Saturday, April 7, 2012

A virulent monster is dangerously out of control. Let us slay it together

A different perspective on inflation. Aivars Lode

The devaluation of everything

The perils of panflation

PRICE inflation remains relatively subdued in the rich world, even though central banks are busily printing money. But other types of inflation are rampant. This “panflation” needs to be recognised for the plague it has become.
Take the grossly underreported problem of “size inflation”, where clothes of any particular labelled size have steadily expanded over time. Estimates by The Economistsuggest that the average British size 14 pair of women’s trousers is now more than four inches wider at the waist than it was in the 1970s. In other words, today’s size 14 is really what used to be labelled a size 18; a size 10 is really a size 14. (American sizing is different, but the trend is largely the same.) Fashion firms seem to think that women are more likely to spend if they can happily squeeze into a smaller label size. But when three out of four American adults and three out of five Britons are overweight, the danger is that size inflation reduces women’s incentive to eat less. Meanwhile, food-portion inflation has also made it harder to fight the flab. Pizzas now come in regular, large and very large. Starbucks coffees are Tall, Grande, Venti or (soon) Trenta. “Small” seems to be a forbidden word.
Inflation is also distorting the travel business. A five-star hotel used to mean the ultimate in luxury, but now six- and seven-star resorts are popping up as new hotels award themselves inflated ratings as a marketing tool. “Deluxe” rooms have been devalued, too: many hotels no longer have “standard” rooms, but instead offer a choice of “deluxe" (the new standard), “luxury”, “superior luxury” or “grand superior luxury”. Likewise, most airlines no longer talk about “economy” class. British Airways instead offers World Traveller; Air France has Voyageur. Sardine class would be more honest. The value of frequent-flyer miles is also being eroded by inflation: it is increasingly hard to book “free” flights; they cost more miles, and redemption fees have increased. This was inevitable: airlines have been issuing so many miles (for spending on the ground as well as in the air) that the total stock is worth more than all the dollar notes and coins in circulation. Central bankers would shudder at such reckless inflationary policies—were they not themselves earning triple miles up in first class.
Some other strains of inflation have more serious economic effects. One example is grade inflation, the tendency for comparable academic performance to be awarded higher grades over time. In Britain the proportion of A-level students given “A” grades has risen from 9% to 27% over the past 25 years. Yet other tests find that children are no cleverer than they were. A study by Durham University concluded that an A grade today is the equivalent of a C in the 1980s. In American universities almost 45% of graduates now get the top grade, compared with 15% in 1960. Grade inflation makes students feel better about themselves, but because the highest grade is fixed, it also causes grade compression, which distorts relative prices. This is unfair to the brightest, whose grades are devalued against those of average students. It also makes it harder for employers to identify the best applicants.
Fight the flab
Employers are themselves distorting the jobs market with job-title inflation, which has recently accelerated because a fancier-sounding title is cheaper than a pay rise. Firms are awash with an excess of chiefs and directors, such as Director of First Impressions (receptionist) and Chief Revenue Protection Officer (ticket inspector). This is not just a laughing matter. Job-title inflation has economic costs if it makes the jobs market more opaque and makes it harder to assess the going pay rate.
Inflation of all kinds devalues everything it infects. It obscures information and so distorts behaviour. A former German central banker, Karl Otto Pöhl, compared inflation to toothpaste: easy to squeeze out of the tube, almost impossible to put back in. The usual cure, monetary and fiscal tightening, will not work for panflation. Women will never squeeze back into their old clothes unless they reject size inflation. Instead, it is time for everybody to tighten belts (literally) and fight all sorts of inflationary flab.

shadow inventory second wave foreclosure defaults short sales hidden benefits stimulus of not paying mortgage

A topic that we are addressing with our data and creation of a Mortgage MarketPlace. Aivars Lode

