House Prices

Bill Gross

Robert J. Shiller


'Prophets of doom' will be right in the end
Rolf Englund
Financial Times
June 5 2007


The Myth Of the Rational Market

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“How do you put together a consumer economy that works
when the consumers are out of work”?

Our economy’s lights, if not switched off in a rehash of the 1930s Depression, have certainly been dimmed in a 21st century version likely to be labelled the Great Recession. McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitising them could never go down.
There is a developing optimism that we can go back to the lifestyle of yesteryear.
Forecasts based on econometric models inevitably miss these secular/structural breaks in historical patterns because it is impossible to quantify human behaviour
Bill Gross, July 2009

PIMCO’s driving thesis however, if not a juxtaposition, is succinctly described as
a “new normal”where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the “gorging” of goods and services that we grew used to in decades past.

Long-term trends involving risk-taking and in turn derisking are decidedly human in their origin.
Bell-shaped curves with Gaussian/random distributions fail to anticipate that human beings do not make decisions by chance or independently of each other, but in many cases in reaction to one another.

I was impressed this weekend by an article in the Op-Ed section of The New York Times by staff writer Bob Herbert.
“No Recovery in Sight” was the heading and his opening sentence asked,
“How do you put together a consumer economy that works when the consumers are out of work”?

That is really all one needs to ask when divining our economy’s future fortune.

As unemployment approaches 10%, what is less well publicised is that the number of “underutilised” workers in the US has increased dramatically from 15 to 30 million.
Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering.

Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy.
Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model.

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See also:Black Swan