patrick.net

The Bill Gross outburst was very entertaining. The real question is why is he talking like THAT and talking like that NOW ?

I point you all to this 2-year old article posted by another Bill on MSN Investor. I highly recommend reading this, even though most of us will not find anything "new" in there.

http://www.fleckensteincapital.com/hotpotato_pt1.htm

It's a 3 part series, replace the pt1 by pt2 and pt3 to access other parts.

This was written more than 2 years ago and introduced me to the craziness of lending, financial dark matter and essentially the root causes of the housing bubble. All this has become common knowledge NOW. Then, it was like a shocking truth that made understanding the bubble so much easier.

DinOr, SP, Skibum

So, with the BS meltdown, naked swimmers, vulnerable CDOs, and questionable MBS backing, are we finally going to see the liquidity crisis (opportunity) sooner than later?

I want the lack of easy credit to swell the unsold listings faster than a diuretic Clydesdale can fill a coffee cup. I want to see lowballs of cents on the dollar become routine, boring news. When??

Headset,

I don't know about "cents on the dollar" for houses just yet but no question, subprime is effectively shutdown! The only reason this lending distribution channel hasn't been completely choked off is b/c new loans CAN have the risk efficiently priced.

Where the downward pressure comes from is the fact that Mr. Howmuchamonth? is in essence priced out of even discounted home prices (let alone armed for a bidding war!) There will be no help for Stanley Johnson.

"Evacuate, in our moment of triumph?"

In the hodgepodge of data from the press release for the latest Case/Shiller Index numbers, it should be noted that Stumptown, Seattle and Fortress BA are showing increasing rates of appreciation for the past couple of months. Subprime fiasco, what fiasco? Is this a case of you can't chart what you can't sell? A few more months of data will reveal if this is a seasonal issue or the beginnings of a recovery in these markets.

HeadSet Says:
So, with the BS meltdown, naked swimmers, vulnerable CDOs, and questionable MBS backing, are we finally going to see the liquidity crisis (opportunity) sooner than later?

The only thing you can be certain about is that risk will get priced in, which basically shuts down the subprime party. Liquidity will certainly be lower - but whether it will reach a crisis is open to question. Liquidity crises are big, scary events that affect far more than housing.

For what you want (cheaper houses), you don't need a full blown liquidity crisis - you need a 12-24 month credit squeeze all the way up to the A-grade. This will make mortgages more difficult to qualify for, and also reduce business investment (~jobs). The raised lending standards (20% down, 28% of verified long-term income) will stay in place for a long time after that.

SP

Diversify! A little gold, a little foreign stock, a little domestic stock.

For what you want (cheaper houses), you don’t need a full blown liquidity crisis - you need a 12-24 month credit squeeze all the way up to the A-grade.

All I want is for the bond market to wake up from its hangover induced by drinking too much cheap "liquidity". Especially the non-treasury - and add sufficient risk premiums for MBS that reflect the reality of the housing market. In other words, I want the 30yr FRM to go up to 8% at least. That's all. Nothing earth shattering. ;-) That's how it was 10 years ago. Everything else will automatically get adjusted.

StuckInBA said:
I want the 30yr FRM to go up to 8% at least. That’s all. Nothing earth shattering.

My expectations are also quite close to that. 8% and above, accompanied by some realistic lending standards will bring things down to earth.

When I was talking about a year long credit squeeze, that was in the context of Headset's "pennies on the dollar" scenario - the point being that he would get that without even a total liquidity crisis. Sorry I didn't make it very clear in that post.

SP

If there is a high inflation scenario in the US, do you think the proverbial rich foreign investors would jump in before a bottom that we're comfortable with? Or would they get scared and stay home?

I'm very upset about the weak dollar. Iceland high season prices (in USD) have practically doubled in the last five years and Norwegian prices have gone up even more.

Randy says:
"There are good things about a weak dollar period that have to be recognized: 1. it helps to adjust the current account deficit; 2. it exports inflation to China which helps because it makes them pay for labor arbitrage."

One classic way to approach a current accounts deficit is cut interest rates and create a loose monetary policy. The US obviously did this. Normally, such a policy would weaken the dollar and make the Chinese goods more expensive to us, and the US goods cheaper to foreigners. Thus I understand "helps to adjust the current accounts deficit." For your statement "exports inflation to China....." are you saying this based on the fact that China does not let their currency float? I am assuming that "exports inflation" does not mean Chinese goods more expensive for US market, but that you were talking about overall inflation in the Chinese economy itself. If the Chinese did allow their currency to float, it would seem that a weak dollar export unemployment rather than inflation.