Shadow inventory coming online in 2012 is going to have the biggest impact on the housing market.  With a weak jobs report that shows a labor force that declined by 164,000 you realize thatdemographic trends are now in full play here.  With banks now moving on delinquent properties the supply will be moving higher while traditional inventory remains low.  This is happening.  We noted that in Southern California, over 50 percent of all MLS inventory is now composed of short sales showing that banks are now willing to sell homes for less than the original mortgage balance.  One of the more interesting trends is the aggressive pricing we are seeing on some of these listings.  Of those in actual foreclosures, nearly half have made no mortgage payment in two years.  Now that banks are moving on these properties that hidden stimulus will be pulled away.  Think about not paying rent or a mortgage for two full years.  Let us take a look at the current state of the shadow inventory.
 Distressed inventory pipeline
Over 5,800,000+ homes are either delinquent or in the foreclosure process:
shadow inventory 2012 chart
You need to remember that the first two columns rarely show up on the MLS.  These homes have yet to even hit the foreclosure process so do not show up as inventory.  These are simply home owner’s not making payments on their home for a variety of reasons.  Cure rates have been pathetic so most of these will end up as foreclosures.  Then you move to the loans in foreclosure category and many are not on the MLS as well.  You have the three stages of foreclosure:
-Notice of default is filed (at least three missed mortgage payments)
-NTS (scheduled for auction)
-REO (bank owned)
Even when a property becomes bank owned, it may take months (a year) to get it on the MLS.  In total over 5,800,000 properties are delinquent or in some stage of foreclosure.  When the existing inventory is looked at only a small part of the picture is shown:
Shadow Inventory
Existing inventory has trended lower since 2007 and many analysts simply look at this as if this was the only measure of housing inventory.  This only reflects roughly 2 million properties while another 7 million properties are either:
-90+ days delinquent
-In the foreclosure process
-Bank-owned real estate
-Current but underwater
So what you have is a giant pool that isn’t viewable to the public but is slowly leaking into the blue category.  That is, the existing category has room to grow simply because the other pipelines are so enormous and one option is to get out ahead of the curve by allowing short sales.  With home prices making post bubble lows and household incomes stagnant for well over a decade, there is little reason to see pressure for higher prices.  As we noted with a shrinking labor force because of lower paying jobs or people dropping out of the labor force where will pressure for higher prices come from?  Mortgage rates are artificially low thanks to the Federal Reserve and with low down payment loans like FHA insured loanproducts the leverage capacity is at a maximum for buyers to stretch into a property.  Rates are unlikely to go lower and we know FHA loans will get more expensive in the upcoming months because default rates are soaring.  What a shocker that allowing people with almost no down payment to buy expensive homes is causing further issues.
A mini stimulus will also be lost as more of those living in their homes payment free will lose that advantage:
“Vigeland: So first of all, can you give us a sense of how prevalent this is? What are the numbers of people who are squatting in their own homes?
Feroli: Well, right now you’re looking at about 8 percent mortgages outstanding are past due and there are about 44 million mortgages out there. So you’re talking about a pretty significant number of people who right now are not paying their mortgage.
Vigeland: Wow. So how did you come up with the estimate of a $50 billion impact here?
Feroli: Right. So there’s about $10 trillion in mortgage debt owed by the household sector. So you’re looking at about $800 billion in mortgages, which are past due — average interest rate of about 6 percent or a little above. Most of those mortgages, of course, are in the early stage when it’s mostly interest that you’re paying. So 6 percent on a little over $800 billion comes out to about $50 billion per year that are free for other purposes.”
$50 billion is nothing to sneeze at.  As more short sales pop up on MLS searches every day it looks like this trend will be coming to an end.
Underwater nation
Take a look at how many Americans are underwater on their mortgages:
homes with negative equity
Approximately 12 million Americans who “own” their home owe more on the property than what the property is worth today.  So as more properties enter the pipeline there is little reason to believe the demand curve will shift up.  For the short-term, we will likely see a move for the supply side:
supply and demand housing
This is exactly what is happening and why home prices continue to fall.  For example, the mid-tier market in Southern California has seen home prices fall by 8 percent in the last 24 months.  Why?  This is partly due to more short sales hitting the market and a large demand for lower priced properties based on stagnant household incomes.  So as more of these homes leak into the inventory why should we expect some sort of reversal of the trend?
It seems like many in the press are acknowledging this second test for the housing market.  Now what can mitigate this from happening?  If we see strong job gains in good paying fields and household incomes rising then there is reason to argue for higher home prices.  Simply to argue that home prices will go up because “inflation” will pick up is missing the point.  We are seeing global goods like fuel and food going up because these can be shipped anywhere and thanks to the Fed, the dollar is getting hit.  With housing however, it is a local good so therefore local household incomes do matter and this is what we are seeing.  A place like Las Vegas with a large number of low paying service sector work is now seeing homes sell way below $100,000.  This makes sense given their local demographics.  Here in California every segment of the market has seen major price declines.
As more shadow inventory hits the market the supply curve is likely to increase even though some analysts might only narrowly focus on the existing MLS inventory that only highlights a small part of the total picture.  This is missing the next trend like arguing Alt-A and subprime loans were a good thing just because defaults initially were extremely low.  The demand side can shift but only if incomes go up and employment really picks up.  Also, many younger Americans are saddled with high levels of student debt and are making less money.  So who will many of these older home owners sell homes to?  Certainly not at price levels they would hope to get.  Yet banks control a large part of the inventory and short sales and foreclosure sales will dominate in many markets because prices are more set to what the market will support.  After half a decade and with housing making nominal lows it looks like some are finally getting it that those nostalgic high prices are unlikely to ever come back again.

Thursday, April 5, 2012

Another reason to root for dividends: GDP boost

More and more investors are looking for stable returns. Aivars Lode

By Nin-Hai Tseng, Writer April 5, 2012: 12:39 PM ET

If companies don't want to spend their cash hiring more workers, they ought to consider paying higher dividends. The impact on personal incomes and spending might be more than they realize.

Release your grip, corporate America

FORTUNE – For the past few years, a tepid economic recovery has caused America's biggest companies to hoard a growing stack of cash. It's a thorny issue. Not just to the millions of jobless who wonder why corporate America can't just use its plentiful cash reserves to hire more workers, but also to shareholders asking for higher returns on their investments.

But 2012 could turn out differently. Companies have slowly come around, with shareholders likely to see higher payouts this year. Even if firms only paid out a modest 10% of their liquid assets, it could raise annual disposable income by nearly 2%, according to a new report by Capital Economics. With more money in shareholders' pockets, even if they naturally save a bulk of it, such a payout could still raise annual consumption by 1%.

If you believe the estimates, then it's certainly a reminder that companies should really step up.

Last month, Apple (AAPL) announced it would pay its first dividend in 17 years, leading some to speculate if others in the tech world might think differently about their cash reserves. Though Cisco (CSCO), Oracle (ORCL) and Microsoft (MSFT) pay dividends, the companies are still among the nation's biggest cash hoarders.

MORE: Why dividends still beat buybacks

Apple, with about $97 billion in cash amassed from huge demands for iPhones and iPads, ranks at the top of the list of U.S. corporations with lofty reserves, according to Capital Economics. Microsoft follows with approximately $52 billion and Cisco with about $47 billion. Google (GOOG) ranks fourth, with $45 billion. And now that Apple is giving its shareholders a payout, that makes Google the only tech company with a market value exceeding $100 billion that doesn't offer a dividend.

Since the latest recession, executives uncertain about the economy have held onto their money. Cash levels at the end of 2011 rose to $672 billion from $42 billion at the end of the recession in mid-2009. If you include short-term investments, liquid assets nearly doubled to $2.2 trillion during the same period.

Indeed, that's a lot of cash to go around. Companies obviously aren't going to pay out all their cash reserves. If they did return that $2.2 trillion to shareholders, personal incomes would rise by nearly 20%.

It's true raising dividends might not work for every company, but it's hard to argue that it would exactly hurt executives. Even with Apple's plans to dole out dividends and provide stock buybacks, the move isn't expected to put a dent in Apple's coffers. The plan is expected to cost the company more than $10 billion a year over the next three years, while the company attracts a sizable sum of cash – about $1 billion a week in the last holiday season alone.

