US REPRESENTATIVE RON PAUL HAS PRUDENT THOUGHTS ON HOW TO FIX THE ECONOMY. I AGREE WITH MANY OF THE THINGS HE SAYS. HOWEVER, WE WON'T BE GOING BACK TO THE GOLD STANDARD. IF WE STOPPED PRINTING MONEY, IT WOULD ACHIEVE THE SAME THING.
How a "Very Pessimistic" Ron Paul Would Fix the Economy
Posted Jul 16, 2009 11:20am EDT by Aaron Task in Newsmakers, Recession, Banking
Long a proponent of small government and a staunch opponent of the Federal Reserve system, Paul's main point is that increased spending and higher deficits are not the solution to our problems, but their cause.
"You can take care of people, but never with a deficit, never by expanding the spending," the Texas Republican says in this exclusive video interview, taped in the Capitol Hill Rotunda in Washington D.C. "The more we do to interfere with the correction - the longer it lasts."
Had he been elected, Paul said he would be doing "a lot less" than President Obama and blames Keynesian economics - which advocates increased government borrowing and spending during times of duress -- for our nation's current ills.
While admitting a transition to what he views an "ideal society" won't be quick or simple, Paul's economic prescription includes:
* Allowing bankruptcies to occur vs. rewarding failure with bailouts.
* Stop inflation by dismantling the Fed and returning to the gold standard.
* Encourage savings and liquidate debt.
* Deregulate.
* Give tax credits to those who take care of themselves, or the doctors who provide their care.
* Cut government spending, especially on international endeavors. "We spend hundreds of billions of maintaining our empire around the world. Let's bring that money home," he says.
These recommendations will be familiar to anyone who followed (or supported) Paul's run for the Presidency in 2008. Given all that's transpired in the past year, one suspects he'd be getting a lot more votes if the campaign were happening today.
Thursday, July 16, 2009
Wednesday, July 15, 2009
Bob Rodriguez
ON GURUFOCUS.COM
Robert Rodriguez is the first one among our gurus to report his second quarter portfolio. We have just update his recent stock buys and sells and portfolio. Here we would like to point out some most le moves he had with his portfolio for the second quarter.
Who is Robert Rodriguez?
If you are not familiar with Robert Rodriguez, he is the CEO of FPA Advisors and manager of FPA Capital Fund. During the past 20 years, his fund averaged 12.85%, outperforming S&P500 by more than 5% a year.
Robert Rodriguez uses absolute value screen to pick stocks for his portfolio. When he cannot find stocks, he is willing to park funds in cash. This was proved in the years of 2007 and 2008, while he froze buying and had more than 50% of money in cash.
As a bottom up investor, Robert Rodriguez seems to have good understanding on the overall market valuation and sector allocations. In 2007 he had only 3% of his portfolio in financials, and more than 30% in energy stocks. The indicator he used was the ratio of sector total market cap relative to sector GDP. He said: “Financial service stocks represent nearly 22% of the S&P 500 and 28% of its earnings. If one adds in the financial subsidiaries of GE, GM and others, it is quite easy to get the financial share of the S&P 500’s earnings above 30%. This segment’s profitability is at risk.” (see: Robert Rodriguez's Perspective on Financial Stocks and Sub-Prime Loans )
Here we like to point out that Warren Buffett uses total market cap relative to GNP as the indicator of the overall market valuation. We have developed an Broad Market Valuation Indicator, which shows that the market is probably modestly undervalued at current level.
He wrote in 2006: “the financial-services sector currently represents over 22% of the S&P 500. After nearly 25 years of interest-rate declines and the explosion in financial derivatives and questionable lending practices, we prefer to be invested in energy rather than in financial services.” This has helped Robert Rodriguez avoided the loss in financial stocks.
Energy is by far the most weighted sector
As Robert Rodriguez discussed many times in his shareholder letters and speeches, he is very bullish with energy sector and heavily weighted in energy stocks. Since 2005, he has had energy as his largest holding, and his fund had a terrific run with the energy stocks. This is a recap of what he wrote about energy stocks over the past few years.
Experiences With Energy Stocks in 1979, Reduced Exposure From Over 40% to 3%
Robert Rodriguez: We remain very optimistic toward the outlook for energy prices. Before discussing why, I would like to take you back many years into an earlier part of my career. It was 1979, the Iran/Iraq war was taking place and oil was approaching $40 per barrel. There were many “experts” who were calling for $100-per-barrel oil within ten years. I had the good fortune to participate in a high-level corporate meeting at a former employer, where the longterm outlook for energy prices was discussed. At the conclusion of that meeting, the firm’s senior energy analyst concluded that oil would likely be at $80 in ten years. I asked a simple question as to what might be the effects of this forecast on our life, property and casualty, and consumer finance operations, should he be correct. At the end of this discussion, it was estimated that nearly 90% of the company’s operations would probably be bankrupt before we even reached the ten-year mark. My associate and I walked out of that meeting and began selling our energy holdings the following day since, if our company experienced this bankruptcy scenario, this outcome would have serious negative implications for the economy. Over the next two years, we reduced our investment exposure from over 40% to nearly 3%, just before I left the company. I revisit this period because, during this discussion, supporting documentation was presented that indicated oil production would not peak for at least another 25 to 50 years. I never forgot that chart.
After Almost 20 Years, Robert Rodriguez Revisited Energy Stocks and Bought First Energy Stock Since 1981
Robert Rodriguez: In 1997, I began pondering how the long-term outlook for oil consumption and oil prices may have changed since that fateful meeting nearly 18 years earlier. One would think that, after all this time, energy companies and investors should have a better understanding of the situation. It appears that this was generally not the case, since oil prices and share prices were low and heading lower. In thinking about this, I began to realize that, fundamentally, nothing had really changed, in that no major new fields had been discovered and that consumption had continued to grow. At the beginning of 1998, my associate, Dennis Bryan and I, began a search for an energy analyst. We were very fortunate to have found and hired Rikard Ekstrand. He joined us at the beginning of 1999 and our first energy investment entered the portfolio two months later. This was my first investment in energy since 1981. The point in reviewing this is that we consider energy to be a strategic investment area for us. We expect it to be a large percentage of your Fund for many, many years to come and, therefore, we tend to look through the short-term price variations of our holdings. If share prices rise too rapidly, we may trim a portion of our holdings, but if they decline, we will add to them, aggressively.
