Saturday, June 30, 2012

Part 9: Robin's Nightmare

Now that Europe is "saved" for the 20th time, let's turn to this week's chapter of my serialized comic novel "Four Bidding For Love." (Those who find absurdist humor and adult situations offensive, please read no further.)



     Katy gazed at Alexia with the disappointment of a religious soul for an unrepentant sinner, and then brightened. "I have an absolutely fantastic idea."
     Alexia sighed dourly. "What? Finding a nice ex-sniper to pick off the axe murderer before he can get to me?"
     "Stop being so melodramatic. What's your eBay name?"
     "GreenDollGal. Why?"
     "You'll see."
     Alexia strode over to stand behind her friend as she scanned eBay pages.
     "You can bet this jerk wouldn't be outbidding me if my online name was 'GreenBeretSniper007.'"
     "You mean some women use male-sounding names?"
     "Don't be naive, of course they do," Alexia snapped.
     "Don't you be naive," Katy countered. "There are plenty of guys who would snatch a poster from GreenBeretSniper just because they want to prove their machohood."
     Squinting at the screen, Alexia asked, "What are you looking for?"
     Katy did not answer right away, but then she scanned a new page and said, "Not what, but who, and I think I found him."
     "Found who?"
     "Your dream date," Katy replied, as if it were self-evident.
     "Tell me you're not serious."
     Jabbing her index finger at the monitor, Katy said, "I think it's a brilliant idea. Just find local men who share your collecting interests. They must have some good characteristics or they wouldn't like the same things you do."
     "And how can you tell this guy is local?"
     "It says 'local pickup only,'" Katy replied curtly. "Don't you read this stuff before you bid?" Scrolling down the page of the auction history, she enthused, "Look at this guy: a movie poster collector who loves Chinese teapots and books on Asian art history. He's probably about 40, cultured and loves to travel."
     Grabbing the mouse from her friend, Alexia moved down the page and said, "Look at this Dr. Seuss boxed set. He's probably 88 years old and buys all this stuff as presents."
     "No, he's a single parent of an adorable girl," Katy retorted.
     "Look, Chinese cookbooks," Alexia said accusingly. "It's definitely a woman posing as a man."
     "He's a gourmet, too," Katy said defensively, and then added, "See that? A man's electric razor. It's a man."
     "She bought it for her husband," Alexia volleyed, and Katy sighed in defeat. "You really don't want to meet any men, do you?"
     "Not that way," Alexia said sourly, and Katy turned to look at her. "Not any way. Just admit it."
     "Admit to being tired of throwing darts in the dark and always missing? Yes."
     "No, I mean admit to giving up."
     A peculiar sort of exhaustion aged Alexia and she gestured surrender. "Fine. Yes, I give up."
     The front door bell tinkled, announcing a customer, and as Katy arose she murmured, "What are you so afraid of? That someone won't like you?"
     "No," Alexia replied, but Katy had left to greet the customer and Alexia was left alone with her roiled thoughts. Sometimes friends know too much about you, she mused darkly, and then forced herself to straighten the shoes awaiting buyers, not just once but twice.

*       *       *

     Robin awoke from the nightmare in a cold sweat. The setting had been a desert town, a bleak landscape of dusty streets and suspicious townsfolk. He'd entered a creaky old wooden house, wondering why he was considering buying such a ramshackle old pile, when a lean man with the razor-sharp hatchet had surprised him. Turning to flee, he'd shouted in alarm, snapping himself awake. Lying sweat-soaked in the dark, he deeply regretted accepting the task of meeting this dangerous eccentric. And what for? To satisfy the collecting quirks of his neighbor? Why didn't she meet this horrible man herself?
     Rolling over, he told himself, no, it was too late; but forewarned is forearmed, he thought at he looked blearily at the clock—4:04 a.m.—and he realized he could easily stop by Ross's address on his East Bay sales trip the following morning and perform some rudimentary surveillance. At least he'd know what Ross looked like, and be prepared to face him with at least that minimal foreknowledge.
     Despite his attempts to calm himself, he wondered if the dream was a warning that this Ross was indeed unstable, and just the sort to slice one open with a hand axe should he encounter a disappointment.
     And given Alexia's strict instructions on the negotiations, his disappointment could practically be guaranteed. Oh, Lord, why me? he sighed. Why couldn't he be merely a kung fu expert? Punched silly, a broken bone or two, I could take; but being sliced open like a raw chicken—Robin shuddered and turned on his bedside light for reassurance. It was going to be a long day; how did I get myself into this senseless Hell?
     As he turned the miserable prospect of meeting this unstable axe-enthusiast over in his weary mind, Robin suddenly rebelled at the burden and thought, Alexia should be there to take over in case things go sour; that's the least she can do. His mind made up, Robin pulled the down pillow over his head and drifted into a troubled sleep.

Next: Under Protest, Ross Cross-Dresses 


To read the previous chapters, visit the "Four Bidding For Love" home page.



A note of thanks to those who buy the book: As an independent writer, book sales are a substantial part of my income. I receive no funding from a university, trust fund, hedge fund, think-tank or government agency. I self-publish my books as a financial necessity, as the small royalties (5% to 7.5% of the retail price) paid by publishers cannot support me during the long months it takes to write a book. Your purchase makes it possible for me to continue sharing ideas on the blog and in my books. Thank you.

Four Bidding For Love (print, $16.99) 



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Friday, June 29, 2012

Why The Debt-Dependent Status Quo Is Doomed in One Chart

The global economy is now addicted to debt. Once debt stops expanding, the economy shrivels. But expanding debt forever is unsustainable. Welcome to the endgame.



