Your house or your investment

This has been a long time "no-brainer" argument and even books written for this idea -- your house is the best investment of your live.

BRETT ARENDS of Wall Street Journal dare to challenge the common wisdom (it's actually been preached by some people to the mass)

Your house as your investment

Some even went as far as suggesting, only, most American home owners can be millionaires. Well, mind you being a millionaire means you can afford a home, it's the cause of owning a home, not the result of home ownership (that's right, owning a home won't make ordinary people become millionaire).

However, why such ideas are so popular? I call them political correctness - they showed some "simple data" that demonstrates 20000 dollar 30 years ago became more than 10 fold.

However, this is deceiving, you know, if you bought government bond 30 years ago, you probably can get 8% interest rate, and you know what, 20000 dollar with 8% interest rate annually is 201253.14 dollar.

In the past 30 years, the average return on your money, probably is higher than 8% in average.

Not only the return is far from extraordinary, but also it was achieved mainly because of government's (and financial industry's) ignorance.

The housing price is not a one way train as some people implied. The housing price is affected by various factors and most of those factors have been supporting house price to move up. However, as most of those factors are actually drying up, the forces behind past 3 decades housing value appreciation is not there to push the housing price any higher in the long run.

So what caused the housing price to go up "like crazy" in the past 30 years?

1) mortgage (and then the low interest rate).

As we all know, nowadays very few people buy their house with 100% cash. Borrowed money is a key in affording a house. The widely available credit was propelling housing price up in two ways, a) the demand was driven up because lots of people can afford a house with loan than those who can buy up front; b) for those who could bought a house without (or with little) loan, they can afford a more expensive house with (bigger) loan.

So, the progress (or the missteps) of the mortgage industry has helped housing price most. One interesting things is when demand increases, the price goes up and it does not mean the quality of life will increase - people will compete in throwing money just to maintain a relatively OK life.

2) The government's "making houses more affordable move". This has been a long term theme in western world - government tried to make houses more affordable by providing tools to help people to afford a more expensive house. However, such move by the western governments is different than in the east - where (many are socialism) government simply build houses and give out to people they see in need (so that separates the subsidised market from the help-yourself market).

This "making housing more affordable" while helped a little number of people in the short term, actually did nothing but created bubble - why? Because it encouraged people who otherwise need help to find dueling, to participate in the housing market and when it happens, demand goes up again. And while more people being able to afford more, the market adjusts itself so the price actually goes higher, so that again people will live close (if not beyond) to their means.

And since most of the tools designed to "help" people to afford homes are credit related, when credit crisis hit, those people who bought home with maximum credit available to them became hardest hit - they either loose their homes, or had to go through the hardship by degrading their quality of life.

3) the myth of buying home is the best investment.

Really? a home is first and foremost a place for your family to live your life.

The added "investment" value - which indeed was explored by many people in the past 30 years - adds unwarranted demand. Those people with money to spare where the ones who benefited most during this period. While people reckless enough to borrow more than they should have benefited too. However, as we said, this investment value not only in no way is superior than average other investment vehicle, but also has been artificially bumped up due to various reasons (politician wanted vote, banks wanted your interest payment).

I'm not saying that they won't invent more ways to trick your money out of your pocket, but each new invention they come out with, there are less impact they can push the housing market higher as they wish - when income growth does not match housing price growth, at one point, people simply can't afford a house no matter how hard governments and banks try to "help" them. We are not far from that point.

Housing market has grown out of proportion in our economy (as many argued, it's not that housing market grew really fast, it that real economy grew too slowly). This unpropitious partly helped fuel the notion that house is the ultimate investment. The key is most of the driving force behind the housing market boom in the past 30 years have exhausted and proved to be bubble building. The chances that there will be new drivers as powerful as the past ones is slim.

The most powerful at work now is "moral hazard" the American (and other governments in the world) tried hard to shore up. By saving those people "in need" to keep their house, the market participants are thinking "what a hack, I can play the market, and if I fail, the government will bail me out". This "if I win, the profit is mine, if I lost, the lose is the government's" mentality is the only key driver that helping the housing market in the near future.

Other than this single hope, I see no reason why the housing market can beat the long term inflation in the next 30 years.

Happy buying your house(s).

2009 Q2 - The (re)bubbling of the world economy

Not everyone felt comfortable with the 2009 Q2 rally.

Since Mar 09, 2009, the stock market has rallied over 30% in about 2 month.

Not only in US, but in surrounding area (i.e. Canada), stock market and even housing market entered a strong bull run.

"Voila, here is the recovery!" some pundits say.

Not so quick, the others say.

I'm one of the later.

By no means, I'm a professor or scientist in economy (even though my major was economy in university). None of my titles gives me any more qualification than any of you, my dear reader. But if you care to read on, I'd like to share my thoughts - which I found interesting.

first, WHY?

Why there was a rally across the world? Is it really economy turned around? There are SOME statistics came out since March that showed a slowed deteriorate, however, nothing really indicates a turn of direction in economy activities.