Why We Are So Positive About Energy Stocks
Robert Rodriguez: Why are we so positive? Despite the price runup in energy stocks during the past five years, this sector represents barely 10% of the S&P 500. This is up from a low of approximately 5%, but it is down from the 1979 peak of over 30%. Notice that the energy sector topped out at a level that was very close to where the technology sector peaked in 2000. Though it has been a strong performer these past five years, its significance, as a percentage of the major averages, is still substantially less than other periods when a sector has become “the” sector to own.
Oil Prices in the Past Century
Robert Rodriguez: When I entered the investment industry in 1971, worldwide oil consumption was approximately 45 million barrels per day versus 84 million today. The last major oil fields to be discovered were in 1968 at Prudhoe Bay , Alaska and the Shaybah offshore field in Saudi Arabia . We are on the verge of doubling consumption and yet, there have been no other major fields discovered. In the case of the Shaybah field, production began in 1998, so this has helped Saudi Arabia to maintain its daily production. After nearly forty years of searching, with the most advanced technology available and no major fields to show for it, does this not raise a question as to the likelihood of a continuation of low-cost energy prices? Between 1933 and 1970, the price per barrel of oil increased at approximately a 10% compound growth rate, from 10 cents to $3.39. With huge oil discoveries in the 1930s, 40s and 60s, oil prices were low and controlled by the U.S. For many of these years, the price was maintained between $1 and $2 per barrel. With the peak in U.S. oil production in 1970, the world entered a new era. Between 1970 and 2006, oil prices have grown at about an 8.6% annual rate. Much of this rise has occurred in short time periods. As demand grew into the available supply, oil prices began to escalate. For the entire 73-year period, oil prices have grown at approximately a 9.3% annual rate. Given that there have been no major oil discoveries since the late 1960s, this raises the question of what might the rate of growth be in oil prices going forward. If we are to be conservative, possibly a 5% growth rate might be appropriate. This would be a little more than half the rate of growth for the last 73 years. If this were to occur, a barrel of oil would cost approximately $100 in ten years. For consumers not to experience an increase in their energy spending as a percentage of total spending, either their incomes have to grow in line with energy prices or they will have to reduce their energy use. Either way, this could affect the nature and growth of the economy considerably.
World Oil Production May Have Reached Its Peak
Robert Rodriguez: In the case of supply, within the next five years, three countries may reach a peak in oil production: Mexico , China and Russia . Several analysts estimated that Mexican oil production would likely peak around 3.4 million barrels per day and that this event would occur in 2004. Mexico ’s largest oilfield, Cantarell, appears to have peaked and if this is the case, so has Mexican oil production, since six of every ten barrels produced by Mexico comes from this one field. Earlier this year, a 3% decline rate was forecast for Cantarell’s production. This has proved incorrect since it is now estimated that the decline rate is 8%. Obviously, this is likely to be of some concern to Mexico . Should this forecast of peak oil production for these three countries be correct, an additional 35% of non-OPEC oil production will have peaked, and together with the 41% from eleven major countries and others that have experienced a peak in production rates, 76% of non-OPEC oil production might have peaked by 2012. If this occurs, it will give the middle-eastern countries even more clout in the setting of oil prices. This is not a pleasant thought.
As for the possibility of Saudi Arabia and OPEC riding to the rescue, there is a major debate occurring within energy circles as to whether they will be able meet rising oil demand. Saudi Arabia says that they will have no problem meeting incremental oil demand for years to come. They estimate that they have over 250 billion barrels of reserves. This estimate has not changed since 1988, despite their producing over 3 billion barrels per year for nearly twenty years. Saudi Aramco, the Saudi state oil company, has acknowledged that its gross depletion rate is now approaching eight percent. If true, Saudi Arabia needs to bring on 800,000 barrels per day of new oil production each year to offset declines in existing fields. Several OPEC nations appear to have already peaked in their production capabilities. We wonder whether the margin of safety is as great as what Saudi Arabia would have us believe. The last independent audit of their reserves was done nearly thirty years ago and at that time, their reserves were estimated to be 110 billion barrels. It does raise a question.
The Energy Sector Will Remain a Strategic Investment Area for Us
We view the energy sector as both a store of value and a hedge against a future inflation. It is one of the few sectors where we believe the underlying fundamentals will continue to improve despite the worldwide economic contraction. With worldwide oil depletion rates of 9% annually for those fields past peak and U.S. natural gas first-year production decline rates of between 30% and 50%, these trends should be supportive of energy prices longer term.
Again, within three to five years, we believe oil prices will be back above $100 or even higher than $150 per barrel. Our recent asset deployments reflect our typical strategy of being “out of step” with the general consensus, especially with an energy exposure that is nearly 50% of all of our equity holdings.
We deployed more capital than at any other period in the last 25 years, late last year and early this year, with 67% directed into energy stocks. This added to FPA Capital Fund’s hefty energy exposure that existed prior to the market collapse. Over 50% of the Fund’s equity investments are currently in energy.
The Worry on National Debt and Inflation
I estimate that by the close of 2011, Treasury debt outstanding will be between $14.6 and $16.6 trillion and that the U.S. debt to GDP ratio will rise to between 97% and 110%. By comparison, the highest ratio ever attained was 121% at the end of WW2. Furthermore, my estimates do not include entitlement liabilities or the effective guarantee of trillions of dollars of Fannie Mae and Freddie Mac obligations. Treasury debt service will likely rise by 50% to 100% above the present $450 billion rate and this is with interest rate levels near record lows. A critical question is, “How do we finance all this debt?” Assuming consumers save an additional $650 billion in 2009, we will still be more dependent on foreign sources of financing. Should foreign investors retain their present amount of Treasury debt ownership and then let it increase proportionally to our debt growth this year, additional purchases between $719 and $862 billion are required versus last year’s $724 billion. This appears doubtful, given the deterioration in their domestic economies along with rapidly declining exports. To make up the difference, the Fed will be forced to print an additional $800 billion to $1.5 trillion of new money to buy these bonds. Unless Americans increase their personal savings per my estimates and foreign investors boost their Treasury ownership by 39% to 57% between 2009 and 2011, the Fed could be forced to print additional money. This possibility may unnerve some of our trading partners, particularly the Chinese and the oil exporting countries.
