All over the world, from Russia to Argentina, governments' response to agflation has been uniform: limit the export of grain or whatever agricultural commodity the country in question happens to produce. This goes against the textbook, officials quietly acnowledge, but it's one thing to read the Wealth of Nations in your study over a cup of coffee with a sandwich, and quite another to watch food riots from out the window of your car on your way to a policy meeting. When a shortage becomes real enough, governments always introduce quotas and rationing, even if it makes Adam Smith turn over in his grave. So it's only a question of price point at which the US government will have to put a limit on exports. The repercussions of this move will be quite serious. First, if if happens, importing countries could easily see the price of food double or triple. Which, in turn, should ruin some economies, devalue some currencies and put an end to some economic growth stories. Secondly, we'll likely see a global boom in agricultural equipment and irrigation projects, and possibly, some wars over water supplies. Third, OPEC countries, which have lots of oil but very little grain, will feel an urge to retaliate with oil export quotas, which will be another fascinating story to watch. And yet I don't see how the US can avoid such measures for too long. Food inflation is the nastiest kind of inflation, and, besides, the timing could not have been worse: just when landlords need a rent increase to turn the ATM back on, it turns out that renters have spent everything on groceries and the rental check fails to arrive. And that would be really nasty for everyone. No imputed rents - no appreciation, no HELOCs, no economic expansion at zero cost as you enjoy the HELOC-driven demand without having to pay wages. At some point the pressure to switch from the "invisible hand" to old-fashioned regulation will become too irresistable. [more]
For the first time since Jan 2003, TIPS are now traded at prices significantly above par. At the 04/10/2008 auction, 9-year 9-months TIPS offering 1.625% were sold for 104.35362. (For reference: only 3 months earlier, a 10-year, 1.625% TIPS sold for 99.724557). [more]
Today was the fist time I saw a red blot against a newsletter name on the front page. Insive Value has underperformed S&P by 0.69%. [more]
Once again, banks are unhappy, and HELOC'ed homeowners are busily scratching their tiny wounds, putting tears on their face with the help of a can of paint. The people to be robbed by rate cuts own no houses and cannot count on the sympathy of policymakers. So it is a safe bet that the Fed will cut once again. The coming months will see another transfer of wealth from the homeless savers to the leveraged homeowners, so place your bets accordingly. Down with "financial ultra-short" SKF. Up with banks and builders. [more]
Medieval Russian peasants thought that the good tsar is surrounded by bad advisors, so they would send delegates to Moscow to tell the tsar about their economic hardship. If only the tsar would learn that peasants are being robbed and exploited by the landlords, the thinking went, he would surely offer some help. The number of petitions to the tsar written over the centuries must surely run in the thousands, in spite of zero evidence that a single petition ever attained its intended result. How very stupid.
I hardly expected them to use bait-and-switch marketing, because they were supposed to be an ethical oasis, that is, up till recently. A couple of days ago I clicked on a link to a premium content page and taken to their subscription homepage. So clicked the back button, and the next moment a window popped up and showed the following message: [more]
I used to buy a morning cup of coffee in one of the four shops in my neighbourhood. (There are many more, no doubt, but I am not doing an extensive research here, just relating my personal experience with inflation) Two of them were charging 50 cents, one was charging 60, and one - 75. About a month ago, the 75 cent guy began charging 85 cents, the 60 cent coffee went up to 75 cents, and one of the 50 cent shops also hiked the price to 75 cents (it's also making lousy coffee, so I'm no longer buying from them). The fourth shop was still selling coffee for 50 cents last time I checked. In the more expensive category, there is a gas station nearby where $1.50 would buy you a 20 oz cup of really good coffee that came with a free doughnut. Their price hasn't changed, but the free doughnut is now gone. Lacking this incentive to go for 20 oz, you will do well to consider downsizing to a $1.29 12-oz cup. Farther away from our place, the cafe that served a 12 oz cup of exellent $1.60 coffee recently raised the price to $1.80. As you all know, Starbucks hiked its prices about half a year earlier... [more]
Just another update of the latest monetary achievements of my favorite political leader. Enjoy. [more]
0.3% in March, vs. 0.4% that rational people expected. It's very easy to predict inflation in this market. Take the consensus number that people have come to expect after adjusting for BLS's lies and distortions, subtract 0.1%, and voila! You've arrived at the number the BLS is going to report.
