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The "Greenspan Channel"
Tuesday, August 14, 2007
The chart below is a follow-up to yesterday's critique of the NY Times "Chicken Little" article that dismissed the impact of recent mortgage woes on the broader economy.
After looking at a 20-year chart of real estate assets plotted alongside stocks and mutual funds, the future value of residential housing is clearly a potential problem given the almost universal characterization of the U.S. housing market as a bubble in the process of either deflating or bursting.
Real estate clearly "picked up the slack" after the stock market crash in 2000, but the important question is whether it will suffer a similar fate - this is the "giant thing hiding in the closet" (see yesterday's post).
Something interesting developed as the chart above came to life - observe the pair of dashed lines heading skyward.
For lack of a better term, let's call it the "Greenspan Channel".
After taking over in 1987, it took the new Fed Chairman a few years to get the ball rolling, but once he did, assets started inflating rapidly - first stocks, then housing.
What's next?
6 comments:
so why can't stocks and real esate keep going up forever? we can keep printing money forever, can't we?
Tim, I'd be interested in how the money supply tracked this pair...
That's not "ownership" that's open interest. The stocks are not leveraged to any great extent. The real estate line represents majority leverage positions.
Good point - there's about $9.8 trillion in mortgage debt to go along with the almost $23 trillion in real estate assets and virtually no corresponding debt for stocks.
nice chart, but the graph would be more accurate if you put a LN on it.
COME ON WAKE UP, LOOKING FORWARD, THE GAME HAS CHANGED. Tighter lending standards will get tighter, interest rates levels will make little difference. Falling valuations will doom the residential market, expect falling prices for 3 to 5 years. I refer you to UK housing market in 1991 to 1996, median house price fell 25%. BUT debt fueled over valuations in this cycle are MUCH worse. SO SELL stocks and houses NOW !!
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