A periodic blog dedicated to providing commentary and encouraging debate on topics in Economics and Finance.

About Me

Age: 26 Occupation: Private Equity

Monday, June 25, 2007

Blogger Without an Internet

Not only was I overwhelmed with things to do over the past few weeks... When I finally got the chance to sit down and write something, I find that I no longer have a functioning internet at home... I won't until Thursday at the earliest. I'm putting in a quick post from work now just to let the readers out there know I'm still kicking...

Be on the lookout for another horrid existing home sales number today, which may again show price declines. If not... be fairly sure that it's just a blip.

After I get the long-promised big post on housing out of the way, hopefully this weekend... we'll talk stocks, and why everyone who's going to be alive for more than 20 years longer should hold them in some form (and can withstand the occasional large drop in value because he / she doesn't need to use the money immediately).

Thursday, June 7, 2007

What? Inflation?

I love this guy...

barry ritholtzBarry Ritholtz submits: Okay, so here's the "Official" explanation: the selloff over the past few days is courtesy of this new-fangled discovery called INFLATION. That's why rates have ticked higher.

You see, we have been living in a benign non-inflationary environment, and just yesterday, it seems that some traders have discovered that -- WTF?! -- prices of goods and services are rising.

Of course, many pundits, traders and investors -- and a goodly part of the Federal Reserve -- have convinced themselves that there really wasn't any inflation, so long as we wear blinders and ignore those pesky goods and services like Food and Energy. You know, those annoying items utterly necessary for survival.

That's been the f@#ktard explanation, anyway. If you believe it, though, you must be living in a cave -- which given the market for bat guano and stalagmites, probably has achieved the elusive Fed goal of price stability.

Bill King notes that:

For April 2007, the monthly food cost is $1044.80 for average family of four, per the USDA.

For April 2006, the monthly food cost is $995.40 for average family of four. Ergo y/y food inflation is 4.963% according to the USDA.

The BLS has ‘food’ inflation (urban) at only 3.7% y/y (unadjusted) for April 2007. Ergo, there is a 34% discrepancy in food inflation reporting between U.S. Government Agencies – the USDA and BLS.

This story from May 24, 2007
went largely unnoticed: Reuters reports, “The Federal Reserve's adherence to core inflation, which strips out food and energy prices, is taxing the public's patience and risks credibility, a senior U.S. central banker said on Thursday.

‘In the United States over the last 20 years, core measures excluding food and energy did take out a lot of noise. But in the last three years it has been extracting quite a bit of signal,’ said Harvey Rosenblum, head of research at the Federal Reserve Bank of Dallas.”

Meanwhile, the rest of the world continues to raise their interest rates to fight inflation.


The Chicago Sun-Times was kind enough to include this table of food price increases:


Here's a sampling of where food prices are heading across the nation:

National average prices April 2007 April 2002 April 1997
White bread (pound) $1.20 $1.00 $.86
Ground beef (pound) $2.25 $1.78 $1.38
Bacon (pound) $3.50 $3.26 $2.66
Whole chicken (pound) $1.12 $1.11 $1.00
Eggs (dozen) $1.62 $1.05 $1.08
Milk (gallon) $3.14 $2.78 $2.61
Butter (pound) $2.86 $3.20 $2.18
Ice cream (half gallon) $3.79 $3.72 $2.90
Red delicious apples (pound) $1.10 $.91 $.90
Bananas (pound) $.52 $.50 $.52
Navel oranges (pound) $1.24 $.75 $.60
Iceberg lettuce (pound) $.99 $1.15 $.67
Tomatoes (pound) $1.63 $1.32 $1.35
Frozen orange juice (12 oz.) $2.52 $1.89 $1.73
Sugar (pound) $.51 $.44 $.44
Peanut butter (pound) $1.75 $1.98 $1.81
Coffee, ground roast (pound) $3.44 $2.98 $3.89
Potato chips (16 oz.) $3.48 $3.29 $3.18

Source: U.S. Department of Labor, Bureau of Labor Statistics

Tuesday, June 5, 2007

Ron Paul for President - A better America in 2008

I'm going to opine on political issues for a moment, even though I normally detest all things related thereto. In fact, I have been so disgusted with the choices for president in the two elections in which I was eligible to vote that I abstained from voting altogether. For once, I've found a candidate worth backing.

It's worth mentioning that the key issues we should be concerned with are the ones that will directly affect us. For the vast majority of Americans, their only interaction with the Federal government is the payment of taxes. On that note, I'd like to throw my support behind Senator Ron Paul for president of the United States in 2008, who supports low taxes, limited government and limited foreign intervention. I believe that he is the one candidate running today who has the right mix of competence, integrity and economic knowledge to get us out of the quagmire that we're currently in.

