Category Archives: Economy

Housing To Recover Peak Only in 2020, Says Expert

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A gloomy forecast of where the US housing market is going at US News & World Report — Nowhere.

“Economist Celia Chen of Moody’s Economy.com has published a forecast suggesting that residential real estate could take 10 years to recover in most states-and 20 years in Florida and California.

Chen predicts that house prices will stop falling by the second quarter of 2010……..
By the time house prices stop falling, they’ll be down 43 percent from peak prices reached in 2006, as measured by the Case-Shiller home-price index.
That will mark the deepest housing correction since 1890, and probably ever in the United States (meaningful data go back only to the late 19th century)……….
Nationwide, price levels won’t regain the peaks of 2006 until 2020. In the worst-hit states, Florida and California, the rebound will take until 2030. Five other states won’t hit their 2006 peaks until after 2023. Anybody who doubts that it could take that long should consider the real estate bust in Japan, where prices are still down by half from the peaks they reached 15 years ago.
Other states, mainly those where the housing boom was muted, will bounce back faster. Homes in Texas, Oklahoma, and a handful of southern and Farm Belt states could regain peak prices within seven years, after falling by less than 10 percent.“

My Comment

The article goes on to point out, correctly, that housing takes up about 17% of the economy, so a prolonged Japanese-type slump makes any kind of “green shoot” being hyped today more likely to be astro-turf than lawn.

Actually, housing takes up more than 17% of the economy. If you factor in all the related services, from construction to home furnishings to financing, it probably takes up between 30%-40% of the economy.

Add to that the ongoing slump in commercial real estate, world-over, and you can see why some of us are legging it.

Some anecdotal evidence:

I spoke to an Indian management consultant recently. He’d just returned from visits to China and Cambodia and was extremely pessimistic about the prospects for real estate recovery there economic recovery in China.  He suggested a mark-down of about 40% from current prices.

Offices are sitting vacant everywhere. Traveling in the north of Morocco in 2008, I visited one of the hot-spots of investment – the coast from Tangier to Tetuane.  Hotels and apartment complexes were springing up on every available expanse of beach. But a businessman who was involved in exporting and importing clothes (from China) and semi-precious stones (from India) was skeptical. He said a lot of the residential boom there was tied up with the government’s effort to develop tourism and some of it was driven by drug money in search of a place to hide. Business, he said was not so good. He’d been trying to sell a warehouse for over a year, and despite a 15% markdown, had found no takers. He showed me a warehouse full of inexpensive women’s clothes, suits for $4-$5, made in China.

There were no buyers to be had. He was even thinking of shipping them to the US, because shipping costs had fallen so low. At least in the US, he said, you could find a market….

Everything, it seems, depends on the American consumer….

Kevin Carson on the Revolutionary Potential of Barter

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From a Kevin Carson comment on his own blog, Mutualist.org:

“So long as an industry is controlled by a handful of firms with the same organizational culture, using some form of oligopoly pricing, colluding to spoon out incremental improvements, and using push distribution methods for whatever crap they agree is the “new thing” this year, calculational chaos doesn’t cause much of a competitive penalty for any particular firm.

The main thing that will cause them real harm, IMO, that will cause the “walls to come tumbling down” for American state capitalism the same as for the old Soviet system, is the looming singularity in small-scale production technology that will enable much of the population to meet a large share of its needs through direct subsistence production for use in the household/informal/barter economy. (That’s the theme of one of the sections in forthcoming Ch. 15)”

My Comment

Carson is always an interesting and productive thinker, and this snippet is from commentary on a blog post of his about the seizure of some of his writings by the police. The commentary goes from this incident to discuss various other things, including whether big business is really no different from the state, and if it is, how that fact can be squared with the wealth it produces.

Carson argues that its wealth is produced despite the existence of the same “computational chaos” suffered by states, because big business enjoys subsidies, cost-externalizations, and benefits deriving from its size and privileged relationship to the state. That means its wealth isn’t really “its” wealth but the appropriation of wealth actually created by others. (I’ve made much the same argument myself).

Small-scale production and barter withdraw the life-blood of the huge corporations – which is the consumer. The direction of consumption away from the corporate economy is thus an effective form of direct revolutionary action against the corporate state.

Now, one man’s revolutionary struggle is another man’s budget shopping. but why quibble? The main thing is to reclaim the human being as the focus of economic theory, rather than any spurious “economic man,” “factor of production,” or “felicific calculus”…

Financial Follies: Condo Builders Under Water

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In the news today, AP reports:

“Multifamily construction plunged 46.1 percent to an annual rate of 90,000 units after a 23 percent fall in March. Permits for multifamily construction dropped 19.9 percent to 121,000 units. Analysts said apartment construction is being hurt by a glut of condominiums on the market and by tightening credit conditions for commercial real estate.”