Astrid,

I was in Bodo, Norway back in 1993. Even then, a beer at a bar was the equivilent of $14.

I wasn't aware BMW was "farming out" a lot of their production. Funny... their sales literature doesn't mention that..?

Randy H,

Barring an appetite for foreign travel, I don't see much impact in my daily life which could be attributed to a falling dollar. Haven't had a big mac since probably 1970, but my 2007 iMacG5 cost 30% less than the 2000 G4 cube it replaced, so the falling dollar hasn't fallen enough to interfere.

I'm on the low end of the learning curve where this blog's subjects are concerned. While most here are interested primarily in real estate, I read for information to help me protect assets - I'm trying to work out what's prudent and where the risks lie. I also tend to be swayed more than I should be by what I've read most recently, certainly more than I would be had I the level of certainty some here seem to possess.

What I get here is discussion which seems to disqualify every possible investment medium, i.e., paralysis.

Can't say as I'll ever set foot in NORWAY then!

At one time I'd thought about putting together a "Slummin' with DinOR" travel guide. All the best places to go when you're "a little short"? Great post on the Portland Housing blog where gas prices were being discussed. One poster said he WISHES you could a gallon of beer for 3 bucks!

One of the education costs links failed to post correctly above:

One of the education costs links failed to post correctly above:

HARM,

Excellent links. IIRC I paid under a dollar a gallon for gas in 1997. CNBC had some good coverage today on their survey about summer vacations. The number of people electing to stay home (due to fuel costs) should be alarming to anyone in tourism/hospitality!

What's up? Gas has been expensive for the last several travel seasons. Evidently the difference this year is that the ATM has been shut down?

Oh, and for the record, the really *significant* changes to the way the BLS hedocially adjust the CPI came during the Clinton administration in the mid-1990s, not during the 1970s.

FYI: http://www.shadowstats.com/cgi-bin/sgs?

DinOR, that's kinda cherry picking, isn't it? How long was gas $1 in 1997? I seem to recall maybe for a couple months before it picked back up. That's kinda like citing the tech stocks' P/E circa 1999.

Anyway, most of the items cited above--oil, college education, food--are increasing in price because global demand is rising. I'm not sure if youc an call that "inflation" in the purest sense. It's just rising prices. Just look at the number of college applications now vs. 1990 or 1980. Corn and meat are getting more expensive because of this silly ethanol thing and other factors. More foreign countries like China and India are consuming oil, coal, steel, lumber and basic materials at tremendous rates.

Housing prices have been beaten to death here. It's just rampant speculation, and I feel the same way about gold. Healthcare... yeah, it has gotten insanely expensive.

Brand,

Well... I didn't say it -wasn't-? It's true, (as per HARM's chart) crude only dipped below $10 very briefly but we paid a buck and change for much of the late 90's.

Randy DID promise that ethanol would be a boondoggle, so justifying higher food prices ALREADY is evidence enough where I'm concerned. If it were that impactful this soon wouldn't you think there would be some relief at the pump?

Brand,

I have to disagree about housing and education, those things are overpriced not merely because demand is greater than supply, but due to an unfortunately misperception that education and housing are "sure bets" that are worth any price. This causes people to overestimate the value and pay any price for the good. Properly priced, there are plenty of housing in this country and space for a lot more. There are also lots and lots of Ph.Ds (esp. in the humanities) who are only too happy to teach and do research for $40-60K a year.

These trends are harmful to everyone long term except administrators/tenured professors/student loan officers in education and realtors/builders/mortgagers/current owners intending to sell.

Much of the current high oil price is also tied to Middleeastern instability, though China/India/SUVs&McMansions certainly do their part.

DinOR,

When partying in Scandanavia, bring your own alcohol or load up on dutyfree booze.

The question to ask yourself is exactly, precisely, in concrete-terms, why do you care about a weak USD? Tell me exactly what it is costing you in your real life.

I deeply care about the state of US$. In a way that hasn't been mentioned in this thread.

In my real day to day life, the increased spending on gas doesn't bother me much. It's a small portion of my expenses. Rent, day care etc eat significant chunk of my money. It's hard to quantitatively attribute how much increase in these costs is due to falling US$.

