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    Default Escape from Normalville - John Serrapere

    Escape from Normalville

    Reaping High Rewards with Less Risk

    by John Serrapere - November 13, 2006

    Wall Street and consensus economists downplay the year-over-year (YOY) declines in home prices since August 2005 (Figure 1). Most investors expect a minor bump on the road to greater prosperity. Any negatives are expected to be minor and temporary, without even the same level of imact as occurred around 1991, which was the last time YOY home prices declined (RGDP remained negative throughout much of 1990-1991).

    Here is evidence that indicates that 2006 – 2007 may turn out to be a lot like 1990 – 1991. This was the last time that we had a combination of a housing slump, slowing economy, Iraq War with bulging deficits, and a slightly inverted yield curve.

    In summary, this report provides evidence that there is a high probability of the following, although nothing is for sure:
    1. A housing recession has begun
    2. The housing markets are likely to remain weak for an extended period
    3. The economy will experience a severe earnings and/or an outright recession in 2007
    4. US equity indices should correct about 10% soon(1)
    5. The market is likely to correct more than 20% during the summer of 2007 because, average P/Es are dear near profit peaks. Stocks are seldom fairly priced (normal is hard to price)
    6. The Federal Reserve is likely to ease sometime during 2007
    Figure 1 shows September 2006 new and existing median year over year (YOY) home prices down -9.7% and -2.3%, the largest declines in 38 years).

    Every picture tells a different story. Extremely negative effects of housing on the economy depend on the existence of weak or strong correlations between home prices and Real Gross Domestic Product (RGDP) growth and broad market indices. Before going along with the consensus view that current concerns about housing are unwarranted, let’s investigate the housing effect upon economic growth and stock prices through housing price trends and the Housing Market Index (HMI)(2). We also review homeowner equity and how it may influence the financial security and the future spending behavior of Baby Boomers.(3)

    HMI results from a monthly survey conducted by The National Association of Home Builders (NAHB). NAHB has been conducting this survey for nearly 25 years. They ask builders to rate their sales expectations of single-family homes. Current and future expectations (next six months) are rated "good," "fair," or "poor." They also rate the traffic of prospective buyers as "high to very high," "average," or "low to very low." Scores to each component are used to calculate a seasonally adjusted index. Scores over 50 indicate conditions are "good." Readings below 50 indicate "poor" ones.

    Figure 2 shows that from January 1991, stocks rallied 30.5% during the 12-months following a slump in home prices and a 19.99 HMI score–a negative correlation. Prior to 1999, 12-month stock returns were low after HMI peaks and high after HMI troughs–a negative correlation. Since 1999, there has been a positive correlation and RGDP has been a more dominant driver of stock returns.

    Correlations tabulated in Figure 3 show that since the pop of the 2000 equity bubble, housing has become more of a driver of RGDP with the HMI Index’s correlation rising from 0.39 during the baseline period (1984 to 2006) to 0.71 since January 2000. Meanwhile, forward or future 12-month returns for the S&P 500 Index have gone from a negative -0.15 to a positive 0.41 correlation to housing.(4)

    Before concluding that housing will not hurt, let us look more closely at 1991 to decide if it is different this time. First, RGDP was negative during the latter part of 1990 through 1991 Q1. Stocks reacted to a recession in 1990. The S&P 500 Index (S&P) declined 19.92% from July 16 through October 11 (an intra-day basis). Stocks prices declined prior to the 1991 trough in home prices and the slump in HMI. Shortly thereafter stocks anticipated a quick economic recovery and the market rallied strongly (Figure 2).

    Today’s stocks are not anticipating a recession in 2007. Perhaps Mr. Market continues to rally in spite of declining home prices. He may be correct; things could be different this time. After all, a recent drop in gasoline prices has boosted personal real disposal income from 0.26% during June to August 2006 to 0.8% in September 2006 and consumer confidence surveys have rebounded to levels that normally have not been associated with recessions.

