Monday, April 23, 2007
How Do You Spend That Hour Before Work? It Could Mean Millions
By Michael Masterson
Jack and Jill live in the same apartment building and work in the same office. They both wake up at 7:00 a.m., shower, have breakfast, and get to work by 8:00 a.m. It is at this point that their habits diverge.
From 8:00 until 9:00 (when the rest of the workers come into the office), Jill plans her day and gets to work on a job that is important to her long-term goals. Jack likes to get into work an hour earlier too, but he prefers to spend the time "relaxing into his day" with a cup of coffee and the morning newspaper.
Jack sees Jill working away and feels sorry for her. "We both get credit for getting into work early," he thinks, "but she has exchanged happiness for money." In his opinion, that makes Jill greedy, foolish, and, ultimately, self-centered.
David Niven, a college professor and author of the book The 100 Simple Secrets of Successful People would half agree. "Yes, Jill is acting out of self-interest," he’d say, "but so is Jack." Both of them choose to do what they do with their spare time because they believe they benefit from it.
Jack doesn’t like work. Thus, he doesn’t want to work any more than he has to. But since he has to work from 9 to 5, he figures he might as well do a good job during that time. And he does.
Jill does like to work. And although she doesn’t enjoy every single aspect of it, she especially enjoys the hour between 8:00 a.m. and 9:00 a.m. That’s when she plans her day, figures out what she can accomplish, and gets some work done on a project that she knows will change her life for the better.
By 9 o’clock, Jack feels relaxed but just a little bit sad. In a few minutes, the office will be teeming with activity, his inbox overflowing with work, and the phone ringing off its stand. Jill actually feels better than she did at 8 o’clock.
In their use of spare time, Jill is an investor, while Jack is a spender.
As an investor, Jill works from 8:00 to 9:00 because it gives her dividends. On a short-term basis, she is rewarded by knowing that her day is set, her inbox is organized, and she’s already done something she cares about. On a medium-term basis, she benefits by enjoying a more orderly day. And on a long-term basis, the work she puts in now will provide her with all sorts of rewards in the future - higher pay, better work, more responsibility, etc.
As a spender, Jack is not willing to work that extra hour every morning. He would rather use it to "buy" some time that will give him instant gratification.
Generally speaking, value compounds over time. This is true of money, of knowledge, and of work. Invest $1,000 in the stock market today and you can be pretty sure it will be worth about $2,000 in about eight years (assuming the stock market grows at its historic nine percent rate). You get a similar reward with education. That’s why college graduates, on the average, earn at least a million dollars more during their careers than do non-graduates. The same principle holds true with work. Every hour that you put in today will be worth many times that amount later on.
The rewards can be extraordinary if you think of them in terms of money.
Let’s say Jack and Jill are both earning $20,000 a year right now. By putting in an extra hour a day for a full year, Jill can expect to get salary increases that are, perhaps, 20 percent higher than Jack’s. If that’s the case, when he gets a $1,000 raise, hers would be $1,200.
That may not seem like much during the first year, but by the third year, Jill will have jumped up to a new level - a management position with a salary of $40,000. If she continues to put in that extra hour a day, she will eventually be running the business, pulling down $175,000 a year. Meanwhile, though Jack has been enjoying his early-morning hours, he will have had a very slow career arc. With any luck, he’ll be earning about $55,000 a year as a junior manager.
During the 20 years of their respective careers, Jill will have earned a lot more money and lived much better in terms of material goods. But Jack does not regret his choice. After all, he figures that he has enjoyed an hour a day of pleasure - five hours a week, 250 hours a year, for 20 years - that Jill gave up. That’s 5,000 hours of "fun" that Jill didn’t have.
But now Jack and Jill are 48 and Jill doesn’t have to work anymore. She was able to retire with $4 million in the bank, while Jack is forced to continue working. With two kids in college and a mortgage, he couldn’t retire even if he wanted to.
Every 40-hour week that Jack now works is 40 hours that Jill can spend enjoying herself. It will take Jill just 125 weeks, about two and a half years, to catch up with Jack in terms of the amount of time he spent on personal pleasure all those years between the hours of 8:00 and 9:00 in the morning. And Jill will still not only be much richer and freer than Jack, she’ll also be able to continue enjoying herself an extra 2,000 hours a year.
Jack and Jill live in the same apartment building and work in the same office. They both wake up at 7:00 a.m., shower, have breakfast, and get to work by 8:00 a.m. It is at this point that their habits diverge.
From 8:00 until 9:00 (when the rest of the workers come into the office), Jill plans her day and gets to work on a job that is important to her long-term goals. Jack likes to get into work an hour earlier too, but he prefers to spend the time "relaxing into his day" with a cup of coffee and the morning newspaper.
Jack sees Jill working away and feels sorry for her. "We both get credit for getting into work early," he thinks, "but she has exchanged happiness for money." In his opinion, that makes Jill greedy, foolish, and, ultimately, self-centered.
David Niven, a college professor and author of the book The 100 Simple Secrets of Successful People would half agree. "Yes, Jill is acting out of self-interest," he’d say, "but so is Jack." Both of them choose to do what they do with their spare time because they believe they benefit from it.
Jack doesn’t like work. Thus, he doesn’t want to work any more than he has to. But since he has to work from 9 to 5, he figures he might as well do a good job during that time. And he does.
Jill does like to work. And although she doesn’t enjoy every single aspect of it, she especially enjoys the hour between 8:00 a.m. and 9:00 a.m. That’s when she plans her day, figures out what she can accomplish, and gets some work done on a project that she knows will change her life for the better.
