Technical definition of a mania

Here are some interesting quotes from View from the Top of the Grand Supercycle, by Robert Prechter (1996-2001), in an essay called "Calling Too Many Tops".

"A market is in a mania when it (1) ignores its historical range of valuation; (2) decelerates without reversing, then re-accelerates, continually; (3) surpasses long-standing resistance lines; (4) creates no reactions, only pauses; and (5) continues relentlessly in a direction fully anticipated by the majority, in a blowoff."

Does this definition apply to the housing market? We saw some dips in sales late in 2004, but the market generally picked up steam again in 2005. The lifestyles of some homeowners hang on the expectation of annual double-digit gains in the values of their homes, instead of a more plod-along gain of 2-4% annually, keeping pace with inflation. If there have been any pauses in the housing market, perhaps they were to digest the latest wiggle in interest rates, but these pauses have been quite brief. I don't think support and resistance lines apply to housing data, so I'll skip that characteristic.

In this essay Bob Prechter goes on to describe how commodity markets behave differently from stock markets, namely, that stock market manias are often driven by ebullience, and tend to deccelerate and produce some rounding in the top of its chart pattern, whereas commodity bull markets are driven by fear (of shortage, of inflation), and often end at extreme points. He argues that recent (late 90's stock markets) came to be driven partly by fear, the emotion that drives commodity markets. Fear of our financial future, which certainly doesn't look healthy in the US, with a huge deficit, pensions vaporizing, social security bankrupt, can cause people to feel desperate in the stock market.

Has the housing market become commoditized? Are people really buying homes to experience the joy of owning a home? Or are they buying a home because they desperately fear being priced out? Are we going to see a gradual decceleration more characteristic of an ebullient market, or are we going to see a sharp reversal more characteristic of a fear-driven market?

Major job cuts not a trend

In an article in the Boston Globe, Secretary of Labor Elaine Chao said this at the World Economic Forum in Davos, Switzerland:

Job creation is dynamic. When some companies terminate or decrease their payrolls it is not an indication nor a reflection of the general economic times but rather it is an indication of their own company specific challenges and problems.

Reminds me of Abby Joseph Cohen's statement in July of 2000 that "...credit-risk problems were company-specific..."

Uh oh - "Fundamentals are sound" alert!

The National Association of Realtors calls silly people like me who blog about economic and housing bubbles Chicken Littles. In the January 2006 Insights article by Kevin Thorpe and Wannasiri Chompoopet called Taking Inventory, the same reasoning errors are made that are made by virtually all economists and forecasters - they extrapolate the past trend, which nationally has been fine, up to now and say the future will be the same - maybe a little more moderate, perhaps, but fine. And in listing reasons why housing prices won't crash,

One of them is demand. Demand for homes is double what it was in 1986. Another reason: fundamentals. The U.S. economy is fundamentally sound – jobs are being created, interest rates are still low (and will remain under 7 percent, mortgage credit is readily available, and homeownership has proven itself as a viable investment alternative to stocks and bonds.

Like just about every other economist, the authors have not shown they have any tools at hand for anticipating trend changes. Soon-to-be retired Fed Chairman Alan Greenspan is on the record as saying that is impossible to know an asset price bubble has developed until it has burst. According to an April 2005 commentary by John M. Berry at Bloomberg.com, Burton G. Malkiel has said, "My very strong view is that one cannot identify a bubble or its size until after it has burst."

These guys don't ring bells at the top and alert you to changes. It's up to you to protect yourselves. We had lots of "fundamentals are sound"-bites back in 1999 and 2000, right through the Nasdaq crash, which didn't prevent massive losses.

Into the Fire?

I don't think we're all the way back yet in stocks, but I believe there's some good bargains out there...Real estate's been good, and I don't think you're going to see that bubble completely burst, but I think it's time to look at stocks again.

Former dot-com executive, quoted in an article by Michael J. Martinez of Associated Press, published January 14, 2006 in the Springfield News-Leader.

Pass the Rose Colored Glasses Please!

Remember back in the late '90s when all we heard was that there was never a bad time to buy stocks? That you ought to just buy and hold for the long term, that stocks wouldn't go down? That the worst that would happen was that stocks could stay flat for a while, but they wouldn't go down? That it was practically guaranteed you'd make at least 5% a year? Anybody who held cash was laughed at? We're almost starting to hear this again.

Realtors are close cousins of stockbrokers. Not only is there never a bad time to buy a house, but prices never go down. Maybe home prices will stay flat for a while, but they would never never decline, oh no, they'd never do that!?!

Why do people have such short memories and fall for this?

I think [affordability] is going to deteriorate further. I know we're going to get higher rates, and even though we're seeing slower price appreciation, prices aren't going to drop, at least in my view.

- Leslie Appleton-Young, Chief Economist CAR

Realtors only talk out loud about the minimal pain scenario. Do they really think this is going to happen? That everyone in the crowd will remain calm while passing around the stick of dynamite with the lit fuse? That the worst that could happen is that a few little sparks might fly off and you might get a few microscopic burns before you pass the dynamite to the next sucker? That people will calmly sell each other real estate, singing "Give Peace a Chance", serenely taking small losses over the next few years as prices gently decline? Everybody cheerfully but passively sharing the pain, teaching the world to sing? The realtor min pain scenario reminds me of the stockbrokers in 2000 who said that a stock market decline would be OK if it was "orderly".

