Thursday, June 30, 2005

Moron of the Day

Chicago just raised its sale tax to 9%, highest in the country.

Listen to this Moron:

"It will have a negligible effect on mom-and-pop businesses, but the big-box stores who deal in volume or large purchases could be negatively affected," said Alderman Brian Doherty, whose ward on Chicago's northwest edge borders many suburbs with lower sales tax rates.
It is tough to sympathize with Chicagoans when they are the ones who elect such patently ignorant politicians such as Alderman Brian Doherty.

How an increased sales tax will hurt big retailers more than the already uncompetitive "mom-and-pops" isn't even a mystery - it is a falsehood.

Politicians should just say that they are raising the sales tax because they need the revenue?

I have attacked this supposed protector of "mom-and-pops" ruse in a previous blog on Walmart.

No Wal-Mart bash is complete without the requisite empathy for the poor “mom and pop” stores that Wal-Mart devours. This canard fulfills the econo-moronic template as the “pitiable victims of rich evil CEOs”. Every time I hear the “mom and pop” lament, I think back to the last air conditioner I bought in Brooklyn. I went out of town to Wal-Mart and got a huge 12,000 btu air conditioner for around $240. The same air conditioner sold at the “mom and pop” hardware store in my neighborhood for $700. Wal-Mart critics don't care about the moms and pops that shop.

It is basic math, if the sales tax goes up 1% on those air conditioners, the Walmart one will rise $2.40 and the "mom-and-pop" one will rise $7.00.

With electorates and politicans this economically ignorant, it is not surprising that large cities are on the expressway to bankruptcy.

China, Thin Ice, and the Lessons from Japan

$60 oil……

I love it. When oil hit $40 a barrel everyone said it would cripple the economy and now we are 50% higher. But as soon the economy gets hit, whether it is later this year or two years hence, those same broken-clock pundits will be bellowing, “I told you so!!!!”

There is an almost nationwide consensus that oil is “too high”. But sitting around arguing with free market prices is pure intellectual arrogance. The fact is that nobody on this planet KNOWS where prices (stock, bond, real estate, and commodities) are going or what is causing them to move or what level of prices our economy can withstand. Yet this doesn’t stop talking heads from surmising, projecting, or blaming.

$40 oil is too high. $60 oil is too high. China is causing oil to spike. SUVs are the cause.

There is no oil left in Saudi Arabia. Oil companies are lying about their reserves.

Fears of terrorism is pushing oil up (they don’t say this anymore).

The war in Iraq is driving oil up. Alan Greenspan is inflating oil from his interest rate policies.

So much noisy opinion and so little fact.

If a family of four has one box of cookies in the house and it gets consumed, then maybe someone could analyze individual demand components. But oil is a global, highly politicized commodity that is consumed in multitudinous ways all subject to their own sets of dynamic variables.

It is just way too multivariate to study.

About China…

It is estimated that 25% of Chinese banks loans are non-performing i.e. bad.

Remember how Japan was going to eviscerate our economy back in the late 1980s? They work harder, save more money, have superior office desk configurations…..etc. We had to suffer through the semi-apocalyptic Rising Sun by Michael Crighton. What happened?

Well there was no integrity to their financial system – in fact there still isn’t. Japanese corporations prop up failing businesses with the profitable ones and banks won’t pull lines of credit for defaulters. Their system is just too rigid and anti-Darwinian. The result is a steady 15 year decline in Japanese real estate and its stock market.

I am not predicting the same for China, but I predict a definite hiccup in their economy. (At which time I am going to dump some money in Jim Roger’s commodity fund.)

Chinese stocks are tumbling and real estate has cooled off. Remember this is communist country and the transition to capitalism won't be smooth.

We will see if their economy can prove more resilient, flexible, and dynamic when the going gets tough. It is one thing to be hard working and have low labor costs, but if not backed by a solid banking sector....

Tuesday, June 28, 2005

Eminent Domain - A Loophole for the Taxers

In the Kelo decision last week, the Supreme Court ruled that government could expand the definition of “public use” and more easily claim properties in eminent domain cases.

Forget the boring legal and constitutional ramifications, let’s examine the economics.

Don’t let anyone tell you otherwise, but today eminent domain is all about that nexus between politics and economics – TAXES.

Why would local or state legislatures stomp all over property rights? On its face, such action would seem to be political dynamite, but the pols see potential budgetary cuts as the far worse political risk to bear.

Whether it is sports arenas, “big box” retailers, luxury condos, or other commercial development, local politicians view economic development as a vehicle to higher tax revenue and less political heat come budget time. To many, it is not a tough sell to argue that eminent domain grabs serve the greater good at the expense of a few property owners.

Of course the critics clamor about the constitutional rights of private property and invoke the “slippery slope” warning. What will stop local governments from expanding eminent domain to condemn just plain old ugly homes? Or low taxpaying businesses on main streets?

