patrick.net

Robert Cote Says:

We’ve test the limits of consumer credit to the point of destruction. Turns out that you can’t give people as much money as they want. Turns out you can’t let people asset speculate with all borrowed money. Turns out you can’t trust people to self-qualify for generous loans terms. Shocked, shocked I tell you to discover gambling going on.

But hasn't the Fed already interfered going the other direction when they slashed rates after 9/11 to "pump up the economy" and temper the dot-bomb crash?

BTW, nice work on the Casablanca reference.

Page 17–66.7% of single unit homeowner properties were mortgaged in 2001, leaving 33.3% unmortgaged.

That is a count of the number of households mortgaged. I have no issue with that figure. What I was referring to was the value of owned equity, which is more relevant to the nuclear meltdown scenarios.

Hedge funds are just the more speculative (and therefore risky) aspect of a much larger phenomenon: the emergence of a shadow market system. Private Equity, which is much larger a group than just hedge funds, has grown in direct proportion to the onset of capital market regulations. This is basic American capitalism at work before our very eyes. The rules of the "public" market become burdensome, and increasingly smart money exits that market in search of more friendly returns. Enter PE. Has anyone noticed the explosion of LBOs and publics going private?

I'm sure this is both bad and good. It is good if it allocates capital more efficiently than a more heavily regulated public market can. It is good in that it has barriers to participation keeping "ma and pa" and daytraders out of these markets (qualified investor rules). It is bad if it is too loosely regulated and ends up causing mayhem in its own right (LTCM type disruptions).

That's the real risk. We may all suffer collateral damage from hedge fund implosions; probably in the form of bank bailouts. But, the direct damage goes to mainly rich people -- although we are seeing pension funds allocate tiny but increasing amounts into HFs; more into PE funds.

Even this issue ain't so clear as to how it will unravel, if at all.

And I forget the most likely outcome of all the PE/HF/VC money: more regulation. Simply, the SEC could just declare jurisdiction over these markets and start regulating them. This is the most likely outcome, in my opinion.

The 100% homes are not going to be dilapidated or run down. They are only going to be more modest. The median home of 1975 was some 600 sq ft smaller than in 2005 for example. Then there’s the demographics factor. How many million people sold out their BosWash suburban dwelling to move into a Florida trailer park for cash?

RC,

It is hard to try to guess at the relative values of 100% owned homes vs. mortgaged homes. I do not have any data on this, so I am just guessing.

Not to pick nits, but the data source I cited omits mobile homes. But your point is taken that there probably are a significant number of "trade down" retirees.

Although square footage of new homes was smaller in 1975 vs. 2005, I think you are ignoring a couple of factors which make older housing more valuable: (1) A lot of people have "added on" to those smaller, older homes; (2) Many of the older, run-down houses have been torn down, which means the surviving older homes are probably bigger and nicer than the average new home built in 1975 (don't forget all of the beautiful 100+ year old craftsmans, colonials, spanish-style homes, etc., etc.) --this is survivorship bias at work--the nicest homes survive and the cramped, ugly older houses get torn down; and (3) older homes tend to be on larger lots (as Randy points out) and closer to city centers and desirable attractions.

In any case, I would happily take a 1200 sq. foot spanish style home in the Hollywood hills built in 1925 over a 3000 sq. foot mcmansion in Vegas built in 2005.

And I forget the most likely outcome of all the PE/HF/VC money: more regulation. Simply, the SEC could just declare jurisdiction over these markets and start regulating them. This is the most likely outcome, in my opinion.

Money will just go offshore if they are regulated.

May 7, 1997 - October 6, 2005 RIP.

RC,

I figure the May 7, 1997 date refers to the passage of H.R. 2014: 'Taxpayer Relief Act of 1997' that upped the cap gains exemptions to $250K/500K, but what happened on Oct. 6th, 2005?

Glen, Randy H,

It wasn't my intent to get Monday started off on the wrong foot. It's just that it seems many have raised a few serious exceptions when attempting to throw "the number" around.

I can speak from personal experience after having been in the same home (and making mort. payments) for 10 years. When we went to pay off the 1st at closing the balance had only gone down a few grand. I am serious. Had it not been for one crazy stretch I would have basically been at B/E.

My guess is in the future more home "equity" will be generated from software programs that accelerate the repayment of the mortgage than from market appreciation. Be it in a "bi-weekly" installment or other program to maximize the borrowers resources like using the cash value in a whole life policy or other "hidden asset" to kick start the process. I'm guessing if you can pay your home of in say 7 to 10 years your actual int. rate will be about 2%.

Yes, wether or not you over paid for your house!

RC,

Thanks for the data, I will concede the point.

So I guess this means that I overstated my case-- the average homedebtor is actually not as bad off as I thought. Still, though, I think a 5-10% national correction in housing prices would be enough to turn an awful lot of mortgages upside down.

I think I am just going to try to save up enough cash (around $90K) to buy one of these mobile homes and plunk it down somewhere in the boonies, so I won't ever have to worry about carrying a mortgage:

http://www.claytonhomes.com/index.cfm?include=showcase/west/golden_west_perris/GO621FT/exterior.cfm

Lot size is one of my trigger topics in my war with the planners.

Can you clarify?

Might as well throw the last bit of fuel on the fire. It is not true that most wealthy homes (multi-million dollar homes) are owned outright, at least by the owner occupiers so as to show up in these types of statistics.

First, most wealthy people use wealth-managers who optimize their capital portfolio. They will usually use quite a bit of callable debt, secured against liquid capital invested in PE/HF, especially for the past many years with ultra low interest rates. So no, a financed ubermansion is not financed with a mortgage. But it is not "100%" equity owned by the occupier either. It simply could be if the math made it worth while.

Secondly, even when properties are owned outright, and quite a few are, they aren't owned by the actual Mister Richguy. They are owned by this or that trust/corp/LLP/partnership, etc. assumedly for tax and estate transfer reasons. So these won't show up in the owneroccupier stats either.

SP,

What happens to the US manufacturing figure if:
1. you exclude ‘defense’ related manufacturing
2. you factor out the value of imported components from the value of US manufactured products

First off, I don't know precisely but would be interested in the answer myself.

Intuitively, it would be pretty hard to filter out for defense-related spending due to its deep integration in our economy. For example, the DoD buys lots of tires. But the more tires they buy, the cheaper they are for everyone due to scale. So, what is the effect if you take out defense purchases? Maybe not as simple as subtracting out the unit value.

As to the transnational assembly problem, there are legitimate debates about how to account for this properly at a detailed level. Overall, however, the macro accounting works out pretty well because of the way that capital flows and trade flows are counted. In other words, if the US counts export of a $50K car, which is 80% mfg outside the US, then that 80% will show up as capital flowing out. Capital & trade are part of the same equation.

The main thing I think that escapes a lot of people, and prompts honest questioning like SFWoman started with, is that the US' base is HUGE. Enormous. Gargantuan. Post WWII US manufacturing effectively took over the entire planet. The US was the only mfg base left undamaged after the war, and was by far the most efficient. That will take quite a few more decades or longer to unravel.

I remember during the peak of the Boeing v Airbus debacle the Economist ran an interesting little bit about how the "value" of components in an Airbus aircraft actually contained more US sourced product than a Boeing did (because of Boeing's Canadian production).

Robert, I like somewhat higher density because I prefer steel-reinforced concrete.

Robert Cote',

You know, it's just criminal. That exact same scenario playing out with banks and their long time clients made me think there has to be a better way!

I've done a little research and there is one legit firm I found that offers to take your total debt and manage it for you. They simply set up a "reserve account" and pay off the things that would be the most impactful. They would say for instance chip away at your store cards, get them paid off and move on to say auto loans and ultimately the house. I've integrated it into my presentation for wealthier clients. As I'm sure you have surmised the impact is two fold in that not only are debts reckoned with more quickly the money that would have gone into filling "the black hole" can now be adjudicated toward savings.

Oh, the "reserve account" is so they can make payments early reducing the amount of int. the client would have to pay. This also translates into lower DTI and ultimately higher FICO scores. It's sad, so many of us have been debt slaves for so long someone comes along and shows us a better way and it just seems far fetched to us?

And for 9/11 the networks should have the entire 9/11 attacks, the cell calls, and the 911 calls playing 24 hours straight on a loop. Helps the folks stay focused.

On the fact that the terrorists won and that we should live in state of terror?

You know what! We should have 2 minutes of hate per day where they show Ossama on TV and we could all boo him.

There are some more great ideas here: http://en.wikipedia.org/wiki/Nineteen_Eighty-Four

I used to work somewhat near the World Trade Center (actually on Wall St) and this kind of thinking cracks me up: all of the chicken littles (let's tap the phone lines! let's search everyone going into the subways!) are outside of NYC - in the South, in the Midwest, etc.

People in NYC have the right focus and the right priorities: making money and living life.

Terrorists be damned.

FWIW: 42,000 people die a year (14 September 11ths) on our highways.

Since September 11th, 2001 - 210,000 people died on our highways.

Forget the terrorists - we're our own.

Think about even the myth of oil for blood. Without a strong military would our economy be more or lass at the mercy of foriegn interests? Yep, when you look at it that way the minor cost of the military generates great savings in the cost of energy.

There's sort of an infinite loop problem there...

And the alternative is? The carnage on our highways are indeed regretable but they are small and getting smaller every year.

The alternative? I propose aggressively enforcement of traffic laws and speed limits.

The speed limits on many roads are too high and they should be lowered. Also we should have the same speed limit for trucks and auto.

I propose a national 60mph speed limit.

Nope. Sorry. Speed doesn’t kill. Lack of skill kills but we don’t tighten drivers tests.

Lack of skill will not go away. Lowering speed can at least minimize damage.

All other factors being equal, reducing speed can reduce fatality.

60mph is a lot of speed.

I would support raising the legal driving age to 21 though. Teenagers are not mature enough to be trusted with 5000 lb of steel at 80mph.

eburbed,

Those are some sad statistics. I had a client bring that to my attention right after 9/11 and it really is true. Not to lessen or diminish the 9/11 victims sacrifice and pain but if you want something to get angry about start there.

I'm always amazed driving out to the OR coast (where two lane roads are the norm) by the sheer number of people I see drifting into the oncoming lane. It's such a common occurence drivers give me this "what's your problem buddy" look when narrowly averting a head on collision!

What's MY problem? Other than the fact our combined speeds equal about 110 MPH high speed crunch and munch nothing really. I understand that people can become complacent when we're all heading the same direction for extended periods. (Hell I get bored) but when constantly confronted with the very real possibility of a serious head on collision can we pay a little attention here? When emergency responders get the call they just assume it's a "head on". What else could it be?

I’m always amazed driving out to the OR coast (where two lane roads are the norm) by the sheer number of people I see drifting into the oncoming lane. It’s such a common occurence drivers give me this “what’s your problem buddy” look when narrowly averting a head on collision!

This is why I avoid two lane roads at all costs!

55mph is too high for most two lane roads. They should have limits of no higher than 40-45mph. At least the crashes will be more survivable.

Peter P,

I seem to see so many younger drivers that are "one ticket away from walking". They "smarten up" when there's a cop in the vicinity and then trounce on it the minute he goes away! What's the answer? Fewer strikes?

Peter P,

I agree. I try to avoid them where and whenever possible. It's not too much to ask us to do 40mph on the way to the coast. Hell it ain't going anywhere.

I love cops. Especially CHP officers.

I want that electronic toll road system with speed monitoring now!

It’s not too much to ask us to do 40mph on the way to the coast.

Or perhaps they should convert more 2-lane roads to "super-twos" with wider medians.

If we increase the width of the median, the separation between oncoming traffic will increase. At the same time, the lanes will appear to be narrower. This "optical illustion" will cause people to drive slower.

Perhaps a simple median repainting will save lives?

Peter P,

More power to you!