The strongest argument for a reason for the rally was "investors usually predict recovery ahead of real turn of the economy". However, not only it doesn't mean this type of prediction is always right, but also this rally is far more volatile than previous "prediction rallies".

So, second question is "WHAT"?

Then what had happened?

International hot money, need to park their money.

Because in the past two decades, the wealth distribution is lean towards elites (if you think all the out sourcing money went to Chinese or India citizens evenly, you have really kind wishes)

The out sourcing of American manufacture and services, while distributed wealth out of US, created thousands of super rich foreigners, who controls huge portion of some countries wealth.

The imbalance is one of the key reason why the recession came - those belong to these elite groups(they may be American, or foreigner, they may be individual or institution), can hardly extract more value out of American enterprises and consumers - a structure issue causing economy to stop growing in the way it grew in the past two decades.

The stimulus announced by governments all over the world, has been nothing but re-bubbling measure. Since the economies have long been controlled by these elite groups, any short sighted attempt to shore up the economy is actually enabling the elite groups to spend more. Pathetically the governments figured to "enable" the elite groups to spend more, they need to be given more. So all the stimulus are focused on "let banks lend more" and "government spend more".

Unfortunately, because the fundamental issue was structure wise, ordinary people control smaller and smaller portion of the world wealth, hence the elite group feel it's harder and harder to extract value out of ordinary people, so no matter how much money governments give them, the elite groups won't invest in real economy much, because no matter how hard they try, there is simply not enough money in the hands of ordinary people for elite groups to earn.

Of course the elite groups won't put their free loans unused. So they park their money in virtual economy - stock market, housing market of some countries (like Canada), commodity (Oil, and gold) and currency (i.e. anything but USD and JPY).

These hot money caused real shake of the global markets. Oil has nearly doubled, stock rose more than 30%, Euro rose more than 10%.

third, then what?

Then there will be even worse recession. I don't know how long will the current rally last, I would say months instead of years, because those money are free loan, and if they were not put into real economy, they are not helping fundamental (think about a stock you own, by spending most of the money in buying that stock share, you are not helping that companies balance sheet, hence the next quarterly report won't be that good).

All this is creating a second stage bubble, causing the underline structure issue be hidden longer, and make damage to real economy deeper.

Yes you heard me right, seeing the world investment markets boom so quickly in the past three month, (which coincide with the injection of governments money into "economy"), I'd say this will actually make recovery slower, because the private sector who got the money, did not believe in real economy, and instead of participate in real economy, they chose to play in the investment markets.

Not only this means the money government injected did not help real economy, but also it re-creates the crazy investment mentality which was another key reason why the bubble was formed initially.

The governments help to the elite groups served nothing more than a moral hazard - people have already forgotten the burn and rushed back to investment market like crazy.

Reckless led us to here and reckless is back, along with renewed enormous amount of money given to them by the governments, do you think this will help us?

I don't.

Who is to be blamed for the global economy mess of '08?

Check this articale out:

http://www.bloggersbase.com/articles/world-affairs/business-and-finance/the-blame-game/

Very good analysis especially the key point "economics is about INCENTIVES". However, it left one party out of the discussion - the politicians (and governments, congress, senate, Fed, etc contorled by them). Who provided "incentives" for both banks and homeowners to grant/apply for excessive debt? The defense of the Fed at the end of article is a paradox. While "you cannot blame the homeowner for taking the loan and then say that Wall Street was a victim of low rates from the Fed." is true, "the Fed" should not be exempted from being examined as if it's not a possibility at all (The sole purpose of the Fed seems to be limited to contradict bank defenders - which is at minimum an understate of the Fed).  
I would suggest the author to go back to his/her own key idea "INCENTIVES" and look at who provided incentives to the boom and inevitably led to the bust. (Ordinary people like you an me usually are right - the bigger the entity the more like to be at fault in economy crisis - the Government along with the Fed should be held more responsible than banks, and banks should be held more responsible than individual home owners".  


The government by  
a) promote homeownership (provide incentives for people who could not afford a home to buy a home, or those could afford a cheaper home to buy a more expensive home)  
b) low interest rate (provide incentives for banks to lend as much as possible, and home owners to borrow as much as possible) 
single handed provided most fuels needed for this perfect financial storm.  


The truth is some people will live a better life by renting, not owning. And those who are pushed up but stayed at the edge, are actually most vulnerable to any fluctuation, and they are actually the ones hit hardest when bubble burst (look at the most people who lost their homes, they are the ones politicians claimed helped most).  


No politicians are straightforward, they "promote home ownership" to buy people's vote, but, they are not paying the bill, so they creatively invented this grand scheme - let the banks pay the bill. However the banks are not stupid (or totally controlled by the government), so incentives have to be created for banks to "voluntarily" do it - the Feddy and Freddy? The super low interest rate? These things all sounds like serving a purpose.


