Updaate: Saab is saaved!

GGMM haas found a buuyer for Saab.

American Disease, 2010

Ann Elk: Where? Oh, what is my theory? This is it. My theory that belongs to me is as follows. This is how it goes. The next thing I'm going to say is my theory. Ready?

TV Interviewer: Yes.

Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end.

(From Monty Python’s Flying Circus)

I too have a theory, which is to say it is a theory and it is mine. I hope it’s a bit less silly than Ann Elk’s theory, but in any case let’s try it on. The next thing I’m going to say is actually not my theory, but another theory, which is someone else’s and got me to thinking about my theory.

This other theory is something called Dutch Disease, which is an economic diagnosis of the Netherlands’s loss of competitiveness in goods producing industries following a 1959 discovery of natural gas off its North Sea coast. In the simplest terms, this led to inflows of investment, which pumped up the exchange rate and altered terms of trade in such a way that exports became uncompetitive. In this perverse fashion, Dutch Disease describes how a lucky strike in natural resources creates not employment and growth but unemployment and stagnation.

America, my theory proposes, has a version of that, only the resource is money. I want to name the problem “American Disease,” but I read in an article by Bryan Caplan that that's the name of a syndrome of Americans living beyond their means. Actually the problem I pose is closely related, just as H1N1 influenza is closely related to other strains of the flu. Perhaps I can say “American Disease, 2010” to differentiate it from old established strains, or should I call it “California Disease” to reflect the fact that the disease has advanced furthest in the Golden State?

America is a country with real natural resources, of course, but the high costs of extraction and environmental compliance and restrictions on land use places them increasingly out of reach. In the days when the country did produce resources and processed them into manufactured goods which foreigners bought, the U.S. generated a vast amount of wealth, much of which was invested in buildings and infrastructure. These remain visible in the present day, residual wealth as monuments to our peak of economic power.

(Exactly the same is true of Argentina, by the way, which was the wealthiest country in the world 100 years ago and still has the buildings and boulevards to prove it, even though Mr. Juan Peron and the generals set the country on an unusual course from first world to third world status.)

Now, even after the financial crisis, America’s most important industry is finance, broadly defined. The financial industry differs from the auto industry and the chemicals industry in one interesting respect. The auto industry inputs steel, glass, and plastic and outputs autos; the chemicals industry inputs primary and intermediate materials and outputs finished chemical products – in other words, they work on raw and intermediate goods and change them into something else. Most industries do this. But the finance industry has money both as input and output – it changes money’s form but not its nature in its processes. Money is both the input and the output, the resource base and the finished product.

The American finance industry is competitive, one of the nation’s success stories in terms of services exports. Our political class, which increasingly impedes us from taking coal out of our mountains, irrigating our farmlands, and manufacturing products with processes that are not squeaky clean, has long promoted clean, non-polluting financial services, and it has prospered as the industry prospered.

However, I believe that too much money in an economy based on financial services has given us a condition akin to Dutch Disease. It could probably be shown that the maintenance of the U.S. as a financial center has made the American dollar stronger than it would otherwise have been, reducing our competitiveness in global markets for tradeable goods and services. Moreover, the high level of compensation in the financial industry and supporting services has probably driven up wages and benefits right across the U.S. labor economy, another blow to the competitiveness of any entrepreneur bold enough to defy the odds and manufacture a product for sale in America.

While the American political class stands in the way of development of our (real) natural resources and domestic manufacturing, it does see the residual financial wealth of the nation as a resource that it can cut and drill and strip mine – endlessly, in fact, as it recognizes no restraint on the size of resource, but treats it as effectively infinite. The people entrusted to run the country give no thought to the necessary diminution of the resource as taxes, penalties, and compliance costs leave less and less to reinvest, even as the potential returns on investment are inevitably being reduced. They use static models that fail to capture the fact that producers will not produce – or innovate, or hire – out of sheer altruism and public spirit while the returns on their capital and labor are collapsing.

The impoverishment of the United States by the Argentine model is thus well under way.

Oh, and why do I say California has the most advanced case of the “American Disease, 2010?” Well, just look at the Golden State. There is oil offshore, but its development is not permitted. Manufacturing is being driven out. And the Central Valley is experiencing 40% unemployment in agriculture in order to protect mudfish habitat; but California's fiscal position continues to deteriorate as its political class absolutely will not live within its means, as dictated by the state’s reduced economic circumstances.

As California is the United States only more so, California’s political class is America’s in microcosm, with all its pathologies subjected to magnification.

The mindlessness with which the American money resource is to be run down puts me in mind of a passage from Atlas Shrugged:

As they proclaim their right to consume the unearned, and blank out the question of who's to produce it—so they proclaim that there is no law of identity, that nothing exists but change, and blank out the fact that change presupposes the concepts of what changes, from what and to what, that, without the law of identity no such concept as 'change' is possible. As they rob an industrialist while denying his value, so they seek to seize power over all of existence while denying that existence exists.

GM is shutting down Saab

It's saad.

12 naughty ways to economize at Christmas [link]

Via the terrific Girl on the Right Blog, these helpful suggestion from A. Nonymous:

Most of us are not doing God’s work trading credit derivatives at Goldman Sachs. You may be stunned when I tell you this, because I sure as heck was when I found out: the TARP program covers none of our credit card bills. Like, zero. All of that means another tough, tough Christmas, money-wise. The desperate economy calls for desperate measures to economize at Christmas. Here are twelve ways for the twelve days:

1. The first thing to do is to keep doing more of what you’re already doing: bitching and complaining. Cry poor mouth to everyone. Tell everyone you know how tough it is. Make a Bill Clinton face while you share people’s pain and make them feel yours. Next you say, “You know, let’s make it easy this year, you don’t have to buy me anything.” Of course, that means you don’t have an obligation to buy them anything! That works with everyone except your kids.

2. Tell your young kids Santa’s not real. Kids as young as four are old enough to get real in this day and age. In Indonesia and Pakistan kids are out sewing soccer balls to support a family at that age! So just explain to them that it’s all a scam meant to con them into good behavior, tell them how much you know they wouldn’t want to connive in such a fraud, and assure them you know they’ll behave perfectly well without bribery. They’ll thank you. Someday.

3. What about the older kids? They’re all so eco-conscious these days, and that’s an opportunity for the canny cheapskate. Just tell them instead of lame games for Wii and Xbox this year, you’re saving the planet on their behalf by planting a tree with their name on it in the Amazon! You can even work up some kind of authentic-looking certificate on the computer! People in the carbon-credit business are becoming billionaires doing just that, by the way.

4. You still feel you need some real gifts? Well how about re-gifts? You’ve been given things you never opened — herbal soap, crème brûlée mix, thermal bags for keeping wine cold — pass the parcel! Just try to remember not to give it to the person that gave it to you!

5. Books are such a popular item at Christmas. So many books can be had for free! Libraries put out boxes of new, unread, unmarked books that they want to get rid of. These include books about business, money, and investing that are still very attractive and were timely when they were published last year, but are entirely irrelevant under current conditions. Also look for container-loads of books about the Bush and Clinton administrations, and anything by Dick Morris. I don’t normally advocate illegal behavior, but one exception could be Saul Alinsky’s Rules For Radicals. Bookstores are full of this one – it’s the Obama playbook! Somehow it just seems right to go in there and liberate a copy or three, comrade!

6. One of my cheap-ass friends used to always joke, “I wanted to buy you a big plant for Christmas, but GM wouldn’t sell.” What a laff riot, and it got him off the hook for ever buying anything! Of course, now GM desperately wants to sell all its plants, so the 2009 revision of that joke is, “I wanted to buy you a big plant for Christmas, but the Chinese bought them all!” Ha ha! Your friends
will be falling over, and they won’t even notice you didn’t buy a round of drinks!

7. Speaking of drinks, ‘tis the season to bend the elbow, so herewith some recommendations from Chateau Wang. First, drink cheap beer. The cheapest stuff in my local is also the original and greatest . . . it’s Miller at $3.99 a six-pack, compared to $5.29 for Miller Light. That make any sense to you? Me neither, they take stuff out and charge you more? Forget that! Next, drink cheap wine. André’s Cold Duck is back, it’s $4.99, and it’s as good as it was when you were fourteen and sneaked it in the kitchen after the Thanksgiving dinner was cleared away. (You know you did.)

8. As for food, the trick to economizing on food is not to cook any. Instead, head over to your brother’s house and scrounge Christmas dinner there. You need to go unannounced, early in the day, in case they have the same idea of coming over and scrounging from you. If that was the plan and your sister-in-law makes no move to put a turkey in the oven, give her one of your Miller’s and she’ll at least come through with some Dinty Moore. Note: If you were to show up on the doorstep at 7:00 AM, there are secondary benefits – you can reconnect with the Christmases of your childhood, when you punished everyone by getting up too early, and you’ll get breakfast too.

9. Here are the hard liquor recommendations from Chateau Wang. You want to drink cheap, cheap liquor too. The venerable and cheap bourbons and ryes from Old Huckaby, Rebel Heaven, and Elihu Walton lack the sophistication of single-malt Scotch, but they have all of the wallop! Also consider cheap and nasty tequila like Don Cheech and Señor Pepe brand – they mix great with green Gatorade!

