Not the good kind. It's copper as predicted in Scorched Earth Policy.
From WCCO in Minnesota, we have Lawmakers Working To Cut Down Copper Stripping.
State legislators in both houses are working on new laws to cut down on copper stripping. It is the epidemic of thieves stealing industrial metal from vacant homes. Law enforcement says it is a public safety issue and needs help from the Capitol.
With 400 vacant houses in Minneapolis, police want to stop thieves who are stripping out copper wiring and piping. There have already been 115 that have been stripped. And at least four houses blew up when gas from a stripped pipe ignited. Police want lawmakers to fight back.
And from sunny San Diego, we have Copper thieves preying on schools.
Copper thieves are hitting East County schools – hard.
At least 10 schools and district facilities have been struck, some repeatedly, since December, officials said.
“Any copper is what they're looking for,” said Bob Kiesling, director of facilities for the Grossmont Union High School District, where five campuses have been vandalized.
From Las Vegas, we have 'Scrapping' for copper, other metals, helps feed meth habit.
Rising prices for copper are making the once lowly metal a target for thieves, who hit construction sites and abandoned buildings for the element, often to feed methamphetamine habits.
"Scrapping," as meth addicts call it, involves stripping copper and other metals from utility poles, pipes in empty buildings and materials at construction sites.
"It's such quick money, and there are so many places to steal from," Reno police Lt. Jon Catalano said. "They just cut it in pieces and stuff it in their backpacks."
From Arizona: Copper, metal thieves targeted in Mesa campaign.
A recent spree in theft of copper, brass and aluminum from construction sites, farms and businesses around the Valley.
The solution: Paint metal to reduce its value or cage and lock metal units.
These are the suggestions by Mesa's newly implemented "Stop the Metal-ing In Mesa" campaign, raising awareness of the crime.
From Tennessee: Copper theft causes fire.
It appears to be easy to steal and easy to sell and thieves stripping copper from air conditioning units are costing area businesses big time. Thursday fire fighters responded to a fire at the Winchester Office Plaza after someone turned on an air conditioning unit that had been vandalized.
In the last two months the Winchester Office Plaza has been hit three times by thieves stripping air condition units for copper and yesterday their handy work led to a fire in a beauty shop in the complex. Managers of the complex say thieves who vandalized one unit clipped the wires to another. They say Thursday when someone turned on the air conditioning loose wires in the wall sparked a fire.
"We had went to lunch and we had just finished up lunch and started smelling some smoke thru the air vents," said Tina Chism, who works in the plaza.
And just so we are clear, this is global. From Leeds in the UK: Thieves in the night target copper.
THIEVES are stealing copper gas pipes from homes while residents are asleep.
The criminals have targeted dozens of houses on a Leeds estate, leaving families without heating or the means to cook.
Victims have included a 77-year-old woman who is now terrified the thieves will return, and a mum of two-year-old twins who was left without central heating.
"We woke up in the morning and the house was freezing," said the mother, who did not want to be named.
"At first we thought the pilot light was out but when I went outside I realised all the piping had gone overnight.
Tuesday, April 24, 2007
The First Ka-boom!
Literally!!!
From KSL TV: Homeowner Arrested for Arson Following House Explosion.
A home explodes in Salt Lake City, leaving nothing but a pile of rubble. Now the homeowner is being charged with arson.
The blast was enormous, completely wiping out the home near 600 East Wilmington Avenue (2200 South) and igniting two neighboring houses.
The owner of the home that exploded is a man in his 30s.
Heitkemper said he had talked with the homeowner in the past. "He was talking about trying to take a mortgage out of his house, trying to do something to gain some money," Heitkemper told us.
The homeowner's wife is totally distraught. Apparently she was not living in the house with her husband at the time of the fire. This morning she told us she does not know why the homeowner may have set the house on fire. But she indicated there were financial and emotional issues.
What fun the Federal Reserve hath wrought!
From KSL TV: Homeowner Arrested for Arson Following House Explosion.
A home explodes in Salt Lake City, leaving nothing but a pile of rubble. Now the homeowner is being charged with arson.
The blast was enormous, completely wiping out the home near 600 East Wilmington Avenue (2200 South) and igniting two neighboring houses.
The owner of the home that exploded is a man in his 30s.
Heitkemper said he had talked with the homeowner in the past. "He was talking about trying to take a mortgage out of his house, trying to do something to gain some money," Heitkemper told us.
The homeowner's wife is totally distraught. Apparently she was not living in the house with her husband at the time of the fire. This morning she told us she does not know why the homeowner may have set the house on fire. But she indicated there were financial and emotional issues.
What fun the Federal Reserve hath wrought!
Wednesday, April 11, 2007
Tuesday, April 10, 2007
Why bother with knowledge?
From the New York Times editorial: Challenging China.
The administration announced yesterday that it was filing two cases against China at the World Trade Organization. The first is over China’s failure to crack down on pirated goods like movies and books. It will also challenge Chinese restrictions on the distribution of foreign films, music and more.
A trade war would do more harm to American business than to China’s subsidies. What would happen to Boeing if the steel used in its jets became more expensive?
What fuckin' steel?
Steel is way too heavy to make airplanes out of. Everyone knows that they are made out of aluminum, titanium, and other composite materials (which are both lightweight and strong.)
Secondly, the vast majority of that is manufactured right here in America (even if the companies are global, or the raw materials sourced from elsewhere.)
Have the editors heard of Kaiser Aluminum? or Toray?
The irony of ironies is that while a trade war is definitely a bad thing, the one beneficiary of a "weak-dollar policy" would be Boeing (in the short term.) They actually make a product that the world wants, and have the capacity to build it.
Quelle grande surprise!
Lastly, cracking down on subsidies is exactly the right thing to do from an economic standpoint. Subsidized industries hardly constitute "free trade".
But why bother checking facts when you can fulminate inanely on the pulpit?
Man! Even toilet paper is more useful than the "paper of record"!
The administration announced yesterday that it was filing two cases against China at the World Trade Organization. The first is over China’s failure to crack down on pirated goods like movies and books. It will also challenge Chinese restrictions on the distribution of foreign films, music and more.
A trade war would do more harm to American business than to China’s subsidies. What would happen to Boeing if the steel used in its jets became more expensive?
What fuckin' steel?
Steel is way too heavy to make airplanes out of. Everyone knows that they are made out of aluminum, titanium, and other composite materials (which are both lightweight and strong.)
Secondly, the vast majority of that is manufactured right here in America (even if the companies are global, or the raw materials sourced from elsewhere.)
Have the editors heard of Kaiser Aluminum? or Toray?
The irony of ironies is that while a trade war is definitely a bad thing, the one beneficiary of a "weak-dollar policy" would be Boeing (in the short term.) They actually make a product that the world wants, and have the capacity to build it.
Quelle grande surprise!
Lastly, cracking down on subsidies is exactly the right thing to do from an economic standpoint. Subsidized industries hardly constitute "free trade".
But why bother checking facts when you can fulminate inanely on the pulpit?
Man! Even toilet paper is more useful than the "paper of record"!
The Stages of Truth
From CBS Marketwatch, we have No surprise : End of housing bubble should have been obvious to everyone.
In response, policymakers and lenders devised ways to make borrowing easier, since interest expense is the biggest cost of owning a home. These helped a bit - but they really didn't kick in until the Federal Reserve began cutting interest rates in early 2000, eventually pushing them to 45-year lows by 2003.
Since short-term rates were well below long-term rates, many people borrowed at adjustable rates, believing that rates would stay low indefinitely, or that housing prices would continue to rise indefinitely, thus enabling them to refinance at a fixed rate at some future date.
Needless to say, home prices rose even faster than before, as these lower rates (along with new types of loans and creative sales tactics) increased the effective demand for housing faster than supply.
Rising rates reduced the demand for housing, causing prices in some areas to top out and start falling. Readers of this column were informed that the party was over and that some homeowners would soon have difficulty paying off their loans.
Others missed this sign until it was too late. Now they are trying to shut the barn door after the horse has escaped.
"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."
Schopenhauer would be proud!
In response, policymakers and lenders devised ways to make borrowing easier, since interest expense is the biggest cost of owning a home. These helped a bit - but they really didn't kick in until the Federal Reserve began cutting interest rates in early 2000, eventually pushing them to 45-year lows by 2003.
Since short-term rates were well below long-term rates, many people borrowed at adjustable rates, believing that rates would stay low indefinitely, or that housing prices would continue to rise indefinitely, thus enabling them to refinance at a fixed rate at some future date.
Needless to say, home prices rose even faster than before, as these lower rates (along with new types of loans and creative sales tactics) increased the effective demand for housing faster than supply.
Rising rates reduced the demand for housing, causing prices in some areas to top out and start falling. Readers of this column were informed that the party was over and that some homeowners would soon have difficulty paying off their loans.
Others missed this sign until it was too late. Now they are trying to shut the barn door after the horse has escaped.
"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."
Schopenhauer would be proud!
When will people get the freakin' point?
From the New York Times, we have Vikas Bajaj talking about Defaults Rise in Next Level of Mortgages.
Some of the problems afflicting mortgages sold to borrowers with weak, or subprime, credit increasingly appear to be cropping up in loans made to homeowners who were thought to be less risky.
Until recently, Alt-A loans were considered by many investors to be only slightly more risky than prime mortgages, and losses in bonds backed by the mortgages were small and rare, said Zach Gast, an analyst at the Center for Financial Research and Analysis.
When will people learn that credit scores don't matter? What matters is how much debt you borrowed compared to your income! How hard can it be to figure out this basic point?
“The credit markets were showering the mortgage market with capital, and now that’s just evaporating,” said Mark Zandi, chief economist at Moody’s Economy.com. “The capital markets are going to exacerbate the problem, seemingly"
The capital markets are going to exarcebate the problem? That's the job of the capital markets, you fuckin' idiot! And he's the "chief economist" of Economy.com?
What dope are all these people smoking?
Some of the problems afflicting mortgages sold to borrowers with weak, or subprime, credit increasingly appear to be cropping up in loans made to homeowners who were thought to be less risky.
Until recently, Alt-A loans were considered by many investors to be only slightly more risky than prime mortgages, and losses in bonds backed by the mortgages were small and rare, said Zach Gast, an analyst at the Center for Financial Research and Analysis.
When will people learn that credit scores don't matter? What matters is how much debt you borrowed compared to your income! How hard can it be to figure out this basic point?
“The credit markets were showering the mortgage market with capital, and now that’s just evaporating,” said Mark Zandi, chief economist at Moody’s Economy.com. “The capital markets are going to exacerbate the problem, seemingly"
The capital markets are going to exarcebate the problem? That's the job of the capital markets, you fuckin' idiot! And he's the "chief economist" of Economy.com?
What dope are all these people smoking?
Thursday, April 05, 2007
Here comes the choo-choo train...
And from the BBC right on time, we have World growth to 'resist US blip'.
The global economy should be able to withstand a slowdown in the US and wobbles in its housing market, the International Monetary Fund (IMF) says.
However, the IMF said that the problems were US specific and should not spread.
"Most countries should be in a position to decouple from the US economy and sustain strong growth if the US slowdown remains moderate as expected," the IMF said in its World Economic Outlook report.
Ah, yes! The "decoupling" hypothesis.
Let's review the progression of events:
There is no problem.
There is a problem but it will be contained within subprime.
There is a problem but the US slowdown will be moderate.
There will be a 'US blip' but the world will decouple.
So when the US is rockin' and rollin', the global economy is the beneficiary, but when the shit hits the fan, they will decouple?
Chuffa, Puffa, Chuffa, Puffa! The bullshit train's right on time.
The global economy should be able to withstand a slowdown in the US and wobbles in its housing market, the International Monetary Fund (IMF) says.
However, the IMF said that the problems were US specific and should not spread.
"Most countries should be in a position to decouple from the US economy and sustain strong growth if the US slowdown remains moderate as expected," the IMF said in its World Economic Outlook report.
Ah, yes! The "decoupling" hypothesis.
Let's review the progression of events:
So when the US is rockin' and rollin', the global economy is the beneficiary, but when the shit hits the fan, they will decouple?
Chuffa, Puffa, Chuffa, Puffa! The bullshit train's right on time.
Tuesday, April 03, 2007
Accounting and Mathematics
If you ever find yourself having to analyze the financial statements, you will need to learn how to read it.
There is a lot of mumbo-jumbo in the accounting world (for historical and legal reasons,) but there is a very powerful way of thinking about it.
If you have even a slighly mathematical bent, there is great advantage to looking at it from the viewpoint of calculus. (In fact, I am ashamed to admit how many years it took me to grasp this basic point.)
There are two components to the financial statement:
Firstly, the balance sheet which is the snapshot about the financial entity (say, a company) at a particular moment of time.
Secondly, there is the income statement which is about the flow of money through time.
On the balance sheet, there are two things -- assets and liabilities.
assets - liabilities = equity (net worth)
Traditionally, this is always written as:
assets = liabilities + equity
Similarly, on the income statement, you have two things: income and expenses. Traditionally, this is always written as (similar to above):
income = expenses + earnings (net income)
Here's the key point:
The income statement is the derivative of the balance sheet with respect to time.
Or equivalently, the balance sheet is the integral over time of all the income statements from the beginning to the instance of the balance sheet.
If you integrate the second equation:
∑ income = ∑ expenses + ∑ earnings
you will end up at the balance sheet:
assets = liabilities + equity
After this, the big bad bold world of accounting will hold no horrors for you!
Depreciation? Pah! nothing but a delta of writedown, etc. etc.
Now, both of these are complicated (for a real company) but if you think in the language of calculus, you will grasp the mumbo-jumbo far faster than if you think in strictly accounting notation (which uses the language of law not mathematics!)
In fact, the mumbo-jumbo originates because accounting is a subject far older than calculus.
The elegant part about all of this is that because we're talking about money (M), there are only two things: M and ∂M (although the second derivative (∂²M) does show up from time to time -- earnings growth, for example.)
So you can use the old physics trick of using dimensional analysis to see if both sides of the equation match.
Nifty, eh?
(In fact, you can use all the calculus tricks you learnt, and the results are powerful and amazing!)
I just use calculus notation but nobody understands me so I have had to learn to translate it back into "accountant speak", and "trader speak", and ...
There is a lot of mumbo-jumbo in the accounting world (for historical and legal reasons,) but there is a very powerful way of thinking about it.
If you have even a slighly mathematical bent, there is great advantage to looking at it from the viewpoint of calculus. (In fact, I am ashamed to admit how many years it took me to grasp this basic point.)
There are two components to the financial statement:
Firstly, the balance sheet which is the snapshot about the financial entity (say, a company) at a particular moment of time.
Secondly, there is the income statement which is about the flow of money through time.
On the balance sheet, there are two things -- assets and liabilities.
assets - liabilities = equity (net worth)
Traditionally, this is always written as:
assets = liabilities + equity
Similarly, on the income statement, you have two things: income and expenses. Traditionally, this is always written as (similar to above):
income = expenses + earnings (net income)
Here's the key point:
The income statement is the derivative of the balance sheet with respect to time.
Or equivalently, the balance sheet is the integral over time of all the income statements from the beginning to the instance of the balance sheet.
If you integrate the second equation:
∑ income = ∑ expenses + ∑ earnings
you will end up at the balance sheet:
assets = liabilities + equity
After this, the big bad bold world of accounting will hold no horrors for you!
Depreciation? Pah! nothing but a delta of writedown, etc. etc.
