Relevant and even prescient commentary on news, politics and the economy.

German Construction Is Looking a Bit ‘Bubbly’

by Rebecca Wilder

German Construction Is Looking a Bit ‘Bubbly’

Eurostat released its volume-adjusted estimate of construction for April (release here, .pdf). Over the month, Euro area construction declined 2.75% following a large 11.41% monthly increase in March. Across the countries that make monthly data available (8 countries total), Slovenia and Portugal saw the largest decline in April construction activity, -9.3% and -6.7%, respectively, while France was the only country to see an increase in construction, +2.3%. The trend is clearly down, as 3-month over 3-month Euro area construction declined 4.8% through April.

Germany is getting a bit bubbly as regards domestic construction. This shouldn’t be surprising, given that longer dated bunds (even the 10yr) are negative on a real ex-post basis, i.e., using historical measures of inflation.

Note: I re-scaled the volume-adjusted indices to 2001=100 to fully capture the bubble in countries like Spain – the bubble illustration wouldn’t be quite as obvious with Eurostat’s index to 2005. Furthermore, the chart illustrates the monthly construction, while some countries, like Greece or Ireland, for example, list construction solely on a quarterly basis. Eurostat simply estimates construction in these countries to produce the Euro area aggregate on a monthly basis.

Going forward, this construction data does give real-time evidence that the German economy is moving marginally toward domestic-led growth….or we’re seeing the outset of a bubble in German construction

crossposted with The Wilder View…Economonitors

The "Standard" of The Price of Gold is This Century’s DeBoers

I’m writing a few long posts—you’ve been warned—but that machine doesn’t have Internet access right now.* So I’m just going to point to Kash, who writes about something else:

In looking at the data I was struck by how small (relatively) the worldwide market for gold really is. That means that relatively small inflows of funds into the market for gold could potentially have very large effects on the price of gold. And that in turn means that the price of gold could be very sensitive to a number of factors that have nothing to do with economic conditions or inflation….

[M]oving just 0.1% of the financial wealth of US households into gold could be enough to have a dramatic impact on the price of gold. Note that the same can not be said of other asset prices that we care about; it would be difficult to discern any price effects whatsoever of a move of an additional $50 billion more or less per year into the stock market (valued at over $50 trillion around the world), the bond market (also with a total value in the tens of trillions of dollars), or real estate.

[A] good advertising campaign by gold producers could be enough to move the price of gold. Imagine that an effective, sustained advertising campaign, targeted at wealthy, conservative individuals in the US, is able to persuade 25,000 of them per month to switch a portion of their financial assets into gold….Such an advertising campaign would have the effect of pushing $15 billion per year into the market for investment gold — very possibly enough to have a significant impact on the price of gold, given how small the overall market for gold is.

[A] very similar thing happened to the market for diamonds in the middle of the 20th century. The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds.

Whether or not you like that analogy, the central point here is a very simple one. Since the market for gold is so small, its price may be strongly affected by things that have nothing to do with the state of the economy.

Kash’s analysis—read the whole thing—should drive the final stake through the heart of the idea that, in the current economy, gold is anything more than what I quoted Warren Buffett as saying it is more than a year and one-half ago.

*In this context, does anyone know how to add the Windows Live Writer app to a Droid X?

Random Notes on Economics, Music, and Death–and a Bleg

  1. Excess Rents Datapoint of the Day: Since the NYT doesn’t pay Paul Krugman for his blog posts, why should reading those count as part of the “20 free articles” non-subscribers are allowed?
  2. I want the Grapelli track, but not enough to pay for a six-CD set.
  3. This—built by government employees—is the greatest accomplishment in music since Alan Lomax.
  4. And, for fun, via my buddy Tom, the best obituary you’ll read today.
  5. Bleg of the Day: Anyone have a good source or sources on the structures, organizations, and operations of the old “Tea Companies”? Have been thinking about bubbles, and Tea Companies seems to be the Goldman Sachs of the pre-20th century: always in the middle of the problems, but treated reverentially in the histories.

    And, in the Posts I Plan to Write Soon category:

  6. This book is making me wonder if we’re asking the wrong question. Maybe it’s not “Is Economics a Science,” but rather “Is Economics a Discipline.” More to come on this.

The Case is Made Clearly

The only time I personally owned MSFT stock was just after Thomas Penfield Jackson’s second break-up ruling, when there might have been an upside.

I sold it shortly after the Appeals Court nixed the only good idea—breakup—in favor of “let them pay a fine to be determined, and let them dawdle long enough that the incoming Administration decides the fine, just so they’re really disincented from making money by developing good products.”

Barry Ritholtz Explains It All to You.


Many are talking about the bond market being the latest bubble. But it looks more like the press is just seeing bubbles everywhere. To me a bubble happens when everyone starts believing something that probably is not true. For example in the 1990’s investors started thinking that the long term earnings growth of the S&P 500 was shifting up from its long term 7% growth rate. So they believed that the market was worth more than historic valuations implied and the market PE rose to the 25 to 30 level.

In the 2000’s bankers and home owners came to believe that housing prices could never fall so that homeowners could always refinance their mortgages. Consequently, lenders did not have to worry about credit risk.

So for the bond market to be a “bubble” investors would have to start thinking they can make unusually large capital gains in the bond market. But everyone knows that if you buy a 10 year bond that at the end of 10 years all you will get back is your original investment. In the meantime you will get the coupon and what you can earn by reinvesting that coupon. Yes, if rates continue to fall in the short run you will be able to sell the bond for more than you paid, but you total return has to remain limited because in 10 years the possibility of capital gains must converge on zero. As long as this is true the possibility of a bond bubble must remain something reporters and pundits can pontificate on but nothing more than that.