Regardless of whether you call it debt saturation or diminishing return on new debt, the notion that taking on more debt will magically enable us to "grow our way out of debt" is not supported by data. Correspondent David P. recently shared this chart of Total Credit Market Debt Owed and GDP and this explanation:
The purpose of this chart is to examine the relationship of total debt to GDP. Since Debt is not factored into GDP, just exactly how much debt is being used to create growth, and over what time periods. But absolute numbers don't work so well, since they don't let you examine particular years, seeing what the 1950s look like vs the 2000s, for example.
Red Line: Annual Change in TCMDO (Total Credit Market Debt Owed) * 100/ That year's total GDP, showing that year's % increase in TCMDO/GDP.
Blue line: % change in GDP over last year.
Any gap between the red line and the blue line is what I would call the creation of debt in excess of income. And that gap is the ANNUAL gap, not a cumulative gap. As an example, in 2008 TCMDO grew by an average of 30% of that year's GDP, while GDP itself grew by around 5%. Ouch. 
So projecting forward, how much debt growth do you think we'd need to get back to business as usual? 50s was 8%, 60s about 12%, 70s 15%, 80s maybe 20%, 90s back down to 15%, and 00s probably 25-30% per year. We'd probably need a surge of 35% or more, per year, to bring back those exciting bubble years. But who could possibly have the income to support that? To quote the parable of the Little Red Hen: "Not I", said the goose.
Thank you, David. Note what happened to GDP the moment debt ceased expanding in 2008: it tanked. This is the chart of debt addiction: the moment the expansion of debt is withdrawn, the economy implodes. Here is a chart which shows debt has outrun income for decades:


Debt can be expanded at a rate that exceeds the rise in real income in only one way: by lowering interest rates so the same income can support a larger debt.

This is of course the reason the Federal Reserve has lowered interest rates to near-zero with the ZIRP (zero-interest rate policy).

Eventually the buyers of newly issued debt at near-zero (or even negative) yields start to fear they will never get their capital back or they will be paid back in depreciated currency, and so they demand a higher yield. Since income has already been stretched to the limit to support a towering mountain of debt, this rise in yield catapults the borrower into insolvency.

That is Greece, Spain, Italy, and eventually, the entire debt-dependent global Status Quo. 



GARDEN SEED SPECIAL--10% OFF ALL EVERLASTING SEEDS--all seeds are organic.Here is a snapshot of Everlasting Seeds' zucchini coming up in my little urban garden a week ago. This wonderful variety produces all the way into autumn. (ES-seed beets are visible in the foreground.)

My gardening style aims at maximizing opportunities for pollinators and birds, so I let California poppy and alyssum volunteers flower alongside vegetables, and I let plants that produce abundant seeds for birds (chard and kale) go to seed. As a result, our little garden is always busy with pollinator insects and birds. It is a delight to simply watch Nature at work.
So for goodness sake, if you don't have even a single veggie planted yet, order some Everlasting Seeds today and get planting. The rewards are immense.

For small gardens: The Simple Garden - Special price: $29.95 + $8.00 shipping
Contains 30 seeds of each:     Corn     Broccoli     Pea     Onion     Radish     Carrot     Cabbage     Tomato     Cauliflower     Spinach     Lettuce     Pole Bean


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.
History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.


Thank you, Sheldon W. ($5/month), for your exceedingly generous subscription to this site--I am greatly honored by your support and readership.


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Thursday, June 28, 2012

Priced Out of the Middle Class

As rising costs have outpaced incomes for decades, households have been priced out of the middle class.



In Why the Middle Class Is Doomed (April 17, 2012) I listed five "threshold" characteristics of membership in the middle class:

1. Meaningful healthcare insurance
2. Significant equity (25%-50%) in a home or other real estate
3. Income/expenses that enable the household to save at least 6% of its income
4. Significant retirement funds: 401Ks, IRAs, income property, etc.
5. The ability to service all debt and expenses over the medium-term if one of the primary household wage-earners lose their job
I would now add a sixth:
6. Reliable vehicles for each wage-earner
Author Chris Sullins suggested adding these additional thresholds:
7. If a household requires government assistance to maintain the family lifestyle, their Middle Class status is in doubt.
8. A percentage of non-paper, non-real estate hard assets such as family heirlooms, precious metals, tools, etc. that can be transferred to the next generation, i.e. generational wealth.
9. Ability to invest in offspring (education, extracurricular clubs/training, etc.).
10. Leisure time devoted to the maintenance of physical/spiritual/mental fitness.
Lagniappe attributes:
11. Community altruism (volunteer time and/or money).
12. Pursuit of continuing education (not net surfing, but some exploration and growth in the real world).

The key point of these thresholds is that propping up a precarious illusion of wealth and security does not qualify as middle class. To qualify as middle class (that is, what was considered middle class a generation or two ago), the household must actually own/control wealth that won't vanish if the investment bubble du jour pops, and won't be wiped out by a medical emergency.

In Chris's phrase, "They should be focusing resources on the next generation and passing on Generational Wealth" as opposed to "keeping up appearances" via aspirational consumption financed with debt.

What does it take in the real world to qualify as middle class? Let's start by noting that real (adjusted for inflation) income has barely budged in 40 years, while household income has declined: Soaring Poverty Casts Spotlight on ‘Lost Decade’:
According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445. That was 7 percent less than the peak of $53,252 in 1999.
Here are my calculations based on our own expenses and those of our friends in urban America. We can quibble about details endlessly, so these are mid-range estimates. These reflect urban costs; rural towns/cities will naturally have significantly lower cost structures. Please make adjustments as suits your area or experience, but please recall that tens of millions of people live in high-cost left and right-coast cities, and millions more have high heating/cooling/commuting costs.

