bostonbubble.com

[CC]

I got one question for you guys. We all know the Fed is buying more mortgages and treasuries now. The government has/loves to print more money which will certainly create inflation or hyper-inflation next few years.

1) If we have hyper-inflation in next few years, everything will get more expensive. I guess the housing price will get higher too or at least won't look too expensive when you compare it to others. (I do predict it will go down another 15%-25%, though even that happens it's still not cheap....)

2) On the other hand, in a hyper-inflation situation the interest rate will always get higher. (Why would you want to lend money to someone with such a low rate as now, when by the time you get the money back it become less because of the lower buying power?) When interest rate becomes higher, house price will be lower.

My question is how is it possible to have 2 totally different results based on the same hyper-inflation situation? Sorry my English is not very good, but you should know what I mean.

Thanks!

[GenXer]

This is what happens when we try to predict too much too far into the future. We get all kinds of contradictions and confusion, which we try to unravel by doing more of the same.

Will inflation happen? Maybe. Will interest rates rise? Maybe. What is the point of this exercise? If it is to speculate about the future, then anything is possible, and the number of outcomes is infinite, and anybody's guess is as good as anybody else's. What will happen to house prices under this scenario? Nobody knows. The longer you try to 'predict', the less accurate this prediction will be. Futures seem to suggest that what will happen in the future is an extrapolation of what is happening now. However, under extreme scenarios (huge inflation, huge unemployment), things may end up differently. How differently? Nobody knows. So my suggestion is this: worry about the most extreme scenarios you can think of, and forget the rest, if it does not severely impact your financial health.

In that vein, my guess is that we'll have a civil war in a couple of years, if unemployment hits 20% and inflation is like in Zimbabwe, so worrying about house prices will be, lets just say, irrelevant

[balor123]

Inflation covers a lot of areas. It's possible for housing prices to not keep up with general inflation. Interest rates won't necessarily keep up with inflation but I'm guessing that eventually they will, at which point homes will stabilize. There's not really much of contradiction. Home prices increase with rising incomes. But considering that home prices are still unaffordable in this area, we'll likely see rising income with stagnating prices for a while.

[GenXer]

balor123: Sounds plausible. Flip that 180 degrees, and it will sound plausible too. Willing to put some serious dough behind your predictions? Take it easy, have a beer

We can not stop predicting, this will be too much to ask. But at least, let's be civil about this and take our predictions for what they are - very random guesses.

[balor123]

My decision not to buy is me putting my dough. Also, it's not a good time for me In any case, risk from unknown events (noise) dwarfs any advantage I get from insight, which is why most money managers don't try to time the market. It's very hard to diversify away that risk since you only get a finite amount of time in life. That being said, as I've stated before I believe that residential housing market is far less efficient than the stock market. I think you can fairly reliably time the market at times (strong reversion to mean, lower prices in winter). At the least, you can find good deals by shopping around, something that you don't get with heavily traded stocks.

Back on topic, though, found this article on forecast of inflation: Inflation forecast. The analysis is flawed though. The measure of inflation (TIPS - treasuries) assumes that people buy TIPS to keep up with inflation and this assumption is false. There was, and has been, a flight to TIPS in anticipation of inflation, so much that people are willing to accept losing to inflation. Furthermore, the Fed has been buying treasuries off the market to drive yields down, which might be perceived as increasing the spread but most likely causing even greater demand for TIPS. The evidence that this is happening can be found in the price of gold, which qualitatively measures inflation. Unfortunately, I don't know a better quantitative measure of inflation. The market is a bit murky on that.

If you have money and long time horizon, then it should be possible to profit from Fed market manipulation. Not clear if it will outperform other places for your money (like stocks the last two days), especially given the time risk.[/url]

[Boston ITer]

Hello folks, I think there's a difference here between asset inflation and let's say general inflation in the price of perishables and finally, the govt's own CPI trackers.