10. You don’t feel you can scrounge 100% at your sister-in-law’s house? Try this recipe that will cost about 25 cents: Mix two cups of flour with a quarter teaspoon each of baking power and salt, and add up to two cups of water to make a heavy dough. Add a few raisins if you have any, tie it up in a clean handkerchief, and boil it in water until it’s time to go home. Then discard it. Tell them it’s
the dumpling Oliver Twist had in the workhouse at Christmas. Your brother’s family doesn’t read! They won’t know! Ha ha! Give them a copy of Rules For Radicals.

11. Christmas trees are $60 at the VFW, and wreaths are $20. That make any sense to you? Me neither, so here you have many ways to go. You could wait until 4:30 on Christmas Eve, by which time the guy working at VFW will have gone home and abandoned whatever Charlie Brown Christmas trees he has left. Freebie! Option two, you may live in a place where trees are plentiful all around – neighbor’s yards, parks, and so on, if you “catch” my “drift” (wink wink!) Freebie! Another idea, if Border’s Bookstore actually survives far into this Christmas season, you may be able to buy one of the jokey artificial trees they had there last year – these things were some kind of intellectual joke, made with like a few bare wires covered in tinsel; this choice shows a certain post-modern hauteur which goes very well with Dinty Moore and Cold Duck. It’s about $5.99. But you can make it yourself, using wire coat-hangers, spray adhesive, and metallic flock or confetti. That’s a good thing!

12. Finally, we have to get control of this holiday again. Twelve days my wonderful arse! Our Jewish neighbors get by with just eight nights for Hanukkah, and even that is way too much noodle pudding. Let’s do away with this business of Christmas as a 3-month long retail opportunity. The retailers have been unloading container loads of useless crap from Yiwu, China into their Christmas displays since just after Labor Day! With the cheap and nasty Christmas I have outlined here, we can let them know that that is just not the way we want to be living anymore.

Have a happy.

Mao nostalgia in China

On October 1, the People's Republic of China marked its 60th anniversary with an impressive military parade, musical performances and portraits of Sun Yat-sen, Deng Xiaoping, and Mao Zedong.

It's the occasion for a boomlet for Mao nostalgia in China. This, one can kind of understand. He was the founder of the PRC. After liquidating his rivals, he was the maximum leader of the Chinese Communist Party.

Here's today's article on the nostalgia for Mao in China: Mao presides again in China as nostalgia runs high. It's fun stuff. Young people who don't know more about him than his name and image are taking the commercial opportunity to sell T-shirts, hats, badges and snow globes.

In the US, within the Obama administration, Mao Zedong is also enjoying a revival. Communications Director Anita Dunn commends him as a political philosopher to the graduating class of a parochial school. Manufacturing Czar Ron Bloom cites with approval Mao's saying that "Political power grows out of the barrel of a gun" ["Problems of War and Strategy" (November 6, 1938), Selected Works, Vol. II, p. 224].

The thing is this. In China, it is not Mao's Communism that is being celebrated; the country has spent the last thirty years correcting the leftist errors of the previous thirty. Apart from the retail opportunity, Mao's real reputation in China is as a nationalist (not a Nationalist, which in China is a different thing):

1 Mao would work with anyone, anywhere to resist Japanese aggression, including the Nationalists or the Americans, even to the extent of putting the Red Army under their command.

2 Mao unified the war-torn Chinese mainland under Chinese rule for the first time since 1644.

3 In its first five years, the PRC under Mao was drawn into superpower conflict with the US in Korea, and managed to stay in the fight with the nuclear-armed US to secure a draw on the peninsula.

4 When Mao fell out with Khruschev, the PRC found itself surrounded by enemies: the USSR to the north, Taiwan with its US backing to the east, India with its designs on Tibet and implicit backing of the UK, US, and USSR to the south. Mao prosecuted a war in the Himalayas and backed them all down, sustaining the country's independence through a dangerous time.

5 Forty-five years ago this week, the PRC got the bomb; if any of the other powers thought attacking China would be easy, after that it meant mutually assured destruction.

6 When the time came for a new way forward, Mao came to terms with Richard Nixon, and it was easy for the two cold warriors, as if getting reacquainted with old friends. This upset the balance of power in the far east, putting the USSR on the defensive. As much as the US played the China card, China played the America card.

Seek truth from facts, as Deng Xiaoping always said. Mao Zedong's reputation in his homeland has very little to do with his Communism at this stage, and everything to do with his nationalism. Which is fine -- it is his homeland after all.

But like many others, I would like to know just what it is that his highly-placed admirers in the US Obama administration are getting out of Mao Zedong at this time.

Malevolence? Stop the insanity!

“There has to be a counterweight to the malevolence of the insurance industry.” So says Senator Jay Rockefeller to mop-topped interviewer Al Hunt of Bloomberg.

Malevolence? What's next out of the mouth of the Democratic senator from the state of Tourette's syndrome?

You will wait in vain for the industry to fight back hard against this Alinskyite campaign of vilification. Like all other industries that depend upon the US government to treat them with minimal sanity, the insurance industry deals with Uncle Sam the way you would any other lunatic with a trunkful of loaded guns . . . veeeeeeeeeery caaaaaaarefully, for fear of pissing off the lunatic and having him go berserk.

This is the state of play for all owners of capital in the United States today. They hold their breaths; they hold their tongues; they even contribute to the lunatics' campaign, hoping it will buy them some goodwill! Look how well that has worked for you, health insurers -- you're public enemy number one.

The last trade association leaders who was any damned use at all to his membership was the late Jack Valenti of the Motion Picture Association of America.

General Electric profit slumps 44%

from Marketwatch: General Electric profit slumps 44%

Financial business being run down rapidly, industrial business, a basic GDP play, seeing 8% lower revenues from the year ago period.

The pre-eminent American industrial company manages decline.

Read Reed Hundt's book, "In China's Shadow"

If you want to understand Democrat fantasies in the absence of financial constraint or common sense, read Reed Hundt's book, "In China's Shadow." Reed Hundt is a permanent member of the American politcal class, a Yalie, a partner in a high-powered law firm, head of Bill Clinton's FCC, and a member of Barack Obama's transition team.

Free money is Reed Hundt's great idea. Muggins, that is you & me, the hard-pressed American taxpayer, should buy everyone from Nome to Tierra del Fuego a pension, healthcare, and education. By these means, the United States will win in the economic competition with China that furnishes the title of his book and a small fraction of its other content.

No, it's not a joke. People with power and influence really think this way.

Dispatches from the Front Lines of the Real Estate Wars (2)

I have mentioned my misgivings with the Case-Shiller 20 City Real Estate Index before, but everyone now hangs on it monthly and I have had to get on board too.

I have also mentioned that I am a real estate agent in New Jersey with access to the MLS data here, and a keen follower of the trends in local markets.

Case-Shiller was reported on Tuesday this week for the latest month (May). The news was all positive, confirming a four-month improving trend. The index rose one-half of one percent from the April reading, the first rise since 2006. Prices were higher in 13 of the 20 cities surveyed. The year-on-year statistic was 17.1% lower, but that is the first reading better than -18% in several months.

I don't believe anyone wants to forecast a big uptick in prices -- a V-shaped recovery -- but a lot of people are making the bold call that the residential market is at a bottom. For anyone who may have caught the bottom, congratulations! You know the hardest thing to do is to time a market bottom so precisely.

Lately I notice a lot more inventory "under contract". The Case-Shiller data sent me to the MLS to do my usual selling rate to inventory analysis and find out whether macro data confirm anecdotal experience. Do they ever. What I found is that the months of inventory in the local markets I follow has absolutely crashed. In the spring, we were at 10-11 months to clear the active standing inventory. Currently it is more like 5-7 months. Five month's inventory is comparable to the sellers market of a few years back. Wow!

Is there any reason to think the more active market is a blip rather than a trend? I can think of two. One is the action of the $8000 first time home buyer credit, which expires at the end of November and will not be extended. If you want to capture this, you're running out if time. The other is the regular action of the calendar -- every year sales pick up in the spring and close in the summer so that children can be situated in their new school districts for autumn. So let's keep an eye on this to see whether it has legs or causes disappointment later on.

Financial Market Conditions at Mid-Year

As one of the many Americans who depends on a positive business and investment environment for his prosperity, I regarded the election of Barack Obama as president with Democrat supermajorities in the House and Senate with some concern.

More than the usual number of my fellow businesspeople and investors went over to that side, contrary to their own interest as it always seemed to me. Of course many of these unlikely Obama voters were as eager for hope and change after eight years of George Bush as anyone else. But if they gave consideration to the implications of Democrats supermajorities led by Obama for the economy from which they draw life and livelihood, they allowed their desire to believe to outweigh more sober analysis.

Obama took them in with the charisma, the gaseous uplift, and the promise of racial reconciliation; they convinced themselves that the redistribtionist, high-tax, anti-business, anti-capital policies to which he rallied his party constituted red meat for the Democrat base, not a program for governing.

This misapprehension survived the election, and permitted modest financial market recovery through the end of December 2008, followed by modest declines through Inauguration Day. On Inauguration Day, President Obama delivered a speech that any fair-minded listener would have to admit was far less than a rhetorical tour de force, and far more evocative of class envy and racial struggle than everyone expected.

