Wikinvest Wire

M3, "Moneyness", and Conspiracy Theories

Wednesday, November 30, 2005

This is another follow up to the ongoing discussion regarding the announcement that the Federal Reserve plans to discontinue reporting of the broadest measure of the money supply, the M3 data series. A fair amount has been written in the last week, since the previous roundup was done - the original report on this subject first appeared here over two weeks ago.

Two commentaries stand out in today's update - one by Doug Noland of Prudent Bear, the other by Caroline Baum at Bloomberg. In A Quickie on "Money", Doug writes:

“Money” connotes quite different things to different people.
I will attempt to clarify my view that we are at no analytical loss with the upcoming relegation of M3 to the government data scrapheap. First of all, M3 is today definitely not reflective of marketplace perceptions with respect to “moneyness.” With each boom year, the spectrum of perceived safe and liquid instruments expands. This year will see record ABS and commercial paper issuance, with the combined growth of these two categories of financial claims likely in the range of total M3 growth. M3 captures little of this imposing monetary expansion.
Market-based securities issuance is now a major aspect of monetary expansion, and the M’s are undoubtedly ill-equipped for such an environment. The unprecedented expansion of GSE obligations (debt and MBS) created several Trillion dollars of perceived safe financial sector liabilities.
And while I question the premise that the Fed has much to gain by eliminating M3, this nonetheless misses the much more salient point: The Fed has lost control of our nation’s “money” and Credit creation processes. The Greenspan/Bernanke Fed can now only administer feeble attempts to remove accommodation, hoping that over time baby-steps makes some headway but without ever attempting to impede, interrupt or discipline Wall Street Monetary Processes.
From the Federal Reserve Z1 Flow of Funds Report, the following chart shows some of the mortgage components that Doug identifies as not being included in any of the money supply totals today.

Click to enlarge

Notice the leveling off of GSE debt in recent years, as problems at Fannie Mae and Freddie Mac came to light. Their credit issuance has been basically flat, while Wall Street's ABS issuance has handily taken up the slack.

Comparing this with last week's chart of the money supply, using the same scale and duration, it becomes clear that the money supply numbers capture only a portion of what is happening in the financial world today.

Click to enlarge

In fact, going from around $3 trillion ten years ago to near $9 trillion today, the three securitized debt categories are growing at a much faster rate than all of M3 over the last decade - at comparable absolute levels in the $9-10 trillion dollar range. The change in M3 from $4.5 trillion to $10 trillion, about a 120 increase, pales in comparison to the 200 percent increase in the first chart.

In the mainstream financial media Caroline Baum of Bloomberg filed the report Europeans, Conspiracy Theorists Lead M3 Mourners, where she observes:
A chill wind swept across Western Europe, rattling the remains of long-dead Germans who carried memories of wheelbarrows full of worthless deutsche marks to their graves. Stateside, the conspiracy theorists seized on the new information as further proof of deceit and manipulation.
In the M3 review, the board staff determined the elimination would save roughly $500,000 a year for the board and Reserve banks and $1 million a year for depository institutions, according to a Fed board spokesperson. In addition, a search of the economic literature yielded very few results for M3.
So while the discontinuation of a series very few people pay attention to may have been a surprise, it was not nefarious. Nor was it a prelude to a massive, secretive money-printing operation on the part of the Fed, which is how the hard-core conspiracy theorists are playing it.

On, where fantasy and reality mix, contributor Robert McHugh offered up the answer to why the Fed is discontinuing the weekly report of M3.

``Why? It's simple, really,'' wrote McHugh, a regular contributor to the site. ``So that the Plunge Protection Team can hide its market manipulative, equity buying activities.''

The PPT is an alleged cabal of government institutions and large banks that intervene to support the markets, most notably stocks and gold.

Repurchase agreements, which are among the M3 components to be discontinued, are ``the most obvious reporting item where PPT market buying transactions show up,'' McHugh said.

If the theory sounds far out, the accounting is even harder to follow, especially when actions are in anticipation of some future stock-buying binge, as McHugh implies.

Altruistic Exposure

"Apparently, the Federal Reserve (a key member of the PPT?) sees a coming need to buy -- or facilitate the buying -- of markets, including the equity market, incognito.'' That explains "the extra M3 growth over the past several months.'' can print as much money (buy as many government securities) as it wants, but if the banks don't want the reserves, they will dump them, and the federal funds rate will collapse.

That isn't happening. The funds rate has been creeping up every six weeks to 4 percent even as M3 expanded an annualized 10.9 percent in the last 13 weeks.

If the markets are rigged, and McHugh has it all figured out, "why is he exposing it rather than telling me how to profit from it or profiting himself?,'' asked Jim Bianco, president of Bianco Research in Chicago.

Good point. Don't let reason interfere with a good conspiracy theory.
Not defending Robert McHugh here, since anyone reading his commentary would have more than one rasied eyebrow as a result, but there is definitely something amiss in Ms. Baum's analysis when she writes about the accounting being hard to follow.

If, hypothetically speaking, you were going to do something really bad that you know would show up in a money supply statistic, wouldn't you discontinue the reporting of the statistic before you did the really bad thing, so that the really bad thing would not be noticed? Wouldn't that be the whole point - to make the accounting hard to follow?

And as to the embellished question of Jim Bianco (notice Ms. Baum's words preceding the start of the quote) regarding McHugh seeking profit from this, there is a newsletter available for about $300 per year - it's just a click or two away at the bottom of McHugh's article.

Re-reading the McHugh attack a couple times makes you wonder about both Caroline's motives and how her book sales are going (thanks to alert reader L'Emmerdeur for pointing out this connection in the comments section of last weeks post).

Doug Gillespie over at Shadow Government Statistics didn't have much good to say about either the Federal Reserve of Caroline Baum when he wrote Fed Abandons M3 Without An Honest Explanation:
Something is terribly afoul at the Fed, but the popular financial press offers little but moronic platitudes and attacks on "conspiracy theorists" who dare to question the sanctity of the Federal Reserve Board.

I even saw one related comment yesterday from a well known financial reporter who laughed at the concept of there being a Plunge Protection Team that intervenes in troubled stock markets. She cited such a concept as evidence of the absurdity of some conspiracy theories.
The Federal Reserve, not the Treasury, generally is the ultimate backstop for the financial markets. Sometimes the Fed does intervene on behalf of the Treasury, particularly in the currency markets. Despite Mr. Greenspan's denials of Federal Reserve Involvement in stock market intervention, I have had a former Fed official confirm to me that interventions, at times, have been coordinated by the New York Fed.
What game the Federal Reserve is playing will become clear soon enough. Chances that M3 was eliminated because it just duplicated M2 are nil. The cost factor also is a canard. The Fed could privatize monetary reporting, if it wanted to, the same way the government put the Index of Leading Economic Indicators out to bid.
Back in the mainstream financial media Peter Brimlow at CBS Marketwatch writes M3 Mutterers Refuse to Give Thanks, where he reports on all the other reporting going on regarding this topic - he didn't think much of Ms. Baum's reasoning either:
Last Friday I wrote last about the astonishing lack of comment outside of investment letters and the financial blogosphere about the Federal Reserve's curiously discreet announcement that it intended to stop publishing data on the broadest monetary aggregate, known as M3.
Baum has an iconoclastic manner but she usually comes down on the side of Wall Street orthodoxy. A recent example was her Oct. 24 column sneering at the Sprott Asset Management paper documenting the evidence that a "Plunge Protection Team" exists to support the stock market at crucial moments.

Her argument essentially was that none of her friends admit it exists, so it can't.

