Wednesday 23 June 2010

Fraud and Failure

Recent news on the housing front confirms what we have been saying about that market since the inception of Financial Jenga. In sum, there is no real stabilization much less recovery, the costs of attempting to maintain the illusion continue to rise rapidly and any cessation of government interference and manipulation results in rapid breakdown of the fake "market" which was created by those policies.

In the first instance, we now see the failure of HAMP as redefault rates among those "helped" by the program soar. An absolute majority of the government-sponsored loan modifications have now re-defaulted but they did give utterly baseless hope to debtors, thus trapping them into making continuing payments on a hopeless mortgage.

The ongoing cost to prop up Fannie Mae and Freddie Mac continues to rise. Last week the
NY Times reported that the cost of those bailouts has now reached $148 billion and will likely total $389 billion. Bloomberg cites a "reasonable worst case scenario" for the ultimate tab which could be $1 trillion or more.

The creation of the tax credit for housing purchases induced a temporary uptick in the number of sales. But like many other government actions, this merely succeeded in pulling forward future demand into the present - which is now the past. We have now entered the void created by that pulling forward. The existing home sales number yesterday and the new home sales number today both demonstrate that in clear terms. Today's existing sales number was nothing short of a disaster. The headline on
Marketwatch says:
New-home sales plunge 33% to record low in May
But that fails to reflect the full scale of the drop. In addition to May being down, April was also revised lower. This is a game we should all be familiar with by now. Actual may sales were 300k annualized. But the April report had 504k units sold but it has now been revised to 446k. That allowed the comparison to be reported as merely 33% down rather than over 40%. Either way it's not good and May set a new record low. Apparently, new houses just don't sell unless a big tax credit is piled on top of the subsidized mortgage loans.

Yesterday's existing home sales number was less dramatic but still indicated a housing market in trouble. The decline of 2.2% contrasted with an expected gain of 4%. The tax credit doesn't seem to have accomplished anything of value but at least it
fraudulently paid out $9 million to 1,300 prison inmates.

Sunday 20 June 2010

The Nonaggression Pact in Reverse

I guess most college professors have heard about the college teaching version of the nonaggression pact. The teacher sends subtle (and sometimes not so subtle) messages to the students: “I’m a very busy person. I won’t challenge you to do much if you’ll leave me alone. I won’t expect much of you so you shouldn’t expect much of me.” Obviously, this attitude leads to grade inflation and a mediocre (at best) educational experience.

It would be interesting to give college teachers truth serum and ask them what they think of this approach. My guess is that a lot of people are appalled by it but I would bet that a significant number would shrug and suggest “that’s just what college education is like.” The nonaggression pact has been around for a long time now. In 2010, I sometimes think we see so little truly exceptional education that we don’t even know that it exists. It is hard to strive for beauty if you have never experienced it. Acceptance of the nonaggression pact reduces the chance of experiencing education at some wonderfully high level.

At your university, what percentage of the classes are much better than mediocre? What percentage would you judge as a wonderful experience?

How can we change this trend? What is the reverse of the nonaggression pact? I would suspect that it would sound something like this: “I’m a very busy person. However, your education is important and I am going to challenge every person in this class to succeed. All of you. That means you can expect me to be very well prepared for every class and you have the right to come by my office and get help if you need it; I will help you to succeed.”

The question is not about the first three sentences. The question is about the last sentence. But, it is the important one. Teachers often challenge students. That’s easy to do. That challenge is a hollow one, and the students recognize that, if the teacher is not willing to back it up with some effort.

I often say “you cannot challenge a student to leap tall buildings in a single bound if you are not willing to do the boring stuff involved with helping them to learn to fly.”

If you have read this blog for long, you know I often tell my students that a class is like a dance: they do half of the work and I do half of the work and together we can create something that is wonderful. But, both sides have to do their half. Otherwise, it all falls apart.

Here’s my suggestion. Push up your 50 percent to a higher level. Be better prepared. Think more about your classes and your teaching. Encourage your students to come by and see you more often for assistance. Spend a bit longer grader tests and writing notes on their papers.

Student change won’t come immediately but I believe that you will find that, over time, they will begin to push up their 50 percent also. In a dance, someone has to lead. In a class, someone has to lead and it ought to be the teacher. If one dancer starts working harder, the other person often responds accordingly. Don’t ask the students to increase their 50 percent first. That won’t work—you are the leader. Push up your 50 percent and see if you are not impressed by the response you get.

(HAPPY FATHER’S DAY)

Sunday 13 June 2010

Are Your Class Goals Nouns or Verbs?

A good friend of mine asked me recently what my goal was in teaching one of my courses (financial accounting). I think he expected me to list out certain topics and concepts that I wanted all my students to learn. I call these “noun goals” because they describe rules, computations, or the like that students should come to know. For example, I might want my students to be able to compute cost of goods sold using a perpetual LIFO system.

