I am surprised that there are almost no articles (I haven't found one yet) that talks about the high inventory of 5000+ square foot houses. Sometimes there are mentions of "affordable" housing but that's not al that matters - a 2000 sq ft house on Malibu beach is going to be very expensive to maintain.
The problem I see is that there are way too many large mcmansions out there. I don't understand why anyone is buying these up in California - even at half price. There isn't going to be a good market for them for a long, long time.
As one blogger write houses aren't supposed to be a speculative purchase, it's a place to live. Why would anyone buy a mcmansion to live in? A 6000 sq ft house (with pool, fountains, gardens, etc.) is going to be very expensive to maintain. The total cost of ownership is very high.
Even if you buy a forclosure at half price (say $500K instead of $1 million) you are going to have to dish out serious money for maintenance, utilities, taxes, etc. Recurring costs will kill you.
And then who are you going to sell it to? Less than 20% of Americans make over $100K today - and large percentage of them are not going to be looking to buy a house. So if anyone is buying these houses on a speculative basis then they are going to be stuck - there just isn't much of a market for $500K houses.
So what do we do with all these mcmansions? I'm not sure. But I am definitely not going to buy one - even if it seems to be "bargain" because it isn't.
I don't see the government or private industry addressing the issue. Most people can't afford to maintain a 5000+ sq ft house let alone buy one. Trying to prop up the ridiculous situation is only going to make matters worse.
I think eventually we will see entire neigborhoods of these new mcmansions bulldozed down (especially after many rot away regardless of what the government does).
Nothing coming out of Washington DC is making any sense with regards to housing. It's going to be a horrible mess. Nothing is getting fixed at all.
Saturday, February 21, 2009
Friday, February 13, 2009
Deleveraging just beginning
Here is a great article:
http://www.financialsense.com/Market/pretti/2009/0213.html
I agree that the deleveraging process is just beginning and will take over a year (maybe two) to complete. The Federal Government is just muddying the waters with stimulus, TARP's, etc. in trying to get things back to where they were. I also agree that the US (and the world) is resetting to a "new normal" and it will be interesting to see how it plays out. We are in an unprecidented situation now and it is nearly impossible to predict what the end results will be.
However, I do think that the markets have NOT factored in the deleveraging that will take place around the world. We will not see a U-shaped recession - there is going to be a lower-level that we rise up to no matter what Obama, the Fed, Geithner, Congress, etc. do. Steve Balmer said this, "We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to a lower level of business and consumer spending based largely on the reduced leverage in the economy."
I believe Steve is right.
The Federal Government had make some wild and crazy moves to keep the economy from completely collapsing (which it almost did last September it turns out), and the continue to make wild and crazy moves without even knowing what the consequences are (or sometimes I wonder if they even care as long as they are spending money).
I'm betting that the market has not priced in all the deleveraging and asset deflation and will go down over time another 20% to 50%. There is too much wishful thinking out there that the economy will go back to what we knew it to be in 2007. Ain't gonna happen.
http://www.financialsense.com/Market/pretti/2009/0213.html
I agree that the deleveraging process is just beginning and will take over a year (maybe two) to complete. The Federal Government is just muddying the waters with stimulus, TARP's, etc. in trying to get things back to where they were. I also agree that the US (and the world) is resetting to a "new normal" and it will be interesting to see how it plays out. We are in an unprecidented situation now and it is nearly impossible to predict what the end results will be.
However, I do think that the markets have NOT factored in the deleveraging that will take place around the world. We will not see a U-shaped recession - there is going to be a lower-level that we rise up to no matter what Obama, the Fed, Geithner, Congress, etc. do. Steve Balmer said this, "We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to a lower level of business and consumer spending based largely on the reduced leverage in the economy."
I believe Steve is right.
The Federal Government had make some wild and crazy moves to keep the economy from completely collapsing (which it almost did last September it turns out), and the continue to make wild and crazy moves without even knowing what the consequences are (or sometimes I wonder if they even care as long as they are spending money).
I'm betting that the market has not priced in all the deleveraging and asset deflation and will go down over time another 20% to 50%. There is too much wishful thinking out there that the economy will go back to what we knew it to be in 2007. Ain't gonna happen.
