Entries Tagged 'economy' ↓

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So home ownership has fallen to 2002 levels, and at last count there were 2.2 million vacant homes for sale in the U.S.

Lets set aside the critical question of whether a perpetually appreciating housing market should be a goal of economic policy, and assume that home price appreciation is a necessary (but not sufficient) condition for the U.S. economy to improve.

The Bush administration tried to prop up home prices by promoting a higher home ownership rate - with disastrous consequences (to put it mildly).

But there is a direct and self-evidently obvious way of reducing housing inventory, increasing business competitiveness and jump-starting the U.S. consumer base - much more immigration.

The Obama administration needs to look seriously at a completely fresh approach to immigration. To make any new immigration policy both fair and popular, any increases in immigration has to have the following elements:

1. Incentives for financially sound immigrants to move and invest in the U.S. - it is not unthinkable to impose a requirement that immigration seekers within the new system must own a minimum of (say) $250,000 US based property within a year of being granted US residency.
2. Strong disincentives for welfare-seeking immigrants - the last thing the economy needs now is an increase in the number of economically unproductive people.
3. Safeguards to ensure that the system does not evolve into the Dubai model - which places foreigners (and even their Dubai-born children) into a permanently lower class with no hope of citizenship.

The Obama administration should not be afraid of short-sighted union objections to increasing immigration - if it is serious in ending this economic depression, there should be no sacred cows.

The treasury bubble might be finally bursting - the 10-year yield has shot up by nearly 30% in the last few weeks (remember that Treasury yields move inversely with the price).

A bursting of the Treasury bubble would be bad news for two very important constituents. Firstly, large treasury bond holders (like China) would suffer capital losses on their investments. Secondly, an increase in long-term lending rates is bad news for businesses and homeowners who want to borrow long-term.

And so in this monetary policy chess-game, there are rumors that Bernanke is now considering buying long-term treasuries. There is a strong possibility that this is just jawboning. Bernanke is trying to get Treasury prices up (and yields down) simply by threatening to buy Treasuries.

If the market calls this bluff and still refuses to bid up longer-term treasuries, it could force Bernanke’s hand - either he risks losing credibility, or he unleashes yet another round of massive market distortions.

It is ironical indeed that in reality, Obama is the ultimate faith-based candidate. Our support of his Presidency is largely based on our faith in his ability, and our much stronger lack of faith in his opponents.

And because our faith is based largely on his oratory, his speeches and words are of much greater importance than those of other Presidents.

Yesterday’s speech was an oratory masterpiece, but it’s now time to get down to business. Obama needs to speak honestly and openly about the following 5 things early on in his presidency:

1. Stimulus spending (the corner stone of Obama’s economic recovery plan) - does not work. The reason for this is stunningly simple. The money that the government spends as part of a stimulus plan does not come out of a huge idle reservoir of money. Stimulus money is either borrowed or taxed. Hence stimulus spending is just transferring wealth from one group to another, and leads to no net gain.
2. Federal bailouts of states are inherently unfair - because these bailouts tax taxpayers who live in states that "lived within their means" and essentially transfers their wealth to irresponsible states who made poor budget decisions.
3. Social security and medicare are by definition ponzi schemes - A smaller workforce cannot support huge benefits for a larger retiring population. Retirees are in for big disappointments no matter what happens next.
4. The housing bubble was caused due to government intervention, not due to the lack of it. The government push for home ownership caused the housing bubble by forcing Freddie/Fannie to lend to unworthy borrowers. This crisis cannot be resolved by lending to even more unworthy borrowers.
5. The era of conspicuous consumption is most likely over. Even alternative energy cannot indefinitely sustain the suburban SUV consumerist lifestyle. Obama needs to sell the idea of a vastly different lifestyle than the ones most Americans are used to.

The Obama campaign was all about what the American people wanted to hear. The Obama Presidency should be about what the American people need to hear.

Like all bubbles the real estate bubble had a kernel of truth - real estate is a tangible asset that you could touch and potentially live in.

Those of us who feared that real estate was a bubble talked about the price-to-rent ratio, which allows us to value real estate in terms of the actual rental income it would bring.

It is possible to value college degrees with similar tools. The value of a degree is the net increase in lifetime income it brings. Every student who decides to spend her parents money (or his own future income) is making a bet that she will profit from this investment.

From John Robb comes this startling fact - the cost of a degree today is approximately equal to the increase in lifetime income - if true, a college degree provides no additional economic benefit after you factor in the cost of acquiring it.

As real estate shows, it is possible to overpay for anything - the tangibility of the asset does not prevent a mania from occurring.

So are we in an education bubble ? The graph certainly looks bubbly.

