patrick.net

It might yet, but so far, businesses have been spending their money on stock buy-backs and M&A, not plant and material.

PPE spending is only one component, and an ever diminishing one as the tech/service economy marches forward. M&A activity by definition improve productivity. Stock buybacks free up capital for more efficient allocation.

The outstanding issue that seems top be missing from the topic is that there are entire countries that depend on our consumerism in order to survive. Without the US, Japan, China, most of Europe, and a great deal of South America would falter in what would be a global depression. Wal-Mart alone is responsible for over 2% of China's GDP. While eventually we must start to reverse the deficit, it isn't exactly a definite that the US alone will have a major depression if things go as they seem. It will be global, and equally devestating.

Once people see money leaving one area (RE in this case) they seem to want to look for the next big thing, and right now gold seems to be what’s getting the attention.

A *lot* of people will get burned in the gold rush. Those who listen to too much late-night radio or read too many scare blogs will be buying right into the teeth of the cycle. Of course, this is what gold-peddlers encourage. If you weren't accumulating gold as a strategy some years ago, you're too late now unless you plan on holding onto it until the next go around. Thus is the curse of commodity market speculation. The professionals are always pricing in what even the smartest layperson thinks they've discovered.

THE MASSES: Ha! Look at Michael Holliday driving his 1995 pickup with high miles and dents in it. What low-life. Hey, Holliday, why don’t you do a slick refi like us and pimp your ride up to a real drive like our slick new Hummers, Escalades and Mercedes with shiny, spinning 20 inch rims?

MICHAEL HOLLIDAY: My small truck may be a little rough around the edges, but at least it’s paid for. Keep laughing. Keep living large. Keep pointing the finger and feeling like you’re special and high-class. You’ll get yours. And soon enough!

THE MASSES: Hey, look. It’s Holliday again. He’s sporting keys to an apartment. What’s the matter Holliday? Ain’t got the frijoles to buy a real house? Hmm? Look at this plush, pimped out McMansion. I bought it last year for $850k and it’s already appreciated to $925k. Didn’t you know, real estate ALWAYS goes up?

MICHAEL HOLLIDAY: Thou sayest.

THE MASSES: You wise and silly old fool Holliday! You’re throwing your money down the drain and will NEVER accumulate riches. You should have listened to my realtor’s sage ass advice and bought using an exotic, erotic loan. There’s still time for you to pay homage.

We can hook you up with a Stated Income, No Doc I/O, ARM loan and you can be stylin’ and profilin’ in no time. Chicks will dig you then. Then you can refi your way into a pimped-out ride and start scoring like us! What are you waiting for Holliday? You village idiot, you!

MICHAEL HOLLIDAY: (Shakes his fist at the unruly mob). You’re all a bunch of blaspheming materialist dolts! Damn all of you! You sit there fat and happy mocking God, family and country thinking you’re the cat’s meow and all that kind of stuff.

Just as in the days of Noah, so shall you reap what you have sown! Mark my words, you shall pay the price for your arrogance, pride and scorn of reasonable people like me. You cannot deny the laws of economic physics for long. Beware of reflexivity.

THE MASSES: Bwahahahaa! God you say? You bloody fool, my god is my house. My allegiance is to my Humvee and my Escalade and my Porsche. How dare you meddle in our precious housing market and hurl your insults and blasphemes at our 21st-century lifestyle of Silicon Valley opulence. Perhaps we shall burn thee at the stake!

Then, we shall watch you writhe like a worm in economic strife and substandard living forever. You had your chance to buy a McMansion and get a few McGoals, and a McLife and you squandered it on frugality, caution and thrift. You servile little knave! Didn't you know that the road of excess leads to the palace of wisdom?

We shall enjoy your decent into the depths of poverty as we leave you in the dust with our perpetual housing equity. It’s a new paradigm you blathering ignoramus!

MICHAEL HOLLIDAY: God, how much longer must I endure the slings and arrows of the masses of unbelieving, heathen sheeple? When will you avenge my endurance of insults and rhetorical violence from the masses of greedy, real estate asses? Is this not worse than Sodom and Gomorrah and ancient Rome combined, times ten?

GOD: As it was in the days of Noah, so shall it be during the housing bubble. Patience my son. Soon you shall dance and sing on their financial graves as you play a harp with your hard-won angel wings and chubby, cherubic buttocks while drinking Hi-C Fruit Punch in eternal joy and merriment. I shall avenge you and the righteous ones for your long suffering and faith.