Now, both of these are complicated (for a real company) but if you think in the language of calculus, you will grasp the mumbo-jumbo far faster than if you think in strictly accounting notation (which uses the language of law not mathematics!)
In fact, the mumbo-jumbo originates because accounting is a subject far older than calculus.
The elegant part about all of this is that because we're talking about money (M), there are only two things: M and ∂M (although the second derivative (∂²M) does show up from time to time -- earnings growth, for example.)
So you can use the old physics trick of using dimensional analysis to see if both sides of the equation match.
Nifty, eh?
(In fact, you can use all the calculus tricks you learnt, and the results are powerful and amazing!)
I just use calculus notation but nobody understands me so I have had to learn to translate it back into "accountant speak", and "trader speak", and ...
Indian Rope Trick
From Bloomberg, we have news about India: India's Mortgage Borrowers Face the Big Squeeze.
The Indian central bank's monetary shock therapy has left the country's newly leveraged middle class gasping for breath.
Last weekend, ICICI Bank Ltd., which commands a 30 percent share of retail lending in India, raised the benchmark interest rate on all floating-rate loans, including mortgages, by 1 percentage point to 12.75 percent.
This move came on top of a similar increase in February, and a half-percentage-point one in December.
A new homeowner who took out a 2 million-rupee ($46,200), 15-year variable-rate mortgage, say, two months ago was better off as a tenant. His loan's maturity, according to ICICI Bank's ``impact calculator,'' has increased by about eight years.
A 200-basis-point increase in a mortgage rate in less than two months is unbearable even in a high-wage-growth country such as India. It translates into a 20 percent jump in what a family has to pay the bank every month, according to Credit Suisse Group research.
A 20% jump in payment is a disaster. The impact on retail has to be breathtaking.
Where are all the analysts who were predicting that Indian consumers would take over where the US left off?
Of course, this blog had already predicted this in: Hello, Deflation!, and The Goldilocks Economy.
The Indian central bank's monetary shock therapy has left the country's newly leveraged middle class gasping for breath.
Last weekend, ICICI Bank Ltd., which commands a 30 percent share of retail lending in India, raised the benchmark interest rate on all floating-rate loans, including mortgages, by 1 percentage point to 12.75 percent.
This move came on top of a similar increase in February, and a half-percentage-point one in December.
A new homeowner who took out a 2 million-rupee ($46,200), 15-year variable-rate mortgage, say, two months ago was better off as a tenant. His loan's maturity, according to ICICI Bank's ``impact calculator,'' has increased by about eight years.
A 200-basis-point increase in a mortgage rate in less than two months is unbearable even in a high-wage-growth country such as India. It translates into a 20 percent jump in what a family has to pay the bank every month, according to Credit Suisse Group research.
A 20% jump in payment is a disaster. The impact on retail has to be breathtaking.
Where are all the analysts who were predicting that Indian consumers would take over where the US left off?
Of course, this blog had already predicted this in: Hello, Deflation!, and The Goldilocks Economy.
That Creaking Sound
From Forbes, we have the first reporting of a "teensy-weensy" problem: M&T Filing Highlights Mortgage Squeeze.
Last week, Federal Reserve Chairman Ben Bernanke marched up to Capitol Hill where he said he didin't see any significant indications that the headline-grabbing problems in the subprime sector had leaked into the prime loan market, mortgages made to creditworthty borrowers.
But recent news from Buffalo-based M&T Bank (nyse: MTB) could cause the Fed chief to reconsider his opinion.
The bank reported in a Securities and Exchange Commission filing that its first quarter financial results will be impacted by what it said were "current adverse market conditions."
What's the reason for the bad news?
M&T told investors that problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative, or Alt-A, residential mortgage loans that M&T originates for sale in the secondary market.
"Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter," the company said in the filing. "At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected."
Alt-A loans are the highest of the below-prime category, generally comprising mortgages made to creditworthy borrowers but with limited documentation. M&T's filing means that the bank thinks the loans it has recently originated are worth more than investors in mortgage-backed debt are willing to pay for them, another way of saying that the ocean of money that floated the U.S. housing market for the past few years is evaporating.
M&T said that, in accordance with generally accepted accounting principles, loans held for sale must be recorded at the lower of cost or market value. The result: the carrying value of M&T's Alt-A portfolio that had been held for sale was reduced by $12 million in the first quarter, which M&T estimates will result in an after-tax reduction of net income of $7 million in the quarter, or 7 cents per diluted share.
Investors didn't like what they heard. On Monday morning, the bank's shares nose-dived 8.1%, or $9.41, to $106.42.
Houston, we have a problem!
Last week, Federal Reserve Chairman Ben Bernanke marched up to Capitol Hill where he said he didin't see any significant indications that the headline-grabbing problems in the subprime sector had leaked into the prime loan market, mortgages made to creditworthty borrowers.
But recent news from Buffalo-based M&T Bank (nyse: MTB) could cause the Fed chief to reconsider his opinion.
The bank reported in a Securities and Exchange Commission filing that its first quarter financial results will be impacted by what it said were "current adverse market conditions."
What's the reason for the bad news?
M&T told investors that problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative, or Alt-A, residential mortgage loans that M&T originates for sale in the secondary market.
"Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter," the company said in the filing. "At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected."
Alt-A loans are the highest of the below-prime category, generally comprising mortgages made to creditworthy borrowers but with limited documentation. M&T's filing means that the bank thinks the loans it has recently originated are worth more than investors in mortgage-backed debt are willing to pay for them, another way of saying that the ocean of money that floated the U.S. housing market for the past few years is evaporating.
M&T said that, in accordance with generally accepted accounting principles, loans held for sale must be recorded at the lower of cost or market value. The result: the carrying value of M&T's Alt-A portfolio that had been held for sale was reduced by $12 million in the first quarter, which M&T estimates will result in an after-tax reduction of net income of $7 million in the quarter, or 7 cents per diluted share.
Investors didn't like what they heard. On Monday morning, the bank's shares nose-dived 8.1%, or $9.41, to $106.42.
Houston, we have a problem!
Monday, April 02, 2007
St. Joseph spotted at Walmart
What's $2.93 (+ tax) if St. Joseph will sell your house for you?
Looks like Walmart is getting in on fleecing the last sheep for their last few pennies (which they will charge to a credit card, of course!)
Needless to say, it's made of plastic, and imported from China (which the US will charge to its even larger credit card, of course!)
Sweet!!!
Saturday, March 31, 2007
New York is "special"
From the rag that's basically a shill for the real-estate market in New York, the New York Times, we have news that all doesn't seem to be well in paradise. Turns out even though everyone wants to live in New York, they're having just a teensy-weensy bit of trouble: The Battle for a Mortgage.
AS homeowners across the country have dealt with the declining values of their houses and their ballooning mortgage payments, most New Yorkers seem to believe that the market here doesn’t play by the same rules.
But in recent weeks, a growing number of New Yorkers, often with six-figure salaries and reasonably good credit, have begun to find that mortgages are harder to get as lenders try to stem losses from loans to the weakest, or subprime, borrowers.
Ooooh, trouble in paradise!
Buyers like Lee and Kimberly Au had to adjust their expectations. The Aus wanted to buy a one- or two-bedroom condominium costing $800,000 to $1.25 million at the Atelier on West 42nd Street, now that their 8-year-old son has a modeling contract in New York. But they quickly learned that they could no longer get 100 percent financing, even though Dr. Au makes more than $700,000 a year as a surgeon in Hawaii. So the couple settled on a $625,000 studio and used $62,500 in savings for the down payment.
The Aus recently found that their credit scores had slipped into these lower categories. Dr. Au, who has four surgical offices in Hawaii, saw his score dip to a subprime level after he and a relative invested in a project, which Ms. Au would not discuss. She said the relative had missed some payments.
The Aus tried to tap into the equity in their four-bedroom house in Honolulu or their rental property at Haiku Plantation nearby in Kaneohe, but banks refused to refinance or to lend on these investments.
The couple are using Ms. Au’s credit score, which falls in the Alt-A category, to qualify for a 7.5 percent first mortgage and an 8.5 percent second mortgage.
“We have a lot of our money tied up in real estate in Hawaii,” she said. “I knew we had to find something quick.”
Incidentally, this is the profile of the typical speculator. Someone who thinks "real estate can't lose", someone who's already invested in a "project with a relative" which they don't discuss.
What kind of person spends $625K on a studio? They rent for $1500-$2000 depending on the area. Hell, they're paying something like $3500 for the first mortgage alone, never mind the second.
(Answer: someone who thinks a greater fool will come along.)
Please note that the credit score of the "good doctor" who's "making" $700K is sub-prime (as in same as the average Burger-flipper.)
This is all speculation, levering up, negative gearing, call it what you will.
When this shit happens, and there's literally no doubt any more that it will, I'm going to be like the hyperactive kid on too much sugar, running around screaming, "I told you so, I told you so, I told you so!"
Wheeeeeeeeeeeeeeeee! This is so much fun.
AS homeowners across the country have dealt with the declining values of their houses and their ballooning mortgage payments, most New Yorkers seem to believe that the market here doesn’t play by the same rules.
But in recent weeks, a growing number of New Yorkers, often with six-figure salaries and reasonably good credit, have begun to find that mortgages are harder to get as lenders try to stem losses from loans to the weakest, or subprime, borrowers.
Ooooh, trouble in paradise!
Buyers like Lee and Kimberly Au had to adjust their expectations. The Aus wanted to buy a one- or two-bedroom condominium costing $800,000 to $1.25 million at the Atelier on West 42nd Street, now that their 8-year-old son has a modeling contract in New York. But they quickly learned that they could no longer get 100 percent financing, even though Dr. Au makes more than $700,000 a year as a surgeon in Hawaii. So the couple settled on a $625,000 studio and used $62,500 in savings for the down payment.
The Aus recently found that their credit scores had slipped into these lower categories. Dr. Au, who has four surgical offices in Hawaii, saw his score dip to a subprime level after he and a relative invested in a project, which Ms. Au would not discuss. She said the relative had missed some payments.
The Aus tried to tap into the equity in their four-bedroom house in Honolulu or their rental property at Haiku Plantation nearby in Kaneohe, but banks refused to refinance or to lend on these investments.
The couple are using Ms. Au’s credit score, which falls in the Alt-A category, to qualify for a 7.5 percent first mortgage and an 8.5 percent second mortgage.
“We have a lot of our money tied up in real estate in Hawaii,” she said. “I knew we had to find something quick.”
Incidentally, this is the profile of the typical speculator. Someone who thinks "real estate can't lose", someone who's already invested in a "project with a relative" which they don't discuss.
What kind of person spends $625K on a studio? They rent for $1500-$2000 depending on the area. Hell, they're paying something like $3500 for the first mortgage alone, never mind the second.
(Answer: someone who thinks a greater fool will come along.)
Please note that the credit score of the "good doctor" who's "making" $700K is sub-prime (as in same as the average Burger-flipper.)
This is all speculation, levering up, negative gearing, call it what you will.
When this shit happens, and there's literally no doubt any more that it will, I'm going to be like the hyperactive kid on too much sugar, running around screaming, "I told you so, I told you so, I told you so!"
Wheeeeeeeeeeeeeeeee! This is so much fun.
Hog wash!
We have some wonderful news from Harley-Davidson (HOG.N). It turns out that there seems to be a bit of a problem in HOG's receivables. They're not receiving what they should be receiving.
Something like half of these motorcycle loans were made by the financial subsidiary (HDFS). They were packaged and sold off (duh! we're in a securitized universe!) We can infer what's happening at the subsidiary via the delinquencies in the book.
And something like 28% of these loans have FICO's below 650 (a.k.a. we're in subprime territory.)
(Source: here.)
All these companies (Harley-Davidson, General Motors, Ford) have their own lending units which they are desperately trying to unload.
Only problem? Nobody's biting.
I mean, why back at 90 cents on the dollar what you will be able to get at 40 cents on the dollar two years down the road?
My research friends at all the big banks assure me that there's no chance of the subprime problem spreading. No chance at all! Of course, they're all singing for their supper, but there's no chance of any problem. (Not that I would ever dream of accusing my friends of a conflict of interest.)
Nothing to see here. Move along! These are not the subprime droids that you are looking for.
Something like half of these motorcycle loans were made by the financial subsidiary (HDFS). They were packaged and sold off (duh! we're in a securitized universe!) We can infer what's happening at the subsidiary via the delinquencies in the book.
And something like 28% of these loans have FICO's below 650 (a.k.a. we're in subprime territory.)
| Harley-Davidson's 30-Day Delinquencies | |
| 4Q2006 | 5.18% |
| 3Q2006 | 4.46% |
| 2Q2006 | 3.61% |
| 1Q2006 | 3.69% |
| 4Q2005 | 4.83% |
| 3Q2005 | 4.07% |
| 2Q2005 | 3.66% |
| 1Q2005 | 3.60% |
| Source: Lehman Bros. | |
(Source: here.)
All these companies (Harley-Davidson, General Motors, Ford) have their own lending units which they are desperately trying to unload.
Only problem? Nobody's biting.
I mean, why back at 90 cents on the dollar what you will be able to get at 40 cents on the dollar two years down the road?
My research friends at all the big banks assure me that there's no chance of the subprime problem spreading. No chance at all! Of course, they're all singing for their supper, but there's no chance of any problem. (Not that I would ever dream of accusing my friends of a conflict of interest.)
Nothing to see here. Move along! These are not the subprime droids that you are looking for.
Friday, March 30, 2007
The Goldilocks Economy
There seem to be a few myths floating around about the magic knights in shining armor that are going to ride by and rescue the US economy.
The Feds will "print" money to save the day.
Three flaws in this argument:
Firstly, the Feds can print all the money they want but there is no mechanism that will make it flow into wages (which is what is needed in order to "bailout" the debtor.)
Secondly, the sheep never eat the wolves as we have discussed here.
Lastly, to trash the dollar (or worse, compromise its reserve currency status) would mean "game over" for the Fed, and why would they do that, as we discussed here?
Cap-ex will pick up where the consumer left off.
This seems to be the biggest myth.
Why exactly would businesses invest in expanding their business when consumers are retrenching? Instead, they'll be cutting costs, and the simplest way to do that is to fire people. Any CEO that engages in "cap-ex" while the US burns will be scorched to a crisp.
It doesn't matter if the American consumer retrenches. The consumers in China and India will pick up where the US left off
Three flaws in this argument:
Firstly, Chindia have built a business model exporting stuff to the US (classic mercantilism) so when the US economy gets torched, Chindia will have a complete meltdown.
Secondly, the credit markets in these countries are hardly robust. Foreign banks employ thugs in Bombay to recover defaulted credit. And the claim that the Chindians will suddenly within the next few years give up their thrifty habits and turn into spendthrifts is ludicrous in the extreme.
Thirdly, while it is possible that Chindian companies indulge in capex, the downturn in their economy will make them conservative.
Looks like Goldilocks is going to get sodomized by the three bears!
Three flaws in this argument:
Firstly, the Feds can print all the money they want but there is no mechanism that will make it flow into wages (which is what is needed in order to "bailout" the debtor.)
Secondly, the sheep never eat the wolves as we have discussed here.
Lastly, to trash the dollar (or worse, compromise its reserve currency status) would mean "game over" for the Fed, and why would they do that, as we discussed here?
This seems to be the biggest myth.
