The Housing Bubble

Good morning HBB!

I didn’t get to read Yesterday’s BB, nor Sunday’s, until early this morning. Thanks to all for the good info.

California moratorium will have little to no effect IMHO. The last one didn’t so why should this one?

PB, you almost sounded for a bit there that you give some credulity to my theory of the Fed buying all the debt. I must admit that I hadn’t even really thought of the plan to crash the markets in order to do the heavy lifting. That certainly maximizes pain for the maximum number of people, which is what the market is designed to do!

oh heck…i still rent and I am the best

After reading this story, I am not sure whether to laugh or cry. Seems that every free-spending, no-planning/no-saving person is being bailed out and us savers are being rewarded with the bill:

By DAVID STREITFELD
Published: June 15, 2009

The banks were bailed out last fall, the automobile companies last winter. For Edward McClelland, a writer in Chicago, deliverance finally arrived a few days ago.

Mr. McClelland’s credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.

It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.

As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

The practice started last fall as the economy worsened. But in recent months, with unemployment topping 9 percent and more people having trouble paying their bills, experts say this approach has risen drastically.

They say many credit card issuers have revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.

“Now it’s the card company calling you and saying, ‘Let’s talk turkey,’ ” said David Robertson, publisher of the credit industry journal The Nilson Report.

I’m no good at posting links, but I read the following article on MSN this morning if you’re interested in searching for it.

This recession is SO fabulous! By Kim Peterson

The comments are hilarious!

Good morning everyone from Afghanistan!

I see housing starts surged 17% and people are asking for building permits. I hope these would be for entry level homes and not multi billion dollar homes. I wonder where these “housing starts” are?

Prepaid College Funds:
My wife and I are big on education. We have “done without” all the useless and costly frills and stupidity so that our children can be well-educated. We acquired this from our families and our own experiences. We brought these values into our marriage. Note: My wife is from a large New Orleans family. She has 5 siblings all of whom possess an undergrad degree and several have advanced degrees.

So, I have been worrying for several years on the health and dependability of the Florida Prepaid College Plan. I cannot really find anything that tells me what my risk is. We have the plan paid off and are currently ready to roll when my two boys are college age. They could attend under this plan right now except that my eldest is 3 years away from graduating high school.

Is the plan healthy? Any info would be appreciated. I realize that there isn’t anything I can do about it anyway, but knowing my risks will certainly help me plan for the future.

Roidy

FWI, you folks are going to have to hold down the blog-fort for a while, I am swamped with foreclosure work and will be checking in as often as possible out in the field.

Is there some sort of Starbucks index? After less then x number of Starbucks, your town is no long viable?

DETROIT — They call this the Motor City, but you have to leave town to buy a Chrysler or a Jeep.

Borders Inc. was founded 40 miles away, but the only one of the chain’s bookstores here closed this month. And Starbucks Corp., famous for saturating U.S. cities with its storefronts, has only four left in this city of 900,000 after closures last summer.

http://online.wsj.com/article/SB124510185111216455.html

I continue to believe that there is a fundamental mismatch between our belief in an economic model of continued growth forever and the world’s dwindling supplies of light, sweet crude.
China has now overtaken the U.S. in terms of units sold per month.
Soon, China will be up to a million units per month. Even if they are mini-cars, that’s a lot of additional fuel that must be obtained. Every month.

812,000 cars sold in May in China

Calif. Aid Request Spurned By U.S.
Officials Push State To Repair Budget.

By David Cho, Brady Dennis and Karl Vick
Washington Post Staff Writers
Tuesday, June 16, 2009

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy — the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching “fiscal meltdown” caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California’s fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

With an economy larger than Canada’s or Brazil’s, the state is too big to fail, California officials urge.

“This matters for the U.S., not just for California,” said U.S. Rep. Zoe Lofgren, who chairs the state’s Democratic congressional delegation. “I can’t speak for the president, but when you’ve got the 8th biggest economy in the world sitting as one of your 50 states, it’s hard to see how the country recovers if that state does not.”

The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state’s recession and further dragging down the national economy.

After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.

These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions.

California is among several states that have asked for a bailout from the Treasury Department. A few have gotten some traction, notably Michigan, whose economy is among the country’s weakest and is struggling to deal with the fallout from the bankruptcies of General Motors and Chrysler. To stave off mass layoffs, Treasury officials are considering helping the state’s auto suppliers stay afloat and convert their businesses to support other industries.

California Controller John Chiang, a Democrat, warned last week that the state was “less than 50 days away from a meltdown of state government.”

While its fiscal crisis is severe, experts say the state is unlikely to default on what it owes, even if it runs out of cash. It can raise money through taxes and other means to assure repayment of its debt. Most likely are massive cuts in public services.

“After June 15th, every day of inaction jeopardizes our state’s solvency and our ability to pay schools and teachers and to keep hospitals and ERs open,” Gov. Arnold Schwarzenegger (R) said Friday.

Problems unique to California have made it hard for the state to find a way out of its crisis.

Best Buy 1Q profit drops 15 percent
Best Buy 1st-quarter profit falls 15 pct over year-earlier period as shoppers cut back.

NEW YORK (AP) — Best Buy Co. Inc. reported Tuesday that its first-quarter profit fell 15 percent, even as its biggest competitor exited the market, as recession-weary shoppers cut back on items like appliances and digital cameras.
The results, however, beat Wall Street expectations, and the nation’s largest consumer electronics seller maintained its annual profit outlook.

Even so, shares fell $1.23, or 3.2 percent, to 37.43 in premarket trading.

Profit was $153 million, or 36 cents per share, in the quarter ended May 30. That compares with $179 million, or 43 cents per share, a year earlier as stimulus checks spurred spending.

Adjusted profit was 42 cents per share. Analysts surveyed by Thomson Reuters expected 34 cents per share.

Revenue rose 12 percent to $10.1 billion as it opened 185 new stores and gained some market share from the shuttered Circuit City Stores. The company said it had gained 2 percentage points of market share in the quarter and that its gains accelerated after the March 8 closing of Circuit City outlets across the U.S.

But clearly Best Buy is facing increasing pressure from Wal-Mart Stores Inc., the world’s largest retailer. Wal-Mart is aggressively expanding into higher-end TV and electronics with names like Sony and Dell to woo those orphan customers.

In fact, Best Buy’s same-store sales fell 6 percent and the stronger dollar hurt overseas results. Same-store sales, or sales at stores open at least a year, are a key measure of a retailer’s health because they measure sales at existing stores rather than newly opened ones.

Best Buy, however, is hoping that its service will help differentiate itself from discounters like Wal-Mart hoping to grab share left by Circuit City.

More debt-related stress and lunatic-tragedy here in Central Florida.
http://www.orlandosentinel.com/orl-bk-four-dead-in-heathrow-murder-suicide-061509,0,7094170.story

“HEATHROW - The family of four killed in an apparent murder-suicide in this gated community was deep in debt and struggled for five years to get out, according to records filed in federal bankruptcy court.

John Dillon Wood, 41, and Cynthia Wood, 40, declared bankruptcy in 2004 and tried for years to pay back money they owed, including more than $100,000 in credit-card bills. As of March, documents show, the Wood family still owed $85,000 to a list of creditors…”

Sorry for the repost from yesterday’s BB - Mikey and Leigh are your areas doing anything similar?