MORE: Apple's dividend and buyback: What the analysts are saying

This certainly helps build the case for changing the mentality of Silicon Valley, where leadership has historically been cautious with their cash. And like the late Apple CEO Steve Jobs, who resisted giving dividends, tech companies would rather save cash for possible acquisitions and other investments. In a way, raising dividends might actually signal companies aren't planning enough for future growth. Such arguments become less convincing during economic environments like today's, since cash reserves keep rising and aren't likely returning much for companies at a time when interest rates are at record lows.

To be fair, companies have started relaxing their purse strings. During the first three months this year, net dividend increased by 27.6% to $24.2 billion over the same period during the previous year, Standard & Poor's reported Tuesday. There were 677 dividend increases during the first quarter, a 32% rise compared with the 510 increases during the same period in 2011.

"Dividends had another great quarter, with actual cash payments increasing over 11% and the forward indicated dividend rate reaching a new all-time high, with or without Apple," said Howard Silverblatt, S&P Indices' senior index analyst in a statement.

To be sure, he adds, payout rates remain historically low. The percentage of net income paid out in dividends, which historically averages 52%, remains near its lows at under 30%.

It remains to be seen where dividends go this year, but thus far they're off to a good start. Perhaps a small boost in consumer spending will come next.

Oil Hedge Fund BlueGold to Liquidate

I love the words used in this story “took bold BETS” is investing in hedge funds and commodities about making bets or making a return? Aivars Lode

By Reuters
Thursday, April 05, 2012               

LONDON (Reuters)— BlueGold Capital, an oil-focused fund that made headlines in 2008 by calling the peak of the market, is liquidating after four years of trading—the last of which put it at the bottom of commodity hedge fund rankings.

BlueGold is conducting an "orderly closure" of its business and expects to return about 98 percent of investor capital before the end of the year, the London-based fund said in a letter to investors on Thursday, a copy of which was obtained by Reuters.

It did not give a reason for its closure. A person who answered the phone at BlueGold's London office declined comment.

BlueGold was one of the worst performers among commodity hedge funds last year, industry data gathered by Reuters shows. It lost 35 percent through 2011 and its asset base shrunk to about $1.2 billion from $2 billion a year as before.

The fund was co-founded by former Vitol oil trader Pierre Andurand, who made his mark with a more than 200 percent gain in 2008 as other rival funds suffered. However, it appeared to veer from its energy roots last year, irritating some investors by placing half its bets on equities and other assets, Reuters reported in December.

An investor who redeemed money from BlueGold in January said he still regarded the fund as "a pretty talented group" that may have given investors concern about the risk it was taking, its apparent change in tack and the rapid growth in assets until last year.

"Performance is always a symptom that something is going wrong, even when things may otherwise seem fine. For instance, if you're constantly hitting the sweet spot, you might be extremely skilled, but you could also either be taking too much risk or getting lucky," the investor said. "In BlueGold's case, they also took in a lot of money, which when fully invested, meant more risk being deployed. And as far as process and trading methodology is concerned, investors also don't like it when you say you're changing your stripes midway."

Mr. Andurand, a 35-year-old Frenchman, has made a name for himself in pursuits as divergent as sports, oil trading and movie-making. Mr. Andurand is an avid kickboxer and former member of the French junior national swimming team. He's also a director at Shangri La, a Chinese movie production company that has three films to its credit, with the latest, "Sin-Jin," due to be released in December this year.

In the oil market, he took bold bets that once paid handsomely for him and his investors. His meteoric rise in trading came after he moved to Singapore in 2000 after earning finance and engineering degrees from top French universities. He started as an oil trader at Goldman Sachs, then climbed the ranks at Bank of America and Swiss oil trading giant Vitol before launching BlueGold with Vitol colleague Dennis Crema in early 2008.