    Figure 3 shows housing becoming more of a driver of RGDP and while the HMI Index’s correlation rises from 0.39 (during the baseline period 1984 to August 2006) to 0.71 since 1999. Meanwhile, the S&P 500 Index’s 12-month forward return correlation to housing rose from -0.15 to 0.41. A high correlation calls into question findings in an article published the October 16, 2006 issue of Pension & Investment magazine, which promoted a long position in housing price futures as a diversification tool, based upon a negative housing to S&P 500 correlation since 1995.

    From 1984 to 1999, long housing while long stocks were sound diversifiers–had a negative correlation. Although both assets have provided substantial returns since 1999, it is now riskier to be long both assets. Since the stock bubble collapsed in 2000, the correlation between them has been positive. RGDP has also become a more dominant driver of stock returns.

    Everything has become more dependent upon housing. The tail may be wagging the dog because housing and related home finance sectors account for 30% of employment, and according to the Federal Reserve, for every $1,000 decline in home values there is a 5 to 6 cent reduction in consumer spending.

    Easy Allan Greenspan gave us an extended period of negative real interest rates that stimulated excessive debt that feed a housing bubble. The Fed’s excessive stimulus was in reaction to a collapse in equity prices from 2000 to 2002. After bubbles pop, excesses correct through a contraction in economic growth. The Center for Economic and Policy Research (cepr) expects a 3.6% to 4.5% decline in GDP at some point during the current housing recession.(5)

    An explosion in home prices enabled consumers to borrow equity out of their homes or it enabled them to feel more comfortable about spending rather than saving, feeding the trade deficit and increasing global imbalances. This wealth effect stimulated the economy and helped companies to rebuild their balance sheets and recover from both price and corporate earnings troughs. Most of us have felt well and good for a long time, but the wealth effect should be symmetrical. If the same spring feeds the well (RGDP and earnings) when the spring dries, there will be little to drink.

    However, Merrill Lynch, Goldman Sachs, and US Bancorp expect median home prices to decline another 3% to 10% in 2007, which would be the first calendar year decline and the most severe slump since the Great Depression. Evidence indicates that if housing prices remain highly correlated with RGDP and stocks, these forecasts may have dire consequences for the economy and stock prices. The Fed has estimated that the wealth effect from housing is two to three times greater than it is for stocks. Feeling more or less wealthy has a direct bearing upon consumer confidence and personal spending, which weaken RGDP growth.

    Home Equity, the Financial Safety Net

    The deterioration in homeowner equity has received very little attention. Equity is important. The financial hardships associated with declining home equity are not confined to hot real estate markets. Homeowner debt to equity ratios are a pervasive threat to national economic growth. At 2006 Q2, it was at record low levels in all US regions.

    Since year 2000, low rates and innovative debt products have enticed homeowners to withdraw and spend their home equity. Forty percent of equity withdrawals paid down excessive credit card debt. However, the use of home equity loans has not reduced systemic credit risk because 20% of the sample added $12,067 to their mortgage while continuing to build an additional $14,419 in credit card debt (within three years). Our sub-prime group carries 78% more debt than homeowners who had refinanced a mortgage for reasons other than paying down their credit cards: debt-to-income ratios were 2.64-to-1.73. Sickness, a job loss, and home or car repairs distressed the vast majority of the sample, forcing them to use home equity as their safety net.

    The median existing home price was $225,400 when the above survey was completed. Let’s assume that respondent’s homes equaled this value. Then at best, our sub-prime group ended up with 56% in home equity. Based upon $48,000 in their average incomes, this sub-prime group most likely holds less than 20% in home equity because they would not qualify for the very expensive homes that skew median home prices higher in lucrative national markets.

    The October 2005 Center for Responsible Living Survey (CRL) also estimated that, the average homeowner had $10,300 in credit card balances. Although consumer sector debt has risen about 5% since the CRL survey, let’s assume credit card debt levels have remained near $10,300 since the survey was completed. Adding this debt to $105,616 in average household mortgage debt results in a debt load of $115,916 (as of September 2006). Dividing $116K by 2006, Q3’s median existing home price of $220K results in 47% equity. As we cite above, many cardholders with $10,000 or more in plastic are likely to be sub-prime credits with home-equity well blow 47%.

