Crocodilian

Step Two of a Housing Bottom?

There's really two sorts of "housing bottoms"

One is construction, which is what the starts number refers to. The other is sales & values.

To reach a bottom in values, you'd want to see demand in excess over supply. So a good housing starts number is not particularly good news for the financial edifice that's been built on the existing housing stock.

The fact that new homes can be delivered cheaply enough (due to lower costs of labor, raw land, and building materials) to make it worth it to a builder to start a few more homes is not necessarily a good thing. Such a builder must be calculating that he can profitably deliver new units at prices substantially under where the market is today

Coming Soon: Banking Crisis of Historic Proportions

author writes
"We need one hell of a recovery here to prevent disaster. Muddle through will not do it. A return to 3% GDP growth may not do it. We need a couple of years at 4% (or higher) GDP growth to have any chance that some of these banks can earn their way out of the quagmire."
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Some banks _won't_ "earn their way out of the quagmire", but that does not mean that "disaster" necessarily will ensue. The FDIC has been dealing with this long enough that we know the routine: the FDIC has a blank check from the Federals, so we're practicing a "heads you win, tails I lose" public policy.

Failing banks are, today, either taken over by the Federals directly, or sold with a nice check from them to a healthy bank. This will continue.

The net effect?

Dead banks' bad debts become national debt, healthy banks acquire healthy assets on the cheap, even as competition is driven out of the system, and sky high savings rates ensure very cheap capital.

It adds up to unfairness for the taxpayer, and a gift to bank shareholders, but not a crisis.

You Can Keep Your Doctor - If Your Employer and the Union Say So

The most common impediment to "keeping your doctor" is neither your union nor your employer: its your insurance company/HMO.

Neither your union nor your employer care which doctor you see: it is you health insurer who manages "the plan" and decides which doctors, PPOs et cetera will be included, and which will not.

The Specter of Excess Capacity

Excess capacity is not a disaster.

Consider: during the Great Depression, starvation was a real concern, as was homelessness.

Today, by contrast, our problems are far too many homes, and obesity. These are better problems to have.

Rational Market Theory and Black Swans in Healthcare Reform

"Black swan" is a useful idea in financial statistics of markets, but is meaningless in healthcare finance. I don't know why author brings it up-- it suggests that he understands neither what Taleb is talking about, nor healthcare.

Healthcare finance is actuarial in character. So many people will be in car accidents, so many will suffer kidney failure, so many will have heart attacks, so many will have breast cancers. What may be an "unknown" for an individual is a statistical certainty for the population as a whole.

To refer to a patient as a "black swan" is an error. Patients who are uninsurable are uninsurable precisely _because_ the future costs associated with their condition are highly predictable, and underwriting their care is predictably unprofitable.

Microsoft: Whistling in the Dark

While MSFT certainly is not at its apogee, author's take on MSFT's Apple investment is wrong.

As a monopolist, the greatest threat to Microsoft has never been competition-- its been antitrust. In maintaining Apple as a viable competitor, Microsoft put itself on far better ground with respect to the DOJ. Remember, it was an endless anti-trust lawsuit that nearly brought IBM to its knees . . . Microsoft "immunized" themselves from many of the anti-trust challenges precisely because Apple offered a choice, but ideally for Microsoft, it was a "niche" choice that not many of its customers would switch to.

This has allowed Microsoft to enjoy monopoly profits for many years, and that's a huge win in business terms. No monopoly lasts forever, but Microsoft's skillful strategy has clearly allowed them to enjoy it for a very long time.

Did Lehman Save America from a Dollar Collapse?

That Lehman went under was salutary, precisely because it was so scary and so painful. Following the LTCM rescue, the market drove down risk premiums to dangerous lows, based on the moral hazard of the "Greenspan put"

If investors conclude that they cannot lose money, then they will take too much risk, and increase the risk profile of the system as a whole beyond what is optimal.

Lehman induced losses effectively reintroduced the pricing of systemic risk into the system, and that's a good thing.

Healthcare: Does Prevention Reduce Costs?

There is an important distinction between "early detection" and "prevention". In many cases, early detection may be clinically useful (or not) but it does not reduce costs. Breast cancer would be one example; prostate cancer another.

But _prevention_ is something else entirely. The Robert Wood Johnson Foundation and the CBO have both come up with numbers showing that obesity is driving a tremendous amount of healthcare spending. Address obesity promptly, early and effectively and the savings are real and identifiable. A nation with a %40 obesity rate is going to have much more diabetes than one with %20

What Will Happen If America Returns to an Historical Savings Rate?

A thoughtful article, with good data and something rarely found on SA, intellectual modesty. Would be good for others to learn from author and say "I don't know" more often . . .

As to author's points, one compelling one has to be retail space. There's a good argument that a good part of it is obsolete; a friend of mine who works at Amazon refers to malls as "Amazon's showrooms".