Several oil traders said Mr. Andurand had earned a $20 million bonus in one year at Vitol, after helping the company book a trading profit of $200 million. The bonus figure could not be confirmed, but in 2008 Mr. Andurand and Mr. Crema both made the ranks of the world's top 20 hedge fund earners, with payouts of $90 million apiece, according to research firm Hedgeable.

Mr. Andurand's near-perfect run in 2008 became the stuff of oil market lore. He accurately anticipated crude's rise to a record $147 a barrel in July of that year, then shifted positions to cash, ending BlueGold's exposure as prices fell to as little as $33 in December, people who tracked the fund said. The fund was up 209 percent that year.

BlueGold also made money in 2009, returning a commendable 55 percent.

Its winning streak ended last year as oil prices were locked in a range through most of the year, thanks to intermittent spikes in the dollar and a mixed global economic outlook, before breaking out in a late rally.

Even before BlueGold's fortunes turned, Mr. Andurand faced major losses. In 2003, he was a principal oil trader in the Bank of America team that suffered a loss of up to $89 million in the jet fuel market when the SARS virus led to a collapse in air travel worldwide.

In February 2010, BlueGold was briefly thrust into the spotlight when a sudden crash in oil markets brought the fund down as much as 14 percent. It, however, recovered to finish up nearly 13 percent that year.

By Joshua Schneyer and Barani Krishnan

Wednesday, April 4, 2012

Meet the upscale gas station

As Companies in Australia searched for profits this was the direction they took in the 90’s in Aussie. Aivars Lode

By Dan Mitchell, contributor April 4, 2012: 3:24 PM ET

It's hard to imagine that gas stations will become "the next Whole Foods." But making them less unpleasant would be good business.

FORTUNE -- A new report concludes that gas-station convenience stores should go "upscale" to boost business, a notion that might sound counterintuitive given the industry's slim profit margins as well as the fact that most shoppers at such stores are in a hurry.

Problem is shoppers increasingly swipe their credit cards at the pump, never entering the store at all. That means fewer impulse purchases of Doritos, Mountain Dew and Kenny Loggins compilation albums. Turning a gas-station shop into more of a destination by, for example, offering fresh foods, can boost bottom lines, according to the report (pdf) prepared by the Association for Convenience and Fuel Retailing and the Coca-Cola (KO) Retailing Research Council and presented Wednesday in Chicago.

MORE: The new normal in American cars

Another big part of the problem is that other kinds of retailers are increasingly competing with convenience stores for shoppers. Drug stores, big-box retailers, and supermarkets are all "trying to win their convenience business," says the report. And when you're paying for your gas, you might think to yourself that you'd like a Butterfinger, but you need to stop at Target (TGT) for paper towels anyway so why not just pick it up there?

By offering fresh baked goods, high-quality coffee, and even a wide selection of fresh produce, convenience stores can offer incentives to enter the store and even linger over the merchandise for a while. One crucial element, the report notes, is that the shopping experience should be pleasant. That runs counter to the usual image of grungy, overlit, ill-decorated stores that seem designed to dissuade people from hanging around too long. "Grab and go" has been the philosophy of the convenience industry throughout most of its history.

MORE: Wheels of tomorrow: Electrics

Such big upgrades, of course, are expensive and risky. Crain's Chicago Business, which wondered whether gas stations are "the next Whole Foods," cited one local convenience store owner who seems to have thrived by going upscale. But while making convenience stores less unpleasant couldn't hurt, it's hard to imagine "high end convenience" becoming a widespread trend.

Tuesday, April 3, 2012

Is the Wimpy Recovery Morphing into a Recession? Read more: http://is the wimpy recovery now morphing into a recession

As I noted years ago the stimulus packages merely delayed the right decisions. The USA needed to take its medicine in order to move forward. Aivars lode

