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

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Age: 26 Occupation: Private Equity

Thursday, June 12, 2008

From Yahoo Finance: Couldn't have said it better myself

Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Has the American Dream Become a Fairy Tale?

by Laura Rowley

Excellent (113 Ratings)
Posted on Wednesday, June 11, 2008, 12:00AM

Once upon a time there was a greedy young man with shiny wingtips and important degrees. His father, an advisor to the king, had paid the young man's way through an Ivy League college and got him a job managing the village's pension investments.

The greedy young man went to his magic mirror and said, "Mirror, mirror, I'm at the top of my field, I'm entitled to a higher yield. I'd like to earn that yield today, so I get a bonus with my pay. Tell me now, because here's the thing -- I'm really entitled to earn more than the king."

The mirror replied, "Call Wall Street please, and invest in mortgage-backed securities. Don't worry whether the yield will last, this way you'll get your bonus fast."

And the greedy young man went on television, where the media declared him a genius.

The Investment Banker

Once upon a time there was a greedy investment banker with shiny high heels and important Ivy League degrees. She went to her magic mirror and said, "Mirror, mirror on the wall, I'm clearly entitled to a windfall. I'm putting upon you the onus -- what's the best way to boost my bonus?"

The mirror replied, "Here you'll find the recipe -- sell this hot security: Bundle good and bad mortgages together, slice and dice them and sell them as treasure. Don't worry about what's really inside -- anything foul the rating agencies can hide. If you follow my advice today, surely you'll increase your rate of pay."

And the greedy investment banker went on television, where the media declared her a genius.

The Bank President

Once upon a time there was a greedy bank president with a fancy gold watch and important degrees. He went to his magic mirror and said, "I find myself on the executive floor -- I'm really entitled to be earning more. If the stock went up I'd have no cares, since I own about a million shares. Ten other banks have opened on my block -- tell me how to boost my stock."

The mirror replied, "Hand out mortgages across the land, and sell them to Wall Street as fast as you can. Heed my word in this endeavor, and your stock will go up and up forever."

And the greedy bank president went on television, where the media declared that his bank's stock would likely go up forever.

The Mortgage Broker

Once upon a time there was a greedy young man with a not-so-fancy degree and a leased Porsche. He went to his magic mirror and said, "Mirror, mirror, I want to be rich, tell me where I can find my niche. I've read 'The Secret' and I'm ready for action, I'm familiar with the laws of attraction. My ambition is so thoroughly unbridled, I think you'll agree that I'm entitled."

The mirror replied, "Now my friend don't fret or frown, but make some loans with no money down. Become a mortgage broker and get on the phone; get some expertise in the 'liar loan.' Find suckers with no income to sign on the line, tell them when the rate adjusts things will be fine. Or sign yourself, who needs permission? Just make sure the loan has the biggest commission. Since you're lending the bank's money there's no hitch, just close those loans and you'll be rich."

And the mortgage broker went on television, where he starred in a commercial as Crazy Morty the Mortgage Broker, urging would-be homeowners to call him at 1-800-555-4567.

The Greedy Townsperson

Once upon a time there was a greedy townsperson who lived in his parents' basement and spent most of his time watching television. He saw the mortgage broker's commercial, went to his magic mirror, and said, "I don't have a job or a fancy degree, but I'm smarter than those geniuses on TV and I'm entitled to a home for free. Should I call the number that I see?" And the mirror replied, "Yes, and then cash out your equity."

He bought a McMansion and, six months later, cashed out the equity and bought a Lexus.

The Hard-Working Townsperson

Once upon a time there was a hardworking townsperson, the neighbor of the man who bought the McMansion. The hardworking man toiled in IT for the bank, where he received raises of 4 percent a year. Unfortunately, his expenses -- food, gas, utilities, taxes, health insurance, college tuition, even the cleats for his kids' soccer shoes -- were rising much faster. He drove an 8-year-old minivan, and had scrimped and saved to buy a house he could afford -- even putting 20 percent down.

He went to his magic mirror and said, "Mirror, mirror, I'm exhausted. Today at work I almost lost it. I come home from my toil and fall into bed. What can I do to get ahead?" And the mirror replied, "I have no schemes for such an honest dude -- I sincerely hope you don't get screwed."