My Comment

Oh, my. This made my day. Condo flippers and developers are in big trouble.

Overlook the opening of this article, with that plaintive reference to a ” modest rebound in single-family home construction in April” that  “raised hopes.”

Hopes should not be raised. That’s pretty clear by now. Not unless you’re being paid to pump houses for some rash developer who ran out of buyers for his pet eye-sore. We can think of a number of things that should be raised  – black flags, eyebrows, interest rates…..but not hopes.

I’ve been checking condo prices all over the world and it’s the same news. From Panama to Kuala Lumpur, from Miami to  Baltimore. Commercial developers are in trouble.

If that doesn’t warm the cockles of your heart and put a smile on your face, I don’t know what will. These wretched companies drove up housing by 100-300% (and more) in some cities and literally chased people on small or fixed incomes out of places they’d been living for years.

And don’t tell me they added any real value.

In New York. construction in one building was so shoddy, the Buildings Department had to intervene.  I personally inspected a condo where, when the owner kicked the wall, her foot went right through.  Many of them were aesthetic monstrosities that ruined the skyline,  polluted the air, and destroyed the architectural beauty of the places where they metastasized.

Now there’s a glut and the developers are losing their shirts.

Miami’s condo king, Jorge Perez, is sitting on top of a market with the biggest glut in the country. Since 2003, nearly 23000 condos were added to downtown Miami, and 33% of them remain unsold. The financial hurricane hit just when Perez, the “tropical Trump,” had opened his newest project, Icon Brickell, a boutique hotel combined with over 1,640 luxury apartments and squeezed into three towers. Only 18 units have sold so far. Perez (once estimated to have a net worth of $1.3 billion) is in big money trouble. His company, Related Group, lost $1 billion in 2008 and ran up debt of $2 billion, $700 million from Icon Brickell alone.

It just doesn’t get better than that….

Award Winning Research Proves that Fed Fiddled Us Into Disaster

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A Distinguished Academic Research Award went to researchers who showed that Bernanke’s tinkering with the interest rate converted a minor recession in 2004 into a full-fledged implosion of the credit markets in 2008:

“In a correlative movement with the rise in the price of oil, the Federal Reserve moved from a low accommodative interest rate policy to one of a steady and consistent increase in interest rates between 2004 and 2007. The switch in policy, to higher interest rates, combined with the financially corrosive effects of low initial variable interest rates, between 2001 to 2004, converting to much higher indexed variable interest rates, between 2005-2008, became a prime cause of the financial services mortgage crisis of 2008. The study suggests that the Federal Reserve’s sustained manipulation of interest rates between 2000-2008 had a deleterious effect on financial lenders and individual borrowers.”

— “Federal Reserve Interest Rate Manipulation between 2000-2007 and the Housing Mortgage Crisis of 2008,” by Dr, Fred M. Carr and Dr. Jane A. Beese, August 8, 2008, of the University of Akron’s .K. Barker Center for Economic Education.

My Comment

(later)

Why Pork-Chop Health-Care Doesn’t Work

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Donald J. Boudreaux on why collectivized health care solutions don’t work (hat-tip to Cafe Hayek):

“Collective efforts — which, in practice, mean “imposed by government command” — typically allow each of us to free-ride off of each other’s resources. And when I get to spend your money and you get to spend mine, it’s a sure bet that that money will be spent wastefully.

Consider Medicaid and Medicare — huge socialized health-care programs. Funded with tax dollars, these programs allow the millions of Americans covered by them to consume medical services without paying the full cost of those services. The predictable result is that these services are over-consumed.

To see why, ask the following question posed by my George Mason University colleague Russell Roberts. If you go to dinner with a large group of strangers and you know that the bill will be split evenly, aren’t you more likely to order pricier dishes and drinks than you would order if you, and you alone, were responsible for picking up your full tab?

The answer is surely “yes.” Let’s say that you’d be content to order the pork chop priced at $15, but would get even greater enjoyment from ordering the rack of lamb priced at $25. If you alone were responsible for your tab, you’d order the lamb only if it is worth to you at least the extra $10 that it costs. So suppose that you value the lamb by only $8 more than you value the pork chop. In that case, you’d order the pork chop. You wouldn’t spend an extra $10 to get extra satisfaction worth only $8.

