As a follow up to my previous post on housing supply, read Christopher Matthews latest Time Magazine Article: What Ever Happened to the Big, Bad “Shadow Inventory” of Homes?
Dash your expectations for a go-go housing expansion like last decade, but expect a steady recovery in US home prices and a modest GDP tailwind from residential construction. Here’s why:
Simply, the economy has worked through excess inventory created by the last downturn, and housing supply hasn’t seen these low levels basically since they started recording this sort of thing. This creates significant pressure to expand supply, and that’s been seen—in spades—in recent homebuilder sentiment indexes.
For those interested in forecasting (particularly for political outcomes) as a field of study, Philip Tetlock is a name you should know. Here’s an insightful interview: http://edge.org/conversation/win-at-forecasting. A few of my favorite quotes:
“I naively thought that pundits were in the business of accurately making forecasts” but really they are “flattering the prejudices of their base audience” and routinely “insulate themselves on vague verbiage…cushion themselves with rhetoric”.
Check out Guy Sorman’s latest article in City Journal: A Brief History of American Prosperity.
It will both soothe those fearing the demise of the US economy and inform of the dynamic American economic past.
As said on this blog way back in April: I’m Adopting “Grey Pigeons”
Why? Because the concept of black swans is one of the most overwrought notions in recent financial memory. Now the Economist is getting in the act:
Gray Swans: Why Frugal Firms Keep Piling Up Cash – The Economist
Mind you, they’re seeing gray for slightly different reasons, but the logic remains: black swans are black swans for their rarity. For the market to have all sorts of little shocks, ebbs, flows, and unexpected events is status quo.
Why be optimistic a deal can be struck on the fiscal cliff? Because there are weak links in the Congressional strongholds. Not only has the GOP shown some willingness to negotiate, but there are also a handful of Democratic senators up for re-election in two years, hailing from largely traditional GOP red zones, who will want to keep their jobs. Look for at least a few of them to show “temperance” and move to the middle on the Fiscal Cliff.
Red-State Senate Democrats May Be Hard to Corral on Cliff– Bloomberg Businessweek
If you’ve never read Leonard E. Read’s I, Pencil, it’s always a good time. A wonderful summation of free market principles, it’s also a document Milton Friedman referred to often. Here’s a parting lesson, straight from the pencil himself:
“The lesson I have to teach is this: Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles the best it can. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.”
By now, folks have gleaned the Sandy storm won’t have as much economic impact as feared. On the Monday of the storm I saw figures speculating upward of $75 billion in damages. By Wednesday’s end it was knocked down to ~$15 billion, depending who you ask. But it’s clear widespread consensus overestimated by multiples.
Acts of God are often a case study in bad economics. Though, it’s probably not the calculations so much as the psychology of the matter: it’s far better in most folks’ minds to overestimate than underestimate. If you worry too much, no one will blame you. But if you worry too little, fingers will wag in your direction. (In my view, most economists could use a crash course in Bastiat and Broken Window Fallacies before publishing their guesstimates, too.)
Natural disasters have rarely or ever had lasting deleterious effects on capital markets. It’s quite a statement about the durability and plasticity of global capital markets that the NYSE along with US markets generally can be closed for two days and one could barely tell come Wednesday’s trading action. And yet people worry over and over about this stuff.
Lately, there’s been a torrent of popular press refuting the notion that small business “drives” the US economy. This is sheer nonsense.
The only way to get a big company is for a small one to get big. Huge companies don’t just materialize out of thin air. (Occasionally there are spin-offs, but these are comparatively rare.) Of course big companies have more profits and do more hiring—they’re, well, a lot bigger. But no company starts out huge; they start small. You have to have lots and lots and lots of small companies come and go, with access to capital, hiring and firing, to get just one Facebook or Microsoft or FedEx, or Caterpillar, and so on.
The reason this is so important is because we need constant renewal of our big companies, they aren’t at all static in place or size—take a look at what was in the Fortune 500 just 20 years ago versus today…vastly different! Small companies become big companies and big companies falter or shrink (hello, Kodak?), and those are the things that drive growth, innovation, productivity, and jobs. Not a stagnant pool of big companies that expand and contract like an accordion with growth/recession.
Nurturing the real job creators – John Bunzel
Fisher Investments (the firm I work for), along with MarketMinder, has posted several good resources on the upcoming US elections and the stock market: