Wednesday, April 23, 2008

The day the recession started

Guambat just got back from a couple of days on Saipan, a gem of the Marianas islands. It has been disorienting to get back to the Big Smoke of Guam. To help the process, he checked in on the hits to the Stew (and YaHarr there to Cap'n Jack) and that led to looking back to a post in December 2006.

From there, he was directed to this contemporary post from Calculated Risk. Calculated Risk was having a go at Dr. Christine Chmura, president and chief economist at Chmura Economics & Analytics, who was having a go at "pessimists [who] point toward a soon-to-occur recession".

Calculated Risk made this assessment of Chmura's nonchalance over the state of over-indebtedness:
"she could have written this piece in mid-1990 - just as the early '90s recession started.

Chmura notes that the mortgage portion of the homeowners financial obligation ratio (FOR) was a record 11.6% in Q2 2006. In Q2 1990, the ratio was a then record 10.9%. The Q2 2006 debt service ratio (DSR) was a record 14.4%; in Q2 1990 it was a near record 11.96%. And in Q2 1990, pessimists were also concerned about "a significant slowdown in home-price acceleration".

But if someone just looked at the household balance sheet in Q2 1990, everything looked great (Fed: Flow of Funds). Assets were a record $23.7 Trillion and net worth hit a record $20.1 Trillion in Q2 1990.

And then the recession started ..."

It was in this same time frame that Bill Gross was instructing us on "The Limits of Leverage". Oops. Did Guambat say "instructing"?

PS: Another Pimco head, Mohamed El-Erian, has today (April 24, 2008) instructed us, Why this crisis is still far from finished.
The dynamics driving the disruptions are morphing and may again move ahead of both the market and policy responses.

the dislocations are entering a new phase.

Persistent financial dislocations have now caused the real economy to become, in itself, a source of potential disruption. During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system.


Blogger Jack said...

The problem with Chmura's analysis is the asset value in her equation somehow assumes that home-price is somehow a fixed, immutable number. The value of any real estate is exactly what the next buyer will pay for it. If more people think the price will go up than otherwise, prices go up. Vice versa. When assets (and thus new worth) are properly valued, the happy-days equation goes humpty-dumpty. And none of those geniuses in Wall Street (also London, Zurich, Dresden, etc.) thought this one through and read the fine print.

I wonder if they still serve that wonderful steamed
parrot fish at the Hong Kong restaurant in Saipan.

Snowbound in San Juan.

24 April 2008 at 1:53:00 am GMT+10  
Blogger Guambat Stew said...

Alas, Hong Kong is no more, just like in China.

Current favourite haunt is the nasty, funky, greasy beach bar, Oleai's. Nothing anywhere near so sublime as steamed parrot fish. But after a bucket or two of margaritas, even their buck a taco tastes, well, ingestible if not digestible.

24 April 2008 at 8:48:00 pm GMT+10  

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