First Birthday for the Recession? "In all likelihood, this recession either has reached its first birthday or will soon do so."
Is A Recession The Best Time To Tackle Climate Change?
Stallion Fees Sink as Financial Crisis Hits Thoroughbred Market: Horse breeder James Squires "needs to generate $600,000 a year to cover his costs. So far this year he’s taken in just $20,000".
Jim Surowiecki is quite sure that Treasury’s bailout plan, or at least the $250 billion part of being spent on recapitalization, is an investment rather than an expenditure:
I realize that, given the way the U.S. budget is accounted for, it’s accurate to say the $250 billion package is increasing the deficit. But it’d be good to see some acknowledgement that in this case, "spending" that money is going to make the government richer, not poorer.
Richer? I doubt it. The US has past history here: the S&L bailout, which was smaller than this one, ended up with a cost to the government 3.2% of GDP.
Bank bailouts in other developed countries have had similar fiscal results: Norway’s bank crisis of 1987 cost the government 8% of GDP, the Finnish bank crisis of 1991 cost 11% of GDP, and Japan’s bank crisis from 1992 onwards cost a whopping 20% of GDP. If you consider South Korea a developed country, its bank crisis of 1997 cost more than 26% of GDP. And bank bailouts in developing countries can be much more expensive still.
All these figures come from a 2000 World Bank report entitled "Controlling the Fiscal
Costs of Banking Crises"; its authors, Patrick Honohan and Daniela Klingebiel, write that
Fiscal costs are systematically associated with a set of crisis
management strategies. Our empirical findings reveal that unlimited deposit guarantees,
open-ended liquidity support, repeated recapitalizations, debtor bail-outs and regulatory
forbearance add significantly and sizably to costs.
Sound familiar?
Adrian Ash was on this back in March, citing I think a different version of the same paper:
On average, the World Bank economists found, “governments spent an average of nearly 13 percent of GDP cleaning up their financial systems” as a result of the bailout programs they tried to implement.
“Indeed, each of the accommodating measures examined,” they continued, …"appears to significantly increase the costs of banking crises.”
None of this is to say that Paulson’s recapitalization plan is a bad idea. But the probability that it’s going to end up making a profit is pretty low, if past experience is any guide.
Update: Surowiecki stands his ground.
Here’s a contest for you — since y’all did so badly on the last one — can anybody find me a value investor who isn’t saying that there’s loads of cheap stocks out there and that they’re pretty bullish over a medium- to long-term time horizon? Buffett, Grantham, and other devotees of Ben Graham all seem to be singing from the same songbook. And when there’s so much unanimity, I start getting worried. So, a few questions for value investors:
To put it another way: what makes you think that cheap stocks are more likely to go up, over the medium term, than they are to go down?
One question in the back of my mind during this crisis has been how Paul Singer, of Elliott Associates, has been doing. I wrote a pretty long profile of him, back in the day, and the one thing he was more adamant about than anything else was that his first job was to see round corners, to worry about tail risk, and to make sure that he was protecting his investors’ money. Then he would see about returns.
Well, lo and behold, Singer’s strategy seems to have worked: Matthew Mosk reports today that Elliott is up 6% for the year. And Singer is no one’s idea of a value investor. In fact, he made his fortune in what was possibly the single most toxic strategy of 2008, convertible arbitrage.
Now I have no idea how Elliott’s been making money this year. But over the first year of this bear market, a strategy of avoiding risks would seem to have been a very good idea. And jumping in and buying stocks at these levels is most emphatically not a strategy of avoiding risks.
If I had to sum it all up in one big question, it would be this: "What exactly are you saying beyond calling a bottom?". I might have some faith in the ability of value investors to find cheap stocks, but I have no faith at all in the ability of value investors to time the market. And a lot of what these investors are saying seems, at its core, to apply to the market generally more than it does to value stocks in particular.
Money in the street: Very high yields on TIPS; it’s unclear why.
Bank-Lending Boost Could Spur Thaw: The first signs of life in the interbank market.
Jim Cramer Retreats Along With the Dow: A weirdly sympathetic article by David Carr.
