This is my personal blog. Travel, financial and political observations. Notes to myself and my friends. Content development for my monthly newsletter, Porter Stansberry's Investment Advisory (www.stansberryresearch.com).

Thursday, March 09, 2006


Paul Kasriel, the top economist at Northern Trust, and one of the very best data hounds out there now, wrote about the housing bubble in John Mauldin's latest ezine (http://www.investorsinsight.com/otb_va_print.aspx?EditionID=289).

You'll recall that my thesis is that while housing prices may not collapse, real estate sales volumes are likely to contract and the ability of consumers to "refi" and draw equity out of their homes is likely to end -- which would have a seriously negative effect on consumer spending. That's bad news for our economy, because consumer spending and the housing market are the main contributors currently to economic activity.

Kasriel points out that the last time there was a correction in home prices, consumer spending wasn't directly hit because back then people still thought paying off the mortgage was a good idea. Back then, people didn't use the equity in their homes as an ATM machine. Here are the relevant figures (from Kasriel): "in the third quarter of last year, households extracted equity at an annual rate of $633 billion, representing 7.0% of their after-tax income, from their houses. In 1989, home-equity extraction totaled only $82 billion, or 2.0% of after-tax income."

And here's a chart that shows equity extraction since about 1980...as you can see, most of the time it's near $0. But since 2000, it has soared.

When the economy crashed after the tech bubble in 2001/2002, most of the experienced investment writers I follow noted that equity valuations should have fallen to much lower levels and dividend yields should have reached new highs. In the past, extreme bear markets have always fallend extreme bull market and no bull market was longer or more extreme than the bull of '81-2000.

But the expected correction in stocks never came. We didn't see the Dow trading at 8 times earnings and yielding 6.5%. High quality tech stocks, like Amgen, for example, never even traded below 30 times earnings! Why not? Why didn't the economy contract more...why didn't assets become cheaper...

Mmmnn.... I wonder.


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