More Random Items

A nasty software bug, inserted by yours truly just before the Pennsylvania trip a couple months ago, has reared its ugly head and has required unexpected attention in the last twenty four hours. Hence, just a couple of items from yesterday's newspapers.

Housing Bubble Bursts in the Market for U.S. Mortgage Bonds

Bonds backed by home loans to the riskiest borrowers, the fastest growing part of the $7.6 trillion mortgage market, have lost about 2.5 percent since September on concern an 18-month rise in interest rates may force more than 150,000 consumers to default.

"We've been hearing about risks of a house price bubble, easy credit and loans to borrowers that really don't qualify, and now in the last couple of months we're starting to see things turn for the worse,'' said Joseph Auth, a bond fund manager who helps oversee $135 billion at Standish Mellon Asset Management in Boston. "We don't know if it's going to be a hard or soft landing.''
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The slump in the bonds is one of the first signs the housing boom is ending after the Federal Reserve's 12 interest- rate increases. Real estate has accounted for about half the economy's growth since 2001, according to Merrill Lynch & Co.
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The market "will deteriorate as housing slows down,'' said Christopher Flanagan, who runs asset-backed debt research at New York-based JPMorgan Chase & Co., the fourth-largest mortgage lender in the U.S. The amount of loans made next year may fall by as much as 25 percent, he said.
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"Froth'' in housing markets may be spilling over into mortgage markets, Fed Chairman Alan Greenspan warned an American Bankers Association convention in September. A rise in interest- only loans that initially don't pay down principle and the introduction of "exotic'' variable-rate mortgages "are developments that bear close scrutiny,'' he said.

Soft landing, hard landing, no landing at all? It's hard to see how this is all going to end well. It's hard to see how so many people have not seen this coming - especially central bankers. You can make the statistics tell any story you want to tell and support any conclusion you want to draw ... up to a point.

The Dynamic Yield Curve


Click to enlarge

Click on the title above this chart, then slide the red vertical bar left and right to see how the yield curve has changed over time. The snapshot above is from the end of 2000 after about a 200 basis point hike in the fed funds rate from early 1999 until mid 2000.

The Fed meets again on December 13th and expectations are for another quarter point hike to 4.25 percent, which given today's 4.5 percent yield on the ten-year note, makes the yield curve dangerously close to inversion. Bloomberg also has this page, but you can't really tell how flat the curve is because it automatically gets scaled to fill up the chart area.

What does an inverted yield curve mean this time? We'll see.

Growing Pains for Wikipedia

For Wikipedia founder Jimmy Wales, last week was a tough one. And he's going to change the ground rules for the popular anyone-can-contribute encyclopedia because of it.

First, in a Nov. 29 op-ed piece in USA Today, a former administrative assistant to Robert Kennedy lambasted the free online reference work for an article that suggested he may have been involved in the assassinations of both Robert F. Kennedy and John F. Kennedy.

Then, on Dec. 1, a new flurry of attention came when former MTV VJ and podcasting pioneer Adam Curry was accused of anonymously editing out references to other people's seminal podcasting work in an article about the hot new digital medium.

To critics of Wikipedia--which, in a spin on the open-source model, lets anyone create and edit entries--the news was further proof that the service has no accountability and no place in the world of serious information gathering.

"Wales, in a recent C-SPAN interview...insisted that his Web site is accountable and that his community of thousands of volunteer editors...corrects mistakes within minutes," former Robert Kennedy aide John Seigenthaler wrote in USA Today. "My experience refutes that...For four months, Wikipedia depicted me as a suspected assassin."
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When Wikipedia articles are first published, they show up on a special page, and volunteers--so-called new-page patrollers--monitor entries in their area of interest.

Wales said the Seigenthaler article not only escaped the notice of this corps of watchdogs, but it also became a kind of needle in a haystack: The page remained unchanged for so long because it wasn't linked to from any other Wikipedia articles, depriving it of traffic that might have led to closer scrutiny.

Wikipedia is a fantastic resource. It is akin to the open-source movement in software, which begat the Firefox browser and Thunderbird mail from Mozilla, and many lesser known open software products. It is always fascinating to see how sensitive subjects are treated - occasionally notices will appear about certain pages being under review. People love participating in this sort of thing, and most stay away from the controversial topics - they just want to be a part of something that is good.

Some reader comments about the article:

I've never used Wikipedia, but from simple face value it doesn't sound like a credible source to me.

I use wikipedia as another source of information. I don't just simply believe it (or Newsweek or the WSJ) just because it is written. It's a wonderful idea and will be flawed just as any human endeavor is.

Personally, I believe Wikipedia (along with blogs) are quickly changing the landscape of traditional media and information distribution. Like all things that are freely available for consumption, there will be abusers.

What do Rising Gold Prices Mean?

Representative Ron Paul comments on the inexorable rise of element number 79:

The market price for an ounce of gold rose to over $500 last week, a significant milestone for economists watching precious metals and commodities markets. The last time gold topped $500 was December 1987, in the wake of the “Black Monday” stock market collapse earlier that fall.

Gold prices historically rise when faith in paper currencies erodes, as investors seek the intrinsic value of gold to protect themselves from inflation. It’s interesting to note that while the U.S. dollar has regained some of its value relative to other paper currencies like the Euro, it continues to lose value relative to gold and other hard assets. This shows the folly of using one fiat currency to value another.

Gold is history’s oldest and most stable currency. Central bankers and politicians don’t want a gold-backed currency system, because it denies them the power to create money out of thin air. Governments by their very nature want to expand, whether to finance military intervention abroad or a welfare state at home. Expansion costs money, and politicians don’t want spending limited to the amounts they can tax or borrow. This is precisely why central banks now manage all of the world’s major currencies.

Yet while politicians favor central bank control of money, history and the laws of economics are on the side of gold. Even though central banks try to mask their inflationary policies and suppress the price of gold by surreptitiously selling it, the gold markets always cut through the smokescreen eventually. Rising gold prices like we see today historically signify trouble for paper currencies, and the dollar is no exception.

WE INTERRUPT THIS PROGRAM TO BRING YOU ------------>>>>>

President Nixon finally severed the last tenuous links between the dollar and gold in 1971. Since 1971, the Federal Reserve and U.S. Treasury have employed a pure fiat money system, meaning government can create money whenever it decrees simply by printing more dollars. The "value" of each newly minted dollar is determined by the faith of the public, the money supply, and the financial markets. In other words, fiat dollars have no intrinsic value.
What does this mean for you and your family? Since your dollars have no intrinsic value, they are subject to currency market fluctuations and ruinous government policies, especially Fed inflationary policies. Every time new dollars are printed and the money supply increases, your income and savings are worth less. Even as you save for retirement, the Fed is working against you. Inflation is nothing more than government counterfeiting by the Fed printing presses.

The only gold bug in congress. Many of his fellow congressmen have probably thought he was crazy all these years - talking about gold, fiat money, and inflation, then peppering Alan Greenspan with sometimes uncomfortable questions which many times were left unanswered.

Maybe the other 534 elected officials on Capitol Hill don't think he's so crazy today - in fact Rep. Ron Paul is becoming demonstrably smarter as each day goes by and gold continues to climb higher.

JON CARROLL

So the gay guys across the street are moving out, to the general disappointment of the neighborhood, and they've put their house up for sale for the usual ridiculous amount of money. I love skyrocketing real estate values; I am so very rich on an entirely hypothetical basis. I could sell my house and buy the best house in Cedar Rapids, 900 bedrooms and an indoor koi pond, but then I'd be in Cedar Rapids.

They had to endure the usual humiliation, which is having the real estate agent tell them that their furniture was not suitable for showing. "You must remove your disgusting junk or I will not sell your house," said the agent, or words to that effect. And of course they humbly said yes, because good staging can add $50,000 to the selling price. Or so they say. I have a strong feeling this is an urban legend, because 10 years ago there was no such profession as "house stager" and now there are millionaire house stagers who make television appearances and, for tax purposes, are registered in the Cayman Islands.

I told my mother-in-law about house staging. She doesn't get out much. She refused to believe me. I had to call in a third party to attest to the reality of house staging. My mother-in-law made clucking noises and shook her head. She did not say, "The world has gone mad," but I could see that she was thinking it.

Y'all do know about house staging, yes? Maybe not everyone. For the uninitiated, just before a house goes on the market, busy people in jumpsuits come in, take away every stick of furniture and replace it with selected furniture that screams "Buy this house, buy this house." The homeowner has no say in the furniture. If the homeowner is still living in the house, the homeowner must be very careful not to interfere with the stage set. Much better if the homeowner is not living at home, or in the country, or at all.

When the guy next door sold his house, the stager deemed his big television to be inappropriate, so he had to spend two weeks squinting at a small black and white model perched precariously on the end of his bed. He also couldn't cook anything that might have an aroma. Aromas bad! Signs of actual habitation bad! Must have phoniness. Phoniness sells.

This makes for a fantastic half-hour TV show (if you're a cynic, it's hilarious). A flurry of activity between before and after shots of every room in the house, and a rousing conclusion where everone wins - so 2005 America.