Sean Olender

Understanding Energy: Professional Money Management and Peak Oil

It's a "moot" a point and not a "mute" point.

When Banks Try to Defend Credit Cards

Yes, Mr. Salmon delivers a surprisingly politically even handed analysis of these issues. Congratulations.

As for the argument from "six" about "consumers" ought to look out for themselves is so irritatingly stupid that you have to wonder if this comment is from an ideologue, or some PR hack on the payroll of the American Bankers Association.

Corporations are so enormous and wield such legal power, retain the top talent in law, psychology, psycho-marketing, media, etc. They shape the environment. You can't negotiate crap with them. You take it as it is or leave. They design the maze and we're the rats. "Just don't play in the maze then." Oh really? Well, how do you get out of the maze then? I mean can you please show me where the exit is? Right. I thought so.

Oh, yes, I know, the "consumer" is free to refuse and then "free enterprise" will come up with an alternative that these "sophisticated consumers" with "perfect knowledge" can then patronize. Be real, man.

The fact is that people are overworked and not terribly too bright about the hypertechnical nature of their exploitation. I bet if I quizzed you on your real liability and obligations under your credit card contracts, you'd score less than a 70% in your understanding of what your rights and liabilities are. The agreements are complicated on purpose and the idea that one party, the bank, can unilaterally change the contract terms at any time, but the consumer can't, is an example of how ridiculous this is.

Many suggest the same "caveat emptor" should apply to food and chemicals. Consumers should just buy giant chemical toxicity kits to analyze the carcinogenicity of the chemicals in their food, water and consumer products. Then the savvy consumer can make decisions about which products to use and which not and this will result in a market decision that is equivalent to freedom. If most people would rather a 20% discount on their goods in exchange for a 50% lifetime risk of being diagnosed with cancer (for women it is 33%), then the market should be free to choose that.

But the problem with contracts and chemicals and all manner of other things is that you're lucky to find 1 in 500 people who really understands what's going on and then it's only in their field. I have a friend who is a toxicologist with a Ph.D. and highly respected in his field, but I don't doubt that he'd be clueless as to the carcinogenicity of the consumer products in his house. It's outside of his narrow area of expertise.

So maybe we can set up systems where all Americans will get an MBA and a Ph.D. in chemistry (just for starters) so that they can be informed and play on a level field with the corporations that tap very talented experts to design products and to design the marketing campaigns that often distract consumers from the truth of what they are getting into. We can encourage all Americans to be rich so that they can have very talented lawyers on retainer to provide them with advice when they sign all manner of contracts and engage in all sorts of binding relations with large companies.

Some of the philosophical underpinnings of capitalist theory like the rational consumer, perfect information, etc. need to be assisted through government regulation (from a less corrupt government than the one we have, because we're still not getting even a discussion of meaningful regulation, nor a single big conviction in any of the mortgage fraud Wall Street horrors - it's like a bank junta took over the government) lest the entire system be so discredited that it eventually fails. Robert Schiller is doing some things with behavioral economics theories that are a promising way to avoid pushing capitalism down the path of an extremist ideology that eventually bears such scant relationship to what is real and obvious to everyone that it is dismissed forever. That risk is deeper and more persistent than many pushing the most extreme versions of the theory would like.

Tata Nano About to Give Detroit a Run for Its Money

Yes, this is embarrassing to write that a US release is coming in July 2009. A quick review of the papers would tell you that Tata isn't releasing anything in the United States and merely plans to in about three years. It is likely that a US model would cost a bit more, but maybe still less than $5,000.

The American car market is a joke because they require all of these expensive safety features like airbags and certain front and side energy impact performance, but they allow the sale of 8,000 pound SUVs that are raised high enough where the bumper doesn't contact the other driver's car and this actually results in decapitations not infrequently.

Small, light cars are safer unless you have big, heavy cars. A small light car hitting a fixed object like a wall, tree, lightpost, etc. will release less energy and result in less damage and injury to the car's passengers than a heavy car hitting the same thing. It's a principle of physics. Small cars are very dangerous in the United States because when they are hit by a big car, especially one raised off the ground so that the bumper impacts the small car well above the bumper, even at slow speeds it can kill the small car's occupants and the bumpers, seat belts and air bags don't matter at all. A real reduction in auto fatalities and radically improved gas mileage, reduced air pollution and even reduced traffic could result from a stringent regulation of auto size and weight.