Robert Rodriguez is the first one among our gurus to report his second quarter portfolio. We have just update his recent stock buys and sells and portfolio. Here we would like to point out some most le moves he had with his portfolio for the second quarter.
Who is Robert Rodriguez?
If you are not familiar with Robert Rodriguez, he is the CEO of FPA Advisors and manager of FPA Capital Fund. During the past 20 years, his fund averaged 12.85%, outperforming S&P500 by more than 5% a year.
Robert Rodriguez uses absolute value screen to pick stocks for his portfolio. When he cannot find stocks, he is willing to park funds in cash. This was proved in the years of 2007 and 2008, while he froze buying and had more than 50% of money in cash.
As a bottom up investor, Robert Rodriguez seems to have good understanding on the overall market valuation and sector allocations. In 2007 he had only 3% of his portfolio in financials, and more than 30% in energy stocks. The indicator he used was the ratio of sector total market cap relative to sector GDP. He said: “Financial service stocks represent nearly 22% of the S&P 500 and 28% of its earnings. If one adds in the financial subsidiaries of GE, GM and others, it is quite easy to get the financial share of the S&P 500’s earnings above 30%. This segment’s profitability is at risk.” (see: Robert Rodriguez's Perspective on Financial Stocks and Sub-Prime Loans )
Here we like to point out that Warren Buffett uses total market cap relative to GNP as the indicator of the overall market valuation. We have developed an Broad Market Valuation Indicator, which shows that the market is probably modestly undervalued at current level.
He wrote in 2006: “the financial-services sector currently represents over 22% of the S&P 500. After nearly 25 years of interest-rate declines and the explosion in financial derivatives and questionable lending practices, we prefer to be invested in energy rather than in financial services.” This has helped Robert Rodriguez avoided the loss in financial stocks.
Energy is by far the most weighted sector
As Robert Rodriguez discussed many times in his shareholder letters and speeches, he is very bullish with energy sector and heavily weighted in energy stocks. Since 2005, he has had energy as his largest holding, and his fund had a terrific run with the energy stocks. This is a recap of what he wrote about energy stocks over the past few years.
Experiences With Energy Stocks in 1979, Reduced Exposure From Over 40% to 3%
Robert Rodriguez: We remain very optimistic toward the outlook for energy prices. Before discussing why, I would like to take you back many years into an earlier part of my career. It was 1979, the Iran/Iraq war was taking place and oil was approaching $40 per barrel. There were many “experts” who were calling for $100-per-barrel oil within ten years. I had the good fortune to participate in a high-level corporate meeting at a former employer, where the longterm outlook for energy prices was discussed. At the conclusion of that meeting, the firm’s senior energy analyst concluded that oil would likely be at $80 in ten years. I asked a simple question as to what might be the effects of this forecast on our life, property and casualty, and consumer finance operations, should he be correct. At the end of this discussion, it was estimated that nearly 90% of the company’s operations would probably be bankrupt before we even reached the ten-year mark. My associate and I walked out of that meeting and began selling our energy holdings the following day since, if our company experienced this bankruptcy scenario, this outcome would have serious negative implications for the economy. Over the next two years, we reduced our investment exposure from over 40% to nearly 3%, just before I left the company. I revisit this period because, during this discussion, supporting documentation was presented that indicated oil production would not peak for at least another 25 to 50 years. I never forgot that chart.
After Almost 20 Years, Robert Rodriguez Revisited Energy Stocks and Bought First Energy Stock Since 1981
Robert Rodriguez: In 1997, I began pondering how the long-term outlook for oil consumption and oil prices may have changed since that fateful meeting nearly 18 years earlier. One would think that, after all this time, energy companies and investors should have a better understanding of the situation. It appears that this was generally not the case, since oil prices and share prices were low and heading lower. In thinking about this, I began to realize that, fundamentally, nothing had really changed, in that no major new fields had been discovered and that consumption had continued to grow. At the beginning of 1998, my associate, Dennis Bryan and I, began a search for an energy analyst. We were very fortunate to have found and hired Rikard Ekstrand. He joined us at the beginning of 1999 and our first energy investment entered the portfolio two months later. This was my first investment in energy since 1981. The point in reviewing this is that we consider energy to be a strategic investment area for us. We expect it to be a large percentage of your Fund for many, many years to come and, therefore, we tend to look through the short-term price variations of our holdings. If share prices rise too rapidly, we may trim a portion of our holdings, but if they decline, we will add to them, aggressively.
Why We Are So Positive About Energy Stocks
Robert Rodriguez: Why are we so positive? Despite the price runup in energy stocks during the past five years, this sector represents barely 10% of the S&P 500. This is up from a low of approximately 5%, but it is down from the 1979 peak of over 30%. Notice that the energy sector topped out at a level that was very close to where the technology sector peaked in 2000. Though it has been a strong performer these past five years, its significance, as a percentage of the major averages, is still substantially less than other periods when a sector has become “the” sector to own.