    Home price declines of -5% and -10% for calendar year 2007 might lead to -4% to -5% declines in nominal GDP.(10) Assuming a base economic growth rate of 6% (evident since 1980) it is easy to see GDP growing near 2.4% to 1.5% with real GDP negative in 2007. A 10% decline is reasonable. It only reverses 20% of appreciations since 2002.

    Dean Baker of cepr found that in 2006 Q2, mortgage debt rose more rapidly than equity causing the US homeowner equity ratio to hit a record low at 54.1%.(11) He cites that this ratio is more than 10% below the average ratios found during the 1960s, 1970s, and 1980s. In 1985, unsecured consumer debt was only 10.7% of what it is currently. Today’s debts are still huge in spite of nearly a four-fold increase in household assets. Debts have grown much faster than assets. Debt loads become more of a concern when compared to the higher volatilities in household income, lower real disposable income growth, lower unemployment, and employer health and pension benefits that were much more common prior to 1985.

    Concern about housing is more critical if the recent slump is correcting a bubble. Bubbles result when asset prices climb at rates that are divorced from economic fundamentals. Prior to 1995, home price appreciation was equal to the annual growth in the Consumer Price Index (CPI). The average annual increase in the rental cost index from 1951 to 1994 was 3.27 percent, virtually identical to the 3.29 percent average annual increase for the CPI as a whole.(12)

    The Office of Federal Housing Enterprise Oversight (OFHEO) calculates the Housing Price Index (HPI). The HPI is published on a quarterly basis and tracks average price changes in repeat sales and refinancings of the same set of single-family properties (Fannie Mae and Freddie Mac). HPI is better suited to estimate prices, because unlike median home prices it is skewed less by hot markets. Since 1995, HPI is up 108% while the CPI is up 28% but as Figure 6 shows, most of the boom was recent. The USA has never experienced such a boom. Throughout history and in global as well as US markets, home values have matched price increases in goods and services.

    A substantial portion of the differential between housing appreciation minus CPI growth is speculation. Being generous, let’s attribute three-quarters of the 80% in excess price appreciation since 1995 to fundamentals. If this is marketable, a 20% price correction brings homes back to fair prices. This correction would bring home price in line with the BLS’s owner-equivalent-rent (employed in the CPI).

    In 2005, the Federal Deposit Insurance Corporation (FDIC) published a study to ally concerns about a housing bust. Their worst-case scenario was for a gradual decline in home prices over an extended period. “Because prices are sticky downward,” the FDIC defines a housing price bust using a threshold and a time-period of a real price decline of 15 percent or more in five years.(13) The study is of little value. It lacks depth and scientific methods. It relies upon examples from past regional housing busts as evidence for what homeowners should expect after the current boom. Their position is the consensus.

    However, please recall that the FDIC failed to see the 1990s savings & loan bust. They are like Belt-Way Lobbyists. It is wise to seek other opinions. Below are some well-informed contrary views:
    “Nevertheless, the real estate boom of the last decade has been unprecedented in size and scope, which raises the risk that the downside also could exceed forecasters' best guesses”, said Eric Belsky, executive director of Harvard University's Joint Center for Housing Studies.

    "There's a tendency to predict a more gradual unwinding than actually occurs. Housing's troubles pose two main threats: one to millions of jobs directly dependent on the business, the other to homeowners' willingness and ability to spend if they feel poorer because of the trend in property prices", he said.

    “I expect a real house price decline of around 30 percent. If this takes place in a period, in which there is 10 percent inflation then that translates into a nominal decline of about 23 percent. I expect that much of it will occur in 2007 (house prices are already declining in real terms), but I certainly wouldn't predict that the drop would be completed by the end of 2007.” said Dean Baker, co-director of Center for Economic and Policy Research.