The Moral

And as it turned out, the mortgage-backed securities were not treasure, and the pension fund went broke. The king made up for the loss by doubling taxes. The greedy young man and the greedy investment banker both got lucrative new jobs at a hedge fund run by an Ivy League pal.

The bank stock didn't go up forever -- it crashed to $5 a share -- but the bank president received a bailout worth $160 million and retired to the Caribbean. The mortgage broker moved to the Caribbean as well, where he was recognized by the banker who had enjoyed his Crazy Morty TV commercials. The banker got him a job running the country club's caddy shack.

The townsperson who bought the McMansion couldn't afford his mortgage when the rate reset, so the government bailed him out. The hardworking townsperson was laid off with no severance (that money had been given to the bank president). The hardworking townsperson's home plunged in value and his taxes went up (to bail out his neighbor and the kingdom's pension fund). His IT job was sent overseas, where the bank hired a programmer for $8,000 a year.

And the mirror just sighed at all the trouble. "Another mania, another bubble. The winners get out before it bursts, the man who follows the rules is cursed. With a sense of entitlement and plenty of greed, you can win this game with lightning speed. I've told the tale, and now I'm finished."

And the American Dream was greatly diminished.

Wednesday, April 23, 2008

From Barry Ritholtz at The Big Picture via James Bednar at the New Jersey Real Estate Report via RentingInNJ comes an excellent graphic that basically sums up the credibility of the National Association of Realtors, wholes sole existence is to create home sales (change the direction of the line below) and enrich its members to the detriment of house buyers everywhere.
1. "There's no question there is a strong demand for housing from a growing population." -David Lereah, NAR Chief Economist

2. "For the foreseeable future, the demand for homes will continue to outstrip supply" -Al Mansell, NAR President

3. "We've been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream." -David Lereah, NAR Chief Economist

4. "We are returning to more balanced markets between home buyers and sellers… We feel confident that housing is landing softly as rates continue to rise." -David Lereah, NAR Chief Economist

5. "This is part of the market adjustment we've been discussing, with a soft landing in sight for the housing sector. The level of home sales activity is now at a sustainable level. Overall fundamentals remain solid…" -David Lereah, NAR Chief Economist

6. "Higher interest rates are slowing home sales, but we see this as another sign of a soft landing for the housing sector which remains at historically high levels." -David Lereah, NAR Chief Economist

"After five years of booming sales, we are now experiencing normal market conditions across most of the country… most owners can expect steadier gains in home values for the foreseeable future." -Thomas M. Stevens, NAR President

7. "Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projection, which tells us the market is stabilizing" -David Lereah, NAR Chief Economist

8. "Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it'll likely take some months for price appreciation to rise." -David Lereah, NAR Chief Economist

9. Existing-home sales stabilized at a sustainable pace in August -NAR

10. "…the worst is behind us as far as a market correction — this is likely the trough for sales. When consumers recognize that home sales are stabilizing, we'll see the buyers who've been on the sidelines get back into the market" -David Lereah, NAR Chief Economist

11. "It looks like we're moving beyond the low for the housing cycle last fall, and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices." -David Lereah, NAR Chief Economist

12. "Fundamentals have improved in the housing market and buyers see a window now with historically-low mortgage interest rates and competitive pricing by sellers," -David Lereah, NAR Chief Economist

13. "We also may be seeing some losses as a result of the subprime fallout. However, this is masking improved fundamentals in the housing market, with lower mortgage interest rates and motivated sellers." -David Lereah, NAR Chief Economist

14. "Buyers who've been on the sidelines may want to take a closer look at current conditions in their area – if they wait for sales to rise, their choices and negotiating position won't be as good as they are now." -Pat V. Combs, NAR President

15. "The rise in sales and prices in the Northeast region on a fairly consistent basis in recent months is promising because this was the first region that underwent sales and price weakness after the boom. Now, it appears that it will be the first region to climb back, indicating that other regions could follow a similar path." -Lawrence Yun, NAR Chief Economist

