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Analysis and Discussion with James Hedges of LJH Global Investments

Bloomberg, February 19, 2009

There’s a full run of witty ramblings about Presidents in this month’s New Yorker. They are very much in the absurdist style of early Woody Allen (Without Feathers), but this one stuck me as the most amusing:

“The first two wishes had been easy. Sure, President seemed like a reach, but George W. Bush figured you only came across a genie in a lamp so many times—you might as well go for it. As for the chocolate milkshake, well, that was a lark. Later, he would claim that he was just testing the genie’s powers, but in truth he’d really wanted that milkshake, and in his heart he never regretted it. The third wish, though, had proved more vexing than he’d ever imagined; and, to his own surprise, the genie’s suggestion was starting to make sense. “Explain it to me one more time,” W. said.

“You see, master,” the genie said, stroking his goatee, “high earners provide the capital for business infrastructure and equity markets. Therefore, sweeping tax cuts for corporate income, coupled with steady deregulation, will stimulate growth, the benefits of which will necessarily trickle down.”

Years later, with the country in a shambles, the President privately wondered if he’d been too quick to accept the genie’s supply-side logic. But by then the genie had his own problems: his 401(k) was all but defunct, and he found himself embroiled in a major lawsuit over whether or not he had assured a previous client that “all the riches of Araby” were tax-exempt.”

The whole run is pretty funny . . .

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Source:
MORE APOCRYPHAL STORIES OF THE PRESIDENTS
Yoni Brenner
FEBRUARY 23, 2009

http://www.newyorker.com/humor/2009/02/23/090223sh_shouts_brenner

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Tonite I will be on Fast Money with Dylan Ratigan on CNBC at 5:30pm discussing today’s Housing Rescue Plan — and the good and bad ideas within it.

See our prior suggestions:

1. Homes: Still Too Pricey to Stabilize the mess!

2. Intelligent Loan Mods & Foreclosure Abatement

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UPDATE

Click for Video:

http://www.cnbc.com/id/29260607

WSJ’s Rebecca Blumenstein and Andrew Browne discuss China’s recent investment in natural resources, including a $25 billion deal with Russia for oil.

WSJ, 2/17/2009

Nightly Business Report is celebrating their 30th year on television.

NBR viewers suggested the advances they admired during the 1979 to 2009 time frame. Professors at The Wharton School of the University of Pennsylvania selected and ranked the top thirty.

The Top 30 Innovations of the Last 30 Years

30. Anti retroviral treatment for AIDS (Health Care)
29. SRAM flash memory  (Electronics)
28. Stents   (Health Care)
27. ATMs   (Finance)
26. Bar codes and scanners   (Retail)
25. Bio fuels   (Biotechnology)
24. Genetically modified plants   (Biotechnology)
23. RFID and applications (e.g. EZpass)     (Electronics)
22. Digital photography/videography   (Electronics)
21. Graphic user interface (GUI)      (Computer Science)
20. Social networking via internet   (Media)
19. Large scale wind turbines   (Energy)
18. Photovoltaic Solar Energy    (Energy)
17. Microfinance      (Finance)
16. Media file compression (e.g., jpeg, mpeg, mp3)      (Computer Science)
15. Online shopping/ecommerce/auctions (e.g., eBay)       (Information Technology)
14. GPS Systems     (Electronics)
13. Liquid Crystal Displays             (Electronics)
12. Light emitting diodes (first real devices in 1960s; in products in mid-70s)      (Electronics)
11. Open source software and services (e.g., Linux, Wikipedia)         (Media)
10. Non-invasive laser/robotic surgery (laparoscopy)        (Health Care)
9. Office software (Spreadsheets, word processors)        (Computer Science)
8. Fiber optics         (Telecommunications)
7. Microprocessors        (Computer Science)
6. Magnetic resonance imaging (MRI)     (Biotechnology)
5. DNA testing and sequencing/Human genome mapping     (Biotechnology)
4. E-mail         (Computer Science)
3. Mobile phones           (Telecommunications)
2. PC/laptop computers      (Computer Science)
1. Internet/broadband/WWW (browser and HTML)       (Telecommunications)

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Source:
The Top 30 Innovations of the Last 30 Years
PBS, February 16, 2009

http://www.pbs.org/nbr/site/features/special/top-30-innovations_home/

The Obama plan is a little better than I expected, but it still dances around an issue that is sacrilegious to many economists: Home prices are still way too high for any stabilization an/or housing bottom to form.