    "Additional price declines should not be surprising," says Asha Bangalore, an economist at Northern Trust Co. in Chicago. "We have a recession in the housing market... Usually it takes two to three years to stabilize."
    One new uncertainty in this cycle is today's greater reliance on adjustable-rate mortgages. With the interest rates on those loans shifting upward, a key question is how many owners will have to unload homes they bought during good times when values were rising and interest rates were low.
    "The probability of a more disorderly correction is raised by this element," says Bangalore of Northern Trust.

    “Home prices will fall 10% on average in 2007 and it will likely take three years to clear out the huge inventory of empty unsold homes currently in the market”, according to UBS analyst Margaret Whelan.
    Home price appreciation from Q2 one year earlier peaked at 14.0% in 2005 Q2. Housing peaked in 2005 Q2 when the OFHEO reported the largest 3-year inflation-adjusted gains for median home prices on record (26-years). What a difference a year makes. Price appreciation for 2006 Q2 shows the largest deceleration in three decades. "Black Gold, Texas Tea" forecasted that 2005 Q2 was most likely a turning point for the housing wealth effect.(14) The Bureau of Economic Analysis’s (BEA) advance 2006 Q3 estimate at 1.6% adds weight to the forecast made in this article. If their estimate holds, RGDP will have declined 4.4% from nearly 6% in 2006 Q1.

    Contributing Factors: Healthy Blood Letting or Rupture?

    Let us turn our attention to factors that would exasperate a housing slump. A high level of interest rates, a peak in the corporate profit-earnings cycle, and a continued inversion in the yield curve would rupture a fragile balance between our housing and equity markets.

    Our service driven economy is dependent upon low interest rates and high consumption. Declines housing are most likely responsible for last week’s disappointing retail sales reports and Wal- Mart’s 2006 Q3 earnings miss (60% of the sector missed earnings). In the face of higher disposable income, weak retail earnings are attributable to healthier personal savings, which rose from -3% to -0.5% from November 2005 through September 2006.

    Figure 8 summarizes the Bureau of Labor Statistics ( latest productivity report. It shows YOY productivity at or near 1.5%. Anything below 2% is an impetus for higher inflation. Productivity is running well below the 2.5% rate estimated as necessary to keep core inflation below 2.0%.

    Last week’s data provides impetus that stagflation is a real and present danger. If productivity continues at these levels into 2007, inflation will rise and it may keep the Fed from cutting rates. The YOY home price declines seen since August 2006 are evidence that current interest rates are restraining housing speculation. Low productivity will keep the Fed from cutting rates. It could cause them to resume increases.

    Last week, the BLS reported that October job growth continued in several service-providing industries (the total unemployment rate fell to 4.4%), while employment declined in manufacturing and construction. Average hourly earnings rose by 6 cents over the month. Employment was revised upward to 148,000 in September and 230,000 in August 2006. From this vantage point, there are no signs of a pending recession.

    Demand, Investment & Employment

    The Graph of the Week at was the Demand Net Rising Index from the October 2006 NABE Industry Survey, which showed the demand for manufactured goods approaching recession levels seen in 1990 – 1991, which is another similarity to our last housing slump. Here is NABE’s commentary:
    “Industry demand for goods and services slowed further in the third quarter. The net rising index (NRI, percent reporting rising demand minus percent reporting falling demand) stood at 37, the lowest reading since the second quarter of 2003 (see Figure 1). This was the third consecutive quarterly slowdown. The 54 percent of NABE panelists who reported rising demand was in the general range of surveys of the last three years; it was the 17 percent of the sample who reported falling demand that pulled down the NRI reading. That said, the latest NRI reading is higher than the average of the twenty-four year history of the survey of 34. NABE members can read the full survey or the summary available for the public.”
    NABE’s corporate net rise-decline indices for capital equipment expenditures (CAPEX) and employment were added to show how demand for manufactured goods leads total demand for goods & services, CAPEX, and then employment.

    Demand for goods & services drives CAPEX. CAPEX is highly correlated with aggregate employment growth. Higher corporate investment and employment are excellent indicators of economic and earnings growth.

