Article On Asset Bubbles

March 9th, 2010

On January 25 Fortune had an article on asset bubbles titled “Beware the 4 new asset bubbles.”

The four purported bubbles mentioned in the article are Gold, oil, the stock market, and Treasuries.  I have discussed each of these markets, with the exception of oil, in previous posts.

I found the logic and discussion in the article interesting, although I did not agree with various aspects of the article.  I especially disagree with the logic about housing, for reasons I have recently written about.

It is very important for investors to understand whether the markets they are investing in are indeed experiencing bubbles.   My previously written posts are found under the “Bubbles” Category.

Of course, the existence and prevalence of bubbles also has massive ramifications for the economy, especially when viewed from the standpoint of Sustainable Prosperity.

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The “Double-Dip” Scenario

March 8th, 2010

Lately there have been an increasing number of people citing the possibility of a “double-dip” recession.  Much of this scenario is predicated upon the belief that as government stimulus spending fades, so too will economic activity.

This March 5 article from CNBC.com summarizes some of the opinions regarding the double-dip reasoning and possibilities.

I find these worries about a “double-dip” recession interesting for many reasons.  Perhaps chief among these reasons is that even among those who think a “double-dip” recession is likely, these people don’t seem to believe that any further economic weakness will be worse than that which we experienced during the trough set in late ‘08-early ‘09.

I’m not sure for the reasoning behind this belief; and I have seen none offered.  However, per my previous posts I don’t believe this is a logical conclusion.

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Another Ponzi Scheme

March 7th, 2010

I have been intermittently commenting upon the growing number of investment frauds being uncovered.   Those posts can be found under the “investment frauds” tag.

Here is yet another alleged Ponzi scheme as seen in Thursday’s Wall Street Journal article titled “SEC Charges Couple in Florida Ponzi Scheme.”

As seen in the article, this alleged scheme is stated at $135 million.

It is difficult to say how widespread investment frauds are and how much investment fraud is yet to be uncovered.

However, based upon a variety of factors I would say that there is much investment fraud still “out there” (i.e. yet to be uncovered) and the true figure will likely prove to be eye-popping.

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“I Can Own Cheaper Than I Can Rent”

March 4th, 2010

One of the commonly stated reasons for buying a home now, as opposed to renting, is that “I can own (a home) cheaper than I can rent.”

This is no doubt the case in many areas of the country, especially those that have experienced large declines in residential real estate prices.

Is this condition, where one can own cheaper than renting, a valid justification for buying a home?

I would argue that it is not, for many reasons.  Here are three of the many reasons:

First, “I can own cheaper than I can rent” usually refers to the condition that the monthly mortgage payment is cheaper than the monthly rent payment.  Is this the main criteria that one should use when evaluating what is likely the largest financial commitment one will ever make, that of buying a house?  Of course not -  there should be many factors that weigh into such a decision.

Second, as indicated in the real estate valuation story in my last post, historically when house prices fell to or below the equivalent rent levels, a “bottom in (home) prices” had either been realized or was close.   However, as I have written in previous posts, our national real estate situation is far dissimilar to that of prior years.  As such, comparisons need to be adjusted accordingly.

Third, one should be very mindful of one’s ability to sell real estate in today’s real estate market, should one need to.  Normally, the ability to sell real estate in a timely fashion, and at a “decent price,” is not a major issue.  However, for many people currently looking to sell a house, it has become a very significant factor.  While I could post some statistics with regard to unsold home inventories and the like, I will not do so as I feel these statistics are significantly skewed (and as such unrepresentative) due to a variety of factors.

For these three reasons, as well as many others, I feel that on an “all things considered” basis, the fact that one “can own cheaper than renting” in many areas is to be considered more of a “red flag” than a “green light” as far as buying a house is concerned.

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An Interesting Article On Housing Prices

March 2nd, 2010

I came across an interesting Fortune Magazine story dated February 16 titled “Where’s housing headed? Follow rents.”  The link can be found here.

Of course, given my previous posts on residential real estate I don’t agree with many aspects of the story, especially the statement “Given that analysis, it’s likely that prices will fall another 5% or so nationwide.”

However, I do find the story interesting as it portrays a case for the commonly-held belief that the residential real estate market decline is nearly over.

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The Yield Curve As A Leading Indicator

March 1st, 2010

Here is a link to the NY Fed’s page regarding the yield curve (specifically the 10-year rates vs. 3-month rates) as a leading indicator.

What I find interesting is that the chart (pdf, at this link) plotting the current probability of recession indicates an imperceptibly small .04% chance of recession as of January 2010.  As seen in the chart (as well as accompanying data file) the recent peak was in the 40%-50% range in the latter part of 2007 and into 2008.

Of course, I strongly disagree that there is currently a .04% of recession.