Financial markets tanked that day and kept tanking for weeks, pressured further by the stimulus package that offered precious little real economic stimulus, but rather a shocking grab bag of packages to traditional Democrat constituencies, with not the merest nod to the rights or concerns of the minority.

We experienced headlong collapse from Inauguration Day through first week of March. Obama Democrats in the business and investment community awoke too late to the realization that the Democrat program now encompasses nationalization of vast swathes of industry on the pretext of emergency (autos and banks) or necessity (health care); that owners' property rights are provisional and expendable; that the ideological attachment of our rulers' to the green agenda trumps their duty of care to the free-market economy; and that they mean to bleed the productive sectors of the economy to feed the non-productive to the fullest possible extent they can get away with.

So far, so bad. But then something interesting happened -- we had a dramatic bounce in stock markets from March through early May. Some of this is probably discounting the possibility of a 1929-37 depression, correctly. Some might even be what I regard as an unrealistic pricing in of a rapid economic recovery, when what we still have in prospect is a deep and long recession as in the 70s and early 80s.

But some of the bounce is almost certainly due to the business and investment interests of this country re-assessing President Obama's grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that most of this stuff will never come to pass. On this view, Obama has expressed extreme initial positions just as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. One way or another, the entire Obama agenda can and will be resisted.

This is a bull item in the market since March.

After stock price gains of over 30% from March to May, markets have stalled since then, and fallen into a few air pockets. The public policy problems for the markets at this point remain the administration's apparent readiness to overturn our carbon energy-based economy and its radical intentions toward the 15% of the economy that health care represents.

But the overarching sentiment problem comes from yet another reassessment among business people and investors: even if the entire Obama agenda can be resisted and its worst effects rolled back later, on this new view a tremendous amount of violence can still be done to the U.S. economy now. In the meantime, we are still losing jobs at a sickening pace while Obama and the Congress waste unimaginable sums of money on projects lacking any other point beside paying off their friends and allies.

In the background the Chinese, our principal creditors, are objecting more and more forcefully to American fiscal unsustainability and the debasement of the U.S. Dollar that this portends. The managers of other erstwhile basket-case economies, Russia, India, and Brazil, tut-tut their agreement and back calls for changes to the global reserve system.

At the very least, these mid-year movements call upon investors to review their portfolio allocations with care. My own view is currently defensive on U.S. Dollar assets, light in risk assets in general, and seeking for growth mainly in Chinese stocks.

Don't Re-Elect Jon Corzine

I get the feeling that Google and its various organs such as Adsense sometimes make sport of their users.

I'm a Republican. I try not to be excessively political, I avoid beating people over the head with it, but you can probably tell from the values I express on this blog and, previously, in my writings for worldlyinvestor.com if you remember the good old days. My values are the values of self-reliance, personal responsibility, equality of opportunity for all, free trade, open markets, strong national defense, and sound public finances.

So it is queer to see an Adsense ad for New Jersey's Democrat Governor Jon Corzine in the right margin. "Re-Elect Jon Corzine", it orders. "Committed to New Jersey Values Working for New Jersey's Success JonCorzine09.com".

Look, by all means click through. I need the money to pay taxes that are among the highest in the nation. But I'm not going to vote for Jon Corzine myself if he pays me hundreds of dollars, which research shows is pretty much how much this Goldman Sachs limousine liberal does pay for every vote he receives. His bad works and those of his Democrat predecessors and co-dependent Democrat legislators are catalogued in a previous article. And if you live here too, I hope you are not going to vote for him either.

Fathers' Day

A couple of things as I wish all fathers well.

The most important work I do is as father to my daughter. I hope all fathers feel the same way about their children.

On another personal note, my father's best Father's Day was the day I took him to the final round of the 1993 U.S. Open golf tournament at Baltusrol. It was glorious to see all our golf heroes in their natural habitat. He died a year later. There is never a day when I don't miss my father, think about him, and honor his memory.

Dispatches from the Front Line of the Real Estate Wars

In March, I contributed a piece called "The Coming Real Estate Recovery By The Numbers". I have also written extensively on various plans for real estate recovery policy, my own and other people's, and got some excellent feedback from people in the academic and policy establishment. But in general, the phone has not not stopped ringing. As Chris Mayer of Columbia told me, there is a loss of momentum for all real estate plans.

I can't just sit around writing, as I am among other things a real estate practitioner, a licensed salesperson in the state of New Jersey. Most of my work has been investment and commercial in the urban areas near New York City , but I do residential, I go out of my local market, and have trusted contacts all over the east coast and in California.

At the moment I am working with a couple who have two young children and want to buy in one of the elite towns with a top-rated school system. They have very particular requirements with respect to price, condition, proximity to public transportation, and several other factors. Even in a buyer's market, these limitations make the search challenging.

The action of several recent weekends and the treatment of various offers makes me believe that conditions are moving away from buyers having it all their own way.

On one miserable cold and wet Saturday morning, we found ourselves queuing up to see a new listing that had come on the market at the extreme low end of the price. The wife was hopeful. "It must be a wonderful opportunity at such a low price, and with so many people come to see it." Inside, what a let-down it was. Dirty, small, poor condition. Garbage, even at the price, and disgraceful really to market a house complete with dirt and cobwebs.

And yet the couple who viewed it before us stood across the street in the rain after finally letting us go in, with the husband gazing longingly at it all goo-goo as if it were Megan Fox in her birthday suit instead of a knock-down. The house went under contract immediately, probably to them. If they got any competition for it, no doubt they paid more than asking.

My clients did not compete for the dirty house. On the next one they saw, they did compete and aggressively so, through not one but two rounds of "best and final" offers. This house had the following good points: clean and tastefully decorated living room, dining room, and three good-sized bedrooms, all with good re-done hardwood floors. And it had the following bad points: lousy bathrooms, lousy kitchen, central air on its last legs, and washing machine separated from dryer by 25 feet of dirty unfinished basement. On balance I rated this house just OK, nothing special, and yet if the listing agents are to be believed (agents lie -- I make no judgments on these particular agents) there were a dozen offers. However many offers there were, my clients' full-price offer with 20% down and no house sale contingency was not successful.

If that sounds more like sellers' market conditions, so too did the response of sellers through their agent to my clients' next offer. This time they bid on a house they liked at 95% of asking price. The sellers countered at 99.6% of their asking price, essentially throwing my clients' offer back in their faces with little consideration. Moreover they told us haughtily not to come back without meeting a number of onerous conditions that are not customary in this market.

Guess what? We did not extend ourselves to meet those conditions, and we did not go back to them. My clients found something else instead and had their full-price offer accepted.

A few days later the haughty agent called, and was more than a little miffed that we had done exactly as she told us to do.

The general point is this. At current rates, the inventory in this town will take 10.3 months to clear compared to over 11 months around the county; however, there are micro-markets within the town that are much hotter than that and the behavior of buyers and sellers has to adjust accordingly.

There are other factors to note. One, the $8,000 first-time homebuyer tax credit is going away soon if nothing is done, and the direction of policy-making in DC suggests nothing will be done. That provides impetus in this segment of the market, at least. Two, rising mortgage interest rates can also get buyers off the fence -- if they have been hanging in for lower rates and instead see them going the wrong way, they may be pushed to act for fear their inaction will cost even more later.

New Jersey, the Sorry State

William McGurn wrote an article entitled "New Jersey Is the Perfect Bad Example" in the December 30 2008 edition of the Wall Street Journal. (http://tinyurl.com/94y8ll) It's all good, but the really arresting part was this:

From 2000 to 2007, says the New Jersey Business & Industry Association, the government added 54,800 jobs. To put that in proper perspective, that works out to 93% of all jobs created in New Jersey over those seven years.

This statistic was picked up and widely discussed by radio and TV talkers, but the problems of one small and increasingly insignificant northeastern state are of little enough interest even to its residents, never mind the rest of America. Since then it has been swept away by the stimulus package, the budget, the stockmarket fall and rise, the G20, Susan Boyle, torture memos, Carrie Prejean, Somali pirates and Mahmoud Ahmedinejad. But as one of the people who hasn't left yet, and who paid his real estate taxes today, I want to linger over New Jersey, the sorry state.

I'm never satisfied by what I read, but have to check myself. The info is there for the taking at one of my favorite websites, from the BLS, at http://www.bls.gov/data/#employment.

What I found, using different beginning and ending points, is more or less the same, with some other disconcerting data as well.

In the ten years to February 2009, non-farm employment in New Jersey rose by ninety-six thousand. Population rose around 320 thousand. Labor force participation rose in the middle of the ten years but fell later to end the period where it began at 47%.

State and municipal employment increased by 87,200 over the period which is 91% of the total increase. The federal government, the US Postal Service, and the Department of Defense all shed jobs in the garden state.

The goods producing sector of the state economy is in a total free-fall, losing 138,600 jobs in the decade, or 25% of all jobs in the goods producing sector at the beginning of the period.

One-third of manufacturing jobs were lost, and now government workers outnumber manufacturing workers five-to-two, making a mockery of the old motto "Trenton Makes, The World Takes."

One-third of NJ workers now work for the government, or in health care which increasingly is much the same thing.

Does anybody imagine this state of affairs is satisfactory, or sustainable?