No bubble in Madison, but the city needs to spend money to prevent foreclosures

http://www.cityofmadison.com/news/view.cfm?news_id=1522

Heard on the news this morning (NPR headline story): The housing market may have bottomed out, as evidenced by a DOC report showing a 17 pct increase in housing starts. If so, then why are the builders still so glum?

P.S. I note that the NAR is a major NPR supporter.

Wall Street Journal

* REAL ESTATE
* JUNE 15, 2009, 1:57 P.M. ET

Higher Mortgage Rates Sap Builder Confidence

By JEFF BATER

WASHINGTON — Confidence faltered in June among U.S. home builders, left uneasy by a rise in mortgage rates.

A market sentiment index published monthly by the National Association of Home Builders dipped this month. The gauge reflects builder confidence in sales of new, single-family houses.

The drop in the NAHB’s housing market index reported Monday, to 15 from 16 in May, followed two months of increases that had nurtured hopes of a bottom to the housing crisis. Signs have surfaced this spring indicating the worst of the recession is past.

But mortgage rates have climbed in recent weeks, pushed by rising government bond yields. Investors are concerned about inflation because of increased spending in Washington meant to pull the economy out of recession. Freddie Mac data showed the average on a 30-year mortgage loan was 5.59% last week — 73 basis points higher than the average four weeks earlier of 4.86%, an advance that could hurt demand for houses.

“The housing market continues to bump along trying to find a bottom,” NAHB chief economist David Crowe said.

New-home sales have gone up twice in the latest three-month period. Affordability has gone up with the long, deep slide in prices; there was a 15% drop, year over year, in April alone, the latest data show.

But used homes, driven down sharply in price by a wave of foreclosures, are competing with the new-home market. Layoffs and tight credit have also slowed new-home sales. Inventories of unsold homes are high; the ratio of homes for sale to houses sold in April exceeded 10 months. As a result, home construction fell 13% in April compared to March. Construction year over year was less than half the April 2008 level.

An HMI component that measures current sales conditions held steady at 14. An index gauging traffic of prospective buyers also stayed flat, at 13. An index gauging sales expectations in the next six months slipped to 26 from 27.

“Builders are taking their cue from consumers, who remain uncertain about the economy and their own situation,” Crowe said. “Builders are also finding it difficult to complete a sale because customers cannot sell their existing homes.”
…

“WASHINGTON – Construction of new homes jumped in May by the largest amount in three months, an encouraging sign that the nation’s deep housing recession was beginning to bottom out.

The Commerce Department said Tuesday that construction of new homes and apartments jumped 17.2 percent last month to a seasonally adjusted annual rate of 532,000 units. That was better than the 500,000-unit pace that economists had expected and came after construction fell in April to a record low of 454,000 units.

In another encouraging sign, applications for building permits, seen as a good indicator of future activity, rose 4 percent in May to an annual rate of 518,000 units.

The better-than-expected rebound in construction was the latest sign that the prolonged slump in housing is coming to an end, which would be good news for the broader economy.”

Does anyone else sense the propaganda spin?
Why in the world would adding more housing units to an already overpriced and oversupplied market be good news? Good news for renters only? This will only prolong the size and duration of the deflating bubble.

Financial reporting these days must be done by high schoolers working part-time with lotsa help from Mr. Wizard.

Check out what these gloomsters are saying.

I will add an optmistic note to their dirge of gloomy prognostication: California housing will become increasingly affordable through 2011 or later, laying the foundation for economic recovery, as it will be much easier to attract a vibrant young work force if families can afford to live here.

THE ECONOMY
Budget woes, building drop-off may prolong state’s hardships
Unemployment will reach 12.1% by the end of the year, UCLA economists forecast.

By Alana Semuels
June 16, 2009

Despite some healing in the national economy, California still faces significant difficulty, in part because of the state’s budget woes, economic forecasters at UCLA say.

Unemployment in the state will reach 12.1% by the end of this year and will not return to single digits until late in 2011, economists predicted in the quarterly UCLA Anderson Forecast, which was set to be released today.

“California is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year,” wrote Jerry Nickelsburg, senior economist at the forecast.

Driving California’s difficulties are a shrinking state budget, a disappearing non-residential construction market and sluggishness in housing construction.

Construction jobs, which fell 12% in 2008, are expected to drop more than 15% this year as demand continues to fall for both residential and commercial development. Already, activity has dropped so dramatically in the state that developers are now under-building for the size of California’s population, sowing the seeds of another housing bubble, the report said.

The state’s fiscal woes make the picture bleaker. The budget for the 2009-10 fiscal year will probably lead to program cuts and layoffs on top of spending decreases in last year’s budget.

“California’s state government . . . has no choice but to contract at the worst time,” Nickelsburg wrote.

The cuts don’t affect only government jobs. Some of the program reductions will be in healthcare and education, damaging two sectors that haven’t yet experienced massive job losses in California during this recession.

Bill Watkins, executive director of California Lutheran University’s Center for Economic Research and Forecasting, agreed with the Anderson group that California faces a rougher road than the rest of the nation.

“California’s economy is quite a bit weaker than the U.S. economy, and we don’t expect to see a recovery any time soon,” he said. The state will not come out of recession until the second half of 2011, he predicted.

I am wondering why Gary Watts did not get interviewed for this story?

Sunday, June 14, 2009
The Great Depression in O.C.: Are the hard times back?
Residents and experts compare the 1930s crisis to today.
By EUGENE GARCIA
THE ORANGE COUNTY REGISTER

Have we avoided another Great Depression? Many think the worst has passed. But some long-time Orange County residents are less hopeful. They lived in and around Orange County through the relentless Depression of the 1930s, a period with stark differences and similarities to the current recession. So how do the two crises compare?

“I think it’s worse now — as far as the loss of homes,” said Julie Ireland, 90, of Laguna Beach. During the Depression, the teenager often walked 6 hours a day looking for work.

“I expect this recession to last as long as the Depression,” Ireland said.

According to most economists, the Great Depression began with the stock market crash of 1929, and ended with the start of World War II in 1941. The term depression was then largely dropped as a description for periodic business cycle contractions. Another word was adopted to describe economic slowdowns: recessions.

The green shoots are for real, folks, even if it is unwanted weed:

Hedges of Greenwich Succumb as Weed Invades Hedge Fund Capital

June 16 (Bloomberg) — It isn’t just hedge funds troubling fund capital Greenwich, Connecticut. It’s hedges.

A fast-growing vine known as mile-a-minute weed, or the kudzu of the North, is stalking hedges, shrubs and trees in the town 27 miles (43 kilometers) north of New York City that is home to 60 fund companies. The plant advances as much as 6 inches (15 centimeters) a day and has a grip on National Audubon Society land and other patches, said Denise Savageau, Greenwich’s conservation director.

“Remember ‘Invasion of the Body Snatchers,’” said Tom Baptist, executive director of Audubon Connecticut, who found the creeping interloper at the group’s Gimbel Sanctuary in 1996. “This has a similar science fiction feeling, but it’s the attack of an alien plant. It usually kills what it covers.”