By 9 o’clock, Jack feels relaxed but just a little bit sad. In a few minutes, the office will be teeming with activity, his inbox overflowing with work, and the phone ringing off its stand. Jill actually feels better than she did at 8 o’clock.
In their use of spare time, Jill is an investor, while Jack is a spender.
As an investor, Jill works from 8:00 to 9:00 because it gives her dividends. On a short-term basis, she is rewarded by knowing that her day is set, her inbox is organized, and she’s already done something she cares about. On a medium-term basis, she benefits by enjoying a more orderly day. And on a long-term basis, the work she puts in now will provide her with all sorts of rewards in the future - higher pay, better work, more responsibility, etc.
As a spender, Jack is not willing to work that extra hour every morning. He would rather use it to "buy" some time that will give him instant gratification.
Generally speaking, value compounds over time. This is true of money, of knowledge, and of work. Invest $1,000 in the stock market today and you can be pretty sure it will be worth about $2,000 in about eight years (assuming the stock market grows at its historic nine percent rate). You get a similar reward with education. That’s why college graduates, on the average, earn at least a million dollars more during their careers than do non-graduates. The same principle holds true with work. Every hour that you put in today will be worth many times that amount later on.
The rewards can be extraordinary if you think of them in terms of money.
Let’s say Jack and Jill are both earning $20,000 a year right now. By putting in an extra hour a day for a full year, Jill can expect to get salary increases that are, perhaps, 20 percent higher than Jack’s. If that’s the case, when he gets a $1,000 raise, hers would be $1,200.
That may not seem like much during the first year, but by the third year, Jill will have jumped up to a new level - a management position with a salary of $40,000. If she continues to put in that extra hour a day, she will eventually be running the business, pulling down $175,000 a year. Meanwhile, though Jack has been enjoying his early-morning hours, he will have had a very slow career arc. With any luck, he’ll be earning about $55,000 a year as a junior manager.
During the 20 years of their respective careers, Jill will have earned a lot more money and lived much better in terms of material goods. But Jack does not regret his choice. After all, he figures that he has enjoyed an hour a day of pleasure - five hours a week, 250 hours a year, for 20 years - that Jill gave up. That’s 5,000 hours of "fun" that Jill didn’t have.
But now Jack and Jill are 48 and Jill doesn’t have to work anymore. She was able to retire with $4 million in the bank, while Jack is forced to continue working. With two kids in college and a mortgage, he couldn’t retire even if he wanted to.
Every 40-hour week that Jack now works is 40 hours that Jill can spend enjoying herself. It will take Jill just 125 weeks, about two and a half years, to catch up with Jack in terms of the amount of time he spent on personal pleasure all those years between the hours of 8:00 and 9:00 in the morning. And Jill will still not only be much richer and freer than Jack, she’ll also be able to continue enjoying herself an extra 2,000 hours a year.
Saturday, April 21, 2007
The Latte Factor
link
$5 per day (the average cost of a latte and a muffin) x 7 days = $35 per week
$35/week = $150/month
$150 per month invested at a rate of 10% annual return =
1 year = $1,8852 years = $3,967
5 years = $11,616
10 years = $30,727
15 years = $62,171
30 years = $339,073
40 years = $948,611
Friday, April 20, 2007
A Brief, Superficial, and Arbitrary History of Property-Price Collapses
By Fred Sheehan, ( fsheehan@aucontrarian.com ) link
The Anderson Forecast team at UCLA might restore one’s hope that academic
economists fulfill a productive function. Having disparaged the California housing boom through its ascent, a springtime presentation by one of its economists predicted the swoon that has come to pass. Alas, he stumbled. Asked if a real estate crash was in store, he reverted to form: Southern California is in no way comparable to such one-industry towns as Houston, and besides, California had never suffered a real estate meltdown. On the first point, with 2% of adults in California now proudly waving real estate licenses to sell, houses to California today may be as dominant a force as oil to Houston in the 1980s. On the second point, one of the worst real estate debacles in the history of the United States occurred on the ground where he stood.
More important than the misleading history lesson is the foregone opportunity to profit. The banking system today is a far more reckless operation than during earlier periods. This offers investment options.
Maybe the professor’s own education is lacking. For all the data spilling forth that
quantify current property trends (e.g., house sales, inventory, borrowing rates), reference to past price changes is lacking. Unlike historical data on stock and bond market peaks and valleys, the history of housing swoons lies entombed in the dark. The information is difficult to collect, if it was ever collected at all. Therefore, such formulations as “the stock market fell an average of x% during past market breaks” do not exist. Yet, to ignore what we do know leaves us without any reference when economists make off-the-cuff predictions with no fear of contradiction.
A recent example by America’s most successful mortgage broker was par for the guild
and for the man. On October 26, former Federal Reserve Chairman Alan Greenspan mumbled that the housing slump is “likely past.” Exactly one week later, this unsubstantiated opinion was expertly choreographed into a National Association of Realtors $40-million-advertising campaign with full-page newspaper ads: “It’s a Great Time to Buy or Sell a House.” According to the upper-right-hand quadrant of the newsprint layout, the man who told the nation “a traditional fixed-rate mortgage might be an expensive method of financing a loan” in February 2004, only to raise rates two months later, assures us now that the fourth quarter (of 2006) will “certainly be better than the third quarter.”
Alan Greenspan has always been wrong when it mattered. But that’s enough of him.
