Nouriel Roubini: Desperately seeking an exit strategy

Expert’s Podium: David Rosenberg on the aftermath of a bubble bust

Interestingly, David Rosenberg was one of the first economists to warn of a housing bust in the United States and the ensuing financial market and consumer spending collapse. He recently left his post as Bank of America Corp.’s chief North American economist to join Gluskin Sheff & Associates, the Toronto-based wealth-management firm. I’m posting a link to a daily newsletter they put out- I hope it works. What I find most interesting in today’s issue is what he has to say about Canadian housing (page 4):

Canadian Existing Home Sales: What Housing Collapse?

He has been and still is bearish on the US economy and housing market, but his thoughts about the Canadian market indicate a fair amount of current price support nationally.

or ….we’ll rebound stronger than people are expecting, that’s what i’m hoping for. i think common knowledge a few months back is we were doomed…

“It’s a little eerie how many are people are calling for a correction now and yet it keeps rising. I’m starting to think I need to discount whatever is now common knowledge about the future as the least likely outcome.” It is indeed eerie, and I think you make a very interesting point with your last statement.

“Using the term [depression] also makes a prediction about the future, assumes things are going to get a lot worse over the next two years, and I’m not so sure about that.” If we take your thoughts concerning the future (above), if it’s common knowledge that we’re starting to see signs of a recovery, and expectations are that we’ll see a quick rebound in world economies, might it be possible that the recovery may not materialize as many anticipate – and that we may even slip into a second recession?

I read an interesting article today that examined the US debt per household, which is currently around $200,000. When you take into consideration social security, health care, etc. this number is actually around $1,000,000 per US household. I think obligations in Canada are around $100,000 per household (just to put things into perspective). So bankrupt? Definitely. They’re just prolonging the inevitable.

I of course disagree. The country’s debt to GDP ratio still isn’t as bad as many developed nations in Europe, and is better than Japan’s I believe. It’s not bankrupt at all and so far they’ve had no problem at all selling their debt. Also, to date, as far as I know, unemployment is no worse than during the early eighties. I also don’t believe the kind of deflation that economists worry about, the kind that hit Japan, has taken root there at all. Sure, some energy related stuff, but consumer prices and wages aren’t locked in a downward trend. And now everything is improving, consumer sentiment, manufacturing indexes, etc. This is a harsh recession down there for sure. But in the end, it will look far more like the early 80s, than the 1930s. That’s what I think anyway. I mean, just looking at unemployment, until we get an offical rate of 17 percent and an ‘real unemployment rate’ of 30 percent, comparing what’s going on now to the depression (cause there is no definition of a depression, only the ‘depression’ of the thirties as our benchmark for the term) involves quite a leap from where we are today. I mean a huge leap. Using the term also makes a prediction about the future, assumes things are going to get a lot worse over the next two years, and I’m not so sure about that.

In March and April I sold a few of the houses that were very cheaply acquired in December, but other than that, no, doesn’ t make sense to sell them. When a mortgage payment on a three bedroom house is locked in at 500 a month and rent for such a house is minimum 1000 these days, it would take quite a drop in rental rates to make that unprofitable on even a monthly cash-flow basis, not to mention the equity paydown. It is a little strange, because if you keep your eye out, you really can buy a decent three bedroom character house on not a bad block for 120 thousand. And they seem to rent easily for over 1000 a month, somtimes 1200 or 1300. You can also buy houses, not as nice, on not as nice blocks, for as little as 60 or 70 thousand, and they rent easily for 800 or 900. It’s odd there aren’t more investors doing it here, or more renters buying them. It is changing, and there is far more home ownership in these areas, but there seems to be quite a disconnect between rents and home prices. But even if rents drop 30 percent, they aren’t bad investments.

As for the stock market, I’m thinning a bit now after this run, though how much I haven’t quite decided. It’s a little eerie how many are people are calling for a correction now and yet it keeps rising. I’m starting to think I need to discount whatever is now common knowledge about the future as the least likely outcome.

