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Interesting Points, but Reality Is More Complicated Than Portrayed
on June 4, 2013
Whitney o9pens by telling us that she never looks at any one data point or an event in a vacuum, rather at a series of data points from myriad sources to tell the story of what is to come. Whitney looks first at consumer spending because it accounts for 70% of GDP and drives returns on most every asset classification and sector.
Early in her career she focused on subprime consumer lenders. Their prosperity and survival hinged on their access to cheap credit. One way of doing that was through securitization - bundling the loans they made into mortgage-backed or asset-backed securities. Sometimes, however, their access to the market faded, such as in the late 1990s right after the 1998 Russian credit crisis. Ten years later, New York-based financial giants were also into subprime. Many of those loans were bad, and in late 2007 investors pulled out of the securitization of their products. Lenders started falling like dominoes. Many banks didn't realize how much trouble they were in - residential real estate had been considered safe for decades. By 2009 the industry had lost over $600 billion in write downs, including about $60 billion at Citibank (Whitney correctly predicted Citibank's problems.) Five years later, over $7 trillion has come out of the lending system and over 30% of Americans have little or no access to credit.
Some regions were hit far worse than others - California, Nevada, Arizona, and Florida were hit the hardest by declining home values and negative equity. Worse yet, those states tended to also bet on rising home values, increasing spending (+72% in California, 98% in Texas, 114% in Nevada) - especially for municipal employees and teachers. (D.C., NYC, and Chicago seemingly competed with each other to see which one could irresponsibly grant the biggest teacher raises, without worrying about the impact on future pensions.) Outmigration has further added to the problems of some areas - eg. in 2004, Riverside was gaining 95,000 new residents/year, while four years later it was losing over 7,000/year. Many of those jobs lost in Riverside (and the rest of California) were higher-paying ones - between 2000 and 2008, California lost 370,000 jobs paying wages 25% or more above the state average, a reversal of the 65,000 such jobs gained between 1992 and 2000. Further, between 2000 and 2011, it gained no employment in science, technology, engineering, and math, vs. a 5% gain nationally and 14% gain in Texas. Meanwhile, eg. Ames, Iowa home prices went up only 5% by 2005, compared to 20% in Jacksonville, 41% in Phoenix, and 60% in Las Vegas.
The complicating factor in all this, however, is the new natural gas boom - especially boosting the economies in North Dakota and Texas, as well as in other states such as Pa and Ohio. Thus, drawing conclusions as Whitney does simply based on housing inflation and local spending becomes treacherous. Later she also somehow stirs into the mix the varying degree varying states have funded employee pensions, but since New York scores best here (the only state with 100%-funded employee pensions), while also being one of the most profligate in spending (despite not enjoying much in the way of a housing boom), the strength of her predictions as to which states will do the best in the near future is weakened.
U.S. home ownership now stands at 65%, down from its record 69% in 2006. Buying a home is much different in the U.S. - we've become accustomed to 30-year mortgages and tax-deductibility of mortgage interest payments. France, Germany, etc. have home ownership rates below 55%. Canadian mortgages typically are for only five years, mortgage interest is not deductible, and those defaulting can have their personal assets seized.
In December 2010, Whitney predicted 50 - 100 large municipal bond issues would fail. That didn't happen in 2011, and she points out that she never said they'd all occur in 2011. So far we've had bankruptcies in Orange County (2004), Jefferson County in Alabama (2011), Stockton, Mammoth Lakes, San Bernadino, and Detroit. I wouldn't bet against her.