If you really want to understand the current speculative frenzy, and we have had two back-to-back in less than 15 years (which is historically unprecedented), you owe it to yourself to read John Kenneth Galbraith's A Short History of Financial Euphoria.
I am very far from a fan of Mr. Galbraith but he does hit the nail on the proverbial head here. It's only 110 pages, and you can get a second-hand copy for less than $5.
In most sciences, you can safely ignore history because it is not relevant. Nobody cares about false theories (except perhaps, the philosophers of science.) But, Economics is not a science, however much its practitioners claim otherwise. Ultimately, it relies on humans, and human behavior, and history is the guide to that.
Contrary to the vast majority of my profession, I claim that history, basic arithmetic, and accurate analysis of data is a far better guide than all the stochastic differential equations that the professional economists have developed put together.
History, of course, will prove who's right.
Wednesday, January 31, 2007
Tuesday, January 30, 2007
Rents
Everyone's been bitching about how rents "always go up".
See if you can interpret the above graph correctly, and predict what's going to happen to rents (and when that happens, I want you to think about what's going to happen to house prices.)
Monday, January 29, 2007
The Rules of Engagement
From the Florida Herald Tribune, we have Michael Braga writing about: Sweet deals turn bitter amid CCI's decline, fall.
The allure of a handy profit with no money down was too much for some of those now caught between Bradenton's Coast Bank and St. Petersburg's Construction Compliance Inc.
Mike Wood, a Zephyrhills resident, is one of those investors who might just walk from his unfinished homes.
Wood contracted with CCI to build two houses in North Port neighborhoods in 2005.
He was told about the investment possibility from a friend who worked for American Mortgage Link in Tampa. Wood then told 20 friends and relatives, who also leapt at the chance of making $30,000 to $40,000 with no money down.
Rule 1: If you find an "opportunity" to make $40K with "no money down", run! Run like the wind!
The first house was a three-bedroom model valued at $190,000. The second was a slightly bigger three-bedroom model valued at $220,000.
"All I had to do to complete the deals was to show that I had 10 percent of the value of the home liquid," said Wood. "I was never asked for the money. I never paid one red penny out of my pocket."
American Mortgage Link processed all the paperwork and handled the closing, and the loan was financed by Coast.
Wood said the deal was a no-brainer because he would be getting a house for 10 percent less than its appraised value and would have no out-of-pocket expenses.
Rule 2: If the entity selling you the object, also appraises it, the appraisal is fraudulent.
"The builder pays all the closing costs and the interest through the draw period," Wood said.
"With the market going up, there was a built-in profit of 10 percent and the potential to make 15 to 25 percent more based on appreciation rates at that time. I could make as much $40,000 on the flip, and in the worst case I would have to hold the property for a while."
Rule 3: Greed kills!
CCI finally started work on his first home in summer 2006 and abruptly stopped in October.
"They have never touched a blade of grass in the second home," Wood said. "Two years out and $80,000 drawn against my credit, and all I've got is a lot that is worth $20,000 to $25,000."
Wood said he does not know whether he will hire a lawyer. He said he might be better off walking away from his obligation.
"I'm not going to convert $80,000 in credit into a lot worth $20,000," Wood said. "If I walk away, it won't help my credit. But I'm 35. My wife and I make a lot of money. We have liquid assets, and I know plenty of lenders willing to loan us money.
Rule 4: Know the law!
You're on the hook for the entire amount. The bankruptcy laws have changed.
Wood added that though CCI said it would pay all closing costs and interest payments for its customers during the construction phase, nothing actually came out of the company's coffers.
Closing costs and interest were paid from the loan itself, Wood said. The initial draw of around $50,000 from Coast was used to pay all the commissions to mortgage brokers, title agents and others associated with the closing.
Rule 5: Commissions kill!
How can you be out $50K at the start of the race, and still think you're getting a deal?
The truth is that these people have never seen $50K in their life; they've never had to actually save up $50K so they treat it like monopoly money.
But in the case of Wood's second home in North Port, CCI withdrew $80,000 from Coast and has not spent a penny on construction.
"The lot hasn't even been cleared yet," he said.
Congratulations, sucker!!! You've been left holding the bag.
The allure of a handy profit with no money down was too much for some of those now caught between Bradenton's Coast Bank and St. Petersburg's Construction Compliance Inc.
Mike Wood, a Zephyrhills resident, is one of those investors who might just walk from his unfinished homes.
Wood contracted with CCI to build two houses in North Port neighborhoods in 2005.
He was told about the investment possibility from a friend who worked for American Mortgage Link in Tampa. Wood then told 20 friends and relatives, who also leapt at the chance of making $30,000 to $40,000 with no money down.
Rule 1: If you find an "opportunity" to make $40K with "no money down", run! Run like the wind!
The first house was a three-bedroom model valued at $190,000. The second was a slightly bigger three-bedroom model valued at $220,000.
"All I had to do to complete the deals was to show that I had 10 percent of the value of the home liquid," said Wood. "I was never asked for the money. I never paid one red penny out of my pocket."
American Mortgage Link processed all the paperwork and handled the closing, and the loan was financed by Coast.
Wood said the deal was a no-brainer because he would be getting a house for 10 percent less than its appraised value and would have no out-of-pocket expenses.
Rule 2: If the entity selling you the object, also appraises it, the appraisal is fraudulent.
"The builder pays all the closing costs and the interest through the draw period," Wood said.
"With the market going up, there was a built-in profit of 10 percent and the potential to make 15 to 25 percent more based on appreciation rates at that time. I could make as much $40,000 on the flip, and in the worst case I would have to hold the property for a while."
Rule 3: Greed kills!
CCI finally started work on his first home in summer 2006 and abruptly stopped in October.
"They have never touched a blade of grass in the second home," Wood said. "Two years out and $80,000 drawn against my credit, and all I've got is a lot that is worth $20,000 to $25,000."
Wood said he does not know whether he will hire a lawyer. He said he might be better off walking away from his obligation.
"I'm not going to convert $80,000 in credit into a lot worth $20,000," Wood said. "If I walk away, it won't help my credit. But I'm 35. My wife and I make a lot of money. We have liquid assets, and I know plenty of lenders willing to loan us money.
Rule 4: Know the law!
You're on the hook for the entire amount. The bankruptcy laws have changed.
Wood added that though CCI said it would pay all closing costs and interest payments for its customers during the construction phase, nothing actually came out of the company's coffers.
Closing costs and interest were paid from the loan itself, Wood said. The initial draw of around $50,000 from Coast was used to pay all the commissions to mortgage brokers, title agents and others associated with the closing.
Rule 5: Commissions kill!
How can you be out $50K at the start of the race, and still think you're getting a deal?
The truth is that these people have never seen $50K in their life; they've never had to actually save up $50K so they treat it like monopoly money.
But in the case of Wood's second home in North Port, CCI withdrew $80,000 from Coast and has not spent a penny on construction.
"The lot hasn't even been cleared yet," he said.
Congratulations, sucker!!! You've been left holding the bag.
Friday, January 26, 2007
The Big L.I.E.
From the New York Times, we have a report on Long Island: On Long Island, More Are Priced Out of the Housing Market.
In 2000, 60 percent of the homes sold on Long Island could be classified as “affordable” for families earning up to $100,000 a year, under the old rule of thumb that buyers should spend no more than 2.5 times their income on places to live.
Last year, according to a new report, just 2 percent of the houses sold on Long Island were in that range for families with such earnings, which make up more than 60 percent of Long Island households.
Here's how you interpret the above graph.
Each vertical pair of graphs should have been equal.
This isn't rocket science, and you don't need to be a Warren Buffett to understand this. All you need to realize is that you can't spend more than you earn (at least not for any extended periods of time.)
The above graph is showing what happens when you spend more than you earn on housing. Prices goes through the roof, and affordability plummets.
However, remember the above fact that you can't do it for any extended period of time.
The markets must revert, and sooner rather than later, the number of people earning X, and the price being roughly 2.5-3.5X are going to become identical.
There are two ways for that to happen. Either people make a lot more money, or prices collapse.
With China and India online, there is no way in hell the first option is going to happen!
Long Island is going to be a world of hurt!
In 2000, 60 percent of the homes sold on Long Island could be classified as “affordable” for families earning up to $100,000 a year, under the old rule of thumb that buyers should spend no more than 2.5 times their income on places to live.
Last year, according to a new report, just 2 percent of the houses sold on Long Island were in that range for families with such earnings, which make up more than 60 percent of Long Island households.
Here's how you interpret the above graph.
Each vertical pair of graphs should have been equal.
This isn't rocket science, and you don't need to be a Warren Buffett to understand this. All you need to realize is that you can't spend more than you earn (at least not for any extended periods of time.)
The above graph is showing what happens when you spend more than you earn on housing. Prices goes through the roof, and affordability plummets.
However, remember the above fact that you can't do it for any extended period of time.
The markets must revert, and sooner rather than later, the number of people earning X, and the price being roughly 2.5-3.5X are going to become identical.
There are two ways for that to happen. Either people make a lot more money, or prices collapse.
With China and India online, there is no way in hell the first option is going to happen!
Long Island is going to be a world of hurt!
Thursday, January 25, 2007
The Infantilization of Discourse
From the Boston Herald, we have Sales of existing homes plunge by largest amount in 17 years.