In truth, I don’t think I have a single “noun goal” because I am not certain what any of my students are going to need to know after they leave my class. I am not sure if some or even any of my students will ever need to compute cost of goods sold using a perpetual LIFO system. How can a topic be a course goal if most of the students may never need the knowledge?

I explained to my friend that I had a single goal for my classes and I call it a “verb goal” because it involves action. I will be perfectly happy if I can get all of my students (100 percent – not just the ones who need to know perpetual LIFO) to spend 5 hours per week outside of class thinking seriously about financial accounting and 3 hours per week inside of class thinking seriously about financial accounting. I believe that is reasonable and if I can get that kind of effort then my students will come to better understand and appreciate financial accounting –qualities that can have a very positive effect on them in their years after leaving my class.

For this reason, I’m not so obsessed with getting every bit of information covered. If my students don’t happen to cover every possible depreciation method, I don’t lose sleep. If my students don’t learn every characteristic of common stock, their lives are not ruined. If I can get them, though, to think seriously about financial accounting for 8 hours per week for 14 weeks, I think they will take away a huge amount of understanding and interest. I think that is how you get a student to say “wow – I never knew financial accounting could be so interesting.” And, that is what I want – it comes from having a verb goal and not from a noun goal.

How do you get students to think seriously about a topic? Isn’t that really the ultimate question for a teacher? Forget everything else. If I can get my students to think seriously about financial accounting, haven’t I won the battle? At that point, the class starts to be able to leap tall buildings in a single bound.

If you have read this blog before, you know that I rely almost exclusively on two teaching techniques. First, I ask a countless number of “why?” “how come?” “are you sure?” type questions. I believe questions are the driver for critical thinking skills. Second, I work constantly to puzzle my students. If I can present them with a puzzle, I find they are dying to figure out how to solve that puzzle.

Think of your classes for the fall of 2010. Are your goals nouns or verbs?

Monday 7 June 2010

THe Keynesian Comeuppance

During the current economic crisis, most of the major countries have tried to spend their way out - either with government programs funded with new debt or by forcing debt directly into the private economy through guarantees, regulations and action by quasi-government bodies. We discussed the implications for China in Command and Control and for the US in The Federal Funhouse. These initiatives were based on Keynesian economic theory - that government should make up for any shortfall in private demand by spending (likely
incurring deficits) sufficient to stabilize aggregate demand.

This is a temporary band aid at best and the governments and central banks were hoping to buy time and convince everyone that things were OK so they should go out and spend. This was doomed to fail as prior private demand was based on nearly universal lending at suicidal risk levels. One of the key objectives of Financial Jenga was to document the extent of the madness in credit. Enough people have seen through the wishful thinking so that there will be greater caution on the part of both borrowers and lenders for the foreseeable future.

The massive deficits that various governments have run can only be sustained as long as there are lenders out there willing to finance them. Several bond auctions have failed or nearly failed in the last several weeks. Now we see the appetite for debt drying up and some key nations beginning to talk about austerity. A good example is this statement from the G-20 Meeting Communique:

The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances... We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions.
Clearly, the finance ministers are signaling a new mood of fiscal responsibility here - in sharp contrast to the "stimulus" measures that have previously reigned. This change in emphasis is further reinforced by the recent statements from two key European governments. From the UK we have (Prime Minister) "Cameron warns of painful cuts to tackle debt" as a headline. In Germany, Chancellor Merkel is cutting the budget by nearly $100 billion according to Bloomberg. This is not only a sharp contrast with the Keynesian program here in the US, it is a direct slap in the face of Tim Geithner at Treasury and the entire Obama Administration:
German Chancellor Angela Merkel’s Cabinet approved levies on banks, air travel and nuclear-power plants as part of what she called an “unprecedented” round of budget cuts, rejecting U.S. calls to spur growth.


Bux Populi
Austerity is the new watchword and it is showing up first in places where governments either have their backs to the wall or are less under the influence of the banks. Yet even here in the US, where we have the best government the bankers' money can buy, things are starting to change. Actual voters concerned about the rapidly growing deficit seem to be a stumbling block to Congressional spending with less than 6 months until the elections. Web-based My Way News reports:

Obama's proposed $250 bonus payment to Social Security recipients was killed by the Senate. Also gone is an $80 billion-plus Senate plan that promised money to build roads and schools, help local governments keep teachers on the payroll and stimulate hiring in the home improvement industry with rebates for homeowners who make energy-saving investments.

Just last month, deficit concerns killed $24 billion in fiscal relief to prevent state workers from being furloughed. It was a measure that earlier had won initial votes in both the House and Senate.