New Jersey's population growth in the decade, at 3.8%, was barely one-third of national population growth. The state has the nation's highest population density, so we can afford to let other places catch up on this measure. But to the extent that we are growing less because we offer an unattractive place to live, work, and do business, it is a problem.

UPDATE May 5 2009 . . . Newark Mayor Cory Booker was quoted today by Bloomberg saying “New Jersey will go bankrupt in 10 to 20 years because we cannot afford our employees as a state. I’m talking about every worker from the cities and counties to the state government. Eventually, we’re going to price ourselves out as a government or tax ourselves to death.” Although he's a Democrat, Booker talks like a pro-growth Republican. He gives the appearance of understanding that a diminishing private sector cannot indefinitely support a boundlessly growing public sector and hundreds of thousands reposing in the soft feather-bed of our ludicrously generous welfare state.

I wish him well. I like Newark, have done business in every neighborhood there, and know them so well at ground level that it horrifies my suburban Bergen County mother, who did her level best to prevent me ever knowing such places existed. The city of Newark is the biggest urban center of the state, but probably not the one that places the largest strain on the state's finances on a per capita basis. Cory Booker deserves our support.

As for this state, it is Booker's to run as governor in a future that is not too remote. No doubt he wants his prize to be worth something when he takes it in his hands. If he can get the ear of his party's apparatchiks, maybe it can be. The trends, however, are not encouraging.

Japan's Golden Week Is Almost Upon Us

Back when I was working for Argonaut Capital in the 90s, Japanese stocks were part of my coverage. It was four or five years into the bear market that followed the 80s boom. The Japanese authorities had noticed that doing almost anything was better than opening the exchange for trade, so they multiplied meaningless holidays and started taking any excuse to close. Or so I remember the manner in which Golden Week became almost an entire week off from the end of April into the first week of May.

I noticed that one of the most powerful seasonal tendencies in the financial markets was for the Nikkei stock index to break shortly before or after Golden Week and decline meaningfully in percentage and time terms. "Sell in May and Go Away" is an adage quoted by stock traders everywhere, but counter to that there is also the market lore of the summer rally, which endures because it works sometimes. But not, it seemed, in Japan, where the very name "Golden Week" seemed a black joke. Leaden Week for financial markets was more like it.

This observation was bankable. In every year of the decade of the 90s, the Nikkei dropped substantially from its pre-Golden Week highs; the biggest drop was 39%, the smallest 9%, the average about 20%.

In 2000 I presented original research on the effect in the late lamented worldlyinvestor.com (hey there Jeremy Pink! Lay off the Dim Sum, will you?) I forecast the same thing to happen that year, and it did: a 20% drop a few weeks after Golden Week, a 30% drop within a few months.

In 2001, the Nikkei peaked in May and plunged.

In 2002, it rose in May but collapsed later that summer.

In 2003,the pattern failed for the first year in fourteen as the index rose 10% in May and kept on trucking.

In 2004, there was a modest 10% loss.

In 2005, there was again no playable decline around Golden Week. However in 2006 there was a rapid loss of 2500 Nikkei points.

Then in 2007, the peak did not arrive until the first week in July, and in 2008 the market rallied in May but began the collapse from which it is still suffering in early June.

One might conclude that the pattern is no longer reliable. Possibly as the effect became more widely known it has been arbitraged away through the action of traders. I always felt things changed since 2000 with the inclusion of a number of key technology shares in the Nikkei that year at very high weightings and the near disappearance of financial sector weightings. Over time the Nikkei has become more like a Nasdaq proxy, and the Nasdaq is having a pretty good year in 2009, all things considered.

I'm positioning for the thing to work again this year, even though at time of writing the Nikkei is only at 8686. That's still 1900 points above its low for the year, at a time that the economy is contracting at rates approaching 10% per annum, world markets may have run out of puff, and there are few redeeming factors in sight.

Worst Market Day in Six Weeks

I know a lot of market participants have been looking for this break long before today. My sense has been that they are wrong and the market recovery in the six weeks through Friday can carry a long way, surprise everyone, and ruin the bears' year as the prices will be set by investors looking beyond the current recession earnings trough. At the moment, I am holding on to that view. But I can be persuaded that I am wrong, and switch my position accordingly.

Recently I have had correspondence with Professor Christopher Mayer of Columbia Business School, regarding his Mayer-Hubbard Plan and my Household Initiative Plan. He says he has been in Washington lately and senses a real loss of momentum for all these plans. I think you can generalize that. There has been a loss of momentum for all the administration's economic schemes as they have had other things on their plates such as foreign summitry, stem cells research, climate change, torture memos, and so on and so forth. Also, Congress has been on Easter recess. It may be a coincidence that the market took a swan dive on the day Congress returned and the administration held its first cabinet meeting. But on the other hand it may not -- market participants have ample cause for concern about the administration of the TARP, the independence of the Federal Reserve, the possibility that Ben Bernanke is not reappointed, and the dawning realization of the scale and scope of the budget deficit to come. And with government back in full domestic operation, players may be pricing that in, and the previous six weeks could turn out to have been a pleasant holiday from hard reality.

Chinese Business Naming: Baby Banana Fettewql, etc.

I once met with a company in China. It had a great business plan for its proprietary skin care products for men, terrific sales pitch to go with the products, attractive product design and logo. Altogether pretty credible, until you got to the name. Who told them it was a good idea to pick a Chinese name that transliterates to something that sounds exactly like "Lady Man"?

A lot of regular guys feel mildly conflicted about using any product beside the traditional soap and shaving cream on their skin. Offering them Lady Man brand products is going to queer the deal, probably for good.

The Lady Man men have an elaborate explanation of how they came up with their names, trademarks, and trade dress, all of which is really beside the point. They have made the mistake of being unintentionally ridiculous in a major world language. Of course they are not the first or the biggest to do so. Many of us have heard how General Motors struggled to sell Nova’s in Latin America at a time that it apparently had no Spanish speakers on staff to point out that “no va” is Spanish for “doesn’t go.”

There are hundreds of world languages, and no doubt almost everything is ridiculous to some linguistic community or other. For the brand manager it might be OK if your name is smutty in Sinhalese, hilarious in Hittite, or politically incorrect in Papuan, as long as it is OK in all the majors. On the other hand, if you sell Iran’s market-leading detergent Barf, you don’t worry because your customers do not know or care why Americans think that is so funny.

But back to Lady Man. This is one small particular instance of problematic product/business naming in China, where companies are thinking big, trying to graduate from producing dollar-store fodder and white-label products for foreign brand owners to developing international brands in their own right. They need to know that getting the right name is the first and most important part of this, because you are not a brand unless customers ask for you by name.

Some Chinese companies are going international with their Chinese name, transliterated into foreign script -- for example Huaxin Cement, Hai'er Appliances, and Tsingtao Beer. This follows the example of many Japanese and Korean competitors (e.g. Toyota, Samsung). It takes confidence and a willingness to hear foreigners mispronounce your language. It is working pretty well for Hai'er as they establish their brand worldwide.

Other Chinese companies venture out into the wide world with their Chinese name translated into foreign language -- Snow Lotus Cashmere, White Cat Laundry Detergent. These brand names can seem quaintly "Chinese-y" to foreign ears.

It is common for companies and brands all over the world to bear the name of their founder or animating spirit, and this seldom presents any problems. With the growth of individual enterprise and entrepreneurial culture in China, we can expect to see more labels and brands bearing the name of the real people behind them. Yue Sai-Kan had turned herself into a brand before the personal branding consultants in the U.S. ever thought of such a thing. Han Feng, the Shanghai-based fashion designer, is my favorite example in the fashion industry, one of the businesses I know best.

For fashion and allied businesses such as cosmetics and salon and spa services, the Chinese consumer values foreign experiences and foreign brands far above homespun Chinese, so the smart domestic entrepreneur picks an evocative personal name, place name, or foreign language word. In big city malls, the fashion brand Sao Paulo is side by side with Only, Less, and a Korean competitor that rejoices in the name of Mojo S. Phine NY. But it remains to be seen whether Sao Paulo the Chinese fashion brand can gain a following in Sao Paulo the Brazilian business capital.

How about using the Chinese proprietors' names together with foreign language words? Cindy Luo's label Omnialuo reaches for the classics -- the name of her line is literally "all things Luo" in Latin. Will Omnialuo mean anything to modern consumers in the western world? It just might, if they can learn to say it.

But from there things go downhill in some significant respects.

For purposes of this discussion we are concerned with legitimate business, rather than the products of intellectual property theft, made-in-China copies of foreign products with stolen brands and trademarks that make up 7% of global branded consumer product sales according to one estimate. This is criminal activity, understood as such by all concerned.

But in China and even in China's near-abroad, many Chinese companies sell own-design products under close facsimiles of well-known foreign brand names and trademarks -- there are Prader, Pal Zingeri, Dunhïll, and dozens of others, including countless variations on the name and trademark of Valentino, the leading IP victim according to my research. The foreign brand owners object to this abuse of their IP too, but the purveyors of this stuff go about their little activities unmolested. To the extent that these near-knockoffs make it into mainstream outlets such as Isetan in shopping Meccas like Kuala Lumpur, the IP originators can legitimately complain of real displacement and lost sales.