Just watch and see!

so many other countries who are tied very closely to the U.S. economically, that they will continue to prop up our economy in an effort to keep their own from sliding into a depression along with ours. I don’t know how long this is sustainable,

It is sustainable so long as those countries wish to stave off political revolution or worse. Deflationary depressions cause political uprising and fundamentally change societies. Thus, the tipping point for getting there is very very high. Even Japan's long-deflation was not Depressionary, it was secular.

Have you read the 56 page CreditAgricole/Chevreau report? [..] This report is highly disseminated in Europe, unfortunately our U.S. centric press didn’t deem this subject newsworthy. [...] You might at least read the report before commenting on the veracity of the manipulation theory.

I have read much of the report. I am well aware of the European perspective, being a religious reader of the FT and Economist, among others. Did you read the FT's and Economist's many analyses on this subject? I am a pure agnostic when it comes to things economic/financial. Show me compelling data and supporting theory, and I'll be convinced.

SF Woman,

My wife was born and raised in the Philippines. My oldest daughter was born there and we lived ther for many years. It's a place where infants are to this day delivered in the home. The elderly die at home surrounded by the people they have known all their lives. Wakes last about a week so that no one is left out. I KNOW you can't live in the BA without having Filipino friends, (they're the greatest AND they drive you crazy) trust me.

My youngest daughter's first summer job was at an assisted care facility. She kept the job all summer (at our insistence) but grew to dread it. She couldn't deal with elderly clients being crushed by relatives that had to cancel at the last minute. These gals (mostly) would get up at 6:00am, get dressed, do their hair and wait by the window for a 2:00pm visit only to have it cancelled. I'm not sure I could deal with that. When I get old I'm going back to the P.I! (Philippine Islands)

SQT,

I've always been told your children will treat you the same way you treated YOUR parents! From what you've shared here I think you'll be O.K! And yes, that IS Investment Advice.

We now resume our steely eyed, cold, calculating, cut throat, mercenary coverage of the markets.

"Notice how the gold-bug arguments collapse into theoretical attacks on the fiat money system. This exposes a basic misunderstanding about what fiat money is, why nearly all systems evolve into fiat systems, and why fiat money is preferrable to intrinsic value money." --Randy H

Agreed. A lot of the gold-bug arguments focus on trying to emphacize that fiat money is just "worthless pieces of paper" but fiat money does in fact have a real cost and worth to it which is the current interest rate for money.

And then of course, if you back your currency with a real asset then you constrain your economies GDP growth by the available supply of the asset you have backed your currency with.

Whether gold has merit or not, we may be looking at a potential gold bubble in development. Unlike housing, gold should be liquid enough to trade.

Now is the right time to buy, in a couple of months there will plenty of multiple offers, which normally increases the selling price.

What a dumb agent. Why sell now when he can get multiple offers in a couple of months? What a charitable agent!

And you will be the new owner, probably paying less than rent when you consider the tax benefits of being a home owner.

And you will be the new sucker, probably paying more Tax/HOA alone than rent when you consider the excellent rental market in the Bay Area.

The best advice that I have heard so far is to diversify your investments. The future is not pre-determined. No one can predict. Never bet more than you can afford to lose. That is true for gold, oil, $US, NASDAQ, or Houses. As for currency, I pay Axel Merck to trade it for me (MERKX).

Remember, your investments will have to stand up to events that are so improbable, no one cam forsee them. Capital preservation is key in this environment. The future is always full of surprises. That was the lesson of long term capital management (LTCM). None of us are smarter than Black, Fischer, or Shoales. And they were not as smart as they thought they were.

Good to hear the Tommy J quotes. As a UVA grad, he is near and dear to my heart. Remember, Tommy J was the founder of the "Anti-federalist" party. He would never have any part of the the strong federal government that we have today, nor would have had any part of its imposition by force. Mr. Jefferson wanted an agrarian society; our federal government was formed expressly for the purpose of facilitating the transition to an industrial economy for the purpose of creating US power. New England and the great lakes benefitted from the strong federal system at the expense of the South and West who supplied nat resources. Our federal government today is an anachronism in a post-industrial society. It is in the process of devolving into a more state-rights friendly governemnt.