What follows is a brief, superficial, and arbitrary history of property-price collapses in the United States. It is true any tenured economist would toss this summary into the dustbin – only data worthy of correlation and regression analyses are worth knowing. (Charles Kindleberger’s Manias, Panics and Crashes is chock full of property-crash prices, but the late and great economist was his own man.) The intention of this exposition is to annotate the broad generality that real estate prices never fall. When Houston in the 1980s and Southern California in the 1990s are mentioned, these tempests are qualified as local market quandaries. This is both selective (only post-World-War II need apply) and faulty (the national price level dropped in 1964). And besides, since most local markets across the country are falling now, parochial dips in the past are worth visiting. Alas, the broad generality is what most everyone knows and the National Association of Realtors should be congratulated for succeeding so thoroughly in its marketing campaign.
In one sense, the post-War fixation is proper: the Federal Reserve’s money printing press is greased and oiled to ward off a collapse in prices today. Yet, to save the housing market by inflating credit is a remedy for a specific problem that would cause a general epidemic. The Fed has no control over the direction of credit flows. Should the current rate of credit growth spill into consumer prices, $50 hamburgers will create a bull market in Ramen Pride. It is doubtful the unnerving private equity flows today would exist if not for current Fed efforts to resurrect the moribund housing market. If the authorities accelerate this vain effort, the credit inflation will chase things and Spam will be served for Thanksgiving dinner.
Should the Fed either resist the temptation to hyperinflate, or find itself incapable of doing so, the current housing market will fall into a much longer history of bubbles. Here, the most important recurring characteristic is the propellant for all such bubbles: credit. The recent mania was no different: it was not a housing feast but an indulgence of mortgages.
A protracted exposition on California is explored for the benefit of haphazardly tutored students at UCLA. Florida is next in line followed by some quick flybys of other mortgage manias.
The population of Los Angeles rose from 10,000 in 1880 to 50,000 in 1890 and 100,000 in 1900. Yet, a severe real estate bust wiped out most of the wealth in 1887 and 1888. David Starr Jordan described the boom and bust in California and the Californians: “[A]lmost every bluff along the coast, from Los Angeles to San Diego and beyond was staked out in town lots.” He continued: “Every resident bought lots, all the lots he could hold. The tourist took his hand in speculation. Corner lots in San Diego, Del Mar, Azusa, Redlands, Riverside, Pasadena, anywhere brought fabulous prices. A village was laid out in the uninhabited bed of a mountain torrent, and men stood in the streets in Los Angeles...all night long, to wait their turn in buying lots. Land, worthless and inaccessible, barren cliffs' river-wash, sand hills, cactus deserts' sinks of alkali, everything met with ready sale. The belief that Southern California would be one great city was universal. The desire to buy became a mania. ‘Millionaires of a day,’ even the shrewdest lost their heads, and the boom ended, as such booms always end in utter collapse.”
Of course, those “Visionaries” who believed Southern California would be “one great city” were correct. This was an impressive long-sighted prediction (and, we can be sure, also promoters’ attempts to entice more fish to the lure), yet, “even the shrewdest” lost their shirts. Those today who harp on “housing shortages” and the demographic needs of a growing population should consider a city that went broke during a decade of 500% incremental growth.
In 2006, “utter collapse” looks remote. It is difficult to imagine. It is drummed in to us that the Fed would never permit another mass default such as occurred in the 1930s. So we turn to the 1890 account of T. S. Van Dyke, author of Millionaires for a Day, who writes in terms a Californian might find enriching today, given the loan markdowns – and tight credit – sure to beset the more aggressive local lenders: "The money market tightened almost on the instant. From every quarter of the land the drain of money outward had been enormous, and had been balanced only by the immense amount constantly coming in. Almost from the day this inflow ceased money seemed scarce everywhere, for the outgo still continued. Not only were vast sums going out every day for water-pipe, railroad iron, cement, lumber, and other material for the great improvements going on in every direction, most of which material had already been ordered, but thousands more were still going out for diamonds and a host of other things already bought – things that only increase the general indebtedness of community by making those who cannot afford them imitate those who can. And tens of thousands more were going out for butter, eggs, pork, and even potatoes and other vegetables, which the luxurious boomers thought it beneath the dignity of millionaires to raise."
Van Dyke’s paragraph addresses a handful of parallel booms and busts that accompany any and all property credit booms and busts. These might be considered by the reader. Of a more specific nature, we do know the population in Los Angeles proper was supplemented by at least 200,000 transients in 1887. (Living in tents, they used the post office for mail delivery.) We know that over 40% of houses bought nationwide in 2005 were for speculation or second (or third, or fourth) homes. (The Internet rendered the pup tent unnecessary, making it possible to buy blocks of houses without missing one’s favorite sitcom.) Price levels are hard to come by; the momentum of day-traders is easier to track. We also know that the value of real estate transactions in Los Angeles County exceeded $2 million for the first time in May 1886, passed $5 million in January 1887, $10 million in June 1887, $12 million in July 1887, fell below $5 million in December 1887 and slid under $3 million in November 1888. (The figures look small but it is the change in proportions that matter. There was no Federal Reserve in those days to print and inflate the money supply as it wished – the reader might feel more at home by replacing “million” with “trillion.”)
Of greater immediate importance for those considering a short or put position against California lenders, is the comparative recklessness of banks today. In The Boom of the Eighties, Glenn S. Dumke found that banks became more conservative as the boom reached its peak. “In 1885 loans amounted to 80% of deposits; in January 1887, to 62 ½ per cent…. By July of 1887, less than half of the banks’ funds were on loan, and six months thereafter only one quarter.” There were a couple of minor bank runs; the banking system stood rock solid after the crash. All this, and without the 500 Ph.D. economists on the Federal Reserve staff whose models have proved housing bubbles are either inconsequential or cannot exist.