16. "The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales…Once we get through these disruptions, we'll get a better sense of where the actual market is in late fall as conditions begin to normalize," -Lawrence Yun, NAR Chief Economist

17. "Existing-Home Sales Rise in November, Market Likely Stabilizing" -NAR

18. "Home sales remain weak despite improved affordability conditions in many parts of the country, but we could get a quick boost to the market if loan limits are raised in combination with the bold cut in the Fed funds rate," -Lawrence Yun, NAR Chief Economist

19. Existing-Home Sales to Stablize Before Upturn in Second Half of 2008 -NAR

Wednesday, April 16, 2008


Take a moment from your day and oppose the coming housing bailout by clicking here. None of us, especially those paying our mortgages on time or who avoided taking out mortgages we couldn't afford altogether and rented, wants to be rewarded for our good behavior by paying for other people to remain in their mansions.

It's simple... it's just the wrong thing to do, even setting aside the fact that a bailout won't work.


Monday, March 31, 2008

Hillary Says to Copy Japan?

Sometimes, I can't believe what I hear from our politicians. But then, I realize that our politicians know as much about economics as they do about, well, anything else except politics (no, they are not smarter than a 5th grader). So, in essence, they know what is spoon-fed to them by their overworked, underpaid and understaffed staff, which is often incomplete and sometimes dead wrong.

At first, I was delighted to hear 1990s Japan brought into the discussion. That is, until I heard Hillary say that we should be more like Japan. Then I was shocked. Yes! Bring on the agonizing, torturous 15-year funk that was Japan after 1990! What amount of self-loathing would actually lead someone to desire such an outcome? Is she going to try to legislate mandatory self-flagellation for 5 hours per day, and bi-weekly root canals with no anesthetic, as well? Sometimes, we just have to gape in awe at the folly of our fellow (wo)man.

Saying we should try to emulate Japan is no different, IMHO, than holding up the Pittsburgh Pirates as the blueprint for baseball success (I still love you, Buccos, but your 15-year funk puts you in the same category as Japan's economy as far as futility is concerned, though on a slightly different scale).

At least someone is paying attention.


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Hillary's Bad History
March 31, 2008; Page A18

No, not sniper fire in Bosnia. We're referring to Hillary Clinton's lament last week that the U.S. is flirting with a 1990s Japan-style deflation. Perhaps it's a good time to remind everyone what really happened in Japan, so Mrs. Clinton and the rest of Washington don't make the same mistakes.

"I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone," Mrs. Clinton said in the interview with Journal reporters. "I think the Japanese tried that and tried and tried that." She added Japan should have relied more on fiscal stimulus spending and aid to banks and homeowners, which is what she wants Washington to try now.

The Senator needs a refresher in Japanese economic history. Far from easing monetary policy, the Bank of Japan kept money too tight for too long in the early 1990s. Japan's stock market slide began in early 1990, but its central bank raised interest rates through most of that year and didn't cut them until July 1991. While the Bank of Japan eventually chased interest rates down to zero, it was always too late to break the deflationary spiral.

There's little sign the U.S. is facing a similar danger today, given that the Federal Reserve has been dropping rates quickly as the economy has slowed. If anything, the problem is the opposite, with the Fed risking future inflation by putting rates into negative real territory and devaluing the dollar. (See Ronald McKinnon nearby.)

Japan also made the mistake of refusing to make banks pay for the mistakes they made during their global lending spree in the late 1980s. As the world economy fell into recession in 1990, so did Japan. But rather than letting banks take their losses, the Liberal Democratic Party kept bailing them out. This merely delayed the day of reckoning, as insolvent banks were allowed to exist as "zombies," alive in name but unable to lend.

[Hillary's Bad History]1

The government also raised consumption taxes, burdening consumers at exactly the wrong time. Meanwhile, with encouragement from the Clinton Treasury, Tokyo launched a vast Keynesian spending program. Roads, bridges, trains -- you name it, Japan built it. The nearby chart shows the impact this spending had on overall Japanese government debt, which exploded over the decade. The nearly annual spending programs led to several false recoveries with growth blips, but they never changed incentives enough to revive domestic risk-taking.