What some people also don't realize is that the United States uses more than 40% of the world's refined gasoline (not oil, refined gasoline), so when 50% of Americans moved to SUVs that get 11 to 15 mpg, it had a significant impact on WORLDWIDE gasoline consumption. It affects everyone. When you go to buy gas at the gas station, a significant part of the cost is reflected by demand and demand is reflected by gas mileage multiplied by miles driven. So when you see someone pull their 8,000 pound Ford Expedition into the gas station, realize that no matter what sort of car you drive, your gas is more expensive because they are bidding against you to use a whole lot of it. The proliferation of heavy, low mileage cars absolutely and undeniably and powerfully affects gasoline prices.

So let's look at the Nano. It gets between 50 to 60 miles per gallon, weighs 1,300 pounds and has a top speed of 75 miles per hour. To many Americans this may seem like a sad joke. But it's not. You aren't supposed to drive faster than 70 miles per hour in California and many other states and even those with faster speed limits only allow 75 except for a small part of Western Texas that allows 80.

"What about passing?" Oh shut up! It's illegal to exceed the speed limit while passing. It's one thing to say, "Well, everybody does it" and other to say that cars must be minimally designed to allow or even encourage people to break the law.

43,000 Americans a year die in car accidents. There are 6 million accidents annually and 3.5 million result in injuries. An incalculable amount of taxpayer money goes into the happy motoring project from ambulances and funeral parlors, to body shops, highway patrol, the ridiculous car/ticket/court/traffic school/insurance racket. The cost of owning and operating an automobile doesn't register in most Americans' minds because it is distributed. Imagine the cost separately of your garage at home, your parking at work, insurance, auto repair, gasoline, tickets, licensure, parking fees, bridge tolls, parking tickets, car washes. It's such a suck of resources that it is incredible.

Then there's the cancer. Did you know that if you live within half a mile of a gas station, researchers have found that your children will have seven times the likelihood of getting leukemia? Gasoline and its distillates have polluted so much soil and ground water and the automobile has caused so much lung cancer, so many deaths from respiratory illnesses in the very young and very old. 20% of children living in US urban areas have asthma due specifically to air pollution which is 60% to 80% caused by automobiles.

What about risks to the continued existence of modern civilization? Food production is petroleum based and global oil production is falling. From the evidence we have at this point, it seems highly unlikely that oil production will rise. It will be almost impossible to find and develop sufficient new production to keep depleting fields from dragging down overall production.

As oil prices rise, food prices will rise because modern food is petroleum (petroleum based fertilizer, petroleum based pesticide, petroleum fueled farming machinery and petroleum fueled transcontinental food shipping). Modern food is petroleum.

The Nano and China's Chery cars will have the unfortunate effect of driving up oil prices and rapidly depleting reserves because they will get a lot of people who previously didn't drive in India and China to start driving. The result will be catastrophically higher prices for food and fuel worldwide.

Americans may indeed start buying subcompacts like the Nano, not because they want to, but because they have to. If gasoline prices rise up to $5-$7 a gallon as a recovery takes hold next year or in 2011, happy motoring will resume its growth and probably take prices to $8 to $10 a gallon when combined with reduced worldwide production by 2012-14. At those prices, the exurbs will become ghost towns. Only the top 20% of income earners will even be able to afford fuel to make very long daily commutes and that to 20% isn't the group that moved out to the sticks to buy a cheap McMansion anyway.

My fear isn't gasoline prices because that will drive a much needed reduction in car sizes and car driving. America needs that and it would make for less respiratory illness, less asthma, fewer car accident deaths, less cancer, and less offensive noise and dust that keeps most Americans from even walking to the store because it's a dirty factory out there.

My worry is that it will cause food prices to skyrocket. A "successful" American family will be one that can afford food and fuel. It may become the new bling. "Did you see the Johnsons next door came home from the grocery store with four bags of groceries and they drove! They must be doing well." Americans will get gasoline company credit cards that tie into home equity loans while the Federal Reserve and US Treasury claim that Fannie, Freddie and FHA need to refinance borrowers to help them "afford" fuel and food by using their homes to finance those weekly consumption expenses over 30 years.