I've come back up in energy lately. May add next week. Might not. Trying to close some deals that will bring me bucks. My fingers are crossed.

--Deo V

I thought that in the past year or so both China and Korea have actually stated that they were going to diversify their currency holdings, and then a few days later made statements backtracking (ostensibly due to political pressure from the US). --SFWoman

Many dollar-denominated debt holders, including China, Japan, and others, have started to diversify a *portion* of *new accruals* into other currencies, mainy the EUR. The press and gold-bugs often misrepresent this as a diversification of the *existing* reserves, which it is not. In fact, they are still accepting dollars as the overwhelming majority of their new reserves; just not as exclusively as they were before.

I don't think there was much political pressure on Japan. Political pressure on China is pretty much inneffective. The real constraint on both those economies dumping the dollar is what we discussed before: they don't really have a choice unless they're ready for massive economic disruption in terms of both future GDP growth and rampant inflation. This is especially true for China.

Look for them to slowly try to start investing more internally in their own economies over time...over many decades, again, especially China.

None of us are smarter than Black, Fischer, or Shoales.

None of us are dumber (greed-blinded) than these people.

Related question to how do you prepare your investments for the coming crash. How do you prepare your career?

I'm in a safehaven job now. I would like to go back to Tech, and I have great skills and experience is enterprise software/consulting. Is this a bad time? Has the tech cycle peaked? Anyone interested in a separate thread? I think career is a bigger potential source of risk/financial loss for many on this blog.

--Deo V

Peter P:

Greed and fear have always been the undoing of genius.

Look for them to slowly try to start investing more internally in their own economies over time…over many decades, again, especially China.

That's what they are doing now... tease foreigners with potential extraordinary profits and get them to build their infrastructures.

They will continue to tease...

That was the lesson of long term capital management (LTCM). None of us are smarter than Black, Fischer, or Shoales. And they were not as smart as they thought they were.

I contend they were every bit as smart as they thought they were, probably moreso. The problem was that the market does not operate as a rational, efficient, state-machine. They underestimated the acceleration towards threshold events that market psychology and human behavior could cause.

I'm curious about your anti-federalist statements. Do you contend that the US had any real choice about participating in the Industrial Revolution? Would there even be a USA today if we'd remained agrarian? I don't know of any non-isolated societies that survived the industrial era if they remained agrarian.

Greed and fear have always been the undoing of genius.

Absolutely. No one is totally immune. Power does not corrupt. Fear corrupts.

DinOR, to be fair, with state income tax and other misc deductions (donations, educational expenses) it is not difficult to exceed the 10K standard limit.

In fact, if we are to buy, we can probably get mortgage interest deduction rather close to our marginal tax rate.

However, I cannot see any political reason not to change this deduction into a tax credit for mortgages up to 300K. A lot more voters can benefit from this simple change.

"I’m curious about your anti-federalist statements. Do you contend that the US had any real choice about participating in the Industrial Revolution? Would there even be a USA today if we’d remained agrarian? I don’t know of any non-isolated societies that survived the industrial era if they remained agrarian."

Sorry to all for yet another OT post. It is a topic dear to my heart.

This is an extremely complicated topic. It is a related topic to "How can there be a land shortgage when there is so much of it just outside of town".

It has been studied and acted upon throughout the third world in the post colonial era. The US is the key model (North) that the world studies because they (North) were the first successful "late industrializing nation" and did so through an extremely deliberate program, i.e centralized government that spent on infrastrucure combined with confiscatory tarriffs.

The South essentially was forced to pay for Northern industrialzation through this tariff. That is what the states rights issue was about. The South resented having to pay for a revolution that would eliminate their power base. That is why Fort Summter was the flashpoint. It served as the US customs house.

If you really want to get into this, google a Dutch economist called "Von Thunen." Also, look at the implications of the revolution of the day, rail based transportation, as it applies to Von Thunnen's "agrizone model".

Yes, the US would have industrialized. Thomas Jefferson was foolish to favor agarian economies. He was right to recognize that the North would benefit at the expense of all resource producing economies that it traded with. He correctly predicted that power would shift from South to North as a result of the inherent accumulation of wealth in centers of production at the expense of resource producing economies.

In a nutshell, it creates a dependency on those industrial centers that can only be broken through trade barriers. That is what the US did(Yankees) to break their dependence on European manufactured goods. It was one cause of the American Revolution, ie. that Americans were forced by British Mercantilist policies to buy exclusively English goods and prevented from competing.

