Brian Romanchuk

In previous articles (example), I have been arguing that investment is the major driver of the private sector cycles. (I am using the national accounting definition of investment, and not the act of purchasing financial securities.) We can now turn to the data, and the important question: how are we doing right now?…

There are a number of categories of expenditures that are all lumped under the notion of investment. The major categories of interest are:

• Investment by government (which is a policy decision).
• Private Residential (houses, apartment blocks) investment.
• Private Inventory growth (not included in fixed investment).
• Private non-Residential (includes equipment, non-residential structures, etc.).

The decision-making behind each category is different, and so there is no reason to believe that we can explain all of these types of investment with the same measured variables. (This is unlike simplified economic models, where all investment is under the control of some representative firm or household.) For example, if sales are rising, and the inventory-sales ratio is falling, we might expect firms to step up production in the near run to bring up inventory levels, regardless of their views on long-term fixed investment.

As a result, we need to break our analysis of investment by category. This article focuses on the last category -- private fixed non-residential investment -- which is depicted in the chart at the top of the article....

Bond Economics
Initial Comments On U.S. Fixed Investment
Brian Romanchuk

How Taxes Were Shifted Off Real Estate — Sharmini Peries interviews Michael Hudson

Video and transcript.

Michael Hudson
How Taxes Were Shifted Off Real Estate
Sharmini Peries interviews Michael Hudson

A guy sees this blog, learns how things work, then writes a book!

A while back a fellow by the name of Gary Carmell contacted me and told me how much he appreciated the blog and that he wanted to understand more about MMT.

Gary is in the real estate industry and he was struggling to come to terms with trillion dollar deficits and their (non) relationship to interest rates and how QE was not going to result in runaway inflation. I explained to him how these things work; how rates were set and how the deficit and debt had no correlation to rates for a sovereign currency issuer. In addition I explained why there was no real threat as far as inflation was concerned.

He seemed enlightened.

Yesterday I received a nice email from Gary telling me how his understanding of MMT has helped him see things differently. He even told me he wrote a book recently, entitled, The Philosophical Investor: Transforming Wisdom into Wealth and he dedicated a few chapters to MMT explaining how instrumental it was in reshaping his perspective and how he put it to use in his business

Of course I was very gratified to hear all this and I think everyone who is involved with spreading the word of economic and monetary truth and reality should also be gratified. We are all doing our part and these signs of change, person by person, may not seem like much, but they are very meaningful.

Please check out Gary's book.

-Mike Norman

Yves Smith — Adair Turner: The Consequences of Money-Manager Capitalism

Yves here. This is a terrific interview with Lord Adair Turner, former head of the FSA. Most of it focuses on the things missed in contemporary economics, particularly macroeconomics, and how some disciplinary “back to the future” would be desirable. 

A major topic of discussion is how wealth is becoming as concentrated as it was in the 18th century, and the driver then and now was the disproportionately large role real estate has come to play. Then, it was income-producing agricultural land. Now it is urban property, bid up by domestic and international elites who want to live in particularly prized cities. Turner points out the irony that access to cheap finance for housing, meant to help middle and lower income buyers, has instead contributed to rising wealth inequality. He also describes how the ability of banks and financial markets to supply virtually unlimited amounts of credit, against a limited stock of particularly sought-after locations, has the potential to create tulip-mania type results. 

Perhaps due to time constraints, Turner didn’t venture into the views of classical economists, that profiting from land, which they derided as rentier capitalism, was economically unproductive. As Michael Hudson has stressed, they urged heavy taxation of land as the remedy 

An aside: Turner has an extremely plummy accent which he normally uses to theatrical effect. It isn’t clear whether the recording quality flattened that or whether he decided to tune his intonation a tad for North American listeners (not sure why that would be a plus, since a British accent is worth at least 20 attributed IQ points here, and the more obviously Oxbridge, the better).

 Naked Capitalism
Adair Turner: The Consequences of Money-Manager CapitalismYves Smith

Dr. Housing Bubble — The inflection point has arrived in Southern California real estate

As it turns out, investor buying does have a massive impact on local real estate. Big money is slowly starting to pull away from the real estate market. We are seeing this in dramatic fashion in Arizona and Nevada. It is also happening here in the sunny Golden State. What is interesting in the last housing correction is that prices and sales fell on the outskirts first and slowly made their way inward. The marginal buyer is pushed out first before making its way up the economic food chain. We are seeing similar action happening in places like the Inland Empire and Central Valley where inventory is certainly up and prices are hitting plateaus. The momentum from 2013 is now running on fumes. We also have certain cities being dominated by investors and in many cases money is coming directly from China. Hot money is finding a home in the oddest of places. Yet one thing is certain and that is SoCal real estate is now entering into an inflection point. As this turn unfolds we are going to find out what areas are truly prime and what other areas are all hat with no cattle.