While he is a candidate of the Republican party, Ron Paul doesn't quite fit the Republican mold as we have come to know it recently, which now includes wasteful government spending, huge federal budget deficits and a ballooning national debt. From a generational standpoint, Mr. Paul's policies, I believe, will give us non-boomers the best chance to enjoy at least a half-decent life compared to our elders.

Some of his key platform points are below:

Getting out of Iraq
... The cost of the war is approaching $1 trillion, funded almost entirely by debt (debt that the boomers won't have to worry about too much, but the under-40 crowd will have to work paying off). Iraq has gotten plenty of help and it's time to let them sort it out for themselves. RON PAUL IS THE ONLY REPUBLICAN CANDIDATE SUPPORTING A COMPLETE PULL OUT FROM IRAQ.

We can't afford to increase our massive national debt further by spending ruinous amounts of money carrying out an interventionist foreign policy (anyone remember what happened to those guys from Italy about 1600 years ago? You know, I think they were based in Rome...)

Ron Paul has consistently voted against the Iraq war (Hillary, eat your heart out!!!).

Limited Government.. "I believe in limited government. The purpose of government is to protect liberty and not to run our lives or run the economy or police the world." - Ron Paul

Bloated tax codes with "incentives" that attempt to tell you how to spend your money, wasteful government spending on foreign wars and pork barrel politics, government subsidies and government sponsored entities such as Fannie and Freddie that distort markets, FHA (subprime lending financed by the government).... Ron Paul would work to end the wasteful bureaucracy that plagues Washington (remember, it's all paid for by you!).

Looking at the federal budget, it's abundantly clear that we could both generate a surplus and keep more of what we earn through lower taxes by simply reducing the size of government. We could probably cut out half of government expenditures and still have more government than we'd ever need.

Why we need a budget surplus: Young people (in their 20s and 30s) like me are going to have to pay down the national debt sometime, and it gets downright ugly when the bills come due and the creditors release the hounds (remember Mexico circa 1994?)... The greater the obligation becomes, the greater the drag on our economic growth.

Right now, 9% of our taxes go right out the door to pay just the interest on this debt. Of course, we'd have to pay this 9 percent - about 239 billion this year, before we even begin paying off our $9 trillion in debt. If we assume each family has, on average, 4 people, our national debt is $120,000 per family. Here's another interesting piece of information. Without interest on this debt, we'd have a balanced budget, notwithstanding the excesses of the Iraq war.

We need to be accumulating reserves to pay for social security and medicare, not piling on more debt. As it stands, with a savings rate of nearly zero and large budget deficits, we are spending a lot more than we make, and have been for some time. A wise person once told me "If your outgo is higher than your income, then your upkeep will be your downfall." Balancing the budget is a good first step toward making sure this doesn't happen.

Protecting the Value of Currency... Fairly simple... restrict the printing press at the Fed. Since 1913, when the Federal Reserve was established, the U.S. dollar has lost 95% of its value. From 1790 to 1913, prices were effectively flat (I'm quoting Peter Schiff from Europacific Capital on this). Inflation hurts prudent savers and rewards borrowers, who get to repay their debt with dollars that are worth less and less over time.

Easy money simply causes inflationary bubbles, as we've seen over the past 20 years. Ever notice how the price of anything that can't be imported has gone through the stratosphere? Healthcare, Education, Housing? I've just mentioned three of the most important things in life. While their costs have skyrocketed, the CPI has clocked in at relatively low rates. The reason... the CPI is a failure as an indicator of inflation... There are too many tweaks, the "basket of goods" that it measures is not representative of the spending needs of large portions of the American population, and other important factors (food and energy) are often excluded as undue focus is placed on the "core" number that excludes food and energy prices... which is a good indicator, I guess, if you don't need to consume food or energy.

Ron Paul's economic policies are certainly the best suited for the under 40 crowd (and I believe, the nation as a whole). If we don't get the federal budget under control and (for real) control inflation, we going to watch the value of the dollars we make erode faster than we can increase our earnings (get poorer) while we pay a much higher portion of our earnings in taxes in the future. In short, we'll all be screwed... except the baby boomers, who ran up the debt in the first place and left us holding the bill as they laugh their way to their retirement homes in Boca.

Ron Paul realizes that we're setting ourselves up for ruin, and he wants to do something about it. By all accounts, he's an honorable man (according to former treasury secretary William Simon, he's "one exception to the Gang of 535" on capitol hill), and he presents a cogent, credible platform for building a better America... Something that I believe none of the other candidates offer.

Yes... Ron Paul for president, for a better America. (Come on, are you really going to vote for Hillary? Do you really want to make it 24 years straight with a Bush or a Clinton in the White House? It's time for some new blood in the Oval Office)

- eternitus

BTW - It's only extra icing on the cake (I wouldn't vote just because of this), but Ron Paul, like eternitus, is a native Pittsburgh.

