Thursday, March 5, 2009

An Odd Thought, and a Prediction . . .

Odd Thought--
How has U.S. government policy gotten to the point where the objective is to stabilize house prices and thereby protect the equity of homeowners and the value of securities collateralized by mortgages? I understand the political pressure to do this, but isn't it ass backwards?
Government policy should be promoting affordable housing and low housing prices. Appreciation in home values should be recognized as an undesirable drag on the general economy. Perhaps gains on the sale of residences should be taxed at a higher rate, rather than exempted from taxation, to control unwanted appreciation? Rather than relying on the escalator of building equity through leveraged appreciation, people wanting to grow their net worth should refrain from consumption to generate savings, then invest those savings productively.
The transition may be awful, but the thought is intriguing.

The way in which the limits of federal borrowing power will be manifest is in increasing funding costs. Qualitative easing will enhance the ability of central banks to control the yield curve further out, but in the end, the substitution of sovereign credit for the discredited AAA collateralized structures will have a boundary. An inflation tax will be the way out of the box. Combined with a devaluation of the dollar against some, but not all, currencies. Not sure when the refunding crisis will hit. I'd guess in about a year or so.

Santa Fe Report

Miscellaneous factoids--
1. This is the slow season. There is a feeling that it's unusually slow, even for the slow season, but that is less a concern than the anticipatory fear that this summer the tourists won't show up. That is, they won't show up at the high end--opera goers and art purchasers, or at the low end, the souvenir shoppers spending the weekend in town on their way to a week at a church camp somewhere in northern New Mexico.
2. The real estate market is dead. Many, many agents have left the business and some have left town. On our first night here, we ran into an older woman we knew from when we lived here a couple of years ago. She's retiring, not showing housing, and considering moving to Mexico to lower her living expenses. A friend whose brother runs a real estate agency says his brother's headcount is down. Supposedly, residential real estate is down 20% or so, and commercial is following. No one is predicting an upturn or even an end to the decline.
3. The community is surprisingly healthy. Santa Fe depends on seasonal tourism, public sector employment (it's the state capital) and regional commerce (it serves northern New Mexico for just about anything that doesn't require a trip down to Albuquerque). State employment is reasonably resilient. Last summer was okay on the tourism front. And the region, never very prosperous, is creaking along as usual (once out of Santa Fe and Taos, northern New Mexico is very slow, always).

Wednesday, March 4, 2009

Short View?

John Authers in the Short View feature at The Financial Times Reports reports that, with the recent U.S. stock market declines, we are now in the second most severe market downturn in the last century. He reaches that conclusion by taking the beginning of the current market decline all the way back to 2001, making the fair point that, taking into consideration fluctuations in the value of the dollar and such, the October 2007 market peak approximated the turn of the century peak, so that three three big market declines of the last hundred years were 1929-1937, 1966-1974 and now 2000-2009. The current episode is roughly as severe as the 1966-74 episode, more moderate than the 1929-37 episode, and slightly longer than either of the other two.

I'm not sure this is the short view of things, but interesting nonetheless. And it underlines the point that we've bought ourselves one hell of a recession with the declines in asset values that have already occurred and that further declines in the stock market will be discounting, in effect, a recession.

My instincts lead me to forecast a great deal more misery, but more in the general economy than the one financial markets. One more catharsis in the financial markets as later in the year the U.S. government reaches a political resolution to the problems of the four money center banks controlling 64% of U.S. commercial deposits, then a long, slow slog as the economy continues to sag, residential real estate values continue to decline, and we all adjust to an economy less focused on the financial services sector, the U.S. consumer, and real estate appreciation (residential and commercial). Not just long and slow, but sour, wretched and bitter, as well.

There you have it. A prediction, like a sonnet, has a certain form. The key rule is, never include a date and a number in the same sentence. Mark this prediction 'complied.'