Why you should become an Empirical Skeptic
First things first, most days I get some sort of prediction from someone about the state of the housing market. I have found that most of these are either driven by an agenda or by emotion. There is too much speculation as to what tomorrow may bring, when today is here, right in front of you. We usually will not know what happened today until tomorrow. So why even focus on tomorrow, when you have today! Use what you learned yesterday. It is often a waste of time and resources to speculate what will happen tomorrow in any sort of detail. With an empirical base of facts and historical references you can deduce a range of outcomes that tomorrow may bring. If are using all of those ranges in your business model, then good for you. If you are using one of those ranges, you are playing roulette. If the range of outcomes is based on anything but empirical facts, then you are playing “Russian” roulette. What is empirical? In economics, "empirical" generally refers to statistical or econometric analysis of numeric data. Other forms of observation-based hypothesis testing are not considered to be "empirics." The use of the adjective empirical, especially in scientific studies using statistics, may also indicate that a particular correlation between two parameters has been found, but that so far, no theory for the mechanism of the connection is known. Below are some thoughts based upon empirical evidence. Plan on, a good portion of the mortgage transactions, (2004 thru 2006) to default. We (SWFL) are at 2003 pricing. So people who bought houses in that time frame…… Most people buy houses, not HOMES. A HOME is the house you can and will pay for as long as it does not break you. People who live in houses well.......... It really boils down to; do you make your decisions from emotions’ or logic? For 95 percent of the world it’s all emotions. Foreclosure has become quite acceptable. You will be amazed in the coming years (today even) what a bankable loan is. The current generation of bankers gave away the income stream for fee’s years ago. We will be seeing these cycles until that business model changes. Would you rather have 4 percent of the loan balance or the interest? Making money on the interest spread of a portfolio is what banking was all about, not fees. This is the aftermath of a mania; we have been doing this since recorded history was born. Watch and learn, so the next one does not bite you. That is about all you really can do. We as people have a predisposition go from greed to fear and vice versa. The speed of the world and pop culture are amplifying these tendencies. Welcome to the aftermath of Fractional Banking on Steroids, AKA CDO, SIV, etc. Pick your financial poison. We really do not know how bad it is because the Fed quit publishing M3 in 2005. It’s not pertinent anymore, LOL. What is M3? The different types of money are typically classified as Ms. the number of Ms usually range from M0 (narrowest) to M3 (broadest) but which Ms are actually used depends on the system. The typical layout for each of the Ms is as follows:
- M0: Physical currency. A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency.
- M1: M0 + demand deposits, which are checking accounts. This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.
- M2: M1 + time deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. M2 is a key economic indicator used to forecast inflation.
- M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. This is the broadest measure of money and is used by economists to estimate the entire supply of money within an economy.
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