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debt housing Macro Tourist

Mind The Scale, Chicken Little

"I simply want to point out that neither one of these graphs are anywhere near as bearish as the Chicken Littles claim."

By Kevin Muir of “The Macro Tourist” fame; reposted here with permission

KM1

Today’s post will be short and sweet.

Over the weekend I stumbled upon a chart that plotted the total amount of debt in the United States. It was a scary looking chart and the post’s author used it to justify all sorts of apocalyptic projections.

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But wait, is this as bad as it seems at first glance?

Bill Gates once famously said, “we always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” I am not sure Bill was talking about the magic of compounding, and it is tough to take any advice from anyone talked into taking these pictures (see below), but maybe there is a little nugget of wisdom in the words of this Rod Stewart lookalike.

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Here is the same graph, but with a log scale. I also added the year-over-year percentage change (red line).

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All of a sudden, it’s a completely different graph. Far from debt increasing at an accelerating rate, the last eight years has seen some of the slowest debt growth since the 1950’s.

Be careful of using linear scales over long periods of time.


Here’s another example. It’s not quite the same trick, but also deceptive.

I have noticed articles where American housing bears claim another bubble is being blown in real estate. They will cherry-pick periods to make it look like housing is being built at an astonishing pace.

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Single family homes have “sky-rocketed” from 300k to 600k over the past eight years. A doubling! It must be unsustainable and irresponsible.

But wait, let’s back the time period out a little.

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In 2005, the U.S. was building 1.2 million new homes a year! So even at 600k, we are still half of where we were last cycle.

And yet, there is still another trick embedded in this chart. Let’s agree that we are now approximately at the average rate of home building that we experienced over the past five decades. Tough to argue against that logic.

But what has happened to the population over this period? It has exploded! So it’s not an apples-to-apples comparison.

If you adjust for population, the chart looks completely different.

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The adjusted series is still sitting below almost all levels over the past half century.

I don’t have any deep insights to offer from today’s post. You can probably read between the lines and deduce that I am not as worried about debt and housing as the uber bears – can’t disagree with that conclusion.

And obviously there is much more that goes into both of these calculations. Instead of using them to be bullish, I simply want to point out that neither one of these graphs are anywhere near as bearish as the Chicken Littles claim.

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2 comments on “Mind The Scale, Chicken Little

  1. broblawsky

    I can’t agree with this. In real, per-capita terms, total credit market debt is still at its highest level in recorded history, beyond even the GFC peak: https://fred.stlouisfed.org/graph/?g=j8ro

    Similarly, while per-capita real mortgage debt may not be as bad as it was during the GFC, it’s still sitting at late-2003/early-2004 levels, above any pre-bubble level in history: https://fred.stlouisfed.org/graph/?g=j8rt

  2. monkfelonious

    Umm, the last two charts (in comparison) look pretty much the same to me. Lets make the X coordinate value long enough and the Y less, any line through points (describing a range) will appear flat, the wiggles undetectable to the human eye thus rendering them useless. So what’s the point, I thought everyone knew this? My point is charts are more or less useless in the long term. Every chartest on the planet plays with the coordinates in order to add or subtract drama. Just draw me a chart of the change in average global temps over the last 10,000 years with the Y, temp, in 10* Celsius increments and the X ,days (all 3,650,000 of them with ten inches of ‘space’ between each), and see how nicely it shows “What’s the big deal?” Yeah, I know that my product is ridiculous. I’m a little disappointed, this guy usually has something better to offer.

    “I have noticed articles where American housing bears claim another bubble is being blown in real estate. They will cherry-pick periods to make it look like housing is being built at an astonishing pace.”

    Has not the author done the same? HIS chart offered as an example starts at 2010. What happened before that?

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