The Florida land mania of the 1920s offers another potentially fruitful comparison for the contemporary investor – then, too, banks were tightwads compared to the profit-mad lenders of today. Promoters descended on the state. Restaurants and delis served lines of speculators coffee for 75 cents (with no cream) when the going price for a cup in New York City was a nickel. In the summer of 1925, residents of Miami placed “Not for Sale” signs to ward off the pests. Leases to realtors reached $700 a square foot in Miami, when similar space at Broadway and 42nd Street in New York – a very desirable location – rented for $13 a square foot. Even today, the top commercial property rents in the world, in Hong Kong and London, top out at around $250 and $220 a square foot, respectively.
The momentum traders in Miami, tracked by real estate transfers, increased volume from 4,126 in January 1924 to 9,744 in January 1925 to 16,960 in October 1925 to 4,491 a year later. By March 10, 1926, it was reported that scores of small real estate offices had been closed “overnight.” Miami real estate bond houses took advantage of a stock market break in that same month. They waged a full-page ad campaign: “How Wall Street Lost $4 Billion: and how you can forever escape such losses.” It seems safe to say the credulous readers of National Association of Realtors propaganda today will be just as dissatisfied as the followers of Miami bond touts 80 years ago.
Price depreciations are anecdotal, though a good part of the property went to zero. D.P. Davis sold 875 acres near Tampa in 1924 for $18 million. People waited in line 40 hours before the sale began. Most of the property was underwater. In 2005, San Diego-based Zarzar Land sold 10- and 20-acre lots of West Texas desert to eager buyers on eBay. The land was worthless. The local school district included 53 students. It took 100 acres to support each cow. The Texas Attorney General’s office was asked to interfere but decided not to. “The only thing we could take action on is something like the Deceptive Practices Act, but if you look at their websites, they tell people there is no survey, no water, no utilities,” reckoned the Assistant Attorney General.
A skeptical view of the media would go a long way to restoring common sense. The parade of economists who echo Greenspan are daily features in the newspapers and television. In mid-summer 1925, the Miami Daily News set a New World Record with a 506-page edition – almost all of it real estate advertising. On October 25, 1925, the Miami Herald published a story planted by a movie and real estate promoter who cautioned, “a treacherous Arctic current had been discovered off the coast of California and in a few years would freeze the California climate
so severely that filmmakers would have to quit Hollywood and ship their studios to Florida.” Homer B. Vanderblue wrote in 1927 the money spent on skyscrapers in Miami “has probably been lost exactly as though it had been sunk in drilling dry holes in an oil field.” In May 2005, Miami boasted 60,000 condominiums that had been sold but not yet built. Prices of houses and condos rose 28% in 2005. In South Beach, Miami, a new, 20-story condominium sold beach cabanas for $850,000 apiece.
That was last year. In 2006, the city’s condo supply is leapfrogging demand. According to Multiple Listing Service of Miami, 34% of the houses and condominiums on the market have dropped their price. Many listings, of course, have de-listed. But building continues at a ferocious rate: Empire World Towers, two, 106-story hotel and apartment buildings, are awaiting approval by the Federal Aviation Authority. Cranes over Miami are giving Shanghai and Dubai a run for the most blighted skyline.
Money poured in from points north and west. After the break, it fled. Deposits of clearing house banks in Miami rose from $56 million on December 31, 1924, to $191 million in August 1925, and then fell to $98 million in June 1926. There were failures, but, as in California, the banking system acquitted itself. Vanderblue reported: “[T]he condition faced by the Florida bankers in 1924 and 1925 was quite unprecedented, and it is more remarkable, and greatly to their credit, that most of them were prepared for the shrinkage in deposits when it came. The plethora of funds had not been allowed to flow into land speculation but was invested mainly in corporate and government bonds…. The bank failures were relatively few in numbers….” Vanderblue goes on to commend the governor of the Federal Reserve Bank of Atlanta who visited every Fed member bank and made sure they were prepared for a collapse. Only one Fed member bank in the district failed. By comparison, Greenspan’s bizarre, February 2004, adjustable-rate “exotic loan” speech was pitched to the Credit Union National Association in Washington. The Fed chairman’s Open Wallet Policy was a clear signature of approval for the most irresponsible Florida banks and
developers – some of whom must now wish the Atlanta Fed governor of 1925 was their regulator in 2005.
It is difficult to offer a comparison to the fate of Florida bank shares today. For what it’s worth, the common stock of the Land Company of Florida rose from $50 on September 11, 1925, to $89-3/4 at the end of the same month. A year later the theoretical price was $20 but was rarely traded.
Florida is merely the most benighted of the 1920s property speculation – the building spree crossed the nation. Losses were much greater than from the stock market crash. Prices in many cities have never recovered. Nominal prices of Baltimore residential property prices are still lower than in the 1920s. Prime commercial property prices in Omaha still trade at a discount to Jazz Age highs. In Boston, a lot on Boylston Street near Copley Square sold for $2.12 a square foot in 1873, $35.30 in 1912 and $3.00 in 1939. A building on Boston’s Arch Street sold for $33 a square foot in 1881 and traded for $5.13 sq. ft. in 1940. A lot between Summer and Essex Streets sold for $2.50 in 1831, for $32.16 in 1916 and $1.80 sq. ft. in 1940.