The problem with Oregonians (or "Helenites") as Robert C is fond to say, is that we like to pretend that everything is just that close! Skiing on Mt. Hood? I've made in 46 minutes! Seaside? Pffft. An hour tops! (It helps us deal with the 9 month long depression to think all of these natural wonders are just that close).

And so we go about mangling one another on two lane roads trying to "set the record" getting to our beach house! That's another big part of misguided perceptions. If we told the truth (if only to ourselves) we'd admit that an hour was our BEST time (not the usual time) it takes to get to Hood or the coast. Yet like "a thousand people a day move to FL" and "60% equity" these myths don't go quietly.

If you have a friend in Portland and he tells you he can get to the mountains or the coast in under an hour ask him/her how much a chartered helicopter runs these days? Can we please end this now, please?

RC,

Housing is priced at the margin and the margin call is coming. I mean that in the strict trading desk term that Randy H will do a better job of explaining than I.

Sorry to do this to you (you're on such a roll today) but housing prices aren't really set on the margin, as I described here. But, your point is well taken.

Think about it. Risking life and limb to get to the Oregon Coast (where it will no doubt be cooler with even more rain). Is this stupid or what?

Now I could see if within an hours drive you could find a dry place that's twenty degrees warmer! What a waste.

SFWoman,

Coincidentally, my father was in defense contracting most of his working life also. For a short time (the only time I remember _not_ living in the midwest) we lived in Co Springs and he worked in the mountain. In later life, he was in charge of the other end of things: exporting lots of nifty killing gadgets to needy countries. From what I remember, he spent most of his time focused on 2nd world countries since Israel and Europe were kind of standing orders and didn't require much convincing (this was during the cold war). He has some unsettling stories about what kind of stuff he sold when he worked for a nameless company in Yellow Springs, Ohio. Let's just say their R&D labs were located many levels underground.

But back to the point. I think you may be confusing loss of US mfg jobs with loss of US mfg base. The two are not the same. Our base has grown while the number of jobs has shrunk.

And as to gee whizbang technoweapons: I'm sure we have them. The F111 and B2 are examples of what we had effectively 20 years ago, and they're pretty advanced.

But, what good are EM Weapons, Stealth aircraft, and Emergent Cryptographic Systems against guys hiding in caves who use their own bodies as bombs? I'm not sure how melting all the integrated circuits in Gaza will help Israel? I'm not even sure it would disrupt their radios or TVs, since those are probably powered by tubes & transistors.

Think about it. Risking life and limb to get to the Oregon Coast (where it will no doubt be cooler with even more rain). Is this stupid or what?

Exactly. We should repeal all speed trap laws and make every inch of the highway system a giant "speed trap".

Oh, to add another anecdote to the manufacturing question, my father does machine design. Things like industrial labeling, sorting, and packaging machines, etc, as well as larger equipment. When I last spoke with him, he was working on an automated warehouse system for a distribution center in Europe. Sometime before that it was specialized construction equipment for somewhere in Germany. So, the comments about the state of US manufacturing make sense to me.

I don't even know why they have weather reports on the Oregon Coast. Just look at Portland's weather, subtract 15 degrees and ADD a 1/2" of rain and you'll usually hit it on the money.

If summers are a brief and fleeting thing in the valley the coast is even more depressing. A forecast of "partly cloudy" means there will be about 20 minutes where you'll be able to see the sky (although probably not the sun). When they say "a high for the day of 64 degrees" that means between 3:50 and 4:00pm. After that it starts to plummet (and this is in July?) No thanks.

New thread: Why I hate shower/tub combo

SFWoman,

All of that is true. Some of those systems--at least the automatic eavesdropping & transcription/translation--already exist. I suspect the problems aren't tech-related, but legal, procedural and human-training.

Again, much of that helps when trying to prevent terrorist coordination and plotting on a 9/11 scale. But they don't help in nationbuilding experiments amongst brewing civil war insurgencies.

We *could* easily knock out every cell/satellite service in the whole of Iraq. (Ok, not easily, but practically it could be done). But how does that advance the goal? The insurgents will keep killing each other, just using different triggering mechanisms and different communications mechanisms. Meanwhile we've disrupted the vital infrastructure of the country and prevented any hope of rebuilding an economy. Same with Israel. Saying they should destroy the entire enemy infrastructure is tantamount to saying they should just go ahead and starve them all to death.