Oil Prices in the Past Century
Robert Rodriguez: When I entered the investment industry in 1971, worldwide oil consumption was approximately 45 million barrels per day versus 84 million today. The last major oil fields to be discovered were in 1968 at Prudhoe Bay , Alaska and the Shaybah offshore field in Saudi Arabia . We are on the verge of doubling consumption and yet, there have been no other major fields discovered. In the case of the Shaybah field, production began in 1998, so this has helped Saudi Arabia to maintain its daily production. After nearly forty years of searching, with the most advanced technology available and no major fields to show for it, does this not raise a question as to the likelihood of a continuation of low-cost energy prices? Between 1933 and 1970, the price per barrel of oil increased at approximately a 10% compound growth rate, from 10 cents to $3.39. With huge oil discoveries in the 1930s, 40s and 60s, oil prices were low and controlled by the U.S. For many of these years, the price was maintained between $1 and $2 per barrel. With the peak in U.S. oil production in 1970, the world entered a new era. Between 1970 and 2006, oil prices have grown at about an 8.6% annual rate. Much of this rise has occurred in short time periods. As demand grew into the available supply, oil prices began to escalate. For the entire 73-year period, oil prices have grown at approximately a 9.3% annual rate. Given that there have been no major oil discoveries since the late 1960s, this raises the question of what might the rate of growth be in oil prices going forward. If we are to be conservative, possibly a 5% growth rate might be appropriate. This would be a little more than half the rate of growth for the last 73 years. If this were to occur, a barrel of oil would cost approximately $100 in ten years. For consumers not to experience an increase in their energy spending as a percentage of total spending, either their incomes have to grow in line with energy prices or they will have to reduce their energy use. Either way, this could affect the nature and growth of the economy considerably.
World Oil Production May Have Reached Its Peak
Robert Rodriguez: In the case of supply, within the next five years, three countries may reach a peak in oil production: Mexico , China and Russia . Several analysts estimated that Mexican oil production would likely peak around 3.4 million barrels per day and that this event would occur in 2004. Mexico ’s largest oilfield, Cantarell, appears to have peaked and if this is the case, so has Mexican oil production, since six of every ten barrels produced by Mexico comes from this one field. Earlier this year, a 3% decline rate was forecast for Cantarell’s production. This has proved incorrect since it is now estimated that the decline rate is 8%. Obviously, this is likely to be of some concern to Mexico . Should this forecast of peak oil production for these three countries be correct, an additional 35% of non-OPEC oil production will have peaked, and together with the 41% from eleven major countries and others that have experienced a peak in production rates, 76% of non-OPEC oil production might have peaked by 2012. If this occurs, it will give the middle-eastern countries even more clout in the setting of oil prices. This is not a pleasant thought.
As for the possibility of Saudi Arabia and OPEC riding to the rescue, there is a major debate occurring within energy circles as to whether they will be able meet rising oil demand. Saudi Arabia says that they will have no problem meeting incremental oil demand for years to come. They estimate that they have over 250 billion barrels of reserves. This estimate has not changed since 1988, despite their producing over 3 billion barrels per year for nearly twenty years. Saudi Aramco, the Saudi state oil company, has acknowledged that its gross depletion rate is now approaching eight percent. If true, Saudi Arabia needs to bring on 800,000 barrels per day of new oil production each year to offset declines in existing fields. Several OPEC nations appear to have already peaked in their production capabilities. We wonder whether the margin of safety is as great as what Saudi Arabia would have us believe. The last independent audit of their reserves was done nearly thirty years ago and at that time, their reserves were estimated to be 110 billion barrels. It does raise a question.
The Energy Sector Will Remain a Strategic Investment Area for Us
We view the energy sector as both a store of value and a hedge against a future inflation. It is one of the few sectors where we believe the underlying fundamentals will continue to improve despite the worldwide economic contraction. With worldwide oil depletion rates of 9% annually for those fields past peak and U.S. natural gas first-year production decline rates of between 30% and 50%, these trends should be supportive of energy prices longer term.
Again, within three to five years, we believe oil prices will be back above $100 or even higher than $150 per barrel. Our recent asset deployments reflect our typical strategy of being “out of step” with the general consensus, especially with an energy exposure that is nearly 50% of all of our equity holdings.
We deployed more capital than at any other period in the last 25 years, late last year and early this year, with 67% directed into energy stocks. This added to FPA Capital Fund’s hefty energy exposure that existed prior to the market collapse. Over 50% of the Fund’s equity investments are currently in energy.
The Worry on National Debt and Inflation
I estimate that by the close of 2011, Treasury debt outstanding will be between $14.6 and $16.6 trillion and that the U.S. debt to GDP ratio will rise to between 97% and 110%. By comparison, the highest ratio ever attained was 121% at the end of WW2. Furthermore, my estimates do not include entitlement liabilities or the effective guarantee of trillions of dollars of Fannie Mae and Freddie Mac obligations. Treasury debt service will likely rise by 50% to 100% above the present $450 billion rate and this is with interest rate levels near record lows. A critical question is, “How do we finance all this debt?” Assuming consumers save an additional $650 billion in 2009, we will still be more dependent on foreign sources of financing. Should foreign investors retain their present amount of Treasury debt ownership and then let it increase proportionally to our debt growth this year, additional purchases between $719 and $862 billion are required versus last year’s $724 billion. This appears doubtful, given the deterioration in their domestic economies along with rapidly declining exports. To make up the difference, the Fed will be forced to print an additional $800 billion to $1.5 trillion of new money to buy these bonds. Unless Americans increase their personal savings per my estimates and foreign investors boost their Treasury ownership by 39% to 57% between 2009 and 2011, the Fed could be forced to print additional money. This possibility may unnerve some of our trading partners, particularly the Chinese and the oil exporting countries.
Monday, July 6, 2009
BAD NEWS FOR HIGH END REAL ESTATE
THIS IS THE NEWS THAT I'VE BEEN WAITING FOR. THEY SAID THAT REAL ESTATE WOULDN'T DROP IN SANTA MONICA (WHERE I LIVE). BOY, WERE THEY WRONG.
Has the housing market scraped bottom? Not in some of the wealthier neighborhoods--places like New York City's Greenwich Village, Santa Monica, Calif. and Chicago's Lincoln Park. They held up nicely while the rest of the country slumped last year. This year such Tiffany zip codes are on track to fall 15% to 25%.