Tuesday, February 10, 2009
Nationalizing banks not politically feasible
Very interesting post here:
http://www.nakedcapitalism.com/2009/02/geithner-bank-bailout-plan-fiasco.html
and here:
http://www.calculatedriskblog.com/2009/02/obama-on-nationalization.html
From Roubini:
[W]hy is the US government temporizing and avoiding doing the right thing, i.e. take over the insolvent banks? There are two reasons. First, there is still some small hope and a small probability that the economy will recover sooner than expected, that expected credit losses will be smaller than expected and that the current approach of recapping the banks and somehow working out the bad assets will work in due time. Second, taking over the banks – call is nationalization or, in a more politically correct way, “receivership” – is a radical action that requires most banks be clearly beyond pale and insolvent to be undertaken. Today Citi and Bank of America clearly look like near-insolvent and ready to be taken over but JPMorgan and Wells Fargo do not yet. But with the sharp rise in delinquencies and charge-off rates that we are experiencing now on mortgages, commercial real estate and consumer credit in a matter of six to twelve months even JPMorgan and Wells will likely look as near-insolvent (as suggested by Chris Whalen, one of the leading independent analysts of the banking system).
Thus, if the government were to take over only Citi and Bank of America today (and wipe out common and preferred shareholders and also force unsecured creditors to take a haircut) a panic may ensue ... Instead if, as likely, the current fudging strategy - of temporizing and hoping that things will improve for the economy and the banks - does not work and in 6-12 months most banks (the major four and the a good part of the remaining regional banks) all look like clearly insolvent you can then take them all over, wipe out common shareholders and preferred shareholders and even force unsecured creditors to accept losses ( in the form of a conversion of debt into equity and/or haircut on the face value of their bond claims) as the losses will be so large that not treating such unsecured creditors would be fiscally too expensive.
So, the current strategy – Plan A - may not work and the Plan B (or better Plan N for nationalization) may end up the way to go later this year. Wasting another 6-12 months to do the right thing may be a mistake but the political constrains facing the new administration – and the remaining small probability that the current strategy may by some miracle or luck work – suggest that Plan A should be first exhausted before there is a move to Plan N. Wasting another 6-12 months may risk turning a U-shaped recession into an L-shaped near depression but currently Plan N is not yet politically feasible.
http://www.nakedcapitalism.com/2009/02/geithner-bank-bailout-plan-fiasco.html
and here:
http://www.calculatedriskblog.com/2009/02/obama-on-nationalization.html
From Roubini:
[W]hy is the US government temporizing and avoiding doing the right thing, i.e. take over the insolvent banks? There are two reasons. First, there is still some small hope and a small probability that the economy will recover sooner than expected, that expected credit losses will be smaller than expected and that the current approach of recapping the banks and somehow working out the bad assets will work in due time. Second, taking over the banks – call is nationalization or, in a more politically correct way, “receivership” – is a radical action that requires most banks be clearly beyond pale and insolvent to be undertaken. Today Citi and Bank of America clearly look like near-insolvent and ready to be taken over but JPMorgan and Wells Fargo do not yet. But with the sharp rise in delinquencies and charge-off rates that we are experiencing now on mortgages, commercial real estate and consumer credit in a matter of six to twelve months even JPMorgan and Wells will likely look as near-insolvent (as suggested by Chris Whalen, one of the leading independent analysts of the banking system).
Thus, if the government were to take over only Citi and Bank of America today (and wipe out common and preferred shareholders and also force unsecured creditors to take a haircut) a panic may ensue ... Instead if, as likely, the current fudging strategy - of temporizing and hoping that things will improve for the economy and the banks - does not work and in 6-12 months most banks (the major four and the a good part of the remaining regional banks) all look like clearly insolvent you can then take them all over, wipe out common shareholders and preferred shareholders and even force unsecured creditors to accept losses ( in the form of a conversion of debt into equity and/or haircut on the face value of their bond claims) as the losses will be so large that not treating such unsecured creditors would be fiscally too expensive.
