Manny Mondays: Are We Continuing to Ignore the Elephant or "Sickness" at Our Peril?

Morning all! With Mr. Market now on a 6-week skid, the continued economic recovery teetering, and geopolitical stability looking less certain by the day (no, hour), these are certainly interesting times. While pondering what, outside of the prospects of more Fed QE or quasi-QE, could possibly goose the markets much higher beyond the previous top at least in the short term, I came across this article by Robert Shiller that, for me, sums up why it's going to be a long slog for the recovery (and likely now the markets) over the next few years. It also highlights just how irrational human beings can be, despite economists' claims that we are "rational actors", and thereby markets are "efficient".

The Sickness Beneath the Slump

For me, these were the key excerpts:

Professor Case and I have conducted annual spring surveys of home-buyer attitudes for many years. We ask about long-term expectations: “On average over the next 10 years how much do you expect the value of your property to change each year?”

The survey we conducted in spring 2005, near the end of the bubble, included 407 home buyers. In it, the median expectation for home price appreciation over the next decade — until 2015 — was 7 percent a year. That is substantially less than the 10 percent a year that Americans had recently experienced.

But expected increases of 7 percent a year still implied another doubling of home prices by 2015. And about a quarter of our respondents in 2005 anticipated increases of at least 15 percent a year for the next decade. Something was very wrong with this picture, but few noticed it.

As it turned out, of course, those expected increases didn’t happen. Instead, home prices tumbled 34 percent nationally from the peak in the first quarter of 2006 to the first quarter of 2011 — or 40 percent in real terms — and they still appear to be falling. The brief “recovery” in home prices of 2009 and 2010 was most likely spurred by federal housing stimulus measures like the home buyer tax credit. After that stimulus ended, prices resumed their downward trend.

This is why in my mind this recovery will end up being shorter and more shallow than the prior two, despite all of the Fed's best attempts at monetary stimulus. New household formation, more than anything, is a big driver of the economy, so with housing in the tank, it's hard to see how this recovery can keep feeding itself for very much longer before we see another dip, and possibly a significant one.

This article makes me wonder if this time we've merely swapped out, yet again, once bubble for another, namely housing for equities and commodities. In the '90s we had an equity bubble of epic proportions, followed by a crash, shallow recession, followed by a shallow recovery, then followed by the biggest credit and housing bubble of all time, and subsequent crash, deep recession, and even more shallow recovery. Back and forth we go, yo-yo between asset bubbles, while the real economic "recoveries" get weaker and weaker (with the top getting richer and richer). Go read the whole article this morning. Housing remains the elephant in the room with regards to the viability of the economic recovery. Eventually the markets will reflect that reality as well.