Why haven't you heard about this? Statistics lag. With relatively low unemployment, high-end addresses don't have foreclosures to hasten capitulation. If they've attracted luxury high-rise developers, these markets may be propped up by recent condo closings at foolish prices agreed to two years ago. But talk to experts who know the regions block by block--or to people who've sold (or tried to sell) a home or co-op. There is a still-growing supply of wildly overpriced, unsold homes--60,000 U.S. properties priced above $2 million listed on Realtor.com. Experts get these gloomy vibes by dividing inventory by the current monthly rate of purchases. "Any result over seven months generally means falling prices," says David Stiff, chief economist at Fiserv ( FISV - news - people ) in Brookfield, Wis. In some tony neighborhoods the level of glut is higher than the national average of ten months.
Unsold inventories in Manhattan are at their highest levels in a decade. You can't tell by looking at data about its condo market. According to Radar Logic, which generates national realty info from its New York City office, condo values fell only 4% last year--far less than the 12% drop for the city as a whole. It's been held aloft by new-construction condo sales above the $1,200-per-square-foot level, says Radar Logic founder Michael Feder, reflecting deals struck a year or two ago. Once they pass through the system, the average price of a condo will plummet to $900 a square foot, reckons Feder.
In addition to the 10,500 properties already listed, there are another 9,500 in the wings, estimates Manhattan appraiser Jonathan Miller. Some 2,500 of these shadow listings belong to sellers who have some flexibility to keep their listings off the market in hopes of better pricing. Developers hold the rest. Both groups are likely to rush their listings onto the market once it's clear prices are falling. Some folks can't wait. Françoise Pourcel, 62, listed her 2,100-square-foot Tribeca loft last August at $3.5 million, in line with the sale price of a similar unit on a lower floor of her building. In June she accepted a bid for $2.5 million.
Condo prices in Manhattan would have to fall 50% to return to values relative to rents they had in 1999, a relatively sane year in real estate. A condo owner could then lease his home and garner net rental income (rent minus property taxes, insurance and fix-up costs) equal to about 7% of the property's fair market value. The current yield is around 3.3%. Far too low.
It's a similar story in Lincoln Park, where single-family home prices slipped only 2.2% last year, far less than in the rest of Chicago. But inventory has since tripled. Wagner Appraisal Group figures there's a 16-month supply. A year ago "I was almost cocky about our position compared to the rest of the market," says Jennifer Ames. No longer. After 11 months of lowering the $2.1 million asking price on her 3,400-square-foot house, Ames sold it in June for $1.6 million.
Given the glut of unsold homes, Lincoln Park's prices may well slide at least 15% this year--as Chicago's did in 2008. If you look at Fiserv data going back many years, you find values in Lincoln Park track the rest of Chicago pretty closely with a one-year lag.
In Santa Monica's coveted "north of Montana" area overlooking the Pacific, listings are up 60% since last year and the number of days on the market for those listings has doubled to 140. Homes once sold in as little as a week here. Closer to Main Street, Bill H. Meyers has struggled for more than a year to sell his condo. In April 2008 L.A. was hurting, but Santa Monica values hovered around their peaks. So Meyers tried to unload his property for $850,000, roughly in line with what another unit in his building sold for. He turned down bids near $800,000 after he found a renter at $3,500 a month.
Now that his tenant is gone, Meyers hasn't found a replacement at that price, and getting another $800,000 bid is impossible. The data still say Santa Monica is stronger than other nearby markets. It's just 14% off peak prices, versus Los Angeles, down 38%. But the beach city's inventory of unsold homes has just crossed the 15-month level, as high as Los Angeles' were last year. By that grim logic, Santa Monica's values are likely to tumble as far as those in Los Angeles did last year, 27%.
Like Meyers, anyone who can afford to will hang on as long as possible, banking on the faith, he says, that "the market is going to come back." Meantime, excess supply is piling up.
States of Collapse?
Last year the housing crash spared some of the nation's fanciest enclaves. But mounting inventories suggest they may drop as much this year as their metros did in 2008.
-------------------
Has the housing market scraped bottom? Not in some of the wealthier neighborhoods--places like New York City's Greenwich Village, Santa Monica, Calif. and Chicago's Lincoln Park. They held up nicely while the rest of the country slumped last year. This year such Tiffany zip codes are on track to fall 15% to 25%.
Why haven't you heard about this? Statistics lag. With relatively low unemployment, high-end addresses don't have foreclosures to hasten capitulation. If they've attracted luxury high-rise developers, these markets may be propped up by recent condo closings at foolish prices agreed to two years ago. But talk to experts who know the regions block by block--or to people who've sold (or tried to sell) a home or co-op. There is a still-growing supply of wildly overpriced, unsold homes--60,000 U.S. properties priced above $2 million listed on Realtor.com. Experts get these gloomy vibes by dividing inventory by the current monthly rate of purchases. "Any result over seven months generally means falling prices," says David Stiff, chief economist at Fiserv ( FISV - news - people ) in Brookfield, Wis. In some tony neighborhoods the level of glut is higher than the national average of ten months.
Unsold inventories in Manhattan are at their highest levels in a decade. You can't tell by looking at data about its condo market. According to Radar Logic, which generates national realty info from its New York City office, condo values fell only 4% last year--far less than the 12% drop for the city as a whole. It's been held aloft by new-construction condo sales above the $1,200-per-square-foot level, says Radar Logic founder Michael Feder, reflecting deals struck a year or two ago. Once they pass through the system, the average price of a condo will plummet to $900 a square foot, reckons Feder.
In addition to the 10,500 properties already listed, there are another 9,500 in the wings, estimates Manhattan appraiser Jonathan Miller. Some 2,500 of these shadow listings belong to sellers who have some flexibility to keep their listings off the market in hopes of better pricing. Developers hold the rest. Both groups are likely to rush their listings onto the market once it's clear prices are falling. Some folks can't wait. Françoise Pourcel, 62, listed her 2,100-square-foot Tribeca loft last August at $3.5 million, in line with the sale price of a similar unit on a lower floor of her building. In June she accepted a bid for $2.5 million.