That is the lesson that the third world learned, and that is what they did from India to Nigeria to Mexico to Brazil to Argentina and many other countries. That is why we had so many trade barriers going into the Reagan years.

Like I said; It's complicated. I think the way for Thomas Jefferson to go should have been to promote industrialization in the South; It had begun to happen in VA by 1860. It just wasn't in their blood, and they paid for it with their blood. It doesn't make it right, though.

And today, I think most will agree we are in a post indiustrial economy based on free trade. That fact forces the old inudstrial states to defend the power that they have accumulated at the same time that they try to defend their social welfare model from low cost producers, be they red states or China. Good luck with that!

--Deo V

"I contend they were every bit as smart as they thought they were, probably moreso. The problem was that the market does not operate as a rational, efficient, state-machine."

I contend that they were unable to predict 7 sigma events, i.e. the collapse of the Thai property markets and the ensuing riots and chaos that crashed the Baht. It was an event that they never considered, and so it was a risk not hedged.

Godel's incompleteness theorem got them.

--Deo V

Godel’s incompleteness theorem got them.

I don't think Goedel's theorem of incompleteness applies to market economics or finance, because it fails the "systems that are used as their own proof systems" requisite. Market systems rely upon stronger systems for their own proof systems, making them a whole different ballgame.

Regardless, I'm quite sure the LTCM guys were literate in Goedel's work. What got them were discontinuities and local maxima, not theoretical failure. They are right to contend that their model *would* have worked if they could have remained solvent long enough. The problem is in the real world capital is fininte, and doesn't fill in singularities well.

Deo V,

Thanks for your clarification on Industrial/Civil War/Reconstruction era history. I've also studied quite a bit of this, but more from a pure economic perspective. I share many of your opinions on the economics that drove events. I have little authority to offer further opinion having been raised in the "Pit-bull of the North", Ohio.

The white-haired gentleman, who had risen at 6AM to prepare for his son's 2PM visit, turned away from the expansive window of the rest home with a sigh of resignation. With difficulty he stiffly shuffled his walker back to the joyless room that had become the prison of his golden years. Later that evening, his son phoned to offer shallow regrets that he had not paid a visit that week. When his elderly father rebuked him for his lack of attention, the son said, "Look Dad, remember how often we saw Grampa? I learned it from YOU, okay, I learned it from YOU!"

Gödel's Third Incompleteness Theorem:

"Every statement made by a Realtorâ„¢ that sounds like an axiom can be shown to be a false assertion, or equivalent to a downright lie."

-Kurt Gödel 1932

Randy H: Thanks for taking the time to read my long-winded response. Also, thanks for the lesson in Math/physics; I'm a liberal arts guy.

An interesting one for you: Compare the impact of the internet on transportation costs (i.e. information as the product) vs. the disruptive reduction in bulk shipping costs represented by railroads. Is history repeating itself in digital form?

WARNING: THIS THREAD WOULD REQUIRE THREE BONG HITS AND BE FILLED WITH TWO SCREEN POSTINGS.

--Deo V

Seriously guys:

Does housing bust = Layoffs? Is the tech industry headed below the 2002 lows? I understand that the return on capital for the bottom 90% of VC firms is 7%. Can you say, "shakeout." Will the zombie companies/going nowhere startups just soldier on? Is there a recession coming due to the RE Bust? Will the valley get crushed by it? What should people be doing to avoid a job loss in the coming few years? Are there any safe haven in the Bay Area?

The greatest investment most of us have ever made is education. That investment only pays if there are companies to start or jobs to fill. What will the employent situation be like, apart from the RE/Construction/Mort Finance layoffs? Am I paranoid here?

--Deo V

“I just bought a 10 month CD at a nice promotional rate (5%) just to keep my cash out of my hands, and lock me out of getting into the housing market. ”

6-month T-Bill is expected to yield 4.85% next week. Considering that T-Bill is exempt from sate income tax, it may not be a bad choice too.

NOT INVESTMENT ADVICE

Lastly, Bernanke is an idiot.

Why? You think he may pause rate-hiking too early?

Nominal means not adjusted for inflation. The opposite of REAL.

Real = Nominal - Observed Inflation

Fischer stated it as:

Nominal = Real + Observed Inflation

which allows you to substitute ex ante and ex post rates yielding:

Nominal = real + Expected Inflation

This is the equation everyone relies upon when talking about how the money supply and nominal rates (as set by the Fed) will affect the economy.