For one thing, I hate slippery slope arguments. Censorship-phobes use it to decry any standards for television content, even on channels that broadcast over government granted spectrum. Here in Charlotte, slippery slope is being used to thwart the bar/restaurant smoking ban. Prominent radio personality Jason Lewis warns, “What’s next? Kicking out beer drinkers…..” I love Jason, but that is ridiculous.

I am not categorically dismissing all “slippery slope” arguments, I just think that they are too oft abused and are lazy scare tactics that muddle or even ignore important contextual issues. For instance, in Jason’s opinion, it should be up to individual bar owners to determine whether or not smoking is permitted. Consumers via their free market choices would then determine what restaurants should do. Heck, I am as big a free market advocate as Jason Lewis, but this just isn’t consistent with existing laws and regulations.

Lewis’s argument ignores the fact that bars are already extremely regulated. They can’t serve minors, stay open all night, can’t have rats in the kitchen, and most onerous of all, they need a liquor license. In some places, such as Boston, licenses are extremely expensive, hard to get, and such barriers to entry preclude any claims of a free market in the bar/restaurant business.

I was at a bar downtown recently when a couple of other customers lit up cigarettes near me. Fortunately the bar was empty and I just moved away from the smoke. But the pregnant bartender had no such recourse. She was hanging at the end of the bar, as far away as she could possibly get. So while there are laws granting disability and maternity leave (10 weeks paid) for other pregnant workers, in Charlotte pregnant bartenders have to work in a smoke filled environment. Allowing smoking in bars is just inconsistent with other laws already on the books. Ultra free-marketers would be wise to inveigh against other more prohibitive regulations.

I am no fan of the Kelo decision, but I think that many people don’t realize how limited private property rights already are. In some tony Long Island towns you can’t get an above-ground pool or even hang your wash outside on a clothesline. I believe some towns limit Christmas light displays, all in the name of road safety (seriously). What about property taxes? If you truly owned the land, why must you pay ever escalating (they will get worse) property taxes?

I know a guy who finished his basement in a New Jersey development. Someone must have noticed through that small cellar window and he was reported for breaking a local ordinance. Property owners often need permits to cut trees down or build fences above a certain height. People that buy homes in historic districts of New York City have to get all remodeling plans approved by the Landmarks Commission. And forget about making a new window or altering the exterior.

Real private property is a nice CONCEPT, but in reality that is all it is.

As I alluded to previously, government agencies are like octopi and no where is this more accurate than in describing taxing authorities.

Taxers (federal, state, and local agencies) are in a constant battle with free market capitalism. They throw a tax out there and taxpayers adjust by buying less, moving, innovating, or any other means possible.

Economically illiterate and lazy politicians feel they have to constantly find ways to generate tax revenue because God forbid they had to cut spending or seek out more efficient government. Here in Charlotte they have several ambitious projects: a new arena, commuter rail, huge interstate highway proposal, NASCAR Hall of Fame, etc. When the issue of cost comes up, the immediate response is “we’ll tax rental cars and hotels….”

I just rented a car in Boston and was hit with at 20% rental tax (25% total including sales tax). It was almost $400 to rent a car for 5 days. I will never do that again, and I am sure that only the dumb, desperate, or very rich would rent a car up there more than once.

The same goes for hotels. Here in Charlotte, big companies have all sorts of corporate housing arrangements that circumvent these taxes. So politicians constantly have to come up with new taxing schemes.

The latest new scheme in North Carolina is to tax “SUVs” just as they recently tried unsuccessfully in Connecticut. It is all about semi-socialist lawmakers trying to use the wedge of class warfare to create a new source of tax revenue. They meekly argue that SUVs are heavier and cause more wear and tear on the roads - but what they fail to address is that SUVs already pay tons more in gasoline taxes, which accrue on a per gallon basis and thus fall mostly on "gas guzzlers". Based on fuel efficiency, Toyota Camry owners pay half the gasoline taxes of Ford Explorer owners and one third that of Hummer owners. But heck, if politicians can get SUV owners to pay more.....that is one less after-school program they have to cut.

Why do politicians try to tax car rentals, hotels, SUVs, tobacco ????

The simple answer is because THEY CAN.

Not many local constituencies are fearful of the aforementioned taxes. To the public, they are a tax on outsiders, a veritable white knight to politicians.

Why are cigarettes so heavily taxed? Politicians will say that smoking related healthcare costs are a burden on state Medicare and Medicaid budgets. But instead of drastically reducing the healthcare options available to smokers, politicians elect to tax current smokers. Tobacco tax revenues go into the general coffers of the states and may or may not find their way to helping Medicare and Medicaid – that is if they don’t get usurped by mismanaged public schools or a football stadium. This is a revenue grab, pure and simple. If golf became politically incorrect tomorrow, they’d start taxing tee times, drivers, hot dogs at the halfway house, and if possible they would tax curse words uttered after bad shots.