There are facsimile trademarks that rely for their effect on the font style rather than the actual names. In Guangzhou I saw a Frognie Zila store with the name rendered unmistakably in the font style used by Ermengildo Zegna.

One other case that fascinates me is the "Polo" name. There once was a bright, ambitious chap from the Bronx named Ralph Lifshitz who understood the value of names. He changed his own name to Ralph Lauren and called his fashion lines Polo. Ralph has tried to claim a proprietary right to the name and has even disputed the use by the sport's governing body of a polo player logo in its licensed apparel. But because Polo the sport has been around longer than Polo the brands, there is a little space for others to squeeze into, especially outside the U.S. where Ralph and other litigious parties are less likely to prevail. So in China, "Polo" has become a name applied indiscriminately and in dozens of variations to every kind of luggage and leather goods – “New York Polo”, “Polo Club”, “Polo Golf” -- if you can’t identify fifteen different Chinese Polos at a baggage carousel in any mainland airport, I’ll eat a polo mallet. The original and best Chinese Polo is simply Polo, and the proprietor is a friend of my family. His leather goods are excellent and his business operations in Beijing and Guangzhou are substantial. If his brand name did not bring him into conflict with industry heavyweight Lifshitz, er, Lauren, he would have a sure shot at success in international markets.

If abuse of foreign trademarks is a concern, abuse of foreign language is just a laugh. Visitors to China derive hours of amusement from the weird and wonderful uses to which random foreign letters, words, and texts are put there. In the men’s room in Jinan’s airport is a sign that says “Protect Environment Saving Bumf.” I don’t know what Bumf is, but sure, let’s save it. And while we’re at it let’s also save Chinese brand owners some grief by letting them know that silly confections such as Marisfrolg, Baby Banana Fettewql, and Biemlfdlkk are probably not going to work at the Mall of America.

My father told me, “Don’t try to be clever sonny, just be yourself.” It is good advice, which many in Chinese industry lack the self-confidence to employ despite the good progress of Hai'er and others: Just be yourself. The Japanese are always and everywhere themselves. At some early stage, Toyota decided to be Toyota rather than Forb or Fiak (or Fiaklfdlkk). Shiseido did not try to pass itself off as Channel. Yohji Yamamoto did not change his name to Johhny Valentino. Would it be too much to ask our Chinese friends, in just this one respect perhaps, to look at the Japanese and take a page from their book?

Buy a suit at Jos. A. Bank, let them give you a bank!

Gosh, I'm so sick of their commercials. Where do they get the goofball with the infinitely joyful sing-song voice, who is always offering ever more fantastic deals on clothing that no one needs!

Buy three suits, get five free!!! For what, dude? Don't have no job, don't need no suit!

Or if you had a job to which you might otherwise have worn a suit, the Security Department of your company has sent out a memo telling you to dress like a plumber or electrician just in case demonstrators think you're a bonus recipient and throw garbage at you, or worse.

This is my modest proposal to Jos. A Bank. It's a variation of the old wheeze where you open a CD at the bank and they give you a toaster. I'll buy the goddam suit, and I'll allow you, Jos. A. Bank, to give me a bank. You've got banks, right? That's why you're called that! Plus, if you don't have enough banks to give to the thirteen men in America today who might be persuaded to buy a junky suit if they got a bank with it, you can get more from the TARP. A suit is body cover, and what better to cover bodies than TARP?

Great deal. You unload surplus suits, government unloads surplus banks, I recapitalize my bank by taking Bazooka Joe wrappers and S&H Green Stamps to the Fed discount window. Everyone's a winner.

"Inheriting"

The word of the day -- this day and every day -- is "inherit".

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At least he didn't say "Inherited"

AIG Chairman and CEO Edward M. Liddy has an op-ed in the Washington Post entitled "Our Mission at AIG: Repairs, and Repayment" this morning. He is trying to justify the payment of the $165 million bonuses. Good luck with that there, Mr. Liddy. But for one thing we can be grateful: in telling the tale of his appointment at AIG after the hapless Martin Sullivan, he spares us the word "inherited."

I suppose that word is government property.

The Coming Real Estate Recovery -- By The Numbers

I have been analyzing real estate and construction since 1991. I can’t even say that our current real estate collapse is unprecedented, because to me it’s not – I went through the Asian Financial Crisis, and this is like that. As a matter of fact, the Hongkong real estate slump of 1994-95 was pretty serious even before the Big One two years later. And Japan's real estate collapse has been both huge and enduring.

But I well remember my first AFC trip to the region. I had been correctly bearish in 1997 and I was analyzing from afar, unwilling to allow myself to make the trip in case my natural sympathy with people should overcome my brutally harsh analysis. So instead of my usual five-times-a-year Asia trips, I took no trips in 1997. Finally in the first quarter of 1998 I was sure things were as bad as they were going to get, and I did not have to worry about personal contagion any longer. I flew into Seoul, and was driven immediately in a black car to the Bank of Korea. Along the way I saw the debris from anti-government demonstrations and grafitti saying “IMF = I AM F¿¢KED”. The last two hundred yards of the way to the BOK, the car went slowly enough for me to see the sad, sunken faces looking with deep suspicion at a foreigner in a limo on his way to the central bank.

From Seoul I flew to Singapore on a Singapore Airlines wide-body aircraft with exactly three passengers on it, just me and a honeymooning couple.

In Bangkok, I visited the offices of one of the big commercial real estate brokers, where the Englishman in charge appeared a broken man. We looked out over the vast city with its forest of cranes all idle for the first time in memory. “No one will build another class A building in Bangkok for fifteen years,” he said.

But he was wrong. Capital did re-form in the real estate markets, and things were humming again inside of three years.

That’s good, and I expect we can look forward to some similar unexpectedly rapid recovery. But enough talk already. What do the data say we can expect here? Let’s dig into the housing market data.

For a long time I have resisted the popular Case-Shiller 20-City Housing Index, for many reasons. I think Shiller’s nutty professor act is off-putting, as is the false precision in the reports, the short history, and my sense that it is hard to index lumpy and illiquid stuff like houses. But everyone now uses it, so I have to relent.

I refer to short history -- Professors Case and Shiller only reach back to 1987, which misses the booms and busts of the seventies and early eighties. I can’t deal with that, so here’s what I did. I took their data, and lined them up with Census data going back to 1959, data that HUD also reports. I did some regressions and other hand-waving trend analysis to try to extend the Case-Shiller Index back in time.

Hey, if hand-waving is good enough for the Treasury Secretary, it’s good enough for me.

I got GDP, PCE Housing, and 10-year Note Yield data (the latter my mortgage interest rate proxy) from my good friend Fred at the St. Louis Federal Reserve Bank, and lined that up with the housing index stuff reported by the good professors and massaged by me.

Six recessions have been observed since 1959. Twenty quarters (five years) after trough recessionary conditions, the average increase in the price index has been 46.3%, the median increase 55.2%, the maximum 79.8% and the minimum -0.3%.

Eight interest rate spikes over the same period have seen the average price increase 30.0% twenty quarters later, or 34.5% on a median basis. The maximum increase was 75.9% and the minimum -22.3% (i.e. a more than 20% drop, in the period in which we now find ourselves).

There have been only five episodes of declining prices, of which this is by far the worst. Twenty quarters after the midpoint of these episodes, prices are 18.8% higher (average), 17.1% (median), 75.7% higher at best and down 28.3% at worst. But leaving out the current episode, which I suppose is not finished, the figures are respectively 46.3%, 55.2%, 79.8%, and -0.3%.

Food for thought.

The Contributions of AIG in Perspective, & Who Wrecked Them

I just spent an hour today going through American International Group's last twenty years of Annual Reports, finding out how much tax AIG has paid over the last 20 years, working out estimates of how much tax its employees have paid on their incomes and how much has been remitted to the Treasury on dividends paid by AIG to shareholders on previously-taxed income.

The numbers I come up with are $35 billion of income taxes paid until the company tumbled into loss for its 2008 fiscal year. Taxes on salaries and dividends through 2008 I estimate at another $20 billion, for a total tax rake-off of around $55 billion.

What I cannot work out as easily is how much tax has been paid by service providers, lessors and so many others who prospered when AIG prospered. It would also take study to quantify the other economic benefits conferred on the cities and towns in which AIG operates, and the contributions AIG made to all the good causes it has supported so generously down the years.

As black as the company is now painted by career-making politicians, including some who now advise AIG personnel to commit suicide out of shame, one must try to remember that there were many benefits of AIG's rise and rise and rise. Far from being a criminal enterprise or a ship of fools, AIG was one of the greatest American companies, right up until it was wrecked by the incompetents brought in after that great man of the people, Eliot Spitzer, made it his special project to destroy Hank Greenberg and the company he built.

Hello Kitty at Lever House

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"I Blame the Recession" . . . the wisdom of a 14-year-old

True story. Yesterday as I was driving my 14-year-old daughter to school, the AM stations we normally listen to at that time for business, news, weather and traffic were all in commercial breaks at the same time.

So we switched over to 92.3 for the first (and probably last) time since K-ROCK signed off and the dopey Z100 wannabe top-40 station came on.

There was some gal I've never heard of singing a Top 40 song I don't know. It sounded like Katy Perry, but without the soul.

Cyrenah asked, "Dad, WTF?"

I explained that K-ROCK was gone and this is what we have instead.

