Multiple occupancy

I made a crack recently about how the Japanese will solve their overcommitted entitlements problem, given their increasingly top-heavy dependency ratio, and given that 95 percent of their sovereign debt is held domestically, namely, that they will solve it by the old Boomers hunkering down and taking whatever the kids toss to them, just to keep the kids on the islands.

Now, American sovereign debt is significantly held by foreigners, so the prescription applies doubly to American Boomers. Almost a third of the young adult kids are already at home, since the Boomers already blew the national wad and let the political system get sold to the highest bidder, the multi-nationals and the corporate gangstas who sit atop that pile, who promptly shipped the jobs overseas and in the name of free markets screwed everyone who wasn't a member of their club, i.e., labor, anyone working for a wage or salary who wasn't participating in the ridiculously rigged stock market as a major part of their comp, and established oligopolies in as many industries as possible, and Wall Street decided to get into the action by pulling a magnificent bait and switch on the American homeowner, a classic pump and dump, so that their friends the hedgies could become the landlords of America... yada yada yada, you know the story by now.

The point being that multiple occupancy, whether in the extended family way or otherwise, is probably the future of real estate in America, especially for the Boomers.

 

On the moral superiority of blogging hedgies

While I am an avid follower of several financial blogs written by folks who make their money managing money, I at times become impatient with their unrelenting condemnation of the messed up world situation while they are actively trying to arbitrage it.  As Dmitri Orlov has said, the financial types are the ones earliest to understanding of the extent of the rape and pillage of Main Street by Wall Street, and the complicity of Washington—the Fed and the federal government.

I get tired of the attitude of moral superiority, even as I appreciate the information and knowledge flow provided, that just isn’t reliably going to occur in the MSM.  I do hope these people are doing something with their money for charitable causes.  We salarymen can hardly imagine the amounts of money they make.  A young friend who just moved to London took a flat in Notting Hill with another young American working in The City, who casually allowed that he was in the habit of spending 300 pounds a night when he goes out. The stories of financial sector excess are rife, but they sting when it comes close to you.

In sum, these folks are part of the problem, exacerbating the inequalities that are tearing the world apart.  Cassandra recently schooled those peers who let their moral indignation get in the way of making good investment decisions.  Of all the financial bloggers, Barry Ritholtz stands out as having the best follow-through on policy recommendations, informed by legal training and a proudly middle class, up on your merits, background.  Barry’s positioning in the New York and Washington media outlets suggests some higher levels of support.  Yves is good but lets her cynicism get the better of her too often; likes to carp too much.  Kyle Bass keeps forecasting doom for the Japanese but doesn’t seem to recognize that only about 5 percent of Japan’s government debt is owned by foreigners, so the MMT refrain of “print to pay” applies.  Japanese life expectancies have been rising during their supposedly lost two decades, which I’ve never heard Paul Krugman acknowledge.  The Japanese take care of each other as a big family.  Japanese boomers may very well come up with methods of forgiveness to keep the kids on the islands, so long as the boomers can eat and have a roof over their heads.

Make a nonrandom act of kindness today. 

Peace.

Links worth clicking

A few from tyillc.com that hit the mark, from my POV:

• More on meaningless bank capital: Bragging banks ... – full disclosure, the basis for functional capital markets, is dead (mumbles in the notes don’t count)
• Models for financial risk are flawed – why Richard Bookstaber and most finance professors are idiots
• Virtue, Vice and Banks – got to love the Anglicans, the new Archbishop of Canterbury schools the banks

John Hussman’s remarks on QE are especially trenchant this morning. 

I suspect a deflationary shock is in the cards.

Austerity nonlinearities

Before the crisis Spain had a tiny deficit as a percent of GDP, much smaller than the US's roughly 10 percent. Spain's initial austerity measures were in the same range as those contemplated or forecast for the US in 2013, a few percentage points.

 

Discount rate dissonance

There has to be a huge cognitive dissonance occurring in investor's minds right now around the issue of hurdle rate. Everyone who ever took a managerial finance course knows that a reasonable discount rate for any Capex project is 10%. Sure, nominal interest rates are zero and real interest rates are negative, but who can really believe this when it comes to capital budgeting? Hence, the concentration on nominal spreads, or as Rosie puts it, "cash flow is king." But everyone knows the dangers of investing in stocks based on dividend yield only. Are investors really aware of the probability of capital loss in real estate investment? What happens when mortgage rates go up by a few hundred basis points?

It is common to talk about uncertainty as the cause of investment insufficiency in a liquidity trap, but the fact remains that capital losses are built into a zero interest rate environment. Last one out is a rotten egg. But it may be a while. Last time we had zero interest rates it lasted well over a decade. We might well have them until the end of this decade, or close to it.

This is really a golden age for privately held firms. They don't have to answer to that green eyed monster, the stock market. For the kleptocratic managements of publicly held corporations, the current environment simply fosters a get rich quick mentality to a greater extent than ever before. Why not take on some low-cost debt and buy back even more stock? Yet another reason that the stock market has become a suckers' game.

Another comment on Modern Monetary Theory

I continue to believe that the attraction of MMT to modern liberals like Jamie Galbraith and Warren Mosler (I consider myself a classical liberal) is that something like the trillion dollar coin enables an end run around the fecally impacted banking system to get an inflation going, when the debt-deflationary forces in the private economy and banking system—in which, it is true to say, all money is debt—are overwhelming even Helicopter Ben’s attempts to get a nice, mild inflation going.

It might work, especially if accompanied by starting (or expanding) a significant war effort, but of course the fundamental problem is the Fed, especially since that great conservative Richard Nixon took us off the gold standard (he also opened the door for that gi

Source:  Rogoff via businessinsider.com

The fact an establishment economist like Rogoff could present such material at the annual economics meetings, and that Krugman and the White House won’t issue non-denial denials that they are taking this seriously, tells me that we are very close to the unraveling of the Bretton Woods II monetary system, and possibly to some fundamental change in the way the Fed operates.  There are rumors of a new monetary system in the works, and the way this is being sent out suggests to me it’s a trial balloon—so that they can come up with “the better idea.”

I just can’t imagine that the better idea will not involve some attempt to accelerate inflation, given the grip of the creditors on the sovereigns, and aggregate inability to clear bad debt out of the system.

Europe is showing the world what austerity looks like, and it ain’t pretty.

Today’s depressing arithmetic

Say you have an income of $96,000, under the payroll tax ceiling.  How much will the 2 percentage point payroll tax increase affect your paycheck?

Your gross monthly income is $8,000.  If your take-home is 65 percent of your gross, a standard assumption, then your take-home pay will be reduced by (0.02*8000)/(0.65*8000) = 0.031 or 3.1 percent.  The dollar reduction in monthly take-home is $160. 

Combine this with a health care premium increasing 6.3 percent (source) and the hit to take-home pay climbs to $200 or more.  Combine this with pay raises that approximately match the actual rate of inflation, and you have a situation where most people’s take home pay is dropping in purchasing power.

I can’t help but believe that when the first pay stubs of the new year arrive, that a considerable amount of belt tightening will ensure.

The 1 percent that runs the country is blissfully unaware of all this, and thinks there is no problem with stiffing the American people year after year.