Condo prices in Manhattan would have to fall 50% to return to values relative to rents they had in 1999, a relatively sane year in real estate. A condo owner could then lease his home and garner net rental income (rent minus property taxes, insurance and fix-up costs) equal to about 7% of the property's fair market value. The current yield is around 3.3%. Far too low.
It's a similar story in Lincoln Park, where single-family home prices slipped only 2.2% last year, far less than in the rest of Chicago. But inventory has since tripled. Wagner Appraisal Group figures there's a 16-month supply. A year ago "I was almost cocky about our position compared to the rest of the market," says Jennifer Ames. No longer. After 11 months of lowering the $2.1 million asking price on her 3,400-square-foot house, Ames sold it in June for $1.6 million.
Given the glut of unsold homes, Lincoln Park's prices may well slide at least 15% this year--as Chicago's did in 2008. If you look at Fiserv data going back many years, you find values in Lincoln Park track the rest of Chicago pretty closely with a one-year lag.
In Santa Monica's coveted "north of Montana" area overlooking the Pacific, listings are up 60% since last year and the number of days on the market for those listings has doubled to 140. Homes once sold in as little as a week here. Closer to Main Street, Bill H. Meyers has struggled for more than a year to sell his condo. In April 2008 L.A. was hurting, but Santa Monica values hovered around their peaks. So Meyers tried to unload his property for $850,000, roughly in line with what another unit in his building sold for. He turned down bids near $800,000 after he found a renter at $3,500 a month.
Now that his tenant is gone, Meyers hasn't found a replacement at that price, and getting another $800,000 bid is impossible. The data still say Santa Monica is stronger than other nearby markets. It's just 14% off peak prices, versus Los Angeles, down 38%. But the beach city's inventory of unsold homes has just crossed the 15-month level, as high as Los Angeles' were last year. By that grim logic, Santa Monica's values are likely to tumble as far as those in Los Angeles did last year, 27%.
Like Meyers, anyone who can afford to will hang on as long as possible, banking on the faith, he says, that "the market is going to come back." Meantime, excess supply is piling up.
States of Collapse?
Last year the housing crash spared some of the nation's fanciest enclaves. But mounting inventories suggest they may drop as much this year as their metros did in 2008.
-------------------
Thursday, June 18, 2009
Debt Monetization
What is Debt Monetization? When is it Automatic? Is it a Risk?
What is debt monetization and how does it work? How can constant interest rate rules make debt monetization automatic? Why is this a worry and how does it relate to the choice of a new Fed chair?
What it is and how it works
1. Suppose the government runs a deficit. As an example, let government spending on goods and services be $10,000. For simplicity, all transactions are in cash. Let net taxes from all sources be $9,000 so there is a $1,000 deficit.
2. The government has $9,000 in cash from taxes, but needs to spend $10,000. Somehow (print money, borrow money, raise taxes, or lower spending) it must get $1,000 more.
3. Suppose it decides to borrow – issue new debt. Then the Treasury sells a government bond to someone in the private sector for $1,000. The person gives $1,000 in cash to the government and in return gets an IOU (perhaps for, say, $1,100 in one year).
4. The government now has $9,000 in cash from taxes and $1,000 it has borrowed from the public so it can now purchase $10,000 in goods and services.
5. Now let’s do the monetization step. This can happen automatically, as explained below, but for now let’s have the Fed conduct a $1,000 open market operation to increase the money supply. To do this, it cranks up the press, loads in some paper and green ink, and prints a brand new $1,000 bill. It takes the $1,000 bill and purchases a bond from the public, for simplicity make it the same bond the Treasury just issued. Then the money supply goes up by $1,000 (and may go up more through multiple deposit expansion) and government debt in the hands of the public goes down by $1,000 since the Fed now holds the bond. The increase in the money supply is inflationary.
6. What has happened? When all paper has ceased changing hands, the $10,000 in goods and services is paid for by the collection $9,000 in taxes and by printing $1,000 in new currency. The government debt simply moves from the Treasury to the Fed (in the U.S., the Fed pays for its operations from its earnings on these bonds and remits the remainder to the Treasury; I believe the remittance is weekly, but I’m not positive on that).
What is debt monetization and how does it work? How can constant interest rate rules make debt monetization automatic? Why is this a worry and how does it relate to the choice of a new Fed chair?
What it is and how it works
1. Suppose the government runs a deficit. As an example, let government spending on goods and services be $10,000. For simplicity, all transactions are in cash. Let net taxes from all sources be $9,000 so there is a $1,000 deficit.
2. The government has $9,000 in cash from taxes, but needs to spend $10,000. Somehow (print money, borrow money, raise taxes, or lower spending) it must get $1,000 more.
3. Suppose it decides to borrow – issue new debt. Then the Treasury sells a government bond to someone in the private sector for $1,000. The person gives $1,000 in cash to the government and in return gets an IOU (perhaps for, say, $1,100 in one year).
4. The government now has $9,000 in cash from taxes and $1,000 it has borrowed from the public so it can now purchase $10,000 in goods and services.
5. Now let’s do the monetization step. This can happen automatically, as explained below, but for now let’s have the Fed conduct a $1,000 open market operation to increase the money supply. To do this, it cranks up the press, loads in some paper and green ink, and prints a brand new $1,000 bill. It takes the $1,000 bill and purchases a bond from the public, for simplicity make it the same bond the Treasury just issued. Then the money supply goes up by $1,000 (and may go up more through multiple deposit expansion) and government debt in the hands of the public goes down by $1,000 since the Fed now holds the bond. The increase in the money supply is inflationary.
6. What has happened? When all paper has ceased changing hands, the $10,000 in goods and services is paid for by the collection $9,000 in taxes and by printing $1,000 in new currency. The government debt simply moves from the Treasury to the Fed (in the U.S., the Fed pays for its operations from its earnings on these bonds and remits the remainder to the Treasury; I believe the remittance is weekly, but I’m not positive on that).