And she said, "I blame the recession."

I asked her why.

"Everything that sucks is because of the recession."

Bernie Madoff Court Appearance Tomorrow

Beg your pardon for being away from the blog -- pressure of some document preparation with a Friday deadline.

I just want to take note that Bernie Madoff will appear in court tomorrow, reportedly to plead guilty to eleven counts of various frauds.

My opinion since the beginning of this scandal is that he should have been remanded to custody immediately. His lingering under house arrest in the opulent penthouse apartment has mocked his victims and demonstrated how unseriously and inconsistently our system treats white collar crime.

In New York a fellow of a different color or different profession than Madoff would see the inside of Rikers Island if he were charged for the theft of my wallet. Madoff stood accused of a $50 billion fraud initially, now apparently upgraded to over $60 billion. For perspective, consider that the initial insured loss in the 9/11 attacks was determined to be $11 billion.

Employment in Manufacturing & Government & the Deficit with China

Around the 20th of January, I heard a couple of talkers on business news and talk radio note that government employment had exceeded manufacturing employment in the United States. When I looked into it, I found the origin of this meme at a blogpost of Fabius Maximus entitled America passes a milestone!, with interesting charts and analysis. The charts are from subscription site Contrary Investor. Instapundit, Dr. Melissa Clouthier and Citizen Paine are among the analysts who picked up the story from Fabius, and well done to him.

But I wanted to see the original data, and I found it on one of my favorite sources for primary material, the website of the Bureau of Labor Statistics, for which the relevant interactive dialog box is here.

It is the work of a few minutes to find that, yes indeed, according to BLS, the non-seasonally-adjusted figure for workers employed in the goods producing sector of the US economy was set preliminarily at 21,404,000 for 2008, down from 22,221,000 in 2007, while the comparable employment-in-government figures were 22,457,000 preliminarily for 2008, up from 22,203,000 in 2007.

The services sector is bigger than both put together, with a preliminary 115,648,000 employed for the year 2008.

It was two days after Fabius's article that Timothy Geithner had his confirmation hearings in the Senate Finance Committee. One of the hostile Senators, Jim Bunning (R-KY), roasted Geithner over the US-China trade and financial relationship. He got started in his opening statement:

Thank you, Mr. Chairman.

The financial crisis we are experiencing today did not happen overnight and it could have been avoided. As Mr. Greenspan now admits, the easy monetary policy that he and Mr. Geithner championed at the Federal Reserve created an asset bubble. Large capital inflows from countries like China, for the purpose of keeping its currency low, contributed to the bubble and they went unchecked. But, the collapse of the bubble would not have been so devastating if Mr. Geithner had been effective in his role as a regulator. . . .

. . . and in questioning he was if anything tougher, blaming Chinese manufacturers and workers, in effect, for the financial crisis in which we now find ourselves. This, I believe, is a dangerous new aspect of international financial and trade relations, as I stated in my posting of January 26.

It strikes me that there is a direct line between the manufacturing implosion and the current account deficit with China and certain other trading partners, if anyone just cared to draw it. And there's not a thing Mr. Geithner could have done about it in his role as a regulator.

The capital inflows that so trouble Senator Bunning are just the flip side of America's trade deficit with that country. It's a matter of double-entry accounting identities, rather than any cunning device to "keep its currency low."

It can be shown -- I have done the work, and will put it here at some point -- that a portion of the trade deficit with China is really with American companies who have investments there.

Nevertheless, it is clear that the US economy has gone post-industrial.

Our trading partners will not buy our manufactures if we do not manufacture.

They will buy very little of the output of our large and growing government sector.

They will buy some of our services, but of course in these times of financial crisis and straitened circumstances, they too have less need of the financial and creative services in which American business specializes.

Our trading partners will buy hardly any of the spa, tanning, psychotherapy, handyman, coaching, self-actualization, pet grooming, personal-shopping, kitchen-designing, dog-walking, SAT-essay tutoring, Search Engine Optimization consulting, skateboard training, party-planning, eBay-auctioning, credit-counseling, baby-sitting and similar personal services in which a huge number of Americans now occupy themselves and try to scratch a living.

An entrepreneurial Chinese person might as well try his hand at manufacturing. An entrepreneurial American might as well shoot himself in the head as try his hand at manufacturing. The thought of going into the business of manufacturing a product for sale, with all the nightmares of taxation and regulation that go with that in the United States in the year 2009, is not for the faint-hearted among the business-minded.

And that is why perfectly serviceable industrial parks near my home in New Jersey are rented out to ballet schools, medical offices, day care centers, basketball clinics, gymnastics facilities, skate parks, senior centers, art studios, martial arts gyms, fitness centers, churches, mosques, schools, and even government offices, but hardly at all to industry.

If this cannot be changed -- and if anything the anti-manufacturing tide is still at the flood stage -- then how can the US current account deficit be anything but a huge long-term structural problem for us?

The Household Initiative Plan is posted at Household Initiative Plan Blog

China's fiscal deficit -3% of GDP

What is the US up to now in the Obama budget, 8%? 10%

Big Economic News From China

We have CCTV4 (China Central TV Channel 4) in our house and at the moment Premier Wen Jiabao is delivering a major speech about economic stimulus. Here are a few of my notes.

The Chinese Communists are cutting corporate taxes, cutting capital gains taxes, cutting stock transfer taxes, promoting the motor industry and the housing market, promising to complete major recovery efforts for the Sichuan earthquake zone this year, and committing themselves to major infrastructure projects, agricultural and rural development, and much more. They are not giving up on their earlier forecast of 8% GDP growth for 2009.

Premier Wen's delivery is certain and confident. He is at pains to remind government officials that this is the people's money they are committing, and not "yi fen" (one penny) is to waste. The objective is to increase productivity in the Chinese economy and support employment in productive industry, and not promote make-work schemes or screwdriver assembly industry. Apart from this feint in the direction of industrial policy, the plan is highly market-oriented. It is detailed, fully-formed and ready to implement.

The Chinese Communist Party, which once said "Whatever you do never forget Class Struggle," has forgotten class struggle. There is apparently nothing in the Chinese plan for condoms, community organizers, or Maglev trains from senior politicians' districts to Disneyland.

You just have to be bullish on China. It is hard to argue that China will not emerge from the current financial crisis relatively stronger than before.

More later.

Why Worry About the Capital Gains Tax Rate?

GE's drop below $6 is symptomatic of the fact that the investor class of this country has huge capital losses to write off against gains for the next many years. Our losses will outlast this current anti-capital, anti-business government.

GE joins the -90% club.

The Government is Too Much With Us

The people are sovereign and this is what they voted for.

Obama's speech the other night sounded great, if you paid no attention to the words, which were a lot hair shirt and class struggle guff. Then came the budget announcement, in which those who did not really believe the new president is determined to move the country hard left finally had to face the facts that he means it -- the class warfare, the redistribution, the anti-business, anti-capital worldview -- all of it. Thursday we had attacks on health care and finance, Friday the 40% dilution of Citigroup's common equity. (Citigroup should henceforward be known as Citi Government.) The Dow loses 100 points every day, which wasn't so bad when it was at 14,000 but smarts a bit when it's at 7,000.

One of the most interesting fields of finance is "real options", not the familiar listed options but the features of optionality that are embedded in so many facets of everyday life. It helps me to think of our current predicament in terms of real options: in the face of 100% uncertainty and 200% hostility, the option to withhold my money for investment and keep it in my hip pocket instead is more valuable than ever.

Multiply that attitude by millions of investors and business people, and this economy is heading for a total breakdown.

One half wonders whether the Obama administration actually wants that breakdown in order to be able to ratchet up the class warfare even more . . . "Look, we offered them $3000 to hire new workers, but they laid of people and moved to China instead -- these rotten business people are your class enemies, let's fix them good!" That then is a pretext to move things rapidly in an even more revolutionary direction. It was chief of staff Rahm Emanuel who said crises are great opportunities for rapid and radical change.

On the other hand, the masses of the American people did not really vote for socialism, they voted for charisma and smooth talk and racial reconciliation. Democrats in Congress, who stand for election every two years, are showing their misgivings that when the people see where this is going, how rapidly we are heading towards breakdown, they may change their minds.

What the capital and business class of this country wants, apart from not being demonized and shaken down, is clarity on bailouts, budgets, and the very integrity of the system that produced the wealth and is now under attack for its pains.

There's a sense that the driver does not know the way to go but is driving 110 miles per hour trying to get there. Until we get clarity, or dare we hope a touch on the brakes from a Congress that realizes this is an electoral disaster in the making for them, capital will strike.

The Household Initiative Plan is posted at Household Initiative Plan Blog

While waiting for the Prez's speech, let's talk defaults!

There is time to dispose of a piece of received wisdom that is abroad in the land, and totally wrong.

Jamie Dimon (that's "Die-mon" not "Dee-mon", Mr. Congressman) of JP Morgan had the opportunity to hit this out of the park the other day when someone asked him about whether borrowers who are underwater on their loans might as well just walk away. Predictably enough, he said no, a mortgage is a contract and when you make a contract you should fulfill its terms.

True, and a large part of the moral truth. But not the whole truth, as there is a practical truth as well, for those who are not bound by moral scruple, who ask not "What's right?", but "What's in this for me?" The practical truth is that walking away has dire consequences that people have to weigh together with other considerations.