The National Association of Realtors reported that sales of existing homes were down 0.8 percent last month, a bigger decline than had been expected. For the year, sales fell by 8.4 percent, the biggest annual decline since 1989, when existing home sales fell by 14.8 percent.
David Lereah, chief economist for the Realtors, said that even with the December setback, he still believes that sales of existing homes have hit bottom and will start to gradually improve.
He said that in 2005, 40 percent of the market represented purchases of second homes and investors buying homes looking to resell them for quick profits.
He said that speculators had now left the market and that should leave sales at a more sustainable level.
"With fingers and toes crossed, it appears that we have hit bottom in the existing home market," he said.
Fingers and toes crossed? Do you also need a little hug from your mommy?
The National Association of Realtors reported that sales of existing homes were down 0.8 percent last month, a bigger decline than had been expected. For the year, sales fell by 8.4 percent, the biggest annual decline since 1989, when existing home sales fell by 14.8 percent.
David Lereah, chief economist for the Realtors, said that even with the December setback, he still believes that sales of existing homes have hit bottom and will start to gradually improve.
He said that in 2005, 40 percent of the market represented purchases of second homes and investors buying homes looking to resell them for quick profits.
He said that speculators had now left the market and that should leave sales at a more sustainable level.
"With fingers and toes crossed, it appears that we have hit bottom in the existing home market," he said.
Fingers and toes crossed? Do you also need a little hug from your mommy?
The California Dream
From the LA Times, we have a "disturbing" graphic:
They're below the levels of 1996 because that was the bottom of the previous late 80's bubble.
They're below the levels of 1996 because that was the bottom of the previous late 80's bubble.
Death Becomes Him
From the LA Times, we have David Streitfeld writing about More Californians at risk of losing homes.
The number of Californians defaulting on their mortgage loans is rising rapidly, according to figures released Tuesday, providing striking evidence that more people are at risk of losing their homes.
James Brown, a 66-year-old retired insurance agent in Salinas, Calif., has a history of heart trouble. When he had an operation in 2005, he said, "the doctor gave me a 50-50 chance I'd die on the table. So I did a stupid thing: I refinanced the house."
Brown's goal in tapping his equity was to give his wife, Monica, a $100,000 cushion after his death. But he didn't read the paperwork carefully, and didn't realize that his monthly loan payment would skyrocket.
Right! So your solution to "help" your wife was to take on more debt?
Brilliant!
There was also a problem with the operation: It worked.
But Brown awoke to a different world. With the new loan, his payments went to $4,500 a month from $2,900. The $100,000 in equity he pulled out of the house went to his medical expenses and other bills.
The property has dropped in value to $750,000 from $899,000, leaving him without enough equity to refinance. He arranged to sell the place, but the prospective buyers couldn't qualify for a mortgage.
In September he gave up and stopped paying the mortgage. He's now in default, speeding toward foreclosure.
"Three times a week, they call and say, 'Where's my money?' " he said. "If I hadn't survived, everything would have been fine."
So if you had died, everything would be fine?!?
This is just sad! Plain sad!
The number of Californians defaulting on their mortgage loans is rising rapidly, according to figures released Tuesday, providing striking evidence that more people are at risk of losing their homes.
James Brown, a 66-year-old retired insurance agent in Salinas, Calif., has a history of heart trouble. When he had an operation in 2005, he said, "the doctor gave me a 50-50 chance I'd die on the table. So I did a stupid thing: I refinanced the house."
Brown's goal in tapping his equity was to give his wife, Monica, a $100,000 cushion after his death. But he didn't read the paperwork carefully, and didn't realize that his monthly loan payment would skyrocket.
Right! So your solution to "help" your wife was to take on more debt?
Brilliant!
There was also a problem with the operation: It worked.
But Brown awoke to a different world. With the new loan, his payments went to $4,500 a month from $2,900. The $100,000 in equity he pulled out of the house went to his medical expenses and other bills.
The property has dropped in value to $750,000 from $899,000, leaving him without enough equity to refinance. He arranged to sell the place, but the prospective buyers couldn't qualify for a mortgage.
In September he gave up and stopped paying the mortgage. He's now in default, speeding toward foreclosure.
"Three times a week, they call and say, 'Where's my money?' " he said. "If I hadn't survived, everything would have been fine."
So if you had died, everything would be fine?!?
This is just sad! Plain sad!
Monday, January 22, 2007
You've got to be joking!
From BBC News, we have 'Table-sized flat' for £170,000.
A flat roughly the size of a snooker table has gone on sale for £170,000 in London's upmarket Chelsea.
The former janitor's storeroom measures 11ft by 7ft and has a cupboard place for a shower and kitchenette area.
Potential buyers can expect to fork out an extra £30,000 to make the room habitable as there is no lighting and it is full of rubble.
Even the poshest areas of Manhattan at the height of the current bubble go for roughly $1000/sq.ft. This is roughly $4400/sq.ft. Chelsea (in London) is nice but it's not that nice!
Lunacy! Sheer fuckin' lunacy!
A flat roughly the size of a snooker table has gone on sale for £170,000 in London's upmarket Chelsea.
The former janitor's storeroom measures 11ft by 7ft and has a cupboard place for a shower and kitchenette area.
Potential buyers can expect to fork out an extra £30,000 to make the room habitable as there is no lighting and it is full of rubble.
Even the poshest areas of Manhattan at the height of the current bubble go for roughly $1000/sq.ft. This is roughly $4400/sq.ft. Chelsea (in London) is nice but it's not that nice!
Lunacy! Sheer fuckin' lunacy!
Sunday, January 21, 2007
Broke is the new black : Part 1
From ABC News, we have one of those 20/20 stories: Digging out of Debt.
Meet the Petersons. Matt is a software engineer and Suzie works mostly at home raising their three daughters: Julianne, 12, Rachel, 11, and Caroline, 9.
They live in an upscale California neighborhood in a 4,000-square-foot home with a pool, a huge walk-in wine cellar and even its own movie theater. They drive nice cars and own a second home and two vacation time shares.
How do they do it? They're in debt up to their eyeballs
"I know that we don't make ends meet each month, and to make ends meet, we use credit cards, and then the credit card payments start increasing, and you just can't make ends meet even doing that," Suzie said.
Their monthly household income of $8,750 isn't enough to cover all of their expenses, which total $15,000 a month. For over a year, the Petersons have relied on credit cards to keep afloat financially.
Using one card to pay off the other, their credit card balances eventually ballooned to $60,000. Their Bank of America Visa alone has a balance of $19,000, at an interest rate of nearly 33 percent.
The burden of their debt is something that keeps Suzie up at night. "I woke up at 2:30 a.m. this morning because yesterday we went to the diner and tried to use the debit card and it didn't work."
Charles Dickens sums this up in his classic novel, "David Copperfield". The words are given to a Mr. Micawber (who, not coincidentally, ends up in debtor's prison) :
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
And they say that English literature can't tell you anything about Economics?
Bah, humbug!
In the Peterson case, a series of bad choices contributed to their massive debt. Six years ago, Matt lost his job and spent more than a year out of work. During that time, Suzie decided to open two scrapbooking stores. When her business folded last year, they ended up losing about $200,000 -- most of it borrowed money. There were also some bad real estate and stock investments.
Even as their financial situation worsened, however, the Petersons continued to spend. Last year alone, they took three vacations -- a cruise through the Carribean, a trip to Whistler, Canada and another to Hawaii.
Let's see they lost $200K on a "scrapbooking" business? I must admit that I had no idea what "scrapbooking" was so it was on to Google to help out. Turns out that people like to cut and paste things into scrapbooks, and presumably this was a store that supplied materials, etc.
However, why did they open two stores? Traditionally, everyone opens a store, sees how it's doing for a while before you start expanding.
Nope, this couple jumped in with both feet first. Unfortunately, the feet were covered in concrete.
These people are typical of what I call the "small bid-ness" types. No fuckin' clue about the larger tidal forces that shape their existence, or even the basic economics of running a small business. You know, simple things like "cash flow".
Oh, and they're the first ones with their hands outstretched for handouts when they fail. Not "if" they fail, "when" they fail!
Hell, I spent the first 20 years of my life listening to folks like this bitch about everything. Everything that went wrong was someone else's fault -- the tax laws, the government, the banks, the export policies.
And if all else failed, there was that old bugaboo : "inflation". Everything could be blamed upon it. Never mind the fact that they had no freakin' clue what "inflation" actually meant (hell, they were so stupid that they actually believed that "inflation" meant "increasing prices".)
To help them dig out from under all of their debts, "20/20" introduced the Petersons to financial planner Robert Pagliarini, author of "The Six-Day Financial Makeover," a step-by-step guide to transforming your financial life.
After reviewing the Petersons' financial records, Pagliarini calculated that they were about five months away from bankruptcy. All of their debts translated to a loss of $200 each day.
Pagliarini devised a six-month action plan to rescue the Petersons from economic ruin. First, he advised them to dump their expensive time shares, even though this will mean the Petersons will lose $46,000 on their investment.
Pagliarini hopes they can recoup some of those losses by also selling their home and their second rental property. He believes those transactions will net the Petersons about $113,000.
Pagliarini then wants the Petersons to use that money to pay off their $60,000 credit card debts. If they take all of these steps, Pagliarini believes, the Petersons will actually have a few thousand dollars leftover to save and invest.
The catch? It's an all or nothing proposition. "Do all the big things or do none of them, because if you just do one, two or three, it's not going to work," said Pagliarini.