Baum's Nov. 22 column on the M3 controversy did acknowledge a peculiar lack of consultation. She quoted Maurine Haver, president of Haver Analytics and chairwoman of the National Association of Business Economics statistics committee as saying, "It doesn't seem they reached out very far to get user feedback on the discontinuation of the series."
Mr. Brimlow is of course referring to this prior work by Ms. Baum about the non-existence of the Plunge Protection Team, where she voiced disdain for the Sprott Asset Management Report on market intervention (warning - PDF). Interesting reading, especially in light of the much talked about trader 990N.

At the New York Post, John Crudelle asks What's the Fed Up To?
Bernanke is the guy who said a couple years ago that if the government's monetary policy wasn't working, Washington could just print money to get the economy going and drop it from helicopters.

That's OK for a professor lecturing to freshmen, even the bright ones in the Ivies. But that's not the sort of thing that inflation-wary professionals on Wall Street are accustomed to hearing.

And in the very unlikely event that the government took Bernanke's advice, where would that shocking breach of monetary policy show up? In the M3 figures that are being discontinued, of course.
David Chapman provides a nice summary of the issue in What's Happened to M3?
M3 is very important. Indeed of the Fed's monetary numbers only M3 was of major importance and in other G7 countries we also focus on M3 including our own Bank of Canada. No word that they intend to follow. So why are they dropping M3? Well we have seen nothing to tell us why we only know they are doing it. Oh it's not that the numbers will completely disappear. For those that wish to take the time they can pore through the Flow of Funds accounts (released quarterly as Z.1 release and the H.8 bulletin released weekly for commercial banks) and piece together the former M3. Painstaking, but that is not the way it is supposed to be. European Central Bankers put great stead in M3 so why has the Fed after all these years decided to cease publication?
The economist's point of view can be found at David Altig's Macroblog, where, in More Ado about M3, he states the case that M3 just isn't important in formulating Fed policy:
I'm still somewhat surprised by the sentiment that the Board's decision is, at least in part, motivated by the desire to downplay a statistic that appears to be contradictory to the achievement of price stability. I'm surprised because such sentiment seems to imply that the FOMC places significant weight on the behavior of monetary statistics in the first place!
If you have a sense that M3 is providing any information at all related to the objectives of monetary policy, you know something I don't know.
A commenter stated:
There seems to be a growing disconnect between what people are told the rate of inflation is, and what they experience in their own lives - and not just for energy. Healthcare, tuition, and many other service categories have been rising sharply, while at the same time the cost of imported goods remains stable or declines (how many DVD players do you really need?).

And then there's housing.

Congresswoman Carolyn B. Maloney put it best when asking the following question of Alan Greenspan before the Joint Economic Committee meeting on November 3rd:

"The question that my constituents ask me, I'm going to ask you, 'If the economy is so good and inflation is so well behaved, and there's price stability, then why does everything cost so much more when you go to buy something?"

Not just energy, "everything" (exclusive of DVD players, probably).

Over the last ten years inflation as measured by CPI-U has been in the 2-3 percent range, whereas money supply growth has been in the 5-10 percent range, with the fastest growth coming from the M3-M2 component, the reporting of which is being terminated.

The sense that I get is that the rise in prices felt by consumers is higher than what is being reported in government inflation statistics, and that past and future M3 growth is the uncomfortable confirmation of this.
You'll have to read the rest on your own, or maybe they'll get updated later in the day.

Catherine Austin Fitts - A Note from Catherine on the Fed's Cancellation of M3

Paul VanEden - A gold bull market

Sol Palha - M3 reporting: What’s The Big Deal?


Gambler Nation

Tuesday, November 29, 2005

In a recent trip to visit relatives in Pennsylvania, the following conversation was overheard as family and friends were catching up on how their children were faring in life. "Our oldest son was in an accident a while back - he's recovering, but slowly", she said.

Then she paused, rolled her eyes, and continued, "And our youngest quit his job and gambles full-time now - on his computer. He says he's able to support his wife and their newborn, but it's only been a couple months."

Talking about their offspring is something that aging parents are wont to do - sometimes not so much to share or inform, but just to have something to discuss. There is much to be learned by paying close attention to conversations like this - sometimes the body language speaks louder than the words.

It seems that the older generation has much to say about what the younger generation is doing these days, but often times they are not heard.

Things haven't always been the way they are today.

One thing that has been pretty much the same over the years is the purchase of Christmas gifts around this time of year. What's popular this year? By the looks of what's for sale in local stores and at Costco Online, poker sets seem to be a hot item. Look at all the neat gambling accessories you can get:

  • Bellino Poker Table with 4 Swivel Chairs - $1,999.99
  • Sportcraft 56" Gaming Bar Table - $629.99
  • Texas Hold'Em Casino Table & Poker Set - $379.99
  • 1000-Chip Tournament Poker Set w/ Case - $129.99
  • Spades Deluxe 500pc Embossed Poker Set - $69.99
  • Texas Hold 'Em Folding Game Tabletop - $47.99
  • Bellino Bar w/ Two Bar Stools & Poker Table - $3,499.99
It's a pretty safe bet that very few retired adults are buying items on this list for the parents of their newborn grandchildren.

These items do, however, seem to find their way into the living rooms and basements of baby boomers - in many cases baby boomers with teenagers. Gambling has sky-rocketed in recent years among the nation's youth - many parents apparently feel it's better to have their children gambling at home than roaming the streets, as evidenced by this PBS NewsHour segment:
LEE HOCHBERG: A dozen teenage boys in the Seattle-area town of Snohomish gather after school and on weekends, sometimes twice a day, and the poker bets and the money fly. They said the purse could reach $150 before long. Seventeen-year-old Seth Follis said he's walked away from poker games with twice that in his pocket.

TEEN: In a night, I've lost 50 bucks. But then the next day I won close to $300, so...

LEE HOCHBERG: So you're a net winner.

TEEN: Yeah. Since the beginning of last summer, I've won, like, $700.
Gambling just seems to be part of the culture now - European teenagers drink wine at the family's dinner table, American teenagers gamble at the family's poker table.

Then there is real estate - everyone needs a place to set up that new poker table. The real estate gamble has paid off handsomely for many Americans in recent years, though many of its participants don't see it as a gamble at all. The risk-free interpretation of real estate investing often includes the logic, "Real estate is only going to go up. People are always going to need a place to live".

Thanks to easy home equity extraction, many millions of people now have easy access to many millions of dollars that can be wagered on investment property and second homes. There seems to be little desire to build home equity in a first home when investing the equity can be so much more exciting and rewarding.

As David Lereah, chief economist of the National Associate of Realtors once said, "If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years. It's as if you had 500,000 dollar bills stuffed in your mattress." He called it "very unsophisticated."

Paying off your mortgage is apparently for old people - unsophisticated old people.

At a seminar some time ago, the Citibank home loan specialist commented that this sort of "mattress money" was in fact "dead money" - just sitting there, doing nothing. He argued that it should be put to work - investment real estate was his recommendation.

Today, some people combine card playing with real estate careers until one of the two emerges as the clear winner - professional gambler or real estate tycoon. In this case, a big win tipped the scales:
Aaron Kanter in Elk Grove, Calif., parlayed a $50 buy-in at into $2 million this summer when, by playing on the website, he won his way into the World Series of Poker in Las Vegas and took fourth place in that event, the richest casino tournament.

At home, Kanter, who recently ditched a real estate career to play poker full time, competes in as many as four games at once on his 23-inch computer monitor. "Any more than that, it's hard to pay attention," he said.
A necessary prerequisite for playing poker and investing in real estate is easy access to credit (Aaron's case above is the exception to the rule). Access to credit is one thing that has been a constant in recent years - something that senior citizens knew little about when they were young adults.

Many years ago, the only reason people needed credit was to start a business or if they were in trouble. Borrowing against the family home was done only to help pay for medical expenses due to some tragic accident or illness, or as a last ditch attempt to save the family business.

Today, credit is too easy. Too routine.