That threatens millions of dollars of damage to Connecticut orchards, farms, gardens and landscaping, said Todd Mervosh, a state weed scientist and member of the Connecticut Invasive Plant Working Group. The state produced $14 million of apples, peaches and pears last year, and $3.8 million of Christmas trees in 2007, according to U.S. Agriculture Department data.

A similar supply-and-demand argument would explain why the current surge in housing starts will only serve to worsen the housing price crash.
It is amazing how much of what happens in the economy can be explained by that supply-and-demand graph with the giant X in it that Economics 1 students all learn to love.

MarketWatch
Irwin Kellner
Jun 16, 2009, 9:58 a.m. EST
The buck drops here
Commentary: Don’t be fooled - the greenback is headed in just one direction

…there are two problems with all this happy talk.

The first is that a stronger dollar makes it more difficult for us to emerge from our recession. Exports from the U.S. cost more to holders of foreign currencies, so they are likely to look for cheaper substitutes elsewhere. By the same token, imports are cheaper, since they come from countries whose currencies are falling against ours.

The combination of slowing exports and rising imports can deal a one-two punch to our key manufacturing sector, thus weakening an important pillar of growth.

And while a strong dollar does hold down inflation, this is apparently not a concern of policymakers right now. (Although I think that it should be — see last week’s column.)

That said, I am not suggesting for one moment that Washington would deliberately weaken the dollar to help get us out of recession. We all know that the government favors a strong dollar. It always does.

But lip service notwithstanding, it is hard for me to imagine that Washington wants a strong dollar so badly it would change monetary policy to try to make this happen.

The Federal Reserve is creating dollars at a rapid pace to help jump-start the economy. Liquid money is up 11% over the past year, the monetary base has increased by 110%, while bank reserves are a thumping 903% larger than they were a year ago.

With this much money being created, the dollar has only one way to go — down. It’s nothing more mysterious than supply and demand.

Irwin Kellner is chief economist for MarketWatch, and is Distinguished Scholar of Economics at Dowling College in Oakdale, N.Y.

Hi folks. I didn’t post in a long time. I’ve been busy as you will see.

I have a story that you might find interesting.

Earlier this year I finally got my RBA/Fortress house. Well, the Fortress is not quite what it used to be. I’d estimate 15% less than peak. But good for me as a buyer.

I then sold my non-RBA house. Midrange Silicon Valley. It sold for about 15% less than peak as well. We spiffed it up and staged it, which I’m sure helped with the sale. Put it this way, the pics of my house wouldn’t show up on Burbed with some humorous comments.

There’s been several houses around our new place going up for sale and being sold. But at prices lower than peak. And there’s no denying that volume is lower than 2007. OTOH it’s hardly a Hooverville around here either. And even my non-RBA house was not too bad to sell.

One factor to remember when looking at income/price is that these are usually not first time buyers. In my case, I had a significant down payment, funded by savings and also equity in my first home. Someone who bought in 2005 may not have much equity, but someone who bought earlier can have equity. Therefore the often-cited 3x rule of thumb may apply to the mortgage amount, but not the house price amount. In fact my mortgage payment is similar to rent for this place. Of course that means I am ignoring the investment value of the down payment. But in the long run I’ll bet housing and stock prices are somewhat correlated, so either way I’ll either do ok or get screwed.

I do think prices will continue to fall for some time, and it won’t be a v-shaped recovery. Particularly if interest rates continue to rise. And jobs probably won’t roar back quickly.

So why would I buy? Certainly renting is cheaper on a monthly basis. Well here’s why:

I already owned a house, so already exposed to the housing market price swings. I have increased my exposure obviously but not starting from zero.

It would be cheaper on a monthly basis to rent. But then I’m exposed to the landlord getting foreclosed, or deciding to sell, or whatever. And I really don’t like moving. Renting is great for those who like to move around, but I do not.

Rental houses are often not that great. Even Patrick of patrick.net has written about the miserable state of much rental housing. In a place where there’s a lot of new construction, you can rent from an accidental landlord and get something pretty nice. But there’s not that much new construction in Silicon Valley so not much like that available. So the rent/own calculation is not really apples to apples. By owning I can set up the house the way that I like, and this is important to us.

Kids will enter school in the fall. True, by renting I could still get to this school, but then there’s a reasonable chance that I’d end up moving again in the future. And when transferring mid year you may not get to your neighborhood school.

Finally, what it boils down to is that I’m fortunate to be able to afford it. With a 30yr fixed, payments are affordable, I have a cash cushion just in case. Even if it’s not the cheapest way to house myself and family, it’s worth it to me. It would be way cheaper to rent a 1 bedroom apt for $1500/mo. But less pleasant. Just like someone may opt to eat somewhere other than McDonalds, even though it costs more, I opt to live somewhere that’s not the cheapest possible way to go. This could be a disaster if Silicon Valley ends up like Detroit, but it’s a risk I’m willing to take to enhance my quality of life instead of waiting for prices to reach rental parity or 3x income, which may or may not happen around here.

Last round of interviews for a full-time position today. Let’s see if I can end my personal ‘depression’ semi-permanently.

It’s funny, after being unemployed for so long, I really don’t *want* to go back to work. I like being able to hang at home with my dog, go for long walks, go to the park, etc. At the least, it has me considering starting up my own contracting business so I can work out of my home. I like it here And I *HATE* the thought of having a commute.

Is this the ‘acceptance’ phase of long-term unemployment? If so, I kind of like it.

Perma-bear alert: MS’ Stephen Roach on CNBC shooting down “green-shoots”. Market falls further.

Blatant scamster in AIG fraud case gets tiny slap on wrist:

http://finance.yahoo.com/news/Sentencing-set-for-former-apf-15538121.html?sec=topStories&pos=6&asset=&ccode=

…are you freakin’ kidding me!!

Here is a crock of hogwash. Doesn’t this fool know the bailouts already in place mainly landed on Wall Street, the financial heart of New York state? But it’s OK, as I am quite confident that Wall Street will take a well-deserved drubbing on their California real estate investment portfolio if California does not get its fair share of the bailout allocation, as massive defaults on property loans eventually rise above fraudulent accounting measures to hide them.

Jun 16 2009, 12:30 pm by Derek Thompson
California Screamin’

On such a summer’s day in 2009, when too big to fail has practically become a national slogan, you would think that the Obama administration would find it in their hearts and their pockets to lend some bailout money to the state of California, which now faces a $24 billion deficit. But no. The early word from DC is that the administration has refused to bail out the state of California and that Arnold Schwarzenegger will be forced to take whatever lessons he learned when playing Mr. Freeze and apply them to government spending.

Is Obama doing the right thing? I think so. As my colleague Megan has pointed out, it’s one thing to consider California in a vacuum — one-eighth of our population and almost one-seventh of our budget cannot be abandoned! It’s another to consider the precedent of bailing one state while another 49 gaze on with hangdog eyes and tightening wallets:

But what happens if we bail California out? New York had a fifteen billion dollar budget deficit; why should the Empire State struggle to balance its budget while its citizens’ federal tax dollars leak westward? Why not Texas, or Florida? Why not all the states, for that matter? And if the Federal government does bail them out, why bother with any fiscal restraint at all?