The wages of those employed by Corporate America or the government do not reflect the total cost of benefits. Self-employed people like myself pay the full costs of benefits, so let's "get real" and count *all* costs paid to maintain a middle-class lifestyle.

1. Healthcare. Let's budget $13,000 annually for healthcare insurance. Yes, if you're 23 years old and single, you will pay a lot less, so this is an average. If you're older (I'm 58), $13,000 a year only buys you and your spouse stripped down coverage: no eyewear, medication or dental coverage. If you have two children, you will be hard-pressed to buy decent coverage for less than $1,000/month.

Add in co-pays and out-of-pocket expenses, and the realistic annual total is between $15,000 and $20,000 annually: Your family's health care costs: $19,393Let's say $15,000 annually is about as low as you can reasonably expect to maintain middle class healthcare.

2. Home equity. Building home equity requires paying meaningful principal. Let's say a household has a 15-year mortgage so the principal payments are actually meaningfully adding to equity, unlike a 30-year mortgage. Let's say $5-$10,000 of $25,000 in annual mortgage payments is interest (deductible) and $15-$20,000 goes to principal reduction.

3. Savings. Anything less than $5,000 in annual savings is not very meaningful if college costs, co-pays for medical emergencies, etc. are being anticipated, and $10,000 is a more realistic number given the need to stockpile cash in the event of job loss or reduced hours/pay. So let's go with a minimum of $5,000 in cash savings annually.

4. Retirement. Let's assume $6,000 per wage earner per year, or $12,000 per household. That won't buy much of a retirement unless you start at age 25, and even then the return at current rates is so abysmal the nestegg won't grow faster than inflation unless you take horrendous risks (and win).

5. Vehicles. The AAA pegs the cost of each compact car at $6,700 annually, so $13K per year assumes two compacts each driven 15,000 miles. The cost declines for two paid-for, well-maintained clunkers. Average cost of auto ownership: $8,946 per year. let's assume a scrimp-and-save household who manages to operate and insure two vehicles for $10,000 annually.

6. Taxes. Self-employed people pay full freight Social Security and Medicare taxes: 15.3% of all net income, starting with dollar one and going up to $106,800 for SSA. Since an adjusted gross income (AGI) of $66,193 or more puts you in the top 25% of earners, let's use a base income (self-employed) of $68,000 to calculate our SSA/Medicare taxes: that's about $10,000 annually.

Property taxes: These are low in many parts of the country, but let's assume a New Jersey/New York/California level of property tax: $10,000 annually.

Income tax: Since the mortgage interest is only $5-$10K a year, itemized deductions are less than the standard deductions of around $18,000. One-half of the self-employment tax is deductible, as well as the health insurance and IRA retirement contributions, so that's another $30,000 in deductions. That leaves about $20,000 in taxable income and about $3,000 in Federal tax, and let's assume $2,000 in state and local taxes for a total of $5,000.

7. Living expenses: Some people spend hundreds of dollars on food each week, others considerably less. Let's assume a two-adult household will need at least $12,000 annually for food, utilities, phone service, Internet, home maintenance, clothing, furnishings, books, films, etc., while those who like to dine out often, take week-ends away for skiing or equivalent will need more like $20,000.

8. Donations, church tithes, community organizations, adult education, hobbies, etc.: Let's say $2,000 annually at a mimimum.

Note that this does not include the cost of maintaining boats, RVs, pools, etc., or the cost of an annual vacation.

Here's the annual summary:
Healthcare: $15,000
Mortgage: $25,000
Savings: $5,000
Retirement: $12,000
Vehicles: $10,000
Property taxes: $10,000
Other taxes: $15,000
Living expenses: $12,000
Other: $2,000
Total: $106,000

Oops. That's more than double the median household income. OK, let's assume the mortgage is a bit high, ditto the property taxes. Let's say we need "only" $96,000.

Oops again: our tax calculations were based on $68,000 in self-employed net earnings. To earn $96,000, our taxes are going to skyrocket, as we're still paying the full 15.3% SSA/Medicare taxes while we'll jump into the 25% tax bracket when our taxable income exceeds $35,000. Since we'll be paying at least $15,000 more in SSA and income taxes, then we're up to $111,000 as the minimum household income to maintain a middle class lifestyle for two self-employed adults.

An individual earning $111,000 is in the top 10% of all wage earners. A houshold earning $111,000 is in the 80%-90% income bracket--the lower half of the top 20%. This suggests that the "middle class" has atrophied into the 10% of households just below the top 10%. Households in the "bottom 80%" are lacking essential attributes of a middle class lifestyle that was once affordable on a much more modest income.

Note that this $111,000 household income has no budget for lavish vacations, boats, weekends spent skiing, etc., nor does it budget for luxury vehicles, SUVs, large pickup trucks, etc. There is no budget for private schooling. Most of the family income goes to the mortgage, taxes and healthcare. Savings are modest, along with living expenses and retirement contributions. This is a barebones budget.

If costs had stagnated along with wages, it would take a lot less to maintain a middle class lifestyle. But costs for most middle class essentials have skyrocketed. I was struck by something I read recently in a history of the Tang Dynasty in China, circa 700-900 A.D. When costs are cheap, goods and trade are abundant and prosperity is widely distributed. Once costs rise, trade declines and living standards stagnate. Poverty and unrest rise.

Here are a few charts that illustrate "being pricing out" of the middle class:
Wages have risen modestly while debt has increased enormously.