The dollar has lost approximately 90% of its value since the 1920s. Besides being wrong on even a nominal basis, the claim that real estate prices always go up does not address what those dollars –going up, down, or sideways – would buy. Homer Hoyt’s One Hundred Years of Land Values in Chicago shows that some of the most fashionable addresses between the 1860s and 1880s – Michigan Avenue, Dearborn Street, Prairie Avenue – sold at prices as much as 50% lower at the height of the 1920s boom, and were often 90% lower than their peaks by the 1930s. Economists, especially from real estate trade organizations, love to drag out the argument that demographics support real estate prices. Yet the population of Chicago rose from 109,000 in 1860 to 3,376,000 in 1930. (A great visionary who correctly forecast Chicago’s future from his Prairie Avenue mansion in the 1870s may still have gone broke if he was dealing in real estate.)
John Templeton, who has absorbed price changes in many markets across several decades, told Equities magazine in 2003 (well before the peak): “Almost everyone has a home mortgage and some are 89% of the value of the home (and yes, some are even more.) If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing down home prices further. After home prices go down to one-tenth of the higher price homeowners paid, buy them.”
The Anderson Forecast team at UCLA might restore one’s hope that academic
economists fulfill a productive function. Having disparaged the California housing boom through its ascent, a springtime presentation by one of its economists predicted the swoon that has come to pass. Alas, he stumbled. Asked if a real estate crash was in store, he reverted to form: Southern California is in no way comparable to such one-industry towns as Houston, and besides, California had never suffered a real estate meltdown. On the first point, with 2% of adults in California now proudly waving real estate licenses to sell, houses to California today may be as dominant a force as oil to Houston in the 1980s. On the second point, one of the worst real estate debacles in the history of the United States occurred on the ground where he stood.
More important than the misleading history lesson is the foregone opportunity to profit. The banking system today is a far more reckless operation than during earlier periods. This offers investment options.
Maybe the professor’s own education is lacking. For all the data spilling forth that
quantify current property trends (e.g., house sales, inventory, borrowing rates), reference to past price changes is lacking. Unlike historical data on stock and bond market peaks and valleys, the history of housing swoons lies entombed in the dark. The information is difficult to collect, if it was ever collected at all. Therefore, such formulations as “the stock market fell an average of x% during past market breaks” do not exist. Yet, to ignore what we do know leaves us without any reference when economists make off-the-cuff predictions with no fear of contradiction.
A recent example by America’s most successful mortgage broker was par for the guild
and for the man. On October 26, former Federal Reserve Chairman Alan Greenspan mumbled that the housing slump is “likely past.” Exactly one week later, this unsubstantiated opinion was expertly choreographed into a National Association of Realtors $40-million-advertising campaign with full-page newspaper ads: “It’s a Great Time to Buy or Sell a House.” According to the upper-right-hand quadrant of the newsprint layout, the man who told the nation “a traditional fixed-rate mortgage might be an expensive method of financing a loan” in February 2004, only to raise rates two months later, assures us now that the fourth quarter (of 2006) will “certainly be better than the third quarter.”
Alan Greenspan has always been wrong when it mattered. But that’s enough of him.
What follows is a brief, superficial, and arbitrary history of property-price collapses in the United States. It is true any tenured economist would toss this summary into the dustbin – only data worthy of correlation and regression analyses are worth knowing. (Charles Kindleberger’s Manias, Panics and Crashes is chock full of property-crash prices, but the late and great economist was his own man.) The intention of this exposition is to annotate the broad generality that real estate prices never fall. When Houston in the 1980s and Southern California in the 1990s are mentioned, these tempests are qualified as local market quandaries. This is both selective (only post-World-War II need apply) and faulty (the national price level dropped in 1964). And besides, since most local markets across the country are falling now, parochial dips in the past are worth visiting. Alas, the broad generality is what most everyone knows and the National Association of Realtors should be congratulated for succeeding so thoroughly in its marketing campaign.
In one sense, the post-War fixation is proper: the Federal Reserve’s money printing press is greased and oiled to ward off a collapse in prices today. Yet, to save the housing market by inflating credit is a remedy for a specific problem that would cause a general epidemic. The Fed has no control over the direction of credit flows. Should the current rate of credit growth spill into consumer prices, $50 hamburgers will create a bull market in Ramen Pride. It is doubtful the unnerving private equity flows today would exist if not for current Fed efforts to resurrect the moribund housing market. If the authorities accelerate this vain effort, the credit inflation will chase things and Spam will be served for Thanksgiving dinner.
Should the Fed either resist the temptation to hyperinflate, or find itself incapable of doing so, the current housing market will fall into a much longer history of bubbles. Here, the most important recurring characteristic is the propellant for all such bubbles: credit. The recent mania was no different: it was not a housing feast but an indulgence of mortgages.
A protracted exposition on California is explored for the benefit of haphazardly tutored students at UCLA. Florida is next in line followed by some quick flybys of other mortgage manias.
The population of Los Angeles rose from 10,000 in 1880 to 50,000 in 1890 and 100,000 in 1900. Yet, a severe real estate bust wiped out most of the wealth in 1887 and 1888. David Starr Jordan described the boom and bust in California and the Californians: “[A]lmost every bluff along the coast, from Los Angeles to San Diego and beyond was staked out in town lots.” He continued: “Every resident bought lots, all the lots he could hold. The tourist took his hand in speculation. Corner lots in San Diego, Del Mar, Azusa, Redlands, Riverside, Pasadena, anywhere brought fabulous prices. A village was laid out in the uninhabited bed of a mountain torrent, and men stood in the streets in Los Angeles...all night long, to wait their turn in buying lots. Land, worthless and inaccessible, barren cliffs' river-wash, sand hills, cactus deserts' sinks of alkali, everything met with ready sale. The belief that Southern California would be one great city was universal. The desire to buy became a mania. ‘Millionaires of a day,’ even the shrewdest lost their heads, and the boom ended, as such booms always end in utter collapse.”