SFWoman,

Of course, and I fear that dimension of strategy is not being considered by the current administration. Engagement needs to occur on multiple levels simultaneously.

However, there have been historically, and quite likely there is now, a basic clash of incompatible ideologies battling for hegemony. Such epic moments have never been settled peacefully, and I doubt they will be this time around either.

Greatest force in the country.

Cool... More power to the police!

Terrorists seem to be extremely dependent upon cell phones. They coordinate a great deal of stuff via email and text messaging. Knocking out all cell and satelite phone service would greatly inconvenience them.

that wouldn't piss them off even more, of course... and they plot and plan in all countries of the world. not to mention that iraq was not the known seat of ANY significant 'terrorist' or 'insurgent' activity before they were invaded and occupied. however, they ARE sitting on more than 20% of the world's viably extractable oil resources, by some strange coincidence. now the forces of the historic rival sunni and shia factions of islam have been unleashed. the faction the US govt is courting and favouring in iraq is shia. however, iran is also predominantly shia, but they are being demonised for having nuclear ambitions. there is no doubt the shia in iraq will co-operate with the shia in iran, so you are in the difficult position of supporting and demonising the same faction at the same time. you've stirred up a real hornet's nest this time, solely in the quest for hydrocarbon resources...

there is not a technical fix to every human and social problem, that is the error of judgement that too many in the US make.

there is still a big question in my mind about just how those 3 massive towers, all designed to take large shear forces, came down so easily, especially when no skyscraper in history has ever collapsed with a major fire in the upper storeys. there has been a lot of spin and cover-up in the official structural engineering analyses, not to mention gag orders and ruined careers of anyone who spoke out in the negative -- very interesting. why the need to stifle dissent so ferociously, in a country of supposed 'free speech'? perhaps it really is a closet 1984 Stasi-like society. an oxygen-starved kerosene fire (as witnessed by the black smoke) will only burn at 360 degrees, steel starts to melt at 1500 degrees. as for steel reinforced concrete and the massive central cores of the WTC towers... and what of WTC7? massive skyscrapers that collapse on demand... however, the views (some of the best views in the world) from the towers were crap due to the brutalist 1970s design and narrow windows, the towers always lost money and had to house govt depts on subsidy, $1bn of asbestos rectification work was required imminently, and Westfield America took out new insurance policies with specific anti-terrorism clauses only 6 weeks before 9/11...

DS,

I'm not sure what to say. I start off agreeing with your assessment of techno-solutions; especially being a high tech sort myself and knowing that tech is seldom the real problem or solution, just a tool.

But your 9/11 conspiracy theory stuff is too much to take. 1. The kerosene fire was a massive, widespread trigger to a much hotter fire: the ignition of the internal contents of the building. Those materials would have burned at temperatures upwards of 3000F. 2. Legitimate structural engineers have questioned the data and conclusions without some kind of DDR-Stasi repercussions. They are on the radio all the time. 3. Most structural engineers seem to have consensus that what caused total structural failure was "pancaking"; a chain reaction which gains potential energy with vertical distance due to gravity. 4. No buildings of that scale built worldwide were designed to withstand such forces, which are altogether different than sheer or shaking forces. 5. Visible black smoke does not mean there wasn't a superheated core of fire burning contained within the structure; it merely means that the periphery of the fire was consuming particular materials. I've seen house fires burn pure black smoke, and they were certainly hotter than 360. What's the title of that Bradbury book again??? 6. The steel frame of the building need not have "melted" to fail, only be weakened in key areas to start off the chain reaction.

I guess before going on and on any more I'd ask the simple question: Why? Why the hell would anyone go to all that trouble to "stage" a disaster on such a scale when it could have been done so much more simply, and with so much less scrutiny? A "mysterious truck bomb" in the basement ruse could have had the same effect. Why bother with all the airliner stuff, including the other 2 planes? That's a long way to go to get out of some asbestos cleanup. Geez.