While houses are not nearly as wildly over-priced as they were one or two years ago, they are still too high by most valuation metrics. Propping up home prices and the desperate attempt to forestall foreclosures only serve to delay this inevitable process.  To effect a stabilization, housing bottom and recovery, overpriced assets need to fall even further.

Notice that the States where home sales are increasing are those where we have sen enormous foreclosure surges (80-120%) and huge price decreases (40-50%). The major bubble areas — California, South Florida, Arizona, Las Vegas — have seen price collapse lead to an eventual sales surge.

Why is it that prices are so important to the housing market?

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

Go to any suburban neighborhood — the one you or a freind/family member lives in. Look at the starter homes that a newlywed couple just starting out might consider. Small capes, 2/3 bedroom houses or cottages. Assume that this couple are late 20s/early 30s, and are making decent — but not 6 figure — salaries.

Can they afford that starter house? If not, then the entire real estate chain is frozen.

What’s left is mostly lateral moves, greatly reducing the overall sales.

House sales peaked in 2007 at well over 7 million units. We are now running about 4.25 million sales. A more normalized number would be between 5 and 5.5 million. That’s not gonna happen if the starter home market is dead.

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Home Prices as a Percentage of GDP

chart courtesy of Calculated Risk

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Existing Home Prices vs. Median Income

chart courtesy of The Mess That Greenspan Made

Homeowner Afford Ability and Stability Plan Fact Sheet

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Source:
Help for homeowners
Wednesday, February 18th, 2009 at 9:36 am

http://www.whitehouse.gov/blog/09/02/18/Help-for-homeowners/

Report and analysis by Peter Cook of Bloomberg News (Morning Call)

Bloomberg, February 18, 2009

Japan, the postwar economic miracle, is on a fundamental slide. Fifteen years ago, it ranked fourth in the world in terms of gross domestic product per person, but now it has slipped to 20th.

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Source:
For Japan, a Long, Slow Slide
Blaine Harden
Washington Post, February 3, 2008; Page A17

http://www.washingtonpost.com/wp-dyn/content/article/2008/02/02/AR2008020200913.html

Mark Faber wants to do nothing and let the free market correct the excesses. I agree — but I know its only a pipedream. Given we have already had unprecedented interventions, the let-the-market-correct ship has already sailed. And, no US politician has the stomach for that.

Excerpt:

“As a consequence of this expansionary cycle, the world experienced between 2001 and 2007 the greatest synchronized economic boom in the history of capitalism. Past booms — of the 19th century under colonial economies, or after World War II when 40% of the world’s population remained under communism, socialism, or was otherwise isolated — were not nearly as global as this one.

Another unique feature of this synchronized boom was that nearly all asset prices skyrocketed around the world — real estate, equities, commodities, art, even bonds. Meanwhile, the Fed continued to claim that it was impossible to identify any asset bubbles.

The cracks first appeared in the U.S. in 2006, when home prices became unaffordable and began to decline. The overleveraged housing sector brought about the first failures in the subprime market.

Sadly, the entire U.S. financial system, for which the Fed is largely responsible, turned out to be terribly overleveraged and badly in need of capital infusions. Investors grew apprehensive and risk averse, while financial institutions tightened lending standards. In other words, while the Fed cut the fed-funds rate to zero after September 2007, it had no impact — except temporarily on oil, which soared between September 2007 and July 2008 from $75 per barrel to $150 (another Fed induced bubble) — because the private sector tightened monetary conditions.”

Faber is always interesting to read, and this piece is no exception . . .

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Source:
Synchronized Boom, Synchronized Bust
Mark Faber
WSJ, FEBRUARY 18, 2009
Bad U.S. monetary policy had global consequences

http://online.wsj.com/article/SB123491436689503909.html