Not a Pretty Picture at Auctions: The art market slows down.
The Brokers With Hands on Their Faces blog. Sad Guys on Trading Floors? You just got pwned.
And finally,
The $700 billion the US pays each year to nasty oil-exporting countries — the $700 billion that both Barack Obama and John McCain have cited in their paeans to energy independence — doesn’t exist:
According to government agencies that track energy imports, the U.S. spent $246 billion in 2007 for all imported crude oil; a majority came from friendly nations, including neighboring Canada and Mexico. An additional $82 billion was spent on imported refined petroleum products such as gasoline, diesel and fuel oil. A majority of the refined products came from refineries in such friendly countries as the Netherlands, Canada, the United Kingdom, Trinidad and Tobago and the Virgin Islands.
The great thing about this number is that it’s new enough that its source can be tracked down and made public: Boone Pickens. Boone, characteristically, is unapologetic about the exaggeration.
So here’s the question: now that Josef Hebert has revealed the $700 billion number to be bunk, will the presidential campaigns, and pundits in general, stop using it? The problem of course is that sensible news articles just don’t have the same reach that big scary numbers do. So I suspect that the $700 billion meme will live on for years, with the likes of Jim Surowiecki and myself occasionally and futilely pointing out that it’s utter crap.
On the other hand, at least the Obama campaign claims to be looking into the number. So maybe he’ll stop using it, even if nobody else does.
Richard Sandor, the chairman of the Chicago Climate Exchange, is an old-school Chicago trader who doesn’t often self-censor. But in this case, he most definitely should have:
The debate over whether or not a polluter would have cut its greenhouse-gas emissions without the financial incentive of credit sales is "quite interesting, but that’s not my business," Mr. Sandor says. "I’m running a for-profit company."
Many more stories like this, and cap-and-trade will never take off in this country. Everybody already suspects it’s just a way of letting a bunch of financial entrepeneurs make lots of money, and Sandor’s doing nothing to dispel that impression. Of course the question of additionality, as it’s known, is Sandor’s business.
Jeffrey Ball has done a very good job reporting this story, finding actual landfill owners who are making hundreds of thousands of dollars reaping carbon credits for technology installed as long ago as 1999. They’re not reducing their carbon emissions at all: they’re just picking up free money.
"It seemed a little suspicious that we could get money for doing nothing," says Charles Norkis, executive director of the Cape May County Municipal Utilities Authority, which has raised $427,475 selling credits since February, or 3% of the authority’s projected solid-waste revenue for the year.
This is a prime example of the dubiousness of what’s known in the carbon-trading world as "offsets" — the things which allow PR-minded companies to declare themselves to be "carbon-neutral". Essentially, you add up all your carbon emissions, and then trot along to Mr Norkis, pay him a few thousand bucks, and claim that you’ve now "offset" your emissions by capturing the methane from Mr Norkis’s landfill which would otherwise have gone straight into the atmosphere.
Except you haven’t captured any methane — Mr Norkis has. And he’s been capturing that methane for years anyway, and then selling it as fuel. Oh, and Mr Sandor, acting as the middleman in this transaction, is making a tidy sum of money too.
Now it’s true that from a carbon-emission standpoint, it’s a really good idea to capture the methane from landfills. But you don’t need a system of offsets to do that. If you just bring landfills under the aegis of a cap-and-trade system, then landfills which don’t capture their methane will have to buy a lot of carbon credits in order to cover their greenhouse gas emissions. Those which do capture their methane will have to spend much less — and will also be able to make money from selling the methane (just not the offsets) in the secondary market. In other words, you don’t need offsets in order to incentivize landfill owners to capture their methane.
But bringing landfills under a cap-and-trade system is complicated: it involves measuring or estimating the amount of methane which every landfill gives off. A carbon tax would have the same effect but be equally complicated: the IRS would have to measure or estimate exactly the same thing. Offsets are simpler, because the work is done at the landfill end, rather than by some government entity charged with measuring all the country’s carbon emissions. But the downside of offsets is clearly seen in Ball’s article.