On the NY Fed link above, they have posted numerous studies that support the theory that the yield curve is a leading indicator.   My objections with using it as a leading indicator, especially now, are various.  These objections include: I don’t think such a narrow measure is one that can be relied upon;  both the yields at the short and long-end of the curve have been overtly and officially manipulated, thus distorting the curve; and, although the yield curve may have been an accurate leading indicator in the past, this period of economic weakness is inherently dissimilar in nature from past recessions and depressions in a multitude of ways – thus, historical yardsticks and metrics probably won’t (and have not) proven appropriate.

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Alan Greenspan “Takes On His Critics”

February 26th, 2010

The March 1 edition of Fortune Magazine has an article titled “Alan Greenspan Fights Back.”  The link is found here.

I found the article interesting for a variety of reasons. As the article mentions, rarely has Greenspan addressed his purported culpability in creating the housing bubble and its accompanying impact on the economy.

Greenspan’s tenure at The Federal Reserve is most fascinating.  One aspect of this is how his performance was perceived over time.  Throughout most of his tenure he was effusively lauded (i.e. “The Maestro”) – but this widespread acclaim has been (severely) tarnished over the last decade.

As the Fortune article says, “Four years after leaving the Fed as the Greatest Central Banker Ever, the longest-serving chairman, the Maestro, Alan Greenspan is the designated goat.”

As the article indicates, Greenspan is preparing a 12,000-word article in his defense.  I look forward to seeing this article and analyzing his argument.

As far as Greenspan’s performance and actions are concerned, I do not believe there has been an accurate assessment yet provided.

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Keynesian Theory – A Few Comments

February 25th, 2010

Up to this point, I have yet to mention “Keynes” or any derivative thereof.  The reason for this is simple – I don’t believe that the efforts taken to stimulate the economy are reflective of the theories that Keynes espoused.  Instead, they are a type of “bastardized” Keynesian Theory – used by various parties in an attempt to “legitimize” the tremendous amounts of money spent on various stimulus plans.

I’ve been meaning to write a blog post about this and other related topics.  I still intend to write a fuller post.  However, what prompted me to write about this now is a very interesting article I ran across in Fortune Magazine.  It is a February 5 interview with Allan Meltzer and can be found at this link.

As Meltzer indicates in the interview, Keynesian Theory is not aligned with the stimulus actions we, as a nation, have undertaken.

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The Effectiveness Of Stimulus

February 24th, 2010

“One of the biggest economic myths since the Great Depression is that governments can ameliorate or counteract the ebbs and flows of free markets. Government spending has never worked as a trigger for sustained and vibrant economic growth. Ever. Scholarship has demonstrated that the New Deal perpetuated the Depression rather than cured it. On the eve of the Depression the U.S. had the lowest unemployment rate among developed nations. But a decade later, despite six years of FDR’s New Deal, our unemployment rate was one of the highest among developed economies. Japan’s serial stimulus programs over the past two decades have repeatedly underscored this truth.”

Steve Forbes, Forbes Magazine, March 1 2010 p. 11 (link found here)

______

I have written extensively about interventions, which includes stimulus spending.   Stimulus spending and interventions are widely (and wildly) misunderstood.

I think it is very important to have a full understanding of how the ARRA, a  very large stimulus, is performing.   As I wrote in a July 9 2009 blog post in which I discussed the ARRA, “Even if one were unabashedly pro-stimulus, one would find some serious faults with the $787 Billion stimulus plan, as enacted.”  As such, it should be of little surprise that the ARRA has been, at best, such a poor performer when analyzed in a variety of manners.

Here is a recent article from Alan Reynolds concerning the effectiveness of the ARRA.   Although I don’t necessarily agree with some of his conclusions, he does present some interesting statistics and views with regard to how the ARRA has performed.

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Tax Increases And Our Economic Situation – Follow Up

February 23rd, 2010

On October 16 I wrote a post titled “Tax Increases And Our Economic Situation.”  That post can be found at this link.

Some may wonder what tax increases I am referring to, as at least headline tax rates have yet to increase in many areas.  Tax increases have been deferred for many reasons.  Among these reasons is the negative political ramifications of raising taxes before the upcoming November elections.

However, if we are to at least partially curtail our current deficit levels, an increase in taxes is likely certain.  Everyone should know this, at least intuitively; and I believe there is widespread recognition of these impending tax increases.

Thus, our current economic situation is such:  economic weakness that is met with stimulus / deficit spending – that then leads to tax increases.  These tax increases – during a time of economic weakness – will likely weigh (very) heavily against any lasting economic recovery.

This situation may not be inherently problematical if the stimulus / deficit spending was indeed highly economically stimulative.  However, if it is not (and there is little if any evidence that recent stimulus programs have been), a “vicious circle” may form – with large stimulus / deficit spending driving ever-higher taxes – with the net result a weaker – and more highly-indebted economy.  This weaker economy in turn drives higher stimulus / deficit spending – and ever-higher taxes.

There are a lot of complexities and other factors at work in this relationship; however, such an in-depth discussion would be too prohibitively lengthy and complex for a blog post.

However, as one can envision, this “vicious circle” can become very pernicious on many fronts.

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