Why exactly would businesses invest in expanding their business when consumers are retrenching? Instead, they'll be cutting costs, and the simplest way to do that is to fire people. Any CEO that engages in "cap-ex" while the US burns will be scorched to a crisp.
Three flaws in this argument:
Firstly, Chindia have built a business model exporting stuff to the US (classic mercantilism) so when the US economy gets torched, Chindia will have a complete meltdown.
Secondly, the credit markets in these countries are hardly robust. Foreign banks employ thugs in Bombay to recover defaulted credit. And the claim that the Chindians will suddenly within the next few years give up their thrifty habits and turn into spendthrifts is ludicrous in the extreme.
Thirdly, while it is possible that Chindian companies indulge in capex, the downturn in their economy will make them conservative.
Looks like Goldilocks is going to get sodomized by the three bears!
Serf's Up!
From the Washington Post, we have Ben "Helicopter" Bernanke talking about credit: Fed Chief: Two Sides to Credit Access.
Troubles plaguing lenders and borrowers with risky mortgages may challenge the notion that widespread access to credit is always a good thing, Federal Reserve Chairman Ben Bernanke suggested Friday.
"Recent problems in mortgage markets illustrate that an underlying assumption of the CRA that more lending equals better outcomes for local communities may not always hold," Bernanke said at a Federal Reserve conference.
You mean that loaning a million dollars to people who barely make $50K was a bad idea?
You mean to say that allowing a homeless man to buy five houses isn't a glorious outcome of the "democratization of credit"?
Hot diggity damn! Say it ain't so, dude, say it ain't so!
Troubles plaguing lenders and borrowers with risky mortgages may challenge the notion that widespread access to credit is always a good thing, Federal Reserve Chairman Ben Bernanke suggested Friday.
"Recent problems in mortgage markets illustrate that an underlying assumption of the CRA that more lending equals better outcomes for local communities may not always hold," Bernanke said at a Federal Reserve conference.
You mean that loaning a million dollars to people who barely make $50K was a bad idea?
You mean to say that allowing a homeless man to buy five houses isn't a glorious outcome of the "democratization of credit"?
Hot diggity damn! Say it ain't so, dude, say it ain't so!
Thursday, March 29, 2007
The Reset Cometh
We're only three months into this, and look at the bitchin' and moanin'. Look what's coming down the pipe.
Therefore, send not to know
For whom the bell tolls,
It tolls for thee.
Peace, Love, Granola
I didn't feel like leaving out the other delusional coast so from Bloomberg: California Investigates Subprime Mortgage Industry.
California Attorney General Jerry Brown opened an investigation of the subprime mortgage industry, which made the state the largest U.S. market for high-risk home loans.
Half of the 20 biggest U.S. subprime lenders, including No. 2 New Century Financial Corp., which is trying to avoid bankruptcy, are located in California, according to the newsletter Inside Mortgage Finance. The industry is under scrutiny by regulators after delinquencies on subprime mortgages rose to 13.3 percent last quarter, the highest since September 2002.
About 13 percent of the U.S.'s subprime loans are in California, according to the Washington-based Mortgage Bankers Association.
The following graph is from the Wall Street Journal: Where Subprime Delinquencies Are Getting Worse.
Among other things, it has a lovely table on this madness.
Pass the Maui-wowie, baby. Cali needs a few hits!
California Attorney General Jerry Brown opened an investigation of the subprime mortgage industry, which made the state the largest U.S. market for high-risk home loans.
Half of the 20 biggest U.S. subprime lenders, including No. 2 New Century Financial Corp., which is trying to avoid bankruptcy, are located in California, according to the newsletter Inside Mortgage Finance. The industry is under scrutiny by regulators after delinquencies on subprime mortgages rose to 13.3 percent last quarter, the highest since September 2002.
About 13 percent of the U.S.'s subprime loans are in California, according to the Washington-based Mortgage Bankers Association.
The following graph is from the Wall Street Journal: Where Subprime Delinquencies Are Getting Worse.
Among other things, it has a lovely table on this madness.
Pass the Maui-wowie, baby. Cali needs a few hits!
Blood in the Big Apple
From the New York Daily News, we have a map of pain: Set up for a fall.
More than 9,000 New York City home owners faced foreclosure last year - an astounding 50% increase over 2005 - and that number has skyrocketed even higher during the first months of this year.
Please note that the survey is only of 1-4 family homes, and Manhattan is mostly high-rises (both co-ops and condos) so the survey is biased. Basically, the white part in Manhattan means nothing (and yet, one brave soul in the West Village managed to go tits up!)
Also note that wide swathe of red in the poorer areas of Brooklyn and Queens.
Of course, Manhattan is different, right? Right? RIGHT?!?
All prices are set at the margin. Expect a bloodbath!
More than 9,000 New York City home owners faced foreclosure last year - an astounding 50% increase over 2005 - and that number has skyrocketed even higher during the first months of this year.
Please note that the survey is only of 1-4 family homes, and Manhattan is mostly high-rises (both co-ops and condos) so the survey is biased. Basically, the white part in Manhattan means nothing (and yet, one brave soul in the West Village managed to go tits up!)
Also note that wide swathe of red in the poorer areas of Brooklyn and Queens.
Of course, Manhattan is different, right? Right? RIGHT?!?
All prices are set at the margin. Expect a bloodbath!
Sunday, March 25, 2007
Scorched Earth Policy
For the record, if I want to be an economic prognosticator, I need to make exceedingly exact predictions. (I wanna be "on the record.")
Here's a specific set of things that will happen with the upcoming foreclosures:
"Owners" will strip the place clean of instruments -- refrigerators, washing machines, dishwashers, toilets, bathtubs and the like.
All copper will be stripped (this is almost axiomatic!)
After that, the house may or may not be burnt down for insurance reasons.
The FBI and the media will be "shocked, shocked about the events."
The media will say, "We could never have predicted this."
Congress will be called upon, and get involved.
Any fool can predict this. It was the same in the early 90's!
Here's a specific set of things that will happen with the upcoming foreclosures:
Any fool can predict this. It was the same in the early 90's!
Not for everybody
For anyone who cares to understand the "miracle of US GDP" for the last five years, here's the link to Negative amortization for UberNerds.
(Warning: your head may explode. This is seriously wacked out shit.)
(Warning: your head may explode. This is seriously wacked out shit.)
Saturday, March 24, 2007
Intrinsic Value, Interest Rates, Payment Schedules (and other complicated topics)
I'd like to talk about a topic that has many people left scratching their heads.
Suppose I run a business manufacturing tiny cubes of gold. (Never mind why, just tag along for now.) Suppose also there's another guy across the street manufacturing the exact same thing, and let's say the market value of each piece is $1000. (just to make calculations easy.)
Now, imagine someone comes in to my shop, and since it goes "oh so well with the decor in her home", she wants to buy it but doesn't have $1000 in cash. Suppose I offer it to her at 20% simple interest to be paid back in 12 installments ($1200/12 = $100 a month for a year.)
There are three concepts here:
Intrinsic Value : $1000.
Interest Rate: 12%
Payment Schedule: $100 per month.
Now, suppose my competitor really really wants this lady to buy it from his store (he wants to bang her on the side so there's your "economic incentive") so he offers it to her at 10% simple interest to be paid back in 12 installments ($1100/12 = $91.67 per month.)
Did the intrinsic value of the object change?
Well, of course not, because he (or I) would be happy to sell it to anyone who walked in with $1000 in cash.
So what changed? (because she would clearly prefer the second "deal".)
Well, clearly the interest rate changed so her payment schedule changed!
Now, I'm a crafty guy, and go tell this broad, "Look you don't have to pay it off right away. I'll charge you 20% simple interest over two years." (equivalently $1400/24 = $58.33 per month.)
Oooh! that must be a better deal, right, right, right?
Bzzzz. Wrong.
The intrinsic value is still $1000. Nothing has changed.
You can get a lower monthly payment by either lowering the rate, or increasing the payment schedule, or both.
But the fuckin' crucial point is that the intrinsic value of the goddamn' object has not changed!
(On a side note, you can quickly see the "best deal" by seeing how much you are paying net over the intrinsic value -- $200, $100, and $400 respectively.)
And that, ladies and gentlemen, is the lesson about the housing market of the last seven years. Interest rates were artificially lowered, and payment schedules stretched out to infinity (I/O-loans.) Nothing has fuckin' changed. Wages are exactly where they were in inflation-adjusted terms seven years ago.
So if salaries are exactly where they were, on what basis did California prices triple, and New York prices double?
Answer: the payment schedule changed (in very complicated ways); the intrinsic value never did.
Now you all know why Joe-Monthly-Payment and How-much-a-month-Sally are truly and royally fucked!
Suppose I run a business manufacturing tiny cubes of gold. (Never mind why, just tag along for now.) Suppose also there's another guy across the street manufacturing the exact same thing, and let's say the market value of each piece is $1000. (just to make calculations easy.)
Now, imagine someone comes in to my shop, and since it goes "oh so well with the decor in her home", she wants to buy it but doesn't have $1000 in cash. Suppose I offer it to her at 20% simple interest to be paid back in 12 installments ($1200/12 = $100 a month for a year.)
There are three concepts here:
Intrinsic Value : $1000.
Interest Rate: 12%
Payment Schedule: $100 per month.
Now, suppose my competitor really really wants this lady to buy it from his store (he wants to bang her on the side so there's your "economic incentive") so he offers it to her at 10% simple interest to be paid back in 12 installments ($1100/12 = $91.67 per month.)
Did the intrinsic value of the object change?
Well, of course not, because he (or I) would be happy to sell it to anyone who walked in with $1000 in cash.
So what changed? (because she would clearly prefer the second "deal".)
Well, clearly the interest rate changed so her payment schedule changed!
Now, I'm a crafty guy, and go tell this broad, "Look you don't have to pay it off right away. I'll charge you 20% simple interest over two years." (equivalently $1400/24 = $58.33 per month.)
Oooh! that must be a better deal, right, right, right?
Bzzzz. Wrong.
The intrinsic value is still $1000. Nothing has changed.
You can get a lower monthly payment by either lowering the rate, or increasing the payment schedule, or both.
But the fuckin' crucial point is that the intrinsic value of the goddamn' object has not changed!
(On a side note, you can quickly see the "best deal" by seeing how much you are paying net over the intrinsic value -- $200, $100, and $400 respectively.)
And that, ladies and gentlemen, is the lesson about the housing market of the last seven years. Interest rates were artificially lowered, and payment schedules stretched out to infinity (I/O-loans.) Nothing has fuckin' changed. Wages are exactly where they were in inflation-adjusted terms seven years ago.
So if salaries are exactly where they were, on what basis did California prices triple, and New York prices double?
Answer: the payment schedule changed (in very complicated ways); the intrinsic value never did.
Now you all know why Joe-Monthly-Payment and How-much-a-month-Sally are truly and royally fucked!
Thursday, March 22, 2007
Math is hard!
A little comic relief from Clownifornia: Porsche dealer - "I got it wrong with the buy one get one free card".
Glen Fergusson - Sales and Marketing manager for a brand new Californian Porsche dealer. Has lost his job and faces possible legal proceedings as the company strives to reclaim the costs of the 18 Porches given away free under Glen's Opening day "buy one get one free promotion" "I admit I didn't really do the numbers properly on this one" said Glen who told reporters that he had "seen the concept work really well for coffee stores" and in terms of numbers you could argue that Glen's campaign worked. As the new Porsche dealer sold 18 Porches in the first hour of the store opening.
It took the head office a full hour to realise what was going on and subsequently shut the store.
Local man Bruce Stepper took out a second mortgage on his home after getting a promotional flyer in his mailbox. "I am ecstatic - I brought a shiny red Porsche today, got another one free and I have sold just sold it on EBay, all up I end up getting a Porsche 911 for $5000"
Jane Cameron was arguably even more entrepreneurial. The local Janitor purchased a Porsche using the dealers "no deposit finance plan for low income earners", sold both cars, paid off the finance account and walked away with $120,000 profit. The finance plan was another one of Glen's initiatives that has now been cancelled.
A red faced Glen stated "I have never really been too good at Math and I was sure the whole time we were making money - I was initially blown away by the amount of cars we were selling in that first hour. I had seen the "buy one get one free card" work extremely well for the new coffee shop down the road and thought what a great idea I will try it here."
National spokesman for the dealership chain was quoted as saying "We are just glad that the idiot didn’t have time to run with his 'test drive 5 cars, get one free loyalty stamp card' campaign.
Bravo!
Glen Fergusson - Sales and Marketing manager for a brand new Californian Porsche dealer. Has lost his job and faces possible legal proceedings as the company strives to reclaim the costs of the 18 Porches given away free under Glen's Opening day "buy one get one free promotion" "I admit I didn't really do the numbers properly on this one" said Glen who told reporters that he had "seen the concept work really well for coffee stores" and in terms of numbers you could argue that Glen's campaign worked. As the new Porsche dealer sold 18 Porches in the first hour of the store opening.
It took the head office a full hour to realise what was going on and subsequently shut the store.
Local man Bruce Stepper took out a second mortgage on his home after getting a promotional flyer in his mailbox. "I am ecstatic - I brought a shiny red Porsche today, got another one free and I have sold just sold it on EBay, all up I end up getting a Porsche 911 for $5000"
Jane Cameron was arguably even more entrepreneurial. The local Janitor purchased a Porsche using the dealers "no deposit finance plan for low income earners", sold both cars, paid off the finance account and walked away with $120,000 profit. The finance plan was another one of Glen's initiatives that has now been cancelled.
A red faced Glen stated "I have never really been too good at Math and I was sure the whole time we were making money - I was initially blown away by the amount of cars we were selling in that first hour. I had seen the "buy one get one free card" work extremely well for the new coffee shop down the road and thought what a great idea I will try it here."
National spokesman for the dealership chain was quoted as saying "We are just glad that the idiot didn’t have time to run with his 'test drive 5 cars, get one free loyalty stamp card' campaign.
Bravo!
Wednesday, March 21, 2007
Beggars, Horses, Wishes
From Yahoo! Finance, we have the master-baiter himself talking up the market: Greenspan: Subprime Spillover Unlikely.
The troubles plaguing lenders of risky mortgages are not likely to spill over into the broader economy unless housing prices see another substantial dip, former Federal Reserve chairman Alan Greenspan said Thursday.
Greenspan said that as home prices dipped, "subprime borrowers have not been able to build up enough equity."
If home prices drop in a year, he predicted that could cause the problems to "spill over into other areas."
However, Greenspan said that if home prices "would go up 10 percent, the subprime mortgage problem would disappear."
Right! And if my house were a helicopter, I would be able to fly around in my underwear.
There are so many things wrong with this, it's hard to know where to begin.
The problem with subprime isn't that house prices are flat. It's that buyers bought more house than they could ever pay back.
So how does the house going up 10% change anything?
The only way I can think of is they pull out the difference (as a HELOC loan,) use that to pay the mortgage payments. However, that only delays the inevitable because they couldn't afford the freakin' thing in the first place!
This is so disingenuous I'm surprised that no one calls him on it.
The troubles plaguing lenders of risky mortgages are not likely to spill over into the broader economy unless housing prices see another substantial dip, former Federal Reserve chairman Alan Greenspan said Thursday.
Greenspan said that as home prices dipped, "subprime borrowers have not been able to build up enough equity."
If home prices drop in a year, he predicted that could cause the problems to "spill over into other areas."
However, Greenspan said that if home prices "would go up 10 percent, the subprime mortgage problem would disappear."