If you walk away, and the lender forecloses, it will destroy your credit for eight or ten years. If things improve and you want to buy a house again, or you need a car, a credit card, a student loan for your kids, you will be hard pressed to get one with a foreclosure in your recent past.

Moreover when the sheriff auctions your foreclosed house on the courthouse steps, there could well be a deficiency judgment against you for the difference between the hammer price and the amount on which you have defaulted. That deficiency judgment could follow you around for twenty years, during which the court can garnish your wages, withhold your tax refunds, and sell whatever assets you have that they can attach.

A ten- to twenty-year sentence? It is not worth it. You are far better off, and your lender is far better off, working it out than mailing the keys back to the lender and running off.

OK, now the President.

The Household Initiative Plan is posted at Household Initiative Plan Blog

Confiscation of Retirement Assets?

There is a lively discussion under way at the Legal Insurrection blog with a post "The Revolt of the Kulaks Has Begun." In the comments it is suggested that the administration will come after tax-advantaged savings assets of American retirement savers.

This is dynamite. It is hard to believe the administration would overreach this way, but congressional Democrats exposed them to the charge by taking advice from Teresa Ghilarducci, a critic of the retirement savings system at the New School. In effect she suggests confiscating private accounts and supplying guaranteed government accounts in their place.

Promoting my Household Initiative Plan or something like it is one way to make the administration tell us what it really has in mind for private retirement accounts.

I have been making free-market proposals to liberalize the current rules for the 46 million IRAs, SEPs, SIMPLE and Keogh retirement accounts and permit them to invest in real estate without the heavy restrictions which pertain to them now. Retirement-minded people who are in good shape, not behind on their bills, and not struggling, could benefit from this opportunity to use retirement savings to take advantage of low real estate prices in popular retirement areas.

If you believe that the money people have contributed to their retirement accounts belongs to them, then it should be their free choice to do with as they think best, to take advantage of such opportunities as they perceive, or to bail themselves out of the trouble they are in. And if the administration thinks differently, then it would have to knock down proposals like my HIP.

Let's speak more generally about the restrictions and penalties that apply to these accounts. They are making a terrible situation even worse by restricting liquidity. Many people are being severely penalized for tapping their retirement accounts in order to try to save their homes and credit scores. Others who are behind on their mortgages and other bills, thereby damaging their credit, are nevertheless unwilling to incur the penalties they would pay to access their money in these accounts to get current on their bills. This is just madness. For the duration of the crisis, let's free things up, and let people access their own money in these accounts to work themselves out of trouble without penalties.

The Household Initiative Plan is posted at Household Initiative Plan Blog

Post-Industrial Winter

The Household Initiative Plan is posted at Household Initiative Plan Blog

The Question of Capital Flight

In better times, I was a money manager. My first job was analyzing Asia-Pacific stocks for one of the world's largest pension funds, and my first boss was a very smart, savvy Hongkong Chinese person. I had coffee with her recently and she says she is certain that this country is already experiencing capital flight. Capital flight is one critical step beyond "capital strike," which is how Larry Kudlow on CNBC characterizes it. If true, this is a big problem for a country with a current account deficit such as ours.

The Household Initiative Plan is posted at Household Initiative Plan Blog

Household Initiative Plan to Rescue Real Estate

Here's a new plan for America's housing problem called the Household Initiative Plan. It’s called that because of all the plans out there it is the only one that asks little of the Treasury, Federal Reserve, or other government agencies besides non-interference in what millions of responsible householders could do for themselves on their own initiative.

My Household Initiative Plan will act to revive the real estate market by attacking three parts of the problem together. It reduces the unsold housing inventory and arrests the decline in home prices by helping liquidity re-form in the real estate market. It does this by making available an untapped source of capital that has previously been hard to access: the IRAs, SEPs, SIMPLE and Keogh plans of American retirement savers. According to the Investment Company Institute, there were over 46 million of these retirement accounts at the most recent survey in 2007, holding an incredible $4.5 trillion. No doubt some has gone in the financial market collapse, but it is still a great deal of money even by current jaded standards.

While it has been possible to buy real estate with IRA funds all along, the heavy restrictions and complicated regulations have kept people from doing so. This plan calls for suspending the restrictions and regulations on the use of IRAs for real estate purchase.

At present, if you buy property through your IRA, you do not own the property, the IRA does. You cannot pay the taxes and maintenance expenses of the property, the IRA has to have enough funds to cover them. You cannot make personal use of the property while the IRA owns it, it must be held only for investment until distribution upon your retirement. You cannot manage the property, the IRA trustee has to designate a manager. You cannot collect rents, they have to be paid to the IRA. You can apply monies from more than one IRA account to the purchase and expenses, but in effect you cannot buy the property with a mortgage simply because no lender is going to have IRA accounts as mortgagors.

At least for the duration of the economic crisis, why not liberalize and simplify the system, so that more people might take advantage of low real estate prices using IRA money that they have but would not think to use for this purpose? Let's allow people to take as much of their money as they want out of IRAs, SEPs, SIMPLE and Keogh plans, without taxes or penalties, for any real estate purchase – investment property or principal residence, first, second, or seventh home. They can then write contracts and take title as real persons in the regular way, without the complication of having a trustee execute these instruments on behalf of the IRA. Subject to market conditions and substantial down-payments, buyers should be able to get mortgages for regular-way purchases.

Let's permit buyers using IRA funds to pay property taxes and maintenance expenses and collect any rents of the property either personally if they prefer, or through the IRA if they can. On an investment property, if they receive net investment income personally, it can be taxable, if through the IRA, then not. That will provide an incentive for directing investment income back to the retirement accounts. If the property is used as the principal personal residence of the owners, the normal mortgage interest deduction can apply. If it is a vacation home, then perhaps disallow that, because there has already been a tax advantage conferred by the liberalized use of the IRA monies.

If a property paid for with IRA funds is sold before the owners' retirement, there are at least two sensible ways of handling the net proceeds. They can either go into another property without any capital gains tax but also without the further complication of a Section 1031 Exchange. Or the proceeds can return to the IRA, without fees, taxes, or penalties. Also – and this is important – if the account holders suspended IRA contributions after their property purchase, they should be permitted to catch up on their contributions and top up their accounts to the full extent that they could have funded their accounts under IRA rules.

The idea of my Household Initiative Plan is to make things easy for people to choose to use their IRA assets to buy real estate now. It removes the preference for financial assets over real assets and places both on a level playing field. Financial experts will object that retirement-minded investors should prefer stocks at today's low prices. However, real estate is also very cheap now, particularly in popular retirement regions of the southwest and southeast, and there is no way of knowing whether houses or stocks will treat people's money better in the coming years. As they always say, past performance is not an indicator of future results, but it is noteworthy that even after its sharp decline, the broad real estate asset class has performed better than the S&P500 over the last ten years.

The key point at this time of financial uncertainty is this: The people's money in IRA accounts belongs to them, and it should be their free choice to do with as they think best. If their choice can help the national prosperity as they prosper themselves, and at no additional public expense, what could be better for the general welfare?



D.H. Smith, Mt. Freedom NJ, 2/16/2009
Cross-posted at Household Initiative Plan Blog
Glad to get your feedback at "the.grayling at gmail dot com"

Notes on the HIP

1. The careful reading and valuable insights of Harriet Baldwin, Charles Burns, Timothy Gildner, Cameron Adams, Swee Hsien Tsung and Terry Zou are gratefully acknowledged.

2. Other plans to fix the housing market focus variously on one or more parts of the problem: they aim to shore up the capital of banks, re-constitute the mortgage markets with private or government investment, re-work loan terms to mitigate foreclosures and keep people in their houses, clear the market oversupply of houses, and stop the spiral of house price declines. No single plan acts upon all of parts of the problem. Most act upon more than just one part. No useful plan acts upon only one.

3. The following are the key points of the well-known real estate plans, no doubt digested to the point that their originators would not recognize them:

a) The Zingales Plan (Luigi Zingales, of the University of Chicago) -- A decline in an index of local property prices triggers a government-mandated reduction of principal balance on securitized mortgages; lenders thus crammed-down may recapture some of future price appreciation in underlying assets.

b) The Columbia Plan (Glenn Hubbard and Chris Mayer, Columbia Business School) -- Calls for nationalized institutions Fannie Mae and Freddie Mac to provide home loans to new and existing borrowers with positive equity on such terms as would be available were markets working normally e.g 4.75% for 30 year loans.

c) The Feldstein Plan (Martin Feldstein, Harvard) --Proposes “mortgage-replacement” loans from the treasury at low cost (e.g. 2%) for all mortgage holders, up to 20% of their outstanding mortgage debt, to reduce their cost of debt service. These loans are full recourse, in first place ahead of mortgage, and aim to reduce the incentive for owners to abandon their properties.

d) The Immigration Plan suggests allowing an increased flow of immigrants to take up the excess housing stock.

e) The National Association of Realtors Plan: Expand and extend the home purchase tax credit, increase conforming loan limits, use TARP funds for mortgage interest buy-downs, and keep banks out of Realtors’ traditional business.

f) The National Association of Home Builders Plan: Extend tax credits of 10% of purchase price up to $22k to all new home buyers, and use TARP funds to buy down interest on conforming mortgages.

g) The Fix Housing First Plan (Sen. Johnny Isakson, Republican of Georgia, et. al.) -- Extend tax credits as per the NAHB plan, applicable to 2008 income tax, and make them monetizable, so that buyers can apply them at closing.

h) The Stimulus Plan as signed on 2/17/09 -- Expanded a program of $8000 tax credit for first-time homebuyers, repayment not required.