David Weidner’s Writing on the Wall

Jun 16, 2009, 10:06 a.m. EST
How O learned to stop worrying and love the bailout
Commentary: Did campaign finance or Wall Street friends water down reforms?
…
No campaign finance?

But the big hole in the Geithner-Summers plan is campaign finance and financial sector lobbying in Congress.

The securities industry, with donations of $64.43 million, was the third-biggest contributor to congressional candidates during the 2008 cycle, behind retirees and the legal community. Combined with various financial companies at $36 million, insurance companies at $30 million and commercial banks at $22.8 million — financials were by far the biggest donors to Washington, according to the Federal Election Commission.

Maybe the reformers were swayed by the fact Barack Obama was the top recipient of financial industry contributions, save for the insurance industry. They instead favored Republican presidential nominee Sen. John McCain and his status quo health-care plans.

Financial firms already are showing Congress the money for the 2010 mid-terms. Big banks and financials have contributed $4.34 million this election cycle. Sen. Kirsten Gillibrand, appointed to Hillary Clinton’s senate seat earlier this year, is getting the lion’s share of Wall Street cash.

I remember a thread about careers and lawyers from last month. Looks like India is the place to go now:

As Law Firms Elsewhere are Firing, Those in India are Hiring

Posted Jun 15, 2009, 03:07 pm CDT
By Martha Neil

As many major law firms based in the United States and London are shrinking their attorney rosters in reaction to a global recession, their counterparts in India are doing just fine.

In fact, a number of law firms in India are hiring in anticipation of increased business, reports Bloomberg in a lengthy article.

“India is a ‘must have’ when the rules for entry of foreign law firms are clear,” says Nandan Nelivigi, a New York partner of White & Case.

“The outlook for India is very promising—more than any other Jones Day market, in my view,” says partner Jeffrey Maddox. He works in his firm’s Hong Kong office.

This should entertain you guys:

A neighbor of mine (FB type) recently got foreclosed on. Good thing he has a stable job, though. He takes back foreclosed houses! Hahahahahahahah.

packman, re:S&P earnings in the ’70s, thanks for the link, and I apologize for being snippy yesterday. My point was simply that the numbers you were quoting were earnings yields, ie earnings divided by share price, and since share prices were very low in the ’70s, it’s not impressive to say that earnings yields were high.

36 South Starts Hyperinflation Bet After Black Swan…

June 16 (Bloomberg) — 36 South Investment Managers Ltd., whose Black Swan Fund gained 234 percent in 2008, is raising money for a new hedge fund, betting that government efforts to pump money into economies could result in hyperinflation.

The Excelsior Fund targets returns that will be five times the average annual rate of inflation of the Group of Five economies — France, Germany, Japan, the U.K. and the U.S. — should the rate exceed 5 percent, Jerry Haworth, co-founder of the firm, said yesterday. Raising $100 million for the fund would be a “good” amount, he said.

“There is a sharply increased risk of greater than 5 percent inflation starting from now,” Haworth said in a telephone interview from London. “We are in the lag period between when the seeds of inflation are sown and when their off- spring, that is higher prices, are evident for all to see.”

U.S. President Barack Obama is selling record amounts of debt to try to end the steepest U.S. recession in 50 years, while Japanese Prime Minister Taro Aso has unveiled three stimulus packages worth 25 trillion yen ($261 billion) since taking office in September. Governments around the world selling record amounts of debt may devalue currencies against assets and spark inflation.

Most investors are underestimating the risk of inflation, Haworth said. Consumer prices in the U.S., the world’s largest economy, are set to rise 1.7 percent next year, following a 0.6 percent decline this year, according to the median of 70 economists surveyed by Bloomberg.

Inflation Risk

“There is certainly talk about inflation but people might think of inflation at 5 percent or 6 percent,” Zimbabwean-born Haworth said. “We’re talking 5, 10, 15, 20 percent or more.”

Investor Marc Faber said on May 27 he was “100 percent sure” that U.S. prices may increase at rates “close to” Zimbabwe’s gains, and the U.S. economy will enter “hyperinflation” because the Federal Reserve will be reluctant to raise interest rates. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

I know there are some law types on HBB… is it really this bad?

NYTimes
Unemployed and Struggling Lawyers Seek Solace

This was not supposed to happen. The path: become a star in college, get into a top law school, make law review, then take the job at a cushy law firm (maybe after a clerkship or two). Life was supposed to be a regimented ladder to the vacation home, insulated against economic down and up cycles.

Until now.

The recent wave of legal layoffs, rescinded job offers, and even bankruptcies has created the ugliest market for lawyers — particularly in Wall Street-fueled New York City — in more than a quarter century. The bankruptcy opportunities that were supposed to be anti-cyclical to the mergers-and-acquisitions work never materialized.

Thus, on Tuesday, the ornate wood-paneled meeting room of the New York City Bar Association was flooded with 200 unemployed and underemployed risk-averse people. (Law is a field where optimism is not a career booster.)

Still equipped with their BlackBerrys and laptops, Manolo Blahniks and $3,000 suits, they traded stories about “transitioning” and shared their dates of notice against a backdrop of velvet drapes and portraits of Supreme Court justices. Collectively, they wondered, now what?

Among the recent law graduates and the almost-partners was a sense of bitterness, resignation and even smidgens of hope. “There is a whole cohort of young lawyers who feel like the rug has been pulled out from under them,” said Brian Dalton, the managing editor of Vault.com, a career Web site that co-sponsored the daylong program at the New York City Bar Association, called “Getting Back in the Game: How to Restart Your Career in a Down Economy.”

Will the latter-day version of Keynes turn out to be Chinese?

Just added to my “unread paper collection”:

Speculative Bubbles and Financial Crisis

Pengfei Wang and Yi Wen
Working Paper 2009-029A

June 2009

FEDERAL RESERVE BANK OF ST. LOUIS
Research Division

Why are asset prices so much more volatile and so often detached from their fundamentals? Why does the burst of financial bubbles depress the real economy? This paper addresses these questions by constructing an infinite-horizon heterogeneous-agent general-equilibrium model with speculative bubbles.

We show that agents are willing to invest in asset bubbles even though they have positive probability to burst. We prove that any storable goods, regardless of their intrinsic values, may give birth to bubbles
with market prices far exceeding their fundamental values. We also show that perceived changes in the bubbles’ probability to bust can generate boom-bust cycles and produce asset price movements that are
many times more volatile than the economy’s fundamentals, as in the data.

Keywords: Asset Price Volatility, Boom-Bust Cycles, Financial Crisis, Speculative Bubbles, Sunspots, Tulip Mania.

JEL Codes: E21, E22, E32, E44, E63.

1949….It was one of the two years since 1940 the United States saw DEFLATION…as measure by the Consumer Price Index. The other year of price deflation was 1955.

Today, another little whiff of deflation is in the air. Compared to one year ago the Producer Price Index is DOWN 5 percent. However, it’s too soon to bet on deflation. In fact, the majority of economic guessers confidently declare that terrible inflation is in store. Which scenario are YOU prepared for?

June 16 (Bloomberg) — Industrial production in the U.S. fell in May for the 16th time in the last 17 months, reflecting declines in consumer goods and business equipment that signals the manufacturing slump remains broad-based. The amount of industrial capacity in use dropped to a record-low 68.3 percent. (Let’s hope everyone remembers that what’s going on in the economy right now is a correction which entails a serious slump in business as consumers try to get their finances in order. This correction has been years in the making and won’t be cleared up quickly.)