    Figure 9, depicts NABE member expectations for demand in goods & services (total demand) as a leading indicator of CAPEX and employment (both hold 0.54 correlations to demand). Watch CPAEX to see if it picks up the slack from our expected declines in consumer spending. Time lags exist between changes in total demand, CAPEX, and employment.

    Also, pay attention to the differential between reported earnings and corporate profits (Figure 10). Wide differentials precede periods a corporate fraud or insider gaming. These periods are followed by drastic earnings revisions, earnings surprises, and deep price corrections in underlying stocks.

    Wide differentials are also associated with stock market prices that appear to be divorced from fundamentals, which is captured by the severe -0.61 negative correlation between S&P Earnings – BEA Profits and 12MF S&P 1995-2000. After the lies are exposed, 12-month forward S&P total returns correct for distortions as investors reallocate capital to higher return assets. The current negative correlation between these differentials and recent stock prices prompts concern about the quality of earnings. Earnings are highly cyclical. Their peaks are highly correlated to peaks in corporate profits.

    All things have their season. One of biggest mistakes that investors make is overweighting and/or buying low quality stocks on margin near peaks in the corporate profit cycle. Earnings have risen very rapidly since 2002. Figure 10 plots the wide differential between earnings and profits, which have shifted wildly from extremely positive to negative and then back to positive extremes since 1999. In 2006 Q2, capital income (profits) was near its all-time peak in relation to labor’s share of national income (Figure 11). Near peaks, labor demands a greater share of profits, which reduces equity earnings.(15) Dean Baker of cepr finds:
    “Profits or capital income is now approximately at the same share of income as they were at the peak year of the 90s cycle (1997). The earnings share typically falls substantially after peaks, implying stagnant or declining profits.”

    “My crystal ball would support the declining profit view. We are just beginning to feel the effects of the collapsing housing bubble and it is not going to be pretty. It is also worth noting that productivity growth has slowed sharply in recent quarters. With the sharp upward revision to employment growth, productivity growth will be under 2.0 percent for the six quarters ending in the 3rd quarter of 2006 (assuming consensus projections for 3rd quarter GDP). If we ever see any wage growth in this cycle, it should be now and it will be at the expense of profits.”(16)
    The Wall Street consensus remains bullish. Near peaks, the horizon looks great because current earnings appear strong. However, the current wide differential between reported earnings and profits and the 22.8% capital income share as of 2006 Q2 looks TOPY. If so, current price-to-earnings ratios are dear. At 17.8 for the S&P 500 and 22.5 for the Dow P/Es are well above the S&P’s 15.8 average P/E for all points in the earnings/profits cycle since 1939.

    Wall Street’s view is that current P/Es are normal if viewed on a forward basis. They see strong earnings growth. Is it normal to expect no limits to growth. No, their view is pure speculation. The Street touted the same line during the spring of 1990 with P/Es near 17 but, stocks were priced better after correcting -19.9% (P/Es fell to 13).

    Near peaks, even average P/Es near 16 are too expensive. 2006 Q3 profits for the S&P 500 are expected to rise 12% -15% YOY, which would put P/Es near 16. Stocks may hit or exceed estimates but doing so is not a justification for higher prices. Near profit peaks, P/Es should contract especially with 10-year T-note yields near 4.5%.(17) Large companies with consistent dividends are best here. They are undervalued relative to norm and they display earnings consistency.

    Only slightly more than 20% of the 500 stocks in the S&P deliver consistent earnings and dividend growth (quality rankings of A- or higher). My last installment of Active Indexer provided evidence that the Mr. Market is telling us to protect capital through his rotation from low to high quality stocks. Since May 8, 2006, large caps have bested small caps and most defensive sectors have bested economically sensitive sectors because price knows more than the blue suits. It is also wise to listen to the yield curve. It too may help you to escape from Normalville.