Social Security taxes have skyrocketed:


So have property taxes: they rose right through the last recession even as property values tanked:


Labor's share of national income has plummeted:


Interest income has fallen through the floor (thank you, Federal Reserve):


The bedrock of Main Street, small business, has cratered:


Net worth of the middle income households has been reduced to a sliver:


As costs have risen faster than incomes for decades, households have been "priced out" of the middle class. There is no other way to plausibly interpret the data.
Worth reading if you missed it:



GARDEN SEED SPECIAL--10% OFF ALL EVERLASTING SEEDS--all seeds are organic.Here is a snapshot of Everlasting Seeds' zucchini coming up in my little urban garden a week ago. This wonderful variety produces all the way into autumn. (ES-seed beets are visible in the foreground.)



My gardening style aims at maximizing opportunities for pollinators and birds, so I let California poppy and alyssum volunteers flower alongside vegetables, and I let plants that produce abundant seeds for birds (chard and kale) go to seed. As a result, our little garden is always busy with pollinator insects and birds. It is a delight to simply watch Nature at work.
So for goodness sake, if you don't have even a single veggie planted yet, order some Everlasting Seeds today and get planting. The rewards are immense.

For small gardens: The Simple Garden - Special price: $29.95 + $8.00 shipping
Contains 30 seeds of each:     Corn     Broccoli     Pea     Onion     Radish     Carrot     Cabbage     Tomato     Cauliflower     Spinach     Lettuce     Pole Bean


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.
History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.

Read more...

Wednesday, June 27, 2012

Some Thoughts on Overseas Investing in U.S. Real Estate

Overseas investor buying of U.S. real estate is a consequence of trade deficits that have built up huge surpluses of U.S. dollars that must be recycled into dollar-denominated assets. Perhaps we should welcome the investment as both necessary and positive.


What few media pundits seem to grasp is that when our trade deficits transfer hundreds of billions of dollars to other nations, those dollars have to end up in dollar-denominated assets like bonds, stocks or real estate. Mish of Mish's Global Economic Analysis has tirelessly explained this dynamic many times: when U.S. dollars (USD) end up in another country as a result of our gargantuan trade deficits, the dollars don't just vanish into some other currency. One way or another, they have to flow into one dollar-denominated asset or another.

Many people have missed the difference between dollars used to settle accounts and dollars held as a result of trade deficits. Many of those emotionally wedded to the belief that the U.S. dollar is doomed gleefully grabbed onto the news that China and Japan will swap currencies directly (yen and yuan) rather than intermediate the trade with U.S. dollars. This was mistakenly seen as a nail in the coffin of the USD.

If I am in Japan and I have yuan due to trade with China, and I want to exchange those yuan for yen, I only need USD for about 10 seconds to intermediate the exchange. Cutting out the USD simply cut the exchange costs and lowered the daily trading volume of the USD.

This reduction in the transactions needed to exchange yuan for yen did nothing to change the dollars held by China or Japan as a result of their trade surpluses with the U.S.

This also didn't lower the amount of assets or credit (debt) denominated in USD. In other words, the effect on the value of the dollar is trivial.

No matter how many exchanges the USD sitting in overseas accounts are pushed through, they still end up in dollar-denominated assets somewhere. If China exchanges its surplus USD to Saudi Arabia in exchange for oil, the USD didn't vanish or become yuan: the USD were simply transferred to Saudi Arabia, which can either exchange them with another nation for goods or services, or they use the USD to buy dollar-denominated assets: bonds, stocks, U.S.-based companies, land in the U.S., etc.

Every time overseas holders of dollars start using their monumental stash of USD to buy real estate in the U.S., domestic pundits freak out and declare "X is buying America!" What the xenophobic pundits fail to understand is the overseas holders of USD have to buy something with their surplus dollars, and if they're sick and tired of buying negative-yield bonds (i.e. the bond yield is lower than inflation) then they have little other choice but to buy land, buildings and businesses in the U.S.

The largest overseas owners of U.S. assets have long been the Europeans, chiefly the English. Tremendous sums have been sunk into the relative safety and dynamism of the U.S. economy, going back to the 16th and 17th centuries.

"Foreign investment in the U.S. last year totaled $234 billion, a 14% jump over $205.8 billion in 2010, with around two-thirds of the cash coming from Europe."

There is an element of implicit racism at work when the cries of "we're being taken over" swell after the Japanese or Chinese make a signature purchase of U.S. assets: beneath the surface, the message is clear: it's OK for Caucasian Europeans to buy huge swaths of American land and built capital, but not OK for Asians to own the same percentage of assets.

Let me put this bluntly: if you don't want overseas investors to buy American assets, then stop running gigantic trade deficits with them. Once you transfer hundreds of billions of dollars a year, each and every year, to overseas accounts, the owners of those USD will have to buy something denominated in dollars. And since we presumably made those trades of our own free will to our own benefit, then it's hardly cricket to get all hot and bothered when those owners of USD seek the same thing we do: assets that return a higher yield at a lower risk.

That leads many holders of USD to U.S. real estate. As I outlined yesterday in Some Thoughts on Investing in the "Bottom" in Housing, rental properties offer attractive returns in a zero-interest rate world. Why are the Chinese investing in Toledo?

I have raised hackles by suggesting that the U.S. remains a very attractive "safe haven" for overseas holders of USD. The people who are emotionally attached to the "dollar will be destroyed" ideology are often equally attached to the notion that the U.S. is an internationally unattractive place to live/invest.

Yes, I share the concerns about the erosion of civil liberties and the extreme over-reach of the State and concentrations of private capital in the U.S. These are real and worrisome trends I have covered in depth for years.

But we need to see the U.S. through overseas eyes--for example, from a Chinese perspective. Since we have many close friends in China, Japan, Korea and Thailand, and have traveled extensively "on the ground" in these nations over the past 20 years, I have multiple first-hand reports of conditions and perceptions in Asia.