Measuring Bubbles

Brad DeLong and John Cochrane agree on something. I must dissent.

Delong and Cochrane agree that

“The underlying decline in wealth from the housing bust was … around $400 billion. …”

Indeed, relative to the size of the economy the losses during the crash of the dot-com bubble were four times as large.

I object that the two sums being compared are not comparable at all.

OK so this was a comment on DeLong so when you see “you” read “DeLong”

Why do you compare the losses during the crash of the dot-com bubble to the $400 billion rather than to the $25 trillion ?

The losses during the crash of the housing bubble are, you claim, $25 trillion.

Someone who has forgotten 2000 (or 1999 or 2001 or … well I clearly am that someone) would compare the $400 billion to the decline in the value of shares of corporations with names which ended .com. I don’t think that was $ 1.2 trillion.

For some reason, you and Cochrane count the whole loss around that time as the shock and only losses on subprime mortgages this time. The former value of the former shares of Lehman isn’t in the sum which equals $ 400 billion.

I think that it is possible to distinguish the shock due to burst bubbles from the total consequences in a meaningful way. I’d say the reasonable comparison is the total decline in share values then to the total decline in the value of housing now. The current bubble loss would be about $ 6 trillion for the USA not $ 400 billion.

It doesn’t make sense to compare total losses then to losses born by banks now and conclude that the losses born by banks now are smaller than total losses then, but a lot of damange was done because all of the losses born by banks now were born by banks.

I’d say that in the US alone, and ignoring commercial real estate, about $ 6 trillion in “wealth” was revealed to be a fantasy.

That’s gotta to hurt. It hurt even more because investment banks shared the rubes delusions this time, but the delusion was huge and the so was the delusione (disappointment)

Sunday Basket O’ Questions

by Noni Mausa

Sunday Basket O’ Questions

1. The Climate Change memos have opened up some interesting questions. Like, who are the thieves, and when will we see them in court? And if the thieves are shown to be employees of Big Oil or Big Coal, are the Bigs profiting from this crime? The proceeds of crime can be seized by the government — I will be interested to see how the amount of extra profit might be measured, and how a fungible asset is seized.

A criminal conviction might not be necessary, either. Wiki tells us: “In civil forfeiture cases, the US Government sues the item of property, not the person; the owner is effectively a third party claimant. Once the government establishes probable cause that the property is subject to forfeiture, the owner must prove on a “preponderance of the evidence” that it is not. The owner need not be judged guilty of any crime.”

If the data thieves don’t end up in court, then does this mean e-mail archives in general are fair game for worldwide publication?

We’ve been told that there is no real privacy on the Internet — what if it’s true? “If you could read anyone’s complete email archives, completely safe from legal punishment, which archives would those be?” The question is bound to bring a dreamy expression to the thoughtful person’s face. It’s even rather Biblical: Luke 12:3 “Therefore whatsoever ye have spoken in darkness shall be heard in the light; and that which ye have spoken in the ear in closets shall be proclaimed upon the housetops.” Hackers, start your engines.

2. A financial “bubble” is usually thought of as a thin skin of substance surrounding … nothing. But no real-world bubble surrounds nothing — if there was nothing inside, it would be a droplet, not a bubble.

So what inflates a financial bubble? And when the bubble collapses, what happens to the “filler?”

3. The missing phrase in discussing taxes is “for what?” High taxes in themselves are no burden. Low taxes in themselves are no comfort. Arguing tax size without addressing its use is like knitting with only one needle.


Update: Russia and the KGB? Curiouser and curiouser.
by Noni Mausa

This May Make Robert Shiller and SocSec recipients happy…

but it doesn’t do that much for the rest of us. Via The Ambrosini Critique, Scott Sumner discovers there was no housing crash:

The BLS claims that housing prices are up 2.1% in the last 12 months….According to the BLS, housing makes up nearly 40% of the core basket of goods and services.

Further reading gets us to the base of the claim: Owner-Equivalent Rents went up 2.7% in the past year. CR was all over this in April and May. Take a gander at this chart–from the CR posting in May:
Price-to-Rent Ratio

So while the ratio has gone from 1.4 to 1.1 (which would be more than a 21% decline), almost a whole 10% of that change has been because the base (rent) has gone up. The other 19% of decline doesn’t matter for BLS in(de)flation calculation purposes.

No one better tell David Malpass or his investors at Encima Global (motto: “Failing Up is Always an Option”; see the Forbes article link at the left side of the Encima page).

Noted for the Record, Failed Bank edition

With today’s (well, yesterday’s) five closings, the total of failings of U.S. banks since March of last year to 69.

Of those, slightly more than 20% (14) are from the state of Georgia. Excepting the much larger California, there have been more failings in Georgia than in any two other states combined.

Also as a matter of record, the 69 failings since last March constitute more than 70% of the 97 failings since October of 2000. So, in round numbers, 15% of the time accounts for 70% of the failings.

Bubbles beget bubbles. Anyone find anything more to it than that?

Yankee Interlude

I’m not really paying attention to (major league) baseball this year, so I should probably leave this to Scott, but, as a query:

For all team that was supposed to have had a major improvement in its middle relief this year, the Yankees appear to have given up a large number (>=7) of runs in the middle and late innings this year.

Is Alan Greenspan the Yankee pitching coach, and assuring the von Steingrabbers that such “bubbles” are ‘Once in a Century’ moments?