But if the bill is evenly shared among, say, 10 diners (yourself and nine others), then if you order the lamb, your share of the higher bill will be only $1. That’s $10 split evenly 10 ways. You’ll order the lamb.

You might think that this sharing arrangement is good. After all, in this example, the cost to you of getting something you valued more (the lamb rather than the pork chop) was reduced. It became sensible for you to order the lamb.

Look more deeply, though. What happened is that society (here, the 10 diners) was led to supply something that wasn’t worth its cost. The lamb was worth to you only an additional $8, but to make it available to you, society spent $10. Ten dollars were used to raise the welfare of society by only $8. (You’re a member of society, so any improvement in your welfare counts as an improvement in the welfare of society.) That’s a waste of $2…”

My Comment

(Check back later tonight)

Paul Volcker Praises the Grace of Government

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The Bureau of Economic Analysis released the Q1 ’09 GDP numbers.

The annual rate of decline came in at the expected 6.1%  (a decline of 6.3% in real GDP).

Calculated Risk has an optimistic assessment of the Q1 numbers.

The optimistic case rests on the following:

  • Declining residential investment contributed more to the GDP slump in Q1’09 than in Q4 ’08 and will likely come to an end by Q2’09, in keeping with its role as a leading indicator of recession.
  • Simultaneously, the contributions of lagging indicators (like unemployment, declining investment in equipment & software, and declining non-residential investment) have increased.
  • The over-weighting of lagging indicators in the decline of GDP signals the end of recession.
  • Real personal consumption expenditure (PCE) was up in positive territory (2.2%) in Q1’09, where it was negative (4.3%) in Q4’08.

Mish Shedlock is less optimistic. He says that the Q1 ’09 rise in PCE is either an outlier  or temporary, and will be followed by another dip in 2010-11 and more trough for a few years.

Meanwhile, former Fed chairman Paul Volcker, head of Barack Obama’s economic team, thinks the economy is “leveling off,” according to this Bloomberg report.

Highlights of what Volcker is reported to have said:

  • Bernanke is “doing a great job”
  • the economy is functioning “by the grace of government intervention”
  • a strong recovery is “going to take a while”
  • “systemically important institutions” are going to be kept afloat
  • the expansion of the Fed’s balance sheet to more than $2.2 trillion as of last week will likely lead to inflationary problems in 2-3 years, but not immediately
  • Glass-Steagall (repealed in 1999) isn’t likely to be resuscitated but proprietary trading and commercial banking activity should be kept apart (Lila: how?)
  • no regulation of hedge funds is likely but in the case of those that get too big capital requirements and a cap on leverage might be imposed (Lila: this is vague and opens the door to selective regulation)
  • regulation of executive compensation isn’t likely but there could be a “quid pro quo” for federal aid. It would have to be a “culture of exchange” with Wall Street (Lila: more weasel words that allow for selective regulation).

Altogether, I thought Volcker’s comments were evasive, inadequate, and temporizing.

IMF: G-20 Fiscal Stimulus On Target

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In the news:

The IMF says the G-20 fiscal stimulus will reach its 2% target.

Bloomberg reports on the figures spent so far:

“The G-20 countries will spend $820 billion on stimulus measures in 2009, up from a March estimate of $780 billion, and will spend $660 billion in 2010, the fund estimated.

The IMF also revised its forecast for budget deficits in G- 20 countries as a result of fiscal expansion. Today’s report calculates that budget deficits in the G-20 this year will increase by 5.5 percentage points of gross domestic product relative to 2007 and 5.4 percent in 2010. In March, the fund forecast a 4.7 percentage-point rise this year and a 5.1 percentage-point jump next year.

Strauss-Kahn said yesterday that governments should start to discuss “exit strategies” from the emergency spending once the crisis passes.

The fund’s estimate for financial-sector support also increased today to 32.1 percent of GDP, up more than 3 percentage points from the March estimate….”

My Comment (check back for more):

Domininique Strauss-Kahn, a member of the Socialist party and a former finance and economy minister in  Lionel Jospin‘s “Plural Left” government became the new managing director of the International Monetary Fund on September 2007, replacing Spain’s Rodrigo de Rato.