BUT!!!! American Bankers Association advisors say the recession will end sometime before the end of September! However, high unemployment and big federal deficits will continue to be millstones around our necks. “The economy will return to growth but not to health,” said Bruce Kasman, chairman of the economic advisory committee and chief economist for JPMorgan Chase in New York.

Thanks Mr. Kasman. We’re making a note of your hopeful prediction and will give you full credit for the call if the recession ends in the 3rd quarter.

ITEM: An Obama administration official says the Treasury will propose the creation of a regulatory agency to protect consumers in their credit, savings and other banking transactions.

< The Nanny State will go to great lengths and spare no expense to create as many czars and regulatory agencies as necessary to protect the ignorant consumer. We look forward to the day a government agent will be assigned to every household to supervise the management of family budgets.

$1.7 Million for little over an acre. You get the swimming pool, foundation, and chimney, but no house. What a steal!

sacbee.com/business/story/1943350.html

Notorious lot in Arden Oaks goes up for sale
By Bob Shallit
sacbee.com
Published: Saturday, Jun. 13, 2009 - 12:00 am

“Businessman Larry Cassidy bought the property – at 1821 Maple Glen Road – in 1994 and spent hundreds of thousands of dollars creating what he says is “the most manicured estate – without a house – in Arden Oaks.”

He has hosted parties there and at one point intended to build a new home atop the original foundation.

“I had a girlfriend and we were going to have six kids and live there,” says Cassidy, “but that didn’t work out.”

Last week, the president of Northern California Collection Service Inc. put the lot on the market, listing it with Lyon Real Estate. A buyer gets a ready-for-construction foundation (with two still-standing chimneys), plus a secluded yard that includes a pool, hot tub, fruit trees, pond and an outdoor barbecue area shaded by grape arbors.”

Apparently, Sacha Baron Cohen lured Ron Paul into the interview for the movie Brüno by telling him they were going to talk about “Austrian Economics”.

This is gonna be hilariously awesome!

http://finance.yahoo.com/news/Obama-US-Not-Overregulating-cnbc-15541585.html?sec=topStories&pos=1&asset=&ccode=

Obama: US Not Overregulating

In other news, Pamela Anderson is no longer overly plasticized.

46 million?The Myth of the 46 Million
By Philip Klein on 3.20.09 @ 6:10AM

“Even for folks who are weathering this economic storm, and have health care right now,” President Obama said at this month’s White House health care summit, “all it takes is one stroke of bad luck — an accident or an illness, a divorce, a lost job — to become one of the nearly 46 million uninsured…”

Whether it’s in political speeches, commentary, newspaper features, or hard news stories, the statistic of 46 million uninsured is one of the most-widely cited numbers in the health care debate. It promotes the idea that nearly one out of every six Americans does not have access to health care and it plays into the arguments of those calling for massive expansion of government to fix the problem. Yet the ubiquitous figure is highly misleading.

To be clear, the statistic is not pulled out of thin air. It comes from an annual report by the Census Bureau, which most recently pegged the number of uninsured at 45.7 million for 2007. But the problem lies in the way the statistic is commonly cited and understood.

For starters, the statistic does not mean that there are “46 million uninsured Americans,” as the New York Times reported in a recent story on health care, and as is echoed throughout the media. Just a quick look inside the Census Bureau data shows that 9.7 million of the uninsured are not citizens of the United States. Liberals can argue that we still have a moral duty to cover non-citizens, but this doesn’t change the fact that as a matter of accuracy, the Census data only tells us that 36 million Americans are uninsured.

But this doesn’t fully convey the problematic nature of the 46-million statistic. As even the authors of the Census Bureau report themselves acknowledge, “health insurance coverage is likely to be underreported” in the Current Population Survey from which the health insurance data is derived. The reason is that respondents are asked in February through April about their health coverage status in the previous calendar year. Some may answer the question as intended, but others may cite their current insurance status, and others may say they were without insurance even if they only spent a portion of the year without coverage.

“[T]he estimate of the number of people without health insurance,” according to the report, “more closely approximates the number of people who are uninsured at a specific point in time during the year than the number of people uninsured for the entire year.”

In reality, a person who goes without coverage for a few months while between jobs is in a completely different boat from somebody who is permanently without insurance. But the broad citation of the headline figure would have you believe that there are literally 46 million people who never, ever, have coverage.

How many people actually spend the whole year without health insurance? It’s difficult to say, and recent data is hard to come by. But in 2003, the Congressional Budget Office took a stab at answering the question, and looked at two studies from 1998 that conducted interviews multiple times over the course of the survey period. One study pegged the number of people who were uninsured for the entire year at 31 million, while another put it even lower, at 21 million. In either case, the number was significantly lower than it was in 1998’s Current Population Survey, which found 43.9 million uninsured.

Another problem with citing the 46-million figure is that many of those who are identified as uninsured are actually eligible for existing government programs but simply never bothered to enroll. In 2003, a BlueCross BlueShield Association study estimated that about 14 million of the uninsured were eligible for Medicaid and SCHIP. These people would be signed up for government insurance if they ever made it to the emergency room.

In addition, some of the 46 million could theoretically afford health coverage, but chose not to purchase any. In 2007, 17.6 million of the uninsured had annual incomes of more than $50,000 and 9.1 million earned more than $75,000. In fact, as Sally Pipes notes in the Top Ten Myths of American Health Care: A Citizen’s Guide, those making more than $75,000 per year are part of the fastest growing segment of the uninsured population.

The Census figures also show that 18.3 million of the uninsured were under 34. Some in this age group may have simply determined that they are young and healthy and thus can do without coverage.

When all of these factors are put together, the 2003 BlueCross BlueShield study determined that 8.2 million Americans are actually without coverage for the long haul, because they are too poor to purchase health care but earn too much to qualify for government assistance. Even being without insurance still doesn’t mean they won’t have access to care, because federal law forbids hospitals from denying treatment to patients who show up at the emergency rooms.

This exercise isn’t about downplaying the problems facing the American health care system, but a necessary part of devising the proper remedies. Under current state laws, mandates force insurers to provide certain benefits, meaning that young and healthy Americans must choose between paying exorbitant premiums to cover treatments that they don’t need or going without health insurance. Many of these so-called “young invincibles” who are included in the ranks of the uninsured could be wooed into the market were they allowed to purchase catastrophic insurance with lower monthly premiums.

Right now, the tax code exempts people from paying taxes on health care benefits purchased through their employer, while denying the same tax advantages to individuals. Ending this discrimination would make health care more affordable to those who are self-employed or not covered through their workplace. In addition, this would allow Americans to have health care policies that are portable, so it would reduce the gaps in coverage people can face when they quit or lose a job.

Those pushing for a major government intervention in health care are distorting the 46-million statistic to boost their cause, and by disseminating it so widely without further elaboration, the media is rigging the game in their favor.

1949….It was one of the two years since 1940 the United States saw DEFLATION…as measure by the Consumer Price Index. The other year of price deflation was 1955.