Anyway, this is a rant, but I had to do it. The Nano would be great for the US, but Americans don't get where things are going yet. The US uses twice as much energy per capita as Europe and Japan. That means that as energy costs rise, the US will be hurt twice as much as Europe and Japan. An American with an 11 mpg truck designed to ferry agricultural workers but sold to the gullible as a "luxury vehicle" because it has a ridiculous Cadillac emblem on it will suffer four times as much as gas prices rise as a European driving a 44 mpg subcompact. And it's worse, most Europeans and Japanese who take electric subways and trains will suffer even less of an impact from that gasoline price increase.

Combine that with American urban development where the suburbs are so far from work centers and miles of tract homes are connected to "office parks" by freeways, and you have a disaster on the horizon. What's coming will hurt everyone, but it will hurt much worse here because of the way this place is designed.

There is a limited amount of time and a limited amount of resources going into this. It will take huge cultural shifts and hundreds of billions of dollars, maybe trillions, to rework the way we do things here to avoid a catastrophe. Arrogance will probably stop that from us even talking about it.

But if you take a calculator and figure that the average American will have to pay 4x or 6x as much as the average European or Japanese to maintain current habits per unit of gasoline price increases, you can see how this will cost jobs, production, economic activity. It will change American behavior by force. Instead of embracing the future and doing our best to meet its challenges, the future will bring us to our knees and from that uncomfortable position, we will make practical choices.

Maybe we should all buy some knee pads.

Unemployment Will Take Out This Bear Rally by July

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Unemployment Will Take Out This Bear Rally by July

Unemployment is calculated differently now than during the Great Depression. A broader measure of unemployment that includes the discouraged who want to work, but who aren't actively seeking a job as well as those whose unemployment benefits ran out - called U6 and that is at 15.6%, only about 10% below the worst levels of the Great Depression. Also, unemployment did not spike from 4% to 25% in a year during the Great Depression. It took time. Much different now than then is that the workforce includes women and so real unemployment then when you include women who were not counted as wanting work (mainly because they were culturally dissuaded from work) may have been much higher than the 24% often cited.

Unemployment in the Depression

1929 3.2%
1930 8.7%
1931 15.9%
1932 23.6%
1933 24.9%
1934 21.7%
1935 20.1%
1936 16.9%
1937 14.3%
1938 19.0%
1939 17.2%

So by the U-6 measure, we're about even with 1931, but by the U-3 measure that's 8.5% right now (more widely reported in the media), we're at 1930 levels. It's helpful to realize that unemployment didn't go from 3.2% to 24.9% in six months or a year. It took time. Last March on Seeking Alpha I read some bumbler who claimed this wasn't a real crisis because unemployment was only 4.8%. Here we are a year later and it's almost double that, indeed it will probably be double that with the May 8 nonfarm payrolls report because of these incessant upward revisions to earlier months (it should be ~9 to 9.5% for April).

So what's different between 1982 and today that will help us understand if the early 1980s experience is a good guide to how this will play out? Let's start with the Federal Funds rate. In November 1982, the Federal Funds rate was 9%. Today it is 0%. And in late 1982 the rate was on the rise and everyone knew it. The Federal Funds rate didn't peak until July 1983 at 11.5%.

Installment credit (i.e. credit card debt) was $384 billion in November 1982 and today it's $2.5 trillion.

30 year mortgage rates in late 1982 were 18.45%. Today they are 4.85%.

In 1949 mortgage debt was equal to 20% of annual household income. By 1979 it was 46% of annual income. By 2001 it had risen to 73% of annual household income. Between 1998 and 2001 the median amount of home-secured debt rose 3.8 percent, while from 2001–04 it rose 27.3 percent.

The above facts suggest that the past recoveries came from lowering interest rates and from people borrowing a lot more money. Here interest rates were low going into this, and people had already borrowed more money than they can mathematically afford even at very, very low interest rates.