The Kelo ruling is a definite short term victory for the Taxers. It will embolden politicians to forge ahead with aggressive tax boosting developments. But what good are stadiums and convention centers if nobody wants to live in those high tax locales? And how good of a contrary indicator will this be that in 2005, politicians were given the green light on real estate investment? Time for everyone else to sell? It smacks of the Clinton Administration suggesting that some of the Social Security "trust fund" be invested in the stock market - in 1999. That was some great timing as well.

Who knows, it may turn out that this ruling becomes a great catalyst for change on the Supreme Court. Kelo can always be reversed.

But in the interim, I see no doomsday scenario here. Taxers have proven no match for free market capitalism.

Just take a step back and look what is going on. Bostonians drive to New Hampshire to buy lower taxed liquor, businesses move just outside of the Philadelphia line to avoid the city-wage tax, budding retirees buy their investment/retirement homes in Nevada and Florida where they'll enjoy no state income taxes, and naïve young people pile on deductible mortgage debt.

Many cities and towns are technically already bankrupt from public pension liabilities so taxes will only go up. Read this from anti-Businessweek. I haven't fisked it yet so Caveat Reader.

Here is my nominee for the Supreme Court opening.

Friday, June 24, 2005

The Hillary Homerun

I am a very experienced trader. “Experienced” means that I have lost tons of money in a multitude of ways, and have had to dig out of some massive deficits throughout my career. What invariably goes through traders’ minds in rough patches is essentially a homerun dream.

If only my biggest long gets a takeover bid….

If only India fires a nuke at Pakistan (when I was long gold)….

If only IBM misses their earnings this quarter (when I was a bleeding short)…..

You can bet that many a ravaged trader goes to bed dreaming of whatever scenario or event could pull them out of their hole in a flash.

So while I watch today’s obsession with “Hillary in ‘08”, I can’t help but see the parallel. Hillary winning the White House is the homerun dream for more than a few people. ESPECIALLY, when this speculation was running rampant BEFORE Bush even started his second term. Four years is a long ass time…..

(For the record, I predict George Allen will be the Republican nominee. But I don’t go to bed dreaming of it.)

In 1992, Bill Clinton came out of nowhere to win the Democratic nomination. Most likely, someone other than Hillary will be the nominee. Probably at no time in history has someone been the frontrunner for four years.

Furthermore, the Hillary homerun won’t solve the dreamers’ problems entirely. Republicans are gaining at every level of government. What good would Hillary be, other than psychologically comforting, if she is facing big Republican majorities in the legislature?

But I differ from most people I guess, in that I just don’t think who the President is really matters much.

On a related note, I played golf with a guy recently who said he ran into Bill Clinton at Hilton Head (or maybe Kiawah – I can’t remember). He told me that Bill was like a dog in heat, trying to pick up his friend’s wife!!!!!!!!

I am not a big fan of Hillary, but I will take her seven days a week over John Kerry – even though she is a cuckold.

Saturday, June 18, 2005

Obese Budgets


There are some immutable laws of nature. For instance, a psychiatrist will never tell a patient that they are problem free, an exterminator will never tell a customer that the vermin is completely gone, and researchers will never conclude that they need less research funding.

Inertia is word often used to describe government agencies because once born, it seems they never go away. In fact they invariably grow like amoebas or octopi, stretching their agendas, purviews, and budgets to billowing heights.

Consider the Centers for Disease Control & Prevention, or the CDC. Read about how this $7 billion agency completely botched a report on obesity.

In a report published in March 2004, four of CDC's scholars stated that 400,000 people a year in the U.S. were dying early as a result of obesity and that obesity might soon pass smoking as the country's leading cause of preventable death.

One of the four scholars was CDC boss Julie Gerberding (pictured above), who had earlier compared the obesity epidemic in America with the plagues of the Middle Ages. Announcing the new findings, she said, "Our worst fears were confirmed."

Come April 2005 a research report offered a quite different perspective on obesity. This time the researchers were led by a CDC epidemiologist named Katherine M. Flegal. Their report estimated obesity-driven deaths at 112,000, and added that moderately overweight people gain some protection from the extra poundage, so that net deaths from overweight were in the neighborhood of 26,000. The new finding transformed obesity from fearsome killer to pitiable also-ran, ranking in seventh place on the CDC's list of preventable death causes. It came in just behind gun-related incidents.

As Forbes says, so much for comparing obesity to “Black Death”. Make no mistake, the CDC might be embarrassed, but they are definitely pissed. Just think of all the new funding they “missed” from this lost epidemic. I wonder what it like to sit around and root for epidemics.