From credit cards funding Party Poker accounts and Las Vegas cash advances, to all-too-easy home loans - the amount of credit available and the ease with which debt is acquired surely must surprise the older crowd. "I don’t' know how they do it", they say, "Where do they get the money?"

Nothing exemplifies this credit-debt-gambling connection better than seeing house-rich Californians spending their home equity in Las Vegas or at Indian casinos that seem to grow like weeds around the country. At the craps tables or in line for pre-construction condo sales, they are ready and willing.

Ready, because they are now wealthy beyond what they or their parents could have ever imagined just five years ago, willing because this sort of thing is now accepted behavior - everyone is doing it.

Craps, condos - this is the way the world now works. You've got to play to win.

To really appreciate how much the world has changed in the last twenty years, you must go to Las Vegas - to see the new casinos and the new condominiums. The scale of things is breathtaking. The amount of money people have to spend is daunting.

While the younger generation crowds around the craps table, the older folks contently sit in front of the quarter slot machines, avoiding the condo sales offices completely.

Casinos and condos and generational changes in attitudes toward credit, debt, and risk.

What will Las Vegas look like in another twenty years? Who knows?

Today it is just another part of our gambler nation.


Five Hundred Dollar Gold

Monday, November 28, 2005

Who knows what's going to happen now? Having been knocked down hard early in New York trading, then two more times during the day after steady, plodding rallies, gold has finally breached the $500 mark in Sydney and Hong Kong - $501.80 as this is written.

The end of the current cycle, or just getting warmed up?


More Interesting Gold Stories

It seems that the mainstream financial media reporting on gold is becoming more and more interesting as each day goes by and the price of gold edges higher. The word 'interesting' is a polite choice of words here - the spirit of the season, and so on.

Well, at least they are talking about gold. lf you go to the Wall Street Journal/Barron's search page and type in 'gold', you'll see just how much they're talking about it there - five, ten, fifteen articles a day contain this magical word.

Not all of these stories are about the yellow metal, as many proper nouns contain these letters in this sequence, but nonetheless, this is a marked increase in attention. All of this is completely understandable, of course, as gold has now come within whispering distance of five hundred dollars per ounce.

A search for 'inflation' on the WSJ/Barron's site yields an even higher number of articles per day. Here, it is safe to assume that the count is not skewed upward due to its use in names, however, anything is possible.

Gold and inflation, what a secretive couple they are - much talked about, yet little understood.

In the last two days, the mainstream financial media has produced two more articles about gold -
one from Bloomberg and the other from the New York Times. They seem to be begging for attention:

Newmont Forecasts Gold to Rise Above $1,000 on Asian Demand by Miriam Steffens
To See How Gold Is Doing, Check the Rest of the Market by Floyd Noris

In the Bloomberg article, the possible path of future gold prices is pondered, during which it is first learned that Japanese investors are buying bullion to hedge against inflation. What? In a country with chronic disinflation and deflation, investors are hedging against inflation? Fascinating.

Newmont Mining Corp., the world's largest producer of gold, says the price of the precious metal may rise to more than $1,000 an ounce in the next five to seven years as demand growth driven by Asia outstrips global supply.

The gold market "is hot and it is going to get hotter,'' Denver-based Newmont's President Pierre Lassonde said in an interview on Australian Broadcasting Corp. television today. "By early next year you are going to see $525 and down the road even a lot higher than that.''

Gold for immediate delivery touched $497.02 on Nov. 25, the highest intraday price since December 1987, as Japanese investors bought bullion to hedge against inflation and jewelers in Asia and Europe stocked up. Lassonde's prediction surpasses a Merrill Lynch & Co. forecast in July that gold may rise to $725 by 2010 because of rising demand from China.
Then the talk turns to inflation:
Some investors buy gold to hedge against accelerating inflation. Gold futures surged to $873 an ounce in 1980, when U.S. consumer prices rose more than 12 percent from the previous year. Gold last climbed above $500 an ounce on Dec. 11, 1987.

"Everybody thinks inflation is going to stay at 2 percent, I don't believe it,'' said Lassonde. "There has been way too much money printing in the world for that to happen.''

Inflation, excluding food and energy, will probably rise 2.4 percent by the fourth quarter next year from this quarter, up from a 2.1 percent gain a year earlier, a survey by the National Association for Business Economics found.
So what's the message here? The last time gold soared, in 1980, was completely different than today. Today, inflation is under control - twelve percent to two percent.

Yes two percent. As in two percent inflation. The core rate. It's a reasonable guess that as a gold mining executive, when Pierre Lassonde said two percent inflation he was joking, but it looks like he was taken seriously.

Excluding food and energy, the core rate of inflation, as seen by economists, is benign both today and one year out. There's nothing to worry about - both inflation and inflation expectations are well contained, or so the inflation expectations management story goes.

Some disagree with this inflation story - for example here and here.

From the looks of its recent price movement, gold doesn't seem to have heard the story.

Conveniently omitted from the Bloomberg inflation discussion were a number of important pieces of information - inflation for all items in the CPI-U is now well over four percent, the inflation calculation is fundamentally different in 2005 than it was in 1980, and our Asian trading partners have been working day and night to keep many consumer prices low, while huge unsustainable trade deficits grow.

These differences between 2005 and 1980 might have been worth noting as possible reasons that the price of gold is rising - all the author serves up is the Washington Agreement, where some central banks have limited their gold sales in recent years. Ironically, in recent weeks, there have been more announcements of central banks buying gold than selling it.

Here's an interesting exercise involving gold and inflation - it might provide some insight into where the price of gold may be headed. If you look at the last peak in the gold price - $873 in 1980, then go and plug this number into the handy inflation calculator over at the Bureau of Labor Statistics, here's what you get:


In the New York Times article, once again the acknowledgement of the rising price of gold comes first, followed by an attempt to discredit gold as an investment over the last few years - since the end of 2002 when the S&P 500 hit a multi-year low.
GOLD is in a bull market, approaching $500 an ounce for the first time since 1987, and there is talk that the move shows renewed fears about inflation. Gold bugs say it may be that people are starting to lose faith in central banks to preserve the value of paper currencies, while others see evidence of growing demand for gold jewelry as Asia grows richer.

But perhaps it shows something else entirely. For the last three years, since the world settled down from the technology stock boom and bust, gold has traded suspiciously like just another American stock. If the stock market goes up, so does gold. And ditto if the stock market goes down.

One of the accompanying charts shows the value of gold in the conventional way, measured in dollars an ounce, over the last decade. It shows a price that slipped in the late 1990's, hitting bottom at $253.70 on Aug. 25, 1999, and then a gradual bull market began, with the price almost doubling since then.

That is a reasonable way to price gold, but for those considering it as an investment, it does not show how gold has performed relative to alternatives. The other chart provides the answer. It shows the price of an ounce of gold divided by the level of the Standard & Poor's 500-stock index. If the line is falling, then stocks are doing better than gold. If it is rising, then gold is a better investment over that period.

The case is then made that there has been nothing special about gold in the last few years when compared to other investments. They're all pretty much the same - all up around 50 percent from about three years back.

So, what's the message here? You'd be better off staying away from the yellow stuff - just stick with what you know and don't ask too many questions.

One question that should have been asked as part of this analysis is about gold stocks. How would gold mining shares have fared against the S&P 500 since the end of 2002?

Using the Gold Bugs Index (HUI), an index of the largest unhedged gold mining companies, the answer is clear. Of course it's been a wild ride, and there is more in store, but look at these charts - going back three years, where would you rather have been invested?

Going back five years there is an even more dramatic difference:

It's hard to imagine what the gold stocks are going to look like if gold itself starts looking like a good investment relative to other investments, such as the S&P 500.

Of course going back ten years, the S&P500 handily outperforms both gold and gold mining stocks, but should the period 1995-2000 really affect how you invest today?