Today, another little whiff of deflation is in the air. Compared to one year ago the Producer Price Index is DOWN 5 percent. However, it’s too soon to bet on deflation. In fact, the majority of economic guessers confidently declare that terrible inflation is in store. Which scenario are YOU prepared for?

June 16 (Bloomberg) — Industrial production in the U.S. fell in May for the 16th time in the last 17 months, reflecting declines in consumer goods and business equipment that signals the manufacturing slump remains broad-based. The amount of industrial capacity in use dropped to a record-low 68.3 percent. (Let’s hope everyone remembers that what’s going on in the economy right now is a correction which entails a serious slump in business as consumers try to get their finances in order. This correction has been years in the making and won’t be cleared up quickly.)

BUT!!!! American Bankers Association advisors say the recession will end sometime before the end of September! However, high unemployment and big federal deficits will continue to be millstones around our necks. “The economy will return to growth but not to health,” said Bruce Kasman, chairman of the economic advisory committee and chief economist for JPMorgan Chase in New York.

Thanks Mr. Kasman. We’re making a note of your hopeful prediction and will give you full credit for the call if the recession ends in the 3rd quarter.

The agency that could not see the housing bubble before it loudly popped is going to have primary responsibility for monitoring and stemming systemic risk. Good luck with that plan…

Financial Times
New rules put Fed in hot seat
By Krishna Guha in Washington
Published: June 16 2009 20:39 | Last updated: June 16 2009 23:02

President Barack Obama will reveal plans on Wednesday for a new system of US financial regulation that gives the Federal Reserve primary responsibility for averting future financial crises.

Mr Obama will also announce plans for the creation of a council of regulators and a new consumer protection regulator. He is expected to call for the elimination of the Office of Thrift Supervision, one of the nation’s bank regulators.

But the administration will not attempt a more far-reaching consolidation of regulators due to the political difficulties involved. Instead, the plan proposes rule changes to limit the capacity of institutions to choose their regulator.

Mr Obama will propose giving the Fed powers to address the build-up of risks that threaten the system as a whole, with a focus on core institutions and financial markets. It will not require that the Fed seek approval from the council of regulators to act against systemic risks. The new systemic risk powers for the Fed will be accompanied by tougher capital requirements for banks – particularly the most important banks – and moves to strengthen the infrastructure of core financial markets.
…

From Graham Summers:

We will bottom WHEN:

* CNBC and Bloomberg start firing anchors and cutting their coverage time by hours, not minutes.
* Maria Bartiromo and Jim Cramer start telling investors to short the market with all they’ve got.
* Questions like “do you think we’re heading for a recovery” result in the questioner getting punched in the face or ignored like a loony tune.
* People HATE stocks and stock ownership has plummeted back to one in ten Americans (the pre-401(k) levels).
* Investing is no longer a hobby and people fight tooth and nail to retain their nest egg (honestly what the hell is “play” or “speculative” money?)
* The number of mutual funds has fallen by at least half (why are we paying fees for people who can’t beat the market?).
* People no longer want to get an MBA to become a broker or a financial advisor.
* Our economy is based on “making something,” not “offering advice.”
* Books about Warren Buffett no longer comprise an entire publishing industry (seriously, Amazon lists 5,000+ books on him).
* The Richest 500 people in the world are no longer all billionaires (never happened before in history… how’s that for concentration of wealth?)
* Guys like me are no longer writing about finance or investing but instead take up a respectable profession.

My wife is more worried about crime in the Clear Lake area of Houston than she was in mid cities Dallas/Ft Worth.

We used to live in a suburban dallas cul de sac where the only problems were rowdy lake seekers getting lost and driving fast trying to escape our development with only one entrance road.

http://www.ktrh.com/cc-common/news/sections/newsarticle.html?feed=121300&article=5609918
Authorities Ready to Launch Warrant Round Up in Houston

Now we find out that her feeling was correct. There are 550,000 people with warrants out for them in the Houston municipal court area, and over 1,000,000 warrants outstanding around here. The police are threatening to actually go to the suspects homes of record or businesses and attempt to arrest them.

This “trying to find the scoflaws” idea might be new here, but I think it might have originated overseas in the 1800s…

Billy Beer anyone?

Obama’s half-brother George signs book deal
Twitter
New York, June 16 (DPA) US President Barack Obama’s half-brother, George Obama, is working on a book to be published by Simon & Schuster, the US publishing giant said in a statement Monday.

George Obama, 27, is the youngest of the seven children born to Obama’s father in Kenya and was recently arrested there for marijuana possession. The two Obamas have different mothers and never met until Obama visited Kenya in 1987.

The book is tentatively titled Homeland and is scheduled for publication in January 2010. It will be co-written by Damien Lewis, author of the books Apache Dawn, Cobra Gold, Operation Certain Death, Bloody Heroes, Slave and Desert Claw.

‘Even had George Obama not been our president’s half brother, his story is moving and inspirational,’ said Simon & Schuster publisher David Rosenthal. ‘It is an object lesson in survival, selflessness and courage.’

The publishing deal makes George the fourth member of the Obama clan to sign a book deal in recent months. Shortly before his inauguration, Obama signed a deal for a teenage version of his best-selling book Dreams From My Father.

Tuesday, June 16, 2009

Are housing starts a sign of the bottom?
A construction worker measures a window

After a dismal April, home construction did surprisingly well in May, depending on how you look at the numbers. So is the bottom of the housing market here? Dan Grech reports.

A construction worker measures a window as he works on a new home at the Olson Homes Garden Walk development in Hayward, Calif. (Justin Sullivan/Getty Images)

Kai Ryssdal: This is going to sound like a rhetorical question, but I promise I’m being completely serious. If a given economic indicator has been abysmal for months, then how big a deal is it that said indicator has become less abysmal? The housing news today is one of those ‘depends on how you look at it’ stories. After a dismal April, home construction did surprisingly well in May. But that’s really only half the story as Marketplace’s Dan Grech explains.

DAN GRECH: The May figures show the biggest rise in housing starts came in the regions hardest hit by the housing bust. Economist Edward Leamer says the biggest jumps were in the West and the South.

EDWARD LEAMER: And that’s suggestive that we’re at or near the bottom right now and makes us hopeful that the official recession will end in the middle of the summer.

Got REIC funding, Ed?

BwaHaHaHAHAHAHAHAHHAHHAHAHAAAA!!!!