CPI data will be released tomorrow. There is little doubt that the Bureau of Labor Statistics will say that inflation does not exist, and that the market will use this pretext for a mini-rally, not because it believes the falsified numbers, but because BLS's phony statistics will send the message that another rate cut is on the way.
The interest on CDs and savings accounts is below the official inflation. The good news is, there are still safe investments offering a higher rate of return. These tax-free investment vehicles shold easily keep pace with real inflation, while comfortably beating the official inflation figures. Better yet, there are no frictional costs, and no need to cash out at any specific time. Here are some investment ideas for you to consider. [more]
Suppose I asked you for a $100 loan, and promised to pay you back $83 by the end of the year. What, do you think I am crazy to approach you with such a proposal? It appears that the American people find this deal sufficiently attractive. We have the Federal Reserve that is diluting the value of the dollar by 20% a year. And we have the banking system that offers 12-month CDs at rates varying from 1.5% to 3%. And then we have the depositiors who lend their money to the banks under these terms and imagine that they are saving. [more]
Three weeks ago, I had this to say about Bernanke's printing press: [more]
Banking system bailout is different. This was an unmitigated evil, because it prevented the banking system from collapse. Now, as to the desirability of builder bailout, I am agnostic. If builders don't get a bailout, then land will remain cheaper for a while, as floridabuilder points out. Sadly, with land investors not selling anything because they recognize the value of land too well, bancrupt builders is the only remaining suurce of cheap land. Not that it's going to make housing any cheaper becuase in the absence of competition, the remaining builders are not going to pass their lower input costs to consumers, they will keep it all to themselves. On the other hand, if we do have a bailout, the industry will stay competetive and run slimmer profit margins, but again, these slimmer margins will not produce cheaper prices because competing builders will drive up the cost of land. Now you have builders ready, or, rather, forced by the "invisible hand" to pass their cost savings to consumers, but unfortunately, they have no cost saving to pass along. So either way, the consumer is screwed. The only practical question is which builders to greenthumb. If there is no bailout, then we have a winner-take-all scenario, with TOL and MDC emerging victorious. If the bailout comes to pass, the spoils will be distributed more equally among the players, and then HOV, SPF, and BZH will outperform the rich builders because avaoiding Ch 11 is all it really takes for them to produce a two-bagger in the short term. Either way, floridabuilder is wrong: affordability is not coming back, and it is only the short-term price of land that is debatable. [more]
Median household income in England is slighltly higher than 25000 pounds (Wikipedia gives 24700 pounds for 2004). Average house price is now 191 556 pounds. A pound is worth roughly 2 dollars. So the average American house has to cost some $360K-380K in order for us to catch up with England in terms of affordability.
The rumors about the death of the middle class have been slightly exaggerated. What is the basis for these rumors anyway? Let's go over some favorite pet peeves. Expensive gas? Shrug. Is that such a big expense as some panic-stricken SUV drivers would have us believe? Let's run the numbers. In order to really bite, this higher price should take some meaningful amount out of your pocketbook. Let's say, an extra $1000 a year would be noticeable. The price of gas has increased about $1 per gallon, from 2.40 to 3.40, so in order to lose $1000, you have to spread this additional cost over 1000 gallons. A normal car should run 30,000 miles on this amount of gasoline, which is considerably more than an average driver (and perhaps an average household) should drive in one year, so for the people who buy their cars rationally, price at the pump is a lesser issue than this year's $600 present from Bush. Don't be an idiot, don't drive a gas-guzzling SUV you have no reason to own, and you'll do just fine. What else? Food? Yes, food is a big concern and it could become an important issue in the future. But for now, price increases have been relatively modest. A year ago, a family of 4 would need roughly $10,000 to buy food. This number should be something like $11,500 today (I don't believe the official 4.5%), but it should still be manageable. The median household income was 48,000 in 2006, and despite "income stagnation" complaints it did increase slightly afterwards. In practical terms, the recent deterioration of macroeconomic conditions amounts to roughly $2000 of additional expences for an average family living within its means. This is unpleasant, but it doesn't take you brom the middle class to the lower class. Nor does it have to result in reduced consumption if you counter this challenge by reducing your 401K contribution, which would obviously have negative long-term repercussions, but is perfectly acceptable for a period of 3-5 years while we're grappling with this temporary oil spike. This is where we stand today from the income standpoint. But wealth is less a matter of income than a matter of assets. Considering that house values have doubled as compared to Clinton's era of good feeling, and stock indices, which form the backbone of your 401K plan, also grew very substantially (excepting the 1999-2000 dot-com aberration), it should take middle class a higher than average level of impudence to complain about being squeezed. [more]
