The CapCom Debate, Round 4


It's Round 4 of the inaugural Capital Commerce slugfest between Donald Luskin, chief investment officer at Trend Macrolytics, an economics and investing consulting firm, and Barry Ritholtz, proprietor of Ritholtz Research & Analytics. In addition to being practitioners of the "dismal science" and finding much to fault in each other's analyses, they're bloggers: Luskin writes The Conspiracy to Keep You Poor and Stupid, and Ritholtz authors The Big Picture.

Donald Luskin: Let's Take One More Look at the Hard Facts

Ah, the "appeal to authority"–citing respected sources to back up one's point when one doesn't really have the facts on one's side. That's what Barry did yesterday in citing the provenance of his mortgage equity withdrawal (MEW) figures as being Alan Greenspan and Goldman Sachs. Sorry, Barry, that doesn't make them authoritative.

The fact remains there is no data source comparable to the Bureau of Labor Statistics, the Bureau of Economic Analysis, or the Federal Reserve to come up even with the raw amount of MEW. Barry's data, according to the footnote on his chart, came from someplace or other called "Calculated Risk." Let's see, what government agency is Calculated Risk part of?

And the fraction of MEW spent on consumption is even more of a wild guess. The two seemingly authoritative sources Barry cites, in fact, are just models by his own admission–they are not statistics, nor are they even based on reliable statistics. And Barry can invent all the anecdotes about plasma screens that he wants–that doesn't turn a mere model into hard statistics.

But that's splitting hairs, actually. The real issue, which Barry ignores entirely, is that even accepting his theoretical models as authoritative data sources, I showed a chart demonstrating that–in reality, as opposed to theory–growth of consumption over the past 15 years has utterly no visible correlation with MEW.

I don't care whether Barry uses a model that came straight from the pope. Facts are stubborn things. There's just no connection between MEW and consumption. Face it.

What would happen if Barry is right? What would happen if MEW dried up or fell from its stupendous levels of the past three years back to its normal levels?

That's easy. Take another look at the chart, at real history–not theory. The answer is: nothing. Other than in a recession, consumption grows at about the same rate regardless of what MEW does.

But overlooking the reality of MEW versus consumption isn't the only way Barry ignores history. He says, "I do not see data supporting Don's contention the economy has accelerated." There is none so blind as he who cannot see. All Barry had to do was read my first posting in this debate, in which I said:

"... real gross domestic product grew at a ho-hum 2.5 percent rate [in the fourth quarter of 2006]. But if it hadn't been for the big drop in housing, real gross domestic product would have been up a whopping 3.7 percent."

The same pattern happened in every quarter of 2006. ... Without housing, on a trailing four-quarter basis, every quarter in 2006 was better than any quarter in 2005.

Want to see it in pictures? Take a look at this chart.

Oh, but I suppose I could ignore the data and the history and go with theory. After all, the theory does come from Alan Greenspan and Goldman Sachs.

Yes, Alan Greenspan. Let's see ... wasn't he the one who said that the stock market was "irrationally exuberant" in December 1996? Yes, he was. And has there ever been a worse market call in history? No, there hasn't. Other than a brief reaction a couple days after "the maestro" uttered those regrettable words, the stock market has never traded lower.

And Goldman Sachs? Let's see ... they were the ones who were calling for 4.5 percent interest rates by year-end in early 2003, weren't they, just before rates fell to 1 percent? They were the ones who said the 2003 tax cuts wouldn't do any good for the stock market, weren't they, just before the S&P 500 was set to nearly double? They were the ones who called for a "superspike" in oil to above $100, weren't they, an event for which we are still waiting with the same eagerness with which we wait for Qualcomm stock to hit $1,000?

But let's rely on them. Forget the facts. It's the end of the world! Without MEW–we're doomed, doomed I tell you!

... Not!

Barry Ritholtz: Job Growth Is Weak, Savings Are Nil, and Debt Is Soaring

On Wednesday, Don wrote: "There are no authoritative statistics on MEW; no reliable agency really claims to know what fraction of mortgage volume went into cash extraction."

Don was wrong. To correct this error, I provided three "authoritative statistics" from "reliable agencies"–the Fed, the Congressional Budget Office, and Goldman Sachs–on the precise issue of just how much MEW gets converted to consumer spending (51 to 68 percent, depending upon source).

Don's response to my citing the authority he had asked for was to dismiss this as an "'appeal to authority'–citing respected sources to back up one's point when one doesn't really have the facts on one's side."

This was disingenuous at best, intellectually dishonest at worst.

Now, on to a new topic: Employment and Income.

By just about any measure, this has been a disappointing jobs recovery. In terms of total jobs created, it lags behind every other post-World War II recession recovery.

As Bureau of Labor Statistics data show, the job growth has been concentrated in lower-paying, weak-benefit areas. Retail, schools, food and beverage service, and entry-level healthcare have been the big winners. Manufacturing and professional services have been the losers. (Manufacturing has been on the down slide for decades; professional services are facing new realities of globalization.)

You can see the impact of this in the savings rate, now negative for the first time since the Great Depression. This is not a new issue: Consumers have taken on increasing levels of debt since 1975. It is just that this year, consumer debt hit an all-time record–both as a percentage of gross domestic product and as a percentage of disposable income.

And then there's housing. From 2001 through early 2006, housing was not only the prime driver of consumer spending (see Mark Kiesel, "U.S. Credit Perspectives," PIMCO, June 2006) but also of job creation. From November 2001 through April 2005, 43 percent of private-sector jobs were housing related. As that sector of the economy has cooled, so, too, has job creation slowed.

Even the chipper National Association of Realtors recognizes this. An article in Realtor magazine noted, "Jobs, Not Subprime, Drive Foreclosure Rates".

More recent job creation (BLS average monthly nonfarm payrolls) has barely kept up with population growth; that's only after the magic of the BLS birth/death model–a statistical sleight of hand that "imagines" newly created positions–added nearly 1 million phantom jobs in 2006.

Just yesterday, the BLS released its third-quarter 2006 "Quarterly Census of Employment and Wages," covering 98 percent of U.S. jobs. This BLS report is a head count sans seasonal adjustments or birth/death nonsense. It shows "national job growth of 1.5 percent"–less than the 1.8 percent payroll growth reported by BLS.

Additionally, "Over the year, the national average weekly wage rose by 0.9 percent"–substantially below the 4.3 percent that BLS itself reported.

The weaker job growth and substantially lower income growth occurred before the U.S. economy slowed dramatically in the fourth quarter of 2006. We know the subprime impact only surfaced in the first quarter of 2007. Based on these two data points, I expect the job and income stats from the past six months to be revised substantially lower in the future.

Confused by these two different BLS sources? Consider what the labor pool themselves had to say about this. A Bloomberg/Los Angeles Times poll released just yesterday found that "most Americans expect a recession within a year. A similar percentage disapproved of the handling of the economy–even though the unemployment rate is at a five-year low." This is similar to the polls taken in December 2000, when a majority of people anticipated the economy would contract.

If job growth is terrific and income growth great, why are Americans so negative on the economy's near-term prospects?