Matt Peterson is excited by Pagliarini's plan. "We can't wait. I mean we literally can't wait," he said.
Suzie was less enthused, saying, "We have no place to live and $3,000."
Honey, you currently don't own anything at all. You're bleeding $200 a day. That's a fuckload of bleeding.
Compared to that, $3K in assets sounds positively peachy to me!
Meet the Petersons. Matt is a software engineer and Suzie works mostly at home raising their three daughters: Julianne, 12, Rachel, 11, and Caroline, 9.
They live in an upscale California neighborhood in a 4,000-square-foot home with a pool, a huge walk-in wine cellar and even its own movie theater. They drive nice cars and own a second home and two vacation time shares.
How do they do it? They're in debt up to their eyeballs
"I know that we don't make ends meet each month, and to make ends meet, we use credit cards, and then the credit card payments start increasing, and you just can't make ends meet even doing that," Suzie said.
Their monthly household income of $8,750 isn't enough to cover all of their expenses, which total $15,000 a month. For over a year, the Petersons have relied on credit cards to keep afloat financially.
Using one card to pay off the other, their credit card balances eventually ballooned to $60,000. Their Bank of America Visa alone has a balance of $19,000, at an interest rate of nearly 33 percent.
The burden of their debt is something that keeps Suzie up at night. "I woke up at 2:30 a.m. this morning because yesterday we went to the diner and tried to use the debit card and it didn't work."
Charles Dickens sums this up in his classic novel, "David Copperfield". The words are given to a Mr. Micawber (who, not coincidentally, ends up in debtor's prison) :
"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
And they say that English literature can't tell you anything about Economics?
Bah, humbug!
In the Peterson case, a series of bad choices contributed to their massive debt. Six years ago, Matt lost his job and spent more than a year out of work. During that time, Suzie decided to open two scrapbooking stores. When her business folded last year, they ended up losing about $200,000 -- most of it borrowed money. There were also some bad real estate and stock investments.
Even as their financial situation worsened, however, the Petersons continued to spend. Last year alone, they took three vacations -- a cruise through the Carribean, a trip to Whistler, Canada and another to Hawaii.
Let's see they lost $200K on a "scrapbooking" business? I must admit that I had no idea what "scrapbooking" was so it was on to Google to help out. Turns out that people like to cut and paste things into scrapbooks, and presumably this was a store that supplied materials, etc.
However, why did they open two stores? Traditionally, everyone opens a store, sees how it's doing for a while before you start expanding.
Nope, this couple jumped in with both feet first. Unfortunately, the feet were covered in concrete.
These people are typical of what I call the "small bid-ness" types. No fuckin' clue about the larger tidal forces that shape their existence, or even the basic economics of running a small business. You know, simple things like "cash flow".
Oh, and they're the first ones with their hands outstretched for handouts when they fail. Not "if" they fail, "when" they fail!
Hell, I spent the first 20 years of my life listening to folks like this bitch about everything. Everything that went wrong was someone else's fault -- the tax laws, the government, the banks, the export policies.
And if all else failed, there was that old bugaboo : "inflation". Everything could be blamed upon it. Never mind the fact that they had no freakin' clue what "inflation" actually meant (hell, they were so stupid that they actually believed that "inflation" meant "increasing prices".)
To help them dig out from under all of their debts, "20/20" introduced the Petersons to financial planner Robert Pagliarini, author of "The Six-Day Financial Makeover," a step-by-step guide to transforming your financial life.
After reviewing the Petersons' financial records, Pagliarini calculated that they were about five months away from bankruptcy. All of their debts translated to a loss of $200 each day.
Pagliarini devised a six-month action plan to rescue the Petersons from economic ruin. First, he advised them to dump their expensive time shares, even though this will mean the Petersons will lose $46,000 on their investment.
Pagliarini hopes they can recoup some of those losses by also selling their home and their second rental property. He believes those transactions will net the Petersons about $113,000.
Pagliarini then wants the Petersons to use that money to pay off their $60,000 credit card debts. If they take all of these steps, Pagliarini believes, the Petersons will actually have a few thousand dollars leftover to save and invest.
The catch? It's an all or nothing proposition. "Do all the big things or do none of them, because if you just do one, two or three, it's not going to work," said Pagliarini.
Matt Peterson is excited by Pagliarini's plan. "We can't wait. I mean we literally can't wait," he said.
Suzie was less enthused, saying, "We have no place to live and $3,000."
Honey, you currently don't own anything at all. You're bleeding $200 a day. That's a fuckload of bleeding.
Compared to that, $3K in assets sounds positively peachy to me!
Thursday, January 18, 2007
So sad, too bad...
From Bloomberg, we have Deutsche Bank Swap Makes Pennsylvania Taxpayers Lose.
The Reading, Pennsylvania, school district, which has 18,323 students, this week must pay $230,000 to Deutsche Bank AG, Germany's largest bank, because it's on the losing side of a wager that long-term interest rates will rise faster than short- term interest rates. In April, the board rushed approval of the so-called interest rate swap in eight days after its adviser said the transaction may earn the district $16 million by 2034.
While Reading's taxpayers are liable for the loss, bankers and advisers already have pocketed $1 million in fees for arranging the swap, enough to buy 11 Mercedes-Benz S-550 sedans. This week's payment to Deutsche Bank would have covered the school district's monthly utility bill.
``It was all done in a real hurry,'' said Keith Stamm, the only member of the board to vote against the deal. ``The whole board is so desperate to try to find a way to raise money, they see this floated in front of them as a big-time amount of money and they want to go forward with it.''
Wow, this school board is filled with retards. Then again, if they were actually smart, they would be working for DB, not teaching the little asses and jennies in Pennsylvania.
The adviser said that the transaction "may" earn $16M by 2034. Did they ask themselves why DB took the opposite side of that transaction. After all, the people DB employs are many levels of smart more than some silly school board in Pennsylvania.
The school board paid Frankfurt-based Deutsche Bank $575,000 to arrange the contract, known as a constant maturity swap, and awarded $400,000 to its financial advisers, including Reading-based Concord Public Financial Advisors Inc. and lawyers for arranging the trade, school officials said.
Concord principal Mike Setley didn't return calls seeking comment.
Hmmmm, looks Concord Financial Advisors took the money and ran! Who wouldn't?
The blunt truth is that "pension funds", and "school boards" are just sitting ducks for such derivative transactions.
DB probably got to offload its interest-rate risk in some other offsetting transaction, and collected the fees from both sides. (Alternately, DB can easily hedge the other side of its transaction for a much smaller fee, and keep the difference between the the two fees.)
Why exactly did the board "rush" into the transaction in 8 days? Also, what made them think they can predict rates of change of interest rates out to 2034, no less?!?
Hell, I can't predict the probability that there will be an attack on the US in the next year (and I assure you, that if that were to happen, that would definitely impact interest rates!)
The Reading contract is based on $103 million of zero- coupon bonds issued by the district in 2003 that come due from 2026 to 2034. Reading is required to pay Deutsche Bank the equivalent of 67 percent of the one-month London interbank offered rate, a lending benchmark, plus 0.3 percent every Jan. 15 and July 15. That amounts to about $2 million for the period ending this week.
In return, Deutsche Bank must give the district a rate equivalent to 66 percent of the so-called five-year swap rate, which is the interest rate a borrower is willing to pay to exchange fixed payments for those that reset each month. That totals about $1.77 million for the period. The difference amounts to the $230,000 the district owes Deutsche Bank. Only the net payment changes hands.
The contract became a money loser because the five-year swap rate has declined to 5.145 percent from 5.5945 percent in July. Meantime, Libor dropped to 5.32 percent from 5.37 percent, according to data compiled by Bloomberg.
Reading's schools will profit if five-year rates are higher relative to one-month yields. That's been the case 80 percent of the time during the past 10 years, according to Citigroup Inc., the biggest underwriter of municipal debt.
"So long as interest-rate relationships return to normal conditions, this transaction should provide a significant financial benefit to the school district,'' Concord said in a memo to the district May 22. While Reading is paying now, it may earn money on the swap over time.
Here's the heart of the problem. If things return to normal, they will make money. And yes! most likely over 30 years, they will. But the real question is will the board remain solvent enough before then? DB has the balance-sheet to ride out this transaction for a very long time. The school board does not. I predict a bankruptcy in this school district's future.
Basically, these boards all suffer from the principal-agent problem. If things go wrong, the taxpayers lose their shirt, but as far as the people who made the decision (the idiots who sit on the board,) they don't care. They will collect their salary, and keep on truckin'. There are no consequences attached to their bad decisions.
The blunt truth is that most of these people also suffer from the "do something, anything!" syndrome. Hell, my own friends and family suffer from it! Nobody likes to hear that the correct thing to do is to do nothing. Sit tight with your money in a conservative fashion. Oh, no! they must "do something" even if that something is a furiously speculative transaction. (I have a lot to say on this subject but that will have to wait for a future post.)
So what's the solution the board has for the problem?
Dennis Kelley, the school district's director of finance, said he was "surprised" to learn he owes $230,000. He said the district would pay the money using proceeds from another interest-rate swap.
Wow, they are fuckin' incredibly stupid! They got their ass reamed in the casino, and the solution is to put more money into the casino?
I really feel sorry for the children! I really do!
Un-fucking-believable!