So, the current strategy – Plan A - may not work and the Plan B (or better Plan N for nationalization) may end up the way to go later this year. Wasting another 6-12 months to do the right thing may be a mistake but the political constrains facing the new administration – and the remaining small probability that the current strategy may by some miracle or luck work – suggest that Plan A should be first exhausted before there is a move to Plan N. Wasting another 6-12 months may risk turning a U-shaped recession into an L-shaped near depression but currently Plan N is not yet politically feasible.
4 bear markets
Here is an interesting graph of the four worst bear markets in the US since the Great Depression. Interesting to me is that we keep hearing how our current situation is similar in magnitude (if not worse which it may be) than the Great Depression. That lends me to believe that we will follow the path of the DOW in the early 30's and it will go down quite a bit more (regardless of what Obama, Congress, Geithner, and Bernarke do).
http://www.calculatedriskblog.com/2009/02/cliff-diving-us-stocks.html
Apparently the market wasn't too thrilled with Geithner's bail-out "plan" which, of course, has no details in it.
http://www.calculatedriskblog.com/2009/02/cliff-diving-us-stocks.html
Apparently the market wasn't too thrilled with Geithner's bail-out "plan" which, of course, has no details in it.
Sunday, February 8, 2009
Credit money versus fiat money
The long post below is an excellent essay on a different way to look at our economy. It isn't really based on fiat currency, it is based on credit money. The banks control it and the Fed doesn't have all that much power. It makes sense to me.
http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html
http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html
Friday, February 6, 2009
Looks like we are heading for Depression
After reading this article,
http://market-ticker.denninger.net/archives/775-Its-A-D,-Not-An-R-Folks.html
it's clear that we are heading into a Depression. There isn't just a supply/demand issue, there are structural issues with today's economy, in the US and the world.
It's a very deep hole we are in and the current solution by the Federal Government is to dig faster. The stimulus package is not - it will be good for growing government but won't do much for the economy.
What's a definition of insanity? Keep doing the same thing over and over and expect a different result. That seems to be what the Federal Government is doing.
The government is not going to be able to print enough money to cover the destruction of fantasy wealth that has been created over the past 20 years. There will be many trillions worldwide (my guess is $50 trillion) that will need to be washed out of the global economy before the world can begin healing again. My guess is that it will take a decade to do so, and we will move farther to the Left and become much more socialistic as well.
When people choose security over freedom the government will easily centralize and expand their power. And this will happen with governments around the world.
Interesting times.
Depressions are a different animal. They come about because of structural problems in the economy, and are always credit-driven.
Credit began as a way for goods producers to get paid for things they needed to make the goods before the goods were made. That sounds circular, and it is. That is, the farmer who has land requires seed, fertilizer, water, sun and labor to produce wheat. Some of those things (labor) he can personally produce in limited quantities, but the rest are either things he must buy or are outside his control (the sun and of course weather - that is, rain.) It is the same for the builder of a television set - he requires plastic, electronic components, electricity to operate his machinery and people to assemble the sets, all of which he must pay for. The farmer with apples to sell must have a way to get them to the store, and he must pay the truck driver to get them there.
Trade credit evolved as a way to provide this short-term financing necessary to take raw materials and turn them into finished goods, or to get finished goods from one place to another. It is referred to as 'self-liquidating' because when the goods are made and sold forward the credit (debt) is retired as a consequence of the sale.
It didn't take long before people realized that credit could be used to finance consumption too. That is, your desire to own a car can be realized through the provision of credit. But this credit doesn't self-liquidate; the car is consumed as you drive it, and when you're done with the car its value is greatly diminished instead of remaining constant or being enhanced. This sort of credit effectively "pulls forward" demand - that is, it allows one to play "Wimpy" and have a hamburger today for which one will pay next Tuesday.
When this sort of financing becomes embedded in an economy there is a very real risk that it will expand almost without limit, based only on the optimism of the people involved. This in turn will create distortions in supply that are irrational and cannot be "worked off" with short layoffs and labor cutbacks.
Automobile demand is a good example. The last few years we've built 14 million cars a year. But our inherent demand to replace destroyed cars (rusted away, crashed, etc) is only 11 million or so. The other three million were "pulled forward" with creative financing - for a while.
We employed hundreds of thousands of people building cars that cannot be sold on a permanent basis. That's a problem.