The battle over extending jobless benefits for up to 99 weeks for the long-term unemployed typifies how the Democrats' jobs agenda has foundered. What originally was a $200 billion measure combining the jobless benefits with renewing popular business and family tax breaks was cut to $115 billion by House leaders after moderate Democrats who are particularly vulnerable in November refused to support it.

The Federal Government has been able to finance large deficits so far. Partially this results from capital flight as Europe's problems become more apparent. Part of the equation is an increased preference for Treasury bonds over stocks and lower-grade private bonds. Finally, there is the large-scale purchases of MBS by the Fed, which has indirectly funded Treasury auctions by putting more money into the hands of bond buyers and Primary Dealers. Despite a very favorable environment for Treasury bond demand, huge issuance pushed yields upward until the recent resurgence of Europe's problems.

The difficulty financing our debt led the Obama Administration to float several proposals for major tax increases in an effort to convince bond buyers that there would be enough tax revenue to support the debt. This included a VAT. Notice how little we have heard about that and other taxes since the Euro crisis made the dollar and Treasuries the only game in town. Even so, the easy period of debt finance is coming to an end - even for the US government. Washington had best not expect to fund large deficits easily into the indefinite future.

A lot of bankers have to be asking themselves a question. If governments are cutting back, who is going to bail me out?

Sunday 6 June 2010

June 6, 2011

When I lead teaching seminars, I often start out with a quote and a challenge that I hope tie together well enough to give the audience members something to ponder.

The quote is: "Teaching does not come from years of doing it. It actually comes from thinking about it." Your teaching, I believe, will not get better simply by ongoing repetition. Too often, bad teachers stay bad teachers year after year until they retire (often with an established list of rationalizations). Teaching gets better when people sit down and think seriously about what is going on in their classes, why it is happening in that way, whether they like the result, and—if not—what can be done differently. I am always reminded of Albert Einstein’s definition of insanity: “doing the same thing over and over again and expecting different results.” If you do something in class that does not work as you hoped, don’t just do it again and expect better results.

The challenge is: “Work to become 5 percent better as a teacher over the next year.” I consider that a reasonable and worthwhile goal. No one is going to become 50 percent, or even 20 percent, better as a teacher in one year. But, 5 percent is a goal that I think everyone can achieve. And, if you meet that goal for a few years straight, you’ll be surprised by how quickly you become one of the best teachers at your school. Evolution does happen.

Many of us do not teach during the summer making this the ideal time to think about teaching. A brand new school year is coming up in the fall. What do you need to work on? What elements of your teaching need to be evaluated and retooled? How are you going to make 5 percent improvement? Surely, there is some aspect of your teaching where you can get better.

One of the things that I like to do is break teaching down into its various components and then consider them individually. Many times, I will work on one single component of the learning process rather than try for across the board improvement. What are some of these components?

--How often do you want students to be prepared for class and how do you get them to do the preparation that you want? Does this preparation stress critical thinking? There is a big difference between: “why does a lessee want an operating lease?” and “write down the four criteria for a capital lease?”

--How do you get all of your students to participate in class and not just the most extroverted ones?

--How do you introduce a new topic into class without just telling the students about it (lecturing)?

--How do you move from a mechanical/memorization based class to one where students truly are pushed to understand?

--After material has been covered in class, how do you encourage students to continue spending time on it until they understand it fully? Class coverage is rarely enough to establish complete knowledge.

--How do you encourage students to learn on an ongoing basis and not just to prepare for tests?

--How do you test in a way that encourages students to learn and not just memorize?

--How do you grade so that students are challenged without being overwhelmed, encouraged without everyone getting an A?

--I led a discussion this past Friday where I stressed I I E E – involve, interest, engage, excite. How do you add those verbs to you class?

There are lots of components to this learning process that we deal with each day in our work lives. Today is June 6, 2010. Think about the components of your teaching and pick one or two to focus on over the next 12 months with the goal of using that thinking to help make yourself 5 percent better as a teacher. Come back on June 6, 2011 and hold yourself accountable. What did you actually do? What did you try? Did you get better at those components of teaching and did they make your overall teaching 5 percent better?

Saturday 5 June 2010

The Visible Fist

The Visible Fist of government that is. The Visible Fist is about to crush the property market in China, exploding one of the most egregious bubbles on the face of the planet. The specific blow will take the form of imposing a property tax nationwide - in guidelines recently approved by the State Council. It was reported earlier this week in China Daily.

Although the measures have been considered for some time, the recent push has been given urgency by the dangerous levels that China's property bubble has reached. One of the key contributing factors has been the number of speculators buying property and then holding it off the market to profit from the price run up. Morgan Stanley's Andy Xie estimates that such properties number in the 10-20 million unit range.