The first thing that is attractive about the U.S. is the wide open spaces--just look how much of the country is sparsely inhabited. Compared to places constantly teeming with people, the U.S. is wide-open. (Recall that the U.S. is Meiguo in Mandarin: Beautiful Country.)

Just another landscape in America, ho-hum....


The northern side of Mt. Rainier (Sunrise):


Also noteworthy is the air is generally amazingly clean in the U.S. Even smog-ridden Los Angeles is relatively clean compared to Chinese urban air quality.

Then there's the rule of law, which despite constant abuse still exists in the U.S. Your assets will not be expropriated at the whim of a senior Party official.

These same conditions also make Australia, New Zealand, Canada, Chile and Europe attractive places to invest surplus currency. The difference between all these places and the U.S. is of course the size of the currency holdings needing a home: the long-standing trade deficits with China have stockpiled hundreds of billions of USD in China. That alone powers a much greater interest in U.S. real estate.

Despite its bloated Plutocracy and numerous structural problems, the U.S. is exceedingly stable compared to other nations and remarkably dynamic compared to less-dynamic safe-havens such as Japan.

Lastly, there are enclaves serving dozens of nationalities in the "98% of us are immigrants" U.S. (92 languages have been identified among students of the Los Angeles Unified School District.) Your religious faith, class origins, caste and all the other social attributes than limit your social and financial mobility in much (if not most) of the world don't matter that much in cosmopolitan parts of America. In general, people here are too busy to care about your personal history: just get the job done and don't rip-off/exploit others, and you are good to go about your business.

Those with assets in China are feeling increasingly insecure. Even if your wealth was earned legitimately, as opposed to being skimmed via corruption or officially sanctioned theft, it doesn't matter: when the blowback to corruption and inequality arises, everyone with assets will be a target.

This is why everyone with significant assets in China is seeking an overseas passport, green card and a safe haven for their wealth. This is a longstanding trend that seems to be picking up momentum: Hedging their bets: Officials, looking for an exit strategy, send family and cash overseas (the Economist).
THE phrase “naked official”, or luo guan, was coined in 2008 by a bureaucrat and blogger in Anhui province, Zhou Peng’an, to describe officials who have moved their family abroad, often taking assets with them. Once there, they are beyond the clutches of the Communist Party in case anything, such as a corruption investigation, should befall the official, who is left back at home alone (hence “naked”). Mr Zhou says the issue has created a crisis of trust within the party, as officials lecture subordinates on patriotism and incorruptibility, but send their own families abroad. 
You do not have to be corrupt to be “naked”, however. Sending your family abroad is simply a state of maximum readiness. It does not suggest huge confidence in a stable Chinese future. Many wealthy businessmen have also been preparing exit strategies. One of the most common legitimate routes involves immigrant-investor programmes in America, Canada or Hong Kong, typically requiring an investment of up to $1m. Chinese nationals have rushed to apply for these. Three-quarters of applicants for America’s programme last year were Chinese. 
In 2011 the central bank published an estimate on its website, attributed to the Chinese Academy of Social Sciences, that up to 18,000 officials had fled the country between 1995 and 2008 with stolen assets totalling 800 billion yuan ($130 billion at today’s exchange rate). The bank then claimed the figures were inaccurate, and scrubbed them from its website. 
Officials who can afford to send their families abroad are usually the most powerful, and the most aware of China’s problems. Says Mr Li of Peking University, “They know better than anyone that the China model is not sustainable and that it’s a risk to everybody.”
In essence, investing a mere $1 million in U.S. business and promising to hire Americans will yield up a highly-valued green card. From an overseas point of view, wages in the U.S. are not that burdensome: Apple store employees, and millions of other workers, earn $11.25 an hour.

We have to put all this overseas investment in perspective. There are roughly $62 trillion in net assets in the U.S., and over $20 trillion in real estate. $200 billion or even $2 trillion isn't going to buy a dominant piece of the U.S. economy.

There are positives to overseas investors buying U.S. properties. Everyone who owns real estate wants their parcel to start rising in value, and the only way that can happen is for demand to exceed supply. The "creative destruction" of capitalism only works if owners who have failed to capitalize on assets move on and turn the assets over to those with capital and a desire to rework the assets into productive uses.

The irony is that the driver of overseas buying of real estate--trade deficits--could decline as oil prices slip and imports from China decline in recession. Those complaining about overseas buying may withdraw their complaints if the drivers of overseas investment dry up and the buyers vanish, leaving the U.S. real estate market vulnerable to another cascade down in valuations.
At that point, people may wish Chinese investors were still buying in Toledo. 



GARDEN SEED SPECIAL--10% OFF ALL EVERLASTING SEEDS--all seeds are organic.Here is a snapshot of Everlasting Seeds' zucchini coming up in my little urban garden a week ago. This wonderful variety produces all the way into autumn. (ES-seed beets are visible in the foreground.)



My gardening style aims at maximizing opportunities for pollinators and birds, so I let California poppy and alyssum volunteers flower alongside vegetables, and I let plants that produce abundant seeds for birds (chard and kale) go to seed. As a result, our little garden is always busy with pollinator insects and birds. It is a delight to simply watch Nature at work.
So for goodness sake, if you don't have even a single veggie planted yet, order some Everlasting Seeds today and get planting. The rewards are immense.

For small gardens: The Simple Garden - Special price: $29.95 + $8.00 shipping
Contains 30 seeds of each:     Corn     Broccoli     Pea     Onion     Radish     Carrot     Cabbage     Tomato     Cauliflower     Spinach     Lettuce     Pole Bean


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.
History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.


Thank you, Craig H. ($50), for your splendidly generous contribution to this site--I am greatly honored by your steadfast support and readership.


Read more...

