Great Quote on the Fed

From ZeroHedge:


Now if one studies history one finds out that the Federal Reserve was formed to prevent speculative panics, to maintain the value of the dollar, to preserve the purchasing power of the consumer, and to responsibly manage the nations money supply. Has an organization ever strayed as far from accomplishing its goals as the Fed?

-- Walter Zimmerman                 

What comes next?

Tech Bubble --> Market Crash --> Low Rates --> Credit Bubble --> Market Crash --> Low Rates/QE --> ???

The Quote of the Year

From David Stockman:

"I think the Fed is injecting high grade monetary heroin into the financial system of the world and one of these days it's going to kill the patient"

President Obama on Jon Stewart's Daily Show, October 27, 2010

Loved this exchange on the Daily Show Tonight:

Stewart: "I remember very clearly you said, you know, we can't expect different results with the same people. And I remember when you hired Larry Summers, ah, [pause; audience laughs], I remember thinking that seems like the exact same person..." [audience cheers and laughs]

Obama: "... and, in fairness, Larry Summers did a heckuva job trying to figure out how to ..."

Stewart interrupts: "You don't want to use that phrase, dude." [Stewart brings the house down]

Is a housing bubble brewing in South Delhi?

After looking at several residential flats (apartments/condos) in the posh South Delhi area, I am tempted to conclude yes.

First some observations: A new 300 yard (2200 square feet) 4 bed 3 bath flat bought directly from a builder in South Delhi's Greater Kailash (GK) neighborhood is currently quoted at $850,000 (Rs. 4 crore) for a price per square foot of $386. This place will rent for $1500 to $2000 per month. An older flat in the same neighborhood is going for about $691,000 (Rs. 3.25 crore) and rents for $1100 to $1600 per month.

Here's why I think there's trouble brewing:

1. Rent vs. Buy: The price to rent ratio for the new apartment in GK is over 35! At these prices, the rental yield is less than half the 7 to 8% you can currently get on a one year fixed deposit (CD) so the only reason to buy is if you believe that prices will continue to escalate i.e. The Greater Fool Theory. As we have seen with the Tech and Real Estate bubbles in the U.S., when prices are divorced from economic fundamentals i.e. the cash flows of the underlying asset, they eventually return back to earth.

2. Incomes: There's no getting around the fact that real estate prices are absurdly high compared to household income. Household income statistics in Delhi are very difficult to come by (please contact me if you have access to this data), but even today, a $50,000 annual salary is considered very good and a $150,000 to $200,000 annual salary is a king's ransom in Delhi. According to this slightly dated presentation (page 41) from the respected Times Group, only 5085 households in Delhi made over $200,000! Even at that salary the house I described above would be difficult to afford for two reasons. One, at the prevailing home loan rate of 8%+, this income would not qualify someone for a $700,000 loan. Second, the buyer may need to fork over 50% of the purchase price up front in cash (see the next bullet for details) which is a prohibitive amount. Indeed, I'd estimate that less than 2% of Delhiites can afford to buy a $850,000 flat in South Delhi.

Note: Furthermore, the price per square foot is high when you consider the fact that these prices are similiar to prices in Chicago or Los Angeles but the per capita income in Delhi at approximately $2000 per year (yes you read that right) is a tiny fraction of the per capita income of the afore-mentioned cities.

3. The 2010 Common Wealth Games: This is my favorite theory. The 2010 Common Wealth Games will be held in Delhi in October 2010. The total expenditure on the games by the Government of India is $17.5 billion. Assuming that 75% of that amount is spent in Delhi and assuming 30% "leakage" i.e. bribes (which many people assure me is a conservative estimate) we get a ton of money hitting the local economy through both legit and illegitimate channels. Sadly, $4 billion in "black" money will be transferred from tax payers to corrupt developers, engineers, and all the way down the food chain. Real Estate is a very popular (but not the only) channel for laundering this kind of money because a house that sells for $850,000 will probably be recorded on the books at $300,000 to $400,000 with the remaining amount paid in cash. If my theory is correct, we should see the rate of price appreciation slow down after the games end.

Note: The circle rate is the minimum government-set rate for valuation of land for residential use. These rates are typically much lower than the actual transaction rates in the housing market but properties are usually officially recorded at close to the circle rate in India to minimize taxes and registration fees, and to launder money.

4. Rapid Price Appreciation: According to the Makaan.com IQ property index, prices in the Delhi area are up 41.7% year-on-year. I could not find a South Delhi property index, but it's safe to assume that prices rose by at least that percentage in this area as well. For obvious reasons, this rate of annual growth is unusual and not sustainable, especially when prices in South Delhi dipped by less than 15% in 2008-09, if at all. If you believe this rate of appreciation is sustainable, please contact me because I have some properties to sell you.

5. What you actually get for that money: Finally, as nice as South Delhi is, it's no Beverly Hills.There is massive traffic congestion, inadequate parking, almost no sidewalks for pedestrians, as well as an erratic water and electricity supply. Furthermore, the recent monsoon rains have led to street flooding all over the place! Sure, these new direct-from-the-builder apartments have excellent fixtures and quality finishing, but not enough in my mind to be worth anywhere close to the current asking price.

In a future post: Why the $%#% are prices so high?

Thank you, Alan Greenspan

This ad for a 5 year 0.80% "High" Yield CD popped up when I logged into my Bank of America account recently. At this incredibly generous yield (applying the rule of 72) it'll take me a mere 90 years to double my money in nominal terms. Alas, by then I would have lost 99% of the purchasing power of this amount to inflation, and I would also have to pay taxes on the income.

Hmmm is it really any surprise that the equity and fixed income markets, as overvalued as they are, are showing such strength?

99¢ Only Stores

So, I was at my local 99¢ Only Store to buy gag gifts for a friend who was coming into town, and geek that I am, I started thinking about how long it would be before "Helicopter Ben" Bernanke worked his magic and inflation caused the company to change its name. The $1.99 Only Stores doesn't quite have the same ring, does it?

Much like a central bank trying to disguise its money printing by reducing the metal content in its coins, maybe the store would first attempt to reduce the size of its merchandise - get 2 double A batteries for 99 cents, instead of 4. (Aside: you probably missed this in 2006 - New rules outlaw melting pennies, nickels for profit. This is a classic sign of a currency that is rapidly being debased. See http://www.usatoday.com/money/2006-12-14-melting-ban-usat_x.htm)

Anyway, sooner or later, playing with the quantity would stop working. After all, people would probably start noticing when the store tried to sell half a AA battery for 99 cents! At that point the gig is up - either the store has to overhaul its inventory to stock the lowest quality, commodity goods, or it will have to raise prices. How long do I think it will take? Well, according to their website, 99¢ Only Stores got started in 1982, right at the tail end of the Great Inflation, and benefited from the tailwind of rapidly declining inflation. Given my prognosis for significant inflation in the US in the next 3-5 years and the start of a new era of inflation, I expect to see a name change in about 10 years.

Note:
China's vast (and excess) manufacturing capacity, a well as its under-priced currency is also a huge factor in the pricing of cheap retail goods. China has allowed its currency to appreciate over the last four years from a little over 8 yuan to the dollar to 6.84 today, but that appreciation has been too little and too slow for the U.S. Govt's taste. I will address China in a future post, but suffice it to say, I see serious problems ahead in their economy.

Welcome

This blog is an attempt to organize my frequent rants on our current economic situation. With luck, I will get to subject readers to my skeptical and cynical take on "conventional wisdom," and also get to mix in little personal segues from time to time.