GNP dropped catastrophically from 1930 to 1933 (-9.4%, -8.5%, -13.4%, -2.1%), but rose very fast from 1934 to 1937 (+7.7%, +8.1%, +14.1%, +5.0%) and despite that unemployment remained very high and most people wouldn't call 1935 to 1937 "the good old days." We could have catastrophic drops in GDP this year and in 2010 and a big jump in GDP in 2011 that is accompanied by only a modest improvement in unemployment (U3 could remain at 13% to 15% while real GDP rises).

Today is much different than the early 1980s. Public and private debt is impossibly high. Interest rates are too low. Additional "stimulus" will come Japan-style from deficit spending that does essentially nothing except dig a big hole for future taxpayers (Japan has the highest public debt to GDP ratio of any industrialized country by miles and miles and it's still having problems its public spending spree was supposed to have fixed a decade ago).

The 1980s also did not present a synchronized global recession. IMF thinks the world economy will shrink 1.3% this year. The last time that happened was in the 1930s. This doesn't mean that we're necessarily going to have an experience like the 1930s, but it makes what's happening fundamentally different from the early 1980s in so many ways that the comparison isn't useful.

Finally, let's look at jobs. In 1982 the great offshoring of US manufacturing was just getting started. It hit mostly blue collar workers who made the equivalent of $20 or $22 an hour back then and most of whom were thrown into $8 to $12 an hour jobs as the process continued. But it was a long process that is still going on.

I have talked with attorneys and business managers who bragged that they can get electrical engineers with Ph.D.s from the best universities in China to start at $17,000 a year at super fantastic clean room and office facilities in China. The starting salary here for similar talent is $100,000 to $120,000. It's the same with software engineers, accounting, business consulting, radiology, call support, IT support.

This movement of jobs and services to South and East Asia is building an increasingly sophisticated infrastructure there not just of office buildings, broadband, servers, data centers, telecom, etc., but also of people who are increasingly tailoring their education, English included, to serve the US and European markets. e-Ink used in the Kindle and Sony's e-book reader was invented by a Chinese company and they own the patent. AMZN and Sony license the technology from them. English speaking is getting better, the broadband is getting better, teleconferencing, data networks, systems for holding online meetings and sharing files, information, etc. is getting better. And it's not just getting better, it's getting cheaper.

I'm not a fan of globalization for political reasons. Global labor arbitrage weakens democratic institutions. But there is almost nothing standing in the way of this. Most Americans don't mind offshoring because they think they are superstars and someone else's job is being offshored. This Great Recession will be an opportunity to fire a lot of Americans working at 2x to 5x the comparable wage in India and China for highly educated professionals. As a recovery emerges, those jobs will be added back abroad where it's financially sensible add them.

OK, one last finally. OIL. Oil is a big reason that this downturn is not going to end in the normal way ending is understood. If we get 1% growth or 2% growth, oil is going to go through the freaking roof. Right now oil is trading around $50 a barrel. If you look back at inflation adjusted prices, that's higher than at any time since 1978 if you strip out the last couple of bubble years. We have a synchronized global recession with the largest drops in output, factory activity and transglobal shipping since at least 1940 and oil is at a 30 year high adjusted for inflation? Let's look at why.

Al Ghawar in Saudi Arabia and Cantarell in Mexico are being depleted very quickly. There are not sufficient new sources available to make up for the ones where production is declining. Even improved technology, the Canadian oil sands, none of it will provide cheap, plentiful oil. The energy and cost of retrieving and producing Canadian oil sands product is steep. A 1% or 2% growth rate in the United States would probably send oil up to $120 a barrel. Economic growth at this time cannot proceed without oil production growth. Alternative energy isn't just great, it's the only path forward, but it can't grow as quickly and as cheaply as oil to allow for economic growth worldwide. The real cost of sweet crude is practically free. You stick a hole in the ground and out it comes. It's cheap and easy to refine and packs a wallop of energy in a small package. It sucks for lots of reasons, not least the gas station-benzene-cancer problem, air pollution, greenhouse gases, etc., but when cheap oil is gone, my guess is that it will missed.

So this is why I think we're not having a recovery now. I also think that when a recovery comes (maybe 2011), it's not going to be a return to what is believed to be trend economic growth. It is going to be 1% or 1.5% growth and it's going to come with high oil prices and high unemployment rates structurally for a long time (read decade plus). Oil will stop any roaring recovery and offshoring and improved technologies will stop any surge in employment and wages.

