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The Asset Inflation (not to be confused with wealth) booms that we are talking about here are the biggest of their kind ever recorded in the US. To assume that when these booms peter out we wouldn’t have a recession is a wishful thinking. The idea that the housing will simply flatten out and there will be no bust is simply not supported by history. It is hard to deny that there was a very strong speculative component to the recent housing boom and all speculative booms do end in a bust. As to history, I have been told and I have read about housing busts in Southern California during 1970s, 1980s and 1990s. Why would it be different in 2000s? Especially, when the current boom was bigger than any that I am aware of. I am soon going to be heading for a barbecue at a friend’s house in an area called Sky Park (most own a plane, many more than one, and all must have a hanger). It was first built in early 1980s and then the project went bust. There were many empty lots just 4 years ago. The lots that went for 70K in early 1980s, originally, were selling for 45K in 2002 (this friend of mine bought one and has built a big home). If you take inflation into account, the real lot prices were less than a third after 20 years! Soon after my friend bought, the lot prices kept rising and there has been a building boom during 2003-2006 that is absolutely amazing. I have been going to the neighborhood for some 18 years because there is another close friend who bought a home during early 1980s. For years, there was absolutely nothing going on in terms of construction that I could notice. Now, in order to predict a recession we need to look at some leading indicators. I have already presented the recession forecasts based on the Yield-Curve – the 3-Month to 10-Year US Treasury Yield-Differential (3M-10Y-YD) has already indicated a recession in 2006 with a 50% chance. See, ACCURATE CHARACTERIZATION OF YIELD-CURVE & RECESSION PROBABILITIES. Today, let us look at another leading indicator, the stock market, or the comparison of the leading stocks for the two booms.
I have chosen Toll Brothers, TOL, as representing the Housing Bubble primarily because the behavior of its top executives in terms of very optimistic forecasts after the stock already started to decline was very similar to the executives of Cisco, CSCO. In both cases, the admission that business wasn’t growing came too late when they couldn’t hide the ugly facts anymore. With reference to Fig. 1, I will summarize the behavior of the two stocks, with appropriate time-shift indicated, as follows:
The most likely beginning of the recession based on the relative behavior of the two stocks is Sep-Dec 2006. The Tale of the Two Bubbles might give us a clue of the Tale of the Two Recessions of 2000s. I will stop right here. Don’t want to be late for that barbecue. (You can bet on spirited debates). Jas
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