Expect a lot of such sob stories from boards (particularly pension funds) all around the world in the next few years. They've all been speculating furiously in the derivatives market. Thanks to this speculation, risk premiums are at historical lows even in the riskiest tranches, and things always come unhinged at some point.
Oh well! Banks collect the fees, and if things go bad, well, mugs will be mugs!
The Reading, Pennsylvania, school district, which has 18,323 students, this week must pay $230,000 to Deutsche Bank AG, Germany's largest bank, because it's on the losing side of a wager that long-term interest rates will rise faster than short- term interest rates. In April, the board rushed approval of the so-called interest rate swap in eight days after its adviser said the transaction may earn the district $16 million by 2034.
While Reading's taxpayers are liable for the loss, bankers and advisers already have pocketed $1 million in fees for arranging the swap, enough to buy 11 Mercedes-Benz S-550 sedans. This week's payment to Deutsche Bank would have covered the school district's monthly utility bill.
``It was all done in a real hurry,'' said Keith Stamm, the only member of the board to vote against the deal. ``The whole board is so desperate to try to find a way to raise money, they see this floated in front of them as a big-time amount of money and they want to go forward with it.''
Wow, this school board is filled with retards. Then again, if they were actually smart, they would be working for DB, not teaching the little asses and jennies in Pennsylvania.
The adviser said that the transaction "may" earn $16M by 2034. Did they ask themselves why DB took the opposite side of that transaction. After all, the people DB employs are many levels of smart more than some silly school board in Pennsylvania.
The school board paid Frankfurt-based Deutsche Bank $575,000 to arrange the contract, known as a constant maturity swap, and awarded $400,000 to its financial advisers, including Reading-based Concord Public Financial Advisors Inc. and lawyers for arranging the trade, school officials said.
Concord principal Mike Setley didn't return calls seeking comment.
Hmmmm, looks Concord Financial Advisors took the money and ran! Who wouldn't?
The blunt truth is that "pension funds", and "school boards" are just sitting ducks for such derivative transactions.
DB probably got to offload its interest-rate risk in some other offsetting transaction, and collected the fees from both sides. (Alternately, DB can easily hedge the other side of its transaction for a much smaller fee, and keep the difference between the the two fees.)
Why exactly did the board "rush" into the transaction in 8 days? Also, what made them think they can predict rates of change of interest rates out to 2034, no less?!?
Hell, I can't predict the probability that there will be an attack on the US in the next year (and I assure you, that if that were to happen, that would definitely impact interest rates!)
The Reading contract is based on $103 million of zero- coupon bonds issued by the district in 2003 that come due from 2026 to 2034. Reading is required to pay Deutsche Bank the equivalent of 67 percent of the one-month London interbank offered rate, a lending benchmark, plus 0.3 percent every Jan. 15 and July 15. That amounts to about $2 million for the period ending this week.
In return, Deutsche Bank must give the district a rate equivalent to 66 percent of the so-called five-year swap rate, which is the interest rate a borrower is willing to pay to exchange fixed payments for those that reset each month. That totals about $1.77 million for the period. The difference amounts to the $230,000 the district owes Deutsche Bank. Only the net payment changes hands.
The contract became a money loser because the five-year swap rate has declined to 5.145 percent from 5.5945 percent in July. Meantime, Libor dropped to 5.32 percent from 5.37 percent, according to data compiled by Bloomberg.
Reading's schools will profit if five-year rates are higher relative to one-month yields. That's been the case 80 percent of the time during the past 10 years, according to Citigroup Inc., the biggest underwriter of municipal debt.
"So long as interest-rate relationships return to normal conditions, this transaction should provide a significant financial benefit to the school district,'' Concord said in a memo to the district May 22. While Reading is paying now, it may earn money on the swap over time.
Here's the heart of the problem. If things return to normal, they will make money. And yes! most likely over 30 years, they will. But the real question is will the board remain solvent enough before then? DB has the balance-sheet to ride out this transaction for a very long time. The school board does not. I predict a bankruptcy in this school district's future.
Basically, these boards all suffer from the principal-agent problem. If things go wrong, the taxpayers lose their shirt, but as far as the people who made the decision (the idiots who sit on the board,) they don't care. They will collect their salary, and keep on truckin'. There are no consequences attached to their bad decisions.
The blunt truth is that most of these people also suffer from the "do something, anything!" syndrome. Hell, my own friends and family suffer from it! Nobody likes to hear that the correct thing to do is to do nothing. Sit tight with your money in a conservative fashion. Oh, no! they must "do something" even if that something is a furiously speculative transaction. (I have a lot to say on this subject but that will have to wait for a future post.)
So what's the solution the board has for the problem?
Dennis Kelley, the school district's director of finance, said he was "surprised" to learn he owes $230,000. He said the district would pay the money using proceeds from another interest-rate swap.
Wow, they are fuckin' incredibly stupid! They got their ass reamed in the casino, and the solution is to put more money into the casino?
I really feel sorry for the children! I really do!
Un-fucking-believable!
Expect a lot of such sob stories from boards (particularly pension funds) all around the world in the next few years. They've all been speculating furiously in the derivatives market. Thanks to this speculation, risk premiums are at historical lows even in the riskiest tranches, and things always come unhinged at some point.
Oh well! Banks collect the fees, and if things go bad, well, mugs will be mugs!
Delusions of Grandeur
From the Boston Globe, we have Brenda J. Buote writing about : Speed dealing.
No, they're not talking about amphetamines; they're talking about auctions.
Harvey Goldberg, 53, of Rowley, has adopted a different philosophy. He's offering a "real estate deal like no other" on eBay, the popular online auction site. His ad invites potential buyers to buy his four-bedroom home with custom kitchen, basement media center, and "nifty new granite mailbox post" for $1.75 million -- more than double the appraised value.
"You will be helping not only pay off our mortgage and bills but also pay for my children's college educations and assisted living for my mother.... Does that not make you feel great???? Well if it does... we are ready to deal!" the ad states.
What rational buyer would care about your children's education, or your mom's living?
They would rationally examine the cash-flow, and put in a bid. And, why would anyone be so stupid as to pay twice the appraised value. Hell, while you're at it, why not ask for a billion dollars? You have the same probability of getting that as this one!
"We thought we were going to get kicked out of doing it, because it was tongue-in-cheek, but if someone offers the right price, my wife and I will absolutely sell it," Goldberg said. "Don't get me wrong; we love this house. But we love money more."
Delusional? or optimistic? You decide!
No, they're not talking about amphetamines; they're talking about auctions.
Harvey Goldberg, 53, of Rowley, has adopted a different philosophy. He's offering a "real estate deal like no other" on eBay, the popular online auction site. His ad invites potential buyers to buy his four-bedroom home with custom kitchen, basement media center, and "nifty new granite mailbox post" for $1.75 million -- more than double the appraised value.
"You will be helping not only pay off our mortgage and bills but also pay for my children's college educations and assisted living for my mother.... Does that not make you feel great???? Well if it does... we are ready to deal!" the ad states.
What rational buyer would care about your children's education, or your mom's living?
They would rationally examine the cash-flow, and put in a bid. And, why would anyone be so stupid as to pay twice the appraised value. Hell, while you're at it, why not ask for a billion dollars? You have the same probability of getting that as this one!
"We thought we were going to get kicked out of doing it, because it was tongue-in-cheek, but if someone offers the right price, my wife and I will absolutely sell it," Goldberg said. "Don't get me wrong; we love this house. But we love money more."
Delusional? or optimistic? You decide!
Saturday, January 13, 2007
Feedback Loops
From the Canadian Globe and Mail, we have Harry Koza pretending to be knowledgable about science: U.S. housing bubble has the potential to blow up real good.
Lenders don't want to keep these high-risk loans on their books, so it is not surprising that the majority of these mortgages are securitized, packaged and sold to investors.
This is scary because, according to a recent study by the Center for Responsible Lending (a U.S. non-profit), one out of every five subprime mortgage loans made in the past two years will go into foreclosure. That would mean 1.1 million houses getting repossessed by banks, vaporizing $74.6-billion in homeowners' equity.
The banks will sell the repossessed properties as quickly as possible, driving house prices lower, triggering more foreclosures, putting more excess properties on the market, driving prices lower and, well, you get the idea -- a negative feedback loop, the mirror image of the one that built the bubble.
Oh, great dumbass! A negative feedback loop is one that regulates itself. You're using "negative" in the English sense as in "not a good thing".
The classic example of "negative feedback" is the thermostat in your refrigerator. As the temperature falls, the thing turns itself off, and then as the temperature rises, it turns itself on. The point is that the feedback is in the opposite direction as the underlying mechanism wherein you get the term "negative" (in the equation, the feedback coefficient has a negative sign.)
What does this have to do with economics?
Well, "negative feedback" is the masturbatory dream of economists of how the market "should" behave. As prices rise, market-makers come in to sell the object causing the price to fall, and as prices fall, market-makers come in to buy the object causing prices to rise.
That's the theory anyway!
Reality, of course, proves to be a little more intransigent.
Human beings are greedy, and if there's one thing that really burns them up inside, eating away at their flesh like carnivorous bacteria is when their neighbors are making money, and they are not. So they pile on to the same investments that have made others money in the past creating the ultimate "positive feedback" loop.
As prices rise, more buyers show up which in turn causes prices to rise further.
Of course, this always ends badly. It always has, and always will. Sooner or later, there are no "greater fools" left, and the market collapses.