If you think the revised TARP costs look bad, "wait until it becomes clear that the GDP growth estimates meant to calculate the budget deficit end up being too high because of the recession. That will make the TARP miscalculation look like nickels and dimes."

I couldn't agree more. They are hiding the cost of these bailouts because they would cause upheaval if they revealed those costs. The game is to get as much money out the door through the Fed, Treasury, FHA, FHLB, FDIC, and every other agency imaginable before anyone figures out the cost. An unknown majority of loan guarantees will turn into direct taxpayer liability and judging the likely strategy that people will try to get rid of what's most toxic first and least toxic last, we can expect a catastrophe as the real numbers come out.

I wrote an article at the San Francisco Chronicle Sunday about the unfortunate origins of this idea of a "credit crisis" and how it needs to be "fixed." Check it out: www.sfgate.com/cgi-bin...

The SEC Panics

Felix is right on here. So is Ackman. Fannie and Freddie are certainly insolvent. The reason it doesn't appear so is that their write downs bear little rational relationship to what they are actually holding. Fannie and Freddie did wade into the toxic subprime and Alt-A pools and they are an abomination because their executives get paid like hedge fund managers and their shareholders (till recently) made out very well and this is all with some vague implicit taxpayer backing, but without the taxpayer getting anything in return for it.

Fannie and Freddie ARE the US mortgage market and the US mortgage market is secured by real estate that peak to trough is going to fall 30% or more. I'd say that will put Fannie and Freddie ultimately underwater by $1 trillion or so. It won't look like that now, but how about when nobody can buy a house without 20% down (or even 30% down) and everyone suddenly learns that only 15% of Americans can afford to do that? That realization will send prices down another leg for sure.

I think that if Fannie and Freddie's shareholders want to speak up about their right as investors in a capitalist system to not be jerked around, then that right should be respected and Congress should pass a resolution very clearly stating that there is no federal backing for either entity other than the paltry $2.25 billion credit line each has with the US Treasury. That's it. Period.

The problem is that implicit promise (to socialize losses by backing them with taxpayer money) combined with ridiculously weak regulation and huge potential gains for investors and managers creates a perverse incentive for management to take big risks right now - HUGE risks. If they win, everybody makes out great. If they lose, the Feds come in and make sure bond holders don't lose anything. I wish the US Treasury would back me in my business decisions like that with taxpayer money.

Fannie and Freddie have hurt the US housing market for 30 years by pushing up prices. They've not made housing more affordable. They've made it far less affordable by working with a coterie of corrupt banks, real estate agents and appraisers to push up prices as high as possible to expand their lending as widely as possible because it's how they make money. If it weren't for Fannie and Freddie, home prices would probably be 30% lower than they are right now and that means that 90% of Americans would need mortgages 30% smaller than they need right now.

The key is less lending not more. Lower prices make houses more affordable. Bigger loans do not make houses more affordable. Bigger loans make houses more expensive and hence less affordable. Banks will always claim lending makes things more affordable and the sellers who work with banks (whether the real estate industrial complex, universities in student lending, or any seller) will claim that loans make the product more affordable. But the racket is that sellers and lenders work together to push up prices because they both benefit from higher prices.

Will Housing Bottom in 2010 or 2012?

The wildcard here is how people feel about housing as an investment. It's not just what people can afford, it's what they want to afford and what they choose to buy. The median American household could afford to pay $10,000 for a small pile of cat poop, but few people expect the price of a small pile of cat poop to rise that high in the near future.

Built into current prices was the expectation of price appreciation of 10% or 15% a year. Strip that out and it's uncertain what a "rational" consumer would pay for a house in any given area. It's also uncertain whether the average consumer will in fact be rational. Most consumers certainly weren't rational for the past eight years. They bet the farm tying themselves down with speculative debt and essentially betting years of future freedom in exchange for the chance to make a bunch of money. It's not unusual for a few people to do that, but for the majority to enter into that sort of speculative behavior is deeply disturbing.

In short, nobody knows where this is going to go because we aren't merely talking about homes returning to "affordable" levels. We're talking about at what price people will want to buy them, which may have only a little to do with whether they are affordable.