Interesting things to note about Strauss-Kahn:

  1. He’s part of the European Council on Foreign Relations, launched in October 2007 (i.e. just after DSK became IMF chief), which in an expression of pan-Europeanism in world affairs. Rubbing shoulders with DSK, according to Source Watch are such notable globalists as George Soros (Chairman of the Open Institute), Stephen Wall (Chairman of the influential PR firm Hill & Knowlton, advisor to Tony Blair), and Timothy Garton Ash (whose influential book, The Magic Lantern, cheered on the 1989 revolutions in Eastern Europe). Note: Hill & Knowlton was the outfit that concocted the story about Iraqi soldiers killing babies that became a provocation for the 1991 Gulf War.
  2. Strauss-Kahn has been linked to the financial scandal around ELF Aquitaine, a state-owned oil giant through which former President Francois Mitterand allegedly channeled money to Germany’s Christian Democrats. Strauss-Kahn’s wrong-doing was apparently less serious than some of the fraud and corruption with which other French government officials and company heads were charged (including money-laundering, influence peddling, falsification of documents, and bribery)
  3. Money from the ELF oil company, as well as from the Taiwan frigates scandal, passed through “unpublished accounts” at  Clearstream Banking, the clearing division of Deutsche Bourse, based in Luxembourg. The ELF affair and the Taiwan frigates scandal were the two major financial scandals that hit France in the 1990s. And in both, Clearstream was a platform for money-laundering and tax evasion.

Liberals Prefer Bureaucrats to Citizens…

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“A less publicized case of arrogant disregard for people occurred in Carmel Valley, California, during the 2008 fires. Ivan Eberle, a well-known wildlife photographer, was commended for heroism in saving the Monterey Institute for Research Astronomy observation station on Chews Ridge from a raging wild fire. A few days after the fire, he was visited by six Monterey County Sheriffs and charged with the crimes of battering a firefighter and interfering with a firefighting crew in the line of duty.

Calling the charges “ironic” and “truly bizarre,” Eberle said he felt that his “constitutional rights were violated to an egregious degree.” To him, the charges filed by the fire department were in retaliation for his public criticism, as he had spread the word that the firefighters refused to help him save the observatory, which is also his home. To Eberle, the firefighters were acting with “willful negligence or dereliction of duty.”

Eberle believes the bogus charges stem from his quick actions to save the observatory. When a large tongue of flames raced toward propane tanks next to a grove of pines, he unrolled a fire hose from the facility’s hydrant and bumped into a sleep-deprived firefighter. Although the observatory is the only structure on Chews Ridge, Eberle single-handedly saved it. Nobody from the fire department would help. Similar to the theme of Fahrenheit 451, the firefighters seemed to have forgotten their primary purpose.

So how could such arrogant misconduct occur? Some have pointed to the consolidation of local volunteer fire departments with more formal, government-operated ones. Years earlier in 2001, the Valley Volunteers Inc. in Carmel Valley Village merged with a government fire department in the Mid-Valley area. The merger quickly turned sour. In 2004, the volunteer fire department circulated a petition for “detachment,” arguing that their privately raised million-dollar fund had been squandered and that the two groups had different philosophies on how to operate a fire department. Although explicitly told that a detachment could easily be arranged if either side found the merger unsatisfactory, the LAFCO government agency in charge of such disputes refused to allow the separation. Many of the citizen firefighter quit the department, saying that they were being “treated as subordinates” by the new consolidated fire department.

The most dangerous threat from Vichy liberals is that they do not trust ordinary people to do the right thing. Instead, government control and bureaucracy are substituted to run society. Politics and officiality overshadow anything that citizens attempt to do, preventing society from self-organizing into a system to which people are willing to dedicate valuable time and money. Unfortunately, as consolidation grows, so does an attitude that only government can solve problems, leaving the citizenry defenseless and dependant. Obviously, government has gotten too big for it britches, and its arrogance is showing through….”

“The Arrogant Self-righteousness of Vichy Liberals,”

L.K. Samuels, Libertarian Perspectives, Dec. 28, 2008

Jim Rogers Likes Farmland…

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An interview with commodities guru, Jim Rogers, in Newsweek, April 11,2009 :

“Does the future growth of China factor into your bullishness?
China is tiny in comparison to the U.S. economy. Anyone who thinks that the commodities story is driven by China needs to do more homework. In the 1970s, everyone was in recession, and you still had declining supply [in oil] and higher prices. Asia wasn’t even in the game then. China was run by Mao. But now, of course, there are those 3 billion people in Asia who are in the game. It’s just another factor.

Are we going to see another food-price spike sometime soon?
Definitely. I think you should move back to Indiana and marry a farmer. There are times in history when the money lenders have been in charge, and we just came through one of those periods. But it wasn’t always that way. Wall Street was a backwater in the ’40s, ’50s, ’60s and ’70s, and it will be again. Farmers are going to be the ones driving Lamborghinis, and the traders are going to have to learn to drive tractors.