Generally speaking, public sector research, polls, and intellectuals are not to be trusted. Their biases are pronounced and only allegiant to their own self-interests.

As I have stated in a previous blog, I really have no opinions on “obesity”. I just find it curious that while life expectancies keep rising, big media (MSM) and academics would have everyone believe the opposite.

(Lest anyone forget, those academics subsist mostly on the taxpayer funded tuitions and research grant money - a welfare demographic in and of themselves.)

The Housing Bubble - A Short Memory Refresher


It astounds me that many of today's home buyers don't remember the stock market tumble of only five years ago.


In my previous blog, I threw out a hypothetical example where a $600,000 house would did not appreciate for 30 years. Think that is ridiculous? Well consider this:

At the local or regional level, there's a history of ups and downs in the real-estate market. The downturn in the oil industry in the 1980s affected real-estate values in many Southwest metropolitan areas, with home prices in Dallas and Houston dropping in 1986 and recovering three years later. In the wake of the 1987 stock-market crash and the subsequent layoffs in the financial-services sector, prices in Manhattan took a beating. In 1982, a buyer could have paid $237,000 for a Manhattan apartment and sold it in 1988 for $660,000, a 178% gain. But if a buyer bought the same apartment that year, by 1995 it would have fetched just $397,000. It wouldn't reach its previous high price until 1999, according to a study by Corcoran Group, a New York real-estate firm.

The lesson here is that from 1988 to 1999, that Manhattan apartment did not appreciate. So one doesn’t have to go back that far to find a protracted real estate slump. It also bears noting that the late 90s saw the beginning of the greatest stock and bond bull markets in history and that is what pulled up real estate from its malaise. I wouldn’t hold my breath waiting for another such boom. And I wouldn't be surprised if the next real estate bust is worse, given the risky leverage of today's adjustable rate borrowers.


Wednesday, June 15, 2005

Real Estate Hot Potato...Buy versus Rent & Invest


I just rented the first floor of a two unit building in Newton, Massachusetts. The building just sold two weeks ago and so I could see all of the property specs.

The top unit rents for $1,700 a month and I rented the lower one for $2,300 a month. The building sold for $1 million. Best case scenario – the new landlord will be getting $4,000 per month, or $48,000 per year in gross rent. So 48k on $1 million represents a gross 4.8% yield.

The local property taxes are $7,500 and $2,000 is listed as the insurance premium (I have not checked how realistic that number is.) So now, the net annual rent is down to $38,500 for a yield of 3.85%, already below the ten year Treasury note yield of 4.1%.

From that $38,500 one still has to deduct general maintenance costs, lawn care, water bill, legal/accounting costs, etc.

Also the new owner is losing rent on our unit for both June and July (We start August 1st) – a not so slight $4,600.

Since they never go down, taxes will probably go up. The landlord can’t realistically count on 100% occupancy and rent collection for the life of the building. Tenants may break their lease or he may have a few months between successive tenants. Pipes may burst. The roof may leak. An exterminator may have to be called. Plumbers will extort money from this landlord too. Real estate management is not a sit-and-collect sinecure.

Any way you shake it, the new owner is getting a paltry yield (around 3.7%) on this “investment”. Good luck to him.

My unit represents 57.5% of the rent but I will round up to at least 60% since the upstairs unit is not renovated or as real estate types say, “updated”.

So compare me buying this $600,000 unit versus renting it for $2,300 a month.

If I put $100,000 down, a 5.75% fixed rate mortgage would make my payments around $2,900 a month. After subtracting the federal mortgage tax deduction and adding back in property taxes, insurance, and maintenance, at best my total payment would reduce by $100 a month. By at best, I mean assuming the highest federal income tax rate for myself, flat property taxes, and minimal expenses. So compare the “at best” figure of $2,800 per month to my rent of $2,300. So after one year, I will have $6,000 more in the bank by renting, but if I bought, I would own a little more than that in home equity.

In fact, if I save $6,000 a year for 30 years (the life of the mortgage comparison) and compound it at 4% (today’s ten year rate), I will end up with…


To that you have to add the original $100,000 deposit that I did not put up and compound that over 30 years at 4%.

=100,000*(1.04)^30 = $324,340

So adding my annual payment savings (compounded) to the future value of the 100k deposit that I did not have to give up ….

$349,221 + $324,340 = $673,561.

Conclusion, in this very limited example, after 30 years, the renter would have about $674,000 in cash, and the buyer would own the $600,000 apartment. (and lest anyone forget, the homeowner would lose around $30,000 in real estate commissions if he wanted to move.)

NOW HOLD ON. I know that right now, thousands of my blog readers are saying I am an idiot if I think that apartment will be still be worth 600k in 30 years. I am not saying that at all. This is a very sensitive multivariate exercise and I will tweak the variables one at a time.

