Consider, Balance Sheet Nation

Posted by: Tom Keene on October 31, 2010

Edward F. McKelvey Sees a Trend to 2016

It is one thing to line up some 842 economists and try to gauge their abilities. Who are the 50 Major Economists? (This is a must-own book!) It is an entirely separate effort to glean the nuance, the weekly dynamics in their writings and predicitions. I was honored to have Bill Dudley and Ed McKelvey write a chapter in my book on the nation’s deficit. I am even more privileged to read McKelvey’s work every week.

McKelvey, authoritative on the deficit, has been thinking about housing and the “framework of massive excess supply that we enunciated about three years ago.” He sees a trend to…2016.

ecochat103110mckelv.bmp

HOWNSART INDEX GP Q ROLL: Homeownership, pre-boom at 64%; post-boom at 66.9%. The regression from the 9-unit moving average extrapolates to the vicinity of St. Patrick’s Day, 2016.

There is a Debate

I have the clearest memory of driving four-lane-West with my parents (Alan Mulally, you can’t build this). Long hours of familial torture as back-seat battles were arbited by possible and rare violence from the front seat. And then the road stopped. We built a highway system. We built things. And, we need to build and repair, now.

Here is John B. Taylor of Stanford with a devastating critique of “stimulus.”

“The portion allocated to infrastructure (gross investment) at the federal level was $0.9 billion in 2009 and $1.5 billion in the first two quarters of 2010. Thus, of the total $862 billion, 0.3 percent has been spent on federal infrastructure projects.”

1945a.jpg

Here is too-much-information from Taylor/Weerapana. As Taylor writes, on the Keynesian multiplier, there is a debate.


ecochat 103110 constr.bmp

CNSTPUHI INDEX GP Q ROLL: U.S. Public Highway & Street Construction shown arithmetic. Picks & Shovels shown logarithmic.


White, Sondhi & Fried

Now what? Elections, QE2, G-Whatever in Korea. If the marginal difference in economists and strategists views is the attempt to anticipate behavior, now what? One guess is a generational (societal?) shift in our personal and household accounting.

Long ago and far away (Warren was younger), we were more tempered. We (Philip Carret) kept one eye on assets and liabilities in a less-levered world. We (les boom des bebes) then shifted and presumed the top-line of the income statement would always migrate higher with various permutations to margins below. Some years good; some years better, but always advancing.

The shift is on. Not nostalgically back, but forward to our new, improved (?) behavioral accounting. To adjust your inner clock, serious torture is in order. Try White, Sondhi & Fried to understand better your inner accounting (for $142!). There are two mysteries in life: Daughters and equipment-lease accounting.

Which of the following actions would be least likely to be viewed as
conservative?
A. Company increases its estimated provision for bad debts.
B. Company uses the FIFO inventory method when inventory prices are
declining.
C. Company discloses contingency losses in the footnotes to the financial
statements.
D. Company uses the completed contract method for recognizing revenue for
long-term contracts.

Consider, just possibly, a lesser weight to the income statement.

2011 beckons. Post election, QE2, G-Whatever and wherever Cliff Lee lands (they don’t spit in Boston), we will need courage to consider Balance Sheet Nation.

Discuss.


Reader Comments

Joseph

November 2, 2010 7:15 PM

Tom, Re: the housing market hitting bottom in 2016, I think your chart is a case of _right for the wrong reasons_.

The chart to watch is not % of families who already own homes, because the income of the non-homeowners is an unstated, but necessary, variable.

The chart to watch is the median home price vs. median household income. That is a stat. that remained very stable for decades, excepting for temporary variations due to interest rate fluctuations.

It rocketed up a decade ago when lower income families were encouraged to buy houses they couldn't afford. It has come down, but not to historic levels. The ratio is becoming attractive for home buyers, but extrapolating from the trend, 2016 isn't a bad guess for the bottom.

John

November 9, 2010 10:42 AM

QE2, QE2.5 ....QE3.5 , these are necessary to see the recovery on track. We are not here to debate who is master in economic theory and who is a good thrower?? If one could drive down the unemployment figure and create jobs, then however naive an idea is must need serious consideration, yes?

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EconoChat captures Tom Keene's thoughts on economics, finance and investment. He is editor-at-large for Bloomberg News and hosts Bloomberg Surveillance and Bloomberg on the Economy on NYC1130, Sirius 129 and XM 130 and Surveillance Midday on Bloomberg Television. His complete interviews are at Tom Keene on Demand. Look for Tom on twitter @tomkeene

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