Always look on the bright side of life...

In search for a good laugh and a great topic for today's post, I stumbled upon the National Association of Realtor (NAR)'s monthly housing fantasy ... err... economic forecast by their Chief Economist Lawrence Yun.

Dr. Yun's qualifications on housing finance come from his 10 years working in the NAR (which famously predicted the housing boom would continue into 2009),  stints as a consultant with the Department of Veterans Affairs and Department of Education, and studying the great free market housing finance of the Soviet Union. He's even been named as one of the top 100 economists by the prestigious news publication, USA Today.

After listening to his podcast, several words came to mind: delusional, self serving, pollyanna and finally understatement. My high school friend Rustin W. of Oregon had suggested "understatement" for one of my posts. Thanks Rustin!

According to the dictionary, understatement makes something appear smaller or less important than it really is. It can be used to entertain (typical British Humor) or to reduce the importance of the truth (typical NAR).

Dr. Yun sees encouraging signs in the housing market as existing home sales were 23% higher than last year (which was the lowest level EVER). Great News!! More sales! We should expect the worst to be over and home prices should be rising, right? The NAR desperately believes so.

(Source: Federal Housing Finance Agency)

Understatement.

Dr. Yun goes on to say the worst of the job loss is over. 500K new private industry jobs have been created in the last six months. Last month 30k of new private sector were added. Understatement. 

Realtors make their money on sales. The more sales the more money they make. It doesn't matter if the seller is a homeowner, a bank or a government. The New York Times recently published an article on Mr. Bill Bridwell of Golden Touch Realty, a realtor in Arizona who sells Fannie Mae foreclosed properties. Fannie Mae foreclosure sales represent fifty percent of Mr. Bridwell's business. Investors purchase many of these foreclosure properties. I wonder what percentage of expected existing home sales are from foreclosures due to foreclosure sales to investors? 

Dr. Yun says the housing money has to "get back on its own feet without any government stimulus" in the next few months. Fantastic.  Magically, borrowers will pay off all their debt, save for a 20% down payment (Detroit notwithstanding), and improve their credit scores. Dr. Yun doesn't mention over 95% of mortgages are financed by the Federal government via Fannie Mae, Freddie Mac and Ginnie Mae. Americans love our 5% mortgage rates. Understatement.

I'm sure the patriotic, kind hearted realtors through their trade group will announce a reduction in their fees to help the American economy by strengthen the weak housing market.  The reduced fees would allow sellers to lower prices to make it easier for buyers to pay the downpayment  and qualify for a loan.  On a $200,000 house, a 2% lowering of fees will save the borrower $4,000 tax free! I'm sure the NAR will chip in and lower their fees from 6% to 4%. Right? Hello? Can you hear me? Can you hear me now? 

Hmm, seems they are on the AT&T network.

Understatement.

Next week I'll talk about antidisestablishmentarianism. 

A Credit Cycle built for two

For better or worse, richer or poorer...

Dear readers, a warning: I'm ready for an all out get-on-your-soap-box and scream-at-the-top-of-my-lungs rant based on the word "disintermediation" submitted by Bill L.


I am sick and tired of listening to politicians, mainstream media, liberals, conservatives, and everyone else who complains about the warfare between Main Street and Wall Street. In the immortal words of Peter Griffin, this grinds my gears. Politicians, who continue to take money from investment banks, decry how evil and corrupt Wall Street (read New York Jews and wives of certain cheating governors from the South) bankers took advantage of poor illiterate folk in middle America for their own mega million dollar bonuses.  Other politicians, who continue to take money from investment banks, decry the irresponsibility of the average American and demand investors take losses and people lose their homes if they can't afford them. 


Michael Moore and Oliver Stone are all over this topic with their agendas hanging out for all to see.


I can see it now! John Carpenter's new horror film "They came from Lower Manhattan!" or a remake of the 1951 classic "The day the banking system stood still".