Yet this is exactly the policy that Mrs. Clinton now wants the U.S. to emulate. Rather than let housing speculators and lenders take the hit for mispricing credit and allow the market to clear, she wants a 90-day freeze on foreclosures and a five-year freeze on mortgage resets. She also wants the feds to buy up mortgage-backed securities and guarantee troubled mortgages. Rather than let housing markets find a bottom where they can begin a recovery, she and her allies in both parties would prolong the agony. While some homeowners and banks would be saved from foreclosure or greater losses, the cost would be to lengthen the housing recession.

A better model is the one the late Al Casey put into practice during the savings and loan crisis in the early 1990s. As president of the Resolution Trust Corp., Mr. Casey sold almost $400 billion of bankrupt assets as rapidly as he could. Declaring that his purpose was to "put the RTC out of business," Mr. Casey let investors buy those assets even at "vulture" prices. The real estate market was able to find a bottom, and the recovery came so fast that Bill Clinton inherited an economy that grew by 3.3% in 1992.

The Beltway class also now wants to indulge in the same Keynesian "stimulus" that failed in Japan. Mrs. Clinton's "Rebuild America Plan" would invest $10 billion over 10 years in an "Emergency Repair Fund" -- a plan she claims would create 48,000 jobs for every billion dollars spent, or close to half a million jobs. She would build ports, railroads, airports, public transit, tunnels and roads. Senate Democrats are proposing more than $35 billion in new spending -- on top of their $168 billion in tax rebates. These may also lead to false recoveries, but they won't ignite a new round of risk-taking and investment.

Japan finally emerged from its funk earlier this decade after it realized its bank losses and caught the updraft from global monetary reflation. Still, its economic growth remains mediocre -- a level that wouldn't be tolerated in the U.S. and may not be enough even in Japan. Sluggish growth has already sunk one Prime Minister and could prove fatal to the current leader, Yasuo Fukuda, whose approval ratings are dropping fast.

The way to revive U.S. growth is by learning from Japan's mistakes, and doing the opposite. The U.S. needs monetary policy that maintains a stable price level, bank supervision that recognizes mortgage losses and lets markets clear, and marginal rate tax cuts that boost incentives to work and invest. In short, the American policies of the 1980s, not those of Japan's lost decade.

Friday, March 28, 2008

Waiting for that one, dumb home buyer

Tim Iacono, in his fantastic blog "The Mess that Greenspan Made," has some great points in his post below.

Waiting for that one, dumb home buyer

Amid the very low real estate sales volume in many parts of the country today, the prices of those few homes that are sold are now falling much faster than the asking prices of homes currently for sale.

That fact is clear to see in many neighborhoods as sellers sit and wait, either not knowing or not caring that they have little chance of getting anywhere close to what they're asking unless that one, dumb home buyer shows up who knows less about real estate market conditions than they do.

The New York Times had a story about this yesterday - what some call "riding the market down" - and they touched on a couple of the key issues:
In most other areas of the economy, this combination of plummeting sales and stable prices would not happen. When demand for airline tickets drops, the airlines cut their prices until they have sold their seats. When stocks become less appealing, share prices fall, sometimes sharply.

Just try to imagine stock prices staying roughly flat over a three-year period while sales volumes sank because investors considered the market overvalued. Bear Stearns is still worth $150 a share, and I’m not selling until someone pays me $150!

Real estate, though, is different. For both economic and psychological reasons, there is no asset more conducive to hopeful overvaluation.
That means real estate slumps tend to grind on for years, until sellers submit to reality and reduce their prices.
In many ways, it would be better if the housing correction would happen more swiftly and sharply. The pain might be worse, but it would be over quickly. We seem to understand this principle when we’re removing a bandage. Why, then, is it so much harder with housing?

Because houses are almost perfectly engineered to trick owners into overvaluing them.