Tuesday, June 26, 2012

Some Thoughts on Investing in the "Bottom" in Housing

Investor buying has helped put a floor under the housing market. The rental housing market is currently robust, but that is dependent on a highly artificial economy supported by unprecedented government stimulus and transfers.


In my previous entry on housing's presumptive "bottom," ( The Housing Recovery: Based on What? June 20, 2012), I showed that the conventional foundations of the housing market were impaired: demand was weakened by demographics and declining income/employment, and supply was still well above the organic growth of new household formation.

The housing "Bulls" who think the millions of young people living in basements can afford to buy a house despite having high student debt, little job security and declining incomes are either delusional or they are studiously ignoring the causal relation between buying a house and qualifying for a conventional mortgage, i.e. the financial factors of current debt loads, income, the need for a down payment, etc.

The majority of wage earners have seen real incomes decline and most households have high debt levels.


Not buying a house is a choice for a relatively few who qualify but who choose to rent. The vast majority of people who do qualify to own a home by conventional standards already own a home (65% of all households). Those who don't own generally do not qualify due to insufficient income, heavy debt loads, poor credit, etc.

There are two significant pools of buyers, however, who have become very active in the U.S. and Canadian real estate markets: domestic and overseas investors.Their buying has soaked up quite a bit of inventory--up to 40% of all home purchases in some areas have been all cash, a transaction that typifies investor buying rather than young people moving out of basements.

Each pool of investors is motivated by different forces. Domestically, the Federal Reserve's ZIRP (zero-interest rate policy) has turned cash into trash, and investors desperate for a return above 2% without the risks of the stock market casino have flooded into the rental housing market.

In California, roughly 30% of all house purchases have been for cash (investors). Some may be planning to improve and then "flip" the house as the market improves (the housing bubble redux strategy), while others are assembling a portfolio of rental properties.

I recently came across a local real estate listing in a desirable Bay Area (Northern California) location (near a University of California campus) for a multi-unit rental building: $4.9 million for 40 units, with a net of all expenses of $150,000 (not counting depreciation or tax benefits). That's a 3% return on a cash purchase, but the real yield is much higher if the buy is made with a 35% cash down payment and 65% mortgage. Regardless of the financing, the yield instantly doubles with depreciation and basic tax benefits, and could even be higher in some circumstances.

The higher yield and relatively low risk of owning rentals in a high-demand area make real estate more attractive than other investments such as 10-year bonds or dividends. As a bonus, if housing does recover, there is the potential for a capital gain.

The appeal of rental housing is understandable, and it has long been a favored investment for households (as opposed to institutional investors). According to a March 1996 report from the Census Bureau (I couldn't locate any more recent data), 92% of the nation's rental housing was owned by individual investors. In other words, owning rental property has long been a localized "Mom and Pop" enterprise.

Here is a Quick Fact Sheet on rentals in the U.S. from the National Multi-Housing Council (NMHC). According to this data, there are about 40 million households in rental housing and 78 million households in owner-occupied housing.

Owning rental property as an investment is not like owning a bond or stock or gold.Housing is a "real-world" investment that irrevocably decays with time. Heaters fail in the dead of winter, the roof eventually needs to be replaced, the yard must be maintained, and rapacious local governments generally view property owners as tax donkeys who they can load with ever-higher property taxes unless they are restrained by Prop 13-type limits.

Rental housing is also a "people business:" some tenants might disturb other tenants, others might not pay the rent, and so on. A renter is a customer, though newly minted landlords often seem to regard the tenant as an ATM machine whose only function in life is paying the rent.

The point here is the higher yield promised by rental property must be earned.Those with no experience in rental housing will learn this the hard way. All the rosy projections of steady profits vanish if vacancies rise above a very low level.

The price of rentals, like almost everything, is set on the margins. If the inventory of rentals rises above demand, then prices will eventually decline. In areas with limited inventory and strong demand (Manhattan, San Francisco, etc.), rents are generally high and the rental properties fetch a premium.

In areas without such geographical constraints, the market for rentals might not be so favorable.
In other words, it's quite possible to lose money buying and managing rental housing. There is nothing guaranteed about the return, as there are so many inputs and variables. It can be a profitable business, but that is not guaranteed.

In this chart, we can see the decline in rental income as marginal buyers became homeowners in the housing bubble, and the subsequent rise in rental income as former homeowners returned to the rental housing market.


But this rise in rental income occurred in an era that has been distorted by unprecedented Federal transfer payments, stimulus, etc., and unprecedented intervention in capital and credit markets by the Federal Reserve. The total sum of "extra money" borrowed (or printed) and injected into the economy exceeds $8 trillion, and this does not count banking-sector backstops and guarantees. The U.S. economy was not allowed to experience a "burn the deadwood and rejuvenate the forest" recession, and demand for housing, owner-occupied and rental alike, has been artificially supported by near-zero interest rates, enormous deficit spending and transfer payments.

We can see some of the consequences of borrowing and spending $1.5 trillion a year in these charts. The first chart is employee compensation, wages and salaries. It has recovered smartly from its shallow recessionary trough and has risen above 2007 levels.


One would hope that borrowing and spending trillions of dollars would support employment, but the question raised here is whether the stimulus required to keep employment aloft is sustainable.
Here is a chart of personal transfers, cash transferred by the government to individuals. This has risen by $1 trillion a year in a decade, and roughly $400 billion since late 2007.


If we subtract transfer payments from real personal income, we get a more realistic snapshot of the household economy: minus government transfers, personal income is still about $400 billion below its pre-cression peak.


Thus the rental housing market has yet to experience a "real recession." When it does, household formation may well decline or even go negative and rents may well decline as demand falls and supply of rentals rises as millions of previously owner-occupied units go on the market as rentals.