Just what do these guys (and gals) smoke?!?!?

I don't know about you, oh reader of the Mania Musings, but I don't think people behave that way. I think people are capable of panicking in a big way and there is a well-documented history of bubbles bursting revealing the psychological nature of the crowd.

So when the hucksters admit there could be a problem, their #1 strategy is to tell you that nobody will get hurt.

The #2 strategy is to admit, well yes, there is a problem, and somebody may get hurt, but it won't be you. For example, Abby Joseph Cohen of Goldman-Sachs said in July 2000, that "...credit-risk problems were company-specific...", implying that such problems were not a system-wide problem so the chances of you being negatively affected financially by such a bad company was minimal. Fed Chairman Alan Greenspan resorted to similar verbal deception when he testified before Congress June 9, 2005 and said,

Although a "bubble" in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.

The herd is gullible to this tactic, because each buffalo in the herd has a case of NIMBY - not in my backyard. Congress is a problem, but my Congressman is OK, it's your Congressman who is the problem, voting for all those spending bills. Yeah, housing prices are stupid in Long Island, but they can't possibly be a problem here in Phoenix. You've got the problem, not me. I think there is a close resemblance between this psychological trait in the herd and the psychological traits exhibited by the herd in the classic short story The Lottery, by Shirley Jackson. As long as I am not Mrs. Hutchinson and nobody in my family drew the ticket, who gets stoned is not my problem.

I guess the answer to my earlier question, what do brokers and realtors smoke, is - that they may not necessarily be smoking anything, but they are geniuses at saying what people want to hear.

If you are reading this and have some insight into other verbal tactics used by those who want us to stay dumb, post your comments.

It's Different This Time

From a Reuter's article on Chicago Fed comments:

Moskow said the current flat U.S. Treasury yield curve does not suggest a recession is on the way, as many have claimed.

The two-year/10-year Treasury yield spread briefly inverted in late December, when short-term yields traded higher than those of longer-dated government debt.

That shift has often been linked to a pending economic slowdown. "I don't see this as forecasting any kind of recession," Moskow said, adding that stubbornly low long-term yields remain a puzzle with several possible explanations.

You can read the original speech at the Chicago Federal Reserve website.

Financial Planning in a Bubble

Remember back in July 1999 when a disgruntled speculator named Mark Barton shot up his brokerage, then went and turned his rage on his family?

No disgruntled worker can justifiably shoot up his former place of employment, and no disgruntled speculator can justifiably shoot up his brokerage. But it would not surprise me at all if in the future, financial planners, realtors, and brokers were in danger from mentally unbalanced clients who suffer huge losses from acting on advice from these purported professionals.

To tell somebody that since they have so much equity in their house they ought to take out a home equity loan and put the cash in the stock market is plain irresponsible. My my, how short memories are.

A Walk Down Memory Lane

Let's travel in our wayback machine for a few minutes to 2002 and 2003 and see what the economic powers-that-be were saying. We're going to hold them to their words in case they decide to reinvent themselves as experts on managing our economy. Of course, there is the sticky problem that they are already considered experts, some of them have practically had their ring kissed by members of Congress and been knighted.
The Fed Chairman who can't recognize bubbles until after they burst apparently was not worried about the use of derivatives.

...judging from the data on the use of derivatives, the potential for financial innovation to have a broader impact and thereby to continue contributing to globalization appears considerable...
-Fed Chairman Alan Greenspan, March 7, 2003

But one of the most brilliant investors that ever lived sure was (and still is). He is one of the few people in the financial world I have respect for:

We view them as time bombs...financial weapons of mass destruction...The range of derivatives contracts is limited only by the imagination of man or sometimes, so it seems, madmen.
- Warren Buffett, in annual letter to shareholders, March, 2003

OK, we'll remember this Mr. Greenscam!

The United States is nowhere close to sliding into a pernicious deflation..
- Fed Chairman Alan Greenspan, December 2002

How about this quote, which just shows that we who blog about bubbles are just very negative people:

...Because we had a bubble in the stock market, people are thinking about bubbles nowadays and wondering, where could we have another bubble...Intellectually once people decide to be negative they start to look at things in the worst possible way...
- Maury Harris, UBS Warburg Chief Economist, October 2002

Beyond the current tummy ache, in the long run we have a very healthy, very vibrant future...
- Newt Gingrich, September 2002

The time has come to put this issue to rest...the nation’s home builders have said it, the Realtors have said it, and now Alan Greenspan has said it once again, in no uncertain terms: there is no such thing as a current or impending house price bubble.
- David Seiders, Chief Economist of the National Association of Home Builders, July 2002

And here was the mindset of Joe Consumer:

I want to go to the Caribbean... I don't care if it's on plastic for a year...
- US consumer overheard by a bubble watcher, May 2002