Friday, June 1, 2007

Fantastic Article from the Motley Fool

I know I promised to analyze stocks versus housing, and when things calm down for me, I will... The article below does an excellent job. I particularly agree with the "throwing money away" discussion points at the bottom of the article. Mortgage interest, property taxes, insurance and maintenance (which you throw away when you rent money and buy a house) right now amount to much more than the cost of renting.

Motley Fool
The Worst Investment Ever
Friday May 18, 2:05 pm ET
By Robert Aronen

My fellow Fool John Rosevear considers a house to be the best investment ever. I disagree. A house is a place to live, not a road to riches.

Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.

Positive cash flow
If you buy a house, how much money goes into your pockets every year? How much goes out? That's right -- a house clearly produces negative cash flow. Mortgage payments, maintenance, and taxes add up to a lot of money heading out and none coming in.

This is not necessarily true for real estate as an asset class. Purchase a parking lot, apartment block, or strip mall, and you very well may find that the rents are higher than the cost of ownership. Real estate that generates positive cash flow can be a great investment. This positive cash flow fuels the dividends from REITs such as Avalon Bay (NYSE: AVB - News) and American Financial Realty (NYSE: AFR - News).

Low costs
The Fool has long advocated seeking investment vehicles with low expense ratios and transaction fees. The expense ratio is the cost of owning an investment as a percentage of its value over the course of a year. Shannon Zimmerman at the Motley Fool Champion Funds service searches for mutual funds with expense ratios of less than 1%.

How does this compare to housing? Costs vary significantly by location, but for urban areas, annual property taxes are typically between 1% and 2% of the current property value. Annual maintenance costs can add another 1% of the property value. If your down payment is less than 20%, you will also usually have to pay private mortgage insurance. Add property insurance, and the annual expense ratio associated with homeownership can easily reach 3% or more.

The big hit, however, arrives when you sell a property. Real estate agents will collect 6% of the selling price, while, lawyers, inspectors, title companies, and banks will collect additional fees. These fees appear as though they will remain stubbornly fixed for years to come. If you flip properties as though you are actively trading stocks, the only folks getting rich will be real estate agents. Meanwhile, transaction fees for stocks and mutual funds have plummeted in recent decades, to the point of falling below $10 per trade at several discount brokers.

Historically proven returns
The Fool has long advocated shares of individual companies as the best road to wealth, because of their inflation-crushing performance over very long periods of time. In The Future for Investors, Jeremy Siegel identifies several companies that have not only beaten inflation but also delivered returns far in excess of the market average for 50 years. It does not take a genius to actually buy companies like Pfizer (NYSE: PFE - News) or Altria (NYSE: MO - News), consistently reinvest the dividends, and build wealth over the decades. Over the 50 years of data compiled, Pfizer and Altria returned 16.0% and 19.8% respectively.

For any time period longer than the past few years, residential housing prices fall far behind these returns. Perhaps the best measure of housing-market appreciation is the S&P National Home Price Index. This index represents the actual appreciation of the same house over time, whereas a portion of overall housing-price increases occurs because new houses are generally much larger than old houses and people frequently spend substantial money upgrading and expanding their houses. Looking at the index, from 1987 to 2006, we see that the overall average appreciation in the U.S. was only 5.6%. Even cities showing huge gains during the final years of the housing bubble -- including San Diego, Las Vegas, and Washington, D.C. -- showed gains slightly above only 7% for the 19-year period. If we adjust these returns for inflation, we end up with real returns on housing in a range of 3%-5%. Subtract our annual expense ratio of 2%, and the return gets pretty thin.

This index is relatively new, and the data ends at the top of the final eight years of the biggest housing boom in U.S. history. Longer-term data paints an even less encouraging picture. Piet Eichholtz studied records on home sales in Amsterdam's premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns.

Final thoughts
I will agree with John Rosevear on one account -- a house is a great place to live. Fool Mary Dalrymple provides a good discussion of the issues associated with the rent-or-buy decision. Those who think renting is "throwing money away" should consider that mortgage interest, maintenance, taxes, and insurance are also "thrown away." Having a place to live costs money no matter what, and a rational evaluation of your local market should let you know which one is a better value. Before you start plugging overly optimistic numbers into the rent-vs.-buy calculator, just remember that past performance may not be indicative of future returns.

Fool contributor Robert Aronen does not own shares of any of the companies mentioned. He lives in a van, down by the river. He would rather fund his retirement with his stock portfolio, not equity withdrawals from a house. Please feel free to share your comments with him. The Motley Fool has a disclosure policy.