And at the end, when bubble burst, politicians jump out and say "you banks all suck, and let me clean up the mess. Vote for me" Unfortunately they got it again and again. And the game of blaming does not even mention these politicians, we know they got their way again this time.  


Considering the quality of analysis in this article is fairly high, yet it still omitted government, politician, and even defended the Fed, one would suspect the omission is somewhat intentional - which suggest at least in part, use the 2nd in command as scapegoat - as in many multi-player games -- the crowd wants "justice" and wish to see some of the big guys held responsible, and the biggest guy though, will never blame himself, so the 2nd biggest is pulled out and executed as scapegoat. (Have you seen many big enterprises fire high ranking executive but the chairman/CEO stay intact?).  


Not saying Banks are not responsible, actually I agree the banks are more responsible than homeowners, but just like arguing which homeowner is more responsible than the other is useless and misleading, this argument between banks and homeowners is misleading too. It did nothing but shielding the politicians behind the government from being held responsible of their own disgusting deeds.

Another one dares to counter the popular notion of "capticalism is guilty of the recession"

Being popular may not always means being right at the same time.

As political incorrectness goes, this blog is all about counter popular wisdom.  Not that majority is always wrong, but "majority is NOT always right."  And if you find this blog is "anti-majority", it's simply because for most of the time when majority is right, there is no need to blog.  So you only see on this blog "unpopular" ideas, which I think worth people to seriously consider. 

OK, deregulation is the cause of the financial melt down is one popular idea.  It is so hot these days, that I encountered heated debate on this issue that people may take it personal.  And you know what majority's opinion is. 

It was so one unified opinion, that whenever I brought out my idea, I was looked at like an endangered animal wondering around a shooting range, you known how much time such a thing gets to express its idea - near ZERO. 

At least someone dare to say it loud now.  Which helps me get some audience. 

FIRST, as I always maintained, capitalism's best strength comes from "The fit survive; the unfit die out. "  (I'll have an other article dedicated to this).  The key is instead of giving one authority all the resources and count on this single authority to do the best thing possible, capitalism rely on many entities tries out many different ideas and let the fit survive and unfit die out.  The "Capital" works like the natural selection process, determines who survive and who dies out.  That's the real capitalism. 

Now, what deregulation means, was to the key point of capitalism - let them try what ever they think is good, and those "unfit" will die, right?

Wait a minute, here is what the problem comes from.  Through out the whole 2008 financial crisis, the most commonly heard phrase was "too big to fail".  This is nothing less than direct counter-capitalism.  

So how does this happen?  Wasn't this "too big to fail" caused by deregulation?  

Partly it was.  

We all know one key responsibility of a government governing a capitalism economy is enforce "anti-trust" regulations.  And these anti-trust regulations unlike most of the "do what I tell you to do" type of government intervention, is "you are not allowed to be too big to fail, or too big for others to compete with you".  

OK, if you like me think the deregulation of "giants-can't-merge" regulations, I'm with you, it was part of the problem. 

However, one of the key reasons these "rules" weren't followed was because US financial institutions were playing in a field filled with "regulated" players.  From Swiss bank with government backing, to Russian semi-government funds, to Mideast sovereign funds to Chinese government reserve funds.  These are all players with government backing, and they were "impossible" to fail.  To compete with competitors "impossible to fail", US financial institutions were allowed to be bigger, and bigger - resulted in "too big to fail" situation.  Which was the real cause of the whole system melt down. 

In short, in a global environment, even though a local government may follow true capitalism theory, the result can be unintended, as other governments may not be following the same rules, yet their companies compete with companies from capitalism economies. 

So some may wander, why those "regulated" country did not have the problem like US had - government had to step in and bail out their financial institutions?

What problem?  For those countries where financial institutions are either owned, backed, or tightly controlled by their government, government save these entities are not called bail-out, their government are the managers, and they just suck it up, not called bail out.  Check the Russia, Chinese national balance sheet, you will see. 

On the other hand, the undue low interest rate from 2002-2008 was equally blamed in  causing a bubble while it should have encouraged saving.  So partly, the wrong was done by one of the most powerful authority.  That's what I call the prove of problem of "regulate everything" - you give control to a single authority and wish it will do the best, how about they do the worst?  What's your plan B?  

In capitalism, plan B is the company doing the same business one block down the road - the fit will survive and just let the unfit die.  In "totally regulated" economy, the "government" did it wrong, we all die. 

happy dying. 

Why they didn't pay tax - Pres. Obama's cabinet nominees

Three cabinet nominees were dinged for not paying taxes: Treasury Secretary Tim Geithner, Tom Daschle, would-be head of the Department of Health and Human Services, and Nancy Killefer, nominated for the newly created role of chief performance officer.  Commerce Secretary-designate Gov. Bill Richardson also withdrew his nomination, citing a  "pay-to-play" probe into a company that had won more than $1.5 million contracts with New Mexico.