My main worry is job outsourcing. The value of US$ in other currencies, mainly INR has a significant impact on this. So the falling US$ actually provides some help in securing my job. I know this is just ONE factor, but it IS a factor, and quite important one at that.

Falling US$ is a mixed bag, but to me, it has more positive than negative.

DinOR,

I guess ethanol changes the old saw that "they can't consume fuel, and we can't put food in our gas tanks."

Actually, a mix of 80% ethanol and 20% water makes a fine piston engine fuel (very high octane qualities). To mix with gasoline, ethanol needs to be quite pure (water and gasoline do not mix). Refining pure ethanol is much more expensive than distilling a 80/20 mix. If we could overcome the fear of losing the gasoline option (a piston car engine optimized for ethanol can no longer effectively run 100 octane or less gasoline*), 80/20 may be the way to go. That is, for energy independence. Without subsidies and tax breaks, gasoline has a big cost advantage over ethanol.

Ethanol does have less thermo potential than gasoline, but that can be made up for by much higher compression ratios, like 14 to 1.

*The Model T could burn either gasoline or ethanol, but it had a very low compression ratio, inefficient for either fuel. And yes, some technology like a computer controlled dynamic retarded spark (only fire after the piston is coming down off the compression stroke, when the pressure is lower) could allow gasoline to not knock in an ethanol optimized engine (14 to 1)

Ethanol from corn is an all around terrible idea.

@Patrick

Careful of those changes. I had an admin panel pop up for the last few minutes at the main blog URL.

@HARM

I'm not arguing hedonics. I'm just pointing out that CPI as measured in 1970 would be an inaccurate measure applied to today's economy. One of the main components of core inflation, Oil, was structured differently then than now.

My evidence is in yesterday's FT. The *European* central bank and the Bank of England both produced data showing that the EUR was losing ground to the USD as a reserve currency. Certainly that is odd if the USD is declining in reserve status.

Oil is more expensive in real terms today. True. It is *even more* expensive in real terms in strong-currency countries such as the UK and the Eurozone. Yea yea, they do that with taxes. But by hook, crook or tax, the effect is *more* petrol price inflation in their economies, despite their strong currencies. In actuality, the reason is that we've restructured our crude oil import mix drastically from 1970 to present.

Food is more expensive in real terms here too. Not by much, bit it is more expensive. Of course, go shopping in Frankfurt or London sometime. The same thing has occurred there. Seemingly, this isn't directly tied to the strength of the domestic currency either. Makes sense, since in most developed economies the vast majority of food is locally produced.

@StuckInBA

Yes, a falling dollar diminishes the comparative advantage in labor costs. As a matter of fact, I'm going through a round of funding right now and I have not heard once -- not a single time -- from VCs that old mantra: "and you're going to outsource development to where?" Even further, there is a belief that "onshoring" of tech should be done a couple years down the road when products are in a stable maintenance cycle to places in flyover states. The comparative advantage between Michigan and India isn't enough to justify the risks anymore.

All we need is a good housing price correction here in the BA and we'll be back to our normal "premium labor" market, and out of our "ridiculously premium labor" market.

After all, if housing prices dropped by half, many on this blog would consider their salaries quite good.

@everyone

I'm not trying to defend the weak dollar policy. I'm on the fence about it. I don't agree with HARM's position on hedonics, but I do agree that reporting is politicized (I just don't think its necessarily nefariously so).

But remember that inflation is a terribly complicated beast. There is no such thing as "inflation" as a single factor. It is a wildly complex amalgamation of factors, including monetary inflation, trade weighted prices, purchasing power, domestic sourcing, price inflation, and technology trend induced/productivity induced secular price deflation.

The truth is that most Americans have much more purchasing power today than they did in 1970, if by purchasing power you mean "buying stuff".

Finally, I refer you to wiki up the history on the "strong dollar policy" and what that did to the US economy some decades ago. Anyway, I had a great prof in grad school a few years ago who was the guy who set up a number of currency regimes in Africa in the 90s. His quote on the dollar was: "The US dollar is a terrible currency. But what else are you going to use?" I add to that, "Linden dollars?"

Headset,

I had no idea the Model T could do all that!? It was a pretty common practice during the war for fermentations of all types to be converted to fuel (primarily coconut wine) in the P.I. Farmers here have used ethanol for some time on a limited basis. I thought (and I don't know if this is astrid's point) but with widespread use MTBE's could pose a real problem?

DinOR

BMW even sources manufacturing from the US; for their X class SUVs. I think they have plants in places like South Africa, and a number of supply chain suppliers are located across eastern Europe and form Soviet republics with long names and no vowels.