In Canada I think we’ve managed to successfully inflate our way out of this through increased consumer spending (much of which has come in the form of guaranteed mortgages), but I can’t help but think that these massive deficits and personal financial obligations won’t come back to haunt us sooner as opposed to later in the forms of a stagnant economy and prolonged recession. What impact increased taxes and higher interest rates might have under these economic conditions is open to speculation, but I suspect it would be less than ideal.

I’ve put forward (or endorsed) the theory that housing has already seen hyperinflation, so while we may seen general cost of living increases, I don’t think this will necessarily apply to housing (which I personally feel is still overpriced, unaffordable and precariously perched for another correction). I still feel that Fall and Winter (and possibly very early Spring 2010) will present some ideal buying opportunities for the savvy homebuyer, but I do believe this has been the last housing rally we’ll see in the foreseeable future.

Already there is considerable talk and speculation with respect to interest rates. Not whether they’ll occur, but by how much, and most feel the BoC will be looking at anywhere from 50-100 points (minimum) as an increase during the next 8-10 reviews. I think there will be some clear indications if banks begin adjusting 5/10-year rates upwards prior to any BoC announcement.

As for the stock market, I (like many others) were surprised this rally has continued for as long as it has in the absence of any real ‘recovery’ (the fleet of container ships anchored off the coast of Singapore would seem to reinforce this fact). The ratio of sellers to buyers and the number of insiders exercising options and selling en masse point to a market correction before the end of the year. That being said, I didn’t exit the market entirely, and I made some new investments – but I didn’t completely hedge my bets on equities, either. I feel I did ok with the investments I did make, but I’ve recently divested myself of the majority of my stocks in anticipation of an impending correction. It’s entirely possible there will be another sharp correction, an opportunity for buying, and another rally again in Spring (not unlike the series of corrections and rallies that occurred during the Great Depression).

Next year I think it’s very possible that we’ll finally see the materialization of a gold rally, and I think this offers some interesting possibilities (I don’t think we’re quite there yet, though).

And you – did you use this opportunity to divest yourself of any of your real estate holdings?

I think your posts of the past several months speak for themselves don’t they? I hope they do. I mean you’ve been leaning on the depression, deflation, peak credit, stock market due for another leg down, etc….quite a bit. I’d be pretty surprised if you had actually been using your spare cash to buy stocks in the past six months. But am I wrong? Have you been wading into equities?

The truth is that no single week of sales should be viewed as statistically significant whether the total number of sales is 50, 75, 100, or 125 and the weekly average selling price is certainly the least reliable. Some weeks you have a higher percentage of sales in area one, and the next week that higher percentage may be in less expensive area four. An unusually large number of luxury sales can skew the averages as well. In fact, think about what the $1.1 million sale did to the overall average this week. If that sale had been a $300,000 property the average selling price for the week would have been about $14,000 lower. This is why that particular measure moves up and down so wildly.

The longer-term averages are the more significant price numbers, and in my opinion, they get more significant when placed on the graph with a number of other weeks. Notice how they move far less erratically? One has six-weeks worth of sales and the other includes four-weeks. Those are the numbers that provide a bit of insight into what’s happening with prices.

Thanks for reading Carla.

i wanted to ask a question re stats: week to week comparisons on average or mean #’s are easy to understand and comparable: apples to apples. that being said i wondered about the shorter weeks like this one and wondered if we’re doing apples to oranges??

here’s my concern: week A 130 sales of units over 5 business days
week B 120 sales of units over 4 business days
both are weekly totals but i wonder if for comparison purposes week B needs to be presented with a “pro-rated” amount. so, using this example week A has 26 units sold per business day and week B has 30 units sold per business day giving week B a new “pro-rated” value of 30X5=150 units. i realise that there are not an extra 30 units actually happening, but to compare apples and apples is this not, statistically speaking a more accurate method?

the whole reason i bring this up is that someone looking at week A and B statistics, may conclude that we’re having a reduction in the trend of unit sales in week B compared to week A, where in actuality we’re having a slight increase in the trend better reflected?? by the new “pro-rated” number.

thought i’d throw out this as food for thought. thanks again very much for this resource site; it is truly a superior product,

carla