Of course, those “Visionaries” who believed Southern California would be “one great city” were correct. This was an impressive long-sighted prediction (and, we can be sure, also promoters’ attempts to entice more fish to the lure), yet, “even the shrewdest” lost their shirts. Those today who harp on “housing shortages” and the demographic needs of a growing population should consider a city that went broke during a decade of 500% incremental growth.
In 2006, “utter collapse” looks remote. It is difficult to imagine. It is drummed in to us that the Fed would never permit another mass default such as occurred in the 1930s. So we turn to the 1890 account of T. S. Van Dyke, author of Millionaires for a Day, who writes in terms a Californian might find enriching today, given the loan markdowns – and tight credit – sure to beset the more aggressive local lenders: "The money market tightened almost on the instant. From every quarter of the land the drain of money outward had been enormous, and had been balanced only by the immense amount constantly coming in. Almost from the day this inflow ceased money seemed scarce everywhere, for the outgo still continued. Not only were vast sums going out every day for water-pipe, railroad iron, cement, lumber, and other material for the great improvements going on in every direction, most of which material had already been ordered, but thousands more were still going out for diamonds and a host of other things already bought – things that only increase the general indebtedness of community by making those who cannot afford them imitate those who can. And tens of thousands more were going out for butter, eggs, pork, and even potatoes and other vegetables, which the luxurious boomers thought it beneath the dignity of millionaires to raise."
Van Dyke’s paragraph addresses a handful of parallel booms and busts that accompany any and all property credit booms and busts. These might be considered by the reader. Of a more specific nature, we do know the population in Los Angeles proper was supplemented by at least 200,000 transients in 1887. (Living in tents, they used the post office for mail delivery.) We know that over 40% of houses bought nationwide in 2005 were for speculation or second (or third, or fourth) homes. (The Internet rendered the pup tent unnecessary, making it possible to buy blocks of houses without missing one’s favorite sitcom.) Price levels are hard to come by; the momentum of day-traders is easier to track. We also know that the value of real estate transactions in Los Angeles County exceeded $2 million for the first time in May 1886, passed $5 million in January 1887, $10 million in June 1887, $12 million in July 1887, fell below $5 million in December 1887 and slid under $3 million in November 1888. (The figures look small but it is the change in proportions that matter. There was no Federal Reserve in those days to print and inflate the money supply as it wished – the reader might feel more at home by replacing “million” with “trillion.”)
Of greater immediate importance for those considering a short or put position against California lenders, is the comparative recklessness of banks today. In The Boom of the Eighties, Glenn S. Dumke found that banks became more conservative as the boom reached its peak. “In 1885 loans amounted to 80% of deposits; in January 1887, to 62 ½ per cent…. By July of 1887, less than half of the banks’ funds were on loan, and six months thereafter only one quarter.” There were a couple of minor bank runs; the banking system stood rock solid after the crash. All this, and without the 500 Ph.D. economists on the Federal Reserve staff whose models have proved housing bubbles are either inconsequential or cannot exist.
The Florida land mania of the 1920s offers another potentially fruitful comparison for the contemporary investor – then, too, banks were tightwads compared to the profit-mad lenders of today. Promoters descended on the state. Restaurants and delis served lines of speculators coffee for 75 cents (with no cream) when the going price for a cup in New York City was a nickel. In the summer of 1925, residents of Miami placed “Not for Sale” signs to ward off the pests. Leases to realtors reached $700 a square foot in Miami, when similar space at Broadway and 42nd Street in New York – a very desirable location – rented for $13 a square foot. Even today, the top commercial property rents in the world, in Hong Kong and London, top out at around $250 and $220 a square foot, respectively.
The momentum traders in Miami, tracked by real estate transfers, increased volume from 4,126 in January 1924 to 9,744 in January 1925 to 16,960 in October 1925 to 4,491 a year later. By March 10, 1926, it was reported that scores of small real estate offices had been closed “overnight.” Miami real estate bond houses took advantage of a stock market break in that same month. They waged a full-page ad campaign: “How Wall Street Lost $4 Billion: and how you can forever escape such losses.” It seems safe to say the credulous readers of National Association of Realtors propaganda today will be just as dissatisfied as the followers of Miami bond touts 80 years ago.
Price depreciations are anecdotal, though a good part of the property went to zero. D.P. Davis sold 875 acres near Tampa in 1924 for $18 million. People waited in line 40 hours before the sale began. Most of the property was underwater. In 2005, San Diego-based Zarzar Land sold 10- and 20-acre lots of West Texas desert to eager buyers on eBay. The land was worthless. The local school district included 53 students. It took 100 acres to support each cow. The Texas Attorney General’s office was asked to interfere but decided not to. “The only thing we could take action on is something like the Deceptive Practices Act, but if you look at their websites, they tell people there is no survey, no water, no utilities,” reckoned the Assistant Attorney General.
A skeptical view of the media would go a long way to restoring common sense. The parade of economists who echo Greenspan are daily features in the newspapers and television. In mid-summer 1925, the Miami Daily News set a New World Record with a 506-page edition – almost all of it real estate advertising. On October 25, 1925, the Miami Herald published a story planted by a movie and real estate promoter who cautioned, “a treacherous Arctic current had been discovered off the coast of California and in a few years would freeze the California climate
so severely that filmmakers would have to quit Hollywood and ship their studios to Florida.” Homer B. Vanderblue wrote in 1927 the money spent on skyscrapers in Miami “has probably been lost exactly as though it had been sunk in drilling dry holes in an oil field.” In May 2005, Miami boasted 60,000 condominiums that had been sold but not yet built. Prices of houses and condos rose 28% in 2005. In South Beach, Miami, a new, 20-story condominium sold beach cabanas for $850,000 apiece.