For starters, people have an obvious emotional connection to their house. After you have raised a family or enjoyed long meals with friends there, you are naturally going to place a higher value on it than a dispassionate buyer would. It’s your home.
David Laibson, a leading behavioral economist, categorizes this sort of behavior under the heading of “the principle of the matter.” His point is that people often go to great lengths to avoid taking a loss — or simply having to acknowledge one. “Even a small loss evokes a sense of frustration,” said Mr. Laibson, a professor at Harvard. “There’s something magical about ‘at least breaking even.’ ”

Often, this hurts no one so much as it hurts the would-be sellers. They stay in homes where they no longer want to live, rather than accepting their loss and moving on. Or they move but endure the hassle of renting out their old home, waiting, usually in vain, for the mythical buyer who understands its charms. All the while, their money is tied up in the house, and inflation is eating away at its real value.
There are a bunch of houses in our neighborhood that have been on the market since 2006 and the asking price hasn't budged. In some cases the price has been lowered by a tiny amount - for example, from $595,000 to $589,000 - in what seems to be a mini-capitulation for the benefit of either themselves or their real estate agent.

They look ridiculously out of place now that bank foreclosures are coming onto the market priced hundreds of thousands of dollars lower.

Wednesday, March 19, 2008

Blecch! NAR's Yun Named Top 10 Forecaster by USA Today

Isn't he the guy who revised his forecast on a monthly basis because he was wrong?

There must only be 10 economic forecasters...

NAR Economist Among Top Forecasters

THE NATIONAL ASSOCIATION OF REALTORS'® Chief Economist Lawrence Yun has been named among the top 10 economic forecasters by USA Today. Yun is ranked fifth on the list and is responsible for NAR’s real estate statistics and economic forecasting. The annual list recognizes accuracy in forecasting.

“NAR is proud of USA Today’s recognition of Lawrence Yun and his economic forecast accuracy. He is a highly regarded economist, and the housing and real estate industry have come to rely heavily on his economic analyses,” says Dale Stinton, NAR executive vice president and chief executive officer. “This acknowledgement contributes greatly to NAR’s reputation as the leading innovator in housing-related research.”

Yun was named NAR’s chief economist and senior vice president of research in November 2007. He has been with the association since 2000, previously serving as vice president and senior economist. He pioneered the development of the Commercial Leading Index after helping develop the residential Pending Home Sales Index.

“I’m honored to be recognized among some of the best economists in the country,” says Yun. “The economy and housing industry are facing many challenging issues at this time, which makes this an interesting and stimulating position.”

USA Today enlisted the help of the Federal Reserve Bank of Atlanta to determine the most accurate forecasters among the economists surveyed in the newspaper’s quarterly survey on the U.S. economy.

The economists, whose identities were unknown to those gathering the data, received four scores — one for each quarterly survey — and were ranked on the average of those four scores. FRBA used statistical methods to assess the joint accuracy of the predictions rather than assessing the accuracy of each forecast variable separately, as is commonly done.

Before joining NAR, Yun worked as an economic consultant to the U.S. Department of Veterans Affairs and the U.S. Department of Education. As a research associate at the University of Maryland, Yun developed the graduate economics curriculum for and taught free-market economics in the former Soviet Union as that country transitioned from communism to a free-market system.

Yun received his Ph.D. in economics from the University of Maryland in 1995. He received a B.S. degree in mechanical engineering from Purdue University in 1987.

REALTOR® magazine online

Tuesday, March 4, 2008

Japan, Here We Come!!!

We are at a crisis point, indeed. However, lost in all of this hoopla is that this isn't a foreclosure crisis, but a housing affordability crisis. You need no proof aside from the fact that foreclosures began to spike in a time of extremely low unemployment and a generally strong economy. Prior, foreclosures have largely been a symptom of economic hardship, not the cause. Many cannot afford to handle a "market" housing payment even at today's somewhat reduced values. For those who can, paying off our housing debt continues to suck up valuable income that can be used to buy goods and services and stimulate the economy.

As I've said before, either incomes must rise dramatically (unlikely given the economic outlook) or housing prices must fall dramatically (10-15% with stable interest rates) before the system regains equilibrium. In this housing fiasco, where the order of magnitude stretches into the trillions, there is literally nothing we can (or should try to) do to stop this process from occurring.

Unfortunately, some of us, especially those desperate to hold onto political offices, feel like we should try. Some folks across the Pacific in Japan thought the same thing back in the 1990s. Let's see how that turned out...