Finally, it is very difficult to say how this banking crisis will play out, how the absence of a new bubble to drive economic growth will play out, how the absence of an asset against which to borrow wheelbarrows full of money plays out. There's simply nothing hopeful on the horizon. The three big trends that drove speculative activity and the larger economy since the 1980s was the stock/investment bubble of the 80s, the tech bubble of the 90s and the housing bubble of the 00s. There's a small possibility that we're all out of bubbles.

Pundits have called for a purposeful energy investment bubble because the US economy simply can't operate without bubbles anymore. Sustainable growth is impossible without financial mania. Whether we get an energy investment bubble remains to be seen, but if we don't, what drives the economy from here forward?

If we have low or no growth for a long time, it will make stocks look overvalued by maybe 50%, maybe more. What about the huge unemployment that will likely flow from this?

The way I see it is housing may have started this, but housing is the least of our problems.

12 Observations on Residential Housing

People who make $200K a year are not rich. People who make more like $1 million a year and up are rich. Remember in the 1980s when people said, "Oh, that job pays $60,000 a year?" Well the constant debasement of the dollar has rendered that a $200,000 job. Cops where I live start at $74,000 a year. That's a job that requires a high school diploma and nothing more.

Part of the reason that there's such a serious debate about tax policy in the United States is that people who aren't rich think they are and people who are poor think they are middle class. Debasement of the currency confuses everyone into thinking they belong to a different socioeconomic class then they actually do.

And it's not just income, it's wealth. There are a lot of people making $175K to $250K with huge student loans, and who bleed under zero down mortgages on $1 million condos that are two bedroom one bath. They have little wealth and their income goes mostly to interest payments. 35 years ago the idea that someone making a salary in the top 10% of income earners would, regardless of actual saved wealth, be able to afford something a little nicer than a two bedroom one bath condo. Debasing the currency causes this sort of confusion.

Debasing the currency causes people to see quite modest acquisitions like small condominiums as a luxury objects reserved to the truly wealthy. If Americans had better math skills, they'd realize that the tax rules should focus on those making $1 million a year and more. Aside from the 1920s and the 1980s and now, the highest earners used to pay close to 50% in income tax. Now it's low 30s.

Capital gains taxes at 15% and not subject to "payroll tax" the capital gains exclusion for real estate and so many other rules have been used to try to bribe people making $200K a year by taxing people who make $75K a year even more! (note the "payroll tax" ending at $100K and that huge 15% tax being spent mostly on general tax fund expenditures with now a $2.3 trillion hole in the trust fund from this regressive tax that essentially was a bribe to those making $150K to $250K a year because if their taxes were a bit higher (and they are the new middle class), then the truly rich would have had political problems maintaining existing tax rules.

The saddest part of all of this is that the average person has used finance and credit in a way that put off for 20 years really understanding what these rules have wrought. That consumer credit expansion and erosion of the savings appears to have reached the end of the road as it doesn't seem mathematically possible for the trend to continue.

Americans will figure out how much prices have risen when they have to pay for things with their income instead of HELOCs, 2nd mortgages, borrowing against rising asset prices, etc. When people try to get by using their incomes to buy thing instead of credit, they'll realize that perhaps 80% of Americans are really poorer than at any time since the 1970s.

Could Housing Panic Actually Save Countrywide?

Well, it's been a few months and this author was shown to lack foresight. Anyone who bought into this "bargain" in November 2007 is down 50% now.

Apple and Intel Fail to Impress: Waiting for the Fed's Next Move

I sure hope people who own Apple stock don't become Scientologists because that is clearly the next step.

These Apple Heads who are getting so angry about someone merely writing what they feel the numbers hold for Apple aren't going to be toughing it out with second jobs (no pun intended) after the free fall the stock endured. We're coming up on a 50% correction if the stock gets down to 100. Whether that's undervalued or not remains to be seen. We have to see what the new American consumer, without the benefit of home equity withdrawals equal to double his income, decides to purchase in the coming year or two.

But I will say that if readers listened to this analyst when he wrote the article instead of the Second Jobs attacking him, they would have saved tens or hundreds of thousands of dollars in the past few days.