We’ve just begun coming to grips with the wimpy recovery. Are we actually in for another recession? That was the implication of a couple of economic reports I read this week, including one by ITG Investment Research, which tracked how the pace of this recovery (which was never great to begin with) has by some measures been slowing, particularly among middle-income consumers and industries producing for overseas markets. (Europe is definitely in a double dip, and many emerging markets are slowing too, as I’ve written about many times.)
One of the most interesting snippets from the report: While there are fewer goods on sale in American malls and retail shops than there were last year around this time, what is on sale is being discounted at much steeper rates — and not just at dollar stores but at outlets catering to middle- as well as lower-income people.
That’s not surprising given that the gains we’ve seen during this recovery have mainly gone to the upper classes. Stocks are up, but it’s mostly rich people who own those. The residential real estate market, where most Americans keep the majority of their wealth, is still down. (I met Robert Shiller for lunch last week, and he said we’ve got years of pain to go on that front.) Salaries are also down – there’s been almost no growth in real income throughout the wimpy recovery.
Robert Reich’s FT blog yesterday summed up the bifurcated nature of the recovery well. He pointed out those shocking Berkeley numbers that have been getting so much press lately – in 2010, 93% of the economic gains went to the richest 1% of the population. Most of the bottom 90% lost ground. The 2011 figures aren’t in yet, but there’s no reason to think they’ll be any different. No wonder middle-income, as well as working-class, shoppers aren’t in a buying mood.
The question now is whether this will remain a wimpy recovery, or turn into something darker. I’m not ready to call another downturn yet, but the folks at ECRI, an economic research firm, are. Payroll job growth is up, and probably will be when new numbers come out on Friday (though perhaps less than last month), but a number of the indexes they track — which tally up other things like industrial output, income, sales, and consumer spending — are down. The result is that they’ve already made the double-dip call to their clients. I wouldn’t pay so much attention, except for the fact that they’ve correctly called three recessions, with no false alarms in between.
I find myself consoled (oddly) by a speech Larry Summers gave last year at an INET conference in Bretton Woods, where he noted that all the big macroeconomic vectors in play, from the growth and political future of China to technology-related job creation and destruction to the commodities bubble, are so complex and so intertwined that it’s hard to predict exactly where the U.S. and global economies are headed. Fingers crossed, it isn’t toward another double dip.

Monday, April 2, 2012


This will not come as a surprise to those that read my Blog. Aivars Lode
TechCrunch (@TechCrunch)
3/19/12 10:03 AM
Apple Execs: At $2.65 Per Share, Apple To Become One Of Largest Dividend Payers In The U.S. by @ripemp

It is among the grandest topics in scholarship: Why do some nations, such as the United States, become wealthy and powerful, while others remain stuck in poverty? And why do some of those powers, from ancient Rome to the modern Soviet Union, expand and then collapse?

 Why nations grow and fail interesting reading. Aivars Lode
From Adam Smith and Max Weber to the current day, scores of writers have grappled with these questions. Some scholars, like Weber, have argued that religious or cultural differences create vastly different economic outcomes among countries. Others have asserted that a lack of natural resources or technical expertise has prevented poor countries from creating self-sustaining economic growth.

Economists Daron Acemoglu of MIT and James Robinson of Harvard University have another answer: Politics makes the difference. Countries that have what they call “inclusive” political governments — those extending political and property rights as broadly as possible, while enforcing laws and providing some public infrastructure — experience the greatest growth over the long run. By contrast, Acemoglu and Robinson assert, countries with “extractive” political systems — in which power is wielded by a small elite — either fail to grow broadly or wither away after short bursts of economic expansion.

“You need political equality to underpin economic prosperity,” says Acemoglu, the Elizabeth and James Killian Professor of Economics at MIT. More specifically, he says, economic growth depends on widespread technological innovation. But widespread innovation is only sustained where countries promote rights, giving more people the incentive to invent things.

And while Acemoglu and Robinson have documented this thesis during roughly 15 years of joint research, now, in their new book, Why Nations Fail, released this week by Crown Publishers, they look more closely than ever at the collapse or stagnation of countries that lack these inclusive political systems.

Elites, Why Nations Fail asserts, resist innovation because they have a vested interest in resisting change — and new technologies that create growth can alter the balance of economic or political assets in a country.

“Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people,” Acemoglu and Robinson write. Yet when elites temporarily preserve power by preventing innovation, they ultimately impoverish their own states.