CaptiousNut will now PROVE that renting is a no-brainer.

First of all, the above comparison has extremely favorable assumptions for the homebuyer and RENTING STILL WINS.


Local property taxes stay the same. It has never happened and never will.


The buyer is in and will stay in the highest federal income tax bracket. The IRS lets homeowners deduct mortgage interest payments from their gross income. The dollar savings to the borrower are then:

Dollar savings = annual mortgage interest paid * marginal federal tax rate

For example, the total interest paid in Year 1 of the example is $28,582. If the borrower in is the 35% federal tax bracket, he will be effectively entitled to an $834 monthly rebate. But if the borrower is in the 30% bracket, the monthly tax savings is only $715.

( computational note: 834=28,582*.35 / 12 )

I was amazed at how much marginal tax rates affected the Rent versus Buy equations. That $119 monthly difference between borrowers of different tax brackets becomes huge over time. It is actually one of the few tax laws that favor high income earners.

Remember to compare the $2,900 per month mortgage payment to the $2,300 monthly rental payment, I had to subtract from $2,900 the mortgage interest benefit and then add back in the costs (property taxes, maintenance, etc). Doing so, with a $119 lower monthly mortgage deduction benefit will widen the cost gap between the $2,300 and adjusted mortgage payment. Let’s be conservative again and round $119 to $100. So that brings the adjusted mortgage payment back to its original $2,900 per month.

It also means that instead of the renter saving $500 per month over the buyer, he now saves $600 or a total of $7,200 for the entire year. Let’s replace the $6,000 annual savings figure above with $7,200 and see how much it will compound to over 30 years at 4%.

= $419,065

That is $70k more. Add that to $324k from the compounded deposit and the renter’s total cash after thirty years jumps to $744,000 compared the homeowner’s 600k house.


Most people don’t realize that the mortgage interest deduction fades over time. In fact, it is straight downhill after the first year. Look below to see how in this example, the annual mortgage interest paid decreases. The second and third columns show the decreasing monthly tax deductions for the 30% and 35% tax brackets (that is total interest multiplied by the tax rate and divided by 12). Remember this is a 30 year fixed mortgage on $500,000 at 5.75 %.

Total Interest Paid ....... 30%............ 35%

Year 1........$28,582.24........$714.56........$833.65
Year 2........$28,202.49........$705.06........$822.57
Year 3........$27,800.32........$695.01........$810.84
Year 4........$27,374.40........$684.36........$798.42
Year 5........$26,923.34........$673.08........$785.26
Year 6........$26,445.65........$661.14........$771.33
Year 7........$25,939.75........$648.49........$756.58
Year 8........$25,403.99........$635.10........$740.95
Year 9........$24,836.59........$620.91........$724.40
Year 10........$24,235.70........$605.89........$706.87
Year 11........$23,599.32........$589.98........$688.31
Year 12........$22,925.38........$573.13........$668.66
Year 13........$22,211.65........$555.29........$647.84
Year 14........$21,455.78........$536.39........$625.79
Year 15........$20,655.28........$516.38........$602.45
Year 16........$19,807.52........$495.19........$577.72
Year 17........$18,909.71........$472.74........$551.53
Year 18........$17,958.90........$448.97........$523.80
Year 19........$16,951.95........$423.80........$494.43
Year 20........$15,885.54........$397.14........$463.33
Year 21........$14,756.18........$368.90........$430.39
Year 22........$13,560.14........$339.00........$395.50
Year 23........$12,293.49........$307.34........$358.56
Year 24........$10,952.05........$273.80........$319.43
Year 25........$9,531.41.........$238.29........$278.00
Year 26........$8,026.90.........$200.67........$234.12
Year 27........$6,433.57.........$160.84........$187.65
Year 28........$4,746.16.........$118.65........$138.43
Year 29........$2,959.13.........$73.98.........$86.31
Year 30........$1,066.60.........$26.67.........$31.11

It is easy to see that by year 10, the 35% tax bracket owner will see his monthly interest deduction fall from $834 to $706 and the 30% tax bracket owner will similarly see his monthly deduction savings fall $105 as well. Also, in the last few years, there is almost no mortgage interest deduction at all. The homeowner may claim that he is gaining pure equity at this point; however, the renter is gaining even more cash over the buyer’s equity. In other words, the renter is still paying $2300 a month but since the mortgage deduction has shrunk, the homeowner will effectively be paying easily over $1000 a month more than the renter.

Earlier I assumed that the renter would be saving $6,000 (35% bracket) or $7,200 (30% bracket) a year more in cash and that this amount would remain constant. But due to the declining mortgage interest deduction, this is not true and bolsters the renting argument further.