Now there is an argument for why these landfills should be able to take part in the offset scheme. Unfortunately, in the article, it’s made by Richard "I’m only in it for the money" Sandor:
Richard Sandor, the exchange’s chairman, says that doing so rewards "early action" and encourages other landfills to capture methane too.
There are two arguments here. One doesn’t stand up to much scrutiny: the idea that you need to reward the early adopters in order to "encourage" other landfills to join in. In reality, if the other landfills are eligible for offsets, it’s unlikely to make much difference to them whether their peers are making money from such schemes or not.
But there’s also a fairness argument: why should a landfill which has been emitting methane for years be eligible for offsets, while one which got religion as long ago as 1999 is left out?
The problem with fairness arguments is that there’s really no end to them: it’s not long before people with trees start wanting carbon offsets for not cutting them down. After all, don’t their fully-grown trees absorb more carbon than those being planted by people who are getting forestation offsets?
There is one other argument for offsets, however: when you allow offsets, both nationally and internationally, legislators tend to be more comfortable with a relatively stringent cap on emissions. When you don’t allow offsets, the caps tend to be higher.
All of which is to say: this stuff is complicated; there’s very little which is black-and-white about it. But at some point in the next four years, the president is going to try to get a cap-and-trade bill signed into law. And the more complicated it is, the more difficult it will be to get there. So my gut feeling is to keep things simple, and keep offsets to a minimum.
Your daily TED update: 320bp, and falling. I love Sam’s metaphor: not frozen so much as melting. Credit markets, like water, freeze quickly and melt slowly. But if things continue to improve at this clip, Bill Gross’s prediction of Libor at 2.65% in a few weeks could well come true; it was fixed today at 4.06%, down from 4.42% on Friday.
In other words, all that government intervention is working. Just give it a little time. And hope that the big trading losses we’re seeing at places like Citic Pacific and Caisse d’Epargne aren’t mirrored in the hedge-fund world. Because the last thing the world needs right now is a big hedge-fund collapse and liquidation.
Those stupid bankers and their stupid stupidity: Dsquared on why blaming people is a little bit silly.
Now do something about the interbank market – directly: Willem Buiter on how central banks can bring down Libor.
Libor to Decline on Liquidity Programs, Gross Says: To 2.65% within "weeks".
U.S. Bank Plan Hits Snag in Rules: Treasury’s capital might not be Tier 1. But why isn’t Tier 2 good enough?
Grantham: Stocks May Fall Another 50%, But Still Time To Buy
I sing the praises of financial innovation: And, in the comments, explain the problems with buy-and-hold investing.
Bernanke Is Fighting the Last War: Says Anna Schwarz, who actually remembers it.
The Case (Against) The Case For Debt
Where is my swap line? And will the diffusion of financial power Balkanize the global response to a broadening crisis? Explaining the Fed’s unlimited swap line with Europe’s central banks. "If they didn’t have access to dollar financing, they would either have to borrow euros and buy dollars – pushing the dollar up (and hurting US exporters) or they would have to dump their US assets (hurting US banks holding similar assets)."
I was going to respond to Virginia Postrel’s silly article claiming that current levels of consumer debt are nothing to worry about. But I don’t need to, because Henry Blodget, without mentioning Postrel directly, has done it for me. All I need to do is provide the connection: credit card companies were happy to lend, and consumers were happy to rack up credit card debt, because they both knew that if the credit-card balance got out of hand, it could always be paid off with home equity. Now those days are over, and we’re entering a consumer-credit crunch.
Postrel’s right that the media has cried wolf in the past when it comes to consumer credit. But she forgets that in the fable, eventually the cry is for real. Now is that time.
Jane Baird has the latest on what Alea calls "the non-event of the year": the Lehman Brothers CDS settlement on Tuesday. The upshot is that there’s very little to worry about: the worst-case scenario is limited to the failure of a small hedge fund or two, and even that seems improbable. The reason’s simple:
The standard practice in the CDS market is that hedge funds and other counterparties must adjust collateral on a daily basis as the value of a contract changes.
