This post first appeared on Minyanville and Cirios Real Estate.
It took the Wall Street Journal an entire survey to prove what readers of this column have known for months: The housing recovery, as it plays out, will be a localized event, varying greatly city to city, neighborhood to neighborhood, street to street.
The Journal, God bless them, compiled housing data to compare inventory changes, months supply, price drops, unemployment, and default rates across 28 US metro areas. Unsurprisingly, bubble markets like Las Vegas, Phoenix, and Miami look particularly horrid, whereas areas like Dallas (which avoided much of the housing mania) and cities like Charlotte and Seattle (which are just now seeing price declines accelerate) appear to be holding up rather nicely.
But drilling deeper into the raw data reveals a housing market that's deeply bifurcated, even within individual cities.
As low-end markets experience a sharp increase in buying activity due to supply shortages and vastly lower prices, illiquid high end markets are experiencing violent price swings -- typically in the southward direction. This much is already known, and the Journal's study simply shows what we're told ad nauseam: Real estate is, in fact, local.
What's far more applicable to home buyers and sellers around the country, however, isn't what a few broad (yet important) data points show about what's happening in a few hundred neighborhoods all lumped together. Instead, it's where individual submarkets are headed. After all, owning a home is an investment in a neighborhood, a street, a community -- not necessarily a metropolitan area at large.
Housing prices, by extension -- when measured as broadly as a metro area -- are basically meaningless.
Real estate, for all its intricacies, isn't any different than any other market: Prices are set by the interplay between supply and demand. The trick, then, is isolating the key data points within an individual micro-market that tell us who has the upper hand -- buyers (demand) or sellers (supply). This is the best short-term indicator of where prices are likely going in the near term.
Unfortunately -- and one of the reasons bottom-calling in the current housing cycle is so dangerous -- myriad behind-the-scenes deals between regulators and big banks like Citigroup (C), Wells Fargo (WFC), Bank of America (BAC), and JPMorgan Chase (JPM) are impacting markets in a material way.
There are a number of important measures of housing supply and demand. And because at Cirios Real Estate we take a bottom up approach to evaluating property values (i.e., house by house, rather than city by city), we pay close attention to the sales-price to list-price ratio.
This ratio simply measures the difference between where a home was listed and where it was sold. To be sure, this can get complicated in markets where price reductions are common. But comparing both original list price and most recent list price to the eventual sales price can yield important insights into a market's true behavior.
As can be seen in the graph below, which measures this ratio in 2 towns in the San Francisco Bay Area, this ratio tends to follow housing booms and busts fairly closely.
All things being equal, as sellers gain the upper hand and buyers become more desperate, prices are bid up over list and this ratio will rise. On the flip side, as demand weakens and sellers scramble to unload their homes, price reductions and low-ball offers drive sales.
In markets with rising sales-price to list-price ratios that have been under pressure for months, if not years -- like many distressed markets -- we'd argue stabilization could be just around the corner. The big caveat, however, is that banks keep bleeding out their shadow inventory slowly, and don't dump their massive bank-owned home portfolios onto the market. Keep in mind, also, that stabilization doesn't imply appreciation.
High-end markets, on the other hand, are seeing massive list-price drops, and any sort of bottom is indeed very far away as forced sales and foreclosures creep into well-to-do communities.
In today's market, this analysis further must be broken down between homes that are in move-in ready condition and those in need of rehab. The former, financeable by the various government-backed loan programs, is generally in short supply and high demand. The latter, which must be purchased with cash, appeal to a smaller world of buyers looking to turn a quick profit.
We find that in many areas, turn-key updated homes that pass muster with the FHA, along with Fannie Mae (FNM) and Freddie Mac (FRE), have a far higher sales-price to list-price ratio than do homes bought with cash (i.e., fixer-uppers).
This makes intuitive sense, since even if government-backed loan programs could be used to buy these rehab projects, few prospective homeowners in the current environment have the cash on hand for a down payment as well as a remodel project. Moving in with as little out-of-pocket expense as possible is of the utmost importance.
Taken together, often times the sales-price to list-price ratio in a given town or zip code hovers close to 100%. But dividing sales into "financeable" and "non-financeable" yields a far different result. In most cases, sellers of updated turn-key homes currently have a distinct upper hand over buyers, while buyers of fixer-uppers can still get low-ball bids accepted. Of course, there's still the world of homes that are wildly over-priced -- but those aren't selling anyway.
There are many other ways to look at supply-demand fundamentals in local real estate markets. But if you don't divide analysis between homes that can be financed through the FHA, Fannie, or Freddie and those that can't, you may as well be comparing bombed out duplexes in Oakland to luxury condos in Manhattan.
Wait, never mind, bad example -- those 2 markets share one unique characteristic: No one is buying.
Tuesday, July 28, 2009
California Closes Budget Gap -- For Now
This post first appeared on Minyanville.
The Golden State appears to have eked out another nail-biter, as Governor Arnold Schwarzenegger and California lawmakers struck a deal to (hopefully) solve the state's spiraling budget crisis.
Tricky accounting, borrowing from Peter to pay Paul, and a modicum of spending cuts enabled California to close its nearly $26 billion budget gap, according to Bloomberg. The agreement still has to win approval from the state senate, but legislators are hopeful they can muster the requisite support for a vote later this week.
The plan calls for $15 billion in true spending cuts, diverting $2 billion in tax receipts intended for local governments (the money will be repaid, with interest) and shifting state employees' final paycheck to the next fiscal year. Education will see the largest spending cuts, but lawmakers promise the coffers will be refilled -- as soon as the economy turns around.
This isn't the first time California thought it had cleared the worst of its budgetary hurdles. Earlier this year, an agreement that matched spending cuts with tax breaks failed to win popular support in a May referendum. This rejection sent bureaucrats back to the drawing board, ultimately forcing the state to begin issuing IOUs to avoid going truly broke by the end of this month.
Not insignificant in forging a resolution to the crisis, last week major US banks Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) said they'd stop honoring California IOUs. As I wrote then, since the country's banks are defacto controlled by the White House, it appears the Obama Administration's strong-arm tactic worked to force a resolution in California.
And despite the tentative compromise, it's reasonably certain California's fiscal woes are far from history. By acknowledging the need to "give back" budget cuts when the economy bounces back, lawmakers are implicitly refusing to address the state's fundamental problems.
These are many, to be sure, but few recent stories capture California's propensity to shovel taxpayer dollars into the proverbial blender than does the plight of the San Diego seals.
For decades, tourists have flocked to sunny La Jolla -- just north of San Diego proper -- to catch a glimpse of the seals frolicking at Children's Pool, one of the 2 Southern California beaches where harbor seals give birth and raise their young. The trouble, however, is that state law requires that the beach be safe and clean for children.
Of course, removing a sizable seal population from a beach is no easy task, especially without harming the seals. The solution (truly, only in California) was to amplify the sound of barking dogs in the hope it would spook the seals into moving on to a new beach. Tack on security for the unfortunate soul doing the amplifying and other logistical efforts, and the cost for the entire project was tagged at $688,000.
Yesterday, amidst the turmoil in Sacramento, Governor Schwarzenegger signed a bill expanding the current law, penciling in a marine reserve as one the acceptable uses for Children's Pool, according to the Associated Press.
Bryan Pease, attorney for several pro-seal groups, summed the issue up nicely, and again, in true California form: "This is really the end of the road for the anti-seal forces."
Indeed.
The Golden State appears to have eked out another nail-biter, as Governor Arnold Schwarzenegger and California lawmakers struck a deal to (hopefully) solve the state's spiraling budget crisis.
Tricky accounting, borrowing from Peter to pay Paul, and a modicum of spending cuts enabled California to close its nearly $26 billion budget gap, according to Bloomberg. The agreement still has to win approval from the state senate, but legislators are hopeful they can muster the requisite support for a vote later this week.
The plan calls for $15 billion in true spending cuts, diverting $2 billion in tax receipts intended for local governments (the money will be repaid, with interest) and shifting state employees' final paycheck to the next fiscal year. Education will see the largest spending cuts, but lawmakers promise the coffers will be refilled -- as soon as the economy turns around.
This isn't the first time California thought it had cleared the worst of its budgetary hurdles. Earlier this year, an agreement that matched spending cuts with tax breaks failed to win popular support in a May referendum. This rejection sent bureaucrats back to the drawing board, ultimately forcing the state to begin issuing IOUs to avoid going truly broke by the end of this month.
Not insignificant in forging a resolution to the crisis, last week major US banks Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC) said they'd stop honoring California IOUs. As I wrote then, since the country's banks are defacto controlled by the White House, it appears the Obama Administration's strong-arm tactic worked to force a resolution in California.
And despite the tentative compromise, it's reasonably certain California's fiscal woes are far from history. By acknowledging the need to "give back" budget cuts when the economy bounces back, lawmakers are implicitly refusing to address the state's fundamental problems.
These are many, to be sure, but few recent stories capture California's propensity to shovel taxpayer dollars into the proverbial blender than does the plight of the San Diego seals.
For decades, tourists have flocked to sunny La Jolla -- just north of San Diego proper -- to catch a glimpse of the seals frolicking at Children's Pool, one of the 2 Southern California beaches where harbor seals give birth and raise their young. The trouble, however, is that state law requires that the beach be safe and clean for children.
Of course, removing a sizable seal population from a beach is no easy task, especially without harming the seals. The solution (truly, only in California) was to amplify the sound of barking dogs in the hope it would spook the seals into moving on to a new beach. Tack on security for the unfortunate soul doing the amplifying and other logistical efforts, and the cost for the entire project was tagged at $688,000.
Yesterday, amidst the turmoil in Sacramento, Governor Schwarzenegger signed a bill expanding the current law, penciling in a marine reserve as one the acceptable uses for Children's Pool, according to the Associated Press.
Bryan Pease, attorney for several pro-seal groups, summed the issue up nicely, and again, in true California form: "This is really the end of the road for the anti-seal forces."
Indeed.
Stimulus Stumbles -- While Economy Heals Itself
This post first appeared on Minyanville.
Correlation, they say, doesn't always mean causation. Just because one event seems to lead to another doesn't mean it does -- in any complex system, the answer is unlikely to be that black and white.
Nearly 6 months after President Obama announced his $787 billion stimulus package, the economic outlook appears decidedly better than it was when he took office, at least to the casual observer. Job losses, while persistent, appear to be tapering off. Credit markets, while still gummed up, aren't nearly as frozen as they were last fall. Consumer confidence, while miserable, is no longer at its lowest.
In short, to quote Minyanville's Todd Harrison, "We've sold the car crash and bought the cancer." This is one man's way of saying that, to avoid an economic catastrophe, we've opted instead for a slow bleed, prolonging the ultimate day of reckoning in hopes that our wounds will heal in the meantime.
And each time a piece of economic data emerges that suggests the worst is behind us -- like today's positive reading on leading indicators -- Washington bureaucrats shout that it's because their particular pet policy has proved a smashing success.
To wit: In commenting on the relative effectiveness of the stimulus package, Jared Bernstein, chief economic adviser to Vice President Joe Biden -- whose office is handling the stimulus roll-out -- said that "It's working, it's demonstrably working."
But can recent economic data telling us the sky isn't falling -- but that it may fall -- be attributed to a functioning economic stimulus plan? The answer is an unequivocal no.
The stimulus was meant to be a 2-year investment package, with the bulk of the aid being doled out in the second half of this year. In fact, according to Bloomberg, just $103 billion -- or 13% of the total money allocated -- has been given out. For a country whose gross domestic product is more than $14 trillion, that figure barely registers.
At best, the stimulus provided the average US consumer, worker, and manager with peace of mind. Yes, the government is willing to throw boatloads of money at our problems -- the fact that it's our own money, of course, we're asked to quietly overlook.
To say that government intervention into financial markets hasn't helped stave off an outright meltdown, however, is to frankly ignore reality. The Federal Reserve, the Treasury, and the FDIC have jump-started certain segments of the credit markets; tax credits have pushed first-time home buyers into the housing market; and low interest rates have juiced bank earnings.
And while arguments that these measures have inspired artificial confidence in a system that's still doomed are compelling, this is our economic reality. We're left to either close our eyes and hope it goes away or to operate within its bizarre and sometimes contradictory constraints.
Meanwhile, confusion reigns in the real economy. General Electric (GE) issued a strong profit outlook. Meanwhile, Intel (INTC) and IBM (IBM) provided upbeat expectations about the future. JPMorgan (JPM) and Goldman Sachs (GS) turned in record quarters, CIT (CIT) teeters on the edge of bankruptcy, and the FDIC seems to seize a handful of failed banks every weekend .
Ultimately, the success of the stimulus package can't be measured in dollars and cents, since its true effect on the economy is far too difficult to isolate, tabulate, and report. Instead, its impact will be measured by the extent to which its message -- namely that the government has our economic back -- is well received by the American people.
The jury on that is likely to be out until sometime around November 2012.
Correlation, they say, doesn't always mean causation. Just because one event seems to lead to another doesn't mean it does -- in any complex system, the answer is unlikely to be that black and white.
Nearly 6 months after President Obama announced his $787 billion stimulus package, the economic outlook appears decidedly better than it was when he took office, at least to the casual observer. Job losses, while persistent, appear to be tapering off. Credit markets, while still gummed up, aren't nearly as frozen as they were last fall. Consumer confidence, while miserable, is no longer at its lowest.
In short, to quote Minyanville's Todd Harrison, "We've sold the car crash and bought the cancer." This is one man's way of saying that, to avoid an economic catastrophe, we've opted instead for a slow bleed, prolonging the ultimate day of reckoning in hopes that our wounds will heal in the meantime.
And each time a piece of economic data emerges that suggests the worst is behind us -- like today's positive reading on leading indicators -- Washington bureaucrats shout that it's because their particular pet policy has proved a smashing success.
To wit: In commenting on the relative effectiveness of the stimulus package, Jared Bernstein, chief economic adviser to Vice President Joe Biden -- whose office is handling the stimulus roll-out -- said that "It's working, it's demonstrably working."
But can recent economic data telling us the sky isn't falling -- but that it may fall -- be attributed to a functioning economic stimulus plan? The answer is an unequivocal no.
The stimulus was meant to be a 2-year investment package, with the bulk of the aid being doled out in the second half of this year. In fact, according to Bloomberg, just $103 billion -- or 13% of the total money allocated -- has been given out. For a country whose gross domestic product is more than $14 trillion, that figure barely registers.
At best, the stimulus provided the average US consumer, worker, and manager with peace of mind. Yes, the government is willing to throw boatloads of money at our problems -- the fact that it's our own money, of course, we're asked to quietly overlook.
To say that government intervention into financial markets hasn't helped stave off an outright meltdown, however, is to frankly ignore reality. The Federal Reserve, the Treasury, and the FDIC have jump-started certain segments of the credit markets; tax credits have pushed first-time home buyers into the housing market; and low interest rates have juiced bank earnings.
And while arguments that these measures have inspired artificial confidence in a system that's still doomed are compelling, this is our economic reality. We're left to either close our eyes and hope it goes away or to operate within its bizarre and sometimes contradictory constraints.
Meanwhile, confusion reigns in the real economy. General Electric (GE) issued a strong profit outlook. Meanwhile, Intel (INTC) and IBM (IBM) provided upbeat expectations about the future. JPMorgan (JPM) and Goldman Sachs (GS) turned in record quarters, CIT (CIT) teeters on the edge of bankruptcy, and the FDIC seems to seize a handful of failed banks every weekend .
Ultimately, the success of the stimulus package can't be measured in dollars and cents, since its true effect on the economy is far too difficult to isolate, tabulate, and report. Instead, its impact will be measured by the extent to which its message -- namely that the government has our economic back -- is well received by the American people.
The jury on that is likely to be out until sometime around November 2012.
White House Cold-Shoulders CIT
This post first appeared on Minyanville.
It looks like CIT Group (CIT) may be the first failed financial institution to actually fail in a very long time.
Although the situation is, as they say, fluid, the Wall Street Journal reported that talks between CIT executives and government officials broke down, forcing the small-business lender into a fire-drill attempt to avoid bankruptcy. The company needs around $2 billion to roll over maturing debt -- which it's urging existing debtors to cough up in short order.
Of acute concern the effect CIT's failure would have on small businesses, particularly retailers. CIT not only provides small business loans, but also offers retailers cash advances to pay for inventory. The Journal points out that California may be hit particularly hard, since the state has a sizable apparel-import industry. The Golden State, embroiled in a nightmarish budget crisis, could do without another blow below the belt.
Taxpayers, too, will be smarting. The Treasury Department's $2.3 billion TARP investment into CIT is as good as gone, and any further government investment would be plowed into a company that's bleeding cash with little hope of turnaround. And although CIT is an important player in the US economy -- especially for thousands of small businesses around the country -- it certainly poses no systemic threat to the American economy.
In Washington, on Wall Street, and on Main Street, the debate rages over how the CIT situation should be handled. And now that the White House and Treasury Department have made it clear that CIT's pleas for a taxpayer-funded bailout are likely to go unheeded, Monday morning quarterbacks can begin in earnest to peddle their after-the-fact analysis.
And here's mine.
The White House had to let CIT fail. Although it risks angering Main Street, being seen as rescuing "fat cats" like AIG (AIG), Citigroup (C), and Bank of America (BAC), while small businesses are left out in the cold, the Obama Administration can do damage control by blaming those bailouts on the previous administration.
In refusing assistance to CIT and letting the natural course of bankruptcy take its course, Obama can proclaim -- as did his Chief of Staff Rahm Emmanuel -- that the financial crisis has entered a new phase of getting back to normal.
If instead the government were to step in to save CIT from the brink, the bailout floodgates would be truly flung open. CIT is no small fish, to be sure, with a balance sheet of around $75 billion, but it's no Washington Mutual (JPM) or Merrill Lynch, either -- the failure of which would have had potentially catastrophic effects on the entire world financial system.
Consumer confidence in the economy remains exceedingly weak. And if the President and his minions (not Minyans!) can argue that the country is at least strong enough to absorb the failure of CIT, we'll appear to be on the right track.
Whether we really are, of course, is an entirely different story.
It looks like CIT Group (CIT) may be the first failed financial institution to actually fail in a very long time.
Although the situation is, as they say, fluid, the Wall Street Journal reported that talks between CIT executives and government officials broke down, forcing the small-business lender into a fire-drill attempt to avoid bankruptcy. The company needs around $2 billion to roll over maturing debt -- which it's urging existing debtors to cough up in short order.
Of acute concern the effect CIT's failure would have on small businesses, particularly retailers. CIT not only provides small business loans, but also offers retailers cash advances to pay for inventory. The Journal points out that California may be hit particularly hard, since the state has a sizable apparel-import industry. The Golden State, embroiled in a nightmarish budget crisis, could do without another blow below the belt.
Taxpayers, too, will be smarting. The Treasury Department's $2.3 billion TARP investment into CIT is as good as gone, and any further government investment would be plowed into a company that's bleeding cash with little hope of turnaround. And although CIT is an important player in the US economy -- especially for thousands of small businesses around the country -- it certainly poses no systemic threat to the American economy.
In Washington, on Wall Street, and on Main Street, the debate rages over how the CIT situation should be handled. And now that the White House and Treasury Department have made it clear that CIT's pleas for a taxpayer-funded bailout are likely to go unheeded, Monday morning quarterbacks can begin in earnest to peddle their after-the-fact analysis.
And here's mine.
The White House had to let CIT fail. Although it risks angering Main Street, being seen as rescuing "fat cats" like AIG (AIG), Citigroup (C), and Bank of America (BAC), while small businesses are left out in the cold, the Obama Administration can do damage control by blaming those bailouts on the previous administration.
In refusing assistance to CIT and letting the natural course of bankruptcy take its course, Obama can proclaim -- as did his Chief of Staff Rahm Emmanuel -- that the financial crisis has entered a new phase of getting back to normal.
If instead the government were to step in to save CIT from the brink, the bailout floodgates would be truly flung open. CIT is no small fish, to be sure, with a balance sheet of around $75 billion, but it's no Washington Mutual (JPM) or Merrill Lynch, either -- the failure of which would have had potentially catastrophic effects on the entire world financial system.
Consumer confidence in the economy remains exceedingly weak. And if the President and his minions (not Minyans!) can argue that the country is at least strong enough to absorb the failure of CIT, we'll appear to be on the right track.
Whether we really are, of course, is an entirely different story.
Wednesday, July 15, 2009
CIT Puts "Too Big to Fail" to the Test
This post first appeared on Minyanville and Cirios Real Estate.
We have truly become a bailout nation.
As regulators mull over the possibility of rescuing CIT Group (CIT) -- a small-business lender that counts over 1 million US firms as customers -- analysts debate whether the relatively small firm is deserving of a taxpayer-funded bailout. Or for that matter, a bailout at all.
After converting to a bank holding company last year, CIT received $2.3 billion in TARP money to help solidify its financial footing. Yet even this injection of taxpayer capital couldn't prevent its financial position from deteriorating further, and the company now faces the maturity of over $1 billion in bonds next month. Without government support, CIT doesn't believe it will survive the summer.
The specter for a CIT bailout is a tricky political issue: It pits those that argue Washington must step in wherever necessary to support the reeling US economy, against those who are starting to wonder when the bailouts will stop and when bureaucrats will step back and allow the free market to determine who survives.
Few would argue that CIT presents a systemic risk to the US financial system; with a balance sheet of around $75 billion, the company is one-eighth the size of Lehman Brothers, according to research firm BTIG.
CIT is, however, a key lender to small businesses around the country. This means its failure could threaten salary payments for millions of American workers if the company's customers are unable to get lines of credit with other financial institutions. Under different circumstances, banks like Wells Fargo (WFC), Citigroup (C), and Bank of America (BAC) would be eagerly serving CIT's clients. Instead, they're focused on reining in lending of their own.
If CIT were to fail, it would mark the biggest bank failure since Washington Mutual -- now part of JPMorgan Chase (JPM) -- collapsed last September.
By letting CIT fail and coordinating an orderly shuttering of its operations, the Obama administration has the opportunity to re-establish an old precedent long since forgotten in these turbulent economic times: Firms that should fail actually fail.
If, instead, the government rescues CIT, the yardstick by which we measure "Too Big to Fail" will be severely shortened. This wouldn't be a welcome development.
For the past year, government power brokers -- rather than market forces -- have picked the winners and losers as financial firms have been besieged by a massive deflationary debt unwind. Further, as Washington wades deeper and deeper into the day-to-day operations of American business, companies are starting to compete for government cash, not customers.
Moral hazard is a concept quickly brushed to the side during times of crisis, but it's precisely during these trying times that market principles should be the most firmly upheld. Sadly, over the past 24 months, the opposite has held true.
Risk Surges in Emerging Markets
This post first appeared on Minyanville.
Emerging markets, we're told, are the best bet for riding out the ongoing economic storm. Investors should therefore be afraid. Very afraid.
Since global equity markets swooned this March, stocks have staged an impressive rally. And even more impressive than the S&P 500's 43% gain, developing countries, as measured by the MSCI Emerging Market Index (EEM), have leapt more than 75%.
The outlook, however, remains cloudy. According to Bloomberg, emerging market shares are more expensive than they've been since 2007, as measured by their price-to-earnings ratio. The last time developing-economy stocks hit this level, they subsequently lost half their value.
With the developed world reeling from a wicked debt-inspired hangover, emerging markets have been widely viewed as a relatively safe bet on eventual economic recovery. This viewpoint is contrary to history, as stock markets in developing countries have traditionally been far more volatile than their more established neighbors.
This time, however, was supposed to be different.
Developing nations were in some sense better-positioned to handle a deflationary debt unwind of epic proportions: Their consumers are less dependent on debt to survive, as personal credit cards and home loans are far less prevalent than in the US. As credit markets froze up and the pipelines of free and easy debt went dry, consumers in Brazil, India, Peru, and Ghana could continue their cash-wielding ways with little interruption.
Furthermore, many developing economies rely heavily on commodity exports to bigger, wealthier nations. And even though oil, copper, and wheat prices have tumbled from last year's highs, persistent demand for these essential goods should buoy emerging markets -- even as a broader economic recovery remains elusive.
As evidence of the ongoing rebalancing of the the world economic scene, Petro China (PTR) has blown past Exxon (XOM) as the biggest company in the world by market capitalization. Indeed, 5 of the 10 biggest firms in the world now hail from China.
Lastly, as developing countries, well, develop, income disparities often narrow, as a new middle class evolves into a formidable consumer group. So even as the global economy contracts, individual counties can still grow as millions of people join the mainstream economy.
This is all well and good, but this isn't the first time investors have gotten a bit ahead of themselves with optimistic expectations for emerging markets -- in mid-2007 and in 2000. What followed in both instances was not something investors would care to repeat.
And despite great strides in the development of more robust capital markets, broadly more stable governments and inflation that has run less rampant than in the past (Zimbabwe, of course, notwithstanding) , emerging economies remain on shaky ground.
Many are reliant on just a few exports -- usually commodities -- to sustain growth, which leaves their economic fate at the whims of volatile markets for raw goods. Russia, Ecuador and Venezuela have all suffered as crude oil tumbled from it's highs last summer. These and other export-dependent countries still rely largely on bigger, more developed countries to buy their wares.
Latin America has rebounded from its debt crisis of the 1980s, but Argentina seems to be sliding back to its wayward ways and Ecuador, the Andean little brother of Hugo Chavez's Venezuela, recent defaulted on some of its sovereign debt, calling it "illegal."
It is no doubt that in the past 10 years, developing nations have been the leading engine for economic growth around the world (well, that and an historic debt bubble caused by reckless monetary policy and irresponsible borrowing in developed countries). And while it is certainly reasonable to expect these emerging economies to benefit as the United States, Europe and Japan rejigger their aging, bureaucracy-laden economies, to call them a safe harbor during turbulent economic times is borderline lunacy.
With potential reward comes risk. No matter how the global economic paradigm shifts in the coming years, this won't change.
Emerging markets, we're told, are the best bet for riding out the ongoing economic storm. Investors should therefore be afraid. Very afraid.
Since global equity markets swooned this March, stocks have staged an impressive rally. And even more impressive than the S&P 500's 43% gain, developing countries, as measured by the MSCI Emerging Market Index (EEM), have leapt more than 75%.
The outlook, however, remains cloudy. According to Bloomberg, emerging market shares are more expensive than they've been since 2007, as measured by their price-to-earnings ratio. The last time developing-economy stocks hit this level, they subsequently lost half their value.
With the developed world reeling from a wicked debt-inspired hangover, emerging markets have been widely viewed as a relatively safe bet on eventual economic recovery. This viewpoint is contrary to history, as stock markets in developing countries have traditionally been far more volatile than their more established neighbors.
This time, however, was supposed to be different.
Developing nations were in some sense better-positioned to handle a deflationary debt unwind of epic proportions: Their consumers are less dependent on debt to survive, as personal credit cards and home loans are far less prevalent than in the US. As credit markets froze up and the pipelines of free and easy debt went dry, consumers in Brazil, India, Peru, and Ghana could continue their cash-wielding ways with little interruption.
Furthermore, many developing economies rely heavily on commodity exports to bigger, wealthier nations. And even though oil, copper, and wheat prices have tumbled from last year's highs, persistent demand for these essential goods should buoy emerging markets -- even as a broader economic recovery remains elusive.
As evidence of the ongoing rebalancing of the the world economic scene, Petro China (PTR) has blown past Exxon (XOM) as the biggest company in the world by market capitalization. Indeed, 5 of the 10 biggest firms in the world now hail from China.
Lastly, as developing countries, well, develop, income disparities often narrow, as a new middle class evolves into a formidable consumer group. So even as the global economy contracts, individual counties can still grow as millions of people join the mainstream economy.
This is all well and good, but this isn't the first time investors have gotten a bit ahead of themselves with optimistic expectations for emerging markets -- in mid-2007 and in 2000. What followed in both instances was not something investors would care to repeat.
And despite great strides in the development of more robust capital markets, broadly more stable governments and inflation that has run less rampant than in the past (Zimbabwe, of course, notwithstanding) , emerging economies remain on shaky ground.
Many are reliant on just a few exports -- usually commodities -- to sustain growth, which leaves their economic fate at the whims of volatile markets for raw goods. Russia, Ecuador and Venezuela have all suffered as crude oil tumbled from it's highs last summer. These and other export-dependent countries still rely largely on bigger, more developed countries to buy their wares.
Latin America has rebounded from its debt crisis of the 1980s, but Argentina seems to be sliding back to its wayward ways and Ecuador, the Andean little brother of Hugo Chavez's Venezuela, recent defaulted on some of its sovereign debt, calling it "illegal."
It is no doubt that in the past 10 years, developing nations have been the leading engine for economic growth around the world (well, that and an historic debt bubble caused by reckless monetary policy and irresponsible borrowing in developed countries). And while it is certainly reasonable to expect these emerging economies to benefit as the United States, Europe and Japan rejigger their aging, bureaucracy-laden economies, to call them a safe harbor during turbulent economic times is borderline lunacy.
With potential reward comes risk. No matter how the global economic paradigm shifts in the coming years, this won't change.
Why Should I Care: Real Estate & Price Discovery
This post first appeared on Minyanville and Cirios Real Estate.
Price discovery. It sounds simple enough, right? If you separate out its component parts, you have "price" -- the amount buyers are willing to pay and sellers are willing to accept -- and "discovery" -- the uncovering of that price.
But price discovery -- a term which is bandied about in all corners of the financial markets -- has a meaning far deeper than this cursory analysis.
In a financial sense, it's defined as the point at which the free market -- the natural interplay between supply and demand -- converge on a single point where buyers and sellers can find mutual ground. There, you have price discovery.
In a practical sense, it happens every day; each time an economic transaction occurs. Coffee at Starbucks (SBUX) costs more than, say, coffee at any other establishment on the planet, because consumers have determined they're willing to pay a premium for it. Starbucks, for its part, has generously sprinkled its stores on street corners around the world, matching supply with this persistent demand. The price, even though most of us scoff at the mere thought of forking over more than $4 for some contrived, flavored coffee-like drink, is what the market will bear.
So why then do financial-market participants make such a big deal about "true price discovery" in trying to analyze specifically when and where markets will bottom? The key is in the definition.
Let's examine the housing market to see why this distinction matters, and how the dynamics effecting price discovery are so important.
Homes, unlike cups of coffee, are rarely bought and sold -- other than when entire neighborhoods are turned over (which seems to happen with frightening regularity). But buying or selling a home typically involves uprooting one's family, hauling boxes across town (or across the country), switching schools, changing jobs, and otherwise disrupting the flow of life.
When talking about the housing market, most pundits and so-called experts typically focus on the demand side of the equation. How low are interest rates? Did Wells Fargo (WFC) just tighten its mortgage guidelines? Are property values increasing or decreasing? How is the job market doing? On a more personal level, getting married, having kids, changing jobs, seeking out a slower (or faster) pace of life, or looking to trade up into a better school district or bigger home can all lead buyers to jump into the market.
Sellers, on the other hand, are typically hard-pressed to sell. Many of the same circumstances (jobs, retirement, family, etc.) lead a seller to enter the market, but leaving a home and the emotional attachment therein, is an extremely difficult decision to undertake without a very compelling reason.
In the current housing downturn, as social mood has swung violently towards risk aversion and shorter time preferences, the decision to sell one’s home has effectively become that of necessity, or nothing at all. In other words, the vast majority of sellers on the market right now are forced sellers -- those who don’t have any choice.
So what does this all have to do with price discovery?
The destruction of a widely held economic belief -- namely, that housing prices only go up --has thrown the interplay between supply and demand out of whack. Couple that with insane leverage, abnormally low interest rates, virtually non-existent underwriting guidelines, and massive government intervention in the form of Fannie Mae (FNM) and Freddie Mac (FRE) that caused the recent boom, and in reality, the fundamentals of supply and demand have been wonky for years, if not decades.
As these imbalances are worked through and the weakest hands are forced to fold, markets are slowly starting to heal. And even though massive loan-modification efforts and foreclosure moratoria are once again throwing true supply and demand out of whack, the free market is a powerful force: Certain real-estate markets around the country are beginning to show signs of healthy stabilization.
Price discovery is emerging, as housing prices return to more traditional measures of affordability where buying begins to make just as much sense as renting. To be sure, there's a fear of losing equity as prices tumble, but the emotional pull of owning a home is, and always will be, a powerful force. Other markets, however, have a very long way to go.
Since founding Cirios Real Estate, I've spent a dizzying amount of time looking at local housing markets in California. And in trying to identify trends on a neighborhood-by-neighborhood, street-by-street basis, I've found one trend that's 100% consistent around the state. And although California is a rather unique case, I know enough about markets around the country to be confident this is true there as well.
Markets that have seen the most extreme home-price declines are the ones where owners faced massive amounts of negative equity and foreclosures ran rampant. Virtually every sale in these markets over the past 2 years has been the result of a seller being forced to sell.
On the other hand, markets where job losses have been less severe have seen prices ramp up less severely during the boom; schools are better and fundamental desirability is higher. Sellers have broadly had the luxury of holding out, hoping the market would turn before they, too, would be forced to put their home on the market.
When there are no more forced sellers in a given market -- or at the very least, the proportion of forced sellers and non-forced sellers returns to more normal levels -- healthy stabilization can occur. And in order for this to happen, years of froth and excess must first be worked off. This can happen via 2 methods, which Toddo often discusses when analyzing the stock market: time and price.
Time can heal wounds as demographics shift and new buyers enter a given market, or low prices can bring investors out of the woodwork to snap up underpriced homes.
There isn’t some magic formula or complex property-valuation algorithm (sorry Zillow) that can determine where a given markets is in the bottoming process or where the best real-estate investment opportunities currently lie (to be sure, they're out there). But with careful analysis of individual markets, trends can be identified.
Submarkets where price discovery -- that is, the process of returning to an environment where natural supply-demand fundamentals can thrive -- is further along pose a far smaller risk than those markets where sellers have been hunkering down, hoping the maelstrom would blow over their quiet streets.
So while pundits argue over whether the housing market has “bottomed,” we can all ignore their drivel, knowing this is a meaningless statement. Price discovery doesn’t happen on a national scale; the massive and disjointed real-estate market is made up of thousands of tiny micro-markets, each of which is at a different point along the highway of price discovery.
Price discovery. It sounds simple enough, right? If you separate out its component parts, you have "price" -- the amount buyers are willing to pay and sellers are willing to accept -- and "discovery" -- the uncovering of that price.
But price discovery -- a term which is bandied about in all corners of the financial markets -- has a meaning far deeper than this cursory analysis.
In a financial sense, it's defined as the point at which the free market -- the natural interplay between supply and demand -- converge on a single point where buyers and sellers can find mutual ground. There, you have price discovery.
In a practical sense, it happens every day; each time an economic transaction occurs. Coffee at Starbucks (SBUX) costs more than, say, coffee at any other establishment on the planet, because consumers have determined they're willing to pay a premium for it. Starbucks, for its part, has generously sprinkled its stores on street corners around the world, matching supply with this persistent demand. The price, even though most of us scoff at the mere thought of forking over more than $4 for some contrived, flavored coffee-like drink, is what the market will bear.
So why then do financial-market participants make such a big deal about "true price discovery" in trying to analyze specifically when and where markets will bottom? The key is in the definition.
Let's examine the housing market to see why this distinction matters, and how the dynamics effecting price discovery are so important.
Homes, unlike cups of coffee, are rarely bought and sold -- other than when entire neighborhoods are turned over (which seems to happen with frightening regularity). But buying or selling a home typically involves uprooting one's family, hauling boxes across town (or across the country), switching schools, changing jobs, and otherwise disrupting the flow of life.
When talking about the housing market, most pundits and so-called experts typically focus on the demand side of the equation. How low are interest rates? Did Wells Fargo (WFC) just tighten its mortgage guidelines? Are property values increasing or decreasing? How is the job market doing? On a more personal level, getting married, having kids, changing jobs, seeking out a slower (or faster) pace of life, or looking to trade up into a better school district or bigger home can all lead buyers to jump into the market.
Sellers, on the other hand, are typically hard-pressed to sell. Many of the same circumstances (jobs, retirement, family, etc.) lead a seller to enter the market, but leaving a home and the emotional attachment therein, is an extremely difficult decision to undertake without a very compelling reason.
In the current housing downturn, as social mood has swung violently towards risk aversion and shorter time preferences, the decision to sell one’s home has effectively become that of necessity, or nothing at all. In other words, the vast majority of sellers on the market right now are forced sellers -- those who don’t have any choice.
So what does this all have to do with price discovery?
The destruction of a widely held economic belief -- namely, that housing prices only go up --has thrown the interplay between supply and demand out of whack. Couple that with insane leverage, abnormally low interest rates, virtually non-existent underwriting guidelines, and massive government intervention in the form of Fannie Mae (FNM) and Freddie Mac (FRE) that caused the recent boom, and in reality, the fundamentals of supply and demand have been wonky for years, if not decades.
As these imbalances are worked through and the weakest hands are forced to fold, markets are slowly starting to heal. And even though massive loan-modification efforts and foreclosure moratoria are once again throwing true supply and demand out of whack, the free market is a powerful force: Certain real-estate markets around the country are beginning to show signs of healthy stabilization.
Price discovery is emerging, as housing prices return to more traditional measures of affordability where buying begins to make just as much sense as renting. To be sure, there's a fear of losing equity as prices tumble, but the emotional pull of owning a home is, and always will be, a powerful force. Other markets, however, have a very long way to go.
Since founding Cirios Real Estate, I've spent a dizzying amount of time looking at local housing markets in California. And in trying to identify trends on a neighborhood-by-neighborhood, street-by-street basis, I've found one trend that's 100% consistent around the state. And although California is a rather unique case, I know enough about markets around the country to be confident this is true there as well.
Markets that have seen the most extreme home-price declines are the ones where owners faced massive amounts of negative equity and foreclosures ran rampant. Virtually every sale in these markets over the past 2 years has been the result of a seller being forced to sell.
On the other hand, markets where job losses have been less severe have seen prices ramp up less severely during the boom; schools are better and fundamental desirability is higher. Sellers have broadly had the luxury of holding out, hoping the market would turn before they, too, would be forced to put their home on the market.
When there are no more forced sellers in a given market -- or at the very least, the proportion of forced sellers and non-forced sellers returns to more normal levels -- healthy stabilization can occur. And in order for this to happen, years of froth and excess must first be worked off. This can happen via 2 methods, which Toddo often discusses when analyzing the stock market: time and price.
Time can heal wounds as demographics shift and new buyers enter a given market, or low prices can bring investors out of the woodwork to snap up underpriced homes.
There isn’t some magic formula or complex property-valuation algorithm (sorry Zillow) that can determine where a given markets is in the bottoming process or where the best real-estate investment opportunities currently lie (to be sure, they're out there). But with careful analysis of individual markets, trends can be identified.
Submarkets where price discovery -- that is, the process of returning to an environment where natural supply-demand fundamentals can thrive -- is further along pose a far smaller risk than those markets where sellers have been hunkering down, hoping the maelstrom would blow over their quiet streets.
So while pundits argue over whether the housing market has “bottomed,” we can all ignore their drivel, knowing this is a meaningless statement. Price discovery doesn’t happen on a national scale; the massive and disjointed real-estate market is made up of thousands of tiny micro-markets, each of which is at a different point along the highway of price discovery.
Porn Shooting Blanks
This post first appeared on Minyanville.
- Jackie Treehorn, The Big Lebowski
It seems there's no escaping the structuring deflation rippling its way through the formerly consumerist underbelly of American society. Prices are falling, bling is on the decline -- and now, according to the New York Times, even porn is feeling the ill effects of shrinkage. (No, not that kind.)
Pornographic filmmakers have long debated the pros and cons of plot and character development in their movies: On the one hand, there has to be something in between sex scenes to allow actors and viewers alike to take a break. On the flip side, however, character development in porn is sort of like those personal interest stories during coverage of the Olympics: Absolutely no one cares.
Industry executives say that viewers are now demanding shorter and shorter clips, and films are increasingly devoid of plot and focus exclusively on the sex itself. This shift, in part, is in reaction to the flood of X-rated footage now available for easy viewing online.
The advent of the Internet as a medium for video distribution has been a boon for smut-peddlers, enabling even amateurs to capture their lewd acts for the world to see. And, of course, to pay for. DVD sales have been hit squarely below the belt, with some experts estimating that sales have fallen more than 50% in the past 3 years alone.
Big porn studios, like Vivid Entertainment and Digital Playground, are rapidly changing their business models to meet the thrust of consumer demand. Rather than full-length features, producers are instead opting for "vignettes," a series of sex scenes tied loosely together with a common theme. This provides for easy distribution of the clips themselves, in the likely event that viewers can't be bothered to watch the entire film.
Meanwhile, more traditional media, as it's wont to do, is following porn's lead. After all, it was the pornography industry that first capitalized on the VCR, perfected the art of pay-per-view, and pioneered the concept of premium online content.
Rhythm New Media, who delivers video content through a mobile phone-based distribution platform, recently launched an application for Apple's (AAPL) iPhone where users can splice together snippets of Family Guy episodes, creating, in effect making their own version of the show.
TiVo (TIVO) and other digital video recording services offered by cable companies like Time Warner (TWC) and Comcast (CMCSA), offer TV viewers the luxury of seeing exactly what they want, when they want it. YouTube, now owned by Google (GOOG), has likely advanced this trend more than any other online media site, as attention-deficient users comb through millions of short video clips.
Ultimately, the demise of the intricate, well-developed pornography film was sort of inevitable. I mean, let's face it, the vast majority of porn aficionados aren't looking for surprising plot twists and dramatic action scenes.
They're looking for action of an entirely different sort.
- Jackie Treehorn, The Big Lebowski
It seems there's no escaping the structuring deflation rippling its way through the formerly consumerist underbelly of American society. Prices are falling, bling is on the decline -- and now, according to the New York Times, even porn is feeling the ill effects of shrinkage. (No, not that kind.)
Pornographic filmmakers have long debated the pros and cons of plot and character development in their movies: On the one hand, there has to be something in between sex scenes to allow actors and viewers alike to take a break. On the flip side, however, character development in porn is sort of like those personal interest stories during coverage of the Olympics: Absolutely no one cares.
Industry executives say that viewers are now demanding shorter and shorter clips, and films are increasingly devoid of plot and focus exclusively on the sex itself. This shift, in part, is in reaction to the flood of X-rated footage now available for easy viewing online.
The advent of the Internet as a medium for video distribution has been a boon for smut-peddlers, enabling even amateurs to capture their lewd acts for the world to see. And, of course, to pay for. DVD sales have been hit squarely below the belt, with some experts estimating that sales have fallen more than 50% in the past 3 years alone.
Big porn studios, like Vivid Entertainment and Digital Playground, are rapidly changing their business models to meet the thrust of consumer demand. Rather than full-length features, producers are instead opting for "vignettes," a series of sex scenes tied loosely together with a common theme. This provides for easy distribution of the clips themselves, in the likely event that viewers can't be bothered to watch the entire film.
Meanwhile, more traditional media, as it's wont to do, is following porn's lead. After all, it was the pornography industry that first capitalized on the VCR, perfected the art of pay-per-view, and pioneered the concept of premium online content.
Rhythm New Media, who delivers video content through a mobile phone-based distribution platform, recently launched an application for Apple's (AAPL) iPhone where users can splice together snippets of Family Guy episodes, creating, in effect making their own version of the show.
TiVo (TIVO) and other digital video recording services offered by cable companies like Time Warner (TWC) and Comcast (CMCSA), offer TV viewers the luxury of seeing exactly what they want, when they want it. YouTube, now owned by Google (GOOG), has likely advanced this trend more than any other online media site, as attention-deficient users comb through millions of short video clips.
Ultimately, the demise of the intricate, well-developed pornography film was sort of inevitable. I mean, let's face it, the vast majority of porn aficionados aren't looking for surprising plot twists and dramatic action scenes.
They're looking for action of an entirely different sort.
Banks Reject California's IOUs
This post first appeared on Minyanville.
Apparently, IOUs issued by an insolvent state aren't as good as cold, hard cash.
Last week, after state leaders failed to find a solution to an ongoing budget crisis, California began issuing IOUs to banks and other creditors. Now, despite initially agreeing to accept the IOUs in lieu of actual payments, some of the country's biggest banks are refusing to honor the promises to pay past Friday, July 10.
According to the Wall Street Journal, among the newly defiant banks are Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC). Along with an announcement yesterday by Fitch Ratings that it had dropped California's credit rating to BBB -- just a few notches above "speculative" levels, this shift in sentiment puts immense pressure on Sacramento to find a lasting solution to the state's woes.
California plans to send out $3 billion in IOUs in July alone. The IOUs mature on October 2, and promise to pay recipients 3.75% in annualized interest -- presumably, in addition to the principal. The state has said that without the IOUs it would run out of cash by the end of July.
Other 49 States Could Go the Way of California
The fear -- although there's no reason to assume this yet -- is that California's other disgruntled creditors will jump on the banks' non-acceptance bandwagon in a show of defiance. This would be a crushing blow to Governor Arnold Schwarzenegger and California state legislators, potentially forcing them to go hat in hand to Washington for a bailout.
Since 2 of the banks refusing to honor the IOUs are controlled by the federal government (and since the remaining 2 are essentially being run by Washington insiders), the Obama administration's hands-off posture suggests it may be taking one of 2 possible stances.
Obama may be taking the hard line -- sending California the message that the state's political wrangling has to cease given what's at stake. After all, if the nation's most populous state were to run out of cash, the impact on its more than 30 million residents -- not to mention the US economy as a whole -- would likely be severe.
On the other hand, Obama may have a more disturbing goal in mind. It's possible that the administration is considering making a power grab of epic proportions. After all, it's had little compunction about seizing embattled automakers General Motors (GPM) and Chrysler, and hasn't shied away from becoming deeply involved in the day-to-day management of the nation's banks.
Perhaps President Obama's true motive is to wrest control of California away from its languishing leadership, sending the other 49 states a stern message: Get your fiscal houses in order, or get absorbed by the massive bureaucratic machine that is the US government.
Naturally, this latter possibility is pure speculation on my part. But given the President's actions since taking office, and given his apparent desire to expand the reach of the federal government to an extent previously unimaginable, it's not inconceivable.
Professor Steve Smith asks:
Economic Recovery? What Economic Recovery?
Apparently, IOUs issued by an insolvent state aren't as good as cold, hard cash.
Last week, after state leaders failed to find a solution to an ongoing budget crisis, California began issuing IOUs to banks and other creditors. Now, despite initially agreeing to accept the IOUs in lieu of actual payments, some of the country's biggest banks are refusing to honor the promises to pay past Friday, July 10.
According to the Wall Street Journal, among the newly defiant banks are Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC). Along with an announcement yesterday by Fitch Ratings that it had dropped California's credit rating to BBB -- just a few notches above "speculative" levels, this shift in sentiment puts immense pressure on Sacramento to find a lasting solution to the state's woes.
California plans to send out $3 billion in IOUs in July alone. The IOUs mature on October 2, and promise to pay recipients 3.75% in annualized interest -- presumably, in addition to the principal. The state has said that without the IOUs it would run out of cash by the end of July.
Other 49 States Could Go the Way of California
The fear -- although there's no reason to assume this yet -- is that California's other disgruntled creditors will jump on the banks' non-acceptance bandwagon in a show of defiance. This would be a crushing blow to Governor Arnold Schwarzenegger and California state legislators, potentially forcing them to go hat in hand to Washington for a bailout.
Since 2 of the banks refusing to honor the IOUs are controlled by the federal government (and since the remaining 2 are essentially being run by Washington insiders), the Obama administration's hands-off posture suggests it may be taking one of 2 possible stances.
Obama may be taking the hard line -- sending California the message that the state's political wrangling has to cease given what's at stake. After all, if the nation's most populous state were to run out of cash, the impact on its more than 30 million residents -- not to mention the US economy as a whole -- would likely be severe.
On the other hand, Obama may have a more disturbing goal in mind. It's possible that the administration is considering making a power grab of epic proportions. After all, it's had little compunction about seizing embattled automakers General Motors (GPM) and Chrysler, and hasn't shied away from becoming deeply involved in the day-to-day management of the nation's banks.
Perhaps President Obama's true motive is to wrest control of California away from its languishing leadership, sending the other 49 states a stern message: Get your fiscal houses in order, or get absorbed by the massive bureaucratic machine that is the US government.
Naturally, this latter possibility is pure speculation on my part. But given the President's actions since taking office, and given his apparent desire to expand the reach of the federal government to an extent previously unimaginable, it's not inconceivable.
Professor Steve Smith asks:
Economic Recovery? What Economic Recovery?
States Could Face New Shortfalls as Homeowners Beg for Lower Taxes
This post first appeared on Minyanville.
When the value of your house starts heading to south, there isn't a lot to be thankful for. Some homeowners, however, are looking for a silver lining.
The New York Times reports that homeowners across the country are petitioning state and local governments for lower property tax bills. The timing couldn't be worse for municipalities, many of which are already facing a cash crunch. In California, the state has begun issuing IOUs to contractors and other creditors. Some states, like New Jersey, have increased property taxes in an attempt to prop up revenue -- much to the chagrin of its homeowners.
As property values fall, homeowners face bills that can far outweigh what they would owe should the taxman keep his records in real time. This doesn't sit well with most citizens -- many of whom are already behind on mortgage payments and struggling to make ends meet.
Property taxes are assessed using myriad formulas and reassessment schedules, such that predicting exactly how much you'll owe each year can be nightmarishly complex. Historically, as home prices rose, periodic reassessments benefited homeowners, since the tax assessed value of most properties lagged their true value.
In California, for example, property taxes have increased around 1% per year since 1978 (the year in which voters enacted Proposition 13). Since then, home prices have soared -- the recent decline notwithstanding -- which means residents who have lived in the same home for decades owe a fraction of the taxes than do those neighbors who just moved in.
Requests for tax reassessment have skyrocketed as besieged consumers look for ways to trim monthly expenses. According to the Times, petitions in Ohio have increases fivefold; lines at government offices in Atlanta stretched around the block on the March 31 deadline to file reassessment requests; and in New York, municipalities had to hire extra staff to handle the influx of petitions from cost-conscious homeowners.
Meanwhile, localities are suffering from lower tax receipts across the board as job losses slam income taxes, anemic consumer spending hits sales taxes, and a weak business environment is reducing or eliminating corporate profits. This means staff cuts, wage decreases, and fewer services -- all at a time when the federal government is banking on the public sector to pull the economy out of its tailspin.
Even as Washington funnels billions into the financial industry, bailing out the likes of AIG (AIG), Citigroup (C), and Bank of America (BAC), money has been slow to reach local governments. The endgame isn't clear: Unlike the federal government, states don't have the luxury of running a budget deficit. When counties, cities, or even states go broke, they just go broke.
The next round of bailouts could be just around the corner.
When the value of your house starts heading to south, there isn't a lot to be thankful for. Some homeowners, however, are looking for a silver lining.
The New York Times reports that homeowners across the country are petitioning state and local governments for lower property tax bills. The timing couldn't be worse for municipalities, many of which are already facing a cash crunch. In California, the state has begun issuing IOUs to contractors and other creditors. Some states, like New Jersey, have increased property taxes in an attempt to prop up revenue -- much to the chagrin of its homeowners.
As property values fall, homeowners face bills that can far outweigh what they would owe should the taxman keep his records in real time. This doesn't sit well with most citizens -- many of whom are already behind on mortgage payments and struggling to make ends meet.
Property taxes are assessed using myriad formulas and reassessment schedules, such that predicting exactly how much you'll owe each year can be nightmarishly complex. Historically, as home prices rose, periodic reassessments benefited homeowners, since the tax assessed value of most properties lagged their true value.
In California, for example, property taxes have increased around 1% per year since 1978 (the year in which voters enacted Proposition 13). Since then, home prices have soared -- the recent decline notwithstanding -- which means residents who have lived in the same home for decades owe a fraction of the taxes than do those neighbors who just moved in.
Requests for tax reassessment have skyrocketed as besieged consumers look for ways to trim monthly expenses. According to the Times, petitions in Ohio have increases fivefold; lines at government offices in Atlanta stretched around the block on the March 31 deadline to file reassessment requests; and in New York, municipalities had to hire extra staff to handle the influx of petitions from cost-conscious homeowners.
Meanwhile, localities are suffering from lower tax receipts across the board as job losses slam income taxes, anemic consumer spending hits sales taxes, and a weak business environment is reducing or eliminating corporate profits. This means staff cuts, wage decreases, and fewer services -- all at a time when the federal government is banking on the public sector to pull the economy out of its tailspin.
Even as Washington funnels billions into the financial industry, bailing out the likes of AIG (AIG), Citigroup (C), and Bank of America (BAC), money has been slow to reach local governments. The endgame isn't clear: Unlike the federal government, states don't have the luxury of running a budget deficit. When counties, cities, or even states go broke, they just go broke.
The next round of bailouts could be just around the corner.
Banks Balk at New Consumer Protection Agency
This post first appeared on Minyanville.
Echoes ripple from the lonely barn, its doors agape, the music of rusty hinges piercing the silence. The horses, long gone, are nowhere to be seen. Yet on the dusty horizon, one can barely make out the silhouettes of badge-wielding regulators astride their trusty steeds, racing in to slam shut those hideous, open doors.
After ignoring repeated warnings about the looming dangers of predatory subprime-mortgage lending, turning a deaf ear to consumer complaints about obscenely high credit-card fees, and generally allowing the financial industry to run amok during decades of wild profiteering and debt-fueled excess, Congress is hastily piecing together a plan to protect consumers from Wall Street.
The Wall Street Journal reports that lawmakers are reviewing draft legislation proposed by the Treasury Department that would create the Consumer Financial Protection Agency, or CFPA, whose sole aim would be to protect consumers from the financial industry. The new agency wouldn't oversee securities under the ever-shrinking umbrella of the Securities and Exchange Commission (SEC) or most insurance products, but instead would play an active role in drawing up federal mortgage-disclosure requirements, as well as enforcing newly enacted credit-card rules.
And in what should come as no surprise, bankers are up in arms.
The American Bankers Association, a trade association, complained that the new agency would "stifle product innovation." According to the ABA's president Ed Yingling, "Basically, the government is deciding what every bank in every circumstance should offer." (Pssst, Ed, that's because bankers proved downright unable to decide what to do on their own without blowing up the lab.)
While one can hardly blame lobbyists for doing what they're paid to do -- lobby -- it's not likely that complaints from the likes of Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) are going to find a lot of sympathy in Washington. When an industry displays an abject inability to make good decisions to the extent that its blunders nearly bring down the entire world economy, it should take its regulatory medicine and move on.
To be sure, the agency is likely to be tough on mandate, light on enforcement. But that doesn't mean banks can't still whine about it. After all, the CFPA will be partly funded by the financial industry, so really, how tough can it be expected to be on the very firms that pay its salaries?
The new agency's task of designing regulation in our post-crisis world will be tricky. Indeed, mostly because the crisis hasn't passed.
As noted by Minyanville's Kevin Depew, although the worst of the credit crisis is likely behind us, the debt crisis remains in full swing. Washington doesn't seem to understand this, and is acting as if systemic risk is a term we won't be hearing again. Their focus then, will be to legislate aggressively until the next election cycle, in the hopes of proving to their constituency that they were tough on those Wall Street fat cats -- the AIGs (AIG) of the world that stole from the pockets of ordinary Americans.
This is a typical political response, and will likely result in a period of over-regulation --which will stifle advancements, but will do so in an industry where an overabundance of unchecked innovation ran well beyond its usefulness.
The upshot is that for the few small firms nimble enough to dance around the new rules and step in where behemoth banks are unable to tread, opportunities will be plentiful. Indeed, in the void left when banks went running from all loans that even sniffed of real estate, private lenders are reaping huge rewards.
That's as it should be: Recessions are breeding grounds for opportunity. That is, of course, if you know where to look.
Echoes ripple from the lonely barn, its doors agape, the music of rusty hinges piercing the silence. The horses, long gone, are nowhere to be seen. Yet on the dusty horizon, one can barely make out the silhouettes of badge-wielding regulators astride their trusty steeds, racing in to slam shut those hideous, open doors.
After ignoring repeated warnings about the looming dangers of predatory subprime-mortgage lending, turning a deaf ear to consumer complaints about obscenely high credit-card fees, and generally allowing the financial industry to run amok during decades of wild profiteering and debt-fueled excess, Congress is hastily piecing together a plan to protect consumers from Wall Street.
The Wall Street Journal reports that lawmakers are reviewing draft legislation proposed by the Treasury Department that would create the Consumer Financial Protection Agency, or CFPA, whose sole aim would be to protect consumers from the financial industry. The new agency wouldn't oversee securities under the ever-shrinking umbrella of the Securities and Exchange Commission (SEC) or most insurance products, but instead would play an active role in drawing up federal mortgage-disclosure requirements, as well as enforcing newly enacted credit-card rules.
And in what should come as no surprise, bankers are up in arms.
The American Bankers Association, a trade association, complained that the new agency would "stifle product innovation." According to the ABA's president Ed Yingling, "Basically, the government is deciding what every bank in every circumstance should offer." (Pssst, Ed, that's because bankers proved downright unable to decide what to do on their own without blowing up the lab.)
While one can hardly blame lobbyists for doing what they're paid to do -- lobby -- it's not likely that complaints from the likes of Citigroup (C), Wells Fargo (WFC), and Bank of America (BAC) are going to find a lot of sympathy in Washington. When an industry displays an abject inability to make good decisions to the extent that its blunders nearly bring down the entire world economy, it should take its regulatory medicine and move on.
To be sure, the agency is likely to be tough on mandate, light on enforcement. But that doesn't mean banks can't still whine about it. After all, the CFPA will be partly funded by the financial industry, so really, how tough can it be expected to be on the very firms that pay its salaries?
The new agency's task of designing regulation in our post-crisis world will be tricky. Indeed, mostly because the crisis hasn't passed.
As noted by Minyanville's Kevin Depew, although the worst of the credit crisis is likely behind us, the debt crisis remains in full swing. Washington doesn't seem to understand this, and is acting as if systemic risk is a term we won't be hearing again. Their focus then, will be to legislate aggressively until the next election cycle, in the hopes of proving to their constituency that they were tough on those Wall Street fat cats -- the AIGs (AIG) of the world that stole from the pockets of ordinary Americans.
This is a typical political response, and will likely result in a period of over-regulation --which will stifle advancements, but will do so in an industry where an overabundance of unchecked innovation ran well beyond its usefulness.
The upshot is that for the few small firms nimble enough to dance around the new rules and step in where behemoth banks are unable to tread, opportunities will be plentiful. Indeed, in the void left when banks went running from all loans that even sniffed of real estate, private lenders are reaping huge rewards.
That's as it should be: Recessions are breeding grounds for opportunity. That is, of course, if you know where to look.
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