4. Most of the well-known real estate plans have their good points, but the one thing none of them do is allow the American people a free choice to apply their own existing resources in the service of their own economic interests.

Some Reaction to the HIP

I ran the Household Initiative Plan by the strong free market advocates of the Ayn Rand "Atlas Shrugged" group on Linkedin, and got back strong opinions. One comment:

“The defect [of the HIP] is that it's just minor tinkering. Instead, let's repeal the community investment act, privatize or abolish the GSEs. Repeal the income tax, lay off all government employees . . . this plan is illogical since it seeks to artificially make real estate go back up again . . . "

Another:

"The defect [of the HIP] is that is a plan and a planned economy never works. You describe it as a plan to turn the housing market around. Around from what and in which direction? I don’t know if real estate has to come down [and] neither do you . . . the only way to know what should happen is to free the market and watch it work."

I answered as follows. First, there is no way that liberating 46 million accounts and trillions of dollars constitutes minor tinkering.

Second, I think my use of the word “plan” has caused more grief than the actual contents of the plan. Among strong free market believers it is a word that elicits negative reactions. I only chose the word plan in order to try to compete for attention among all the other plans that are out there -- Zingales, Hubbard/Mayer, Feldstein and all the rest. I could have called it a proposal, an idea, or following an ancient Fed official, a banana.

My plan, or banana if you object to the word plan, is non-interference, a level playing field, clearing away the regulatory debris, and letting the owners of capital decide how to apply their capital.

The "planned economy" is not part of my proposal. On the contrary the "planned economy" was introduced to this situation years ago when the current structures of IRAs, Keoghs, SEPs Simples and all the IRS apparatus that goes with them were created. By the way, it should be understood by one and all that this whole apparatus was a giant gift for investment companies, banks, financial planners and accountants.

Surely I am not the only one with money in IRAs, losing money in financial assets and thinking about the future, who might choose to buy a condo in Florida instead with the money if the restrictions were lifted. That would be my choice, freely made, well considered, possibly wrong, but I'm willing to take the risk on that if I am permitted and not ask for a bailout if I am wrong. If someone else chooses to stick with their Fidelity and Putnam funds, I would be the last to tell them they can't.

At least for now, the money in these accounts belongs to the people who own the accounts. (There are professors at the New School who are advising the administration to do something about that too.) Let the people make their own choices. I don't see how that can be objectionable.

Still More Reaction to the HIP

I got a valuable contribution from my best college friend. He writes:


Dave,

. . . First, the biggest problem is selling the idea. It sounds good, but who in the government is going to buy it? Democrats don't trust that people are smart enough to be able to handle their own retirement accounts - isn't that the purpose of Social Security? The cushion that an IRA, et. al., offers is still a piece that is supposedly handled by people that have some idea as to what they're doing - not Joe Bag O'Donuts next door. Republicans don't think that people with small investments are worth supporting in this measure, as they get their support from those money managers who are handling all the IRAs. You're going to take away their revenue stream.

Second, it seems that more people have problems with their existing mortgages. Emptying out their IRAs will have already occurred in some cases, in an attempt to stave off that foreclosure. Others will have to figure out how to draw out that IRA to buy fresh real estate while still being upside down on their existing mortgage. How do you handling buying a $300k home, with your $250k IRA when you already owe $250k on a house now valued at $200k? Insert whatever relevant numbers you want here, the problem is still the same.

Third, how do you convince people that investing in real estate is a good idea. [My city] ranks third among emptying cities. There's a glut of available real estate, and the prices continue to drop, but even those people with money are refusing to part with it - at least not for tickets that pricey. It's the same reason car sales have dropped. You can survive in a house with drafty windows and too small rooms, while you wait for the recovery. You can milk another 20 thousand miles out of that car, squirreling away the finally-relieved car payments, rather than upgrade, just to make sure that HP doesn't decide to downsize your department.

All that being said, I do think that your idea seems worthwhile. The problem has always been what the Dutch discovered hundreds of years ago - it's all just a bunch of tulips. Speculation leads to false value leads to soaring investment, finally to gossamer worth. When you discover all it ever was is a flower, then it all falls down on itself. Real estate has a quantifiable value. While it may not always be monetary, it is always concrete in its being. (Picture bad pun here.)

Hope that helps.



I replied as follows:


Hey there, I really appreciate you looking at it and giving me this well-considered feedback.

I'm a strong free market guy, so my best hope of sponsorship is not in either of the parties as you say, but in think tanks like Cato, Hudson, AEI. If they get behind something like it, the Republicans may pick it up in their role as opposition.

There is nothing for Republicans from Wall Street anymore, and no risk in attacking the franchise of the investment companies, banks and financial advisors.

You allude to a major problem that bothers me too: the fact that people are struggling when they have money that could help them, or are being subjected to penalties when they go into that money. I think it would be best to get rid of these penalties for the duration of the crisis. (Or forever.)

The candidates for buying condos in Florida and Phoenix are not the people who are upside down in their principal residence. They are the ones who could take $75k out of their accounts and finance $25-50k . . . in other words, buyers who would buy with a low loan-to-value ratio, if not a zero LTV.

I would be the last guy to try to convince anybody that they should do this or that with their money. Some people would make this choice freely if it were open to them. I sure would. That said, I believe the loss of confidence in financial assets will last for many years, while there is some baseline real-life demand for real estate. As you say, it is concrete and you can live in it.

If governments gets things wrong now and print money to paper over the cracks in the system, we will get to where you need bushel baskets of dollar bills to buy a Big Mac. The gold price is telling you there is real concern about this outcome. Real estate prices are indexed for inflation, but financial asset prices generally are not.

Federal Open Mouth Policy is a Big Sell

The first time I realized that the Federal Open Mouth Policy is a Big Sell was over a year ago, when Fed Chief Ben Bernanke made some innocuous remarks about financial conditions that at that point did not yet rise to the level of panic. The stock market sold off hard.

Bear Stearns rescue -- short term relief, after which market sold off hard.

The statements that have followed every one of the Fed's and Treasury's Sunday evening interventions -- short term relief, after which market sold off hard.

Every one of these schemes to expand the type of security they'll take at the Fed window to include S&H green stamps, Pokemon cards, Indian wampum and pocket lint -- short term gain, after which, well, you know.

TARP, TALF . . . barf.

George W. Bush, Ben Bernanke, and Hank Paulson -- just the headline on CNBC that any of them would make any kind of a statement those last many months of 2008 unleashed a blizzard of sell orders. If the latter two had to go to Congress, same thing, only worse. It has been singularly unedifying to see the people who run the world questioned by the likes of Maxine Waters, Ron Paul, and Bernie Sanders.

The sands ran out of the glass on the hapless Bush administration, and everyone hoped for change. Just the good feeling and positive energy engendered by the new Obama administration would improve the economy in short order, or so I was told by business friends including some Wall Street people.

The Inauguration Address went over like a lead balloon. Big, big sell.

But there were high hopes for the Stimulus Bill . . . until that turned out to be a carnival of wasteful payoffs to favored constituencies, of which capital is emphatically not one. Sell.

The president's first press conference. Surely even his fans can't think this was a great performance. Apart from the oddly angry demeanor, the one takeaway is the he didn't want to steal the thunder of Treasury Secretary Timothy Geithner. Geithner, the indispensable man who had to be confirmed, despite his defects, because he is the career financial policy fixer who lives breathes eats and drinks financial and economic policy, and only he can prevent the ailing system of free market capitalism from falling about our feet. He will have a banking plan for us the next day. Can't steal his thunder.

The finger was on the sell button, but we held back on pressing it.

It turns out there's no thunder! Timothy Geithner may be a career financial and economic policy geek whose entire life has been preparation for the moment. He may have been Treasury Secretary in waiting for many months, during which time he presumably could have given some thought to our systemic issues and what he might like to do to address them. But on the day he had nothing. The indispensable man had no plan. There was some hand waving and some expressions of good intentions. What a disappointment. Big, big sell.

The bank chieftains went to Washington to get punched out by Congress. You knew what to do. It's become routine.

So yesterday we had the housing plan, and a speech by Ben Bernanke at the National Press Club. Bernanke sounded at ease, and very sensible. What do you know . . . these have actually been taken on board without another tsunami of selling. Maybe the capital interests of this country are exhausted, or have put as much into gold and Chinese stocks as they care to for now, or maybe they actually think that socializing the debts of the fiscally unsound is the way to move America forward.

Or maybe they will wait till later in the day. It's early yet.

While I wait, I'll express my hope that everyone in government would reconsider their open mouth policy for a while.

UPDATE: No mistake, they sold it hard in the afternoon. After the close, a few companies blew up, portending more of the same tomorrow.

MORE UPDATES: The selling continued all week, taking the indices down to 1997 levels. In other words, if you have been investing since 1997, you needn't have bothered.