What about technological advances? Another green revolution could easily drive prices down …
Sure, there’s always something that will end a bull market. But if you think we’re anywhere near that point now, think again. Even if everyone in the world decided to put a windmill on their head, it’s going to take decades for that to really change things. In the meantime, you’ve got to put your money somewhere. And as we’re already seeing, even the value of cash can be wiped out.

I guess that’s one reason the Chinese are so worried …
Well, if I were running the Chinese central bank, I’d buy oil, wheat and zinc. Which is what folks there are already doing.”

Update:

Jim Rogers is involved with two direct farmland investment funds: Agcapita (Canada) and Agrifirma (Brazil), according to a comment.

Comment

I agree with Rogers on this and always have.

Unfortunately, until recently it was hard to invest in commodities without going through a trading platform. Now you can buy and sell commodities as ETF’s, although their risks and performance can and will vary from the underlying commodity, so you can end up being in the right sector and still losing money.

But nonetheless, trading will work for a while. Who knows what happens after.

After that, yes, you might think of getting some nice little fruit or veggie farm, where you can stomp around, pull beets out of the ground and milk your pet goat…

At least, that’s the fantasy.

Meanwhile, however, you could do worse than get a rental property near the water. Where is the question.   Forbes tells us that Florida is one of the worst places to buy now

But don’t believe everything in Forbes.

When you see block houses for $50-60k near water and when your hear the Obamites are going to be putting money (or rather credit) into infrastructure, and and every effort is being made to reflate the real estate bubble and create jobs programs in select cities, I’m afraid follow the trend makes sense…

Just make sure the numbers work and your horizon is more than 5 -7 years.

AIG Is A Criminal Scam (Update)

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Karl Denninger quotes AIG investigators:

“In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

(Karl Denninger talking) Read that folks. Then read it again. Then read it AGAIN. More excerpts:

There are two basic problems with side letters. First, they are a criminal act, a fraud that usually carries the full weight of an “A” felony in many jurisdictions. Second, once the side letter is discovered by a persistent auditor or regulator examining the buyer of protection, the transaction becomes worthless. You paid $6 million to AIG to shift risk via the reinsurance, but the side letter makes clear that the transaction is a fraud and you lose any benefit that the apparent risk shifting might have provided.

(Denninger) And finally, the last nail in the coffin:

The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams – with no correlation between “fees” paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world.

Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing.

Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations….”

That’s a post by Karl Denninger, citing comments by AIG investigators

My Comment

Well.. finally some people are catching on. It’s ALL a scam, folks. One gigantic ball of criminality. Told you so.

All this high falutin’ stuff about who’s going to fix what when is nothing more than jive talk to cover up for crime. I’ve always said that.   Here in June 2006, here in July 2006   On September 19 2008 and  September 30, 2008  and this year again,  and again and again.

These folks live in each other’s pockets, buy each other’s businesses, swap each other’s debts…. and crimes…..  We have a mafia in power. All this talk about fixing this and fixing that is beside the point…and misleading. There’s a fix alright. It’s the fix cooked up by the regulators, the bankers, and the politicians.

What we really need now is the FBI busting in and handcuffing people and dragging them off to sticky little jail cells where they can be subjected to all forms of inquiry within the law.

We’ve been saying this till our throat hurts.

But, of course, we weren’t the right sort (well-connected Wall Street money manager), and no one paid any attention…and now it’s a bit late. The paper trail has probably gone cold.

But atta boy, anyway, Karl.

Update: Apparently, this post confused a number of people.

James Klicker writes to let me know that Ritholz’s post is what Denninger is riffing off.

Let me clarify. The post above is Karl Denninger’s commentary on a post by Barry Ritholz (of The Big Picture).  However,  my interest was not in the fact of AIG’s criminality (Ritholz’s post), but in Denninger’s forthright reaction.

Compare it to the wussy cover-up for AIG’s chief executives, especially Hank Greenberg, which a lot of people seem to favor.

AIG’s criminality has been known for a long time. I wrote about it on September 19, 2008, purely on what I’d gathered from skimming off-shore newsletters, which had been documenting the criminality in the company since the 1980s. My interest is less in AIG’s criminality (which is so obvious you’d have to be wilfully blind not to notice) but why it is that so many people rushed to claim niceties of contract law for a company whose contracts were obviously fraudulent to begin with. Sounds like the usual media deflection…