These distortions cannot happen without active government involvement. Without allowing willfully false statements on 1003s (mortgage documents) you cannot grant $500,000 loans to people who make $8/hour. It simply can't happen, because the inherent risk of default on those loans is so high that absent fraud nobody in their right mind will fund those loans and honest regulators will step in and stop the stupidity before it can get out of hand.
But when these distortions become embedded in the economy as a consequence of government mismanagement, willful blindness and even active complicity in the frauds then you've got a major problem because now laying people off for a few weeks or months won't solve anything. The excess capacity that gets built into the economy is too great and creative destruction has to take place - that is, we must actively destroy that excess capacity to get out of the mess. Worse, since "pull forward" financing has taken place we've got an even bigger problem - the companies that overbuilt wind up bankrupt as they can't service their debt, and the bankers who wrote that credit go under as well.
Thus we need some sort of "systemic reset" to get out of it, lest the spiral become embedded - and the economy experience a Depression.
http://market-ticker.denninger.net/archives/775-Its-A-D,-Not-An-R-Folks.html
it's clear that we are heading into a Depression. There isn't just a supply/demand issue, there are structural issues with today's economy, in the US and the world.
It's a very deep hole we are in and the current solution by the Federal Government is to dig faster. The stimulus package is not - it will be good for growing government but won't do much for the economy.
What's a definition of insanity? Keep doing the same thing over and over and expect a different result. That seems to be what the Federal Government is doing.
The government is not going to be able to print enough money to cover the destruction of fantasy wealth that has been created over the past 20 years. There will be many trillions worldwide (my guess is $50 trillion) that will need to be washed out of the global economy before the world can begin healing again. My guess is that it will take a decade to do so, and we will move farther to the Left and become much more socialistic as well.
When people choose security over freedom the government will easily centralize and expand their power. And this will happen with governments around the world.
Interesting times.
Depressions are a different animal. They come about because of structural problems in the economy, and are always credit-driven.
Credit began as a way for goods producers to get paid for things they needed to make the goods before the goods were made. That sounds circular, and it is. That is, the farmer who has land requires seed, fertilizer, water, sun and labor to produce wheat. Some of those things (labor) he can personally produce in limited quantities, but the rest are either things he must buy or are outside his control (the sun and of course weather - that is, rain.) It is the same for the builder of a television set - he requires plastic, electronic components, electricity to operate his machinery and people to assemble the sets, all of which he must pay for. The farmer with apples to sell must have a way to get them to the store, and he must pay the truck driver to get them there.
Trade credit evolved as a way to provide this short-term financing necessary to take raw materials and turn them into finished goods, or to get finished goods from one place to another. It is referred to as 'self-liquidating' because when the goods are made and sold forward the credit (debt) is retired as a consequence of the sale.
It didn't take long before people realized that credit could be used to finance consumption too. That is, your desire to own a car can be realized through the provision of credit. But this credit doesn't self-liquidate; the car is consumed as you drive it, and when you're done with the car its value is greatly diminished instead of remaining constant or being enhanced. This sort of credit effectively "pulls forward" demand - that is, it allows one to play "Wimpy" and have a hamburger today for which one will pay next Tuesday.
When this sort of financing becomes embedded in an economy there is a very real risk that it will expand almost without limit, based only on the optimism of the people involved. This in turn will create distortions in supply that are irrational and cannot be "worked off" with short layoffs and labor cutbacks.
Automobile demand is a good example. The last few years we've built 14 million cars a year. But our inherent demand to replace destroyed cars (rusted away, crashed, etc) is only 11 million or so. The other three million were "pulled forward" with creative financing - for a while.
We employed hundreds of thousands of people building cars that cannot be sold on a permanent basis. That's a problem.
These distortions cannot happen without active government involvement. Without allowing willfully false statements on 1003s (mortgage documents) you cannot grant $500,000 loans to people who make $8/hour. It simply can't happen, because the inherent risk of default on those loans is so high that absent fraud nobody in their right mind will fund those loans and honest regulators will step in and stop the stupidity before it can get out of hand.