That was last year. In 2006, the city’s condo supply is leapfrogging demand. According to Multiple Listing Service of Miami, 34% of the houses and condominiums on the market have dropped their price. Many listings, of course, have de-listed. But building continues at a ferocious rate: Empire World Towers, two, 106-story hotel and apartment buildings, are awaiting approval by the Federal Aviation Authority. Cranes over Miami are giving Shanghai and Dubai a run for the most blighted skyline.
Money poured in from points north and west. After the break, it fled. Deposits of clearing house banks in Miami rose from $56 million on December 31, 1924, to $191 million in August 1925, and then fell to $98 million in June 1926. There were failures, but, as in California, the banking system acquitted itself. Vanderblue reported: “[T]he condition faced by the Florida bankers in 1924 and 1925 was quite unprecedented, and it is more remarkable, and greatly to their credit, that most of them were prepared for the shrinkage in deposits when it came. The plethora of funds had not been allowed to flow into land speculation but was invested mainly in corporate and government bonds…. The bank failures were relatively few in numbers….” Vanderblue goes on to commend the governor of the Federal Reserve Bank of Atlanta who visited every Fed member bank and made sure they were prepared for a collapse. Only one Fed member bank in the district failed. By comparison, Greenspan’s bizarre, February 2004, adjustable-rate “exotic loan” speech was pitched to the Credit Union National Association in Washington. The Fed chairman’s Open Wallet Policy was a clear signature of approval for the most irresponsible Florida banks and
developers – some of whom must now wish the Atlanta Fed governor of 1925 was their regulator in 2005.
It is difficult to offer a comparison to the fate of Florida bank shares today. For what it’s worth, the common stock of the Land Company of Florida rose from $50 on September 11, 1925, to $89-3/4 at the end of the same month. A year later the theoretical price was $20 but was rarely traded.
Florida is merely the most benighted of the 1920s property speculation – the building spree crossed the nation. Losses were much greater than from the stock market crash. Prices in many cities have never recovered. Nominal prices of Baltimore residential property prices are still lower than in the 1920s. Prime commercial property prices in Omaha still trade at a discount to Jazz Age highs. In Boston, a lot on Boylston Street near Copley Square sold for $2.12 a square foot in 1873, $35.30 in 1912 and $3.00 in 1939. A building on Boston’s Arch Street sold for $33 a square foot in 1881 and traded for $5.13 sq. ft. in 1940. A lot between Summer and Essex Streets sold for $2.50 in 1831, for $32.16 in 1916 and $1.80 sq. ft. in 1940.
The dollar has lost approximately 90% of its value since the 1920s. Besides being wrong on even a nominal basis, the claim that real estate prices always go up does not address what those dollars –going up, down, or sideways – would buy. Homer Hoyt’s One Hundred Years of Land Values in Chicago shows that some of the most fashionable addresses between the 1860s and 1880s – Michigan Avenue, Dearborn Street, Prairie Avenue – sold at prices as much as 50% lower at the height of the 1920s boom, and were often 90% lower than their peaks by the 1930s. Economists, especially from real estate trade organizations, love to drag out the argument that demographics support real estate prices. Yet the population of Chicago rose from 109,000 in 1860 to 3,376,000 in 1930. (A great visionary who correctly forecast Chicago’s future from his Prairie Avenue mansion in the 1870s may still have gone broke if he was dealing in real estate.)
John Templeton, who has absorbed price changes in many markets across several decades, told Equities magazine in 2003 (well before the peak): “Almost everyone has a home mortgage and some are 89% of the value of the home (and yes, some are even more.) If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing down home prices further. After home prices go down to one-tenth of the higher price homeowners paid, buy them.”
Chicago math finance seminar
Practical experiences in financial markets using Bayesian forecasting systems.
Bluford H. Putnam, EQA Partners, L.P.
Going from theory to practice can be exciting when real money is on
the line. This presentation itemizes and discusses from a
theoretical and practical perspective a list of lessons learned from
20 years of investing using Bayesian statistical forecasting
techniques linked to mean-variance optimization systems for portfolio
construction. Several simulations will be provided to illustrate
some of the key points related to risk management, time decay of
factor data, and other lessons from practical experience. The
forecasting models focus on currencies, global government benchmark
bonds, major equity indices, and a few commodities. The models use
Bayesian inference (1) in the estimation of factor coefficients for
the estimation of future excess returns for securities and (2) in the
estimation of the forward-looking covariance matrix used in the
portfolio optimization process. Zellner's seeming unrelated
regressions is also used, as is Bayesian shrinkage. The mean-variance
methodology uses a slightly modified objective function to go beyond
the risk-return trade-off and also penalize transactions costs and
size-unbalanced portfolios. The portfolio optimization process is
not constrained except for the list of allowable securities in the
portfolio, given the objective function. ?This is a multi-model
approach, as experience has rejected the one-model "Holy Grail"
approach to building the one model for all seasons, so several
distinct and stylized models will be discussed.
link to presentation notes
Bluford H. Putnam, EQA Partners, L.P.
