in France" graphic there. Seeing how the populace doesn't approve in, oh, pretty much every country on earth save the US and (maybe) the UK, you might just want to replace France's national flag with a globe.

Jason, how much of your info are you getting from sources other than the mainstream media outlets of said countries? Are your assertions taken from national polling in those countries? From what I can gather "the populace" is:

(a) majority in-favor in the US, as you note;

(b) split 50/50, or perhaps 60/40 in favor, in the UK;

(c) split roughly in half in most of the other major Western and former Eastern Bloc countries, with the notable exceptions of France and Germany where the majority are against on probably a 75/35 or 80/20 basis;

(d) largely ambivalent in the Middle East on account of wanting neither a US-led war nor Saddam, and willing to accept the former as a fait accompli without significant protest if it permanantly eliminates the latter;

(e) I have no info on Russia or China apart from the official position --

-- although I do think that national-level boycotts of German and French products are bogus, since (1) this is a global economy, get used to it and (2) the primary injured parties are ultimately individual citizens, who may or may not agree with your own perspective on the matter.

re. the France thing:

1) I see it as truth in labeling. This blog contains no material from France.

2) While technically incorrect, as Steven notes,this is the picture making the rounds on trading floors. I don't have time to make a correct one myself. I'll gladly accept submissions.

Now, if you'll excuse me, I'm hoping to go "Freedom Kiss" with my wife.

Oh, I was just being snarky. But the public of Eastern Europe is pretty cranky about the war:

"Yet public opinion in eastern Europe is even more hostile to war than in the west.

A Gallup International poll of a few days ago found low support in the region for war, even if sanctioned by the UN - just 38% in Romania, 28% in Bulgaria and 20% in Estonia.

The figure for Russia was 23%.

And in Turkey, polls have consistently found an overwhelming majority to be against war on Iraq.
Yet the pro-Islamic government there says it will allow the US to use Nato bases in Turkey."

Pretty much the only countries where the public thinks its a good idea are the US, Australia, and the UK (but only there if it's UN-backed). Sure, the eastern european governments aren't following public opinion, but that's a pretty thin reed.....

Thanks. I've been trying to piece this thing together from a multitude of sources but hadn't come upon hard poll data yet.

Let that be a lesson to you. Now stay in ranks or I shall taunt you again!

Mindles Dreck wrote:

"A better measure of what? If you are looking for an expected return then rolling returns do indeed help to eliminate endpoint bias in your analysis."

Which was my point.

"It would be difficult to define a bubble without picking a beginning and an end, and the cumulative performance of the assets in question during the period. Endpoint effects are sort of the whole point of a putative speculative bubble."

So why choose an analysis/graphical method which exaggerates such effects? Wouldn't a finer interval in the time series be better? Choosing a 1982-1999 time interval makes me think that the data was parsed to specifically to fit a preconceived thesis.

If you took a different time interval, you'd get a different picture, and a different conclusion on the course of action. That's what I'm objecting to.

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