Gadget Stock Watch: Apple's Selloff, EA's Spore for Mac, More

Apple seems to me ill positioned if there is a severe downturn in consumer spending. Apple makes very well designed products, but usually with little, or no real additional functionality. It's about turning the experience of using a phone, MP3 player, or laptop into feeling like you are a hip 20-something dancing in a subway station.

That "feeling" is a powerful sales tool, but I am willing to be it will not be more powerful than the desire to get a good deal if credit contracts and consumer spending slows. "Consumers" want to show off their buying prowess to strangers with name brand products that cost as much as possible, but when the bankruptcies and foreclosures roll in, a good deal ALWAYS trumps conspicuous consumption.

Beyond a temporary downturn in consumer spending, Apple is very poorly positioned to weather what may become a structural change in the way consumers spend their money and how much they save. If deeper structural changes occur after what has been a gradual 20 year drop in savings rates from 9% to -1% and a massive bubble in credit growth, people may simply view "splurging" differently than they do now.

Nouriel Roubini, Stephen Roach and many other economists focusing on international markets believe there will be no "decoupling" which means when the US consumer's binge is over, the rest of the world is going to have reduced production and consumption as well.

These issues are much larger than Apple, but Apple may indeed be in the wrong place at the wrong time. It is selling "really incredibly nice and expensive" versions of the things you can buy without the brand name (yes, and without the stupendous interface) for 50% or 70% less. When people can't pay their bills, they are less concerned about dance-video-like interfaces.

Mark Cuban, Is the Stock Market Still for Suckers?

Stocks are a great investment during a period when 401(k) plans from the 1980s to present were sold as "pre tax" retirement vehicles to baby boomers. It is hard to say where it will go from here. Mark's observation about the Ponzi scheme aspect is somewhat true for sure. The new money coming in props up prices. It's not just "great companies creating value!" It is the default money pouring into stocks through retirement plans and other sources.

The way I see it is the entire 401(k) system is viewed by the Federal Government and the corporations that rely on its tax and spend power for billings - they view it as an account receivable. It is reasonable to assume that current tax rates will not be sustainable unless the US government defaults on its obligations to lots of people. They already spent $2 trillion out of the social security trust fund that people paid to social security - they used it for general fund tax expenditures like war and they are going to double tax the same people who paid in to pay them back reduced benefits. That's the biggest regressive tax scam in history.

Additionally, an incredible amount of money is pilfered from the stock market by brokers, dealers, and firms that control things. Look at the spread between bid and ask prices on call and put options. It's incredible - like sometimes 10% or 12%. Look at mutual fund "management" fees. Look at firms like EverBank that provide a "New Zealand Dollar Denominated CD" at an interest rate of 6.75%, which is great except that actual banks in New Zealand are offering 8.8% and EverBank probably keeps the more than 200 basis point interest rate spread as profit. Now there's nothing wrong with profit, but there is an awful lot of profit built into the ethereal investment markets in the United States - enough where the people running that are more likely to be heading to dinner on a private Lear Jet than most of their investors.

The timing is also hugely important. Look at the NASDAQ today? 2,500? It was at 5,000 in 2000 and here we are almost eight years later. Inflation losses are also not usually considered when figuring stock market gains.

The whole economy is wired to make it tough to deal with things here because they inflate the money supply and credit to produce a constant positive rate of inflation that is difficult to accurately measure and is hugely misreported and then they tax you on capital and income gains from interest and capital gains including the amount that just made up for lost purchasing power from the inflation that they cause and control. That's quite a racket. It goes at least a little ways in explaining the savings rate here and the huge consumer and mortgage debt. It makes borrowing lots of money feel smart and saving money seem quite risky.

Jingle Mail, in Practice

California, Florida and several other states have anti deficiency statutes that prohibit lenders from seeking deficiency judgments from residential borrowers except under certain circumstances relating to cash out refinances, HELOCs, and other types of debt not related to buying and/or refinancing the principal balance of the loan used to buy the house.

I think some of these bailout proposals and these Hope Now phone numbers are at least as much to keep people from finding out about their right to walk as they are to allegedly help borrowers. Many borrowers would be better off walking. Credit scores are important if you need or want to borrow money. Americans have become incredibly preoccupied with their credit scores because many people finance almost every aspect of their day to day living. The median American family pays 17% of income in interest payments.