Right! And if my house were a helicopter, I would be able to fly around in my underwear.
There are so many things wrong with this, it's hard to know where to begin.
The problem with subprime isn't that house prices are flat. It's that buyers bought more house than they could ever pay back.
So how does the house going up 10% change anything?
The only way I can think of is they pull out the difference (as a HELOC loan,) use that to pay the mortgage payments. However, that only delays the inevitable because they couldn't afford the freakin' thing in the first place!
This is so disingenuous I'm surprised that no one calls him on it.
Sunday, March 18, 2007
Till mortgages do us part
From the toilet paper that prints all the news that's fit to print, we have A Surge in Foreclosure Filings.
AFTER 20 years as a lawyer, David Volman has handled enough divorces to know that many marriages collapse under financial strain. So when his practice, in Shelton, began receiving an unusually large number of divorce cases last summer, Mr. Volman took it as an omen. “Divorces go hand in hand with foreclosures and bankruptcies,” he said.
Sure enough, in the first two months of this year, Mr. Volman took on some 50 bankruptcy cases, an “enormous amount,” he said, given that in all of 2006 he handled 19.
Many of the cases involve working-class couples in the Lower Naugatuck Valley who can no longer afford their mortgages. “People are walking into my office and saying: ‘Here are the keys. Do whatever you have to do. I just want to get out of this so I can sleep at night,’ ” he said.
That's going to be the new wedding vow. Entirely accurate in my opinion since the etymology of mortgage is from mort (Latin mortuus -- dead), and gage (Germanic origin -- pledge.)
This is going to be the hidden story of the great debt-binge of the last few years. The forces of economic destruction are not limited to jobs and companies. There will be a severe human toll -- broken marriages, destroyed children's lives, more crime.
And there's not a goddamned thing anyone can do about it now because the damage has been done. The horses have fled the stable a few years ago. Shutting the barn door now is a bit useless.
Here's another "safe" set of predictions: a rise in arson (people would rather burn their house for insurance than pay the mortgage,) a disastrous retail environment (broke people don't buy stuff or eat out,) the rise of populism ("do something, Mr. Politician, anything",) and a corresponding rise in both nationalism and intolerance (blame the foreigners/jews/black people/hispanic immigrants, etc,) and economic protectionism ("free trade is a bad idea", Smoot-Hawley, etc.)
All of these are hallmarks of deflationary times. Every single one of them occurs repeatedly in history.
Personally, I'm waiting for the first "pensioner forced to eat dog-food" story (and rest assured, it will appear in the press in less than 5 years.)
In the words of Keynes, "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
AFTER 20 years as a lawyer, David Volman has handled enough divorces to know that many marriages collapse under financial strain. So when his practice, in Shelton, began receiving an unusually large number of divorce cases last summer, Mr. Volman took it as an omen. “Divorces go hand in hand with foreclosures and bankruptcies,” he said.
Sure enough, in the first two months of this year, Mr. Volman took on some 50 bankruptcy cases, an “enormous amount,” he said, given that in all of 2006 he handled 19.
Many of the cases involve working-class couples in the Lower Naugatuck Valley who can no longer afford their mortgages. “People are walking into my office and saying: ‘Here are the keys. Do whatever you have to do. I just want to get out of this so I can sleep at night,’ ” he said.
That's going to be the new wedding vow. Entirely accurate in my opinion since the etymology of mortgage is from mort (Latin mortuus -- dead), and gage (Germanic origin -- pledge.)
This is going to be the hidden story of the great debt-binge of the last few years. The forces of economic destruction are not limited to jobs and companies. There will be a severe human toll -- broken marriages, destroyed children's lives, more crime.
And there's not a goddamned thing anyone can do about it now because the damage has been done. The horses have fled the stable a few years ago. Shutting the barn door now is a bit useless.
Here's another "safe" set of predictions: a rise in arson (people would rather burn their house for insurance than pay the mortgage,) a disastrous retail environment (broke people don't buy stuff or eat out,) the rise of populism ("do something, Mr. Politician, anything",) and a corresponding rise in both nationalism and intolerance (blame the foreigners/jews/black people/hispanic immigrants, etc,) and economic protectionism ("free trade is a bad idea", Smoot-Hawley, etc.)
All of these are hallmarks of deflationary times. Every single one of them occurs repeatedly in history.
Personally, I'm waiting for the first "pensioner forced to eat dog-food" story (and rest assured, it will appear in the press in less than 5 years.)
In the words of Keynes, "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
Saturday, March 17, 2007
Extreme Makeover
From the preferred toilet paper of the United States, the New York Times, we have a pair of stories.
The first one's from August 2005: Good News, Bad News: Your Loan's Approved.
ADAM GARDNER wasn't going to let limited resources stop him from buying a house. A 28-year-old appraiser's apprentice from Reno, Nev., he extended his search all the way to a new development 20 miles north of downtown. When he finally found a place - a two-bedroom, three-bath house - he took out two loans to finance 90 percent of the $253,850 price tag. And to keep his monthly payments within budget, he obtained what's known as an interest-only adjustable-rate mortgage.
Mr. Gardner, for one, is not especially worried. He said homes like his had already appreciated substantially, in his case making him a paper gain of tens of thousands of dollars. By the time the interest rate on this 30-year mortgage starts adjusting and his mortgage starts amortizing - in five years - he expects to have either sold or refinanced the home.
And the second story is from today (Mar 17th): Mortgage Trouble Clouds Homeownership Dream.
Take Adam Gardner, a 29-year-old appraiser who bought a three-bedroom, two-bath house 20 miles north of Reno, Nev., for about $255,000 two years ago. His wife is pining to move closer to town, but with housing prices falling all around him, Mr. Gardner doubts they can pull it off. “I’m not sure we can sell the place we are in,” Mr. Gardner said.
Ooh, sounds a bit ominous.
And he's an appraiser so he's pissing in the same tub that he's taking a bath in. Not exactly the recipe for a happy ending.
Tell you what, there's absolutely nothing of any worth in Reno, and certainly not 20 miles outside it. There's desert land as far as the eye can see.
This house is not even worth $100K, let alone the absurd prices stated in two articles, and that's because there are no jobs in Reno. "High-paying" casino jobs start at $10/hour.
As for the toilet paper, the less said the better. They'll print any garbage as long as it'll sell.
Waiter, I'd like to buy a free round of a$$-poundings for all of these people!
The first one's from August 2005: Good News, Bad News: Your Loan's Approved.
ADAM GARDNER wasn't going to let limited resources stop him from buying a house. A 28-year-old appraiser's apprentice from Reno, Nev., he extended his search all the way to a new development 20 miles north of downtown. When he finally found a place - a two-bedroom, three-bath house - he took out two loans to finance 90 percent of the $253,850 price tag. And to keep his monthly payments within budget, he obtained what's known as an interest-only adjustable-rate mortgage.
Mr. Gardner, for one, is not especially worried. He said homes like his had already appreciated substantially, in his case making him a paper gain of tens of thousands of dollars. By the time the interest rate on this 30-year mortgage starts adjusting and his mortgage starts amortizing - in five years - he expects to have either sold or refinanced the home.
And the second story is from today (Mar 17th): Mortgage Trouble Clouds Homeownership Dream.
Take Adam Gardner, a 29-year-old appraiser who bought a three-bedroom, two-bath house 20 miles north of Reno, Nev., for about $255,000 two years ago. His wife is pining to move closer to town, but with housing prices falling all around him, Mr. Gardner doubts they can pull it off. “I’m not sure we can sell the place we are in,” Mr. Gardner said.
Ooh, sounds a bit ominous.
And he's an appraiser so he's pissing in the same tub that he's taking a bath in. Not exactly the recipe for a happy ending.
Tell you what, there's absolutely nothing of any worth in Reno, and certainly not 20 miles outside it. There's desert land as far as the eye can see.
This house is not even worth $100K, let alone the absurd prices stated in two articles, and that's because there are no jobs in Reno. "High-paying" casino jobs start at $10/hour.
As for the toilet paper, the less said the better. They'll print any garbage as long as it'll sell.
Waiter, I'd like to buy a free round of a$$-poundings for all of these people!
What academia does to you
From Reuters, we have yet-another-sob-story (YASS) about an FB: Mortgage bloodbath?
Unlike many borrowers who took out subprime loans, Andy Sobel had good credit, a decent job and modest savings, but he needed to stretch to buy a home in the white-hot San Diego housing market in 2004.
Three years later, Sobel has lost his home and his savings, and he faces a big tax bill as a consequence of a failed subprime mortgage held by Countrywide Financial Corp. he says he should never have been written.
He should never have been written? What is this? Fantasy-land?!?
You signed the piece of paper, didn't you? Now, suck it up, big boy!
"You never think that this could happen to you. You feel like an idiot," said Sobel, 48, who has a doctorate in education. "You fall down and they stab you."
Looks like you're getting a real education right here.
Or in the immortal words of Ben Franklin, "Experience keeps a dear school, but fools will learn in no other."
Unlike many borrowers who took out subprime loans, Andy Sobel had good credit, a decent job and modest savings, but he needed to stretch to buy a home in the white-hot San Diego housing market in 2004.
Three years later, Sobel has lost his home and his savings, and he faces a big tax bill as a consequence of a failed subprime mortgage held by Countrywide Financial Corp. he says he should never have been written.
He should never have been written? What is this? Fantasy-land?!?
You signed the piece of paper, didn't you? Now, suck it up, big boy!
"You never think that this could happen to you. You feel like an idiot," said Sobel, 48, who has a doctorate in education. "You fall down and they stab you."
Looks like you're getting a real education right here.
Or in the immortal words of Ben Franklin, "Experience keeps a dear school, but fools will learn in no other."
Friday, March 16, 2007
Go, Team USA!
From the LA Times, we have information about the doobie: Pot is called biggest cash crop.
For years, activists in the marijuana legalization movement have claimed that cannabis is America's biggest cash crop. Now they're citing government statistics to prove it.
A report released today by a marijuana public policy analyst contends that the market value of pot produced in the U.S. exceeds $35 billion — far more than the crop value of such heartland staples as corn, soybeans and hay, which are the top three legal cash crops.
Nationwide, the estimated cannabis production of $35.8 billion exceeds corn ($23 billion), soybeans ($17.6 billion) and hay ($12.2 billion), according to Gettman's findings.
Yep, marijuana rakes in more money than corn. Shocking, innit?
Annual cost of the "war on drugs": $12 billion direct, and $33 billion for related stuff (police, lawyers, etc.)
So why is the cost of marijuana so high? Well, there's an embedded premium for risk; the risk of getting caught, and going to jail.
Economically, it's a no-brainer. Legalize it, and the price would collapse. It wouldn't even show up in the top 25 cash products. After all, people consume more carrots and tomatoes than marijuana. (DUH!!!)
So why not?
Behind all the "morals", this is just a free kickback to the "friends of government". You can actually make a lucrative career out of "defending our children from this scourge", and all that garbage.
MISSION ACCOMPLISHED!!!
For years, activists in the marijuana legalization movement have claimed that cannabis is America's biggest cash crop. Now they're citing government statistics to prove it.
A report released today by a marijuana public policy analyst contends that the market value of pot produced in the U.S. exceeds $35 billion — far more than the crop value of such heartland staples as corn, soybeans and hay, which are the top three legal cash crops.
Nationwide, the estimated cannabis production of $35.8 billion exceeds corn ($23 billion), soybeans ($17.6 billion) and hay ($12.2 billion), according to Gettman's findings.
Yep, marijuana rakes in more money than corn. Shocking, innit?
Annual cost of the "war on drugs": $12 billion direct, and $33 billion for related stuff (police, lawyers, etc.)
So why is the cost of marijuana so high? Well, there's an embedded premium for risk; the risk of getting caught, and going to jail.
Economically, it's a no-brainer. Legalize it, and the price would collapse. It wouldn't even show up in the top 25 cash products. After all, people consume more carrots and tomatoes than marijuana. (DUH!!!)
So why not?
Behind all the "morals", this is just a free kickback to the "friends of government". You can actually make a lucrative career out of "defending our children from this scourge", and all that garbage.
MISSION ACCOMPLISHED!!!
Tuesday, March 13, 2007
Top 10 Things I Learnt in the Last Few Years
And the top thing I learnt:
Monday, March 12, 2007
Wednesday, March 07, 2007
Smarty-smarty-smartypants
Here's an announcement from the US Treasury: OTS Approves Countrywide Application.
The Office of Thrift Supervision (OTS) announced today the approval of an application from Countrywide Financial Corporation (Countrywide), Calabasas, California, to convert its national bank subsidiary, Countrywide Bank N.A., Alexandria, Virginia, to a federal thrift charter. The converted institution, Countrywide Bank, FSB (the FSB), will continue to operate out of its existing facilities and to engage in the primary business activities conducted prior to its conversion.
The CEO of CFC, Angelo Mozilo is one of the sharpest cookies in the business. Never bet against him.
We've met him before, of course in The Chickens Rebel Against the Guards.
Now that the bank is under a federal thrift charter, look out for a deal in the next 6-12 months of CFC selling its crap MBS'es to the bank. After that, the bank will go under, and the FDIC and the taxpayers will bail out the bank, and the company can buy back the MBS'es at pennies on the dollar.
Privatize the profits; socialize the losses.
Fuckin' A, dude, fuckin' A!!!
The Office of Thrift Supervision (OTS) announced today the approval of an application from Countrywide Financial Corporation (Countrywide), Calabasas, California, to convert its national bank subsidiary, Countrywide Bank N.A., Alexandria, Virginia, to a federal thrift charter. The converted institution, Countrywide Bank, FSB (the FSB), will continue to operate out of its existing facilities and to engage in the primary business activities conducted prior to its conversion.
The CEO of CFC, Angelo Mozilo is one of the sharpest cookies in the business. Never bet against him.
We've met him before, of course in The Chickens Rebel Against the Guards.
Now that the bank is under a federal thrift charter, look out for a deal in the next 6-12 months of CFC selling its crap MBS'es to the bank. After that, the bank will go under, and the FDIC and the taxpayers will bail out the bank, and the company can buy back the MBS'es at pennies on the dollar.
Privatize the profits; socialize the losses.
Fuckin' A, dude, fuckin' A!!!
Six orders of magnitude
From the Boston Globe comes this pearl of wisdom from Kimberley Blanton: State urges curbs on subprime lenders.
The Patrick administration's chief housing official yesterday called for better regulation of mortgage brokers and the establishment of a $5 million fund to assist the escalating number of Massachusetts homeowners facing the loss of their homes through foreclosure.
Hello?!?
You have a problem in the trillions, and you're putting aside $5M to "help" homeowners facing foreclosure? What does that amount to?
0.0001 pennies a person!
Even if you gave it to the first lucky 1000, what does that amount to?
$5,000 a person!
And that keeps them going for an extra three months. What will they do for the next 29 years?
A quick back-of-the-envelope calculation shows that all of Buffett and Gates wealth combined couldn't even hold up the Manhattan market by more than a few thousand dollars.
These politicians are really fucking stoopid!
The Patrick administration's chief housing official yesterday called for better regulation of mortgage brokers and the establishment of a $5 million fund to assist the escalating number of Massachusetts homeowners facing the loss of their homes through foreclosure.
Hello?!?
You have a problem in the trillions, and you're putting aside $5M to "help" homeowners facing foreclosure? What does that amount to?
0.0001 pennies a person!