I assume that the renter is only earning 4% annually on his excess capital (i.e. the 100k deposit that he invests and $6,000-$7,200 in monthly cash savings). 4% is way below historical rates of return in both the equity and bond markets. Consider the massive jumps in the 30 year return on 100k invested:

At 4% $349,000
At 5% $432,000
At 6% $574,000
At 7% $761,000
At 8% $1,006,266
At 9% $1,326,768
At 10% $1,744,940

Myopic naysayers are bellowing, “Where am I going to get 7%?”

Well, a mere five years ago you could have gotten that from long term government bonds. One thing is for sure, if you put all of your cash into a mortgage down payment, when interest rates do rise, you won’t be able to capitalize on it. And of course your “investment”/house will plummet in value.

Take a good look at those big numbers above and don’t forget that they only represent one half of the renter’s growing cash, that of the 100k deposit.

When I summed up the renter’s monthly cash savings that started at $6,0000 and $7,200 for the 35% and 30% tax brackets, I compounded the money at a mere 4% over the thirty year period. Consider these monthly savings earning higher annual returns over 30 years.

At 4%......$364,897......$432,502
At 5%......$417,329......$500,796
At 6%......$500,859......$601,031
At 7%......$603,450......$724,140
At 8%......$729,602......$875,523
At 9%......$884,878......$1,061,854
At 10%.....$1,076,143....$1,291,371

So if Johnny Renter is in the 30% tax bracket and earns 6% annually on his money (100k lump sum and annual cash savings), after 30 years he will amass $1,175,000 !!!!!!!!!

Some of my readers are saying that I am crazy if I think that house won’t appreciate over 30 years. And I am also crazy for assuming that the $2,300 rent won’t rise. I don’t really want to draw those conclusions, I just wanted to illustrate that if a house is an “investment”, one should not compare it to Renting – it has to be compared to Renting and Investing the cash savings.

Plus I could throw those historical arguments back as well. You claim that housing has never had a 30 year period of price stagnation? Well I will fire back that never in economic history have interest rates been so low… you have to assume they are going to rise. Also, never in economic history have borrowers been so leveraged as they are with half of the country borrowing at adjustable rates. And let’s not forget the interest-only borrowers who are basically renters with major interest rate risk.

Borrowers are nuts to not lock in today’s low rates. But as today’s blog demonstrates even fixed rate borrowers have major interest rate risk in both the value of their home and in the opportunity cost of lost investment income.

Saturday, June 04, 2005

The $50 Million Harvard Apology

When I heard David Horowitz on television say that Harvard president Larry Summers confessed to “thought crimes” I assumed he was speaking in metaphor or hyperbole. I was wrong.

“My January remarks,” he wrote, “substantially understated . . . discrimination [against women], including . . . patterns of THOUGHT to which all of us are unconsciously subject.”

If only Tom Cruise could have intervened and prevented Larry’s original snafu. In Minority Report (a decent movie), Cruise works for Pre-Crime, a law enforcement agency who use oracles to see crime before it happens. He sweeps in and slaps the cuffs on plotting or even uncalculating would-be criminals.

Heather MacDonald analyzes the disgusting fallout from Summer’s faux pas.

She deftly chronicles the new diversity task forces, metrics, quotas, and “goals".

Just play Let’s Pretend: “Let’s pretend that we’ve never had a diversity initiative at our college and that this current proposal to hire more women and minority faculty represents a radical new take on college governance.”

The whole incident boils down to politically correct extortion. At the end of the article, Heather revisits the Cornel West flap. After a tiff with Summers, West (Afro-American studies professor) bolted to Princeton to escape the white male “concepts of excellence.”

West has of course seized the opportunity to dig in the boot a little deeper, following Summers’s current self-abasement. “I was praying for the brother, hoping he would change,” West oozed. “It’s clear he hasn’t changed.” Unfortunately, he probably has. Now, instead of making even a temporary stand for excellence and then retreating ignominiously, Summers will not bother to take a stand at all. Message to diversocrats across the country: Your power is indomitable; use it.
With tuition and expenses at $42,000 per year, you would think someone would object to $50 million apologies.

On the subject of ridiculous college tuitions, check out this op-ed from the president of Simmons College in Boston. As I have touched on in a previous blog, he attacks the logic of paying so much for higher education.

Because a college graduate earns nearly $1 million more in pay over a working career than a high school graduate, while the same college tuition investment in the stock market would yield more than $2 million over that same period….

I am glad this guy went after the FALSE COMPARISON tactic. This is what casuists do, they try to frame a multi-choice scenario as a simple dilemma. Either go to college or lose out on $1 million in career earnings. Of course this altogether avoids the issue of high tuition costs.

Okay forget the educrats. I am still searching for one politician or pundit to question the concept of federal student loans. Runaway college tuitions (and $50 million apologies) prove that despite the virtuous intentions of making college more affordable, all federal loans have done is subsidize profligate school administrations and push the students’ costs further into the stratosphere.