Thanks to Charles Hugh Smith, from whom I borrowed the chart above.

From Wikipedia on the Japanese RE bubble:

The easily obtainable credit that had helped create and engorge the real estate bubble continued to be a problem for several years to come, and as late as 1997, banks were still making loans that had a low guarantee of being repaid. Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many "zombie businesses".

The time after the bubble's collapse (崩壊 hōkai?), which occurred gradually rather than catastrophically, is known as the "lost decade" (失われた10年 ushinawareta jūnen?) in Japan. The Nikkei 225 stock index eventually bottomed out at 7603.76 in April 2003 before resuming an upward climb.

Instead of letting things get back to normal, where people had to be able to pay for stuff out of their incomes, Japan struggled mightily to prop up failing banks and dwindling asset prices. Despite Japan's sincerest efforts, this only served to prolong the agony and balloon the national debt, leading to Japan's "lost decade." Today, due to the bloated cost of government bailout programs during the last 15 years, 70% of Japan's tax revenues are dedicated to servicing debt, up from about 30% prior.

The lesson: We have to take our medicine one way or another, and quick and painful seems much better than prolonged and agonizing.

We haven't seem to have gotten the message. Just when I thought we couldn't get any denser, Ben Bernanke comes out of the woodwork and says that lenders should simply reduce the amount people owe on underwater loans. Am I missing something here? Gee, instead of keeping the loans the way they are and the lender collecting 3/4 of the money... why don't we all just "fuhgeddaboudit" and reduce the principal wholesale, so the lender loses the 1/4 he was going to already along with the 3/4 he would have collected anyway? Who needs all those hundreds of billions anyway? Brilliant (sarcasm).

That's even better than the "negative amortization certificate" idea where banks would buy underwater loans, reduce the principal owed and get a warrant for the reduction amount, which they could collect with interest when the house is eventually sold, provided it sells for enough to cover both the mortgage and the warrant. Hmmm, so why wouldn't I just sell my house to get rid of your warrant and buy a similar house? That way, I wouldn't have to pay anyone when I sell...

Ridiculous... I hope we all don't lose a decade because of this...

Bernanke Says Homeowners
Need More Help on Loans

March 4, 2008 4:35 p.m.

ORLANDO, Fla. -- More needs to be done to help troubled homeowners, including a broader effort to write down the principal of some problem loans, Federal Reserve Chairman Ben Bernanke said Tuesday.

[Ben Bernanke]

"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure," Mr. Bernanke said in prepared remarks. (Read the full speech.)

Speaking at the Independent Community Bankers of America conference in Orlando, Fla., Mr. Bernanke said the current turmoil in the housing market "calls for a vigorous response."

"Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done," Mr. Bernanke said.

Though most loan modifications by lenders have focused on reducing the interest rate on a borrower's loan, Mr. Bernanke said a reduction in the principal might be more appropriate. Specifically, with many borrowers owing more on their home than the value of their mortgage, "a reduction in principal may increase the expected payoff by reducing the risk of default."

Mr. Bernanke also suggested a number of policy options that could help the current situation. Reforming the Federal Housing Administration, including giving the agency more latitude to set underwriting standards, could help reduce foreclosures.

Additionally, Fannie Mae and Freddie Mac could have a bigger role in dealing with the current problems if both companies raise more capital, Mr. Bernanke said.

"New capital raising by the GSEs, together with congressional action to strengthen the supervision of these companies, would allow Fannie and Freddie to expand significantly the number of new mortgages that they securitize," Mr. Bernanke said.

Write to Michael R. Crittenden at michael.crittenden@dowjones.com

Saturday, February 16, 2008

Eternitus 1, Economists 0: Looking Back 9 Months

I think someone mentioned this post in a comment. Looking back, I'm quite proud of what I said. However, this was simply the byproduct of sitting down, analyzing the state of the world, challenging assumptions ("house prices never fall") in light of the facts ("people need to be able to pay their bills out of their incomes, eventually") and finding the logical outcome.

At the time, I was more of a "chicken little" as the stock market was surging toward new highs each day, though it's a fact that there were savvy money managers who knew what I knew... and probably timed their trades better.

