Dirk McCoy

Today's FOMC Meeting: Extended Life Support for Markets?

An upward rate adjustment of a point or so, with a "pledge" to keep future short term rates low for a long time, would have a few beneficial effects:

1. It wouldn't do much to raise actual bank lending rates since most of them are pegged much higher;
2. It would slow bank profits, which, given banks aren't making use of reserves to lend isn't so bad;
3. It would show the Fed isn't totally abdicating an anti-inflation stance;
4. It would be a reversal of the 2002-2006 debacle, where the Fed waited too long, and then started an inexorable march upward that eventually spooked anyone with an adjustable rate mortgage or line of credit (a big part of the economy);
5. It could creat a short term swirl of activity that would blow over, creating more long term confidence.

The worst thing the Fed could do is nothing for a year, and then jack rates back up to above 5% (assuming long term rates stay under 6).

And the worst thing our government could do is take advantage of low rates and debt monetization (to the extent there is any) by spending more of it on more "stimulus". Print more money, but use it to lower debt.

Property Values Set to Fall 43% from Current Depressed Levels

I've seen a few charts of this type, when the trend is extended back another 30-50 years, it shows a 20% further decline from current values.

One factor being overlooked- the tax law changes of 1997 significantly increased the capital gains exemption for houses, creating a short term boost in after-tax earning potential that supercharged the trend.

My guess is that in areas where supply and demand are reasonably balanced, the bottom is in now. In areas where job creation/destruction and taxes force ongoing exodus, another 20% fall is quite possible. The key will be for homebuyers to figure out which areas are which- and for homeowners to take some action vis a vis their taxes...

Airlines: Some Costs They Can't - And Shouldn't - Cut

Perhaps the solution is technology and regulatory structure to allow more- and less expensive- planes to fly within urban flight corridors. Instead of an hour commute downtown on a train, if someone could make it in 10 minutes- think that would be popular?

On the other hand, technology and regulatory structure could make it so we all just work and vacation in cyberspace, and no one has to travel anywhere.

The question- which is the future? And should it be decided by a marketplace, or elected officials? If the marketplace, then pilot salaries will continue to drop as technology and labor availability conspire to make qualified pilots less scarce relative to demand. If elected officials- then get ready for thousands of more articles like this touting pilots, planes, travel, cyberspace, CO2, and every possible factor regarding air transport...

Stimulus Nation: What Are We Getting for Our $3.27 Trillion?

Andy, I agree with you that government interference in economic matters is moreoften destructive than not, and that Keynesian stimulus is a poor use of money.

But, please, don't discount future costs of programs without discounting future benefits- it's like telling someone they've just lost a million dollars because they just had a child and have to pay for food, housing, clothing, tuition, cars, vacations.... The prescription drug program net present cost may be $8.7 Trillion, but the net benefit may be considerably more if those drugs prevent heart transplants and lost work hours- and the cost may come down as economies of scale allow lower cost development and manufacture of drugs.

As for inflation and fiat dollars, the focus should be on the infinitely larger fiat CREDIT expansion- and contraction. Reigning in leverage- while monetizing some of the debt to make repayment easier while punishing those in the money who allowed credit to grow as it did- is more important than trying to affix money creation to a single precious metal (or some other standard that would take the "fiat" out of fiat currency).

America, The Nanny State

Where to draw the line... there must be a public health option for illegals, idiots, and infirm, as Londoners found with combatting cholera epidemics. So a national value added tax on food should be used to fund a minimal level of public health care for everyone, including immunizations, evaluation, and basic treatment.

Most of your ideas would work well after that. I don't see how people don't understand a public option will do to private healthcare what public schools did to education- force the vast majority into a system with higher costs, less choice, and uneven quality.

How Bloomberg Fabricates U.S. Housing Numbers

18.95 = 19. If the report had said 19.0, then you'd have something to complain about.

As for the bank foreclosure numbers forcing this number higher, don't overlook the significant sales in the low end of the market this year. Many first time homebuyers (and others) took advantage of the tax credit.