Wall Street and Main Street are not North and South Koreans. They are a bickering husband and wife team; with the common goal of cheap financing for their kids (read consumers) through financial disintermediation. Without Wall Street providing cheap financing, Main Street couldn't sell cars, televisions, cameras and other goodies. Remember 0% rate credit cards? Thank Wall Street. Remember low auto loans? Thank Wall Street. Enjoy low rate mortgages with 0% down? Thank Wall Street. Enjoying the credit crisis? Thank Wall Street.


Main Street was no better. Main street was enjoying her wine and lawn parties. The kids were entertained with shiny new toys and tree houses. Even the Valium tasted better. However, Wall Street and Main Street forgot fiscal discipline (with or without a belt) and the lessons of the Great Depression.


Both Main Street and Wall Street, hurting after the great depression, slowly sold the consumer society to Americans decade after decade in the same way crack was free in the park near where I went to High School. Americans like their new Buicks and GTOs. Americans were able to send their kids to college and buy televisions. The marketing was everywhere.

In the early 2000s, financial technology allowed money from all over the world to invest in the American dream. This money allowed "Kid" consumers to use their homes and improving credit scores as a free ATM so they could spend money on Main Street.  Investors helped finance all sorts of things: cheap car loans, cheap credit cards, cheap municipal financing, cheap computers, cheap capital investments, cheap mortgages, cheap refrigerators, and cheap visits to foreign countries.  Wall Street was our hero! We had achieved the greatest financial disintermediation in history. Congress and the Federal Reserve board got into the act by getting rid of protections and keeping rates low respectively.


Main Street and consumers thrived and used this cheap credit like the fiscal crack addicts they are. They needed it and justified using it by what a swell timing they're having. Wall Street, ever the drug supplier, needed Main Street to keep the lending going.  Everything was great until the music stopped and the government sponsored methadone treatment began.  I'm sure there is a 12-step program to help.


Like a Lifetime channel movie, the hero (is there one?) has hit bottom, is in rehab and will live happily ever after ... until the next slip.


The Credit Cycle built for two couldn't handle the speed it was going down hill and ran into some not so innocent bystanders like Iceland, AIG, and many others. It will take more than Mom's kiss to make this boo-boo go away.


See you all next week.

Why is this recession different from all others...

I've been looking at the Recession 101 signs around the country and wondered "Who's political agenda supports these messages?" For instance:

Other like minded messages clearly state, the US will get out of this recession like in 1974, 1980, 1981, 1990, and etc.

Charlie Robb creates these "uplifting messages" started with money from an anonymous Florida donor. Who could it be? Rush? Tiger? Oprah? Mickey Arison? Charlie Crist? Probably not Charlie. Governor salaries aren't what they used to be. Even the saintly NY Times doesn't know who is sponsoring these messages.

Well the neurotic in me strongly disagrees. We should be concerned and not because I own some short positions. This recession is a bad one. The New York Times ran the following graph:

Scary no? I point out the 2001 recession took four years to bring jobs back to original levels.

Yes the US will come out the recession but only after a ton of pain.

Need a leg to stand on..

Like the financial markets, I'm broken. I tore the right quadriceps tendon fighting a cabal of ninjas to save a puppy from a burning building. 

Don't believe me? 

Actually I was part of the Top Hat Junk Shot experiment for British Petroleum.

Still don't believe me?

Really? Fine! I seem to have missed the public service announcement reminding dog walkers not play with their blackberry while ice is on the ground. Who knew? Inattention to obvious risks caused my injury. I've lost time at work and my budding improv career has been put on hiatus like Helen Hunt's acting. My dumb-ass moment of 2009!

My leg will completely heal after the surgery, two months walking around in a leg brace and six to eight months of physical therapy.  The healing process hurts. Breaking up scar tissue is painful. The healing process takes time. Time for tendon to fully reconnect and rebuild muscle strength and flexibility. The healing process takes money. Money slotted for other activities like new clothes, vacations and other non-essentials. The world economy also needs painful procedures, cost cutting and time.