FORECLOSURE SALES STEADILY CLIMBING
Despite Increases, Lenders Voluntarily Delaying 73 Percent of Scheduled Foreclosures
Discovery Bay, CA, June 16, 2009 – ForeclosureRadar (www.foreclosureradar.com), the only website
that tracks every California foreclosure, and provides daily auction updates, issued its monthly
California Foreclosure Report for May 2009. Foreclosures sales jumped 31.9 percent in May, following
a 35 percent increase the prior month. Notices of Trustee Sale, which set the auction date and time, also
rose a significant 42 percent from April, indicating that foreclosure sales are likely to continue to rise in
the weeks and months ahead. Despite these increases, and a record number of foreclosures scheduled for
auction, lenders continue to voluntarily postpone the majority of foreclosure sales.
High-level findings for May 2009 include:
o Notices of Default, which are the first step in the foreclosure process, fell 4.2 percent from April
to 40,870 filings. Year-over-year filings were down 3.1 percent from May of 2008.
o Notices of Trustee Sale filings reached a new record level in May with 41,959 filings,
representing an increase of 42 percent from April. Filings were 24.1 percent higher than a year
earlier, and 7.6 percent higher than the previous record set in July of 2008.
o Foreclosures taken to sale at auction reached 17,871, a 31.9 percent increase from the prior
month, but 30 percent lower than a year earlier. Though loan values represented a total of $8.01
Billion in May, 83 percent of the sales were taken to auction with a discounted opening bid that
averaged just 58.6 percent of the loan value.
o The majority of foreclosure sales continue to be taken back by the lender, with 87.9 percent, or
15,599 sales, with a total loan value of $6.98 Billion, taken back by the lender in May.
o Third party foreclosure auction sales continued to increase substantially to a total of 2,272, an
increase of 39 percent from the prior month, and a significant 228.3 percent increase from May
2008. More than half of third party sales occurred in just five counties: Los Angeles, San Diego,
Orange, Riverside and Sacramento.
“While many complain that lenders are foreclosing too aggressively, and others claim a wave of
foreclosures sales is imminent, the data actually shows that lenders are doing everything possible to
delay foreclosure,” says Sean O’Toole, founder and CEO of ForeclosureRadar. “The reality is that we
have very few homeowners being foreclosed on when viewed as a percentage of those scheduled to be
foreclosed on, in default, delinquent, or upside down in their mortgage.”
As the only service that tracks every foreclosure auction throughout the state, ForeclosureRadar is
uniquely able to see not only how many foreclosures were initiated, but also the current status of those
foreclosures and their ultimate outcomes, whether postponed, cancelled or sold. By the end of May we
had a record 111,824 foreclosures scheduled for sale, yet just 15.9 percent were actually sold, versus
49.2 percent of scheduled foreclosures being sold a year earlier. Further, when sales peaked in July 2008
at levels 61 percent higher than those reached in May 2009, there were only 64,598 foreclosures
scheduled for sale, 42.2 percent fewer than today.
Of those foreclosures currently scheduled, 40 percent are being postponed to a future date at the
lenders request, and another 33 percent are being postponed based on the mutual agreement of lender
and borrower, clearly demonstrating that lenders are indeed delaying foreclosure in the majority of cases
on their own accord. Specifically note that lenders were under no obligation in May to offer a loan
modification program, short sale, or other resolution, and that these efforts would have resulted in a
cancellation of the sale rather than a postponement. May saw just 6 percent of scheduled foreclosures
cancelled, the lowest percentage of cancellations we have on record.

American Public Media
Marketplace
Tuesday, June 16, 2009

Exploring the rational market theory
Justin Fox

Time’s Justin Fox talks with Kai Ryssdal about why so many people once believed in the rational market theory, which suggests that the stock market knows what it’s doing and is always right, and what the next economic model might look like.

Time magazine columnist and author Justin Fox (Allison Downing/harpercollins.com)

* “The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street”

(I note that the Amazon purchase price for a new copy has already crashed from $27.99 to $17.83.

Kai Ryssdal: It may not be what you want to hear in the middle of the worst recession in 75 years, but the market? It has no idea what it’s doing. Believe it or not that’s a fairly recent discovery. There was a model that dominated economics for almost 40 years. It’s called the rational market theory. And what it said, in a very brief nutshell, is that the market is always right. That if the Dow closes at 8500 on a Friday and falls 300 points the following Monday, that’s what’s supposed to happen because the market is rational. It sounds crazy, I know, but it is a really important concept. And to explain why we’ve called Time Magazine columnist Justin Fox. His new book is called “The Myth of the Rational Market.”

Barron’s
TUESDAY, JUNE 16, 2009
INVESTORS’ SOAPBOX PM
GDP Gets a Boost From Housing Bottom
MKM Partners sees the GDP turning positive in the second half of 2009.

MKM Partners

SINGLE-FAMILY HOUSING starts and permits rose 7.5% and 7.9% month over month, respectively, in May. Single-family starts have now risen in each of the last three months after more than an 80% peak-to-trough decline, the largest in history.

Although some will dismiss the recent rise because it is coming off an incredibly depressed base, this is precisely the point: With new-home sales having bottomed in January, housing starts have likely fallen enough to establish a durable bottom in construction spending. This will remove a major drag from the gross domestic product going forward. While it will take time for home prices to bottom (they tend to lag sales), we believe they will begin to level out later in 2009.

Every major bottom in single-family home starts was followed either by a pickup in broad-based economic activity or an exit from a recession. We expect both to take shape as the second half of 2009 unfolds.

There has been a significant amount of fear over rising mortgage rates recently, but we think this should be put into context. Mortgage rates are still at incredibly low levels on a historical basis, while home prices have fallen below mean levels with respect to median incomes and rents.

Conclusion: Mortgage rates have nowhere to go but up.

How about the Fed folk do a bit more blogging so we can tell them when a bubble is forming? The wisdom of crowds can go a long way towards eradicating high muckamuck group think. And while they are at it, how about they abolish the plunge protection team, so the markets can once again properly price in risk? And it wouldn’t hurt to abolish the FHA/FNM/FRE mortgage guarantees, as the mortgage market cannot properly price in default risk with all that subsidized insurance backing up the lenders.

The three steps to financial reform
By George Soros , Financial Times, 16 Jun 2009

The Obama administration is expected on Wednesday to propose a reorganisation of the way we regulate financial markets. I am not an advocate of too much regulation. Having gone too far in deregulating – which contributed to the current crisis – we must resist the temptation to go too far in the opposite direction. While markets are imperfect, regulators are even more so. Not only are they human, they are also bureaucratic and subject to political influences, therefore regulations should be kept to a minimum.

Three principles should guide reform. First, since markets are bubble-prone, regulators must accept responsibility for preventing bubbles from growing too big. Alan Greenspan, the former chairman of the Federal Reserve, and others have expressly refused that responsibility. If markets cannot recognise bubbles, they argued, neither can regulators. They were right and yet the authorities must accept the assignment, even knowing that they are bound to be wrong. They will, however, have the benefit of feedback from the markets so they can and must continually recalibrate to correct their mistakes.

Second, to control asset bubbles it is not enough to control the money supply; we must also control the availability of credit. This cannot be done with monetary tools alone – we must also use credit controls such as margin requirements and minimum capital requirements. Currently these tend to be fixed irrespective of the market’s mood. Part of the authorities’ job is to counteract these moods. Margin and minimum capital requirements should be adjusted to suit market conditions. Regulators should vary the loan-to-value ratio on commercial and residential mortgages for risk-weighting purposes to forestall real estate bubbles.

Third, we must reconceptualise the meaning of market risk. The efficient market hypothesis postulates that markets tend towards equilibrium and deviations occur in a random fashion; moreover, markets are supposed to function without any discontinuity in the sequence of prices. Under these conditions market risks can be equated with the risks affecting individual market participants. As long as they manage their risks properly, regulators ought to be happy.
…

Suppose his success last year turns out to have been a black swan?