Thursday, June 11, 2009
Comments from friend in China
THE BELOW COMMENTS ARE FROM A FRIEND IN CHINA WHO WAS RESPONDING TO ONE OF MY EMAILS. I THOUGHT YOU'D FIND IT INTERESTING. THINGS ARE NOT SO GREAT IN CHINA. READ ON....
Spot On Holmes!
I keep hearing the same garbage about Buffett too. The fact of the matter is, the current rally is going to prove very painful for the bulls. On another matter, I am currently studying for my FSA and CFA exams, while living with my Girlfriend's family in Shanghai. Immediately we arrived in Shanghai from London (last week), the economic troubles were obvious, the worry is on everyone's face over here. The Japs are divesting and moving back, the Western firms are cutting jobs (McKinsey, PWC, KPMG, you name it). Local markets have been flooded with goods previously destined for export at 50% discount. If there is a recovery underway here, I certainly cannnot see it. The shopping malls are basically deserted, apart from a few stray Americans. The people here are very smart and cautious, be it on official television or one of the many housewives I have spoken with: they know a crash is coming. As for the talk of reserve currency, I find it very interesting when people begin to check even small bills as the market has been flooded with counterfeits. Makes me pause to think very hard. This is my Third visit to China and it is indeed a wonderful place (as is India), but be sure of one thing: Most people here do not believe a recovery is likely, not in the near future. And if you talk about a V-Shaped recovery you will be laughed out of the tea shops by the housewives.
Best,
Vinay
Spot On Holmes!
I keep hearing the same garbage about Buffett too. The fact of the matter is, the current rally is going to prove very painful for the bulls. On another matter, I am currently studying for my FSA and CFA exams, while living with my Girlfriend's family in Shanghai. Immediately we arrived in Shanghai from London (last week), the economic troubles were obvious, the worry is on everyone's face over here. The Japs are divesting and moving back, the Western firms are cutting jobs (McKinsey, PWC, KPMG, you name it). Local markets have been flooded with goods previously destined for export at 50% discount. If there is a recovery underway here, I certainly cannnot see it. The shopping malls are basically deserted, apart from a few stray Americans. The people here are very smart and cautious, be it on official television or one of the many housewives I have spoken with: they know a crash is coming. As for the talk of reserve currency, I find it very interesting when people begin to check even small bills as the market has been flooded with counterfeits. Makes me pause to think very hard. This is my Third visit to China and it is indeed a wonderful place (as is India), but be sure of one thing: Most people here do not believe a recovery is likely, not in the near future. And if you talk about a V-Shaped recovery you will be laughed out of the tea shops by the housewives.
Best,
Vinay
Tuesday, June 9, 2009
More about Inflation
Jeremy Siegel, Ph.D. The Future for Investors
Inflation, Not Default, Is Risk for Treasury Bonds
by Jeremy Siegel, Ph.D.
The headlines are scary. Standard and Poor's warns that UK gilts (British Treasury bonds) may lose their AAA rating and indicates that U.S. government bonds may also be downgraded. Bill Gross, PIMCO's "bond king," says emphatically that the U.S. will eventually lose its AAA rating.
What does all this mean? Is it possible for the U.S. government to default on its own debt?
Technically, the answer is "no." The government can always print the money to pay its obligations. But from an economic standpoint, the answer is "yes," since printing money causes inflation and pays off bondholders with depreciated dollars.
The Debt Mechanism
All U.S. treasury debt is denominated in dollars, and except for the less than 10 percent that are "inflation-protected bonds," all bonds are promises to pay a specified number of dollars on given dates. Dollars are created when our central bank, the Federal Reserve, either buys securities in the open market or lends to banks against their loans and other assets. Although Congress imposes a ceiling on the debt issued by the federal government, the Federal Reserve has no effective constraints on the amount of money it can create.
It was not always this way this way. Before 1933, the Federal Reserve could only print dollars in proportion to how much gold the government held -- the so-called gold standard. During the Great Depression, one country after another, including the U.S., left the gold standard and moved to a fiat money standard. Under this monetary arrangement, the government decrees by law (fiat) that its money (Federal Reserve notes in the U.S.) is legal tender for all transactions. There is no gold, silver, or other commodity backing the money.
In a fiat money standard, money only retains its worth because the government limits its supply. The government can limit its supply if it has other sources of revenue, such as taxes or borrowings, to cover its expenditures. But if those other sources dry up, the government may effectively borrow from the Fed, and this would result in large increases in money and rapid inflation.
There is much debate among conservatives about whether the government's decision to leave the gold standard was correct. I, like the majority of economists, believe that it was a good move. If we were still on a gold standard, it would not have been possible for the Federal Reserve to back up money market funds and other bank deposits last September when the credit crisis hit. The resulting run on banks and flight to liquidity would have likely sparked a far worse financial crisis than we experienced. But the flexibility of a fiat money standard must be weighted against its bias towards inflation.
Default Under a Fiat Standard
Although under a fiat money standard government money must be accepted as a means of payment, there is no law that says what that money is worth when it is paid. If too many dollars are issued relative to demand, inflation must result. In that case the bondholder gets shortchanged not because of a government default on its bonds but because of the loss of purchasing power of the dollars paid. (Some countries impose price controls in a futile attempt to assure their own currency won't depreciate in value. Except for limited periods during wartime, such controls have always failed.)
There is one type of Treasury bond that could theoretically default, and that is Treasury-Inflation Protected Securities, or TIPS. Since TIPS compensate bondholders for inflation by increasing the coupon payments and final principal payment by the cumulative rise in prices, the bondholder suffers no decline in purchasing power during inflation. In contrast to standard nominal bonds, TIPS cannot be inflated away, and this leaves open the theoretical possibility that the government could not marshal enough resources to pay interest and principal on these bonds. TIPs for the U.S. government are similar to issuing foreign currency bonds. Any attempt to pay them off by increasing the money supply will cause inflation, depreciate the dollar, and increase the government's dollar indebtedness.
