Wikinvest Wire

The fuss over froth revisited

Wednesday, June 11, 2008

Exactly one week ago, I had the pleasure of sitting on a panel to talk about financial blogs along with Jon Lansner of the Orange County Register and Mark Lacter of LA Biz Observed at the Reuters AdvicePoint Investment Conference in Long Beach.

It was a fun time - one of the quickest hours I can recall with lots of questions from the audience and some interesting give-and-take between the three of us and moderator Ray Fazzi.

The first question was the funniest - a white-haired gentleman in the back of the room asked, "How do you make money on blogs?"

None of us could really answer that question.

Since my badge looked something like what you see below, the subject of the retired Fed chairman and his legacy came up with almost everyone I spoke to at the conference as well as a number of times during the panel discussion.
So, it was not much of a surprise later in the day when Jon forwarded a link to his mid-2005 column on the subject of Alan Greenspan's "froth" characterization of the then-booming housing market.

It's worth having another look at three years later. It begins...

What in the world is Federal Reserve boss Alan Greenspan thinking when he says there's "froth" in some of the nation's hottest housing markets?

Understanding the word's meaning is critical in this town, where many folks wonder if the wealth created by soaring home prices is a permanent addition to their checkbooks.
Well, the wondering is over. We all know the answer to that question now - housing wealth is about as permanent as stock market wealth.

After going on to talk about beer heads and baristas, a pricey gourmet coffee analogy concludes the piece:
Greenspan says he's cool with a national economy dotted with dicey regional housing markets that have been heavily financed with exotic, untested loan products.

That logic works for me only if housing is undergoing a froth-like metamorphosis, where changing tastes make folks comfortable spending far more money than previous generations on old favorites.
The Starbucks analogy is a good one.

It's more than just a coincidence that the Starbucks (Nasdaq:SBUX) share price peaked at about the same time that home prices peaked back in 2006.

I can't tell you how many $4 Starbucks cups I used to see when I slogged away as a software engineer in Southern California a few years ago. Stopping on the way to work for a latte when you could brew a cup at home for about 10 cents never made any sense to me.
(Note: Starbucks stock would make a fine addition to the S&P Case-Shiller Home Price Index chart series - see government inflation, job creation, revolving credit, and Countrywide stock.)

In a "froth update" earlier this week, Jon looked back at when the mid-2005 "tiny bubbles" characterization was formalized in a Federal Reserve speech and suggested readers weigh in on the matter.

Not surprisingly, the retired Fed chairman fared rather poorly.

Full disclosure: No position in SBUX at time of writing.

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