Throughout the 00s, asset inflation was rampant, from equities, to commodities futures, to real estate, to private equity capitalization. Now, most of those sectors are depressed and experiencing a deflation.

What I think most here are worried about is the priming of the dollar pump to 'push on the string' when for the most parts, banks and companies simply want to stay in business and pay off their bills, instead of stimulating the economy.

Now, the way to set off a hyperinflation (see Argentina), is to a have a currency which is in a low circulation on the international OTC foreign exchange. In essence, that's what happened to Argentina and Thailand, in the prior decade, and hence, both countries experienced devaluations, since the stampede for the door was initiate by a small number of institutional investors. Right now, the USD is the reserve currency of most exchanges; it would be nearly impossible for the world to liquidate its holdings in a panic mode. So, without that co-mingling spike in Gold/Silver, there's no alternative money on the horizon, the Euro is no longer considered a competitor, like back in '02-'04, so hence, it would be hard to have hyperinflation, just perhaps stagflation. And in this case, a true spike in Gold means over $3K per oz, not the fear based range trading between $800-$1K. The dollar is going the way of the Pound, during the decline of the British Empire, cascading ranges but pointing downward, overall. The Pound went from 3.x (during India's independence period in '46-'47) to 1.7, during the withdrawal from Bahrain, circa 1971, the effective end date of the Empire. The Hong Kong ceremony with China of 1997 was a mere formality; the empire was long gone by then.

So back to the present, all and all, there's deflation in assets & high end consumer items, a creeping inflation in perishables and what that does is create a stagflationary environment where CPI numbers get distorted but the average person still pays more for bananas but can pick up SIM cards at volume discount rates. And finally, in time, houses will catch up as rental rates and mortgages are in that 1.3 ratio of a differential but I don't think that time is now.

[StallionMang]

>> Will inflation happen? Maybe. Will interest rates rise? Maybe. What is the point of this exercise? If it is to speculate about the future, then anything is possible, and the number of outcomes is infinite, and anybody's guess is as good as anybody else's

This sounds like defeatism... "we can't predict with any accuracy, therefore it's not worth trying". Which is hooey - throwing the baby out with the bathwater. Not all outcomes are equally likely. If I throw a baseball, it *might* hit a seagull -or a black swan! But it ain't likely. Should the Left Fielder sit and refuse to speculate on future outcomes in case of a meteor shower?

Like the path of a baseball, the housing bubble and pump and dump schemes have a lot in common. Systematic cause and effect.

Not all outcomes are equally probable.

[admin]

[GenXer]

StallionMang: Yes, I the government is doing a pump and dump on us, but I don't think even the 'smart' people in the government know what they are doing. We can speculate all we want - whether it is the housing prices of the stock market prices, there isn't a single repeatable method which is guaranteed to make money. If you find one, you will be rich. The outcomes are different all the time, and our 'estimates' of probabilities are always wrong. We try to pretend we can 'estimate' anything, but that is not so - the history is the judge.

By the way, pump and dump schemes are illegal, and I'm sure a number of people got prosecuted (just because they weren't does not make it legal). And everybody who knew about this and traded on the tips are probably in jail as well. We know it AFTER THE FACT, but not while it is happening, especially not for small thinly traded volatile companies.

If there was cause and effect, we should be able to pick the 'winners' right now, and make a lot of money. This is not true, and a study after study proves that it is not true.

We can speculate on the macroeconomic outcomes, but our guesses are not bounded in any reasonable sense - we are indeed just guessing. My point was that we shoulnd't take our predictions too seriously. Predict away - as long as there is no grave financial risk involved. It is fun to do this, and I like to play with predictions as well. Makes you feel like a genius if they come out right, but it just may be plain dumb luck.

[GenXer]

admin: and what currency will it be? euro? Europe is quickly declining in importance. Creating a new currency? I think they are just frustrated that they can not do anything about us becoming socialist - it is an irony (with a free-falling inflationary currency, just like in China). They do not have much choice, unless they want to use the yuan. This happened before - in USSR. Guess what people paid for goods with? Dollars of course!