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Quick ethical question - whom would you rather bailout - 1) an otherwise honest industry that makes real products that people use or 2) a corrupt business that has confessed to stealing at least $1 billion from investors ?

Well if you chose 1, the Indian Government would beg to differ. Yes, the Indian government is actually considering bailing out Satyam.

Wonderful idea - Lets take taxpayer money collected from hard-working citizens, and put it into a failed and corrupt company so that overpaid senior managers can receive their bonuses.

And - by the time the bailout money trickles down, not much will be left for low/mid-level employees - many of whom will probably be laid off anyway.

Even the Onion couldn’t make satire like this (except this is real):

The governments handing out money to the auto industry,” Francis, producer of the Girls Gone Wild video series, said on the phone from his Santa Monica office. Why shouldn’t it hand some to an industry the nation could not live without?” The request, Francis said, was being made in a letter to Rep. Barney Frank, D-Mass, and Treasury Secretary Henry Paul­son. The $5 billion figure, he said, reflects the decline in U.S. adult ­ entertainment - industry revenue from $18 billion three years ago.

Porn industry seeks its own stimulus package - Nova Scotia News - TheChronicleHerald.ca

Aside from making puns about a stimulus package, I do have one question:  If indeed the government is going to spend trillions on rescuing the economy, does it not make sense to have the stimulus as broadly diversified across industries as possible ? After all, the consumers of houses and autos are everywhere - not just on Wall Street or in Detroit.

The real estate market is so awful that buyers are now scooping up homes for as little as $1,000.

There are 18 listings in Flint, Mich., for under $3,000, according to Realtor.com. There are 22 in Indianapolis, 46 in Cleveland and a whopping 709 in Detroit. All of these communities have been hit hard by foreclosures, and most of these homes are being sold by the lenders that repossessed them.

……

These houses are almost always small fixer-uppers. Wiring, plumbing and heating systems have to be replaced, walls and ceilings sheet-rocked, plumbing and light fixtures installed and new kitchen cabinets and counters put in. Few come with working appliances.

Often buyers are legally required to rehab these homes to bring them up to code. In Detroit, buyers are required to sign Affidavits of Compliance Responsibility, which obligates them to make repairs outlined in an inspection report. Only after that can a certificate of occupancy will be issued, which makes the house legal to live in.

But even factoring in these costs, they’re still bargains.

Radical cheap: $1,000 homes - Yahoo! Finance

So whats the catch ? Here’s my prediction - many or most of these homes are in neighborhoods that will never recover. These bargain-hunters will be stuck forever paying for repair work and fending off drug addicts from these properties. The chances of getting renters or buyers for these properties are essentially zero - thats what the $1000 home sellers know that the “bargain hunters” dont.

Billionaire Adolph Merckle - who committed suicide yesterday - sure didn’t seem to know the first thing about diversification and risk management:

His fortunes worsened dramatically last year after he was caught on the wrong side of trades in Volkswagen shares, whose price spiked when Porsche revealed it controlled more of VW than had been thought. Merckle had borrowed VW shares to sell them short in expectation of their price falling, while other trades also went against him.

FT.com / Companies / Pharmaceuticals - Billionaire Merckle commits suicide

Predictions are probably the best Rorschach tests for bloggers and investors. Everyone is in the prediction business, because every act of investment (including sitting on cash in the sidelines) is an implicit prediction about the future.

Writing down my predictions for the year has proven itself to be a great tool for me to become explicitly aware of my cognitive biases. Because if there’s one thing I’ve learnt in investing, its this - It’s not what you don’t know that kills you, but instead its what you know that’s wrong. (Can’t seem to find the original source for this quote).

So here’s the top 10 predictions on my mind as of today:

1. Stock market - The Obamarama stock market rally will be mostly over by Obama’s first quarter as President. By late 2009, it will be obvious that all of the government bailout and spending efforts are like holding an umbrella in a hurricane. The nation will finally resign to the reality of a longer term depression. This realization alongwith a few shocking municipal bankruptcies will cause the stock market to finally bottom in early 2010.
2. Bond bubble - The treasury bond bubble will continue to inflate, pushing yields to even lower levels than today. Bond bears will get clobbered in 2009 by being too early and too aggressive. The only thing that can burst the treasury bond bubble is a “growth scare”, which will not occur until 2010.
3. Obama - Barack Obama will not have the courage to give the economy the bitter pill it needs to quickly get rid of the mal-investments and excessive leverage that led to the current crisis. Nor will Obama have the courage to suggest that the government needs to be a referee in the market, rather than the dominant player it has become thanks to Paulson and Bernanke. The high of “Yes we can” will slowly morph into a hangover of “Yes we could have.”
4. Economy - By the end of 2009, almost everyone in the country will continue to believe in the perpetual motion machine that is Keynesian economics and fractional reserve banking. The Keynesians, led by Paul Krugman will still propagate the “free lunch” myth: Deficit spending and huge amounts of bad credit can cure all the problems created by deficit spending and huge amounts of bad credit.
5. Suburbia - 2008 will be seen in 2009 to have been the last year of the techno-triumphalist era. By the end of 2009, it will be apparent that technology (software, finance, green technology) alone cannot indefinitely sustain the now defunct credit-driven consumerist suburban SUV lifestyle. Austerity will be the new black.
6. Real estate - Real estate will overcorrect on the way down, and “fortress areas” like Cupertino in the Bay Area will also experience severe price reductions as IPO/options wealth, jumbo mortgage financing and the hope for a quick recovery dries up. It will be finally realized that encouraging excessive home ownership tends to hurt the economy by making it harder for workers to relocate to where the jobs are.
7. Alternative energy - Alternative energy and OPEC countries will ironically find themselves on the same side, hoping for higher oil prices so that their respective industries and  economies become viable. Oil prices will continue to disappoint them by being stagnant, and this will be a silver lining for the middle-class consumers.
8. Pakistan - The world will again be fashionably outraged for a few days in the Fall of 2009, when it becomes clear that new attacks were being planned against Indian targets even while Pakistan was condemning the recent 26/11 Mumbai attacks. India and Pakistan will again lurch towards war after the next terror attack. The US will once again force India to back down by essentially telling India: “not tonight dear, I have a headache”.
9. Microsoft - Microsoft will realize (if it has not already) that there is no point going after has-been giants like Yahoo, and will instead (correctly) acquire Facebook and/or Twitter at bargain prices. For the first time in its history Google misses out on the obvious due to the “not built here” syndrome.
10. Google - Google revenue will surprise to the upside, but it will be at the cost of cutting down on other expenses, including payroll/bonuses, bandwidth bills for Youtube and possibly even Gmail and other Google apps.

Never intended as investment advice. Read my disclaimer.

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Today we face the ironic situation of the US government abandoning free market principles to save the free market.

Whether or not the Government will succeed remains to be seen. But in the mean time, there are some fascinating unintended consequences going on (fascinating in a morbid sort of way).

It seems like every generation learns the hard way that central planning does not work, and indeed often worsens the situation that it claims to cure.

So here are just a few examples of how the current US government actions often worsen the situation that they are trying to solve:

1. Lowering interest rates reduces credit to companies

People who invest their money in CDs and money markets are (sometimes unknowingly) lending this money to companies who need the money and are willing to pay interest for short-term loans.

By driving interest rates so low, the Federal Reserve risks a perverse side effect - many money markets will have an expense ratio that’s higher than their interest rate! This means that many money market investors will have a negative return on investment. If this causes investors to withdraw from the money market (and invest into, say treasuries), it lessens the amount of money available for companies to borrow. This is already happening, as evidenced by the huge demand for treasuries (even at near-zero interest rates).

If the government wants more money to be available for lending to companies, it needs to increase interest that people earn on savings. This will provide incentives for people to save, which causes more money to flow into money markets and CDs, and hence increases the pool of money to be lent to companies! Right now the very opposite is happening.

2. Lower interest rates reduces lending to individual borrowers

If you are a bank, here is an easy way for you to get almost free money with virtually no risk:

1. Borrow nearly unlimited amounts of short-term money from the Fed (at the 0.5% “discount rate”)
2. Buy longer term treasuries with this money (earn >2%)
3. Hold to maturity if necessary
4. Repeat

Note that the above does not include having to lend to flaky retail borrowers! So this rate cut actually has an unintended consequence of making retail borrowers even less attractive to banks!

3. Helping defaulting homeowners encourages more to default

If the government provides relief to homeowners who are behind on their payments, it creates incentives for even more homeowners to fall behind, so that they too can get lower interest rates and hopefully even principal reductions!

Surely not what is intended.

4. Guaranteeing deposits causes money to leave good banks

By providing strong guarantees to money deposited in unhealthy banks, it creates an incentive for people to withdraw their funds  from otherwise healthy (but not government-backed) institutions into bad banks that are guaranteed by the government!

5. Lesson learned by bankers - take even bigger risks next time

This is probably the worst of the unintended consequences. An entire generation (and probably more) of bankers and traders have now learned - that if you take risks, make sure you take huge ones. So that if you fail, you are more likely to be bailed out in the long run. The moral hazard being created by this bailout is just staggering.

The financial, mortgage, insurance and auto bailouts almost guarantee that the next bubble will be even bigger and even more disastrous when it bursts.