Even if you gave it to the first lucky 1000, what does that amount to?
$5,000 a person!
And that keeps them going for an extra three months. What will they do for the next 29 years?
A quick back-of-the-envelope calculation shows that all of Buffett and Gates wealth combined couldn't even hold up the Manhattan market by more than a few thousand dollars.
These politicians are really fucking stoopid!
The lure of "free" money
From the Bradenton Herald in Florida, we have Builder to help clean up Coast's mess.
Zanuel Johnson, an account executive at a Tampa mortgage company, said he closed in June on a home in Cape Coral being built by Enchanted Homes. The deal was brokered through Tampa-based American Mortgage Link, a broker involved in many of the CCI home loans.
Johnson claims he was promised a 10 percent return on the sale of the home without having to take ownership.
Instead, Johnson maintains, he now is obligated through a Coast Bank loan to pay $430,000 for the home - a price he says was inflated by those involved in the investment scheme.
Johnson's mortgage documents reflect a $43,000 escrow payment, though he insists he never put any cash down.
"They told me it was an investment program for people with good credit and assets," Johnson said. "They would use my credit to build a home and I would get a 10 percent return, because I would never take possession or move into the home."
Johnson said the home is mostly finished but he doubts he'll be able to sell it and accuses Enchanted Homes and American Mortgage Link of inflating the price.
"There's no way they could sell that house for $430,000. They have one listed for $349,900, two houses down from me," Johnson said.
How does someone so stupid wake up before noon?
Zanuel Johnson, an account executive at a Tampa mortgage company, said he closed in June on a home in Cape Coral being built by Enchanted Homes. The deal was brokered through Tampa-based American Mortgage Link, a broker involved in many of the CCI home loans.
Johnson claims he was promised a 10 percent return on the sale of the home without having to take ownership.
Instead, Johnson maintains, he now is obligated through a Coast Bank loan to pay $430,000 for the home - a price he says was inflated by those involved in the investment scheme.
Johnson's mortgage documents reflect a $43,000 escrow payment, though he insists he never put any cash down.
"They told me it was an investment program for people with good credit and assets," Johnson said. "They would use my credit to build a home and I would get a 10 percent return, because I would never take possession or move into the home."
Johnson said the home is mostly finished but he doubts he'll be able to sell it and accuses Enchanted Homes and American Mortgage Link of inflating the price.
"There's no way they could sell that house for $430,000. They have one listed for $349,900, two houses down from me," Johnson said.
How does someone so stupid wake up before noon?
The Weak must go to the Wall
From the same article referenced yesterday, I missed a delicious little tidbit: As Housing Goes Bust, Lenders Become Predators?
Mortgage debt rose by $4.7 trillion from the end of 2000 through the third quarter of 2006, according to the Fed's Flow of Funds report. "We created as much debt in housing in the last six years as we did in the prior 50,'' Carson says.
NICE!!! MISSION ACCOMPLISHED!
For anyone who still believes in "inflating away the debt", what are the chances that the Fed can inflate away $4.7 trillion in the correct time-frame? (less than 2-3 years.)
Theoretically, it could happen. Look at Argentina.
But that would spell the end of US financial hegemony meaning the powerful would get punished.
Nope! The weak must go to the wall, and the banks will get bailed out. That still spells deflation.
Mortgage debt rose by $4.7 trillion from the end of 2000 through the third quarter of 2006, according to the Fed's Flow of Funds report. "We created as much debt in housing in the last six years as we did in the prior 50,'' Carson says.
NICE!!! MISSION ACCOMPLISHED!
For anyone who still believes in "inflating away the debt", what are the chances that the Fed can inflate away $4.7 trillion in the correct time-frame? (less than 2-3 years.)
Theoretically, it could happen. Look at Argentina.
But that would spell the end of US financial hegemony meaning the powerful would get punished.
Nope! The weak must go to the wall, and the banks will get bailed out. That still spells deflation.
Tuesday, March 06, 2007
Some wisdom at last!
From Bloomberg, we have Caroline Baum talking about As Housing Goes Bust, Lenders Become Predators?
The problems in the subprime market may be just the tip of the iceberg, given the depth and duration of the housing bubble -- and the money tied up in it.
"We've created an unproductive asset," says Joe Carson, director of global economic research at AllianceBernstein. "A house doesn't produce income."
For the record, Caroline Baum is one of the smartest journalists working for the MSM. Her economic reasoning is sometimes a bit suspect but her intuition is spot on.
Of course, you know what that means, don't you? She's probably going to get fired sooner rather than later.
Sing it, sister, sing it!
The problems in the subprime market may be just the tip of the iceberg, given the depth and duration of the housing bubble -- and the money tied up in it.
"We've created an unproductive asset," says Joe Carson, director of global economic research at AllianceBernstein. "A house doesn't produce income."
For the record, Caroline Baum is one of the smartest journalists working for the MSM. Her economic reasoning is sometimes a bit suspect but her intuition is spot on.
Of course, you know what that means, don't you? She's probably going to get fired sooner rather than later.
Sing it, sister, sing it!
Pinocchio Time
From Bloomberg, we have Paulson Says Bad Debts in the U.S. to Be Contained.
U.S. Treasury Secretary Henry Paulson moved to cool concern about rising defaults at subprime mortgage companies, saying the woes won't spill over to banks that make less risky loans.
"Credit issues are there, but they are contained," Paulson said to reporters in Tokyo during a four-day tour of Asia. The U.S. financial sector is healthy and most institutions won't feel "a big impact."
This is a flat-out lie, or if I wanted to be more charitable, this is cheerleading at best.
Why?
Subprime refers to people with less than stellar credit. We used to refer to these people as deadbeats but political correctness has transformed them into "sub-prime", as in "less than prime", in fact, "a lot less than prime."
Typically, these people have very little income, or a lot of debt, or both. The reason that these subprime mortgages are going under is because the borrowers have no capacity to pay it back, and foolish investors are just waking up to smell the lovely aroma of horse-manure.
Obviously, they should never have been given the debt in the first place (but let's not argue about that.)
Now, the mortgage pool is stratified by credit worthiness ("Alt-A" and "prime" mortgages) but there is virtually no difference (in a practical sense) between a sub-prime borrower who makes $25K, and takes out a mortgage for $150K, and a prime borrower who makes $100K, and takes out a mortgage for $600K.
The important point is that neither of them has the capacity to repay the debt!
This should be absurdly fucking obvious to anyone with an IQ higher than that of a lobotomized amoeba!
And the latter category is all over the place. California, Florida, Massachusetts, New York, New Jersey, Connecticut, Illinois... (in short, the most populous states.)
The very fact that they created an "Alt-A" (which, is not an "A") is a dead giveaway that these people should never have been given the money in the first place, and an even bigger giveaway to investors that they should never have financed this lunacy in the first place.
So why is the shit not hitting the fan for Alt-A mortgages? Well, higher income households can hide a little bit longer than someone who makes $25K, but they can't hide indefinitely. The day of reckoning is coming, and I'd even go out on a limb to argue it's going to be here in less than six months.
The important point is that you don't get to be the former CEO of Goldman Sachs (as Paulson used to be,) by not understanding finance. To argue that he doesn't grasp the above is absurd in the extreme.
Liar, or cheerleader? You decide!
U.S. Treasury Secretary Henry Paulson moved to cool concern about rising defaults at subprime mortgage companies, saying the woes won't spill over to banks that make less risky loans.
"Credit issues are there, but they are contained," Paulson said to reporters in Tokyo during a four-day tour of Asia. The U.S. financial sector is healthy and most institutions won't feel "a big impact."
This is a flat-out lie, or if I wanted to be more charitable, this is cheerleading at best.
Why?
Subprime refers to people with less than stellar credit. We used to refer to these people as deadbeats but political correctness has transformed them into "sub-prime", as in "less than prime", in fact, "a lot less than prime."
Typically, these people have very little income, or a lot of debt, or both. The reason that these subprime mortgages are going under is because the borrowers have no capacity to pay it back, and foolish investors are just waking up to smell the lovely aroma of horse-manure.
Obviously, they should never have been given the debt in the first place (but let's not argue about that.)
Now, the mortgage pool is stratified by credit worthiness ("Alt-A" and "prime" mortgages) but there is virtually no difference (in a practical sense) between a sub-prime borrower who makes $25K, and takes out a mortgage for $150K, and a prime borrower who makes $100K, and takes out a mortgage for $600K.
The important point is that neither of them has the capacity to repay the debt!
This should be absurdly fucking obvious to anyone with an IQ higher than that of a lobotomized amoeba!
And the latter category is all over the place. California, Florida, Massachusetts, New York, New Jersey, Connecticut, Illinois... (in short, the most populous states.)
The very fact that they created an "Alt-A" (which, is not an "A") is a dead giveaway that these people should never have been given the money in the first place, and an even bigger giveaway to investors that they should never have financed this lunacy in the first place.
So why is the shit not hitting the fan for Alt-A mortgages? Well, higher income households can hide a little bit longer than someone who makes $25K, but they can't hide indefinitely. The day of reckoning is coming, and I'd even go out on a limb to argue it's going to be here in less than six months.
The important point is that you don't get to be the former CEO of Goldman Sachs (as Paulson used to be,) by not understanding finance. To argue that he doesn't grasp the above is absurd in the extreme.
Liar, or cheerleader? You decide!
Monday, March 05, 2007
Understatement of the Day
From Buffett (who else?) : "When you combine ignorance with borrowed money, the results can be interesting."
Sunday, February 25, 2007
America, the beautiful
For those jealous of American "success", the party's winding down.
Now that the "bulge" boomer generation can neither pay back its debts nor fund retirement, whither America?
Wednesday, February 21, 2007
From the mouths of babes...
From the Pueblo Chieftain online, we have Dream repossessed.
Kevin McCarthy of U.S. Bank said mortgage payments can rise $100 to $500 a month when mortgage interest rates go up.
Many buyers who used adjustable-rate loans also didn't have to pay much of a down payment because they were borrowing the down payment too, McCarthy said. That means they were borrowing as much as 100 percent of the cost of the home, plus other expenses.
That gave the buyers a higher interest rate and required them to pay for mortgage insurance, he said.
The cumulative effect is that the buyer has little or no equity, McCarthy said, little incentive to save the home and a huge-and-growing amount of money to pay off.
"Anytime you borrow too much money it's harder to pay it back," he said.
No!!!! You don't say?!?
"You have a bit of a perfect storm," Sean McCarthy said.
The industry is learning its lesson now, he said, but it will be a painful one, both for buyers and the lenders who lose money on each foreclosure.
"The market is healing itself," Sean McCarthy said. "But it takes a year or two of bloodletting."
Last time I saw a bloodletting, it was ER time not "healing" time! Come to think of it, that's not a bad metaphor to what's going to happen to the US economy.
Kevin McCarthy of U.S. Bank said mortgage payments can rise $100 to $500 a month when mortgage interest rates go up.
Many buyers who used adjustable-rate loans also didn't have to pay much of a down payment because they were borrowing the down payment too, McCarthy said. That means they were borrowing as much as 100 percent of the cost of the home, plus other expenses.
That gave the buyers a higher interest rate and required them to pay for mortgage insurance, he said.
The cumulative effect is that the buyer has little or no equity, McCarthy said, little incentive to save the home and a huge-and-growing amount of money to pay off.
"Anytime you borrow too much money it's harder to pay it back," he said.
No!!!! You don't say?!?
"You have a bit of a perfect storm," Sean McCarthy said.
The industry is learning its lesson now, he said, but it will be a painful one, both for buyers and the lenders who lose money on each foreclosure.
"The market is healing itself," Sean McCarthy said. "But it takes a year or two of bloodletting."
Last time I saw a bloodletting, it was ER time not "healing" time! Come to think of it, that's not a bad metaphor to what's going to happen to the US economy.
Saturday, February 17, 2007
Dog is my co-pilot
Oh, wait, I must've reversed the letters in that first word.
From the paper that I use to wipe my butt with (oh, sorry! I meant "paper of record", I must be drunk,) we have: The Psychology of Pricing.
In a market where buyers and sellers circle one another warily — each certain that he or she is being taken advantage of, no matter what the conclusion of a deal — the asking price of a property is rarely a straightforward reflection of comparable values. While comparables may be a starting point, the price at which a seller offers a property is often also based on wishful thinking, propaganda and ploy.
I'll give you a simpler version of this, you fuckin' rug-chompers!
There's only one determinant of price: the bid.
Nobody "needs" to buy, but a lot of people may or may not need to sell. That's why the bid rules all markets. Everything from EBay to the most expensive Van Gogh on sale at Sotheby's!
So long, suckahs! Meet you in bankruptcy court!
From the paper that I use to wipe my butt with (oh, sorry! I meant "paper of record", I must be drunk,) we have: The Psychology of Pricing.
In a market where buyers and sellers circle one another warily — each certain that he or she is being taken advantage of, no matter what the conclusion of a deal — the asking price of a property is rarely a straightforward reflection of comparable values. While comparables may be a starting point, the price at which a seller offers a property is often also based on wishful thinking, propaganda and ploy.
I'll give you a simpler version of this, you fuckin' rug-chompers!
There's only one determinant of price: the bid.
Nobody "needs" to buy, but a lot of people may or may not need to sell. That's why the bid rules all markets. Everything from EBay to the most expensive Van Gogh on sale at Sotheby's!
So long, suckahs! Meet you in bankruptcy court!
Please don't poop in your pants!
From sunny San Diego which this blog had predicted was going to be the minor epicenter of the housing bubble (for the record, the epicenter is somewhere near the Dade and Broward counties in Florida.)
And a happy 2007 to you too!
And a happy 2007 to you too!
Leverage
I want to talk about debt and leverage, and since these are not complicated topics, I'm just going to explain them.
Suppose I allowed you to borrow $100 by putting down a deposit of $10. For argument's sake, I'm a generous guy, and I don't even charge you interest on the $90 that you borrowed. Now, you go and invest that money somewhere. For argument's sake, it's the stock market. At the end of the year, the market returns 5%.
What is your true return?
Well, you made $5, and you only put down $10 so that's 50% return. However, the market only returned 5% so where did the remaining 45% come from?
The answer is leverage.
You controlled $10 for every $1 you put down. That's 10:1 leverage. 10 times 5% = 50%.
Now if the market had declined 3%, you would have a loss of 30%. Same logic: 10 times leverage by -3% = -30%.
And what happens if the market declines 25%? You lose 10 times -25% = -250%, which is to say, you just lost $25.
Where does the extra $15 come from? You owe me $15, and if you don't pay up, I may just send Fat Tony (or its modern equivalent) around to collect it.
And what happens if you can't pay? Well, with Fat Tony, you lose your kneecap but in the modern world, you end up in bankruptcy court.
So leverage magnifies both losses and gains, and if I had charged you interest, the calculations will change (but you get the general picture.)
The key point is that leverage magnifies both losses and gains.
All debt involves leverage. This is an inescapable fact.
There are two key points here:
Firstly, leverage magnifies both gains and losses. Hence it magnifies risk as well.
Secondly, you want to try and use leverage when the odds are in favor of gains rather than losses, and not otherwise. This is a simple probability argument that should be utterly obvious. (A leveraged casino is as much of a "no-brainer" as it gets in the finance world, since the casino has the odds in its favor.)
A non-obvious use of leverage is when people borrow money for higher education. Most likely, it will pay off in the form of higher wages. (However, it may not. You're magnifying risk even though it's not obvious.)
