For those who continue to wonder why I and many others consider even the mainstream media to be intellectually sloppy at best and flat wrong quite frequently, consider the continued references to a supposed “housing crisis”. Today’s LA Time article “A federal cure for the housing crisis faces obstacles” reminded me of this, however one cannot open a paper or magazine without seeing something similar. What’s happening now is not a crisis, it is a resolution to a crisis. The easily available and obviously ominous mortgage statistics from 2003-2007 described and ever-increasing crisis for anyone with even a slight knowledge of historical boom/bust cycles in finance, however the media basically cheered this on with no critical thinking to be heard. The Housing bubble was only a good thing if one thinks rising property taxes, widespread misery, and wasteful misallocation of capital is a good thing, but let’s consider a few of the good things the bursting of the housing bubble in the in the United Kingdom, Spain, the United States and Australia has brought about:
Housing is becoming more affordable and will become much more so. Why aren’t headlines screaming “More great news for lower income people!”?
The morally reprehensible of duping of unsophisticated people into taking on debt they cannot reasonably be expected to repay has come to a halt
In the US at least, Amateur Housing Speculation infomercials have been replaced by that-old stand-by, the Abdominal Gizmo infomercial
The inability of the financial industry to resist the temptation of the boom-bust cycle has been demonstrated for anyone who will think of recklessly investing in the next Boom cycle
The complete inability (or lack of desire) of the popular media to report the completely predictable has been demonstrated yet again
Labor in previously undersupplied fields such as truck driving is now much more plentiful
Incessant talk of housing speculation has died down
Less farmland is being turned into subdivisions
Frugality is coming into fashion (see Cool to be Frugal )
Savings coming back into fashion might not be too far behind which would be a true ray of hope for the US economy, at least given the reduction in imports it would likely entail and the corresponding improvement in the balance of trade
Perhaps a future post will address why the same fallacy applies to the term “credit crisis” however this will have to do for now.
Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.
Friday, April 25, 2008
Monday, April 21, 2008
Is That a Real Economy or is that a Sears Economy?
With a tip of the hat to the late, great Frank Zappa, who famously skewered all manner and form of phoniness with comments like the title of this post, almost all economic discourse has become contaminated by a failure to distinguish between real, sustainable economic activity and the largely fleeting credit bubble driven activity we have seen over the past few years. This perversion of concepts like GDP, Recession, etc. has taken hold even among people who would normally know better, and is everywhere in the mainstream media. All the talk about “are we in a recession”, “when will growth return” blah blah blah glosses over the fundamental point that since at least 1997 or so a very significant part of the developed world economy has been a “false economy” supported largely by credit expansion. The problem with excessive credit creation (or money printing, a different but related phenomenon) is not just the debt-deflation hangover that is just now getting started, it is the complete distortion of investment decisions and asset/income stream valuation that results. The Mainstream media is even more clueless than usual on this topic since any talk of “return to growth” implies that there has been real growth in the past few years. Subtracting out the impact of cash-out refis (as Paul Kasriel) and others have done and the impact of overbuilding, and the impact of the artificially inflated lending administration, real-estate activity, and some of the earnings of all of the businesses and people whose receive money form all of the above activity (i.e. essentially everyone in the developed world and a good portion of everyone else) …subtracting all that out suggests there was little if any real growth in western , “developed world” economies.
For a clear analogy, think of the following, visual…You buy a Lake-Front house and move in, enjoying the beauty of the lake. You paid a significant premium but you justify it because you believe you can always sell the house at an equivalent or greater premium and the beauty of the scene is worth the premium. Then one day you come home and the lake is gone and there is nothing but a muddy field. You walk into the field and notice that in the distance on someone else’s property there is a small stream, but there is no other water in sight. A bit of investigation uncovers that in fact the lake was made by a dam made by beavers well downstream, and when the farmer downstream chased out the beavers and their handiwork, the lake was drained unlikely to ever return. What you fully believed was a permanent condition on which you made major commitments, is reveled to have been purely temporary and unlikely to be repeated in the same way anytime soon.
This may sound oversimplified, but you should care. A lot. Especially every time you see what looks like an investment bargain.
The detrimental affect of the false lake of an economy that was created by unsustainable credit duped millions of well-meaning meaning people in all corners of the globe into making fundamentally poor decisions ranging from the annoying to the disastrous. (And this ignores related nonsense like the likely exaggeration of GDP growth through the potential understatement of inflation.) However, unlike our simplistic visual above, the real lake of credit will take years to fully drain and the level of the original stream (economy) is fundamentally unknowable (take my word for it...more on the science of why this is so in a future post.) Most importantly for wealth management and investing, investment decisions you are making right now need to be evaluated in the context of what degree they are supported by a truly real and sustainable economy.
A future post will look at how to do this on the spectrum of available investments.