    Yield Curves & Risk

    Recently, Fed economist Jonathan Wright published an economic growth model based upon the forward term structure of Treasury bills and notes.(18) Wright’s model predicts the probability of recession 12-months forward. It is based upon:
    “The shape of the yield curve that has historically been the strongest predictor of recessions involves an inverted yield curve with a high level of the nominal funds rate (Wright 2006). Currently, the yield curve is flat, not owing to a historically high level of the federal funds rate, but rather, to a low level of distant-horizon forward rates due in turn to some combination of low inflation expectations, low expected equilibrium real rates, and/or low term premiums.”(19)
    Wright focused upon probabilities and severities of recession (degrees of negative RGDP). Wright’s model currently puts the probability of recession in 2007 at 46%.

    Arturo Estrella and Mary R. Trubin 2006 add to Wright’s findings. They also dispel his notation that inversions are better predictors of a recession when the nominal Fed funds rate is higher than the current rate at 5.25%.(20) Wright’s work is still valuable but he did not need to go so far.

    Figure 11 is my reproduction of Arturo Estrella and Mary R. Trubin’s research published in the Federal Reserve Bank of New York’s July/August 2006 issue of Current Issues In Economics and Finance. Estella and Trubin found that prior to all six recessions since 1968 there was an inverted yield curve (no false positives).(21) The magnitude of the minimum negative yield spread was associated with the severity of a subsequent recession within 12-months following at least one yield spread reading. The strength of the inversion and the level of GS10 yields were immaterial to the ability to predict a recession.

    However, recession severity was associated with the duration and magnitude of inversion. Four of six recessions had six or more negative month-end spreads (during the 12-month period prior to recession). On average, RGDP’ declined -2.24% during these events. The 1990–1991 and 2001 recessions were preceded by three months and one month-end inversion. Their subsequent recessions were mild with RGDP contracting only -1.10% and -0.37%.

    Spreads (GS10 minus TB3MS) were -0.21%, -0.22%, and -0.32% at the end of August, September, and October 2006. These inversions are very relevant. They add support for the likelihood of recession in 2007. Estella and Trubin 2006 is a limited model of probability. Unlike Wright, their method does not result in a current 46% probability of recession in 2007. Their only conclusion is that (so far), T-bill to note inversions have proceeded the last six recessions.

    Figure 12 is another piece of the puzzle that shapes a picture that looks much like 1990 – 1991. Then and now there were at least three months of inversion with minimum inversions of -0.08% in November 1990 and -0.32% in October 2006.

    If you want a number, recent inversions raise the probability of recession in 2007 to somewhere between 35% - 50%.

    Profit Peaks and/or Economic Recessions Breed Bear Markets(23)

    Wall Street often cites the slight and brief inversion between two and ten-year Treasury notes in July and August 1998 as evidence that recent inversions may not portend an imminent recession. Estella and Trubin’s work concurs with a wide body research that concludes that these spreads were not relevant because they were only -0.02% and -0.01% and they were not associated with T-bill yield inversions.

    Despite Wright’s rigorous statistical tests for the probabilities of recession, Estella and Trubin’s methodology is straighter forward than Wright’s is. It simply observes T-bill to T-note inversions 12-months prior to the onset of recessions. They conclude, this report, and my previous publication known as Peak Risk verifies that the probability of recession is high even if there is only one negative monthly spread (simple is not stupid).(24)

    Nouriel Roubini 2006 has been one of the most adamant proponents that the recent housing slump will be severe enough to precipitate a global recession in 2007. His work measures sever market declines that start sometime before the official onset of all National Bureau of Economics Research (NBER) recessions. The S&P 500 Index begins a severe correction that bottoms before the recession ends. The average peak-to-trough decline since 1968 has been -28.5%.(25)

    We may party like its 1999 or 1991, who knows? Parties only result in painful hangovers when too many partygoers deny that the punch is spiked or think they can handle the juice.

    It is time to stay home, drink a soda, and watch a movie. Reward yourself–you deserve it.

    This report was originally written to internally advise private funds for a qualified investor. The posting of this report for public viewing is intended to demonstrate applied research without an intent of business solicitation.

    John Serrapere - Investment Analyst & Strategist - Foster Holdings, Inc.