My leg and the economy have many aspects in common. Both broke due to inattention and belief in the ability that nothing will going wrong despite being fat from excessive leverage and chocolate.

My leg and the economy differ on their short term prognosis. The world governments haven't preformed the critical but painful surgery needed to fix the problem. Sure we've thrown money at the situation but only to have Spain downgraded and riots in Greece. The public, thinking only of its next meal (Philistines!), won't take the necessary medicine. Sure the Republicans talk a good game but realistically they need to get elected like everyone else.

Now if there were an economy sized Motrin!

We return to our regularly scheduled posting next week.

Now where did I leave my Soap Box?

From Ben S. of New Yawk, the word of the post is "harangue".

My initial thought about the word "harangue" was a sweatshirt I bought from the San Diego Zoo which had close to 15 synonyms for bother as in Don't bother the animals. "Don't bother, vex, annoy, harass, harangue, perturb, nettle, molest, harry, provoke, pester, plague, and beset the animals!" This statement should apply to bloggers, and is the Financial Improvisor ever vexed! I feel a harangue coming on...



I'm perplexed by the Treasury Department's economic policy move of the week of blocking of the sale of tax credits from Fannie Mae to Goldman Sachs and Berkshire Hathaway.  Fannie Mae, for those that have been living in an alternate dimension, was placed into conservatorship by the U.S. Government last year. Fannie Mae lost a ton money and the Federal Government (read U.S. payer) had to chip in a whole bunch of money.  So while Fannie Mae loses money, their deferred tax credits are worthless to them.   They want to sell them. Goldman, who is making a ton of money and where former Secretary of Treasury Paulson was partner, wants to buy them. (Both the NY Times and the Wall Street Journals have reported on this news item).

So the current administration now has to deal with the political fall out of:

1. letting the sale go through and Fannie Mae asks for less money but the U.S. Taxpayer gets hurt because Goldman Sachs pays less taxes or 
2. preventing the sale and Fannie Mae has to ask for more money thereby hurting the U.S. Taxpayer.

They chose option number two! Yipee! Let's throw good money after bad. Aren't we glad for both former Secretary Paulson and current Secretary Geithner? I wish I had a money printing press.

I'm collecting the nails I'm spitting for a remolding job in my depreciating house.

Blog of the Blog

If you like rants from your average Joe autodidact, then I highly recommend An Adhoc Life by Shawn Westfall.  He has a Master's degree in Literature (which means he is underemployed), performs improv and teaches his secrets to the Financial Improvisor!

Funny stuff.

Next week is "Disintermediation" from Bill L. of Maryland.

In Tip Top Type Shape....

From Tom T. of New York, the phrase for this post is "Carriage Return"

Tom and I argued about whether the carriage returns of our old manual typewriters from "Yo" Adrien Block  Intermediate School went left-to-right or right-to-left when the typist finished typing a line.  Of course I was correct (the carriage returned from left to right) and we continued about how things were done in the good old days of 1981.



Occasionally, I reminisce about the good old days when broker commissions were percentage points instead of basis points, quarters were necessary to make phone calls while on the street, Atari 2600 was the game system of choice, Queen of Hearts was on the radio, Sony Walkman on my belt, and the Glass-Steagall Act (GSA) was still in force. Many of these wonderful things have been replaced by the significant advances of technology. Of course, the younger generation has no memories of the wonderful trinkets of my adolescence.

Me: [Pantomiming typing on a manual typewriter and hitting the carriage return] Honey. what am I doing?

Precious 10-year old daughter: Typing on a computer and hitting it when it doesn't do what you want it to do.

The innocence of youth is wonderful. The innocence of policy makers is ... well... pathetic.

