The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Some interesting reading to start off your week:

• Scenes From the Madoff Masquerade (NYT)
• Roger Lowenstein: Buffett on the Spot, or What were you thinking, Warren? (Newsweek)
• How Your Journalism Sausage Gets Made (Forbes, Part One and Part Two)
• Lawyers got it right on the foreclosure mess (WaPo) See also Warning signs of foreclosure crisis were ignored (WaPo)
• Nassim Taleb on Living with Black Swans (Knowledge@Wharton)
• Don’t let banks gamble with taxpayer money (FT.com)
• Bill Gross Battles Dealers on Outlook as Treasuries Gain (Bloomberg)
• The Sharing Economy (Fast Company)
• What Lucky People Do Different (Jonathan Fields)
• Rude Boys: The birth of the Beastie Boys—an oral history on the 25th anniversary of Licensed to Ill (NY Mag)  I’m more of a Paul’s Boutique kinda guy

What are you reading?

Mac users are more politically liberal, more urban, younger and more educated than their PC-using counterparts.

That is according to a new survey by affinity aggregator Hunch. Among the more interesting findings:

• 58% of Mac people are “liberal,” as compared to 38% of PC people

• 67% of Mac people have completed a four-year college degree or higher, as compared to just 54% of PC people

• 52% of Mac people live in a city, while PC people are 18% more likely than Mac people to live in the suburbs and 21 percent live in rural areas

• Mac people throw a lot more parties than PC people

• Mac people are more confident about their verbal abilities but less confident about their math abilities than PC people

• Mac people are more likely to see random people as “similar,” whereas PC people are more likely to see them as “different”.

There is a great infographic on this, from Hunch and Column Five:

click for ginormous graphic

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Sources:
I’m A Mac, You’re Sarah Palin
Damon Poeter
PC Mag, April 22, 2011 http://www.pcmag.com/article2/0,2817,2384001,00.asp

With the 14 day RSI rising above 90 this morning in silver, reflecting the parabolic nature of its recent move, all it took was a slight $ bounce against the euro after the early morning’s weakness to get silver and other commodities to reverse course. In terms of the broader market, silver is a great gauge to watch both in its non $ play, gold friend play of course and industrial use/global growth story but also the momentum game in the short term as markets play a game of chicken with the end of Fed Treasury purchases in two months.

In the podcast I did with Dylan Ratigan last week, I mentioned we needed a Constitutional amendment mandating public funding of all federal elections. It seems to be the only way imaginable to get all of the dirty money and corporate lobbying efforts out of each and every attempt to close tax loopholes, reduce overall spending, and fix the tax code.

As if on cue, Tim Iacono points to this outrageous chart (via Time Magazine) showing how much dirty lobbying money has poured into DC over the past decade:

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Source: Time magazine.

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If you want to understand why the problems in DC are intractable, start with that graph above.

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Previously:
Government for Sale: 2009 Lobbying $3.49 Billion (July 14th, 2010)

Census Department:

“Sales of new single-family houses in March 2011 were at a seasonally adjusted annual rate of 300,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.1 percent (±21.7%)* above the revised February rate of 270,000, but is 21.9 percent (±10.3%) below the March 2010 estimate of 384,000.

Note the margin of error. The monthly gain of 11% is not statistically significant with an error of +/- 21.7%. On the other hand, the year over year drop of 21.9% is statistically significant with an error of +/- 11.1%.

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New Home Sales (March 2011)

click for larger chart

Chart courtesy of Calculated Risk

This short film illustrates the power of words to radically change your message and your effect upon the world:

Created by RedSnappa (www.redsnappa.com)
Filmed/directed & edited by Seth Gardner
Music by Giles Lamb ‘One to One’

Homage to Historia de un letrero, The Story of a Sign by Alonso Alvarez Barreda
Music by: Giles Lamb http://sonicdesignagency.wordpress.com
Filmed by www.redsnappa.com
Director Seth Gardner

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.

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There are several similarities between current trends and those in 1994, a year when many institutions were left destitute. Historical analogies can help us imagine what might happen, but identification of differences should be noted too.

The greatest dissimilarity is probably the structure of markets. There was some official (government-sponsored) interference in 1994, the most obvious being the Federal Reserve’s authorized pegging of interest rates. There was, however, no comparison to the government’s merrymaking in 2011.

Official policy to boost the stock market is well known. See, for instance The Fed Underwrites Asset Explosion. Rumblings that the Federal Reserve is writing put options on U.S. Treasury securities circulate, the particulars of which can be read on various websites and in the Financial Times (see: ft.com/alphaville: “More on the Literal Bernanke Put,” April 18, 2011.) The result of such interference is, or, would be, (depending on your inclination), to relieve fears of bondholders. The risk of falling prices is transferred to the party that has written the put. The Fed is (would be) absorbing losses if Treasury bond yields continue to rise and prices fall. (The latter is often forgotten but is important since balance sheets suffer losses and collateral falls: leading to calls for additional collateral.)

All government interference in security markets fails. The Fed’s monopolized control and underpricing of short-term interest rates failed when the Internet and mortgage bubbles burst. Today, whether or not the Fed is writing put options to attract buyers of Treasuries is not as important as the knowledge that there are few interested buyers of an unhedged, 2-year Treasury note (0.70% yield) or a 10-year Treasury bond (3.5%). The Fed-sponsored put option is the logical next step to dampen the yield curve.