Ironically, the collapse creates its own "positive feedback" loop because human beings are also fearful, and prices fall far below what would be considered rational.
In Buffett's words, "What a wise man does at the beginning, the fool does at the end."
Lenders don't want to keep these high-risk loans on their books, so it is not surprising that the majority of these mortgages are securitized, packaged and sold to investors.
This is scary because, according to a recent study by the Center for Responsible Lending (a U.S. non-profit), one out of every five subprime mortgage loans made in the past two years will go into foreclosure. That would mean 1.1 million houses getting repossessed by banks, vaporizing $74.6-billion in homeowners' equity.
The banks will sell the repossessed properties as quickly as possible, driving house prices lower, triggering more foreclosures, putting more excess properties on the market, driving prices lower and, well, you get the idea -- a negative feedback loop, the mirror image of the one that built the bubble.
Oh, great dumbass! A negative feedback loop is one that regulates itself. You're using "negative" in the English sense as in "not a good thing".
The classic example of "negative feedback" is the thermostat in your refrigerator. As the temperature falls, the thing turns itself off, and then as the temperature rises, it turns itself on. The point is that the feedback is in the opposite direction as the underlying mechanism wherein you get the term "negative" (in the equation, the feedback coefficient has a negative sign.)
What does this have to do with economics?
Well, "negative feedback" is the masturbatory dream of economists of how the market "should" behave. As prices rise, market-makers come in to sell the object causing the price to fall, and as prices fall, market-makers come in to buy the object causing prices to rise.
That's the theory anyway!
Reality, of course, proves to be a little more intransigent.
Human beings are greedy, and if there's one thing that really burns them up inside, eating away at their flesh like carnivorous bacteria is when their neighbors are making money, and they are not. So they pile on to the same investments that have made others money in the past creating the ultimate "positive feedback" loop.
As prices rise, more buyers show up which in turn causes prices to rise further.
Of course, this always ends badly. It always has, and always will. Sooner or later, there are no "greater fools" left, and the market collapses.
Ironically, the collapse creates its own "positive feedback" loop because human beings are also fearful, and prices fall far below what would be considered rational.
In Buffett's words, "What a wise man does at the beginning, the fool does at the end."
Friday, January 12, 2007
Sex and the City
From the San Diego Union Tribune we have Lynn Adler talking about U.S. housing seen showing more life in second half.
In California, where home sales tumbled 23 percent in 2006 and could drop another 7 percent this year, “the worst is over,” said Leslie Appleton-Young, chief economist for the California Association of Realtors.
“Housing is always going to be sexy ... but I think some of the buzz about it, when there's less money being made, is going to go away.”
Sexy?!? Did she just say housing was sexy?
Honey, a woman's legs may be sexy, a guy's butt may be sexy, but housing (like any other purchase) is decidedly not sexy!
The level of discourse speaks volumes about the level of her comprehension of economics. But she's the "chief economist" of CAR which means she's a paid shill.
Of course, we can all agree that Ms. Appleton-Young is decidedly NOT sexy!
In California, where home sales tumbled 23 percent in 2006 and could drop another 7 percent this year, “the worst is over,” said Leslie Appleton-Young, chief economist for the California Association of Realtors.
“Housing is always going to be sexy ... but I think some of the buzz about it, when there's less money being made, is going to go away.”
Sexy?!? Did she just say housing was sexy?
Honey, a woman's legs may be sexy, a guy's butt may be sexy, but housing (like any other purchase) is decidedly not sexy!
The level of discourse speaks volumes about the level of her comprehension of economics. But she's the "chief economist" of CAR which means she's a paid shill.
Of course, we can all agree that Ms. Appleton-Young is decidedly NOT sexy!
The Great Cornholio
From the Modesto Bee in sunny California, we have Tax assessors may ease pain for buyers with bad timing.
Albert Quintero's timing couldn't have been worse.
He made a deal to buy a new Turlock luxury home in November 2005, at the real estate market's peak.
By the time construction ended in July, Quintero's Milestone Way home wasn't worth the $874,890 he was contractually obligated to pay.
Now the same model — a new home on nearby Tapestry Way — is priced at $639,990.
"It's really tough to swallow that we paid 37 percent more than what our home is worth now," Quintero said.
But here's a bit of good news for those homeowners: County assessors will consider lowering the assessments — and thus property taxes — for recently purchased homes.
Take Quintero's home. If the assessor's office determines his Milestone Way home is worth $639,990 like the Tapestry Way house rather than the $874,890 he paid, Quintero potentially could owe $2,349 less per year in property taxes.
Dude! You got cornholed for $235K, and the "bit of good news" is that you will pay $2,350 less each year?
It'll take 100 years to make that up, and that's if they don't raise the property taxes.
Alternately, doesn't anyone realize that nothing, absolutely nothing is worth $800K in Modesto. It's a fucking shit-hole; it's not Manhattan, or Chicago, or San Francisco. There's nothing nice about it, no beaches, nothing! It's literally in the middle of nowhere on a hot and dusty plain, and people joke about the Central California as "Oklahoma on the Pacific".
Even $150K is too much to pay there! The median income is $40K (less than the national median, I may add.)
Oh! This is going to end so badly!
Albert Quintero's timing couldn't have been worse.
He made a deal to buy a new Turlock luxury home in November 2005, at the real estate market's peak.
By the time construction ended in July, Quintero's Milestone Way home wasn't worth the $874,890 he was contractually obligated to pay.
Now the same model — a new home on nearby Tapestry Way — is priced at $639,990.
"It's really tough to swallow that we paid 37 percent more than what our home is worth now," Quintero said.
But here's a bit of good news for those homeowners: County assessors will consider lowering the assessments — and thus property taxes — for recently purchased homes.
Take Quintero's home. If the assessor's office determines his Milestone Way home is worth $639,990 like the Tapestry Way house rather than the $874,890 he paid, Quintero potentially could owe $2,349 less per year in property taxes.
Dude! You got cornholed for $235K, and the "bit of good news" is that you will pay $2,350 less each year?
It'll take 100 years to make that up, and that's if they don't raise the property taxes.
Alternately, doesn't anyone realize that nothing, absolutely nothing is worth $800K in Modesto. It's a fucking shit-hole; it's not Manhattan, or Chicago, or San Francisco. There's nothing nice about it, no beaches, nothing! It's literally in the middle of nowhere on a hot and dusty plain, and people joke about the Central California as "Oklahoma on the Pacific".
Even $150K is too much to pay there! The median income is $40K (less than the national median, I may add.)
Oh! This is going to end so badly!
Wednesday, January 10, 2007
Babaloo Bongheads
From WILX in Michigan, we have Housing Market Recovery?.
I know that realtors are not the sharpest tool in the toolshed but this takes the proverbial cake!
If you're looking to buy a home, now's the time to do so. There are more than 4,100 homes on the market in the greater Lansing area and despite the slow market of 2006, realtors expect a gradual increase in sales over the next few months.
"I think the decline that we've seen is not going to occur," said Tomie Raines Realty President Debbie D'Valentine.
Let's "analyze" this: something that has already occurred is not going to occur!
Whoa! That's deep, man!
I know that realtors are not the sharpest tool in the toolshed but this takes the proverbial cake!
If you're looking to buy a home, now's the time to do so. There are more than 4,100 homes on the market in the greater Lansing area and despite the slow market of 2006, realtors expect a gradual increase in sales over the next few months.
"I think the decline that we've seen is not going to occur," said Tomie Raines Realty President Debbie D'Valentine.
Let's "analyze" this: something that has already occurred is not going to occur!
Whoa! That's deep, man!
Tuesday, January 09, 2007
How to gain "investment" experience
From the Wall Street Journal, we have Speculators helped fuel Florida housing boom.
NAPLES, Fla. — In 2005, this once-sleepy retirement haven on Florida's west coast was arguably the hottest housing market in the country.
Builders held lotteries to determine who could purchase homes in new gated communities. In the older neighborhoods, buyers were snapping up modest ranch houses and cottages soon after they were listed for sale. The median home price more than doubled between 2000 and 2005, to about $482,400.
Such a crescendo of activity might have prompted some to pull back. But plenty of investors, who purchased homes to rent or flip, continued to buy and sell through the height of the boom. One of them was Marjorie Dresner. The Canadian native believed that Naples, with its laid-back, balmy atmosphere, would long be an attractive market. A prolific investor, she purchased dozens of houses in recent years, many of them with a partner. One of them cost her $1.7 million.
In late October, Ms. Dresner tried auctioning off 28 of her properties, but some bids were as much as 40 percent lower than what she paid. One three-bedroom ranch house she purchased in July 2005 in the middle-class Lake Park neighborhood fetched a high bid of $400,000; Ms. Dresner and a partner paid $690,000 for the house, according to county records.
Ms. Dresner won't talk much about her investment experience, but prefers to focus on the positive. "I did very well in the beginning," she says. "I look at the overall picture. You don't just look at one year."
Yes, you don't look at it when you've lost your proverbial pants. You look at the "overall picture" which still looks negative to me!
Mr. Krecicki says he met Ms. Dresner a few months after he sold her his home on 10th Avenue in Lake Park in September 2004 for $435,000, more than double what he paid for it.
After that deal, Mr. Krecicki served as her real-estate agent on multiple sales in Lake Park. Soon after homes went on the market, "Marjorie was on the top of my list" to call, he says.