When you think about it, the entire retail experience infrastructure came into existence before online shopping; some retailers have a distinctive niche (the very expensive, the very cheap)-- but the vast middle has a problem. That said, a shrinking sector can actually add to the profitability of the survivors-- Best Buy certainly has benefited from Circuit City's liquidation.

But here's a point which I haven't seen mentioned: a huge amount of discretionary consumer spending -- the part now being channeled into savings-- was spent on imports.

If an American consumer chooses to put $1500 into the bank, instead of buying a television made in China, or clothing made in Thailand, the loss to the US economy is the profit made by the US retailer-- but much of the value-add was always overseas.

Savings which result in decreased demand for imports have a lot of effects. One notable one would be a stronger dollar . . .

Google's Ad-Sales Reporting Is the Real Newspaper Killer

Great article, and yes, its exactly as you say: Google's metrics are the "killer distinction" between them and other kinds of media. The metrics are important to you, the content provider-- but they're a revolution for the advertising buyer.

Long ago, John Wanamaker once said "Half of what I spend on advertising is wasted-- trouble is, I don't know which half". He'd have _loved_ Google.

Google has done what Arbitron and Neilson tried for many years to do -- at great expense and not all that successfully-- link advertising directly to behavior.

There's an interesting implication to this: if advertising on Google is more efficient, then long term, advertisers should allocate more money to advertising than they did previously.

The Budget Battle over Student Loans

Loan guarantees have an intrinsic misalignment of interests. Lenders make loans that they wouldn't have done for their own account, and the guarantor typically under-estimates their exposure; both parties have strong incentives to do so, and no countervailing interest to impede this.

Its a mode of operation should be used little, if at all. Notice that GNMA, which is on the Government balance sheet, has produced nothing like the disaster than FNMA and FRE have-- due in large part to the distinction between direct lending and loan guarantees.

Supporting the Financial System by Bleeding the 'Real' Economy

There's a lot of interesting thought in this piece.

What I would say is this: Goldman's profits have _always_ been earned by passing risks and losses to dumber firms. That is, Goldman is and has been profitable, precisely because AIG were morons.

Seen in that light, Goldman's profits look less cheerful-- for anyone who's not Goldman. Essentially they're a sharp player, who keeps inviting morons to play poker with them; and the morons have a claim on us.

As author writes, there is a disastrous moral hazard here, in that Goldman will keep encouraging "games of risk" which it plays better than other participants. It is in our interests as citizens and taxpayers that these games stop, but that is not GS' interest.

GE Results Validate Theory: Severe Economic Contraction

Author writes:
"Stocks are, at their core, priced on earnings growth."
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Some are, some aren't. That's why we talk about "growth" stocks and "value" stocks.

People have made lots of money in companies whose markets have zero growth or are shrinking. Companies with little or no growth, but large cash flow, are often targets for LBOs

Author points out that the overall volume of sales are down across the board, and infers that no recovery is possible in such a circumstance-- but that's not right.

Consider, for a moment, vehicle sales, presently running at or below 10 million per year in North America. Given that the US scraps 10 -12 million cars per year, and that the average age of the US vehicle stock is nearly 8 years, one may conclude that today's low sales are tomorrow's excess demand.

In short, the tremendous drop in consumption, and extraordinary inventory drawdowns together with the destruction of capacity all add up to more profits in the future (for the survivors). GE, for example, has a much sunnier future as CIT exits the specialty finance market .

Parenthetically, author doesn't seem to know what "high frequency" data is . . . its things like FX and Treasuries markets, which trade hundreds of thousands of times a day. "Port, rail, and tax receipts" are useful data, but no econometrician or financial modeler would call them "high frequency" as author does.

Washington's Dilemma: This Isn't a Recession, It's a Collapse

On Jul 16 04:56 PM Henry's father wrote:

> Just as with many of the bailout proposals, we need to >restructure the state into a "bad" California and a "good" California. Into the bad California would go the debt-laden government, overpaid bureaucrats, and welfare recipients. The good California would be comprised of the remaining working class.
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And when "Good California" dials 911 -- who answers the phone?
When they want to send their kids to school-- who teaches them?
When there's a pothole in their highway-- who fixes it?
When a resident of "good California" loses his job-- does he get "deported" to "bad California"?

I hear America whining -- "I want stuff, but someone else should pay for it".

Unwise to Tax the Rich to Pay for Health Care

Missing in all this is that the nation _already_ spends more than enough money to provide healthcare to everyone. How do we know? Because we spend _far_ more than any other OECD nation, roughly %15 of our GDP, on healthcare. The next highest number is Norway, at %10.

We have clear evidence that other nations, spending less money, achieve equal or better healthcare outcomes, and guarantee care to all their citizens. How do they do it? Largely, by delivering care through government entities, rather than private organizations. The only other nation that relies as heavily on private healthcare delivery is Mexico.

Healthcare reform _is_ an economic necessity for the US, but we won't do our health, or our economy any good by pouring more money into the parts of the system that cost too much and deliver too little.

The part of the proposal that is essential is the "public option"; the part that's destructive is the huge spending.