Bad News for Development

[Conan71]

If I had the money I might consider buying up some property, but again it's iffy as to where the economy is headed.

This brings up an important point:

Other people are doing the same thing.  Are they waiting to get a better deal if the economy tanks further or simply worried about having liquidity issues should they need that money in a year or two?

[nathanm]

it's hard to imagine what else the Fed can do... rates are at 0%, they have tripled the size of their balance sheet with quantitative easing, and we have mortgage rates at near all time lows. At this point they are pushing on a string.

They essentially quit the QE last year. I'd rather see action from Obama on another stimulus package, but since that's politically impossible at the moment, we need the fed to step up and start buying things other than Treasuries to get money into the economy. That's a terrible idea under normal circumstances, but the beginning of deflation is not a normal circumstance.

Conan: In a deflationary environment, nobody wants to spend money because it'll buy more next week.

[Conan71]

They essentially quit the QE last year. I'd rather see action from Obama on another stimulus package, but since that's politically impossible at the moment, we need the fed to step up and start buying things other than Treasuries to get money into the economy. That's a terrible idea under normal circumstances, but the beginning of deflation is not a normal circumstance.

Conan: In a deflationary environment, nobody wants to spend money because it'll buy more next week.

Are you thinking we are in full on deflation right now or that it's simply a possibility at this point?

[SXSW]

It's certainly a good time to buy if you know who to talk to.  Many of the developers I used to work with are literally throwing properties away to get them off the books.  One such developer had his real-estate guy call around and offer models in his developments for 75% of their marketed price.  It still took him a while to unload.  The other builders trying to sell in his subdivisions were pissed, but what can you do?

If I had the money I might consider buying up some property, but again it's iffy as to where the economy is headed.

That has been said during every recession for decades.  The economy will get better, it just so happens this particular downturn is lasting longer than in years past.  There are some positive trends but overall it doesn't appear to be getting much better but it's definitely not getting worse.  They said it may be 2011, 2012 or even 2013 (especially in the development/construction sector) until we see full recovery and I believe it.

Tulsa will remain fairly insulated as long as oil/natural gas prices remain stable (or increase). 

[nathanm]

Are you thinking we are in full on deflation right now or that it's simply a possibility at this point?

Prior to the last release of CPI numbers, we were merely headed for it. The latest release was the first to show actual deflation by some measures. I think it's still early enough that we won't be stuck in the full on deflation trap if we can get action in the next month or two.

Either way, it'll be fun to watch. At least until my clients demand I decrease my rates.

[bokworker]

They essentially quit the QE last year. I'd rather see action from Obama on another stimulus package, but since that's politically impossible at the moment, we need the fed to step up and start buying things other than Treasuries to get money into the economy. That's a terrible idea under normal circumstances, but the beginning of deflation is not a normal circumstance.

Conan: In a deflationary environment, nobody wants to spend money because it'll buy more next week.

What else would you have them buy? They were still buying agency mortgage backed securities until the end of March...a total of $1.5 trillion of them. Interestingly since they stopped buying them mortgage rates have fallen. I am not in total disagreement with you but QE in an environment of basically zero monetary velocity doesn't do anything but increase the risk profile going forward. Kind of like spending stimulus dollars that don't stimulate. All you are left with is a bigger deficit that has to be paid back during a slow growth period.

[nathanm]

What else would you have them buy?

That's for economists to figure out, not me. Do you think our debt laden economy can survive a bout of deflation?

I don't think any of us want to be in the situation Japan has been in since the mid 90s.

[swake]

. . .and the European banks are fueled by US commerce and lending.  

No one is taking a leadership role.  Our federal government has made it very clear that banks are evil, and they are not about to reverse that.  This thing is going to have to play out until someone cries "Uncle."  I think that is probably why many see this recession lasting until their is a change in guard or at least a change in attitude.

The European banks are sick because they haven't gone through a Tarp style reorg. They have never unwound the sick and dead assets owned by the banks there from the healthy assets. They've never really identified what banks are sick and what banks are healthy so they can fix the sick banks. Europe just keeps tossing money at the banks in hopes they will get better on their own.

http://www.dailymarkets.com/releases/2010/07/21/imf-calls-for-transparent-eu-bank-stress-tests/

http://www.guardian.co.uk/business/2010/jul/22/slovenia-bank-stress-tests

http://www.bloomberg.com/news/2010-07-22/political-meddling-may-undermine-european-bank-stress-tests-wyplosz-says.html

http://www.newsweek.com/2010/07/02/worse-than-wall-street.html

[nathanm]

swake, didn't you hear? Austerity will fix everything.

[Conan71]

swake, didn't you hear? Austerity will fix everything.

Might not have been a bad idea when things were steaming along just fine.

[swake]

Might not have been a bad idea when things were steaming along just fine.

Careful now, your inner keynesian will come out....

[bokworker]

That's for economists to figure out, not me. Do you think our debt laden economy can survive a bout of deflation?

I don't think any of us want to be in the situation Japan has been in since the mid 90s.

Those of us that lived in Okalhoma in the mid-80"s and early 90's saw what deflation can do and no, our debt laden economy could not survive a debt liquidation driven deflationary cycle. The best we can hope for is a gradual reduction in debt levels, private and public, which will result in slower economic growth and higher unemployment. It will take a lot of sacrifice and an adjustemnt to lower standards of living in the future as debt  repayment will come at the expense of current consumption. And when 70% of our economy is built on consumption (consumer spending) it will take a lot of time. I am ot one that thinks the outcomes are binary (either deflation or hyper-inflation) but the risks of both are elevated. Thats what leverage does, magnifies the good and the bad.

[nathanm]

Might not have been a bad idea when things were steaming along just fine.

Yeah, unfortunate we didn't keep up the surpluses when we had 'em. Then we could have had truly massive stimulus and still not been at the debt level we're at today.

bokworker, we actually are seeing an increase in repayments and less borrowing in the private sector. It's making Bank of America's numbers relatively crappy. This sort of demand destruction is driving us towards deflation, since there's not some other sector of the economy to pick up the slack.

[Conan71]

Yeah, unfortunate we didn't keep up the surpluses when we had 'em. Then we could have had truly massive stimulus and still not been at the debt level we're at today.

Unfortunately money laying around to a politician is like whiskey to an alcoholic.  I honestly don't think Congress could have kept it's hands out of a surplus for very long.

[bokworker]

An article I just came across...

http://finance.yahoo.com/news/4-Reasons-To-Fear-usnews-2745725653.html?x=0