What will real growth in the developed world economy require? Some ideas in no particular order:
- An increase in the savings rate (be careful with the Retail Sector)
- Opening up of new markets (normalization of relations with Cuba may become an economic necessity in the US, not an option)
- Far fewer imports and far greater exports, especially in the US
- Investment in productive resources, not speculation
- Stable currencies
- Immigration of talented individuals
- A halt to creeping socialism and protectionism
For a more formal discussion of the concept of a real vs. false economy, a review of Austrian Economics is a good place and a good place to start for that is at www.mises.org which Eclectic Wealth highly recommends.
Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.
For a clear analogy, think of the following, visual…You buy a Lake-Front house and move in, enjoying the beauty of the lake. You paid a significant premium but you justify it because you believe you can always sell the house at an equivalent or greater premium and the beauty of the scene is worth the premium. Then one day you come home and the lake is gone and there is nothing but a muddy field. You walk into the field and notice that in the distance on someone else’s property there is a small stream, but there is no other water in sight. A bit of investigation uncovers that in fact the lake was made by a dam made by beavers well downstream, and when the farmer downstream chased out the beavers and their handiwork, the lake was drained unlikely to ever return. What you fully believed was a permanent condition on which you made major commitments, is reveled to have been purely temporary and unlikely to be repeated in the same way anytime soon.
This may sound oversimplified, but you should care. A lot. Especially every time you see what looks like an investment bargain.
The detrimental affect of the false lake of an economy that was created by unsustainable credit duped millions of well-meaning meaning people in all corners of the globe into making fundamentally poor decisions ranging from the annoying to the disastrous. (And this ignores related nonsense like the likely exaggeration of GDP growth through the potential understatement of inflation.) However, unlike our simplistic visual above, the real lake of credit will take years to fully drain and the level of the original stream (economy) is fundamentally unknowable (take my word for it...more on the science of why this is so in a future post.) Most importantly for wealth management and investing, investment decisions you are making right now need to be evaluated in the context of what degree they are supported by a truly real and sustainable economy.
A future post will look at how to do this on the spectrum of available investments.
What will real growth in the developed world economy require? Some ideas in no particular order:
- An increase in the savings rate (be careful with the Retail Sector)
- Opening up of new markets (normalization of relations with Cuba may become an economic necessity in the US, not an option)
- Far fewer imports and far greater exports, especially in the US
- Investment in productive resources, not speculation
- Stable currencies
- Immigration of talented individuals
- A halt to creeping socialism and protectionism
For a more formal discussion of the concept of a real vs. false economy, a review of Austrian Economics is a good place and a good place to start for that is at www.mises.org which Eclectic Wealth highly recommends.
Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.
A Lower-Risk Way To Profit from the Credit Unwind
For reasons I will make clear in later posts, I rarely make short side bets, and disciplined investing requires that one not chase after good ideas that have become overpriced and are late in their cycle. That said, for those of us that believe the ramifications of the Credit Unwind /Reset have a long way to run and that the recent enthusiasm for Financial stocks is premature (especially after last week’s rally), I suggest the following as a reasonably way to play this. I should also point out that one of several reasons for recent self-loathing on my part has been due to having substantially missed the opportunities presented by the early stages of the unwind, so this presents a nice consolation prize and one of those rare opportunities to go back in time and reap the reward of knowing what will happen.
The approach??? Write out of the money puts against SKF.
To explain, SKF is the ultra-short Financial ETF and (as to be explained in future posts) one of, if not the only, truly beneficial feature of an ETF for informed investors is the ability to trade options related to it. In the case of SKF, what this provides is the ability to sell an option to purchase a bet against the major financial stocks only at a price considerably more advantageous than is available today and to earn a significant premium in the meantime. (This strategy assumes a good knowledge of the basics of Put Writing.) and I raise it since the bearish premium on SKF has consistently implied that numerous people are betting that the financials will rally dramatically. If you believe, as I do and has been well documented elsewhere (for example globaleconomicanalysis.blogspot.com ) that the ongoing financial unwind is nowhere near a “bottom” then selling well-out-of-the money puts on SKF gives a reasonably safe and advantageous way to pick up a nice payment whenever the pre-mature rallies in the financials happen.
The approach??? Write out of the money puts against SKF.
To explain, SKF is the ultra-short Financial ETF and (as to be explained in future posts) one of, if not the only, truly beneficial feature of an ETF for informed investors is the ability to trade options related to it. In the case of SKF, what this provides is the ability to sell an option to purchase a bet against the major financial stocks only at a price considerably more advantageous than is available today and to earn a significant premium in the meantime. (This strategy assumes a good knowledge of the basics of Put Writing.) and I raise it since the bearish premium on SKF has consistently implied that numerous people are betting that the financials will rally dramatically. If you believe, as I do and has been well documented elsewhere (for example globaleconomicanalysis.blogspot.com ) that the ongoing financial unwind is nowhere near a “bottom” then selling well-out-of-the money puts on SKF gives a reasonably safe and advantageous way to pick up a nice payment whenever the pre-mature rallies in the financials happen.
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