Of course, I was just a 25-year old "kid" at the time. What did I know?

Friday, May 11, 2007

"The Worst is Over".... Yeah Right

Check out the rather humorous Wall Street Journal Article below my diatribe...

It looks like many of these economists went to the same school as David Lereah. We have gone from "The economy is strong... The housing issue is contained as consumers continue to spend" to the "the worst has passed" in only one quarter. Economic cycles take much longer than that. I suggest they start paying attention to Nouriel Roubini. Of course, it's too late and the train wreck has begun.

I think the debt-laden consumer is starting to feel like the guy in the picture running from a tsunami. Unfortunately, since he's the average guy, he doesn't have the "high ground" of savings to run to.

Here are my reasons why it's going to get worse before it gets better:

1. False Expansion: The recent economic expansion was not precipitated by a growth in productivity or incomes. Instead, the economy was dragged out of a slump by spending through a massive increase in consumer debt. That debt has to be repaid, and the average consumer's income hasn't grown by an amount necessary to compensate for this. Takeaway: The consumer now has to restrain spending in order to pay for past consumption. We simply traded in future consumption to pay for current consumption, with interest.

2. Misallocation of Capital: Why hasn't the consumer's income grown enough? That one's easy. We borrowed massive amounts to pay for a capital good, housing, which has no payoff in productivity. In Econ 101 - Higher Productivity = Higher REAL incomes (meaning income growth greater than inflation... so you are REALLY earning more). A lot of that money should have been spent on infrastructure and technology that would have helped us become more productive and thus earn more. Typically, borrowing is not a good investment if the cost (interest) exceeds the benefit of using those proceeds. Takeaway: Our incomes haven't grown because we flushed away trillions of dollars on assets that don't help boost our incomes. We now have to pay that money back with interest.

3. Negative Savings Rate: Notwithstanding the fact that we are borrowing a lot more, we are borrowing to consume more than we earn. That hasn't happened since the two years before the great depression. Too many of us are relying on paper gains and asset bubbles to support ourselves. Unfortunately, asset bubbles don't make the economy as a whole richer (only producing more goods and services per person does). Low savings rates mean that the average person has much less of an ability to withstand an economic downturn... especially if he has high monthly debt payments to worry about. When the asset bubble deflates, and we haven't saved, we are no better off than when we started.

Negative savings rates are bad for long-term economic growth as well. Using savings instead of debt to pay for investment that improves our lives means that we get all the benefits without having to pay interest. Productivity rises, we earn more, and we get to keep it all. Takeaway: We have severely hindered our long-term ability to earn more by failing to save.

4. The Big One - Consumer Running Out of Credit: Following up on the negative savings rate, a consumer can live above his means as long as there is someone to supply the credit (See: U.S. Government). Consumer debt is already at record highs, and many consumers have little room left to borrow. Mortgage equity withdrawals accounted for a significant portion of economic growth recently (their use has perhaps increased tenfold over the year 2000). Our economic growth has become dependent on consumers continuing to spend at the rate they have been (i.e. spending more than they earn)... which can't be sustained.

The consumer will have to cut back on consumption, soon (he is already beginning... check the retail sales data). When that reality takes hold, the economy will dip into recession... consumers will default on their loans in record numbers (commensurate with the record amounts of debt) and we will be faced with a significant financial crisis. Takeaway: We're screwed.

Nope, the worst is yet to come....

Economy Is Clawing Back, but Not Much

Economists See Signs of a Rebound in Growth,
But 2007 Is Still on Track as Weakest in Years
May 10, 2007

The worst of the economic slowdown has passed, private economists said in the latest WSJ.com forecasting survey. But they don't see any reason to expect a significant acceleration.

By a more than 5-to-1 margin, the economists said they believe the first quarter's 1.3% growth -- the weakest in four years -- marked the low point in the slowdown that gripped the economy much of last year. However, they expect growth to stay below 3% into early 2008, leaving 2007 on track to have the slowest economic growth since 2002.