The only thing not replaced by new and better technology is the Glass-Steagall Act of 1933.  This brilliant piece of legislation not only created the FDIC but prevented bank holding companies from owning any other financial concerns. As an interesting historical note, Senators Glass and Steagall were from from Virginia and Alabama, respectively, and this was the last time senators from either state created good financial regulations.  The Act was castrated (see my previous blog) by the Gramm-Leach-Bliley act (Senator from Texas and Representatives from Iowa and Virginia) in 1999 and signed by that Good Ol' Boy; President Billie Bob Clinton.  The Congress in its infinitesimal wisdom gave banks the ability to take on significantly more risk without regulation or regulators to monitor it. So as a direct result, the FDIC has had to shutter more than 106 banks in the first 10 months of 2009.

So let's raise a toast to Arthur, watch Jane Fonda overact by a Golden Pond, salute Private Winger, and take a spin on the Cannonball Run. Good bye 1981, I .... nope.... I don't miss it.

Album of the Post



While listening to NPR, I heard of an album dedicated to the Brooklyn-Queens Expressway by Sufjan Stevens. I couldn't believe any sane musician would create a piece of music to a New York City throughway (Feeling Groovy notwithstanding). However, after listening to sections of the album on iTunes, it's the best new orchestral music I've heard in a long time.

I recommend it with 4.5 stars!

Next week's word of the blog is "Harangue" from Ben S.

Thanks and keep those word suggestions coming!!!

Ouch! This is gonna hurt you more than me...

It's not just for animals...

From Harold B. of Minnesota, the word for this post is "Castration".

Harold is a college friend and his suggestion makes me worry about him. I'll be calling and making sure he's all right.

Normally, I post pictures related to the subject of the blog entry but I just can't bring myself to do it.

Castration comes in many forms and happens for many reasons: The castration of Eunuchs to protect the harems, men who go through the painful and extremely expensive sexual reassignment surgery, and of course, what women have been doing to men for centuries... just without a knife (unless your name is Bobbit).

I'm fortunate enough to be married to a wonderful woman who came from a matriarchal household. After my third date, my future mother-in-law took me aside and told me in her thick Eastern European accent "If you touch my beloved daughter, you will never salute sun again..." My wife learned from her mother and to this day, I wear a metal sporran. Castration can come in many forms.

Financially speaking, I wonder why haven't corporate boards or activist shareholders haven't castrated CEOs like Zeus upon Uranus. Corporate Boards hire CEOs with iron clad contracts as if all these fine upstanding citizens are the Michael Jordans of the business world. I'll remind everyone there is only one Michael Jordan. The closest superstar in the business world is the one and only Warren Buffett. Even Bill Gates is no Warren Buffett. Why can't we just go back to the tried and true way of pay for performance?

The only CEOs who seem to have their salaries castrated are the ones from companies which received American Tax Payer bailout money. While I haven't had much positive to say about Obama's economic wonderboy (His Royal Highness Larry Summers), I'm thrilled the Pay Tzar (with the extremely spiffy title of Special Master for Executive Compensation) Kenneth Feinberg has drastically cut 25 salaries of executives in seven companies. Maybe other companies can learn this important lesson. "He who has the gold, rules."

"Socialism! Communism! Populist Government run free enterprise!" I hear from my fellow University of Chicago free market economists. To them, I reply "Codswallop!" Once the government has to bail your sorry over-leveraged balance sheets out of the fire, you've lost all right to hold your head up high and claim free-market economics! The companies and the people involved do not deserve to have their full paychecks! The poor executives who still have jobs will have to live on a mere $5,000,000 a year. Like the rest of us they'll have to learn to shop in Wall Mart, Target and (gasp!) K-Mart! Like I tell my kids, "You broke it you pay for it!"

Financial Book of the Blog

Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism by George Akerlog and Robert Schiller.

Ranking: 3.5 Stars

Only Professors Akerlog and Schiller can take the simple of idea that worth is in the eye of the buyer and turn it into a turgid densely written tome. Still they have some good points but only people with an economics graduate degree should read this book.

Next week "Carriage Return".

Peace.

Financial Improvisor!