Of course, just because the government can always technically fulfill its debt obligations does not mean that it always will. Since a large proportion of U.S. government bonds are owned by foreign investors, the government could decide that it will only default on those bonds owned by foreigners. The Russian government defaulted on its foreign-owned bonds in 1998, while still honoring domestic bonds. But such selective default would be met by wholesale dumping of dollar assets, sending the dollar crashing on international markets. Given the huge volume of goods the U.S. imports, a plunging dollar means inflation would skyrocket and render such a policy counterproductive.
Our Current Situation
Since the credit crisis began, the Federal Reserve has more than doubled the supply of its own money, and government deficits are running into the trillions of dollars. Many believe this will inevitably lead to rapid inflation.
But such a conclusion is premature. The Fed has increased the supply of money in response to the tremendous increase in the demand for such money caused by the liquidity crisis. And government borrowing is just offsetting the sharp increase in consumer saving caused by the declining value of assets and tighter credit.
I believe that the government's current economic response is right. But the government must be on guard. Once confidence returns, the Fed must pull back the money it loaned and the government must bring deficits under control. This will inevitably mean raising interest rates, and the latest increase in long-term treasury rates is a clear signal that the bond market sees this happening soon. If, by the second half of this year, the economy turns around, the Fed will have to start raising the Fed Funds rate and restrict liquidity. Otherwise the government will effectively default on its obligations -- not by missing its payments but by making those payments in a depreciating currency.
Inflation, Not Default, Is Risk for Treasury Bonds
by Jeremy Siegel, Ph.D.
The headlines are scary. Standard and Poor's warns that UK gilts (British Treasury bonds) may lose their AAA rating and indicates that U.S. government bonds may also be downgraded. Bill Gross, PIMCO's "bond king," says emphatically that the U.S. will eventually lose its AAA rating.
What does all this mean? Is it possible for the U.S. government to default on its own debt?
Technically, the answer is "no." The government can always print the money to pay its obligations. But from an economic standpoint, the answer is "yes," since printing money causes inflation and pays off bondholders with depreciated dollars.
The Debt Mechanism
All U.S. treasury debt is denominated in dollars, and except for the less than 10 percent that are "inflation-protected bonds," all bonds are promises to pay a specified number of dollars on given dates. Dollars are created when our central bank, the Federal Reserve, either buys securities in the open market or lends to banks against their loans and other assets. Although Congress imposes a ceiling on the debt issued by the federal government, the Federal Reserve has no effective constraints on the amount of money it can create.
It was not always this way this way. Before 1933, the Federal Reserve could only print dollars in proportion to how much gold the government held -- the so-called gold standard. During the Great Depression, one country after another, including the U.S., left the gold standard and moved to a fiat money standard. Under this monetary arrangement, the government decrees by law (fiat) that its money (Federal Reserve notes in the U.S.) is legal tender for all transactions. There is no gold, silver, or other commodity backing the money.
In a fiat money standard, money only retains its worth because the government limits its supply. The government can limit its supply if it has other sources of revenue, such as taxes or borrowings, to cover its expenditures. But if those other sources dry up, the government may effectively borrow from the Fed, and this would result in large increases in money and rapid inflation.
There is much debate among conservatives about whether the government's decision to leave the gold standard was correct. I, like the majority of economists, believe that it was a good move. If we were still on a gold standard, it would not have been possible for the Federal Reserve to back up money market funds and other bank deposits last September when the credit crisis hit. The resulting run on banks and flight to liquidity would have likely sparked a far worse financial crisis than we experienced. But the flexibility of a fiat money standard must be weighted against its bias towards inflation.
Default Under a Fiat Standard
Although under a fiat money standard government money must be accepted as a means of payment, there is no law that says what that money is worth when it is paid. If too many dollars are issued relative to demand, inflation must result. In that case the bondholder gets shortchanged not because of a government default on its bonds but because of the loss of purchasing power of the dollars paid. (Some countries impose price controls in a futile attempt to assure their own currency won't depreciate in value. Except for limited periods during wartime, such controls have always failed.)
There is one type of Treasury bond that could theoretically default, and that is Treasury-Inflation Protected Securities, or TIPS. Since TIPS compensate bondholders for inflation by increasing the coupon payments and final principal payment by the cumulative rise in prices, the bondholder suffers no decline in purchasing power during inflation. In contrast to standard nominal bonds, TIPS cannot be inflated away, and this leaves open the theoretical possibility that the government could not marshal enough resources to pay interest and principal on these bonds. TIPs for the U.S. government are similar to issuing foreign currency bonds. Any attempt to pay them off by increasing the money supply will cause inflation, depreciate the dollar, and increase the government's dollar indebtedness.
Of course, just because the government can always technically fulfill its debt obligations does not mean that it always will. Since a large proportion of U.S. government bonds are owned by foreign investors, the government could decide that it will only default on those bonds owned by foreigners. The Russian government defaulted on its foreign-owned bonds in 1998, while still honoring domestic bonds. But such selective default would be met by wholesale dumping of dollar assets, sending the dollar crashing on international markets. Given the huge volume of goods the U.S. imports, a plunging dollar means inflation would skyrocket and render such a policy counterproductive.
Our Current Situation
Since the credit crisis began, the Federal Reserve has more than doubled the supply of its own money, and government deficits are running into the trillions of dollars. Many believe this will inevitably lead to rapid inflation.
But such a conclusion is premature. The Fed has increased the supply of money in response to the tremendous increase in the demand for such money caused by the liquidity crisis. And government borrowing is just offsetting the sharp increase in consumer saving caused by the declining value of assets and tighter credit.
I believe that the government's current economic response is right. But the government must be on guard. Once confidence returns, the Fed must pull back the money it loaned and the government must bring deficits under control. This will inevitably mean raising interest rates, and the latest increase in long-term treasury rates is a clear signal that the bond market sees this happening soon. If, by the second half of this year, the economy turns around, the Fed will have to start raising the Fed Funds rate and restrict liquidity. Otherwise the government will effectively default on its obligations -- not by missing its payments but by making those payments in a depreciating currency.
Wednesday, May 27, 2009
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