Dr. Housing Bubble
The inflection point has arrived in Southern California real estate: Investors make up smallest percentage of buyers in three years. Inventory continues to grow.

See also, The drought of young California home buyers: Unaffordable housing reigns supreme as first time home buyers squeezed out of market. Of 7,000,000 completed foreclosures since 2005, 1 million occurred in California

It is safe to say that the momentum of 2013 has fizzled out in the housing market. Sales are down and prices are reaching a plateau. Part of this has come from the slowdown of investors purchasing homes in the state. An interesting end of the year study by the California Association of Realtors (CAR) found that 82 percent of investors that bought in 2013 had the intention of turning the home into a rental. The other 18 percent were giving the old flipper lottery a try. This helps to explain why inventory continues to remain lowbecause in more typical markets, a person selling the home would usually also buy another home in the ragtime favorite trend of property laddering your way into a bigger home. In other words, two transactions with one move. Today, you have many investors buying foreclosures from banks with a one and done deal (buy the home from bank and then put it on the market for rent). Yet from contacts in the housing industry, the lack of first time home buyers is dramatic. In 2013 the argument was that pent up demand for young buyers was going to give housing another dramatic run higher. In reality, 2013 gave us a massive run from investors and with them slowly pulling back, the market is already entering into a tipping point. Flippers buy for appreciation so what happens when prices stagnant or turn lower which is typical in these boom and bust cycles? In reality, first time buyers are absent because they can’t afford to buy in California.

Dr. Housing Bubble — The liberation of real estate data

Information affecting the RE market. Welcome to the digital age and knowledge revolution.

Dr. Housing Bubble Blog
The liberation of real estate data: does having readily available real estate information encourage the boom and bust cycle? Zillow reaches 70 million unique users per month.
Dr. Housing Bubble

CNBC morning clown show continues

Starwood Chairman, Barry Sternlicht, on Squawk Box (lowest rated morning cable show), said that all his money manager friends were "ready to sell" at any minute because of the Fed's bond buying, which he says is creating asset bubbles.

My first response is why should we care that his money manager friends are waiting to sell? Given the notoriously bad track record of professional money managers (90% can't beat the market averages and the other 10% are trading off inside information or rigging trades) should their desire to sell really make us worried? Maybe it's better to ask, isn't that a good sign?

As far as the "asset bubble" thing all I can say is this: Sternlicht may know something about real estate and the hospitality business, but it's clear he doesn't know jack shit about monetary policy.

On the one hand he says that the Fed's bond buying is "creating asset bubbles," then he goes on to contradict himself by saying there's "all this cash sitting on the sidelines."

Well, if there's all this cash sitting on the sidelines, Barry, then how the fuck is the Fed creating asset bubbles?

It also doesn't occur to real estate expert Sternlicht, that four years of sub average housing starts means means that the nation's housing stock has shrunk and is dilapidated. This means prices will rise to "replacement cost" and that could be pricey given supply the shrinking/substandard supply.

Meanwhile, clueless Joe CLOWN Kernan sits there eating it all up.

Dr. Housing Bubble — The signs of real estate mania in California

Irrational exuberance is back in fashion in California real estate. The bullish case for real estate is so strong that the echoes of the last housing mania are slowly fading away into economic history. Flipping is now a big part of niche markets and we are starting to see the whacky stories that are common in manias. For example, In San Francisco’s trendy South Beach neighborhood a parking spot sold for $82,000. While that may sound extreme that is simply the behavior that occurs when virtually the entire state is cast under the spell of real estate fever. There can be no wrong and apparently incomes do not matter anymore. We’ve already discussed the reemergence of interest only loans so we are simply experiencing another mania with a different flavor.

Dr. Housing Bubble
The signs of real estate mania in California: San Francisco Parking Spot Sells for $82,000. Median California home price up 25 percent year-over-year. Welcome back interest only loans.

California is the best argument I know of against the rationality assumption. I am getting similar reports from friends on site. It's on again. But this is just the start and there's still money to made before it gets really crazy.

Dr. Housing Bubble — The Good, the Bad, and the Ugly aspects of the American housing market: Key indicators of the 2013 real estate market.

The US housing market is massive. You would expect this from a nation of 315,000,000+ people spanning over 50 states. So it is important to understand the various dynamics occurring over many states. In regards to single family home buyers, in most of the United States home prices are very reasonable. This is hard for some in the coastal regions to digest or even comprehend. When you look at certain markets in high priced areas, many people have a hard time penciling out the financial details. Yet with such a large number of investors purchasing with cash, a new market has been created. But if we are to take the US market and make a wide-eyed observation, we will find some good, bad, and ugly aspects of the current housing market. Whereas in 2008 through 2010, the market was dominated by the bad, ugly, and grotesque. What can we say about the current US housing market?

Dr. Housing Bubble
The Good, the Bad, and the Ugly aspects of the American housing market: Key indicators of the 2013 real estate market