The analogy to 1994 is to an earlier time when the government could no longer control interest rates. Yields were too low and bond prices too high. Once rates did rise, there were several consequences. Many were related to untested and overmarketed derivative products. Institutions failed, some of high reputation, because they did not understand the derivatives that were making their clients rich (and suddenly poor). As we’ve seen time and again, “stress tests” of derivatives (and of banks) are paper exercises that cannot account for unforeseen divergences or convergences of markets that have been mangled. Many institutional and retail investors were caught in the grinder. An autopsy of 1994 may help today’s investors avoid similar mistakes.

Then and now, the Fed had reduced interest rates to a microscopic level (from 9-3/4% to 3%), which had chased investors out of money markets and into the stock market. Net cash flows into stock mutual funds rose from $13 billion in 1990 to $79 billion in 1992 and to $127 billion in 1993. In 1992 and 1993, money market funds suffered net outflows.

Then and now, the banking system needed a bailout. Then and now, the Federal Reserve assisted financial gimmickry to boost a floundering economy. Commercial real estate was the greatest offender in the early 1990s. Citicorp and others had stopped lending. Banks borrowed Treasury bills at 3% and bought Treasury bonds that paid 6% yields.

Read the rest of this entry »

I have been wanting to discuss a horrifically misleading article for a week now: Americans Shun Cheapest Homes in 40 Years as Ownership Fades.

It is an object lesson in how an industry spokesgroup, engaging in biased analysis, used poor econometric models to create misleading data. That led to others making bad assumptions based on that data, which in turn leads to an unsupported conclusions. To wit, that home prices are now cheap (they are not) and home ownership is being shunned (it is not). Thus, the end result is a misleading Bloomberg.com article on residential Real Estate that is unfortunately based on these terribly flawed NAR metrics.

The reality is quite different than the spin. No, it is not, as objective data reveals, especially cheap.

This flawed data/PR flack/spin approach is how the NAR manages to get a false and misleading claims printed in major US media on an all too regular basis. “The most affordable real estate in a generation” nonsense in Bloomberg is only the latest hoodwinking they have pulled on journalists. Recall back in 2009, the Wall Street Journal and IBD were both snookered by the NAR’s seasonal adjustments (we discussed this here, here, here, and here).

Given the NAR’s track record when it comes to data analysis, anyone who makes any sort of purchase based on NAR spin is a fool who will get what they deserve.

All of this leads to our present discussion of Home Affordability. Back in 2008, I wrote an analysis of the Realtors’ model titled “NAR Housing Affordability Index is Worthless.” As you can see from the chart below, during the entire boom period of 1996-2006, there was but ONE MONTH where the NAR index said homes were not affordable. Indeed, that chart period extends from 1985 to 2008 — there was but a single month of over-priced houses.

How on earth did home prices NEVER become UNaffordable during the greatest run up in housing prices ever in the United States history? What sort of model refuses to allow homes to ever be perceived as unaffordable? We could only get that sort of thing from an industry source.

Gee, do you think their bias impacts their index?

Rather than rely on their silly, indefendable model, I suggest you compare median income to median home prices (see NDR chart below).

That metric shows that homes are way off of their boom highs, but stilll remain somewhat overvalued relative to the buyers ability to pay for that home. If you were to measure affordability BUT ignore that metric (of ability to pay), what you will end up with is lots of new homeowners who cannot afford to pay for those homes. Which in turn leads to lots of foreclosures — which is exactly what has occurred here.

By comparing Homes costs with buyers ability to pay for them, we can instead develop a sustainable model with periods of over and undervaluation — something the NAR model seems incapable of doing. That would render the NAR methodology, as a valuation measure, to be without any redeeming factors; (I believe the phrase I used in 2008 was “Worthless.”)

I would argue the measure of Median income to Median home price a much better gauge. It tracks people’s ability to pay for homes — an important data point if you want to see a measure of affordability that also imagines not being foreclosed upon is a relevant part of affordability.

Further, consider this perspective: How ownership ran up when money was free and lending standards had disappeared. That was obviously unsustainable. The latest home ownership data more likely reflects typical mean reversion to normalized ownership rates, rather than a paradigm shift in home ownership. At least, that is the my conclusion, relative to the ownership data and reversion to normal lending standards.

Of all the media outlets to get suckered by a garbage datapoint, one would think Bloomberg would be the last. Perhaps its time for Bloomberg LLC to offer a refresher class on “Understanding data for Journalists” . . .

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Median Incomes vs Median Home Prices

NAR Affordability Index: Never Unaffordable

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Previously:
NAR Housing Affordability Index is Worthless (August 13th, 2008)

How to Read National Association of Realtors News Release (April 20th, 2011)

Source:
Americans Shun Cheapest Homes in 40 Years as Ownership Fades
Kathleen M. Howley
Bloomberg, April 19, 2011
http://www.businessweek.com/news/2011-04-19/americans-shun-cheapest-homes-in-40-years-as-ownership-fades.html

The highlight of the week is going to be the Bernanke press conference after the release of their FOMC statement on Wed and while ears will be listening to his comments about the coming end of QE2 and what comes next, it will also be important if he discusses the state of the US$ or not. I say this for the obvious reason of the daily depreciation we see in its value and the coincident rise to new nominal new highs in gold and silver. He has punted on the issue in the past but has to acknowledge the impact of Fed policy and its impact on the value of the US$ as creating more dollars than there is demand for them is a devaluation. Let’s hope he doesn’t get softball questions. With European markets closed, the only other global action was in Asia and the Shanghai index closed at a 3 week low and the Yuan fell sharply as a Central Bank Advisor played down the talk last week of another one off revaluation of its peg to the US$.