Going from theory to practice can be exciting when real money is on
the line. This presentation itemizes and discusses from a
theoretical and practical perspective a list of lessons learned from
20 years of investing using Bayesian statistical forecasting
techniques linked to mean-variance optimization systems for portfolio
construction. Several simulations will be provided to illustrate
some of the key points related to risk management, time decay of
factor data, and other lessons from practical experience. The
forecasting models focus on currencies, global government benchmark
bonds, major equity indices, and a few commodities. The models use
Bayesian inference (1) in the estimation of factor coefficients for
the estimation of future excess returns for securities and (2) in the
estimation of the forward-looking covariance matrix used in the
portfolio optimization process. Zellner's seeming unrelated
regressions is also used, as is Bayesian shrinkage. The mean-variance
methodology uses a slightly modified objective function to go beyond
the risk-return trade-off and also penalize transactions costs and
size-unbalanced portfolios. The portfolio optimization process is
not constrained except for the list of allowable securities in the
portfolio, given the objective function. ?This is a multi-model
approach, as experience has rejected the one-model "Holy Grail"
approach to building the one model for all seasons, so several
distinct and stylized models will be discussed.
link to presentation notes
Thursday, April 19, 2007
Listen very carefully
http://entertainment.timesonline.co.uk/tol/arts_and_entertainment/film/film_reviews/article1642044.ece
The Lives of Others is a remarkable study of human values in a Big Brother society, says Cosmo Landesman
I can remember thinking when the year 1984 came and went: at last, we can put all that silly talk of Big Brother Britain behind us. And then, just two years ago, Britain’s information commissioner, Richard Thomas, claimed we were “sleepwalking into a surveillance society”. Thomas and the Big-Brother-is-coming brigade are quick to point out that Britain has more CCTV cameras than any other country in the world. May I suggest that those who feel threatened by the snooping state should go and see The Lives of Others, for they will see what the surveillance society is really like.
The film is set in the German Democratic Republic of 1984. The Berlin Wall is still up, but socialism is starting to crumble through its inner corruption. Society is held together not by solidarity but by the state security service (Stasi), which employs 100,000 people and uses 200,000 informers. Here is a world where the wrong joke, the inappropriate question or just a look on your face can draw attention from a state security captain such as Gerd Wiesler (Ulrich Möhe).
Wiesler is an expert in, and teacher of, interrogation techniques and the art of surveillance. What makes him so dangerous is not just his ruthless efficiency but his righteous belief. He is a man with a mission: to protect socialism from its enemies. One night at the theatre, he spots the state’s favourite playwright, Georg Dreyman (Sebastian Koch), offstage in an embrace with his beautiful girlfriend and leading lady, the celebrated actress Christa-Maria Sieland (Martina Gedeck). He tells his boss, Grubitz (Ulrich Tukur), that Dreyman is “arrogant” and should be watched. Grubitz believes Dreyman is clean: “He’s our only nonsubversive writer who is read in the West.”
But a member of the Central Committee, Bruno Hempf (Thomas Thieme), has taken a fancy to Dreyman’s girlfriend and wants Dreyman out of the picture, so he tells Grubitz to check on the writer. The case is given to Wiesler, who has Dreyman and Sieland’s flat bugged and then sets up his base in a deserted attic at the top of the apartment block. There, through his headphones, he monitors the lives of the two lovers. Wiesler has infiltrated Dreyman’s life, but what the all-knowing security agent doesn’t realise is that Dreyman’s life will come to infiltrate him.
The Lives of Others is a remarkable directorial/screenwriting feature debut from the 33-year-old German director Florian Henckel von Donnersmarck. It has the confidence and economy of a mature film-maker’s best work. He has managed to make a serious film that touches on issues of trust, betrayal, art and compromise, and to do it in a way that is quiet and easy to absorb. It has none of the puffed-up self-importance of a film like Syriana. Just compare the title, The Lives of Others, with that of another film about the prisoners of the Stasi, the documentary called The Decomposition of the Soul. What von Donnersmarck has done is to get right into the heart of this socialist tyranny without resorting to heavy dramatics — nobody is tortured, there are no terrible screams. And we register the sheer horror and the daily dose of fear that infects lives by just looking at the faces of ordinary people. In one chilling scene, a compromised neighbour who has seen Wiesler’s men bug the playwright’s flat is asked by Dreyman to help with his tie. He whispers to her so that his girlfriend can’t hear him seeking help, but the poor woman knows that the Stasi in the attic is listening and fears she will pay a price for this innocent exchange.
Von Donnersmarck’s film is the perfect antidote to the cult of Ostalgie — nostalgia for the good old days of East Germany, with its kitschy consumer goods and tinny little cars, affectionately portrayed in the comedy Good Bye Lenin! But while the story is serious and full of tragic irony, it’s also sexy and funny. One of Wiesler’s snooping assistants says he loves to listen in on artists: “They’re at it all the time!” And although there is an element of tragedy in it, the film is also a celebration of change and what the most compromised of human beings are capable of becoming. Von Donnersmarck has an old-fashioned belief in the transformative power of art to change people for the better.
It’s through the love between Dreyman and Sieland that the film focuses on the story of Dreyman and Wiesler. Both are naive idealists who shed their illusions about the system; and — Dreyman through an illegal article about East German suicide rates for the West German magazine Der Spiegel, Wiesler through his falsified reports about the couple — both rewrite the story of their lives.
Until now, our foremost cinematic snoop has been Gene Hackman’s wiretap expert, Harry Caul, in Francis Ford Coppola’s The Conversation. Indeed, Caul and Wiesler have a lot in common, including the empty apartment devoid of all signs of life. But Ulrich Möhe gives such a subtle and commanding performance as Wiesler that Hackman now has some competition.
The Lives of Others 15, 138 mins
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