However, it should be easy to deduce a simple corollary from the above two points:
If things are likely to decline in value, don't take on debt to buy it. In an extreme particular, taking on debt to buy depreciating assets is always a bad idea!
Makes sense, right?
Suppose I allowed you to borrow $100 by putting down a deposit of $10. For argument's sake, I'm a generous guy, and I don't even charge you interest on the $90 that you borrowed. Now, you go and invest that money somewhere. For argument's sake, it's the stock market. At the end of the year, the market returns 5%.
What is your true return?
Well, you made $5, and you only put down $10 so that's 50% return. However, the market only returned 5% so where did the remaining 45% come from?
The answer is leverage.
You controlled $10 for every $1 you put down. That's 10:1 leverage. 10 times 5% = 50%.
Now if the market had declined 3%, you would have a loss of 30%. Same logic: 10 times leverage by -3% = -30%.
And what happens if the market declines 25%? You lose 10 times -25% = -250%, which is to say, you just lost $25.
Where does the extra $15 come from? You owe me $15, and if you don't pay up, I may just send Fat Tony (or its modern equivalent) around to collect it.
And what happens if you can't pay? Well, with Fat Tony, you lose your kneecap but in the modern world, you end up in bankruptcy court.
So leverage magnifies both losses and gains, and if I had charged you interest, the calculations will change (but you get the general picture.)
The key point is that leverage magnifies both losses and gains.
All debt involves leverage. This is an inescapable fact.
There are two key points here:
Firstly, leverage magnifies both gains and losses. Hence it magnifies risk as well.
Secondly, you want to try and use leverage when the odds are in favor of gains rather than losses, and not otherwise. This is a simple probability argument that should be utterly obvious. (A leveraged casino is as much of a "no-brainer" as it gets in the finance world, since the casino has the odds in its favor.)
A non-obvious use of leverage is when people borrow money for higher education. Most likely, it will pay off in the form of higher wages. (However, it may not. You're magnifying risk even though it's not obvious.)
However, it should be easy to deduce a simple corollary from the above two points:
If things are likely to decline in value, don't take on debt to buy it. In an extreme particular, taking on debt to buy depreciating assets is always a bad idea!
Makes sense, right?
Broke is the new black : Part 3 (Job Prospects)
Continuing on my earlier entry "Broke is the new black", I want to talk about what the arc of job prospects over time has been, and more importantly, what it's likely to be.
(I'm borrowing some stuff from Robert Reich, the former US Secretary of Labor, so credit is due where it is richly deserved.)
What are the large forces that are pushing job prospects in the world?
One is obviously globalization (a much misused term, as I have noted here before.)
The second is technology. For the record, technology is not new. The first wheel was technology, as was the yoke, etc. Even the Industrial Revolution is almost two hundred years old at this point. The important point about technology (which we will talk about presently,) is that there have been some recent new wrinkles in it which change things dramatically.
There is also the intertwining of the two, and that's also the part that's both new and interesting.
All modern societies are based on division of labor. A baker can bake bread but he probably didn't grow the wheat. A car mechanic can fix your car, but she probably didn't manufacture the tools.
What matters then is the additional value you add to the product -- the "value add", if you will. (terrible term!) The baker's "value add" is the ability to transform flour, water, and yeast into bread. The car mechanic's "value add" is the ability to take a broken car, and turn it into a non-broken car.
There are two components to being highly successful in the "value add chain" : education (a.k.a. knowledge), and connectedness.
The first should be fairly obvious. The baker has the knowledge to turn flour and water into bread. The car mechanic has the knowledge of the internal mechanics of a car which allows her to fix the car. (Education is just a formal mechanism of gaining knowledge. Don't confuse the two!)
The second should become obvious with a little thought. A baker can only earn as much money as the number of people that know him. Same for the car mechanic.
Now, let's look at the global prospects of these two professions.
My local grocery has fresh bread flown in daily from Lionel Poilâne's bakery in Paris. He is famous, and hence obviously "well-connected". He was only able to do this because "technology" (in this case, the airplane) allowed him to sell the fruits of his labor in fancy grocery stores around the world.
The key important part about "technology" is that for people who are educated and/or well-connected, they can increasingly sell their "value add" in the global market. Also, for certain "value add"'s, technology allows a kind of scaling (a multiplier effect) that is not possible in other professions. Naturally then, these professions then earn many multiples of what they once could.
Note the distinction between the baker, and the car mechanic (the examples were chosen quite deliberately.) There is only a limited multiplier effect for the latter using technology.
Technology can also scale the "connectedness" part of the equation. You're all reading this but none of you is sitting in front of me while I'm "talking". Again, "multiplier effect".
It is this radical scaling via technology that is new in the last two decades, not technology or globalization.
(Next time, you're at a crowded party, and someone says "globalization" and/or "technology", please smack them in the face with the above. Knowledge packs a more powerful punch than a well-placed upper cut!)
Let's repeat the argument one more time: for people who are educated and well-connected, and in professions that allow scaling via technology, globalization increasingly allows them to sell their "value add" in the global market.
That's a mouthful of words but it's the heart of the matter. Everything flows from there. Of course, like any abstraction, any number of specifics can be derived from it. (My advisor used to say, "Any fool can abstract, but it's the intelligent that can turn them into specifics.")
Every one with me so far? Deep breath, and onward we go!
Let's look at a few examples of what happens when technology displaces existing jobs: telephone switching networks replaced telephone switch operators; ATM's replaced bank tellers; e-kiosk's replaced airline agents, etc. etc.
So what happens to all the displaced people? Well, their jobs transform. You will still need someone to program the switching networks, someone to maintain the ATM's and e-kiosk's, etc.
This is the point in time, you should be going, "Hey, hey, hey! Wait a danged minute. You're pulling a fast one. If technology has this multiplier effect, doesn't that actually mean that the jobs lost are going to be greater than the new jobs gained?"
Well, yes! (but in a complicated way.)
The reason it is complicated is that it's not like there's a fixed pile of jobs in the world (like, say, there's a fixed amount of gold on this planet.) New things are created, new needs are created.
Eco-tourism, anyone?
What is true in the short-term is the pain for the displaced workers. They are pretty much screwed in the short-term but if they adapt, and live to fight another day, they will be fine.
The important point here is that you may be able to legislate away globalization (bad idea but let's not argue about that,) but you can't legislate away technology, or the multiplier effect. You can try, but you will fail, and you will fail spectacularly!
And that, amigos, is the real problem!
The day a politician or an economist comes out and says that bluntly, I promise you I will genuflect in their direction in the name of all that are intellectually honest.
Now what happens in the interim is that most of these people get tossed into the local service economy. Retail, restaurants, hotels, transportation, etc. In most of these, the "value add" is minimal so they command low wages to start with. Add to that the problem that the market is crowded, the laws of demand and supply (in this case, over supply) depress wages further.
So the gist of my argument should be clear at this point. If technology can eliminate your job, it will, and you will be tossed out on your ass. If you have enough resources to last out the retraining period, you will be fine. If not, you're screwed, and there's no way to sugarcoat this one.
Next, I'm going to talk about debt, and its role in the US economy.
(I'm borrowing some stuff from Robert Reich, the former US Secretary of Labor, so credit is due where it is richly deserved.)
What are the large forces that are pushing job prospects in the world?
One is obviously globalization (a much misused term, as I have noted here before.)
The second is technology. For the record, technology is not new. The first wheel was technology, as was the yoke, etc. Even the Industrial Revolution is almost two hundred years old at this point. The important point about technology (which we will talk about presently,) is that there have been some recent new wrinkles in it which change things dramatically.
There is also the intertwining of the two, and that's also the part that's both new and interesting.
All modern societies are based on division of labor. A baker can bake bread but he probably didn't grow the wheat. A car mechanic can fix your car, but she probably didn't manufacture the tools.
What matters then is the additional value you add to the product -- the "value add", if you will. (terrible term!) The baker's "value add" is the ability to transform flour, water, and yeast into bread. The car mechanic's "value add" is the ability to take a broken car, and turn it into a non-broken car.
There are two components to being highly successful in the "value add chain" : education (a.k.a. knowledge), and connectedness.
The first should be fairly obvious. The baker has the knowledge to turn flour and water into bread. The car mechanic has the knowledge of the internal mechanics of a car which allows her to fix the car. (Education is just a formal mechanism of gaining knowledge. Don't confuse the two!)
The second should become obvious with a little thought. A baker can only earn as much money as the number of people that know him. Same for the car mechanic.
Now, let's look at the global prospects of these two professions.
My local grocery has fresh bread flown in daily from Lionel Poilâne's bakery in Paris. He is famous, and hence obviously "well-connected". He was only able to do this because "technology" (in this case, the airplane) allowed him to sell the fruits of his labor in fancy grocery stores around the world.
The key important part about "technology" is that for people who are educated and/or well-connected, they can increasingly sell their "value add" in the global market. Also, for certain "value add"'s, technology allows a kind of scaling (a multiplier effect) that is not possible in other professions. Naturally then, these professions then earn many multiples of what they once could.
Note the distinction between the baker, and the car mechanic (the examples were chosen quite deliberately.) There is only a limited multiplier effect for the latter using technology.
Technology can also scale the "connectedness" part of the equation. You're all reading this but none of you is sitting in front of me while I'm "talking". Again, "multiplier effect".
It is this radical scaling via technology that is new in the last two decades, not technology or globalization.
(Next time, you're at a crowded party, and someone says "globalization" and/or "technology", please smack them in the face with the above. Knowledge packs a more powerful punch than a well-placed upper cut!)
Let's repeat the argument one more time: for people who are educated and well-connected, and in professions that allow scaling via technology, globalization increasingly allows them to sell their "value add" in the global market.
That's a mouthful of words but it's the heart of the matter. Everything flows from there. Of course, like any abstraction, any number of specifics can be derived from it. (My advisor used to say, "Any fool can abstract, but it's the intelligent that can turn them into specifics.")
Every one with me so far? Deep breath, and onward we go!
Let's look at a few examples of what happens when technology displaces existing jobs: telephone switching networks replaced telephone switch operators; ATM's replaced bank tellers; e-kiosk's replaced airline agents, etc. etc.
So what happens to all the displaced people? Well, their jobs transform. You will still need someone to program the switching networks, someone to maintain the ATM's and e-kiosk's, etc.
This is the point in time, you should be going, "Hey, hey, hey! Wait a danged minute. You're pulling a fast one. If technology has this multiplier effect, doesn't that actually mean that the jobs lost are going to be greater than the new jobs gained?"
Well, yes! (but in a complicated way.)
The reason it is complicated is that it's not like there's a fixed pile of jobs in the world (like, say, there's a fixed amount of gold on this planet.) New things are created, new needs are created.
Eco-tourism, anyone?
What is true in the short-term is the pain for the displaced workers. They are pretty much screwed in the short-term but if they adapt, and live to fight another day, they will be fine.
The important point here is that you may be able to legislate away globalization (bad idea but let's not argue about that,) but you can't legislate away technology, or the multiplier effect. You can try, but you will fail, and you will fail spectacularly!
And that, amigos, is the real problem!
The day a politician or an economist comes out and says that bluntly, I promise you I will genuflect in their direction in the name of all that are intellectually honest.
Now what happens in the interim is that most of these people get tossed into the local service economy. Retail, restaurants, hotels, transportation, etc. In most of these, the "value add" is minimal so they command low wages to start with. Add to that the problem that the market is crowded, the laws of demand and supply (in this case, over supply) depress wages further.
So the gist of my argument should be clear at this point. If technology can eliminate your job, it will, and you will be tossed out on your ass. If you have enough resources to last out the retraining period, you will be fine. If not, you're screwed, and there's no way to sugarcoat this one.
Next, I'm going to talk about debt, and its role in the US economy.
Friday, February 16, 2007
Hello, Deflation!
From Bloomberg, we have China Raises Lenders' Reserve Ratio to 10 Percent.
China ordered banks to set aside more money as reserves for the fifth time in eight months to cool inflation and investment in the world's fastest-growing major economy.
Lenders must put aside 10 percent of deposits from Feb. 25, up from 9.5 percent, the Beijing-based People's Bank of China said in a statement on its Web site, immediately before the start of a week-long Lunar New Year holiday.
Also from Bloomberg, we have India RBI Raises Banks' Cash Limit to Stem Inflation.
India's central bank increased the amount of cash lenders must set aside to cover deposits for the second time in as many months to curb inflation that accelerated to the fastest pace in more than two years.
Banks in Asia's fourth-largest economy have to keep cash equivalent to 6 percent of deposits starting March 3 from 5.5 percent now, the Reserve Bank of India said.
This is the crudest weapon in the hands of any Central Bank.
This is the equivalent of trying to do heart surgery by using a hand grenade. Not only does it kill the patient but it kills the perfectly healthy doctors and nurses, and destroys all the expensive equipment in the room, for good measure!
(Basically, it penalizes all banks equally. That means, the "good" ones get penalized as much as the "bad" ones, and that's assuming the "bad" ones don't go under.)
There's no way out for the net-debtors: Japan, the US, Britain. Raise rates, or watch your currency collapse. Most likely, Japan is going to be first on the chopping block.
If Japan raises rates, and the US keeps them constant, the carry trade slips a little which creates a bit of panic in the derivatives market, which destroys MBS'es, which destroys the housing market. So the US is forced to raise rates which destroys the housing market directly. And if the US drops rates, the carry trade collapses completely which sends the whole financial system into hell which also destroys the housing market.
Best case scenario: both Japan and the US keep rates constant (or rising in sync very very slowly) which lets the housing market destroy itself (through foreclosures.)
Did I miss anything? Or is it time to invoke the law of the excluded middle?
The real question is: does Bernanke have his fingers and toes crossed?
We live in interesting times, the kinds that only come once a century!
China ordered banks to set aside more money as reserves for the fifth time in eight months to cool inflation and investment in the world's fastest-growing major economy.
Lenders must put aside 10 percent of deposits from Feb. 25, up from 9.5 percent, the Beijing-based People's Bank of China said in a statement on its Web site, immediately before the start of a week-long Lunar New Year holiday.
Also from Bloomberg, we have India RBI Raises Banks' Cash Limit to Stem Inflation.
India's central bank increased the amount of cash lenders must set aside to cover deposits for the second time in as many months to curb inflation that accelerated to the fastest pace in more than two years.
Banks in Asia's fourth-largest economy have to keep cash equivalent to 6 percent of deposits starting March 3 from 5.5 percent now, the Reserve Bank of India said.
This is the crudest weapon in the hands of any Central Bank.
This is the equivalent of trying to do heart surgery by using a hand grenade. Not only does it kill the patient but it kills the perfectly healthy doctors and nurses, and destroys all the expensive equipment in the room, for good measure!
(Basically, it penalizes all banks equally. That means, the "good" ones get penalized as much as the "bad" ones, and that's assuming the "bad" ones don't go under.)
There's no way out for the net-debtors: Japan, the US, Britain. Raise rates, or watch your currency collapse. Most likely, Japan is going to be first on the chopping block.
If Japan raises rates, and the US keeps them constant, the carry trade slips a little which creates a bit of panic in the derivatives market, which destroys MBS'es, which destroys the housing market. So the US is forced to raise rates which destroys the housing market directly. And if the US drops rates, the carry trade collapses completely which sends the whole financial system into hell which also destroys the housing market.
Best case scenario: both Japan and the US keep rates constant (or rising in sync very very slowly) which lets the housing market destroy itself (through foreclosures.)