There are a number of potential (but by no means guaranteed) secondary forces that may influence rents and the value of rental property.

1. Some new landlords may realize the business isn't as easy as expected. Some may decide to cut their losses by dumping their property back on the market.
2. Investors who planned to improve and "flip" the unit may find they can't unload the property, and so they become reluctant (and thus very possibly incompetent) landlords.
3. A peculiar feedback loop may arise as the rental market is flooded with new investor-owned inventory. Rents start declining as landlords tire of vacancy-created losses, and that pushes the value of all homes in the area down, owner-occupied and rentals alike.
4. The trend to "double up" and rent out rooms could go mainstream. These "informal" rentals are already standard practice in high-rent areas such as those found around large universities and geographically constrained markets. For example, it is not unusual for four co-eds to share a 2-bedroom apartment.

Outside these high-demand markets, people who lose their job or see their hours cut to the point they cannot afford their own apartment will move in with family or friends. Anecdotally, I have heard of Mom clearing out the dining room for a returning son and his family.

There are roughly 19 million vacant dwellings in the U.S., of which around 4 million are second homes and a million or two are on the market. Let's stipulate that several million more are in areas with very low demand (i.e. few want to live there year-round). Let's also stipulate that several million more are in the "shadow inventory" of homes that are neither on the market nor even officially in the foreclosure pipeline, i.e. zombie homes.

Even if you account for 9 million of these homes, that still leaves 10 million vacant dwellings in the U.S. which could be occupied. That means 1 in 12 of all dwellings are vacant. Even if you discount this by half, that still leaves 5 million vacant dwellings that could be occupied. Given that the total rental market is 40 million households, that constitutes a very large inventory of supply that remains untapped.

Lastly, it is important to note that the ratio of residents to dwellings is rather low in the U.S., with millions of single-person households and large homes occupied by one or two people. The potential pool of existing homeowners who could enter the "informal" rental market by offering bedrooms, basements and even enclosed garages for rent is extremely large, and that is a difficult-to-count "shadow" inventory of potential rentals.

All of these forces will play out differently in each neighborhood, town and city, depending on the inventory of rentals, the geographical constraints, the employment picture and a host of other factors. The key point here is that the rental market's current robustness is at least partially dependent on unprecedented government stimulus/transfers. The current strength may be temporary rather than permanent.

The second take-away is that demand could weaken considerably in a "real recession" even as supply increases due to millions of investor-owned properties hitting the rental market and the "informal rental" market expanding as people with mostly empty houses seek additional income or accept relatives/friends with a need for shelter. 



GARDEN SEED SPECIAL--10% OFF ALL EVERLASTING SEEDS--all seeds are organic.Here is a snapshot of Everlasting Seeds' zucchini coming up in my little urban garden a week ago. This wonderful variety produces all the way into autumn. (ES-seed beets are visible in the foreground.)



My gardening style aims at maximizing opportunities for pollinators and birds, so I let California poppy and alyssum volunteers flower alongside vegetables, and I let plants that produce abundant seeds for birds (chard and kale) go to seed. As a result, our little garden is always busy with pollinator insects and birds. It is a delight to simply watch Nature at work.
So for goodness sake, if you don't have even a single veggie planted yet, order some Everlasting Seeds today and get planting. The rewards are immense.

For small gardens: The Simple Garden - Special price: $29.95 + $8.00 shipping
Contains 30 seeds of each:     Corn     Broccoli     Pea     Onion     Radish     Carrot     Cabbage     Tomato     Cauliflower     Spinach     Lettuce     Pole Bean


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.
History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.




Thank you, Sriram E. ($100), for your outrageously generous contribution to this site--I am greatly honored by your support and readership.

Read more...

Sunday, June 24, 2012

When Will the Stock Market Finally Hit Bottom?

The global economy is undeniably sliding into an ever-deepening recession. When will the stock market reflect economic reality, and when will it finally hit bottom?


If we pursue the line of inquiry established by Chris Martenson’s recent call to Buckle Up--Market Breakdown in Progress, we come to these basic questions: when will the market reflect the fundamental weakness of the global economy, and when will the market finally hit bottom?

First, we have to stipulate that the correlation between the real economy and the stock market is tenuous at times. According to the National Bureau of Economic Research (NBER), the widely recognized designator of recessions, the most recent recession began in December 2007 and ended in June 2009. Fully six months into the downturn (June 2008), the S&P 500 stock market index was still resiliently hovering around 1,400. The market did not break down until September, 2009, the tenth month of recession. 

A mere three months after the market bottomed in March 2009, the recession ended (as determined by the NBER).

Clearly, the correlation between market action and the underlying economy is weak.  While many would declare the stock market is a “lagging indicator” of recession, even that may be overstating the connection. If we have learned anything in the past three years, it’s that weakening the dollar to foster the illusion of rising corporate profits, central bank monetary easing (QE) and central state borrow-and-spend stimulus can goose the market higher even as the underlying economy remains weak or recessionary.

Properly inflated with cheap liquidity, the stock market could continue rising even as the real economy (as measured not just by profits but by employment, household earnings and tax revenues) sags into recession.

Indeed, some have argued that the emergence from recession in June 2009 was largely illusory, the consequence of counting debt-funded spending as part of GDP.  (By this thinking, all we need to do to avoid recession is borrow and spend $10 trillion a year forever. That this course is artificial and unsustainable doesn’t enter into the calculations.)

If recessions were defined by real household incomes (i.e. adjusted for increases in the consumer price index), then the real economy is clearly still recessionary: household incomes slipped 3.2% in the December 2007 - June 2009 recession, and then fell another 6.7% in the two years from June 2009 to June 2011. This drop in inflation-adjusted income is almost 10% (9.8%), a staggering decline in a supposed “recovery.”