And it's been obvious for over two years that the housing market could precipitate a collapse of the entire economy (based not only on asset bubble collapse but a total loss in confidence in trade and money). The question- "what to do about it?"- was the subject of a few of my articles, and while the Fed has not monetized as much debt as I would have liked, they have at least created the impression that they were going to. Now that the dollar is falling, labor rates stagnating, commodity prices rising- the US has a better chance to work to pay off its debt- as long as we don't create a non-productive nanny state.

Why Apple Is Worth $80

AAPL has a great brand and supply chain that allows it to earn much, much higher margins than competitors. To the extent they can maintain that premium brand (a la, Coca-Cola?) they certainly could continue to see higher share price- their penetration into the PC market is still very small, and I'm sure they have a product roadmap that will turn heads for years to come.

On the other hand, should their brand falter (I never understood why Macs are less susceptible to viruses...), AAPL would falter as well. Given none of us here know if AAPL will be a Coke- or a GM- means that at some point, you'll want to exit the stock based on your risk profile. As long as AAPL is on a winning streak, their shares will do well, but a serious stumble could set the stock back by 100 points, sure.

Financial Panic Is No Solution to Economic Woes

There are two extreme solutions, credit collapse-bank panic Armageddon, or debt forgiveness-bailout mentality avoidance. Neither is optimal, as they reward those who are most malfeasant while changing the socio-economic contract- you have to pay back what you borrow.

What is the optimal solution? Monetization. This makes it easier to pay back debt, while punishing those who gave out too much credit. The risk is inflation, which will reduce living standards- especially if social security, welfare, and minimum wage entitlements aren't indexed.

But shouldn't this be the fate of those who borrow more than they can repay? And technology, increased global production capacity, and recognition of the fairness of living within one's means (no matter how meager) can mitigate the worst effects of this shift upon the national psyche.

Investing in Clean Energy: Asking the Right Questions

Here are a couple questions I think someone should ask themselves:

1. What happens if global temperatures continue to cool?
2. What happens if Briffa fails to adequately address the Yamal controversy (perhaps on Capital Hill, a la Mann)?
3. What happens if the Senate refuses to ratify a climate change treaty or cap and trade?
4. What happens if conservation efforts and technology meet up to push Peak Fossil event out another 100 years?
5. What happens if there is a serious grid event triggered by wind power variability?

I'm a solar believer- but timing is everything, and just like investing in 8% efficient solar would have been a mistake when Jimmy Carter proposed it, I don't believe investing huge sums in current renewables technology in the US today is the best use of global capital- especially if events turn from the perfect storm of government and big business conspiring around the flag of CO2 reduction before consumers understand the economic impact. There is a need for energy expansion around the world- are our actions helping or hurting US companies' ability to participate in that growth?

BTW, there were a couple folks on that TV show whose livlihoods depend on the impression that a climate disaster is imminent- could it be they are they in denial? Have you googled "Yamal trees" and understand the significance of that recent development yet?

Energy Will Lead the Next Commodity Shortage

Peak Oil is kinda like Peak Britney Spears- there's only so much to go around, but at a certain point there are better alternatives. Checking our highways, you'll see 80% of cars with just one passenger, getting 25mpg. At $150/barrel, 1/3 of those cars will be off the highway, substituted with either smaller cars, fuller cars, or cars left in the garage as workers telecommute.

And at $150/barrel, the rest of the world will not develop transportation infrastructure like we have. They weren't at $30/barrel oil. So coal (lots of it, because it's increasingly clearer that the wheels are falling off the AGW wagon) and natural gas will do the heavy lifting for the emerging electric car industry over the next 30 years while solar technology is further developed and can come in at $.05/kwh (in current dollars) to power the world for centuries to come using silicon made from sand.

And we're not running out of sand, or people to convert and install it, anytime soon. Meanwhile, shale and lots of other sources of oil become quite viable at $100/barrel. So while there may be short term shocks (even Britney Spears still sells some albums at higher than I think rational prices), I don't see $200 oil and massive push cost inflation, especially given the excess labor floating around the world.