Well, that's an interesting question...

Maybe the mainstream financial media should just stop talking about gold.

[This just in - a very bullish gold story from Bloomberg - very bullish.]


Random Items

Sunday, November 27, 2005


Alert reader John Law II (not his real name) has found a possible explanation behind Barbara Corcoran's Super Bowl Real Estate Theory mused over in this space last week. From a CNN/Money article almost a year old, we learn:

The Super Bowl may be the grand finale of football season, but in most markets it marks the beginning of prime home buying season.

Buyers usually put house hunting on hold during the holidays, and begin heading out in full force in February.

Last year, according to the National Association of Realtors, existing home sales fell 31 percent in January, reflecting that fewer buyers were out looking in late November and early December. In March, however, sales shot up 41 percent, indicating that buyers rushed back to the market in late January and early February.

Sunday's big game will have no direct impact on the housing market, of course. But real estate agents say they expect that telephone calls and e-mail inquiries will start picking up after the weekend.

"I don't mean to stereotype because there are plenty of women who love football and just as many men who love home buying," said Diane Saatchi, a vice president in the Easthampton, N.Y. office of the Corcoran Group. "But we often get calls from women who aren't interested in the Super Bowl and are instead gearing up to buy a new house."
So be careful Super Bowl watching men of America - while you are enjoying cold beer and nachos, your wife may be perusing local real estate listings, preparing to sweet talk you into upgrading to some new McMansion that you really can't afford, but which is still within your grasp due to ever creative lending practices.

The Corcoran Group is now apparently resorting to normal seasonal patterns in real estate buying to herald a resurgent boom in home sales. As can be seen in this chart for Southern California real estate sales volume, this is a pattern which is repeated year after year - do not confuse the month-to-month increase in sales during the beginning of the year with a new boom.

Click to enlarge

Don't listen to Barbara Corcoran - you'll hate yourself in 2007, maybe sooner.


Who uses this?

Despite the best efforts of Tivo DVR technology to eliminate commercials from the lives of ordinary Americans, this product continues to penetrate our collective psyche.

It looks like a neat product - from room temperature up to 800 degrees and back to room temperature in a matter of seconds, but what is everyone soldering?


Condos at sea? Preconstruction in dry-dock?

Yes, there are now three residential cruise ships selling floating real estate priced at betwen $1 million and $15 million - homeowner's association fees are extra, extra expensive that is, but the good news is that there are no property taxes.
Who is buying? Forty percent of the World's buyers come from North America, 40% from Europe and 20% from elsewhere, with a strong representation from South Africa and Australia. The median age is 52. Buyers are overwhelmingly self-made entrepreneurs as opposed to having inherited wealth.

Who they are, well, that's a secret. Buyers enjoy a level of identity protection that rivals the FBI's witness relocation program.

The ship's residents, said the World's Upshaw, made a covenant not to grant media interviews. Management discourages ownership by high-visibility celebrities, and marketing approaches are more along the lines of a discreet tap on the shoulder from a top international realty broker than a phone call interrupting dinner.

Lee Minshull, who apparently doesn't fear being voted off the ship by his fellow homeowners, just bought the first unit on the Magellan and was happy to speak about it.

A dealer in rare antiquities who lives in Palos Verdes Estates, Minshull is about to close escrow on a $3.2-million, three-bedroom suite on the Magellan. His Palos Verdes Estates house is 6,000 square feet, and he owns a second home in Hawaii.

Minshull, who is in his mid-40s, learned of condos at sea through his membership in Exclusive Resorts, a high-end vacation club with 1,700 members. He paid $400,000 to join, and the annual fees are $25,000.

"I like traveling with people of similar means," Minshull said. "Yeah, I know how that sounds. But it's true."

It's natural to wonder just how safe banks are these days. This cartoon probably sumarizes the situation better than any banker or homeowner could.


The American Consumer

Friday, November 25, 2005

The American consumer takes center stage today as the rest of the world waits ...

The question on everyone's mind is whether or not the seemingly insatiable desire for consumer goods has diminished in any way in light of recent energy price shocks and increasing evidence of a housing market slowdown.

Based on a very informal survey of an infinitesimally small sample group yesterday, it seems the answer is no - the American consumer is, as yet, undeterred.

An editorial in the L.A. Times today notes:

It's easy to deride consumerism. Yet the crowds at the stores today and in the weeks to come will not just be grasping for the latest mass-marketed gadgets and gewgaws. They will be taking a leap of faith and making a vote of confidence in the resilience of the U.S. economy. The fabled American consumer, buoyed by low interest rates and a booming housing market that has turned many homes into ATMs via refinancings, has carried the economy for much of the decade, from the trauma of the dot-com bust through 9/11, corporate scandals, war and the epic hurricanes (and those equally epic fuel costs) of this fall. In the third quarter of this year, the nation's economy grew at a brisk 3.8% annual rate. Remarkably, that was the 10th straight quarter of growth of 3% or greater.
Yes, American consumerism as a leap of faith - a consumer society that is the engine for global growth. It's funny how this is so commonly accepted as being just the way things are today - that this is just how the world works now - low interest rates, a booming housing market, and homes as ATMs.

Not necessarily accepted by this editorial writer, but by consumers.

Last month's real GDP number doesn't look so good when you consider how much debt has been racked up and how inflation continues to be under-reported, but those things just don't seem to matter - the key here is faith ... and more consumption.
There are clouds on the horizon, of course. (There always is in the consumer economy.) Fuel costs could shoot up again, and the stalling housing market in much of the nation could make Americans feel less prosperous. And when it's all over early next year, those December credit card statements could hit mailboxes just in time for a rise in interest rates. But economics isn't always about black or red. It's usually about the grays. With other engines of growth coming on strong, such as business investment and government spending, the economy may be able to continue thriving with a less exuberant consumer.
Government spending coming on strong is completely understandable - that's what governments do (especially this one and especially now). But business investment as an engine of growth in the early twenty-first century is not something that you hear a lot about, unless of course this is intended to mean business investment overseas - that would be understandable.

Isn't the whole concept of an American economy "continuing to thrive with a less exuberant consumer" at odds with everything we know about our economy today?


Gobble Gobble

Thursday, November 24, 2005

Online references Wikipedia and are once again the source of some interesting information about one of America's favorite holidays. The lengthy "Thanksgiving Proclamation" by Abraham Lincoln in 1863, about halfway down on Wikipedia's Thanksgiving page, is particularly intriguing, in light of today's ongoing national cultural debates.

Historical Highlights from Wikipedia

"George Washington, leader of the revolutionary forces in the American Revolutionary War, proclaimed a Thanksgiving in December 1777 as a victory celebration honoring the defeat of the British at Saratoga. The Continental Congress proclaimed annual December Thanksgivings from 1777 to 1783, except in 1782.

In the middle of the Civil War, prompted by a series of editorials written by Sarah Josepha Hale, the last of which appeared in the September 1863 issue of Godey's Lady's Book, President Abraham Lincoln proclaimed a national Thanksgiving Day, to be celebrated on the final Thursday in November 1863.

In 1939, President Franklin D. Roosevelt declared that Thanksgiving would be the next to last Thursday of November rather than the last. With the country still in the midst of The Great Depression, Roosevelt thought this would give merchants a longer period to sell goods before Christmas. Increasing profits and spending during this period, Roosevelt hoped, would aid bringing the country out of the Depression.

At the time, it was considered inappropriate to advertise goods for Christmas until after Thanksgiving. However, Roosevelt's declaration was not mandatory; twenty-three states went along with this recommendation, and 22 did not. Other states, like Texas, could not decide and took both weeks as government holidays. Roosevelt persisted in 1940 to celebrate his "Franksgiving," as it was termed. The U.S. Congress in 1941 split the difference and established that the Thanksgiving would occur annually on the fourth Thursday of November, which was sometimes the last Thursday and sometimes the next to last. On November 26 that year President Roosevelt signed this bill into U.S. law.

Since 1947, or possibly earlier, the National Turkey Federation has presented the President of the United States with one live turkey and two dressed turkeys. The live turkey is pardoned and lives out the rest of its days on a peaceful farm. While it is commonly held that this tradition began with Harry Truman in 1947, the Truman Library has been unable to find any evidence for this. Still others claim that that the tradition dates back to Abraham Lincoln pardoning his son's pet turkey. Both stories have been quoted in more recent presidential speeches."

Trivia from

From the Chicago site:

"According to most historians, the Pilgrims never observed an annual Thanksgiving feast in autumn. In the year 1621, they did celebrate a feast near Plymouth, Massachusetts, following their first harvest. But this feast most people refer to as the first Thanksgiving was never repeated. Oddly enough, most devoutly religious pilgrims observed a day of thanksgiving with prayer and fasting, not feasting.

In the United States, Thanksgiving Day is celebrated on the fourth Thursday in November. But did you know that seven other nations also celebrate an official Thanksgiving Day? Those nations are Argentina, Brazil, Canada, Japan, Korea, Liberia, and Switzerland."

From the Holidays site:

Q. How long did the first Thanksgiving celebration last?
A. It lasted three days (the celebration consisted of games as well as food).

Q. Who wanted to make the turkey the national bird of the United States of America?
A. Benjamin Franklin, but he was opposed by Thomas Jefferson. Legend has it that Franklin then named the male turkey a "tom turkey" to spite Jefferson. (The female is called a "hen turkey" and the baby a "poult.")

Q. What drink did the Puritans bring with them in the Mayflower?
A. Beer.


You're Going the Wrong Way!

Wednesday, November 23, 2005

All that Neal Page wants to do is to get home for Thanksgiving. His flight has been cancelled due to bad weather, so he decides on other means of transport. As well as bad luck, Neal is blessed with the presence of Del Griffith, Shower Curtain Ring Salesman and all-around blabbermouth, who is never short of advice, conversation, bad jokes, or company. And when he decides that he is going the same direction as Neal ...

Today we depart from our normal fare to recall the 1987 John Hughes classic Planes, Trains, and Automobiles starring Steve Martin and John Candy. Over the years, the viewing of this film on Thanksgiving eve has become a family tradition - this summary is provided to readers courtesy of IMDb (Internet Movie Database) and various fan sites.

Owen: I'm to drive you to Wichita to catch a train?
Del: Yeah, we'd appreciate it.
Owen: Train don't run out of Wichita... unlessin' you're a hog or a cattle.
[Clears his throat]
Owen: People train runs out of Stubbville.
Planes, Trains and Automobiles is the story of two very different men who wind up travelling together from New York to Chicago in the day and a half before Thanksgiving. Due to bad weather and various other mishaps, it turns into a worst-case travel scenario.

Neil Page is stuck in a meeting in New York, desperate to get home. He glances at his watch and he has less than two hours to get to the airport. He tries desperately to hail a cab, and when he finally gets one, Del Griffith steals it, accidentally. This is the first of many encounters between Neil and Del.

When Neil finally gets to the airport, he is horrified to find that his flight is cancelled due to weather. Neil recognizes Del, who is sitting across from him at the gate.

Neil finally boards the plane only to discover that he’s been bumped to coach. No sooner than he can say, “I can’t wait to see what happens next!” he finds out he’s sitting next to Del.

Neal: Eh, look, I don't want to be rude, but I'm not much of a conversationalist, and I really want to finish this article, a friend of mine wrote it, so...

Del: Don't let me stand in your way, please don't let me stand in your way. The last thing I want to be remembered as is an annoying blabbermouth... You know, nothing grinds my gears worse than some chowderhead that doesn't know when to keep his big trap shut... If you catch me running off with my mouth, just give me a poke on the chubbs...
The plane is diverted to Wichita, where Del offers to share a hotel room with Neil for the night when Neil has no luck finding one himself. Waking up after sharing the same bed (.wav file):
Neal: Del... Why did you kiss my ear?
Del: Why are you holding my hand?
Neal: Where's your other hand?
Del: Between two pillows...
Neal: Those aren't pillows!
[They both stand up and awkwardly walk around the room]
Neal: Did you see that Bears game last week?
Del: Yeah, hell of a game, hell of a game. The Bears have a great team this year - they're going go all the way.
From here, they embark on a desperate journey to get home in time for Thanksgiving. After being unable to find his rental car in the remote lot and barely surviving the three-mile hike back to the rental office, Neal has this now-famous exchange with a too-cheerful rental car agent played by Edi McClurg (.wav file):
Car Rental Agent: Welcome to Marathon, may I help you?
Neal: Yes.
Car Rental Agent: How may I help you?
Neal: You can start by wiping that f**king dumbass smile off your rosy f**cking cheeks! Then you can give me a f**king automobile: a f**king Datsun, a f**king Toyota, a f**king Mustang, a f**king Buick! Four f**king wheels and a seat!
Car Rental Agent: I really don't care for the way you're speaking to me.
Neal: And I really don't care for the way your company left me in the middle of f**king nowhere with f**king keys to a f**king car that isn't f**king there. And I really didn't care to f**king walk down a f**king highway and across a f**king runway to get back here to have you smile at my f**king face. I want a f**king car RIGHT F**KING NOW!
Car Rental Agent: May I see your rental agreement.
Neal: I threw it away.
Car Rental Agent: Oh boy.
Neal: Oh boy what?
Car Rental Agent: You're f**ked!
[Overnight, instead of the word f**ked above, the less clean word lay saved in a draft of this post. Blogger now thinks this is a spam blog and has forced word verification to save or publish this post - ever vigilant, they are.]

After Del manages to rent a car for the two of them, they find themselves driving the wrong way on a divided highway late at night. Another motorist, driving in the proper direction on the other side of the highway, tries to tell them that they are going the wrong way, toward oncoming traffic, as Neal awakens from a nap:
Neal: He says we're going the wrong way...
Del: Oh, he's drunk. How would he know where we're going?
After barely surviving the encounter with two tractor-trailers, they accidentally set their rental car ablaze. It remains driveable (barely), until they are pulled over:
State Trooper: What the hell are you driving here?
Del: We had a small fire last night, but we caught it in the nick of time.
State Trooper: Do you have any idea how fast you were going?
Del: Funny enough, I was just talking to my friend about that. Our speedometer has melted and as a result it's very hard to see with any degree of accuracy exactly how fast we were going.
With the rental car impounded, they are left with no alternative than to seek bus transportation:
Del: You're in a pretty lousy mood, huh?
Neal: To say the least.
Del: You ever travel by bus before?
[Neal shakes his head]
Del: Hmm. Your mood's probably not going to improve much.
After more tumult, they finally make it back to Chicago, both having learned a lot about themselves and each other.

Planes, Trains and Automobiles is a wonderful film - very funny, with great performances from the entire cast, especially John Candy, who may have given the best performance of his career, which was tragically cut short by his untimely death in 1994.

Highly recommended.


M3, We Hardly Knew You

Tuesday, November 22, 2005

This is a follow up to last week's brouhaha about the Federal Reserve discontinuing the publication of the broadest measure of the money supply, the M3 data series. Instead of trying to come up with something clever on a subject in which we are already in way over our heads, this post simply provides a few colorful charts and links to some other stories on this topic with minimal commentary of our own.

The Colorful Charts

The first chart is the history of the three money supply measures since 1959. Notice the increasing percentage of M3-M2 in the total, and the decreasing percentage of M1 since the late 1970s.

Click to enlarge

The second chart zooms in on the last ten years showing how M3, the total money supply, has gone from under five trillion dollars to over ten trillion. Here, the increasing role of M3-M2 is clear - it has gone from roughly 20 percent of the total to near 40 percent, while M2-M1 has remained fairly stable at just over 50 percent of the total, and M1 has declined from about 20 percent to near 10 percent.

Click to enlarge

Now this chart is interesting - the year-over-year percent change to each of the money supply components. Looking at the year-over-year change over time seems to be the universally accepted way to look at data such as this - in addition to completely removing the need for seasonal adjustments, it gives a clear indication of trends that might not otherwise be noticeable.

What's that circled on the right? Dunno. It looked interesting, given all the talk of conspiracy theories and such - it just looked like something that should be circled. It looked like something that should be watched over the next four months, before its reporting is discontinued.

Click to enlarge

This chart is the most interesting of the lot - the gold price for the last month. The M3 announcement was made on November 10th, but no one really noticed until a few days later, and then on the 16th, the Russian and South African central banks made announcements about buying gold. Hmmm...

Wikipedia Weighs In

One of the first things you do for a story like this is consult Wikipedia, where you will likely find more than you'll ever want to know on this or any other subject. A search on Money Supply yields an abundance of information, all neatly hyperlinked and categorized, but the real payoff from Wikipedia comes with a search on Inflation, which yields this:

Inflation is measured by taking a "basket" of goods, and comparing the prices at two intervals, and adjusting for changes in the intrinsic basket. Thus, there are different measurements of inflation, depending on the basket of goods selected. The most common measures are of consumer inflation, producer inflation and GDP deflators, or price indexes. The last measures inflation in the entire economy. Inflation measurements sometimes exclude volatile goods from the basket to be able to gauge the "core" rate of inflation.

In some contexts the word "inflation" is used to mean an increase in the money supply, which is sometimes seen as the cause of price increases. Some economists (of the Austrian school) still prefer this meaning of the term, rather than to mean the price increases themselves. Thus, for example, some observers of the 1920s in the United States refer to "inflation" even though prices of goods were not increasing at the time.
This is the crux of the controversy - how "inflation" is defined and whether the increase in the money supply is a truer measure of "inflation" than are the price indices.

The Links

There are many links in the post that appeared here last week - here are some newer ones or ones that were missed the first time around.

CBS MarketWatch
To M3 or not to M3?
The Federal Reserve's announcement that it will discontinue reporting the broad monetary measure of M3 has exposed a stark division between the establishment financial media (yawn) and investment letterland (aargh!), and above all -- the burgeoning financial blogosphere (Run for the hills!)
Federal Reserve to Quit Reporting on M3 Money Supply
''M3 does not appear to convey any additional information about economic activity that is not already embodied in M2,'' a Federal Reserve spokesman said. ''The role of M3 in the policy process has diminished greatly over time. Consequently, the costs of collecting the data and publishing M3 now appear to outweigh the benefits.''
Much Ado About M3
From the point of view of a policy maker, why do we care about monetary measures in the first place? We care for the same reason everyone else does -- because most of us still believe that, ultimately inflation, inflation is everywhere and always a monetary phenomenon.
To me, the transparency issue has to do with sharing information directly related to monetary policy decisions. Discontinuing collecting the M3 series would be directly counter to that if, in so doing, the Fed was withholding data from the public that were nontheless being used in policy deliberations or thinking. That is decidedly not the case here.
William J. Polley
What's going on with non-M2 components of M3?
A commenter asks why I think they are discontinuing M3 (a question I did not address directly above). The truth is, of course, I don't know. As I said above, I'm pretty sure that it's not to try to hide anything, particularly anything nefarious going on with repurchase agreements. If I had to speculate, I'd say it was probably determined that the value of that particular formulation of a monetary aggregate to the Fed was no longer was worth the cost of producing it on a monthly basis and benchmarking it annually.
Institutional Economics
M3, the Fed and Inflation
From the point of view of a policy maker, why do we care about monetary measures in the first place? We care for the same reason everyone else does—because most of us still believe that, ultimately inflation, inflation is everywhere and always a monetary phenomenon.

There is robust cross-country empirical evidence for this proposition, but it is also easy to imagine situations in which tests for the long-run neutrality of money might fail due to permanent shocks to financial technology that disturb the velocity term in the quantity theory equation. If these shocks are not modelled explicitly, then they could show up as a unit root process in the residual from a cointegrating specification involving money and inflation.
The Capital Spectator
Does M3 Matter?
Indeed, for an institution that prides itself on managing perceptions, as Ben Bernanke explained so persausively yesterday in his Senate testimony, it's odd that the central bank is blind to potential for conspiracy mischief that inevitably accompanies the killing of M3. Managing expectations about inflation, the designated successor to Greenspan said, is at the core of the Fed's job. A little bit of that sprinkled elsewhere in the central bank couldn't hurt.
The Prudent Investor
Fed Says US M2 Resembles Eurozone
From an email from Dennis E. Farley from the FRB's Division of Monetary Affairs:

M3 does not appear to convey any additional information about economic activity that is not already embodied in M2. Academic papers have occasionally used M3 in empirical work, but these studies have not concluded that M3 is an important financial indicator.

In addition, the role of M3 in the policy process has diminished greatly over time. M3 is not closely tracked by policy makers nor is it routinely analyzied by Federal Reserve System staff.

Consequently, the costs of collecting the data and constructing and publishing M3 now appear to outweigh the benefits.
Refco "Hiccup" a Symptom of Easy Money Binge Drinking?
Taking a look at the most recent money supply data, I see that since August, M3 has been rising at a 12% annualized rate.

Could this have something to do with a clandestine Fed bail out of...say...Fannie Mae, due to its derivative excesses?

A little monetary "hair of the dog" after some derivative binge drinking?

Could this be why the Fed is going to discontinue publishing figures for M3? Wouldn't want that to put the lie to their inflation fighting stance.

Could this be what precious metal markets are sniffing?
Economic Dreams - Economic Nightmares
Is M3 Disappearance a Problem? A Cover-up?
And since I'm fond of his work we might as well include Doug Noland's perspective on M3 which goes something like, "Better to get rid of it, since M3 doesn't include most of what we need to pay attention to anyway." (Thanks to reader bailey for this latter tip.) Here's what Noland said, Nov 18 :

I'll make a brief comment regarding the Fed’s decision to discontinue reporting M3. As someone who enjoys the convenience of using the M3 data on a weekly basis, I am disappointed. It made my analysis nice and too simple. Frankly, the monetary aggregates are losing their relevance. As a broad-based measurement of monetary instruments, M3 leaves a lot to be desired and has this year grossly under-represented actual monetary inflation. I have no confidence in the Fed’s compilation of banking system "net" repurchase agreement positions, and that it generally excludes Wall Street "repos" makes this number worthless. There are also issues with “eurodollar deposits.” Additionally, any broad measure of "money-like" instruments today must at the minimum include CP, some ABS and should include some "structured products." Increasingly, I've come to believe that M3 was seriously flawed and definitely an inadequate measurement of "broad money supply" and system liquidity. Better to just get rid of it. It will force us into better, more comprehensive analysis.
Culture of Life Financial News
Federal Reserve Will Conceal M-3 Monetary Aggregate To Hide Inflation
Stark memo with no mainstream press trumpets, the Fed decided they are fed up feeding us vital financial information. So they will simply hide it from us so we can't see how much money they are creating out of thin air.
M(3)urder Will Out!
Since conspiracy theories abound regarding the Fed's mysterious and rather sudden decision to discontinue collating the M3 data, we offer this – only partly tongue-in-cheek – as a further, suitably alarmist example of the genre.

Firstly, we must ask whether it could be wholly a coincidence that, just as we are to read the obsequies over our beloved aggregate in March 2006, Iran (if not yet "wiped off the map" by the Imperial legions or their auxilia) is due to open its long-heralded oil bourse; an exchange where trading will be conducted – horror of horrors! – in Euros, not USD.
Robert McHugh
The Fed Announces it will Hide M-3 to Keep You from Knowing What?
It’s simple, really. So that the Plunge Protection Team can hide its market manipulative, equity buying activities. You see, one of the key differences between M-2 (which it appears they will report) and M-3, is repurchase agreements. This is perhaps the most obvious reporting item where PPT market buying transactions show up. If they no longer report this item, folks like us who monitor the growth of M-3 for clues as to when the PPT is likely to buy the market, will have a harder time reporting that fact before, or even as, the PPT buys. Investors will be left more in the dark as to any secret rigging of the stock market. Why now? Apparently the Federal Reserve (a key member of the Working Group, a.k.a. Plunge Protection Team) sees a coming need to buy — or facilitate the buying — of markets, including the equity market, incognito. Apparently, they don’t want investors knowing they are the ones doing the buying, keeping prices up, or pushing them higher.
M3 becomes a liability for the Fed
With M3 crossing the 10 trillion dollar level the Fed has decided to stop publication of this important data. The Fed by nature is an inflation machine built to support limitless spending by the government. Yet the Fed also enjoys the reputation of being an inflation fighter. In order to protect its image the Fed has found it necessary to cease publication of M3 data.


The DataQuick Spin

Monday, November 21, 2005

Last week, DataQuick released three reports on California real estate - one for the state as a whole, one for Southern California, and one for the Bay Area. Overall, compared to a year ago, sales were down slightly but prices rose by about 15 percent.

California October Home Sale Report
Southland home sales, prices still near peak
Continued sales slowdown in Bay Area, appreciation flat

In reading these three reports and looking at the data contained in them, it's not hard to see that there's some spin coming out of DataQuick headquarters - maybe a lot of it. Perhaps having been more interested in the data in recent months, the commentary has not been sufficiently scrutinized - this will have to be watched closely in the months ahead, as the California real estate market continues to react to rising interest rates and changing public perceptions.

Southern California

Regarding Southern California, DataQuick President Marshall Prentice seems particularly intent on shaping public opinion about what the future holds:

"The big question is still whether or not the real estate market will end this cycle with a crash, or with a soft landing. Right now the latter scenario is still the most likely. Home values have doubled in the past four years and almost all, if not all, of those gains are here to stay," said Marshall Prentice, DataQuick president.
So, that second sentence is passable as sound analysis of the current situation - no evidence of anything crashing yet. But that third sentence is really very prescient, no? Divine omniscience? Didn't know that you had that in you Marshall - how else to explain stating as fact that an early 1990s style pull back in price levels is out of the question?

The Bay Area Real Estate Market

On Bay Area real estate, Marshall draws conclusions about the market's strength which seem to contradict both the headline and much of the rest of the article:
"We look at today's market as normalizing. Everybody seems to have gotten used to the records set last year and the year before. The fact is that last month was the third-strongest October since we started keeping records in 1988. It was about twenty percent above average," said Marshall Prentice, DataQuick president.
So just how do you measure a market's strength? Marshall didn't say the third best year-over-year price increase, he said the third-strongest October. And, there's that twenty percent number which lately hasn't appeared in DataQuick reports with near the frequency it used to.

While it's not clear what "It" is in the last sentence or how "It" was twenty percent above average, it does sound nice to hear those words - "twenty percent". Californians have become accustomed to twenty percent gains on their median priced half million-dollar homes - that's $100,000 a year, about double the median income.

Life is good out here.

So let's look at how one might measure a market's strength. The recent year-over-year percent changes for median price and total sales for the month of October appear below (curiously, no data is available for the last few months of 1999, which must have been one of the wildest periods in the history of Bay Area real estate, given what was going on with the internet boom at the time).


When looking at price changes and sales changes to measure the strength of a market, it really looks like October 2005 places fifth out of the last six (or possibly sixth out of the last seven). In fact, if you simply use the sum of the two numbers as a proxy for strength, then 2002 and 2003 are by far the strongest.

If changes to inventory were included in the strength measure, then surely October 2005 would not look nearly as good as the DataQuick President would like people to believe. As it is, it is accurate to say that October 2005 was third best in the last six years for price appreciation, and second to last in changes to sales volume.

Had Marshall just said, "Last month, prices were up almost twenty percent from a year ago", it wouldn't have been a big deal. As it is, the words that were ultimately chosen are clearly designed to mislead and confuse, and frankly, they sound a little desperate.

Financing the Boom

In the first DataQuick article about real estate trends in California as a whole, the following statement appears - a statement that most people probably think little about.
The typical mortgage payment that home buyers committed themselves to paying last month was $2,081, a new peak. That was up from $2,004 in September, and up from $1,745 for October a year ago.
So, the first thing to notice here is that the "typical mortgage payment" has risen about twenty percent in the last year - that's interesting. But how is this "typical mortgage payment" calculated?

Using any mortgage calculator, it quickly becomes clear that this is the standard twenty percent down, 30-year fixed calculation. In this case, financing $363,200 (eighty percent of the October median price of $454,000) at the October rate of 5.6 percent yields a monthly payment of $2085. Close enough.

The next question to ask is how this perfectly understandable monthly mortgage payment squares with the median income in the state of California - after all, median house price, median family income, median family awareness of how the real estate and lending businesses work today - surely there is something interesting to be learned here.

Let's first finish the PITI calculation (Principle-Interest-Taxes-Insurance). For a the median priced $454,000 home, taxes at 1.25 percent per year works out to be $473 per month. To this add another $60 per month for basic homeowners insurance, and you get a grand total of $2614 per month for basic housing expenses.

According to the Census Bureau, the three-year-average median household income in California for the years 2002 through 2004 was $49,894. Making allowances for modest wage gains in the last two years, that would put the median household income at around $52,500 today.

So, during the month of October, as a percent of gross monthly income, the typical California home buying family has committed to paying 60 percent of their gross monthly income to basic housing expenses?

By now everyone surely knows the answer to this - it just seems funny that DataQuick and other news reporting agencies continue to report this 20 percent down, 30-year fixed calculation. This is the same calculation that is used to figure the affordability index which last month came in at 15 percent.

Why the Boom Goes On

Obviously, the average homebuyer is not paying sixty percent of their gross income towards PITI, so there must be some other explanation. Where would one look to find the answer? Let's start with Yahoo!

Click to enlarge

Just using the numbers shown here, the picture becomes clearer -$160,000 for $633 per month yields a mortgage payment of $1437 for the above example, which when combined with the fixed costs for taxes and insurance brings the new lower total to $1970 per month - 45 percent of gross monthly income.

This still seems high, and it still assumes a 20 percent downpayment. Not too many years ago lenders would limit PITI to 28 percent of gross income and total debt to 42 percent of gross income.

Wow, things have really loosened up, huh?

So what kind of loan buys $160,000 of house for only $633 per month?

Through, it is very easy to find where answers are quickly revealed - the most important answer relating to a particularly poor choice of the word "buy" in the previous question.

Click to enlarge

There are one or two other combinations, but the obvious one here is the one circled in red above - the 3 year fixed, interest only ARM. Not really a way to "buy" a house - more like a way to rent a place while gambling that home prices will continue to go up and make you rich.

This seems to be the weapon of choice for Californians - a state where well over half of all new home loans are interest only and forty percent of all first time buyers put no money down.

Note the option ARM monthly payment quoted above - why would they not put that in the Yahoo ad? Certainly that would attract more people. That must have been an interesting meeting to attend, where someone stood up and said, "That's crossing the line - we can offer that product, but we can't use that monthly payment to attract people to our website".

So, this is the foundation for what DataQuick President Marshall Prentice calls a strong market?

With loan terms and debt to income levels like these, we should expect that "almost all, if not all, of these gains are here to stay"?

In the months ahead, in addition to the statistics that DataQuick publishes, Marshall's commentary will be greatly anticipated.


Well Done, Money Magazine

Sunday, November 20, 2005

If you were expecting some sort of caustic tirade about something that Money Magazine has published in their most recent issue, you won't find it in this post. As the love-hate relationship with America's number one personal finance magazine continues, today, compliments of Money Magazine, readers are invited to hear the story of a very unusual couple - a couple who have actually saved money, lived within their means, and have retired early.

Click to enlarge, then click again to enlarge more

At least one thing doesn't quite add up here, but generally speaking this is a wonderful story about how saving, avoiding debt, and maintaining a modest lifestyle can work out quite well in the long run.

Engineers make decent money, but a salary of $145,000 as a 35 year old electronics engineer in 1989 is pretty unbelievable - he must have been blackmailing the company president or something. The average engineering salary at that time was well under $50,000 and today it is near $70,000 - either Ian was much more than just an electronics engineer or he made much less than $145,000 in 1989.

Now, the sailing sounds like fun, but the $800 apartment and the 1988 Bronco do not - unless of course they spend so much time in shorts and T-shirts on their beautiful, well appointed boat that the car and the house just aren't that important - that sounds reasonable.

Look for more pieces like this from Money Magazine in the years ahead as an entire nation goes through the wrenching process of unlearning everything they were taught during the Greenspan era - learning once again how to save money and live within their means.


Random Items

Barbara Corcoran on Real Estate and Super Bowls

Readers may think that a mild Cavuto on Business obsession is developing here, and that may be so, but it seems completely understandable given the entertainment value it has provided in recent weeks.

Neil Cavuto and Jim Rogers once again seemed to grasp things rather well, and Ben Stein seemed a little less dumb, but it was a bit difficult to determine who made the most moronic statements in this weekend's edition - Herman Cain or Barbara Corcoran.

OK, it really wasn't difficult, it was just important to mention Herman Cain here right next to Barbara Corcoran and moronic statements - kind of an honorable mention, as it were.

Here it is, for your amusement and enjoyment:

Corcoran: It's funny what's happening right now - there's so much uncertainty in the market, and everybody's been spooked by all the media coverage that's out there that it really is a great time to buy. It's a great opportunity right now, and I don't think it's going to last very long.

I think come January, everybody who doesn't buy the house right now for the price that they could afford is going to wish they had because they are going to be paying more in January.

This "bubble babble" is baloney, and it's scaring people away and making buyers "think about it", and while they're "thinking about it", the house prices are going to go up, and I truly believe that.

Rogers: But Barbara, what's going to make them go up in January? Why are buyers coming back in January?

Corcoran: In January, you can count on it. You can set your watch to Super Bowl Sunday.
Stein: And as to why you can set your watch to Super Bowl Sunday, I'm totally mystified. Usually, people have to have a reason for something. I'm not quite sure what Barbara's reason is. Are interest rates going to suddenly turn down on Super Bowl Sunday?

Corcoran: Can I address that? First of all interest rates are not high, they're low. Even though we've had five big hikes by the federal government, what has it done to mortgage rates? Barely nothing.

But about Super Bowl Sunday, what I mean is by Super Bowl Sunday, this whole media "babble stuff" that's out there is going to get old, boring - the media is going to move on to something else, and guess what? People are going to be back in the market in droves.
A few corrections seem to be in order here:
  1. There have been twelve small hikes by the Federal Reserve.
  2. The Super Bowl in played in February - don't set your watch by it.
Minor details all - the point is that real estate prices are going up! Don't be left behind!

San Diego: "I'm not Dead Yet!"

The October DataQuick real estate sales and price data is now available here in chart form. For the second month in a row, San Diego has managed to avoid going negative in its year-over-year change to median price. The market appears to be very resilient in the last few months as far as price goes - not so much so if you look at inventory levels and numbers of sales.

Unfortunately it looks like all those predicting the 2005 collapse of the great California real estate market will be proven wrong - oh well, there's always 2006.

Click to Enlarge

Click to Enlarge

There will be more on the DataQuick reporting of real estate conditions in California tomorrow - a closer look at some of the commentary in these reports has proven to be most intersting.

Money Magazine on the Housing Bubble

What does Money Magazine have to say about the housing bubble now?

Amazing - in the December issue of Money Magazine, they are now having fun with the whole idea of the housing bubble - after leading the cheerleading just a few months ago.

For previous posts on Money Magazine and real estate, see:

Money Magazine Does a One-Eighty
Money Magazine Does Real Estate
Money Magazine on "Cashing Out"
Why is This Couple So Happy?

Other Items of Note

The best DUI stop video ever
This really is, without question, the funniest DUI stop video ever.

Fun with corn starch
Try this at home, just don't taunt Happy Cornstarch Ball.

New Homeowners Rolling the Dice on State's Rivers
Another none-too-bright California homebuyer:
Flooding was the last thing on the mind of real estate loan officer Errol Riego earlier this month when he, his wife and their two children moved into a $700,000 home in Mossdale Landing that he figures was half the price of a comparable one in the Bay Area.

Riego did not know about the past flooding. In the excitement of becoming a homeowner for the first time, he said, he did not pay much attention to the builder's flood disclosure statement.

Would it have mattered?

"No, not at all," he said.
Guardians for Profit
An interesting series - very sad.


Tamiflu Futures To Trade at the Merc

Friday, November 18, 2005

Another anonymous tip and another story rushed to print...

After the overwhelmingly positive response to the recent announcement that they would begin trading housing-price futures next year, an anonymous source at the Chicago Mercantile Exchange has informed us that they are now planning to make the trading of Tamiflu futures available as well.

In fact, with more reports of housing having already peaked and with the news of H5N1 spreading in China, there is said to be a raging internal debate regarding which one to make available first.

Tamiflu futures, based on the median price for a ten count package of 75 mg capsules from reputable Canadian online pharmacies, are being made available to Tamiflu owners who seek to hedge the gains they have made since buying supplies of this anti-viral drug immediately after the Avian flu became front page news just a few months ago.

The futures market will also provide a way for investors, who may find themselves already priced out of the Tamiflu market or unable to obtain delivery, to participate in this emerging investment vehicle.

Soaring in price, Tamiflu has recently trounced all other investment alternatives with staggering gains in recent months as concern has mounted over a possible bird flu pandemic and short supplies of the drug.

While many online pharmacies claim to have Tamiflu in stock at reasonable prices, there appears to be a burgeoning industry in Tamiflu scams - only a few pharmacies are said to currently have the drug in stock, and prices there are very high.

ABC Online Pharmacy customer Anita Kalew said, "We bought 15 packages back in August just so we would have plenty on hand for our family and friends, since many of them were completely unaware of the Avian flu. Little did we know that it would quadruple in price in such a short time".

With the futures trading at the Merc, people like Anita will soon be able to buy put options for Tamiflu futures to lock in their gains, in the event that the drug is found to be ineffective against the mutating virus, or if a low cost vaccine is quickly developed.

Institutional investor Bobkatz Snootchiebootchies, said "We've recently placed many orders for Tamiflu at very low prices but have yet to receive our shipment. We have repeatedly sent mail to the site's webmasters, but get no response and there are no phone numbers listed. The Tamiflu futures will provide a way for us to get into this hot market".

While unusual, it won't be the most exotic contract offered by the world's largest futures exchange. That distinction belongs to the now famous "pimple futures", based on a select group of adolescents in the greater Chicago area who are monitored daily for acne and other dermatological developments.

The yearly selection process of the next pimple survey group is met with great fanfare and has become a huge local media event.


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