Ms. Dresner says she was growing tired of the burdens of being a landlord. Many of her properties were listed for sale in early 2006, but some were slow to move. In late October, she tried a new tactic and auctioned off the houses.
Mr. Krecicki says he went to the auction out of curiosity and jumped into the bidding when he saw the low prices. "After about two hours, a house came up for bid that I knew very well," Mr. Krecicki recounted in a monthly newsletter he distributes, called the Lake Park Journal.
"I looked at my friend next to me with a bidding card and check in his hand and asked him, 'Aren't you going to bid on this one? C'mon, man, 50/50 split. Bid on this one.'"
They put up the highest bid, which was $275,000.
First he sold the house to her for double the price, and then he bought it again from her at auction at half the price!
And each time, he pocketed the transaction fee as realtor too, and on 27 other houses as well.
Fuckin' awesome!!!
A fool and her money are soon parted!
NAPLES, Fla. — In 2005, this once-sleepy retirement haven on Florida's west coast was arguably the hottest housing market in the country.
Builders held lotteries to determine who could purchase homes in new gated communities. In the older neighborhoods, buyers were snapping up modest ranch houses and cottages soon after they were listed for sale. The median home price more than doubled between 2000 and 2005, to about $482,400.
Such a crescendo of activity might have prompted some to pull back. But plenty of investors, who purchased homes to rent or flip, continued to buy and sell through the height of the boom. One of them was Marjorie Dresner. The Canadian native believed that Naples, with its laid-back, balmy atmosphere, would long be an attractive market. A prolific investor, she purchased dozens of houses in recent years, many of them with a partner. One of them cost her $1.7 million.
In late October, Ms. Dresner tried auctioning off 28 of her properties, but some bids were as much as 40 percent lower than what she paid. One three-bedroom ranch house she purchased in July 2005 in the middle-class Lake Park neighborhood fetched a high bid of $400,000; Ms. Dresner and a partner paid $690,000 for the house, according to county records.
Ms. Dresner won't talk much about her investment experience, but prefers to focus on the positive. "I did very well in the beginning," she says. "I look at the overall picture. You don't just look at one year."
Yes, you don't look at it when you've lost your proverbial pants. You look at the "overall picture" which still looks negative to me!
Mr. Krecicki says he met Ms. Dresner a few months after he sold her his home on 10th Avenue in Lake Park in September 2004 for $435,000, more than double what he paid for it.
After that deal, Mr. Krecicki served as her real-estate agent on multiple sales in Lake Park. Soon after homes went on the market, "Marjorie was on the top of my list" to call, he says.
Ms. Dresner says she was growing tired of the burdens of being a landlord. Many of her properties were listed for sale in early 2006, but some were slow to move. In late October, she tried a new tactic and auctioned off the houses.
Mr. Krecicki says he went to the auction out of curiosity and jumped into the bidding when he saw the low prices. "After about two hours, a house came up for bid that I knew very well," Mr. Krecicki recounted in a monthly newsletter he distributes, called the Lake Park Journal.
"I looked at my friend next to me with a bidding card and check in his hand and asked him, 'Aren't you going to bid on this one? C'mon, man, 50/50 split. Bid on this one.'"
They put up the highest bid, which was $275,000.
First he sold the house to her for double the price, and then he bought it again from her at auction at half the price!
And each time, he pocketed the transaction fee as realtor too, and on 27 other houses as well.
Fuckin' awesome!!!
A fool and her money are soon parted!
Rubes and Retards
From CNN Finance, we have Playful Perks Propel Google To Top Of Fortune's 'best Workplaces'.
Does this sound like your workplace: On-site pool, 11 gourmet restaurants, pool table and climbing wall, plus unlimited sick leave, five weeks' paid time off after a year on the job, $8,000 in tuition reimbursement and classes in estate planning and foreign languages?
It's a safe bet only Google Inc. employees would answer that question in the affirmative. That helps explain why Google (GOOG) catapulted to the top of Fortune's list of "100 best companies to work for" in the company's first year as an entrant.
Google's perks "are quite amazing, but also what really pushed them over the top was the enthusiasm of employees who work there -- they just love working there," said Milton Moskowitz, a New York-based writer and co-author of the list with Robert Levering. Levering is a co-founder of the Great Place to Work Institute, which surveys the employees and compiles the list for Fortune.
At Google, "fun things go on there that don't go on at other companies," Moskowitz said. "You can come to work in your pajamas. Some come in tuxedos, just as a contrast to the pajamas. They have all these games going on there," he said.
Let's ask the obvious question: is Google doing this out of the goodness of its heart?
Obviously not!
Then, the equally obvious conclusion is that if they are spending all this money, then then must be getting something for it. In fact, they must be getting a lot for it because they could equally well use that money profitably elsewhere.
Secondly, let's ask another question : if I doubled your salary, would you be willing to pay for these perks?
You know, the pool tables, and climbing walls, and gourmet chefs?
If not, why not?
After all, there's no distinction between paying out of pocket with a higher salary, and getting a lower salary with these perks.
Lastly, on a brute-force practical level, why would you believe that a company's perks are the right ones for you? The best they can do is provide some kind of "average" perks that appeal to the "average" engineer.
What if you prefer opera tickets to a climbing wall, or vacations to reimbursing tuition? Most importantly, if you don't care for any of the above, why should you be paying for it at all?
After all, the best judge of what you enjoy is you, not someone else who plans it for you.
(This last statement embeds within it the philosophical essence of capitalism, by the way.)
The blunt truth is that this is nothing more than a "dog and pony show". Sucker the creative engineering types because they have no clue about how businesses work.
No creative engineering type would work for Google unless they had a killer contract. And that would not mean "stock options" (which are just another way to sucker engineers) but a fixed percentage of the profit stream.
I don't think Google is going to be handing that one out!
Does this sound like your workplace: On-site pool, 11 gourmet restaurants, pool table and climbing wall, plus unlimited sick leave, five weeks' paid time off after a year on the job, $8,000 in tuition reimbursement and classes in estate planning and foreign languages?
It's a safe bet only Google Inc. employees would answer that question in the affirmative. That helps explain why Google (GOOG) catapulted to the top of Fortune's list of "100 best companies to work for" in the company's first year as an entrant.
Google's perks "are quite amazing, but also what really pushed them over the top was the enthusiasm of employees who work there -- they just love working there," said Milton Moskowitz, a New York-based writer and co-author of the list with Robert Levering. Levering is a co-founder of the Great Place to Work Institute, which surveys the employees and compiles the list for Fortune.
At Google, "fun things go on there that don't go on at other companies," Moskowitz said. "You can come to work in your pajamas. Some come in tuxedos, just as a contrast to the pajamas. They have all these games going on there," he said.
Let's ask the obvious question: is Google doing this out of the goodness of its heart?
Obviously not!
Then, the equally obvious conclusion is that if they are spending all this money, then then must be getting something for it. In fact, they must be getting a lot for it because they could equally well use that money profitably elsewhere.
Secondly, let's ask another question : if I doubled your salary, would you be willing to pay for these perks?
You know, the pool tables, and climbing walls, and gourmet chefs?
If not, why not?
After all, there's no distinction between paying out of pocket with a higher salary, and getting a lower salary with these perks.
Lastly, on a brute-force practical level, why would you believe that a company's perks are the right ones for you? The best they can do is provide some kind of "average" perks that appeal to the "average" engineer.
What if you prefer opera tickets to a climbing wall, or vacations to reimbursing tuition? Most importantly, if you don't care for any of the above, why should you be paying for it at all?
After all, the best judge of what you enjoy is you, not someone else who plans it for you.
(This last statement embeds within it the philosophical essence of capitalism, by the way.)
The blunt truth is that this is nothing more than a "dog and pony show". Sucker the creative engineering types because they have no clue about how businesses work.
No creative engineering type would work for Google unless they had a killer contract. And that would not mean "stock options" (which are just another way to sucker engineers) but a fixed percentage of the profit stream.
I don't think Google is going to be handing that one out!
Friday, January 05, 2007
You're telling us now?
An editorial from the LA Times: Home, borrowed home.
INVESTORS, BANKERS and economists — not to mention 80 million U.S. homeowners — are constantly sifting through data to figure out what's going on with the real estate market. New housing starts, raw material costs, time on the market, average rent/mortgage ratios, the Federal Reserve chairman's loose lips — all of these are supposed to give us vague and partial hints about whether the market is heating up, cooling down or "just right."
Yet the answer may be staring us right in the face. If you can't get a house with no money down, the sky is obviously falling.
Real estate is a topic so fraught with schadenfreude, forlorn hopes and visions of catastrophe that it almost seems like bad form to remain calm in the face of such bad news. The sub-prime market's 45-fold growth, from $13 billion in 1995 to $594 billion in 2005, stands as a monument to the nation's home-buying mania. You'd need the proverbial heart of stone not to laugh at the suffering of the gamblers who bet that the real estate market could increase indefinitely.
There's a puritanical impulse to say, "If you can't afford a down payment, you shouldn't be buying a house." But it may be more appropriate to marvel at a nation in which you can buy a house the way you'd buy a used car, and to thank the market's powers of natural selection that this behavior is now being curtailed.
Yep, it's certainly being curtailed in a Lizzie-Bordenesque way!
INVESTORS, BANKERS and economists — not to mention 80 million U.S. homeowners — are constantly sifting through data to figure out what's going on with the real estate market. New housing starts, raw material costs, time on the market, average rent/mortgage ratios, the Federal Reserve chairman's loose lips — all of these are supposed to give us vague and partial hints about whether the market is heating up, cooling down or "just right."