Wall Street Journal

* JUNE 17, 2009

Black Swan Trader Bets Reputation on Inflation

By SCOTT PATTERSON

Mark Spitznagel made a fortune predicting the “black swan” that hit markets last year. Now the relatively unknown hedge-fund manager is emerging from the shadow of his collaborator, Nassim Nicholas Taleb, with a big bet inflation will soar.

The 38-year old Mr. Spitznagel managed the Black Swan funds to triple digit returns last year with a bet on volatility. The returns have brought a flood of cash, sending assets for his firm, Universa Investments LP, rising to $6 billion from $300 million.

But, for all the gains, Mr. Spitznagel is still far less known than “Black Swan” author Mr. Taleb, who invests in the funds and helps shape their strategies but doesn’t manage the money.
[Mark Spitznagel] Susan Hall

Mark Spitznagel sees economic stimulus efforts spurring inflation.

“Black swan” alludes to the once-widespread belief that all swans are white — proved false when European explorers found black swans in Australia. A black-swan event is something extreme and highly unexpected.

Wall Street Journal
* OPINION: POLITICAL DIARY
* JUNE 16, 2009, 12:11 A.M. ET

Schwarzenegger Gets Radical
Terminating the California Income Tax

California’s Arnold Schwarzenegger shocked nearly everyone in Sacramento last week when he endorsed a flat tax for the state. Or did he? His exact statement was that a “15% straight tax” is “the radical, daring kind of a proposal that I want to see on the table.”

Gulp. 15 percent! The top tax rate right now is only 10.5%. When I asked the governor’s press office about the statement, they assured me, “The governor has not decided on a specific rate. He has only said he likes the concept of a flat tax.”

To make sure the point was entirely clarified, Mr. Schwarzenegger sent me an email on Thursday, in which he explained: “The way we collect revenues in California is so broken that we must look at every bold proposal out there, no matter how daring or radical — including the idea of a flat tax. California’s budget is so volatile because the top 1 percent of taxpayers provide 50 percent of all our personal income tax revenues, so we set up a commission to give us ideas, and a flat tax is absolutely an idea that must be on the table with many others.”
…

Is Citibank the next shoe to drop? And if so, will it collapse outright like Bear or Lehman, or will it get carved up into small-enough-to-fail Villagebanks?

The Too-Big-to-Fail Problem
6/15/2009

The Treasury gave ten banks the greenlight to repay borrowed government money. One name missing from the list: Citigroup. The Journal Editorial Report panel discusses whether Citi is too big to fail.

Dumb question of the day:

Will Obama end too-big-to-fail, or is the plan to expand the program, since it has done such a good job of creating periodic financial catastrophes over the past three decades that have greatly enriched disaster capitalists who serve as reliable sources of campaign finances?

Asia Times Online
Jun 16, 2009

Page 1 of 3
CREDIT BUBBLE BULLETIN
No conundrum, again
Commentary and weekly watch by Doug Noland

Ten-year Treasury yields traded briefly above 4.0% this week for the first time since last October. Benchmark mortgage-backed security (MBS) yields jumped as high as 5.12%, up from 3.94% as recently as May 20. Long-bond yields reached the highest (4.76%) since October 2007.

Despite a near zero Fed funds rate and about US$25 billion of weekly MBS purchases by the US Federal Reserve, yields have surprised the marketplace on the upside. Those of the bullish persuasion are content to see rising yields as confirmation of economic recovery. Others are referring to another “conundrum.” It is worth noting that 10-year Treasury yields were about 20 basis points (bps) higher than their German counterparts at the end of last week, after trading near 20 bps lower only a month ago.

When the Alan Greenspan Fed finally nudged up the funds rate from 1% to 1.25% at the end of June 2004, MBS yields were trading at about 5.5%. By the end of 2005, after Fed funds had been hiked 325 bps to 4.50%, benchmark MBS yields had increased only 30 bps to 5.80%. Mortgage and housing bubbles continued to gain strong momentum. Greenspan began referring to the low bond yield “conundrum” - the phenomena where market yields were failing to respond to so-called Federal Reserve “tightening”. The new “Bernanke conundrum” is a problematic rise in market yields in the face of ultra-low Fed funds and massive quantitative easing (including MBS purchases).

I never bought into Greenspan’s conundrum, nor do I see any current mystery with regard to US market yields. During the period 2004 through 2007, credit bubble excess played a fundamental role in distorting the demand for US securities, especially Treasuries and agencies (debt and MBS). Back then I titled a Credit Bubble Bulletin “No conundrum.”

In particular, massive speculative leveraging of mortgage-related securities during the boom created excess market demand and artificially low yields throughout the mortgage finance arena. Extremely loose financial conditions were self-reinforcing, as cheap and readily available mortgage credit inflated home prices and (temporarily) deflated credit costs.

Market distortion-induced excess returns incited a fateful flood of speculative finance into the mortgage sector. At the same time, credit bubble-induced dollar outflows (massive current account deficits coupled with heightened flows seeking profits from dollar weakness) inundated foreign central banks (notably China’s), creating artificial foreign demand for US Treasuries and agency securities. In short, the Fed’s post-tech bubble reflation had spurred unwieldy bubbles throughout the US securities and asset markets - bubbles the Fed refused to tackle.
…
The rejuvenated dollar from a few months back appeared to assure great leeway to the Ben Bernanke Fed. The expectation was that the Fed essentially had unlimited capacity to employ “quantitative easing”. This bolstered the market’s generally sanguine view of the yield impact from the Treasury’s massive funding requirements. Especially with the announcement of huge ongoing MBS purchases, the view solidified that the Fed would essentially peg long-term market yields - as it does short-term borrowing rates. And, importantly, the perception that the Fed could set artificially low long-term interest rates - hence Treasury funding costs - worked to bolster a more optimistic reading of the US fiscal position (not to mention the US household balance sheet).

Yet a much more uncertain world is emerging. Global reflation and international markets are - as inflation and market dynamics tend to do - taking on a life of their own. And just as credit bubble dynamics overwhelmed Greenspan rate tinkering back in 2004/05, there are now strong countervailing market forces working against the efficacy of Bernanke helicopter money.

If global reflation takes hold simultaneous with a weakening dollar, inflation could easily emerge as a major threat here in the US; and if global markets begin determining longer-term US Treasury and MBS yields - as opposed to the Bernanke Fed manipulating them artificially low - the US recovery outlook becomes greatly more clouded.

During the 2005 “conundrum,” market dynamics fed the US bubble, as artificially low rates boosted household borrowings, asset prices and consumption. Increasingly, it appears the new “conundrum” is putting upward pressure on market yields. Such a scenario holds the potential to stop the mortgage refinancing boom in its tracks, while delaying a meaningful recovery in housing markets and household consumption.

It is fundamental to my analysis that the unfolding reflation will be altogether different than previous ones. On a global basis - and contrary to the consensus view - I expect the US economy to under-perform. Already, a scenario is unfolding where reflation hurts the US consumer through higher energy and import costs, rising borrowing costs, and a greater tax burden. And in contrast to more recent inflations, US securities will be anything but the focal point of global reflation dynamics. I expect global markets to increasingly determine US market yields, with resulting higher borrowing costs and less liquidity generally stymieing recovery in our asset markets.
…

BTW, looks like we might get “universal” health care and I predict, we’ll wish we hadn’t, by the time Congress gets done with it.