Energy Myths for the 21st Century

Global living standards, including here in the US, have risen as population has risen. Julius Simon made a bet decades ago that as more people had better living standards, commodity prices would fall- he was right. We now recycle more steel from old cars than use it to build new cars.

We will never run out of oil because, at some point, we'll have converted so much sand (which we won't run out of any time soon) into solar panels that it will be cheaper than $200 oil- and the oil that's left will rot in the ground.

Marc Faber: Equities Safer than Dollars

For once Faber is making sense- emerging economies will do better than the US because they were so far worse. Their workers are buying work with extremely low wages. The Fed will monetize debt (I'm still not sure Marc gets the difference between issuing debt and monetizing debt, which are not the same thing), the dollar will drop, medical tourism will be big. He's right about all this.

But what he's wrong about is that this will mean a collapse of capitalism. These things will happen because market forces will make it so. A US engineer earning 6X what one in India earns is not sustainable. But just because living standards go up in India does not mean they have to go down in the US- unless Obama and his union pals try to remove us from the global economy, in which case the rest of the world will boom while we stagnate.

While I appreciate tedstr's comment about most of our money being spent on US purchases, let me remind that a typical 1980's Soviet spent most of their money on domestic purchases. But a socialist economy ends up not having as much to buy. Capitalism will fail only if we let it.

Capacity's Comeback Strongly Indicates Recession's End

Man, if some of you were central planners in a communist America back in the 1800s, we'd have most of our population living in Boston, Philly, NYC, and other coastal cities, and virtually no one living out west, because you wouldn't want the jobs to get outsourced to another state.

Funny that China's central planners accomplished the same thing with their coastal cities.

But rather than looking at it as "taking our jobs", look at it as expansion. Chinese, Indians, Eastern Europeans have joined us in the capitalist model- why shouldn't they be rewarded with jobs?

I think monetary policy, lack of vision, and a scarcity mentality have kept us from realizing that expansion is good, that a better living standard for other states/countries is good, and that a rising tide can lift all boats.

As for the idea that we have too many people for the jobs we have, ask yourself this- if money was no object, would you buy anything? The answer would tell you that a lot of construction workers would be building swimming pools and extra garages, that a lot of car workers would be selling some sweet convertables, that a lot of scrap dealers would be coming up with the metals for that, that a lot of solar installers and utility workers would be figuring out how to come up with more energy, and that there would need to be more quality steakhouses, restaurants, and live theater. And then perhaps more planes and boats to carry people to do missionary work when they've realized all the stuff in the world doesn't mean that much anyway.

Don't fall into the trap of the modern central planners who tell you we'll run out of energy, we'll run out of food, we'll run out of - what, land? if we let our economy keep growing.

Capacity's Comeback Strongly Indicates Recession's End

The trend in downward capacity utilization will continue as long as labor price controls dampen utilization. Further weakening of the dollar may mitigate this some, but having filled out these reports in the past I know that what is currently called "capacity" is understated in terms of potential capacity, and overstated in terms of short term capacity. The difference lies in capital investment, and companies will be hesitant to do that if they don't sense they can be competitive over the longer term such that they can achieve payback on their investment.

Will Regulation Hobble Capitalism?

Accurate information, rule of law, private property rights, and limited liability have been cornerstones of capitalism for hundreds of years. Regulation that replaces these with government partisan babble, special rules for special parties, government confiscation, and expanded liability beyond anyone's ability to bear it will only slow down capital investment in this country, leading to a hording of capital, deflation, and malaise.

By focusing law enforcement on those who defraud (Madoffs) or are willfully negligent (rating agencies), we can create an environment where honest businesspeople who want to make money via creative interests- including properly guaging fat tail risk and mitigating it because it can cause them to lose their money and their reputations.

But regulation that just creates more barrier to entry, higher operating costs, and fear that elected (or appointed) officials will be in position to "pick winners" will only serve to damage our economy. Take a look at Africa and their top down "regulation" of their economies to see just how damaging this can be.