    Mr. Serrapere has been advising investors since 1986. He currently is the Investment Analyst & Portfolio Strategist for Foster Holdings, Inc., a large Pittsburgh, PA based family office. His firm also consults other investors seeking alternative investment options. Mr. Serrapere was formerly a principal of Rydex Leveraged Hedges, LLC in Rockville, MD where he designed registered and non-registered products.

    Mr. Serrapere has published in The Journal of Indexes, Global Financial Data, Corporate Finance Review (Warren Gorham & Lamont, NY, NY), The Retirement Planning Journal (Commerce Clearing House, Chicago, IL) and has presented for Information Management Network (NY, NY).


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    (1) There have been 922 trading days since last 10% or more correction
    (2) Roubini, Schiller, etc
    (3) Baker, Dean, Dwindling Home Equity Threatens Growth…The Ratio of homeowner’s debt to equity is at a record high, Center for Economic and Policy Research,, September 19, 2006.
    (4) Refutes the findings of an article published in Pension & Investment magazine that promoted housing price futures as a great diversification tool because of their negative correlation to stocks.
    (5) Dean Baker, Dwindling Home Equity Threatens Growth, Center for Economic and Policy Research, September 19, 2006.
    (6) Alan Greenspan’s testimony before congress in 2003.
    (7) Dean Baker, Dwindling Home Equity Threatens Growth .
    (8) Center for Responsible Living Survey, The Plastic Safety Net, The Reality of Debt in America, October 2005,
    (9) This is generous given that median home prices are skewed higher by very expensive home in lucrative markets.
    (10) Dean Baker, Dwindling Home Equity Threatens Growth
    (11) Dean Baker, Dwindling Home Equity Threatens Growth
    (12) Dean Baker, Dwindling Home Equity Threatens Growth
    (13) FDIC, U.S. Home Prices: Does Bust Always Follow Boom?, February 10, 2005 (revised April 8, 2005)
    (14) John R. Serrapere, Black Gold….Texas Tea, A Survey of The Energy Markets, The Journal of Indexes, Jan/Feb 2006.
    (15) China recently mandated the hiring union workers for all foreign and domestic corporations. Immediately after the Democrats took control of the Congress and Senate they announced that they would introduce legislation to raise the minimum wage to $7.25 per hour.
    (16) Dean Baker, A Note on Distribution and Growth, cper, October, 2006.
    (17) 10-year T-note yields <4.5% have often been accompanied with annual RGDP growth less than 2.5%, which causes bonds and stocks to have a negative correlation as they have since June 1997.
    918) Jonathan H. Wright*1, The Yield Curve and Predicting Recessions and Arturo Estrella and Mary R. Trubin, The Yield Curve as a Leading Indicator: Some Practical Issues, Current Issues in Economics and Finance, Volume 12, #5, July/August 2006
    (19) Jonathan H. Wright*1, The Yield Curve and Predicting Recessions
    (20) John Serrapere, “Peak Risk” concluded that current rates and inversions have historically resulted in recessions. Inversions at higher rates were associated with inflation well above 3.5%. Lower rates were evident during recessions with inflation slightly above 3.5%.
    (21) Type I error, also known as an "error of the first kind", an α error, or a "false positive": the error of rejecting a null hypothesis when it is the true state of nature. In other words, this is the error of accepting an alternative hypothesis (the real hypothesis of interest) when an observation is due to chance.
    (22) Jonathan H. Wright*1, The Yield Curve and Predicting Recessions and Arturo Estrella and Mary R. Trubin, The Yield Curve as a Leading Indicator: Some Practical Issues, Current Issues in Economics and Finance, Volume 12, #5, July/August 2006
    (23) NABE October 2006 Survey. Forecasts for second-half 2006 growth grew more pessimistic between July and October. Only 15 percent of respondents expect second half growth to exceed 3%, down from 29 percent of respondents in July and 63 percent of respondents in April. The percentage of respondents expecting growth to fall below 2% was more than double its April level. A growing majority of respondents expect growth between 2% and 3%.
    (24) John Serrapere, Peak Risk,, May 2006.
    (25) Nouriel Roubini,, July 2006
    Last edited by FRED; 11-12-06 at 10:56 AM.



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