But when these distortions become embedded in the economy as a consequence of government mismanagement, willful blindness and even active complicity in the frauds then you've got a major problem because now laying people off for a few weeks or months won't solve anything. The excess capacity that gets built into the economy is too great and creative destruction has to take place - that is, we must actively destroy that excess capacity to get out of the mess. Worse, since "pull forward" financing has taken place we've got an even bigger problem - the companies that overbuilt wind up bankrupt as they can't service their debt, and the bankers who wrote that credit go under as well.
Thus we need some sort of "systemic reset" to get out of it, lest the spiral become embedded - and the economy experience a Depression.
Tuesday, February 3, 2009
Finance is a utility - not a profit center
I agree with this post from Market Ticker:
http://market-ticker.denninger.net/archives/765-What-Went-Wrong-Corporate-and-Educational.html
........
If I build a jet engine I have a jet engine. It can propel an airplane, and that has value. But when I take that jet engine and turn it into a discounted cash flow and then slice and dice it into tranches and sell it off into the marketplace via my "financial wizards" I am consigned to get less in total than if I just sold the engine outright.
Why? Because nobody works for free, that's why, and the only way I can pretend to get more value this way than via direct sale is when I cheat. That is, when I invent a model that has too-rosy assumptions, either because I have stars in my eyes - or fraud in my heart.
We as Americans must look at the future differently and discard the ways of the past. We must eschew the institutions who refuse to take responsibility for turning out MBAs by the boatload and consign both their graduates and the institutions themselves to the dustbin of history.
These people and these institutions have not advanced our common wealth and weal - they have destroyed it.
Finance is a utility function and we as Americans had better recognize that as the fact that it is. We need financing of some sort; throughout history there has been a means of financing production over short periods of time.
But financial engineering is not and never can be a profit center. It is a profit drain in that for each hand a deal passes through more value is extracted - not added.
All claims to the contrary are fraudulent on their face and must result in criminal penalties and civil disgorgement of every nickel allegedly "earned".
We would not be here were it not for the "financial engineering" that has been fraudulently sold off to the world as a means of "creating value." If we are to return to financial and economic stability instead of a world where "bubble-blowing" is the meme of the day we must eject both the progeny of these "higher education" institutions as well as the institutions themselves who refuse to accept their share of responsibility for the mess they have both fomented and profited from.
http://market-ticker.denninger.net/archives/765-What-Went-Wrong-Corporate-and-Educational.html
........
If I build a jet engine I have a jet engine. It can propel an airplane, and that has value. But when I take that jet engine and turn it into a discounted cash flow and then slice and dice it into tranches and sell it off into the marketplace via my "financial wizards" I am consigned to get less in total than if I just sold the engine outright.
Why? Because nobody works for free, that's why, and the only way I can pretend to get more value this way than via direct sale is when I cheat. That is, when I invent a model that has too-rosy assumptions, either because I have stars in my eyes - or fraud in my heart.
We as Americans must look at the future differently and discard the ways of the past. We must eschew the institutions who refuse to take responsibility for turning out MBAs by the boatload and consign both their graduates and the institutions themselves to the dustbin of history.
These people and these institutions have not advanced our common wealth and weal - they have destroyed it.
Finance is a utility function and we as Americans had better recognize that as the fact that it is. We need financing of some sort; throughout history there has been a means of financing production over short periods of time.
But financial engineering is not and never can be a profit center. It is a profit drain in that for each hand a deal passes through more value is extracted - not added.
All claims to the contrary are fraudulent on their face and must result in criminal penalties and civil disgorgement of every nickel allegedly "earned".
We would not be here were it not for the "financial engineering" that has been fraudulently sold off to the world as a means of "creating value." If we are to return to financial and economic stability instead of a world where "bubble-blowing" is the meme of the day we must eject both the progeny of these "higher education" institutions as well as the institutions themselves who refuse to accept their share of responsibility for the mess they have both fomented and profited from.
Sunday, February 1, 2009
December economic performance - not good
Here are some interesting graphs for the US economy for December 2008:
http://www.calculatedriskblog.com/2009/01/january-economic-summary-in-graphs.html
http://www.calculatedriskblog.com/2009/01/january-economic-summary-in-graphs.html
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