[GenXer]

As far as house prices are conserned, it is clear that buying a house is a lot riskier than renting. I would venture to say that those who seek parity (i.e. expenses being equal) before going out and buying are most likely wrong. I'd say buying has to be CHEAPER than renting an equivalent property, because of the hidden costs of buying which nobody can predict, especially over the long term of ownership. And like any investment, if a crash comes just when you want to sell, you are stuck (think about all those people who wanted to retire by selling their appreciated house).

Thus is is completely irrelevant where the house prices are heading. Renting will probably always be better than buying. However, when financially feasible, buying may be a good option for families with enough resources. Just like piano lessons are not for everyone - but some people are willing to pay $50-$70/hour for their kids to take them. Same way people are willing to pay for owning a house vs. renting, and for owning a bmw vs. owning a toyota. Affordability is never going to be a ruler for majority of people, so there will always be people buying houses with little or no resources, bidding up the prices.

[admin]

[StallionMang]

>> If there was cause and effect, we should be able to pick the 'winners' right now, and make a lot of money.

It's not about picking the winners, but the overinflated's. A pure pump and dump *is* cause and effect. That's why shorting can be easier than going long - a ball in the air *will* come back down. Betcha $100 the boston Metro CSI will be down in a year :

P&D's have been going on forever.. and always will. Jim Cramer does it for a living.. Who's going to stop it - the mighty SEC-- which couldn't catch Madoff after a tipoff and audit? Michael Lewis wrote a great article on a NJ 15-year old who got busted for it. Those with connections, lawyers and lobbying money are beyond that.

[Boston ITer]

[GenXer]

admin: Take a look at how Europe can't 'agree' on anything at all of consequence (that is, when individual members have to pony up cash). Now consider the 'world' and how they can't agree on anything (think UN). China's best bet is our debt. Nothing else exists that is as stable (though who knows what will happen to the dollar now?), unless they land on the moon and start a new civilization (maybe that's what they have been trying to do all along?)

StallionMang: What is the mean? This is what study after study has been showing - if you KNOW what the mean is, then you can (after the fact) 'predict' that what came 'up' above that mean MAY come down, possibly even below that mean (that is, you have a better chance of being right if you knew what the mean was). Otherwise, it is anybody's best guess, and the mean from the past 20 years is NOT at all the same mean that will be 20 years from now. This is simply an artifact of the world we live in - just like the laws of nature. This would be true even if we had a random walk type scenario, but we know we live in a much more chaotic world, so this makes bets on any future 'means' that much less meaningful.

In other words, we do not know how much prices will come down and when, and if at all - all courtesy of the fact that prices are indeed random, and regardless of all of our superficial analysis (i.e. the much touted housing price index and its supposed 'reversion' to the mean), the result will be what it will be, and none of us will be able to correctly predict it, simply because you can not assume a 'mean' beforehand - you would be RANDOMLY guessing, since price moves can be so rapid and large that trying to predicting the mean is quite meaningless.

I hate to nitpick, but trading stocks has never made most people rich - only the select few (just like the natural power law distribution allows for) got lucky doing this stuff, and no, you can not replicate their success, because they were at the right place at the right time, and taking huge risks which sunk the other 99% of the traders.

You are definitely right - financial scams will persist, and people will go to jail. Cramer is just an entertainer - he does not provide investment advice! He is simply having fun doing what he's doing, and if anybody is taking him seriously, so much worse for their portfolios
As far as his 'performance', I'd be willing to bet money its not that great. But who's checking? Thats the 'beauty' of the prediction business - nobody cares what your track record is, as long as you don't steal other people's money.

On the positive side, I HOPE that stocks go back up and housing prices keep sliding down to 0, but I am not going to be arrogant enough to claim that I have enough data to actually predict the time scale and the magnitude of these events.