Our reputation has been built on our accuracy. While other research companies may incorporate “expert” opinion and commentary, our discipline relies solely on actual facts, events and anomalies from which we derive our intelligence. This discipline ensures the change we identify is real rather than simply expected or predicted.
Housing and the Economy
In 2004, the popular view of economic conditions was very positive: The stock market was rising, price-earnings ratios were up, corporate profits were elevated, layoff announcements were down, housing starts were the highest they had been in decades and consumer confidence was high. Using graphs to predict the future, economists drew lines straight upward.
When problems did surface in the housing area after 2004, experts said it was just a few problems in the subprime loan market. In May 2008, after things had gotten worse, Fed Chair Ben Bernanke said the effects of the "troubles in the subprime sector" would not spill over to "the economy or to the financial system."
Picking Up the Critical Facts
In our reading, we were noticing some glaring problems that didn't seem to find their way into the public conversation. For instance, over the years we observed that:
In 2004 the housing industry was driving the economy, even though past housing bubbles had always been the product of an economic boom, not the cause.
In 2007, investors were "flipping" condos for profits before ground had been broken, and interest resets for adjustable rate mortgages were positioned to increase rapidly later in the year.
Between 2000 and 2006, median income for American workers remained flat, while consumer spending steadily increased. Over 5 years, debt outstanding in the U.S. grew 3.5 times faster than income.
In those same years, U.S. GDP expanded every year, while consumer debt increased the most in U.S. history, from $7.4 trillion, roughly equal to the entire country's GDP.
Given how long the economic problems were allowed to grow, we sensed "there was a lot riding on the price of the house."
Diagnosing the Change
We were able to put together a context different from the one most commonly cited in the public conversation.
In 2004, we concluded that when a collapse came, it would affect more than the real estate industry and would negatively impact the overall economy, employment in many industries, Wall Street financing, the stock market, China as well as other exporting economies and eventually the dollar.
In 2005, the financial instruments enabling the housing boom appeared suspect to us and buyers of CDOs really didn't understand what they were buying.
As a result, the high-risk financial instruments were "leaning on air," and the assets upon which they were supposedly dependent were way overvalued and underfunded.
Inductive Inference: Identifying Areas of Impact
The downturn would be much worse than anyone was anticipating and would affect a wide swath of the economy. Moreover, it would last several years, not just many months as some were suggesting.
Because American corporations had become adept at preserving profits, we suggested they would react quickly and lay off workers in large numbers, which would make consumer spending even worse.