Did I miss anything? Or is it time to invoke the law of the excluded middle?
The real question is: does Bernanke have his fingers and toes crossed?
We live in interesting times, the kinds that only come once a century!
The Entitlement Mentality
From CNN Finance, we have a "touching" story about Living in the anxiety economy.
Not so long ago Corey Sarti earned $75,000, plus bonus, as a logistics manager at a software maker. His wife, Holly's home business kicked in a little extra, affording them a comfortable lifestyle in Stewartstown, a small Pennsylvania town near the Maryland border where the couple grew up.
Raising three children and covering a mortgage and two car loans was well within their means.
Three kids, a mortgage, and two car loans on $75K.
How can this not end badly?
But when Corey, 30, was laid off last October, everything changed.
"I started looking for a job immediately," said Corey, who uses Web sites and the career coaching services negotiated as part of his exit package. "I've gone on 5 or 6 interviews. And gone through second interviews but the offers have been in the $45,000 to $50,000 range with no bonus. It's too far of a step backwards."
For now, "We have enough to pay the mortgage and electrical bills," said Corey. "That's about it." The only other cash coming in is $300 a week in state unemployment benefits.
You only have $300 coming in, and you turned down a $45K job?
Logistics manager is nothing more than a fancy title for inventory manager + shipping clerk. Probably a piece of fancy software, and a kid out of college could do it.
Holly, 29, had quit her job as a graphic designer for a local printing company after the birth of their youngest son, Jayden, now nearly 2. For a side gig, she bought her mother's business, a company that customizes sports clothing for local schools and Little League teams.
It has become full time, and Corey helps her with it. But because it's the first year running the business, he's not sure how much it will clear.
In addition to Jayden, the couple have two daughters: 13-year-old Brittany, who is in junior high, and 10-year-old Makayla.
Corey's savings are "depleted," he admitted. Yet, the expenses just keep rolling in.
You've popped out three kids before you were 30; no real savings to back it up.
What is this? The Brady Bunch?
Corey feels that the local market has few positions for someone with his professional background.
What professional background? You're a shipping clerk!
"The holidays were a trying time," with few toys for their three kids, he recalled. A year earlier at Christmas, there were XBoxes and iPods under the tree. "It's been a lifestyle change" is how he characterized unemployment. "An immediate drastic lifestyle change."
Yes, why save for the bad times? The good times will always be a rollin'.
This country is in for such an epic ass-pounding that it's not going to be funny. In fact, it's going to be downright tragic. I really really don't want to watch this but it's like a bad car accident. You can't keep your eyes off of it!
Not so long ago Corey Sarti earned $75,000, plus bonus, as a logistics manager at a software maker. His wife, Holly's home business kicked in a little extra, affording them a comfortable lifestyle in Stewartstown, a small Pennsylvania town near the Maryland border where the couple grew up.
Raising three children and covering a mortgage and two car loans was well within their means.
Three kids, a mortgage, and two car loans on $75K.
How can this not end badly?
But when Corey, 30, was laid off last October, everything changed.
"I started looking for a job immediately," said Corey, who uses Web sites and the career coaching services negotiated as part of his exit package. "I've gone on 5 or 6 interviews. And gone through second interviews but the offers have been in the $45,000 to $50,000 range with no bonus. It's too far of a step backwards."
For now, "We have enough to pay the mortgage and electrical bills," said Corey. "That's about it." The only other cash coming in is $300 a week in state unemployment benefits.
You only have $300 coming in, and you turned down a $45K job?
Logistics manager is nothing more than a fancy title for inventory manager + shipping clerk. Probably a piece of fancy software, and a kid out of college could do it.
Holly, 29, had quit her job as a graphic designer for a local printing company after the birth of their youngest son, Jayden, now nearly 2. For a side gig, she bought her mother's business, a company that customizes sports clothing for local schools and Little League teams.
It has become full time, and Corey helps her with it. But because it's the first year running the business, he's not sure how much it will clear.
In addition to Jayden, the couple have two daughters: 13-year-old Brittany, who is in junior high, and 10-year-old Makayla.
Corey's savings are "depleted," he admitted. Yet, the expenses just keep rolling in.
You've popped out three kids before you were 30; no real savings to back it up.
What is this? The Brady Bunch?
Corey feels that the local market has few positions for someone with his professional background.
What professional background? You're a shipping clerk!
"The holidays were a trying time," with few toys for their three kids, he recalled. A year earlier at Christmas, there were XBoxes and iPods under the tree. "It's been a lifestyle change" is how he characterized unemployment. "An immediate drastic lifestyle change."
Yes, why save for the bad times? The good times will always be a rollin'.
This country is in for such an epic ass-pounding that it's not going to be funny. In fact, it's going to be downright tragic. I really really don't want to watch this but it's like a bad car accident. You can't keep your eyes off of it!
Broke is the new black : Part 2 (Jobs)
I wanted to say more about some of the larger economic forces one of my earlier blog entries: Broke is the new black!
A significant portion of evidence has been provided on this blog before: we've seen graphs of Household Leverage, GDP and MEW, etc.
So what's the story that connects it all up?
Well, there are two: one is the role of jobs in the US economy, and the other is the nature of debt in the typical US household. We shall talk about them separately, and I will try and provide evidence for most of these arguments. Some of the "evidence", unfortunately, will have to be without any statistics to back it up.
Economists, in my opinion, far too often ignore what can't be measured. It can pretty much be summed up in the pithy saying, "The absence of evidence is not the evidence of absence."
First up, we're going to talk briefly about "globalization".
Contrary to popular belief, the "global market" has been global for a couple of thousand years. There is truly nothing new under the sun since the Greeks and Romans wandered to India for its spices. Even in the 19th century, an Englishman could invest in companies around the world without ever leaving the comfort of his drawing room parlor. All this talk about "forces of globalization" is a bunch of twaddle!
The only interesting thing is about the mix in the distribution of labor. That is a dynamic process, and hence, very interesting.
Labor is subject to the same laws of demand and supply as everything else.
Nuclear engineers are paid more than taxi drivers because there are fewer of them. Scientists who design the next generation of nuclear reactors are paid more than the engineers maintaining and running a power plant because there are fewer of them. (Of course, the reason there are fewer of them is because the skill-set is correspondingly "harder".)
Back to America.
After World War II, America was pretty much the only industrialized country left standing. This gave it a huge push in the global market.
America also had the "intangibles" going in favor of it -- a liberal democracy, a strong legal system (with corresponding strong property rights,) and a work-ethic.
It is hardly surprising that when you have virtually no external competition, and a very strong capitalist system in place, that country is going to absurdly well.
Now, let's look at a graph of household income distribution at various percentile levels since 1967. (The graph has been adjusted for inflation, and is being presented in 2003 dollars so it's a fair comparison.)
The key word here is "household" even though it may not be completely obvious.
Back in the 60's very few women worked, and as more and more women started working, household income went from being a 1-person income to becoming a 2-person income. This is not an insignificant fact. Basically, if you look at the bottom half, it took two jobs to replace the income of one. (The top 20th percentile is a lot more complex, and I'm not going to go into that.)
Why would this happen?
Well, for one, the rest of the world started catching up. There's more and more competition, and in a open system, if you don't have specialized skills to sell, you can and should find yourself basically shit out of luck.
Here's the correct way to look at it:
Those who were born post WW II, and found themselves in the labor force in the US in the 60's basically hit the lottery jackpot in being born in the right place at the right time. The average American worker had no more skills than the average worker in Britain, Spain, China, or India, but basically managed to carve out an exceptional lifestyle (comparatively speaking) by being lucky in the birthing sweepstakes.
Let's be blunt about the economic reality: if you have no more skills than a Chinese or Indian worker, you shouldn't expect to have a lifestyle more than a Chinese or Indian worker. Also, since there's a disparity in lifestyle, you should expect the two lifestyles to basically converge.
Brutal? Definitely, but economically realistic.
Please note carefully that this does not imply that your lifestyle must necessarily fall. It is perfectly possible that it will stagnate, and all the adjustment will be in the rising lifestyle of the Chinese or Indian worker. (This is a subtle point.)
In practice, I expect the lifestyle of the American worker to fall, not because the above is not possible but it typically takes more than a generation for the adjustment. (This is just a historical guess not a hard economic law.)
We've seen two waves of this already. Since the 70's, more and more manufacturing jobs moved to cheaper locations, and continue to do so, and the labor market mix in the US turned to the services sector. Since the late 90's, more and more services jobs have moved to cheaper locations, and the labor mix is set to change one more time.
Next up, we're going to examine the role of debt in the US economy.
A significant portion of evidence has been provided on this blog before: we've seen graphs of Household Leverage, GDP and MEW, etc.
So what's the story that connects it all up?
Well, there are two: one is the role of jobs in the US economy, and the other is the nature of debt in the typical US household. We shall talk about them separately, and I will try and provide evidence for most of these arguments. Some of the "evidence", unfortunately, will have to be without any statistics to back it up.
Economists, in my opinion, far too often ignore what can't be measured. It can pretty much be summed up in the pithy saying, "The absence of evidence is not the evidence of absence."
First up, we're going to talk briefly about "globalization".
Contrary to popular belief, the "global market" has been global for a couple of thousand years. There is truly nothing new under the sun since the Greeks and Romans wandered to India for its spices. Even in the 19th century, an Englishman could invest in companies around the world without ever leaving the comfort of his drawing room parlor. All this talk about "forces of globalization" is a bunch of twaddle!
The only interesting thing is about the mix in the distribution of labor. That is a dynamic process, and hence, very interesting.
Labor is subject to the same laws of demand and supply as everything else.
Nuclear engineers are paid more than taxi drivers because there are fewer of them. Scientists who design the next generation of nuclear reactors are paid more than the engineers maintaining and running a power plant because there are fewer of them. (Of course, the reason there are fewer of them is because the skill-set is correspondingly "harder".)
Back to America.
After World War II, America was pretty much the only industrialized country left standing. This gave it a huge push in the global market.
America also had the "intangibles" going in favor of it -- a liberal democracy, a strong legal system (with corresponding strong property rights,) and a work-ethic.
It is hardly surprising that when you have virtually no external competition, and a very strong capitalist system in place, that country is going to absurdly well.
Now, let's look at a graph of household income distribution at various percentile levels since 1967. (The graph has been adjusted for inflation, and is being presented in 2003 dollars so it's a fair comparison.)
The key word here is "household" even though it may not be completely obvious.
Back in the 60's very few women worked, and as more and more women started working, household income went from being a 1-person income to becoming a 2-person income. This is not an insignificant fact. Basically, if you look at the bottom half, it took two jobs to replace the income of one. (The top 20th percentile is a lot more complex, and I'm not going to go into that.)
Why would this happen?
Well, for one, the rest of the world started catching up. There's more and more competition, and in a open system, if you don't have specialized skills to sell, you can and should find yourself basically shit out of luck.
Here's the correct way to look at it:
Those who were born post WW II, and found themselves in the labor force in the US in the 60's basically hit the lottery jackpot in being born in the right place at the right time. The average American worker had no more skills than the average worker in Britain, Spain, China, or India, but basically managed to carve out an exceptional lifestyle (comparatively speaking) by being lucky in the birthing sweepstakes.
Let's be blunt about the economic reality: if you have no more skills than a Chinese or Indian worker, you shouldn't expect to have a lifestyle more than a Chinese or Indian worker. Also, since there's a disparity in lifestyle, you should expect the two lifestyles to basically converge.
Brutal? Definitely, but economically realistic.
Please note carefully that this does not imply that your lifestyle must necessarily fall. It is perfectly possible that it will stagnate, and all the adjustment will be in the rising lifestyle of the Chinese or Indian worker. (This is a subtle point.)
In practice, I expect the lifestyle of the American worker to fall, not because the above is not possible but it typically takes more than a generation for the adjustment. (This is just a historical guess not a hard economic law.)
We've seen two waves of this already. Since the 70's, more and more manufacturing jobs moved to cheaper locations, and continue to do so, and the labor market mix in the US turned to the services sector. Since the late 90's, more and more services jobs have moved to cheaper locations, and the labor mix is set to change one more time.
Next up, we're going to examine the role of debt in the US economy.
Thursday, February 15, 2007
Economics in Pictures
In order to give my readers a break from the "complicated" task of actually analyzing facts and figures, I have decided to distill down the essence to a single picture.
"Cheese" = "credit".
"Cheese" = "credit".
Wednesday, February 14, 2007
The Money Quote
From the LA Times, we have It's the Default Position.
During the four-year boom that ended last summer, Home Center expanded from 15 agents to 80 in three offices. The roster of agents has since sunk to 52, only about half of whom are active.
"The rest are looking for side jobs at McDonald's," said Home Center President Jason Bosch. "It happened overnight."
Yeah, baby! That's the money shot right there.
During the four-year boom that ended last summer, Home Center expanded from 15 agents to 80 in three offices. The roster of agents has since sunk to 52, only about half of whom are active.
"The rest are looking for side jobs at McDonald's," said Home Center President Jason Bosch. "It happened overnight."
Yeah, baby! That's the money shot right there.
Tuesday, February 13, 2007
They will learn to live!
From the BBC News, we have M&S denies Kilroy mirrors claim.
I generally avoid commenting on the nexus of economics and politics but this one was so ridiculous that I simply could not help myself.
Marks and Spencer has said it is mystified by a claim by MEP Robert Kilroy-Silk that it uses "distorting" mirrors in its changing rooms.
Mr Kilroy-Silk has accused the store of misleading women with mirrors that make them look slimmer in its clothes.
In his question, Mr Kilroy-Silk asked if it was "conceivable that within the millions of EU regulations covering virtually every aspect of life in the EU" there was not one that made it illegal for M&S to have mirrors that "deliberately distort women's shapes".
I don't think the EU requires any more stupid regulations.
The women will learn to deal, and assuming that M&S is doing this, the women have the liberty to not shop there. After all, it's hardly the case that any country in the world is suffering from a dearth of womens' clothing stores!
What next? Banning peeing in your own pants?!?
I generally avoid commenting on the nexus of economics and politics but this one was so ridiculous that I simply could not help myself.
Marks and Spencer has said it is mystified by a claim by MEP Robert Kilroy-Silk that it uses "distorting" mirrors in its changing rooms.
Mr Kilroy-Silk has accused the store of misleading women with mirrors that make them look slimmer in its clothes.
In his question, Mr Kilroy-Silk asked if it was "conceivable that within the millions of EU regulations covering virtually every aspect of life in the EU" there was not one that made it illegal for M&S to have mirrors that "deliberately distort women's shapes".
I don't think the EU requires any more stupid regulations.
The women will learn to deal, and assuming that M&S is doing this, the women have the liberty to not shop there. After all, it's hardly the case that any country in the world is suffering from a dearth of womens' clothing stores!
What next? Banning peeing in your own pants?!?
Sunday, February 11, 2007
I wish I were kidding
I just received a "coupon" in the mail.
It's a New Year's Special.
Buy a condo in New York, and get $25,000 off.
I'm not fuckin' making this up. I'm gonna get the goddamn thing framed!
Hoo boy! Manhattan's gonna go down like a cheap whore on crack!
It's a New Year's Special.
Buy a condo in New York, and get $25,000 off.
I'm not fuckin' making this up. I'm gonna get the goddamn thing framed!
Hoo boy! Manhattan's gonna go down like a cheap whore on crack!
