Thursday, September 12, 2002

I wanna be deflated
A couple weeks ago FT reported that insider stock sales by executives of US homebuilding companies had skyrocketed to a record quarter trillion dollars in 2Q02. The article has disappeared into the FT archives, but you can find the graph on praesentia. In May, John Krainer of the SF Fed concluded [pdf]:
House prices in the U.S. appear to be more firm than they were at this phase of the last business cycle.According to one measure of housing demand, the reason house prices are firm is not so much because of the drop in mortgage interest rates as because of expectations. On its own, this conclusion -- prices are high today because they are expected to be high in the future -- would be unsettling. But the strong expectations in the housing market are mirrored in other parts of the economy. These expectations could, of course, be proven wrong. However, indicators ranging from interest rate differentials to trends in consumer savings (see Marquis 2002), provide a substantial amount of economic data suggesting that investors and consumers foresee a relatively mild recession and a return to solid economic growth.
In other words, it is a bubble, but it doesn't matter because people are too stupid to realize that.
By the way, the Nikkei fell to 19-year lows in early September.
The Economist is pertrified of deflation.

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