@HARM

I'm sure you know those links on oil are for crude. I don't know about you, but I've never bought any crude. Not even "light sweet" crude. I buy gasoline.

Gasoline has its own whole market, which is strongly tied to crude but not 1:1 so. A good deal of short term price action in domestic gasoline is based on refinery capacity.

If I want to be cantankerous for a moment, one might say that the Europeans and other high-gas-tax regimes are in more trouble than we. For us, if prices of oil rise as an input to gasoline, we can allow prices to rise without risking losing tax revenue base. In Europe they face the prospect of losing lots of taxes if they don't cut taxes in the face of rising oil prices.

Then again, we don't depend upon Iran and Russia for our crude either. I wish the Europeans the best of luck with that strategy.

(repost with edits)

Brand,

I have to disagree about housing and education, those things are overpriced not merely because demand is greater than supply, but due to an unfortunately misperception that education and housing are “sure bets” that are worth any price. This causes people to overestimate the value and pay any price for the good. Properly priced, there are plenty of housing in this country and space for a lot more. There are also lots and lots of Ph.Ds (esp. in the humanities) who are only too happy to teach and do research for $40-60K a year.

These trends are harmful to everyone long term except administrators/tenured professors/student loan officers in education and realtors/builders/mortgagers/current owners intending to sell.

Much of the current high oil price is also tied to Middleeastern instability, though China/India/SUVs&McMansions certainly do their part.

DinOR,

When partying in Scandanavia, bring your own alcohol or load up on DF booze.

(Ditto healthcare...I think much of what is wrong in the US is caused by the fact that everybody acts as though there is no such thing as scarcity and cost is something to consider between taking a $70K HELOC for a new Corvette or $120K HELOC for a new Carrera.)

Good grief! Secondary and tertiary effects of a weakening dollar!

Well, look for the Chinese to buy Rockerfeller Center and Disneyland in 2012...and the Chinese tourists...the very very gauche Chinese tourists...

All of our cheap Made in China products - i.e. clothes, electronics,and furniture will get more expensive with a weaker dollar.

Buy now.

"load up on DF booze"

Uh.. that's a given.

BMW also makes their sportscars in South Carolina, not just their SUV.
www.bmwusfactory.com

However, Mazda still makes the Miata in Hiroshima, which may account for their glowing reviews.

A guy I used to work with pulled $75K out on a HELOC for a fancy pants Mercedes sportscar three years ago. I wonder how he feels now that his cheapo condo in Sunnyvale isn't worth what he had hoped it would be by now.

That guy made fun of me for buying a lowly Miata (for cash). I think the boot's on the other leg now as they say in Limeyland. He's probably underwater with mortgages and the HELOC. I simply sold my place in Cambrian Park and used to proceeds to retire upon. He's still a wage slave.

New thread: Bakersfield Californian eliminates 12.5% of staff due to 'decline in real estate advertising revenue'

@RandyH -
the problem with the 'exporting inflation to China' theory is that they export it back by buying truckloads of low interest debt.

@DennisN -
I wasn't aware that the Z4 was US-made. I thought it was only the SUV's. I recently drove a friend's new '07 Miata, really sweet car. I just wish they would get a little more adventurous with the styling, or have a differently skinned version. I would totally buy a Japanese-built Miata that looked like the Alfa 8C...

SP

@SP

No they don't export it back. It is unrealized because they keep increasing their foreign denominated debt holdings. If anything they are exporting deflation (or rather containing price inflation).

Because they send cheap crap here workers can buy stuff with lower wages. That takes off wage inflation pressures and is visible in the stagnant or decreasing wages of all but the top 2-classes of US worker. If they were sending inflation back to us then wages would have to inflate and/or people's purchasing power would have to go down.

Someone will eat the inflation eventually. My money is that it mostly won't be us. There is a chance that China just burns it off slowly over many decades, using it as a lever to control their expansion in the form of real rates-brakes.

Astrid and HeadSet,

I'd agree that it is an age old tradition to BYOB when heading for Scandinavia,
or in more rural areas, perhaps have connections with a local "entrepeneur".

As for beer prices, I'd think you could get a pint for about $8-9, but in a hotel
bar it might be the $14 that HeadSet experienced in '93. I think competition has increased since then. Generally speaking, don't be surprised if consumables are about 2X US prices for comparable items, but it can be less as well if you shop around a little.