Saturday, February 10, 2007
Extreme Reductionism
From the New York Times, we have an article on gift-giving: Figuring Out Gift Giving in the Age of $2,000-a-Pound Chocolate.
If you are still seeking the perfect gift for Valentine’s Day, have you considered a box of Noka chocolates?
Both you and the recipient may be in for a surprise. A 12-piece box costs $39 before tax and shipping. And for that you will get 0.9 ounce of chocolate. Not 0.9 ounce a piece, but 0.9 ounce in the entire black and silver box.
Do the math and that comes to $693 a pound. Buy just four pieces in the Signature stainless steel box and you are paying more than $2,000 a pound, making the Noka chocolate more expensive than delicacies like caviar, saffron or black truffles.
How can anyone justify paying that much for a gift? Economists have struggled over that question for years, suggesting that anything other than a cash gift is inefficient.
Most economists would say that giving gifts, other than cash, makes no economic sense. The recipient would be better off spending the money on something he or she values.
Well, these economists are fucking stoopid if they indulge in such extreme reductionism.
Plus, they lack imagination.
Going from the fact that a cash gift is frequently a better idea to the fact that giving a cash gift is always the right idea is something only an economist would come up with. (They're all going on "rational behavior"-style nonsense.)
Here's the conventional reason that people give expensive gifts:
Most frequently, it's because the other party would never spend that money on that stuff so you buy it for them. Alternately, they may love something but can't afford it so you buy it for them. Hell! there are any number of explanations.
I'll even go for the, "It's my money to waste if I want to" explanation.
Rational? Certainly not, but a hell of a lot of fun.
Fun? You know, good times?!?
(To be fair, the article does mention one of the above reasons.)
There's even a dark side to this -- "flaunting your wealth" (a.k.a. Veblen's "conspicuous consumption"), etc.
However, I think I'll give an example of a "rational" explanation for giving gifts over money.
I enjoy receiving surprises as gifts. Authors I've never heard of, artists or photographers I don't as yet know about, composers and musicians I don't know, or even genres of music I don't listen to. Intellectual surprises, something new.
Some are hits, and some are busts but who cares? Many of them end up becoming things that I end up loving passionately.
Even an economist should realize that it is rationally impossible to surprise oneself!
Imagination! It's not a necessary part of an economist's job description.
If you are still seeking the perfect gift for Valentine’s Day, have you considered a box of Noka chocolates?
Both you and the recipient may be in for a surprise. A 12-piece box costs $39 before tax and shipping. And for that you will get 0.9 ounce of chocolate. Not 0.9 ounce a piece, but 0.9 ounce in the entire black and silver box.
Do the math and that comes to $693 a pound. Buy just four pieces in the Signature stainless steel box and you are paying more than $2,000 a pound, making the Noka chocolate more expensive than delicacies like caviar, saffron or black truffles.
How can anyone justify paying that much for a gift? Economists have struggled over that question for years, suggesting that anything other than a cash gift is inefficient.
Most economists would say that giving gifts, other than cash, makes no economic sense. The recipient would be better off spending the money on something he or she values.
Well, these economists are fucking stoopid if they indulge in such extreme reductionism.
Plus, they lack imagination.
Going from the fact that a cash gift is frequently a better idea to the fact that giving a cash gift is always the right idea is something only an economist would come up with. (They're all going on "rational behavior"-style nonsense.)
Here's the conventional reason that people give expensive gifts:
Most frequently, it's because the other party would never spend that money on that stuff so you buy it for them. Alternately, they may love something but can't afford it so you buy it for them. Hell! there are any number of explanations.
I'll even go for the, "It's my money to waste if I want to" explanation.
Rational? Certainly not, but a hell of a lot of fun.
Fun? You know, good times?!?
(To be fair, the article does mention one of the above reasons.)
There's even a dark side to this -- "flaunting your wealth" (a.k.a. Veblen's "conspicuous consumption"), etc.
However, I think I'll give an example of a "rational" explanation for giving gifts over money.
I enjoy receiving surprises as gifts. Authors I've never heard of, artists or photographers I don't as yet know about, composers and musicians I don't know, or even genres of music I don't listen to. Intellectual surprises, something new.
Some are hits, and some are busts but who cares? Many of them end up becoming things that I end up loving passionately.
Even an economist should realize that it is rationally impossible to surprise oneself!
Imagination! It's not a necessary part of an economist's job description.
Friday, February 09, 2007
The Smoking Gun of Deflation
I almost missed this small piece of news among the masses of "news" that's pumped out by the MSM.
From the OC Register, we have Lennar seeks cuts from subcontractors.
Lennar Corp. is asking subcontractors to reduce charges for work they've already done or face a minimum six-month ban on bidding for work, a company executive said late Tuesday.
"As our customers continue to pay us a lower price for our homes, we must in turn pay you a lower price for your services," said a letter sent to subcontractors in Lennar's Orange Coast, Corona, Temecula and Palm Springs divisions.
The letter tells subcontractors to either reduce their unpaid invoices by a set percentage or "be excluded from bidding future work for a minimum of six months."
Subcontractors getting the letters said Lennar had asked for cuts from 5 percent to 20 percent, depending on their trade and location.
Roos said similar requests are being made of Lennar subcontractors nationally. The firm has projects in at least a dozen states.
"Every builder is doing the same thing," added Roos, who works in the company's Western region office in Aliso Viejo. "Everybody understands that the market has softened. … I think everybody realizes in times like this … they need to manage their business accordingly."
"Their ability to absorb and pass along (savings) can be limited somewhat," Simonson said. "I think it would cause a lot of concern and resistance among contractors and subcontractors."
This is it!
And for those confused about what "it" is, this is the tip-over point. The builders are cramming the cuts down the subcontractors because they expect to sell the new houses they have yet to build for less. Nobody cares about what the previous owners paid because the new houses set the "comps" (comparable prices.)
For the subcontractors, it's basically go under now, or go under later. Human nature compels the go under later scenario.
For the fucked buyers, it's also a go under now, or go under later scenario. They will realize that there's no point in paying a carrying costs for 30 years. Far better, to declare bankruptcy and get it over with!
Bankruptcies destroy credit which is the definition of deflation!
Here's the part the inflationists never figure out. Bernanke can print till the cows come home but there's no way to channel the money into the exact channels that are blowing up. Nobody but nobody has that kind of omniscient knowledge of a global economy. Even if you lived in a town of 10,000, you can't have that kind of information!
From the OC Register, we have Lennar seeks cuts from subcontractors.
Lennar Corp. is asking subcontractors to reduce charges for work they've already done or face a minimum six-month ban on bidding for work, a company executive said late Tuesday.
"As our customers continue to pay us a lower price for our homes, we must in turn pay you a lower price for your services," said a letter sent to subcontractors in Lennar's Orange Coast, Corona, Temecula and Palm Springs divisions.
The letter tells subcontractors to either reduce their unpaid invoices by a set percentage or "be excluded from bidding future work for a minimum of six months."
Subcontractors getting the letters said Lennar had asked for cuts from 5 percent to 20 percent, depending on their trade and location.
Roos said similar requests are being made of Lennar subcontractors nationally. The firm has projects in at least a dozen states.
"Every builder is doing the same thing," added Roos, who works in the company's Western region office in Aliso Viejo. "Everybody understands that the market has softened. … I think everybody realizes in times like this … they need to manage their business accordingly."
"Their ability to absorb and pass along (savings) can be limited somewhat," Simonson said. "I think it would cause a lot of concern and resistance among contractors and subcontractors."
This is it!
And for those confused about what "it" is, this is the tip-over point. The builders are cramming the cuts down the subcontractors because they expect to sell the new houses they have yet to build for less. Nobody cares about what the previous owners paid because the new houses set the "comps" (comparable prices.)
For the subcontractors, it's basically go under now, or go under later. Human nature compels the go under later scenario.
For the fucked buyers, it's also a go under now, or go under later scenario. They will realize that there's no point in paying a carrying costs for 30 years. Far better, to declare bankruptcy and get it over with!
Bankruptcies destroy credit which is the definition of deflation!
Here's the part the inflationists never figure out. Bernanke can print till the cows come home but there's no way to channel the money into the exact channels that are blowing up. Nobody but nobody has that kind of omniscient knowledge of a global economy. Even if you lived in a town of 10,000, you can't have that kind of information!
L-ackademia
From the New York Times, we have a report on A Contrarian View: Save Less and Still Retire With Enough.
Could it be possible that you are saving too much for your retirement?
Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry — and spending more — while they are younger. The negative savings rate, they say, is wildly distorted.
Nevertheless, the loose confederation of well-regarded economists, who have not been working in concert, say their research points to the startling conclusion that many Americans are saving too much, not too little. Indeed, their studies of the savings and spending habits of the generation born between 1931 and 1941 revealed that at least 80 percent had accumulated more than enough wealth for retirement.
These "economists" are so fucking stoopid that it's hard to know where to begin.
Yes, the generation born between 1931 and 1941 probably saved too much because they were traumatized by the Great Depression.
But what does that have to do with today?
Every indicator shows that Americans are not just living beyond their means, but they're living way beyond their means! They're going into debt to fund an unsustainable lifestyle.
I'm working on a longer article, and have plenty more to say about this subject.
Could it be possible that you are saving too much for your retirement?
Nevertheless, a small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry — and spending more — while they are younger. The negative savings rate, they say, is wildly distorted.
Nevertheless, the loose confederation of well-regarded economists, who have not been working in concert, say their research points to the startling conclusion that many Americans are saving too much, not too little. Indeed, their studies of the savings and spending habits of the generation born between 1931 and 1941 revealed that at least 80 percent had accumulated more than enough wealth for retirement.
These "economists" are so fucking stoopid that it's hard to know where to begin.
Yes, the generation born between 1931 and 1941 probably saved too much because they were traumatized by the Great Depression.
But what does that have to do with today?
Every indicator shows that Americans are not just living beyond their means, but they're living way beyond their means! They're going into debt to fund an unsustainable lifestyle.
I'm working on a longer article, and have plenty more to say about this subject.
Thursday, February 08, 2007
Finally, they speak!
From CBS Marketwatch, we have Steve Kerch reporting on: Housing still on down slope.
"I don't think we've seen the bottom," said David Berson, chief economist for Fannie Mae. "We're going to see a much bigger drop in investor demand this year. But by the second half of the year the market will stabilize, if investors pull out quickly."
"Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."
This is such a bunch of bollocky-talk from the chief economist of Fannie Mae.
What is so magical about the second half of the year that will cause prices to stabilize?
I'll give you a better prediction:
Real home prices will fall in nominal terms this year, next year, and possibly the year after that.
In fact, I'll give you a stronger prediction:
Since home prices have traditionally been 3-4x income, and now in places like California, they are skirting 11-12x income, I'll go out on a limb and say that real home prices will never in my lifetime reach the same amount in inflation-adjusted terms.
Put that in your pipe, and smoke it!
"I don't think we've seen the bottom," said David Berson, chief economist for Fannie Mae. "We're going to see a much bigger drop in investor demand this year. But by the second half of the year the market will stabilize, if investors pull out quickly."
"Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."
This is such a bunch of bollocky-talk from the chief economist of Fannie Mae.
What is so magical about the second half of the year that will cause prices to stabilize?
I'll give you a better prediction:
Real home prices will fall in nominal terms this year, next year, and possibly the year after that.
In fact, I'll give you a stronger prediction:
Since home prices have traditionally been 3-4x income, and now in places like California, they are skirting 11-12x income, I'll go out on a limb and say that real home prices will never in my lifetime reach the same amount in inflation-adjusted terms.
Put that in your pipe, and smoke it!
Wednesday, February 07, 2007
Genius is what genius says
From the OC Register, we have Jeff Collins writing about Watts forecasts 7% gain in O.C. house prices.
Gary Watts, the Realtor-economist who forecast the downturn of the 1990s, then foresaw the housing boom just ended, believes prices will rise slightly in 2007.
Although his 2006 forecast was overly optimistic, Watts remains confident that local house prices this year will increase 7 percent and that condo prices will go up about 4 percent.
"This will be, I think, a pivotal year," Watts said in a telephone interview. "If the housing correction is behind us, we'll be in pretty good shape. We've weathered the worst."
I love this shit!
If a plane doesn't crash into my building, we'll be in pretty good shape.
If my car doesn't explode on the highway, we'll be in pretty good shape.
If an earthquake doesn't destroy California, we'll be in pretty good shape.
Anyone can make economic predictions! Amazing, isn't it?
Gary Watts, the Realtor-economist who forecast the downturn of the 1990s, then foresaw the housing boom just ended, believes prices will rise slightly in 2007.
Although his 2006 forecast was overly optimistic, Watts remains confident that local house prices this year will increase 7 percent and that condo prices will go up about 4 percent.
"This will be, I think, a pivotal year," Watts said in a telephone interview. "If the housing correction is behind us, we'll be in pretty good shape. We've weathered the worst."
I love this shit!
If a plane doesn't crash into my building, we'll be in pretty good shape.
If my car doesn't explode on the highway, we'll be in pretty good shape.
If an earthquake doesn't destroy California, we'll be in pretty good shape.
Anyone can make economic predictions! Amazing, isn't it?
Tuesday, February 06, 2007
The Great Unraveling
From the St. Petersburg Times, we have Kris Hundley writing about When a home alone won't do.
Prospective new home buyers are learning they don't have to settle for low-dough incentives like granite countertops.
Now available in the Tampa Bay area: college tuition with a new home purchase and a condo-cum-yacht deal.
"I've never seen incentives like this," said Carlos A. Fuentes, president of the Greater Tampa Association of Realtors, who has been in the business for 20 years.
No, you haven't because they're fuckin' stoopid!
College tuition? Condo-cum-yacht?
This is totally crazy!
Firstly, this tells you that the stuff is overpriced.
Secondly, this raises the "double coincidence of wants" problem which lowers the number of potential buyers because you have to find a greater fool who wants both a condo and a yacht.
Lastly, this is telling you that the developers are desperate so that means prices will be dropping a lot.
I hope we haven't all forgotten the pearls of wisdom from Motoko Rich of the New York Times, "South Florida is working off of a totally new economic model than any of us have ever experienced in the past."
Florida is totally and utterly fucked! Remember, you heard it here first.
Prospective new home buyers are learning they don't have to settle for low-dough incentives like granite countertops.
Now available in the Tampa Bay area: college tuition with a new home purchase and a condo-cum-yacht deal.
"I've never seen incentives like this," said Carlos A. Fuentes, president of the Greater Tampa Association of Realtors, who has been in the business for 20 years.
No, you haven't because they're fuckin' stoopid!
College tuition? Condo-cum-yacht?
This is totally crazy!
Firstly, this tells you that the stuff is overpriced.
Secondly, this raises the "double coincidence of wants" problem which lowers the number of potential buyers because you have to find a greater fool who wants both a condo and a yacht.
Lastly, this is telling you that the developers are desperate so that means prices will be dropping a lot.
I hope we haven't all forgotten the pearls of wisdom from Motoko Rich of the New York Times, "South Florida is working off of a totally new economic model than any of us have ever experienced in the past."
Florida is totally and utterly fucked! Remember, you heard it here first.
Friday, February 02, 2007
The MBS Market has spoken!
This is a graph of the BBB tranche of mortgage-backed securities.
Stuff is trading 92 cents to the dollar. Yep, that means that the market thinks that the riskiest tranche of the mortgage pool is worth 8% less than face value.
Where's my popcorn? I want front-row seats to this one!
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