In today's issue, we're looking at the company called the United States of America (NYSE ticker: DJIA). This investment idea belongs to the "wounded elephant" category, both quintessentially and symbolically, as the elephant is wounded indeed, so much so that it can't even stand up to the donkey in the November election. So you have fine assets such as millions of square miles of land, decaying but still good infrastructure, impressive scientific potential, and the undervalued military-industrial complex still carried on the books at cost. In addition you've got intangibles such as exellent printing presses that are capable of churning out record quantities of greenish paper in an unprecentedly short amount of time. The liabilities side of the balance sheet does not look pretty. There is some 5 trln of public debt, plus another 4 trln of intergovernmental debt. Add to this a further 53 trl dollars of unfunded promices, and you get the idea. Four years of mismanaged expansion have resulted in stagnating revenues and deteriorating profit margins. And the cash flow statement is a disaster. Budget shortfall has recently exceeded 400 bln, a result of ill-timed tax cuts for billionnaires and a failed joint venture to explore Iraki oil, which brings in losses that approach 200 bln a year. [more]
When you ask any housing bear, "is it a good time to buy?", he replies: "No way! Prices need to drop 50% from here". But when you ask him, "so should we let prices drop 50% from here?", he replies: "Are you crazy? Property values have got to be protected!" Now, I point out that these two statements are irreconcilable. If property values will be successfully protected, then it's pointless to wait for lower prices because "property values" and "prices" are synonims. On the other hand, if the plan is to let property values drop all the way to historical averages, then why spend any effort protecting them when we are halfway? Let them retreat all the way to your buy-in price, and protect it then. (Which wouldn't even be necessary because once they reach that level, they should stop going down anyway: the beauty of yielding control to market forces is that you don't have to do a thing, the invisible hand is doing all the dirty work for you). Do the bears realize that with a dual message like this, they come across as being totally insincere, and that the true import of their message as seen by an impartial observer boils down to this: keep renting and hoping for lower prices, and we'll make sure that you never get them"? [more]
"WASHINGTON (AP) -- Homebuilders and the mortgage industry are emerging as big victors in a bipartisan agreement reached by Senate leaders on legislation designed to limit the housing crisis. The $15 billion measure, announced Wednesday by Majority Leader Harry Reid, D-Nev., and GOP leader Mitch McConnell of Kentucky, contains a $6 billion emergency tax break that would let companies use losses from 2008 and 2009 to offset profits earned over the previous four years, instead of the usual two-year timeframe. ADVERTISEMENT That's good news for big homebuilders such as KB Home and Pulte Homes Inc., which have been saddled with massive losses over the past year." [more]
I have repeated many times that we are in the early stage of a monster housing bull. But there are many occasions when this point becomes sort of hard to prove because all real estate is local and if someone feels bearish, he can always point to this or that community where the general rule does not apply. The best way to counter these objections is to look at the aggregate numbers and then work with statistical averages. This way you can model the cash flow from an average house so that your model takes into account both Phoenix and New York and you can see what's happening on the national scale and why home prices are set to double again. By the way, I hope that at least some of you were taken in by my previous post which was written to honor the April Fool's Day tradition. No, I am not shorting housing either in real life or in Caps. Not until prices double from today's level. Then I will think whether it's better to short or to stay on the long side. [more]
Now, I've been bullish on housing for many months. I've been bullish when sales prices posted their first decline since the Great Depression. I've been bullish when the CDO market collapsed. I've been bullish when dozens of builders from the top 200 went belly up and when analysts were predicting more bancruptcies ahead. I remained bullish even when the Case-Schiller index showed an unprecedented year-on-year decline of 11%. [more]