[Full Results]
See and download forecasts for growth, inflation, interest rates and more. Plus, items on the dollar, the alternative minimum tax and the outlook for a new high in Nasdaq stocks. Survey conducted May 4-8.
Washington Wire: Economists See No AMT Overhaul

The economists don't see any new engines for growth this year. They expect continued weakness in consumer spending, for instance, which accounts for 70% of the economy.

"All of expected growth is addition by subtraction of drags," said Bruce Kasman of J.P. Morgan Chase & Co. "Drags from housing and inventories of manufacturing are fading," he said. Business spending may pick up a bit from its recent lull, said Allen Sinai, of Decision Economics.

On the whole, the 60 economists predict gross domestic product, the broadest measure of economic output, will grow at a 2.2% annual rate this quarter. Over the second half, they expect growth of about 2.6%, which is a slight reduction from what they had forecast in a survey conducted last month. They don't expect growth to reach 3% until the second quarter of 2008.

Mickey Levy of Bank of America said he expects home construction to provide a slight boost to the economy by late in the year, after dragging down growth the past six quarters. But economists don't expect a big housing rebound. They predict home prices will fall more than 1% this year, as measured by an index calculated by the government's Office of Federal Housing Enterprise Oversight.

Inflation risks continue to loom, a concern that was reinforced yesterday by the Federal Reserve, when it voted to leave interest rates unchanged and cited inflation as its primary policy concern. Amid the inflation threat, the Fed is reluctant to cut rates, something that could boost the economy. And with energy prices high, particularly for gasoline, consumer spending is crimped.

The Wall Street Journal surveys a group of 60 economists throughout the year. Broad surveys on more than 10 major economic indicators are conducted semiannually, at midyear and at year-end. Between each semiannual survey, four monthly updates are conducted for the most closely watched forecasts. This is the monthly survey for May. For prior installments of the semiannual and monthly surveys, see: WSJ.com/Economists.

Economists, on average, increased their estimates for consumer price growth from the previous survey, seeing 2.4% growth this month and 2.8% in November. When asked in April, the economists had forecast 2.1% and 2.7%, respectively, for the periods.

When asked which presents the bigger risk of triggering a spillover of inflation pressures in the overall economy, 67% of respondents chose energy prices, while 33% said food prices. While some economists said that the spillover risks remain small, Mr. Sinai expressed concerns about their affect on wages.

Last year, inflation appeared to shrug off a spike in energy prices, but Mr. Sinai said that was earlier in the inflation process. "When workers bargain, they don't bargain on core [consumer prices, which exclude food and energy]," he said. "Does anyone really think gas prices are going to go down much?"

Of course, the biggest risk to growth remains the unknown. "The economy is more levered here. Something is going to give, either on the upside or the downside," Mr. Kasman said. "I'll be surprised if we just chug along."

Among other findings of the survey:

More than three-quarters of economists said that a widening income gap in the U.S. -- where a growing share of income is going to the top 1% of households -- is a worrisome development. But the majority said the government shouldn't seek to restrain it.

When asked if the Fed is currently behind the curve, just right or too tight in light of its goal of price stability, 75% said it is just right. Just a few economists see the Fed changing rates at its June meeting, but 35 expect a change by the end of the year: 26 see a cut and nine forecast an increase.

While the Dow Jones Industrial Average continues to set records, economists don't see the Nasdaq Composite breaking its high -- which is nearly twice its current level and was set in 2000 -- any time soon. Nine out of 10 said they don't expect a Nasdaq record until 2010 or later.

Almost three-quarters of the economists expect the dollar to fall further this year, and, on average, they expect a 3.42% decline.

Write to Phil Izzo at philip.izzo@wsj.com

Friday, February 1, 2008

This week's sign of the apocalypse

OK.... Sorry for not putting together a post in quite a while... A lot going on at the workplace.

This company is called "You walk away," and specializes in helping people stiff banks by as much and for as long as possible. I can't believe it... I wish I had the gross lack of morality that it takes to dream up something like this. You can find the link to the actual site here. Walk Away

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Wednesday, January 16, 2008

Messed Up Situation

OK... I can't help but smell a rat when the guy who engineered this housing bust joins a hedge fund that made $10+ billion from said housing bust.