Minutes recently released from the 2006 meetings of Federal Open Market Committee (FOMC) offer some disturbing insights into the failure of Fed officials to understand how deeply intertwined the housing sector and financial markets are. This New York Times piece goes into much detail regarding this and other less-than-flattering aspects of these meetings. While residential investment represents a tiny four percent (4%) of Gross Domestic Product (GDP), it has far reaching backward- and forward-linkages into many other components of GDP, such as construction, construction materials, durable goods, home furnishings, brokerage and financial services. For this reason, it is often said that when it comes to the strong effect residential investment has on the economy, that housing is the “tail that wags the dog.”
Yesterday I delivered the keynote address at the Shamrock Capital Advisors Annual Investor Meeting. I was privileged with the opportunity to present to a room full of high-ranking institutional investors and company executives, including Chairman Stanley Gold (former Board member of The Walt Disney Company) and Managing Director Dan Beaney. I spoke for approximately 40 minutes and my primary theme was the replacement of the private consumer bubble with a public bubble, whereby government policy now controls the overall direction of the economy. Click here to see a PDF file of the presentation.
Cari Tuna’s piece in today’s Wall Street Journal discusses a fascinating method of economic analysis: scouring oddball data to uncover trends before official information is available. In some ways, this method represents a reversion to the use of simple bottom-up observation to uncover emerging trends, in many cases before formal data is released. It bears a strong resemblance to Peter Lynch’s famous approach towards stock investing, as explained in his 1989 book, “One Up On Wall Street.” Lynch wrote, “If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them.” For example, Edward Leamer of the UCLA Anderson Forecast uses simple observation of diesel fuel sales along Interstate Highway 5 as a leading indicator of construction activity in California. While it is difficult to place total reliance on such one-off measures, these observations are nevertheless very useful when taken as a supplement to reported information, much of which by definition is incomplete and retrospective in nature. See link below: