By The Tim on April 8, 2009
Here is your open thread for the mid-week on April 8th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.
Be sure to also check out the forums, and get your word in the user-driven discussions there!
Posted in Open Thread | Tagged open_thread
Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.
An observation: I’ve had time to do quite a bit of reading on-line over the last few days. Almost without exception, those following economics,the banks, etc. have gone negative. Most notable is the lack of calls for any kind of turn around or bottom by the end of this year, an expectation that was quite common only a month ago. While not everyone is total doom and gloom, the realization has sunk in that the economic situation is much more serious than many wanted to believe.
Scotsman, what’s interesting is that I don’t necessarily see this negativity and capitulation trickling down to JQ Public. Many people I work with, for instance, believe that local economic conditions will begin to improve steadily starting in late 2009 and that house prices can’t fall much further. And these are even very educated people — economists, even! — with access to data. I think that the on-the-ground denial factor is still very strong. Maybe people remember the last recession, how quickly it resolved and then how Seattle zoomed out of it, and are using that as a benchmark? Among some I know there’s almost a feeling of impatience or exasperation: Oh for God’s sake, the recession is annoying — when will it be over so my stocks come back up?
I must also take advantage of this open-thread format to share what may be the most idiotic, self-pitying, slapworthy, and perfectly PNW passive-agressive (yes I’m generalizing — if you post here I am not talking about you) comment I’ve ever read on the PI boards.
http://blog.seattlepi.com/realestatenews/archives/165864.asp — #285609, posted this morning at 9:29. Enjoy!
CS- I agree, the word hasn’t necessarily gotten down to street level yet, but the majority of the pundits and opinion leaders seem to haver turned the corner. Give it 6 months and I’ll wager pretty much everyone will have gotten the message.
The P.I. post is a riot! The fox is in the hen house, feathers are flying, and everyone has an opinion on who left the door open!
“Give it 6 months and I’ll wager pretty much everyone will have gotten the message.”
Six months? By then it’ll be too late and you’ll have passed up the buying opportunity of a lifetime! :)
Apartment vacancy anecdotal observations:
I walked from Westlake to Swedish hospital this morning along Boren, There are tons of pre-war, nice apartment buildings along that route. Just about every one of them had a for rent/vacancy sign prominently posted. I can’t ever remember seeing so many vacancies in these buildings in the past. nice places, views, typically rented.
I think we’ve flunked just about every one of these criteria:
Ten principles for a Black Swan-proof world
By Nassim Nicholas Taleb
Published: April 7 2009 20:02 | Last updated: April 7 2009 20:02
1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.
2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.
3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.
4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.
5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.
6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.
7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.
8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.
9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).
10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.
Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.
In other words, a place more resistant to black swans.
The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable
Copyright The Financial Times Limited 2009
RE: Scotsman @ 6 –
So Scotsman, did you intend to kill this thread with your post or was it’s philosophical character and complexity a blog thread black swan. Sorry, as you know, I think I’m funnier than I really am. And don’t get me wrong, if I didn’t agree with a lot of what Taleb says I won’t have a name like One Eyed Man. But I don’t think that it’s likely we will fix the economy to his satisfaction. And I do find it a little ironic that a guy who made his fortune trading complex derivatives wants to ban them. I also find it ironic that someone with Taleb’s detest for the certainty claimed by most statisticians and other blindfolded bus drivers sometimes seems so certain about his own conclusions.
In any event, there are an awful lot of powerful vested interests that would oppose something like a scraping and whole sale reform of the financial system. And I don’t think that the Senate Finance Committee has any staffers drafting the necessary legislation. They’re far too busy making patches for the boat. And I think patches are all you’re going to get at least in the short run. In the mean time, I think I’ll just try to stay above deck and hope nobody gets too curious about why I always wear a life jacket.
As I’ve said before, the powers that be will rig the game by keeping rates low but with a steep yield curve. The goal being to improve bank earnings from operations while keeping mortgage rates low to prop up collateral values. They’ll also take all other action necessary to slow down the realization of bank losses so that earnings from operation over several years can offset most of the losses. They’ll incur as much debt as they need to to prop up the banks capital and they’ll monetize the debt if they need to if no one will buy it. The result will be survival of most of the big financial institutions and inflation. A fractional reserve banking system needs inflation to survive. Deflation destroys its capital by destroying the value of the collateral for its loans.
At some point, private investors will see that the government patches and bilge pump are lowering the water and most of the large banks will once again be able to raise private capital. Risk taking young investors will once again make fortunes by buying real estate at depressed values with long term money at historically low rates. By then one of Ardell’s bottom calls will have come true and the cycle will begin anew.
The system will institute modest reforms, just like always, but any true systemic changes will have to await a bigger black swan than this one.
RE: One Eyed Man @ 7 –
You know, I pretty much agree with everything you’ve said… except for where the yield curve may be headed. But without gazing too deeply into the pond, it seemed like he had a pretty good summation of how we got to this point in time. Is it ironic that he’s the author? Everybody gets to jump on the wagon once it’s rolling.
And yes, Ardell WILL be right one of these days. Bless her.
So we see that the Fed’s scheme is starting to work. Now even Bank of England is going on a rampage and printing lots of money. In order to get out of this debt spiral is to create debt at an ever increasing rate. We manage to do this. There are lots of solid companies around as well like Wells Fargo – way to go! Bring in lots of profit to investors. Things are looking great. Now the key is to earn lots of money, buy a house in 1 year when prices wil be low and just sit back and relax and look at ways to go to Hawaii for a vacation.
By Romwo @ 9:
I wish you were right Romwo unfortunately i think it’s more likely that the current heavy government lead manipulation of the economy will end in more tears. Foreclosure moratoriums, low interest rates, stimulus, it will all come to an end, probably before the real economy has been able to fundamentally recover. When this happens the investors who are active today will loose whatever trust they have in the system and things will get far worse. The american people will also loose trust and refuse to support any more taxpayer funded bailouts to the financial companies. I think people are already at the breaking point in their support and when Geitner comes and begs for another trillion it’s not going to be easy. Again, I hope you are right but I don’t believe so.
Another source showing that we are now among the fastest deflating areas together with California, Nevada and Florida. Apparently the data is similar to Case Shiller based on repeat sales:
http://www.sacbee.com/static/weblogs/real_estate/Sacramento-Arden-Arcade-Roseville%20Real%20Estate%20News%20and%20Trends.htm
SEATTLE, April 9 (Reuters) – Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz) warned on Thursday first-quarter profit would be slashed by lower-than-expected airplane prices and production cuts on its lucrative widebody planes as cash-strapped airlines defer purchases, sending its shares down 3.6 percent in after-hours trading.
The world’s No. 2 plane maker, along with rival Airbus, is being hit hard as carriers and cargo operators struggle with the economic downturn. So far this year, Boeing’s order book shows more cancellations than orders for jets.
First the housing needs to recover. Then the spending needs to go up. We are all waiting for helicopter Ben to start doing more money drops. Basically we will inflate ourselves ultimately out of this crisis and we will spend ourselves out of this crisis. In 1 year – it will be a good time to buy a house in Seattle because inflation will start slowly creeping in and mortgage rates will be low and housing bust will be coming to an end…
People who have invested in Dow when it was hovering in the low 7000’s have alrteady made more than 10%.
Also if the stock rally lasts longer – people’s 401ks will get repaired. People will just make lots of money.
By Romwo @ 13:
I think that’s backwards. The economy needs to recover first. What the government is doing is propping up housing trying to prevent a cascading effect from prices overcompensating downward. But that’s a treatment for a symptom, not for a cure.
I’m not saying it’s a bad idea, just that the real fix is a stronger economy. At this point just an economy where people don’t fear a collapse is an improvement.
I agree with Kary that the economy needs to recover before housing can stabilize. Secondly I think a lot of people are in the same boat as the banks. To much leverage/debt that is not supported by assets or income. People need to deleverage in the same way as banks do before the consumer can return on fundamentally sound footing. Unfortunately it will likely require a lot more foreclosures and bankcrupcies to get there and it will take time. What is left in spending power after this deleveraging has taken place combined with the willingness to take on new debt will determine where home prices will end up. It will most probably be a very different market with much lower prices though fundamentally sound and stable.