TampaRentor:

What do you think would happen to the dollar if Benny B dropped interest rates to 1% again? Secondly, with the debt overhang combined with stagnant wages, wouldn't he be "Pushing on a string"? If you were Joe McDebtor, how would a return to the record low rates of the recent past cause you to borrow/consume more? I mean, it's not like CapitalOne is charging the fed funds rate to people? It's not like housing prices are going to take off again with home prices already at record highs. Who is left to buy that hasn't already bought? I mean maybe a few on the margin will jump in, but a "New" boom is not in the future, reagrdless of how low Benny drops the FF rate. When manias ends, they are over.

I don't mean to get all "Japan in the '90s" on you, but I think that this whole thing has to play out based on the laws of gravity and demographics. Irrational exuberance is what caused prices to get out of hand. Interest rates were just a trigger. As reality becomes more evenly distributed amongst the Sheeople, no amount of stimulus is going to overcome sheeople's new found fear of "losing their ass". More significantly, baby boomers near retirement our going to become more conservative, and be even more afraid of "Losing their ass".

There was a comment on Ben's blog suggesting that until the baby boomer bulge finally works its way through the system, housing prices will continue to slide. The posters over there were predicting 2020-2023 for the end of the best. I second that. Even the baby boomers are going to wake up and realize that they can't all sell and move to a low-tax, low-cost state all at the same time. I just don't see stimulus changing the facts.

--Deo V

What do you think would happen to the dollar if Benny B dropped interest rates to 1% again?

Rates dropping to that level may not stimulate consumption as much as last time around (although I will need to be convinced of this emperically). However, it will spur business investment; probably both in R&D as well as M&A. When credit is cheap, businesses tend to build capital stock, especially in the US. Japan had unique problems which slowed or prevented this effect, not the least of which was a terribly corrupt banking system.

Japan had unique problems which slowed or prevented this effect, not the least of which was a terribly corrupt banking system.

So long as moral hazards are present, a banking system will remain corrupted. I do not think is is much better here.

"However, it will spur business investment; probably both in R&D as well as M&A. When credit is cheap, businesses tend to build capital stock"

US businesses have not been investing in capital stock domestically over the last few years, despite the low rates. They have been investing in China. They have been accumulating cash on their balance sheets and de-leveraging. Stephen Roach talked about the theory that capital investment is going to pick up the slack for broke ass consumers post housing bust. His point was that it isn't so clear--why would a business invest in production capacity just after the end user disappears? There has been plenty of M&A, but the only winners in that game tend to be the investment bankers and lawyers. No, they are going to be busy firing people. A 1% FF rate would only happen in the context of a recession.

R&D? Isn't that charged off against current earnings?

"The United states had unique problems which slowed or prevented this effect, not the least of which was a terribly corrupt and unregulated consumer credit industry, structured finance industry, and mortgage industry."

--Deo Vindice

I think dividend tax is partly to be blamed. Since companies do not pay dividends in the name of investor tax efficiency, the only way to increase shareholder value is to increase stock price. As a result, we have all kinds of creative accounting and outright fraud.

We should abolish dividend tax. A business is ABSOLUTELY WORTHLESS if it does not pay its owner money.

In additional to eliminating dividend tax, we should require companies to pay a large percentage of profits as dividends. This way there will be no more creative accounting.

How about growth? Companies can always

1) sell bonds
2) issue new shares

Nominal is just a number denomination. One dollar in 1970 was worth a lot more than a dollar today, because of inflation. Going foward, we can count on the Fed pumping money into the circulation to counter the aftermath when bubble pops, therefore, further reducing the true buying power of USD. Who knows what 2,200 USD can buy in the next 5 years? Certainly not as much as it can today. China's ability to subsidize our lifestyle is limited, they will soon subsidize to an extent of facing internal turmoil because there is not enough resources going around for their own people.

As I said before, I don't buy into any conspiracy theory of gold manipulation. For me it is rather simple, I don't trust the Bush government, I don't trust the Fed/BB, and I don't like to pay inflation tax if I can help it. An ounce of gold would buy you a nice Toga in Roman times, and it buys you a decent suit today, that sounds like a much better preservation of the buying powr of my hard-earned networth than USD.