Asymmetrical Information

Don't forget the stock market. That bubble hasn't burst yet either.

Only 3.1%? Horrors. Sounds awful. I wonder what it was in, say, the first quarter of Clinton's second term? Oh. 3.1%. Sounds like the economy in 1997 was heading for a rough patch...

Meanwhile, the bursting of the "housing bubble" is a myth:

Consumers Are Wary, but Housing Remains Hot
By EDMUND L. ANDREWS
Published: April 27, 2005
WASHINGTON, April 26 - Consumer confidence fell in April, but the nation's housing market seems hotter than ever.

Confounding most forecasters, who had expected home sales to decline last month, the government reported on Tuesday that sales of new homes rose sharply by 12.2 percent in March and hit a record annual pace of 1.43 million.

http://www.nytimes.com/2005/04/27/business/27econ.html?

The housing market is a bubble in certain parts of the country. That you and everyone else and his mother think they have strong vested interests in this not being true doesn't make it so.

I can just see it now. The world is sitting around the kitchen table, Dad says, well, let's stop investing in America. Let's buy, ohhhhhh... Russian bearer bonds instead, or we could just put our money in the mattress. That makes sense.

Harold,

Exactly. Its a sweet deal we've got going. US Debt is getting rather shaky, but no one can risk making a move because doing so would send the world economy into a depression. No one can hurt us without hurting themselves. So everyone just keeps playing the game with fingers crossed and hopes for the best.

3.1% growth isn't exactly anemic or cause for panic. And one quarter doesn't mark a trend. My understanding is that 3-3.5% is the U.S. long run average. It is possible that Greenspan has already gone too tight.

The housing bubble is pretty clearly a localized phenomenon rather than national. There is mounting empirical evidence that much of the run up in home prices has been fueled largely by regulatory and demographic factors rather than the still important financial factors.

Foreign governments are facing increasing pressure to slow their purchases of US government debt because it is becoming increasingly expensive for them to prevent domestic inflation. However this is different than some sort of mass exodus out of dollar denominated debt. It would be suicidal for any country with significant US Treasury holdings to unload in a big way. Furthermore the U.S. is where some, if not most, of the best risk adjusted returns are.

However, it would be nice if western Europe and Japan would get their regulatory and fiscal policy houses in order so that they could grow again too. It would also be nice to get CAFTA going.

Sausagegut - you are correct that there won't be any mass exodus from US treasury holdings. Rather, foreign governments will diversify by putting their future purchases in euro or yen or emerging market securities. It won't be an overnight catastrophe but it will raise the Treasuries borrowing costs and interest rates and will further slow the economy and likely prick the housing bubble.

Al - the Nasdaq continued to climb in first quarter of '00 as well. Perhaps the 'hotter than ever' housing market in March of '05 is just further inflating the housing bubble.

Confounding most forecasters, who had expected home sales to decline last month,

{1} If you pay attention to the news every day you will usually hear a statement something like this --"The earnings report of blada blada enterprises did not (or did) exceed the experts [forecasters] expectations [consensus].

Very rarely do you hear that the so called experts [forecasters] were actually correct in their reading of the entrails.

This being the case why do the markets react to erroneous 'expert' statements the way they do?

I would have thought that after years of ' the experts' missing virtually every call, that investors would ignore the advice of 'experts' or at the very least take the contrarian view.

But then again most investors think of themselves as experts or place their faith in the hands of an expert (their broker) who probably makes his reccomendations based on prognostications of the previously highlighted experts in paragraph {1} above.

Just another factoid showing the empty suits in the "expert" business.

Oh, by the way, the REPUDIATION CONTINUES.

thedaddy

Wallster,

That is certainly a possibility. But the third effect of a diversification out of dollar denominated debt would be a weaker dollar which would tend to increase the attractiveness of goods and services produced in the US. This would boost GDP. Would it be enough to make up for slower housing construction and reduced consumer spending? I don't know. However, the economy remains structurally sound relative to other developed economies: low tax rates, flexible labor markets, mostly free trade, and relatively lax regulatory environment. These characteristics are likely to ward off any serious problems from foreign reallocations.

Additionally aren't higher long term rates often, though certainly not always, a sign of economic growth. That is, increased demand for capital for investment in productive activities.

Sausage -

Increased rates can be a sign of increased economic growth, but economic growth is only one of the variables that determine interest rates. An increased demand for capital due to a growing economy will increase interest rates, however a decreased supply of capital (which is what a foreign diversification out of treasury securities would be) would also result in increased interest rates. These mutually exclusive variables - a decrease in supply would increase rates independently of what was going on in the general economy. You can have a recession and interest rate increases at the same time.

wallster: "Rather, foreign governments will diversify by putting their future purchases in euro or yen or emerging market securities."

I'll demonstrate my ignorance (again). Suppose the countries that are now buying US Treasuries decide that they have all they need, so for the next year they're going to purchase other governments' securities. They bought something like $250B in Treasuries in 2004, right? Will the rest of the world simply decide to issue that much additional debt over the next 12 months? Given a sudden surge in demand, at what interest rates? Does loaning money cheaply to Argentina make sense? If whoever is interested in buying massive amounts of, say, Euro-denominated bonds has dollars, will the Europeans accept them for the bonds?

My perception is that if those countries who currently buy Treasuries decided they wanted to buy someone else's debt instead, they need to find someone who is willing to behave as badly as the US is (in terms of creating public debt).

Feel free to point out how little I understand :^)

Right the europeans and the chinese will take their excess dollars and buy euro bonds instead...yes that will make all the difference in the world when the euros ,take the dollars and then buy the bonds ..

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