Yet the answer may be staring us right in the face. If you can't get a house with no money down, the sky is obviously falling.
Real estate is a topic so fraught with schadenfreude, forlorn hopes and visions of catastrophe that it almost seems like bad form to remain calm in the face of such bad news. The sub-prime market's 45-fold growth, from $13 billion in 1995 to $594 billion in 2005, stands as a monument to the nation's home-buying mania. You'd need the proverbial heart of stone not to laugh at the suffering of the gamblers who bet that the real estate market could increase indefinitely.
There's a puritanical impulse to say, "If you can't afford a down payment, you shouldn't be buying a house." But it may be more appropriate to marvel at a nation in which you can buy a house the way you'd buy a used car, and to thank the market's powers of natural selection that this behavior is now being curtailed.
Yep, it's certainly being curtailed in a Lizzie-Bordenesque way!
Logical loose-motions
From the San Diego Union Tribune, we have some retard writing about Retailers dismayed by December sales figures.
Gap's board, it appears, has had enough.
After a dismal holiday season – the third in a row – the chain's directors are participating in a broad review of the company's strategy, intensifying pressure on the chief executive, Paul Pressler, to pull it out of a protracted sales slump.
Analysts blamed the results on mild weather that depressed sales of winter wear, and consumers – worried about the housing market and energy prices – who waited until just before Christmas to do their shopping.
Wouldn't warmer weather make consumers more likely to go out and shop?
And if you had warmer weather, why are the consumers "worried" about energy prices?
Hmmmm....
Gap's board, it appears, has had enough.
After a dismal holiday season – the third in a row – the chain's directors are participating in a broad review of the company's strategy, intensifying pressure on the chief executive, Paul Pressler, to pull it out of a protracted sales slump.
Analysts blamed the results on mild weather that depressed sales of winter wear, and consumers – worried about the housing market and energy prices – who waited until just before Christmas to do their shopping.
Wouldn't warmer weather make consumers more likely to go out and shop?
And if you had warmer weather, why are the consumers "worried" about energy prices?
Hmmmm....
Blowing in the Windy City
From the Chicago Tribune, we have Marilyn Kennedy Melia writing about Area less affordable for buyers.
If the median home price here was $270,900, the housing affordability index in Chicago would be 100, notes Celia Chen, housing economist at Economy.com
An index of 100 means that a Chicago-area household earning the median income here of about $68,000 could afford the median-priced home, assuming a 20 percent down payment and market interest rates, Chen explains.
Having lived in Chicago for 8 years, I'm having a great deal of trouble believing that median income number. I would've expected it closer to the $55K range in 2006.
But, I'm having trouble finding the statistics so I'm going to have to go on what evidence I can find.
First up, from the Trib itself, we have a graph from 1999:
There's no way in hell that Chicago incomes doubled in 7 years!
Second, here's a PDF from a poverty study group in Chicago:
In short, $68K is pure fantasy!
But hey! This was the same paper that published the Dewey Defeats Truman headline!
If the median home price here was $270,900, the housing affordability index in Chicago would be 100, notes Celia Chen, housing economist at Economy.com
An index of 100 means that a Chicago-area household earning the median income here of about $68,000 could afford the median-priced home, assuming a 20 percent down payment and market interest rates, Chen explains.
Having lived in Chicago for 8 years, I'm having a great deal of trouble believing that median income number. I would've expected it closer to the $55K range in 2006.
But, I'm having trouble finding the statistics so I'm going to have to go on what evidence I can find.
First up, from the Trib itself, we have a graph from 1999:
There's no way in hell that Chicago incomes doubled in 7 years!
Second, here's a PDF from a poverty study group in Chicago:
In short, $68K is pure fantasy!
But hey! This was the same paper that published the Dewey Defeats Truman headline!
Thursday, January 04, 2007
Money Matters
From the esteemed Wall Street Journal, we have an Op-Ed by Brian Wesbury who is the chief economist at First Trust Advisors L.P.: Dow 14000 on Tap (subscription only.)
Full article can be found here.
Money doesn't just evaporate. For every debit, there must be a credit. The world is a closed system as far as the dollar is concerned.
Remedial economics, anyone?
An object is "worth" only as much as you can get in the marketplace.
Suppose today, the market values the shares of company XYZ at $10. Tomorrow, collectively, the market decides that it's only worth $1.
Poof! 90% of the asset disappeared like coke up a starlet's nose!
(I'm aware that short selling complicates this but the basic argument is utterly sound.)
This has nothing to do with fiat or non-fiat currencies. This is simply an artifact of how valuation of assets works.
Once again: something is only "worth" what somebody else will pay for it.
And this guy is the "Chief Economist" of an investment company? Has this guy ever seen a "currency crisis"?
More importantly, would you trust him to invest your money?
Here's his bio.
Brian Wesbury received an M.B.A. from Northwestern University's Kellogg Graduate School of Management, and a B.A. in Economics from the University of Montana. He is a contributor to the editorial page at The Wall Street Journal, and is a regular co-host on CNBC's Squawk Box.
In 1995 and 1996, he served as Chief Economist for the Joint Economic Committee of the U.S. Congress.
He is also a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago.
Yo dawgs! that's fucked up, y'all!
Full article can be found here.
Money doesn't just evaporate. For every debit, there must be a credit. The world is a closed system as far as the dollar is concerned.
Remedial economics, anyone?
An object is "worth" only as much as you can get in the marketplace.
Suppose today, the market values the shares of company XYZ at $10. Tomorrow, collectively, the market decides that it's only worth $1.
Poof! 90% of the asset disappeared like coke up a starlet's nose!
(I'm aware that short selling complicates this but the basic argument is utterly sound.)
This has nothing to do with fiat or non-fiat currencies. This is simply an artifact of how valuation of assets works.
Once again: something is only "worth" what somebody else will pay for it.
And this guy is the "Chief Economist" of an investment company? Has this guy ever seen a "currency crisis"?
More importantly, would you trust him to invest your money?
Here's his bio.
Brian Wesbury received an M.B.A. from Northwestern University's Kellogg Graduate School of Management, and a B.A. in Economics from the University of Montana. He is a contributor to the editorial page at The Wall Street Journal, and is a regular co-host on CNBC's Squawk Box.
In 1995 and 1996, he served as Chief Economist for the Joint Economic Committee of the U.S. Congress.
He is also a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago.
Yo dawgs! that's fucked up, y'all!
The Power of Economics and the Economics of Power
I am so fucking tired of responding to the same bullshit about how the Fed will inflate its way out of this mess with vague statements about "printing money", "governments always inflate", and "helicopter drops" that I'm going to adopt the Socratic method to settle this debate once and for all.
Q: Who owns the liens on the houses?
A: Consumers.
Q: Who owns the mortgages?
A: Banks, pension funds, foreign investors.
Q: If the Fed inflates, who wins, and who loses?
A: Consumers win, the banks lose.
Q: Who has more power?
A: The latter.
Q: When was the last time in history when the sheep ate the wolves?
A: <insert whimpering sound as realization strikes>
Thank you. That will be all!
Q: Who owns the liens on the houses?
A: Consumers.
Q: Who owns the mortgages?
A: Banks, pension funds, foreign investors.
Q: If the Fed inflates, who wins, and who loses?
A: Consumers win, the banks lose.
Q: Who has more power?
A: The latter.
Q: When was the last time in history when the sheep ate the wolves?
A: <insert whimpering sound as realization strikes>
Thank you. That will be all!
Where do I hide the elephant?
From the Herald News, we have some news about Danville, IL: Danville Realtors to withhold data.
Real estate agents in Danville have decided that, as far as the local housing market goes, no news is good news.
The local Realtors group says it no longer will submit sales data to the National Association of Realtors, after the area's median home prices were ranked lowest in the country in a couple of recent quarterly reports.
Yep, bury your head up your ass. Suddenly, it's midnight!
"We looked into it -- all avenues of what we should do," Borgwald said. "We want to let people know Danville is a great place to live."
Yeah, sure! <giggle>
(Those of you who've lived in Chicago for a while know what I mean!)
Real estate agents in Danville have decided that, as far as the local housing market goes, no news is good news.
The local Realtors group says it no longer will submit sales data to the National Association of Realtors, after the area's median home prices were ranked lowest in the country in a couple of recent quarterly reports.
Yep, bury your head up your ass. Suddenly, it's midnight!
"We looked into it -- all avenues of what we should do," Borgwald said. "We want to let people know Danville is a great place to live."
Yeah, sure! <giggle>
(Those of you who've lived in Chicago for a while know what I mean!)
GDP and MEW
From Calculated Risk, we have a graph of GDP, and GDP - MEW (mortgage equity withdrawal.)
Please note that this MEW model was developed by Greenspan and Kennedy (yep! the Fed itself!) The subtraction from GDP was 50% of MEW which was Greenspan and Kennedy's estimate of what fraction flowed to goods and services.
Academia : The Final Frontier
From the LA Times, a while back, we have Lisa Girion writing about: UCLA analysts back forecast of 'soft landing'.
Despite the housing downturn, the California and U.S. economies are headed for a "soft landing" because trouble in one sector alone is not enough to trigger a recession, UCLA economists said in a quarterly forecast to be released today.