Some of his other comments portray a China going through the same stages of economic madness that the US has over the last 20 years. But China is passing through each stage much faster as the (well-deserved) lack of trust in their financial system causes people to only chase really big potential profits. Look at this paragraph and tell me you don't see the parallels:

China's policies have travelled the path of least immediate resistance - monetary expansion and asset inflation. The main purpose behind asset inflation is that the government can tax it. It provides a place for people to chase their get-rich-quick dreams and is popular as long as the market goes up. It also offers insiders who have disproportionate influence to play the game at the expense of little people. It is no coincidence that China's policies have been so pro-asset-inflation in the past few years.
His comments seem to suggest that the lack of a property tax was a deliberate strategy to encourage land speculation and bid up prices in a frenzy. This would make sense as the state was by far the biggest landowner and wanted to extract the maximum price for it. With a large amount of land now in private hands, it can be taxed as the taxable base can now replace diminished land sales as a source of government revenue.

Increasing the carrying cost of speculative assets is one of the surest ways to burst a bubble. That is why rising interest rates nearly always do the trick. Rising ownership taxes have the same impact. China is doing both. The government is both instituting a property tax and requiring higher interest rates on properties other than a primary residence. The impact has been dramatic and nearly immediate and so far, it's just the new financial rules and property restrictions. The tax will aggravate the impact. Here is a report from two weeks ago in China Daily:

The Shanghai market has already felt the chill of the tightening housing policies with new apartment sales falling in April. Over 13,185 units of newly built apartments were traded in April, down 43.7 percent from the same period in 2009, according to data from China Real Estate Index System Shanghai.

Trading in the secondary market in Shanghai also saw a dramatic slump since April 16.

A total of 13,865 housing units changed hands between April 1 to 16, but only 7,974 units were traded from April 17 to 30, said Ma Ji, consulting manager at property consultancy Shanghai Centaline China.

Local media also reported that a property tax might be imposed in the next few months. Houses that fall into the definition for charging property tax will be levied an annual fee of as much as 8 percent of the apartment's total value, the Shanghai Securities News reported on Wednesday.


While I applaud the Chinese government's belated return to sanity, they are now being forced to take action to rein in the monster they created. Recall that we criticized the massive push to force credit through the system last year in Command and Control and The Price of Ponzi. The Sinophiles bragged about how smart the Chinese government was and how the money was going into useful projects. They completely forgot (or never learned) that money is fungible and much of it was bound to end up wasted in financial speculation in stocks and real estate.


Implications
China is trapped in a massive inflationary spiral of its own making. Wages are rising rapidly - undermining their major competitive advantage. But the average worker is still falling behind in terms of housing and other necessities. Just as in the US during the 1970s, inflation's initial effect is seen a purely positive - a feeling of rising prosperity that seems costless. China went through that over the last 18 months and it's time to pay the piper. It is going to be impossible to tame short of crashing their economy to subdue the fundamental labor supply picture, crash the RE market to increase purchasing power in terms of land or crash the stock market through contraction of the overall money supply. I expect more than one will be needed and likely all three will happen when they try to trigger any one readjustment.

One final comment. The divergence between Chinese consumer inflation and US CPI dis-inflation is strong supporting evidence for the Austrian and Monetarist schools view of the matter. Both consider inflation to be a matter of increasing amounts of money (really credit). Private credit is tanking in the US and has been for some time while China forced their banks to lend massively more.

Friday 4 June 2010

Lies, Damn Lies and Statistics

This morning, the Bureau of Labor Statistics release triggered news report to put up a huge headline:
431,000 Jobs Added in May

That sound impressive on the surface but the reality is much less than it seems. When you dig down into the numbers you can see just just how little really is there. First, the Census Bureau hired 411,000 temporary workers who were counted as part of the 431,000. The BLS claims 41,000 private-sector jobs were created, with the discrepancy likely coming from net layoffs at state and local levels of government.

Let's drill down a bit farther and take a look at the Birth-Death model that we have written about before. When we look there, note that the "model" has added 215,000 private-sector jobs for May. By backing out this estimate, we can conclude that the actual survey measured a net loss of 174,000 jobs in the real economy.

We can also dissect the Unemployment Rate in the same fashion. This statistic is based on the Household Survey, where the jobs created number is based on the Establishment Survey of employers. The Household Survey again shows that the number of people with jobs shrank in May - in this case the measured loss was 35,000 jobs. That is not as bad as the Establishment survey but still pointing in the wrong direction. The only way the BLS was able to report a lower unemployment rate was because they reduced the Labor Force by 322,000 workers, even while the pool of employable citizens rose by 170,000 people. Basically. BLS arbitrarily said 600,000 people ceased to exist for purposes of their calculations this month - so they could report a lower unemployment rate.

This is clearly a piece of propaganda designed to keep the ignorant public "confident" and spending despite reality. Like much else that comes from government, BLS reports have become riddled with accounting tricks that amount to fraud in order to paint a rosy picture. Don't be taken in.