The point here is that the real economy could slip further downhill while monetary/fiscal “juice” keeps the stock market buoyant.

Another line of thought suggests that Global Corporate America has effectively decoupled from the American economy: corporate profits could continue rising, powering the stock market higher, even as most of America stumbles along in declining-income recession.

The conventional thinking, however, is that eventually the stock market will have to reflect economic reality, both domestically and globally, regardless of how much juice the Fed injects into the market.

That possibility becomes intriguing when we consider the Economic Cycle Research Institute’s (ECRI) call on September 30, 2011 that the U.S. was entering another recession.  The ECRI reiterated their position in March of 2012. The ECRI argues that the U.S. is entering an era of more frequent recessions as a result of 1) declining trend of economic growth and 2) increased cyclical volatility.

Though the mainstream financial media has treated the ECRI call as an outlier, this following chart (courtesy of frequent contributor B.C.) suggests the call may well be as prescient as ECRI asserts:


This chart displays the current post-recession Weekly Leading Index (WLI)--the ECRI’s proprietary measure of economic activity—with seven other postwar recessions, all plotted from the start of each recession. This enables us to examine the history of each recession from an “apples to apples” time perspective.

While each recession occurs in a unique set of circumstances, it is nonetheless striking that the current recession (WLI 2010, in solid red) tracks the sharp 1973-75 downturn, the 2001-02 “soft patch” and the 2007-09 recession rather closely in time if not in amplitude.

If history offers scenarios rather than predictions, it is interesting to note that if the current downturn follows the timeline of the relatively modest 2001-02 recession, the ultimate bottom lies out another 15 weeks.

If the present weakness tracks 1973-75, the bottom might be roughly 30 weeks ahead, while the 2007-09 recession offers a pattern that suggests the final low in the WLI might be reached about 20 weeks out.

The next chart displays the annual change in the WLI over several recessions. Since the present so evidently tracks the three recessions noted above, these downturns are the ones displayed:


Once again, we see that the final troughs in previous recessions are still ahead by between 10 and 30 weeks.

The ECRI famously reports that they have never missed identifying a recession nor made a false positive (i.e. called 10 of the last five recessions). While it is certainly possible to question their reports or challenge the validity of the WLI as a useful indicator, their record is nonetheless impressive and should not be dismissed as an outlier.

The substance of these charts is clear: the U.S. economy is rolling over into another recession, and the bottom of that recession lies 10 to 30 weeks in the future.
What About the Stock Market?
As previously noted, the stock market’s tops and troughs do not correlate closely with the peaks and valleys of the underlying economy, as depicted on the above charts by the WLI.

Since the closest modern analog we have to a deflationary, deleveraging economy supported by massive central bank and central government intervention is Japan between 1989 and the present, let’s turn to B.C.’s chart of the Nikkei stock index between 1985 and 2003 overlaid with the S&P 500 (SPX) U.S. stock index starting from 1995 to the present.

To make the comparison “apples to apples,” the indices have both been plotted as a percentage of their highs, and each index has been adjusted against the trade-weighted currency (yen and dollar). To insure that currency fluctuations haven’t skewed our understanding of the index’s history, the Nikkei has been plotted both adjusted to the yen (red line) and to the dollar (blue line).

In adjusted terms, the Nikkei index topped in 1989, while the SPX peaked in 2000.


Plotted in this fashion, we see that the two indices, though based in different economies, have traced uncannily similar histories from their respective peaks.

We can see the sharp recoveries in the SPX in 2010 and 2011 when the Federal Reserve responded to market declines with massive quantitative easing (QE) programs.

Will the Fed continue to support the U.S. market with QE programs every time it sags? Will QE always work as well as it did in 2010 and 2011? If the history of the deflationary-era Nikkei is any guide (and we should recall that Japan’s central bank has provided unprecedented monetary easing while the central government has borrowed and spent unprecedented sums on fiscal stimulus), the bottom could be a year away.

In Part II: Predicting the 'When?' & 'How Far?' of the Next Market Decline, we will explore in-depth the technical indicators of both the U.S. and global markets that support the probability that a lot of downward motion lies ahead before we see the ultimate bottom in both the economy and the stock market.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access).

This article was originally published on Peak Prosperity (formerly ChrisMartenson.com) where I am a contributing writer. 


GARDEN SEED SPECIAL--10% OFF ALL EVERLASTING SEEDS--all seeds are organic.Here is a snapshot of Everlasting Seeds' zucchini coming up in my little urban garden a week ago. This wonderful variety produces all the way into autumn. (ES-seed beets are visible in the foreground.)



My gardening style aims at maximizing opportunities for pollinators and birds, so I let California poppy and alyssum volunteers flower alongside vegetables, and I let plants that produce abundant seeds for birds (chard and kale) go to seed. As a result, our little garden is always busy with pollinator insects and birds. It is a delight to simply watch Nature at work.
So for goodness sake, if you don't have even a single veggie planted yet, order some Everlasting Seeds today and get planting. The rewards are immense.

For small gardens: The Simple Garden - Special price: $29.95 + $8.00 shipping
Contains 30 seeds of each:     Corn     Broccoli     Pea     Onion     Radish     Carrot     Cabbage     Tomato     Cauliflower     Spinach     Lettuce     Pole Bean


Resistance, Revolution, Liberation: A Model for Positive Change (print $25)
(Kindle eBook $9.95)

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.
The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution, and it combines cultural, technological, financial and political elements in a dynamic flux.
History is not fixed; it is in our hands. We cannot await a remote future transition to transform our lives. Revolution begins with our internal understanding and reaches fruition in our coherently directed daily actions in the lived-in world.

Read more...

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