There are two ways out of this uncomfortable situation: either home prices fall far, or the price of everything else rises. Either way will be unpleasant, but reckless monetary and fiscal policy to encourage price inflation will be much worse and will render every American poorer (except those with investments outside the United States).

Moreover, the longer this takes, the worse it is going to be. Many sellers are still balking at lowering prices. "But my home IS worth more. It's not like those other homes that dropped in value, just look at my home! It's really nice." If this disconnect between buyers and sellers continues, prices may remain flat for or decline slowly for a while until foreclosure auctions take them abruptly lower in a highly uncontrolled manner.

Although I think that the place housing has come to occupy in the American economy is inappropriate and is a mis allocation of resources, continued drops in home sales will too abruptly rattle things and not allow enough time for other areas to grow absorbing unemployed construction workers, real estate agents, mortgage brokers, and even the economy around home improvement, furniture sales, home electronics, etc.

A drop in prices may also encourage longer term "doubling up" where people move in together - whether with parents, roommates, etc. A trend over the past few decades has put fewer Americans in each housing unit. Some of this is vacation homes, but most of it is fewer people having roommates, or living with relatives. High, sticky prices in a sluggish or recessionary economy may reverse that trend and that will have far reaching and much longer term consequences. We could end up with eight or ten million too many homes.

If nationwide prices, and especially prices in California drop far, we'll have a recession and maybe a nasty one. But a nasty recession is something that ends relatively quickly - a year, even two years is a relatively short time. Major structural changes in how people live can last decades.

Also, I like Mr. Salmon's writing usually, but I'm still a bit peeved that he called me a "nutcase" in reviewing my December 9, 2007 article in the San Francisco Chronicle. The idea that investment banks, bond rating agencies and originating banks may have communicated back and forth about how to maximize ratings while minimizing the likelihood that any could be left holding the bag is far from a conspiracy theory. Bond rating agencies worked closely with investment banks selling this junk and the investment banks paid them to rate it. They paid them billions. The bond rating agencies need an excuse to give a high rating. Perhaps stated income was one of the hooks. "If originators could generate more stated income loans, we could rate the bonds as if the borrowers really had the income they asserted and then disclose on page 149 of the prospectus that we can't independently verify the validity of the borrowers' income and that the rating is based on an assumption that the borrower told the truth." Then the investment bank talks to the originator and explains what they need to do to get the higher prices for their loans. I think if worked for an investment bank and I was getting several hundred million or even billions of dollars in mortgages from an originator, I'd be on fairly good speaking terms with those folks.

Anyway, I have little doubt that every possible means will be used to shut down efforts to get to the investment banks because they own the people who would do the investigating. It's more than a little interesting how the Circuit Court shut down Andrew Cuomo and now a friendlier agency is doing the investigating. We can probably expect a big fat "suggestion" as a penalty for the investment banks, "we think you need to be more careful in the future, okay?"

Jingle Mail, in Practice

California, Florida and a few other states have anti deficiency statutes that specifically prohibit the lender on residential real property from seeking a deficiency judgment against the homeowner/borrower. The exceptions to this are HELOCs and some types of cash out 2nd mortgages.

While I don't think that this is a great situation, it was banks, real estate agents, mortgage brokers, and Fed monetary policy from 2003 to 2004 that caused this situation much more than it was greedy borrowers. There were unbelievable nonstop ads, phone calls, faxes, junk mail, the television news wouldn't shut up about it. It was hard not to behave irresponsibly because people thought you were nuts if you didn't borrow as much money as you could to buy the most expensive home you qualified for. The "experts" on the financial news were regularly advising people to "consolidate" consumer debt at "much more favorable rates" by borrowing against their homes (and financing toasters and handbags over 30 years).

Home prices have to come down, or the price of everything else has to go up. Either way, it is going to be highly unpleasant for everyone. But if a flood of loose credit drives up the price of everything so home prices only drop 5% or 10%, then we're all going to be much, much poorer.

And although I customarily like Mr. Salmon's writing, I'm still a little peeved by him calling me a "nutcase" in his review of my San Francisco Chronicle article of December 9, 2007.