"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Tuesday, July 13, 2010

Really great links (precognition edition) - Tyler Cowen - Jeremy Grantham

Tyler Cowen (January 2005) - If I believed in Austrian business cycle theory - "1. I would think that Asian central banks, by buying U.S. dollars, have been driving a massive distortion of real exchange and interest rates.
        2. I would think that the U.S. economy is overinvested in non-export durables, most of all residential housing.
        3. I would think that we have piled on far too much debt, in both the private and public sectors.
        4. I would think these trends cannot possibly continue."

Jeremy Grantham (September 2007) - Danger: Steep drop ahead - "But even if this crisis is contained, we are facing some near certainties that should be understood.
        First, house prices may move on euphoria in the short term, but long term they depend on family income - the ability to pay mortgages and rent. At levels well above the normal four times family income, the market gradually loses first-time buyers until prices break and fall back to affordable levels.
        Second, profit margins are at record levels around the world. They have lifted stock prices directly alongside the rising earnings. They have served to raise P/E multiples as well, for surprisingly, investors on average reward higher margins with higher P/Es. This is fine for an individual stock, but for the entire market, multiplying boom-time profits by high P/Es is horrific double counting and sends markets far too high in good times (and far too low in bad times).
        Third, and most important, risk will be repriced. Last year a broad base of risk measures - including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality vs. low-quality stock values - reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk."

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