California could have a soft landing — slowing growth but without recession — as long as its economic woes are limited to the housing sector, economist Ryan Ratcliff said in the UCLA Anderson Forecast outlook.
"The question for how bad this thing is going to get over the next two years is whether or not something else comes along and becomes the double whammy," he said.
Leamer's national forecast devotes 14 pages to explaining why several economic models foresee recession.
Then, in the final page and a half, the forecast says such models are wrong because "they can't seem to be taught that something is very different this time."
Never forget the immortal wisdom of Ludwig von Mises: "The four most expensive words in the English language are 'it's different this time'."
Fourteen pages devoted to why "several" economic models say recession, and in one page and a half, suddenly there's no recession. Magical!
Now, let's take a quick look at the contributors to the UCLA Anderson School:
Citigroup - Salomon Smith Barney & Citibank
First Pacific Advisors Inc.
PricewaterhouseCoopers Foundation
Roth Capital Partners, LLC
Arden Realty LP
Bank of America
KeyBank National Association
Apollo Real Estate Advisors, L. P.
CMS Bond Edge
Deutsche Bank
Dimensional Fund Advisors Inc.
Fidelity National Title Company
First Property Realty Corporation
Goldman Sachs Group Inc.
J. P. Morgan Chase
KPMG LLP
Barclays Global Investors N.A.
Capital Group International Inc.
CB Richard Ellis Inc.
Chicago Title & Trust Company
Countrywide Home Loans Inc.
East West Bancorp, Inc.
Eastdil Realty Inc.
Merrill Lynch
Moody's Corporation
Morgan Stanley
Pacific Investment Management Company
Suntrust Bank
Union Bank of California Foundation
Union Bank of Switzerland
Wells Fargo Bank
Western Asset Management Company
Arden Realty, Inc.
Bank of the West
Catellus Development Corporation
Washington Mutual Foundation
No sir! No vested interests there.
His conclusion: "The models say 'recession'; the mind says 'no way.' I'm going with the mind."
Yes, why look at the evidence? Let's go for 'faith' instead!
Despite the housing downturn, the California and U.S. economies are headed for a "soft landing" because trouble in one sector alone is not enough to trigger a recession, UCLA economists said in a quarterly forecast to be released today.
California could have a soft landing — slowing growth but without recession — as long as its economic woes are limited to the housing sector, economist Ryan Ratcliff said in the UCLA Anderson Forecast outlook.
"The question for how bad this thing is going to get over the next two years is whether or not something else comes along and becomes the double whammy," he said.
Leamer's national forecast devotes 14 pages to explaining why several economic models foresee recession.
Then, in the final page and a half, the forecast says such models are wrong because "they can't seem to be taught that something is very different this time."
Never forget the immortal wisdom of Ludwig von Mises: "The four most expensive words in the English language are 'it's different this time'."
Fourteen pages devoted to why "several" economic models say recession, and in one page and a half, suddenly there's no recession. Magical!
Now, let's take a quick look at the contributors to the UCLA Anderson School:
Citigroup - Salomon Smith Barney & Citibank
First Pacific Advisors Inc.
PricewaterhouseCoopers Foundation
Roth Capital Partners, LLC
Arden Realty LP
Bank of America
KeyBank National Association
Apollo Real Estate Advisors, L. P.
CMS Bond Edge
Deutsche Bank
Dimensional Fund Advisors Inc.
Fidelity National Title Company
First Property Realty Corporation
Goldman Sachs Group Inc.
J. P. Morgan Chase
KPMG LLP
Barclays Global Investors N.A.
Capital Group International Inc.
CB Richard Ellis Inc.
Chicago Title & Trust Company
Countrywide Home Loans Inc.
East West Bancorp, Inc.
Eastdil Realty Inc.
Merrill Lynch
Moody's Corporation
Morgan Stanley
Pacific Investment Management Company
Suntrust Bank
Union Bank of California Foundation
Union Bank of Switzerland
Wells Fargo Bank
Western Asset Management Company
Arden Realty, Inc.
Bank of the West
Catellus Development Corporation
Washington Mutual Foundation
No sir! No vested interests there.
His conclusion: "The models say 'recession'; the mind says 'no way.' I'm going with the mind."
Yes, why look at the evidence? Let's go for 'faith' instead!
Wednesday, January 03, 2007
The Aliens made me do it!
Over the holiday weekend, I was told the following tale by a reader of the blog:
Some random older couple were talking about how the only way for an average person to get ahead was to take on debt. The reader pointed out that, "You have to pay the debt back, you know!"
The response?
"Oh no! That's just what the government wants you to believe."
Wow, tinfoil hattery at its supreme best!
Some random older couple were talking about how the only way for an average person to get ahead was to take on debt. The reader pointed out that, "You have to pay the debt back, you know!"
The response?
"Oh no! That's just what the government wants you to believe."
Wow, tinfoil hattery at its supreme best!
Wishing Fairy
From the Baltimore Sun, we have Buying home not best step to reducing college debt.
Charles wants to buy a house, but says $60,000 in student loans is holding him back.
The 37-year-old earns $39,000 a year working for the federal government and pays $420 a month for his Baltimore apartment. He has $6,000 in a savings account that could help with closing costs.
He says he wants a house because renting doesn't allow him to build up equity. But he's haunted by the student loans.
"To me, the one negative outweighs the positive. I keep seeing that $60,000 problem each time I look in the mirror. I still think buying the house is the right thing to do," he writes in an e-mail. "I just don't know what to do."
Charles is banking on selling his house for a tidy profit in five years or so. But there's no guarantee that housing prices will rise in the future. Prices have flattened here in recent months, and they can remain that way or even go down.
He was hoping that if he bought a house and sold it later, he could apply $20,000 or $30,000 from the proceeds to his student loans. A big payment like that might lead the lender to forgive the remaining balance, he says.
$60K in debt, trying to take on more debt in the "hope" that that appreciation would pay off the other debt.
And why would a big payment make the lender "forgive the remaining balance"?
Any lender would milk the last penny out of his cold dead hands!
Logic need not apply in this bizarro world!
Charles wants to buy a house, but says $60,000 in student loans is holding him back.
The 37-year-old earns $39,000 a year working for the federal government and pays $420 a month for his Baltimore apartment. He has $6,000 in a savings account that could help with closing costs.
He says he wants a house because renting doesn't allow him to build up equity. But he's haunted by the student loans.
"To me, the one negative outweighs the positive. I keep seeing that $60,000 problem each time I look in the mirror. I still think buying the house is the right thing to do," he writes in an e-mail. "I just don't know what to do."
Charles is banking on selling his house for a tidy profit in five years or so. But there's no guarantee that housing prices will rise in the future. Prices have flattened here in recent months, and they can remain that way or even go down.
He was hoping that if he bought a house and sold it later, he could apply $20,000 or $30,000 from the proceeds to his student loans. A big payment like that might lead the lender to forgive the remaining balance, he says.
$60K in debt, trying to take on more debt in the "hope" that that appreciation would pay off the other debt.
And why would a big payment make the lender "forgive the remaining balance"?
Any lender would milk the last penny out of his cold dead hands!
Logic need not apply in this bizarro world!
Hope springs eternal
From the Naples News we have Laura Layden: Realtors looking for an upswing in 2007.
In the Naples area, the year ended with more than 11,000 listings, a 16-month supply of homes, on the market.
Bust!
That could increase by 1,000 or more this month, with the height of season.
Bust!
In Lee County, there were 13,330 single-family homes, and another 8,559 condominiums listed for sale on the Multiple Listing Service last week. That works out to a more than 17-month supply of single-family homes and about a three-year supply of condos on the market.
Bust!
“Homes are not worth today what they were last year, or even six or eight months ago,” he said.
Bust!
Realtors don’t expect to ever again see the kind of run-up in prices that sellers experienced in 2005.
Bust!
With the cool-down in the market, some Realtors have left their jobs for other careers or have moved to other states seeking better opportunities.
Bust!
He said 2,500 members of the Realtor Association of Greater Fort Myers and the Beach did not pay their annual dues on time. If those Realtors don’t renew, the association will lose almost 40 percent of the primary board members, he said.
Bust!
The market may not have hit bottom just yet. But the bottom might be around the corner.
Denial!
In the Naples area, the year ended with more than 11,000 listings, a 16-month supply of homes, on the market.
Bust!
That could increase by 1,000 or more this month, with the height of season.
Bust!
In Lee County, there were 13,330 single-family homes, and another 8,559 condominiums listed for sale on the Multiple Listing Service last week. That works out to a more than 17-month supply of single-family homes and about a three-year supply of condos on the market.
Bust!
“Homes are not worth today what they were last year, or even six or eight months ago,” he said.
Bust!
Realtors don’t expect to ever again see the kind of run-up in prices that sellers experienced in 2005.
Bust!
With the cool-down in the market, some Realtors have left their jobs for other careers or have moved to other states seeking better opportunities.
Bust!
He said 2,500 members of the Realtor Association of Greater Fort Myers and the Beach did not pay their annual dues on time. If those Realtors don’t renew, the association will lose almost 40 percent of the primary board members, he said.
Bust!
The market may not have hit bottom just yet. But the bottom might be around the corner.
Denial!
Household Leverage
Equity is basically what fraction of your house do you actually own. Note the steady decline since the 70's, and the precipitous decline since 2001.
Also note that since this is the mean, it is sharply skewed upwards by the "conservative old fogies" who own their home outright.
Subscribe to:
Posts (Atom)