Wednesday, February 13, 2008

Bubbles, cheap money and long terms

USA Today 2/13/08:

Toyota Motor Credit brought the loans to light when it acknowledged at a meeting last week it is making 84-month loans — seven years — to cut buyers' payments and boost sales. It's been making them since August.

GMAC, some credit unions and others also offer 84 months, and a sliver of auto loans, 0.1%, are even longer: 96 to nearly 102 months, says Power Information Network, a unit of consultant J.D. Power and Associates. About 82% are 60 to 77.9 months.

"Definitely bad," says Kevin Tynan, auto analyst at Argus Research. Easing buying with long loans "is bubble-inducing, and the bubble's bursting."

British government 2005:

Britain's first sale of 50-year inflation-protected government bonds was warmly received yesterday as pension funds and insurance companies lapped up the world's longest inflation-linked bonds.

A major Japanese grocery chain 2006:

Aeon, the biggest supermarket chain in Japan, will become thecountry's first company to sell 50-year debt, as it looks to refinance its short- term borrowings.

The company joins the governments of Britain and France in issuing 50-year debt. The longest sovereign debt Japan currently offers is for a 30-year term.

Aeon will issue ¥26.5 billion, or $226 million, of debt

Alex at Marginal Revolutions 2/13/08

The conventional wisdom is that there was a housing bubble which has now popped. The data, however, tell a different story....

The clear implication of the chart is that normal prices are around an index value of 110, the value that reigned for nearly fifty years (circa 1950-1997). ...

Prices will probably drop some more but personally I don't expect to ever again see index values around 110. Do you? If we don't see the massive drop back to "normal" levels then the run up in prices should be described as a shift to a new equilibrium - much as happened during World War II - see the chart. (It's an important question to ask what changed and why?). In the shift to the new equilibrium there was some mild overshooting, especially due to the subprime over expansion, but fundamentally there was no housing bubble.

Interesting, and wrong I think. Basically we had multi-generational low interest rates in the middle part of this decade that everyone was taking advantage of in the quest of cheap and easy money. This drove some economically rational price increases as the price of a bond increases as its interest rate decreases, and then massive and crazy speculation.

We are still operating in an environment of extraordinarily loose credit. Car loans are starting to stretch out to seven or more years, there were some forty and fifty year mortgages bandied about a couple of years ago and interest rates have been at multi-generation lows. With Helicopter Ben being Wall Street's bitch, this will continue in the short term, but home prices are still coming down despite all of the macro-support.

There was no housing bubble only if you are projecting 1% to 2% short term interest rates for several generations as well as a continued proliferation of stupid and amazingly prone to fraud loans within a business model that has absolutely no one being paid to say no to dumb loans.

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