Of course the relevant analogy is the federal mortgage interest deduction. Instead of subsidizing home ownership, it is subsidizing home-indebtedness.

Isaac Newton's third law of motion applies to economics as well.

Friday, June 03, 2005

The Desperate Housewives Subsidy

I have almost beaten the class warfare angle of SUVs to death. The knuckleheads think that SUVs drive up the cost of gas and I have debunked this idea that it is possible to parse price and demand into disparate components. It just simply can’t be done, but if someone tries this on me I have plenty of retorts.

Still believe that paranoid canard that “SUVs think they own the road”? Well maybe they have a claim to it. Highways and roads are maintained by gasoline taxes that accrue on per gallon basis. It follows that all of the zippy little Accords and Prius’s are getting a free ride here from the gas guzzlers. (Federal tax is near 20 cents per gallon and state taxes span from Georgia, 7.5 cents, to Rhode Island 30 cents per gallon.)

SUVs are the most profitable vehicles for car manufacturers. They effectively subsidize the fuel efficient cars whose buyers don’t pay the real cost of production.

Mercifully moving off SUVS…

Most people don’t know that supermarkets usually sell milk and eggs at a loss. All of you non-dairy product consumers, the next time you see someone checking out with eggs or milk, give them that class envy sneer. After all, you are paying higher prices on everything else so they can enjoy their subsidized omelets.

Bars make all of their money from draft beer (ever notice how many places have no bottled-beer?). So certainly bottled-beer drinkers are also a pub welfare demographic unto themselves.

Everyone knows how expensive toner cartridges are for computer printers. In fact, Hewlett-Packard, recently a near monopolist in the printer market, doesn’t make any money from selling the actual printers, but they make oodles from the toners. Their printer/toner business was so profitable that they used the proceeds to subsidize their struggling PC division. Well, Dell Computer wasn’t going to tolerate that for long, and they acted brilliantly. They entered the printer business in a move that is eroding Hewlett-Packard’s printer/toner profits and its subsidized PC business.

ABC has announced an enormous gain in pre-sold advertising for next year’s programming – upwards of 30% higher than this past year. This increase is due in most part to the success of new hits like Desperate Housewives and Lost.(Cast pictured above. Yes that is Charlie from Party of Five.)

Desperate Housewives will bring in around $1 million dollars for some 30 second commercials next year. Those are recent SuperBowl ad rates. I only watched it twice last year and wasn’t very impressed. Next year I predict it will see a drop in viewership as these ultra-hyped hits rarely stay on top. Remember Who Wants to be a Millionaire?

However, I am a huge fan of Lost – I think it was the best show on TV this year. It was even better than 24 this year, and I have watched every episode of 24 since the beginning. I would encourage everyone to either watch the Lost reruns or rent the whole thing when it hits the DVD.

Of course, some of the advertising profits from Lost and Desperate Housewives will help prop up the ABC network news division. The demographic that watches network news is shrinking or more accurately dying. Eventually one of these networks will swallow their pride and depart the ulta-competitive news business altogether as both economics and logic would dictate.

Outside of a fast-forwarded O'Reilly Factor, I don't even watch a second of CNN or Fox News nor do I buy any newspapers. I get all of my information from the internet and I will match my knowledge of current events with anyone's. People thought that cable TV "fractured" viewing audiences. Well they haven't seen anything yet. The internet is throwing all television and media paradigms out the window. I could turn on my $100 webcam, run down today's news, and broadcast it worldwide right now with no subsidies at all.

Thursday, June 02, 2005

Facts, the Fleet Merger, and Agitprop at the Boston Globe

I have touched on the blog-phobes and internet Luddites who mostly, but not exclusively, reside in the MSM. Let’s reexamine one of their chief complaints – that internet information is not factual or reliable. This begs the broader question of where non-internet people get their information from. It is not a long list: word-of-mouth, television, books, radio, and periodicals. Does anyone want to trumpet any of these vehicles as a source of better or more reliable information?

When I was younger, I remember arguing with a friend’s parent over the abilities of a certain NBA player. Of course, inherent in this was my conviction that I was right and he was wrong. But what really annoyed me was that this guy didn’t have cable TV and he could only watch the local team, so he couldn’t have possibly seen this player much at all. (Never mind that he couldn’t watch 95% of the rest of the league play either – another strike against his credibility.)
All too often I find myself talking to someone that suffers from what I call IDD (Information Deficiency Disorder). I am not calling them moronic, just deficient or too narrow in their use and selection of information sources.

For example, take my home state of Massachusetts. There is an army, maybe even a majority, of residents that just read the Boston Globe everyday and probably think they are well-informed. Several times in the past year I have heard from New Englanders that “Bank of America lied about the number of job cuts they would make in Boston…” (all related to the buyout of Fleet Bank.) My response each time was, “Did you read that in the Boston Globe?” To which I received affirmative responses in each case.

The Globe hit Bank of America with a relentless barrage of negative publicity and predictably the socialist politicos (John Kerry and Ted Kennedy) piled on. Artless in the political realities of Boston, Bank of America tried to allay this imbroglio by moving many jobs from Manhattan and Charlotte to Boston.

The Globe reflexively took the position that any job loss from the merger was anathema and justly worthy of its ire. I don’t know whether they simply respond to their local politicians or inspire them. Either way, the groupthink of Boston’s elite is both nauseating and pervasive.

But the last time I checked, mergers of companies were matters between shareholders. In this case, Fleet shareholders loved the 40% premium that Bank of America paid for their shares. The opinions of local politicians and socialist editors are or at least should have been treated as irrelevant. Political meddling in private business deals is far from new, but it is quite fashionable now as a springboard to higher office. Note Eliot Spitzer and now Massachusetts is currently seeing round two of merger meddling with aspiring governor William Galvin and his holdup of the Gillette/Proctor & Gamble combination.

Just what is the Boston elite’s problem with these layoffs? They don’t really say, but hide behind a “gotcha” where they allegedly have a BoA executive or spokesman on record saying there would be no job cuts in Boston. The problem with this is that even if they did “lie” to the newspaper, the Globe remained a disinterested and irrelevant third party in the transaction. In my view, their hostility springs from a presumption of corporate mistrust and a spurious claim to be championing the “little guy.”

Here are the facts about Fleet Bank. Bank of America probably should have laid off way more people than they did. In the last 10 years, while other banks were minting money, gobbling up smaller banks, and splitting their stocks, Fleet languished as one of the worst run and least profitable banks in the country. Will someone please explain to me how a big bank in New England can’t make money during the greatest bull market and when interest rates were plummeting? (Aside from general incompetence, they were pissing away money in Latin American debt.)

So Ted Kennedy is concerned about the little people. Maybe if Fleet was better run, they would have thrived (like every other bank) during this period. Maybe they would have been making money, buying up other banks, and creating more jobs for Bostonians. Does Ted care about the shareholders, including just about every pension fund, whose investment was languishing for years? Does Ted care about the hostile business climate fostered by him and his ilk that scares untold scores of corporations away from Massachusetts? Ted is no friend of the tax paying and job seeking little people.

The Boston Globe hasn’t for a second considered that maybe Fleet was inept and needed a hatchet job for the good of the investors and customers that far outnumber those laid off. Bostonians won’t tolerate an iota of incompetence from say the shortstop of the Red Sox, so why coddle foundering Fleet Bank?

It is not like Bank of America is starving the employees it laid off. I personally know several Fleet employees that are getting upwards of one year’s severance pay. Many have even gotten better jobs elsewhere, and adding in their severance pay they are effectively doubling their salaries for months.

So Bank of America is grabbing its ankles and spending $40 million this year transferring jobs up north in efforts to placate the Boston Globe et al. How much political capital has this gained the Bank? Well consider this. The Bank inadvertently overpaid some of the Fleet layoffs and has asked for the money back. These people signed severance contracts that explicitly enumerated the generous financial terms of agreement. Now the Boston Globe thinks the Bank is not entitled to reimbursement. Would they feel the same way if the Bank had underpaid these workers? Of course not.

Nowhere does the Globe mention how exceedingly generous the severance packages are to begin with. Also when the Globe called Bank of America for a comment on this situation, the Bank asked what the Globe would do if that situation arose for its employees. The Globe reporter’s response was that what they would do is irrelevant, “you (Bank of America) are a big corporation and you should eat the loss on the overpayment.” I guess that with thousands of employees and $3.3 billion in revenue, the New York Times (parent of the Globe) doesn't consider itself a big corporation.

The Boston Globe explains much of the economic illiteracy in New England. The bad news for them and their political accomplices is that the information pipeline is widening.

Ted needs to lay off the pork. No?

Wasn't he at one time an avid swimmer? Hard to believe.

Wednesday, June 01, 2005

Defying Logic at the New York Times

I know I vowed to lay off the New York Times, but I can’t justifiably name my blog MarginalizingMorons and let this one slide.

From Forbes.

A big story, inadequately memorialized by the media, is that crime in America has become a much smaller story. Crime rates have declined by a third since the early 1990s.Violent crimes--defined by the U.S. Justice Department as homicide, rape, robbery and assault--are down by some 60% since 1993.

The main reason, Forbes asserts, is due to much higher incarceration rates. But the New York Times sees no correlation between lower crime and more inmates. In fact they think prisoners should be let out BECAUSE of the lower crime rates. Read the whole article, it is very short.

On the subject of New York Times' perverted logic, all of the compassionate higher minimum wage advocates need to digest this flip-flop.