As Lehman CDS fell in value, before and after it filed for bankruptcy, protection sellers would have had to provide increasing amounts of Treasury bonds or other cash-like investments as collateral for those contracts.
"The mark-to-market on the CDS is margined daily as a credit event draws near, and that mitigates a large, lumpy payment at the end," said Peter Goves, another Citigroup strategist.
This bears repeating: if you take credit risk by writing credit protection, your position is marked to market daily, and is margined daily. Compare that to the behavior of banks, say, which took billions of dollars of credit risk by holding super-senior CDO tranches and didn’t — couldn’t — ever mark them to market. It’s hardly a surprise that the banks have been stunned by the magnitude of their losses, while writers of credit protection were forced to face their deteriorating positions on a daily basis.
But hang on, I hear you say, what about AIG? What about the monoline insurers? Weren’t they undone by CDS? Yes — and they’re the exception which proves my point. AIG and the monolines had something no other writer of credit protection had: a triple-A credit rating. As such, they were the only sellers of credit default swaps who didn’t need to put up collateral as the market moved against them. The minute they were downgraded, they suddenly needed to come up with billions of dollars of collateral, and they failed.
This is basically the issue I have with Jesse Eisinger, who in his latest column claims that "the roots of this year’s financial crisis" lie in the creation of the CDS market:
Credit derivatives aren’t, of course, solely to blame for the pandemic that has helped bring down Wall Street. They didn’t single-handedly force Bear Stearns and Lehman Brothers to bulk up on toxic debt, dooming them to collapse. But they made the financial world more complex and more opaque.
More complex? Yes. More opaque? No. In fact, credit default swaps, being much more liquid than most debt instruments, are thefore also more transparent than most debt instruments. Try to sell a CDO tranche, these days: you can’t. There’s no two-way market in such things. But if you want a price on a credit default swap, that’s very easy to obtain. Eisinger, remember, is the chap who presciently worried about the magnitude of banks’ level-three assets more than a year ago. Credit default swaps aren’t impossible-to-value level-three assets; they’re not even hard-to-value level-two assets. They’re transparent level-one assets: it’s harder to think of a credit instrument which is easier to value.
I’m reminded of the great Dutch urban planner Jan Gehl, who made pedestrians safer by seemingly making streets riskier. The NYT explains how his invention, the woonerf, works:
Pioneered in the Netherlands — the word roughly translates as “living street” — the woonerf erases the boundary between sidewalk and street to give pedestrians the same clout as cars. Elements like traffic lights, stop signs, lane markings and crossing signals are removed, while the level of the street is raised to the same height as the sidewalk.
A woonerf, which is surfaced with paving blocks to signal a pedestrian-priority zone, is, in effect, an outdoor living room, with furniture to encourage the social use of the street. Surprisingly, it results in drastically slower traffic, since the woonerf is a people-first zone and cars enter it more warily. “The idea is that people shall look each other in the eye and maneuver in respect of each other,” Mr. Gehl said.
The CDS market, it turns out, is a bit like a financial woonerf. If you’re buying credit protection from a vendor who himself has credit risk, you go more slowly, tread more cautiously. Rather than trusting the system designers to keep you safe and whizzing through green lights just because the rules say it’s OK to do so, you actually spend much more time interacting with the other participants in the system and making sure that they have they will do in practice what they’re supposed to do in theory.
And if the CDS market is a woonerf, the interbank market is an autobahn. Historically, did all the banks in the interbank market perform due diligence on each others’ creditworthiness on a daily basis? Of course not — just as when you’re driving down the freeway at 80 miles an hour, you can’t check to see whether the car in front of you has dodgy brakes. And the more you travel on the freeway without incident, the more you learn from that lack of incident, and the more confident you are that there won’t be any problems. Which means that the distances between cars remain quite small, even at speeds significantly in excess of the speed limit.
And then, of course, one fateful day, there’s a massive pile-up, and the entire freeway comes to a screeching halt, and the authorities have to mount an elaborate and expensive attempt to clear up the wreckage. After which people still are nervous about driving on that freeway.
A lot of people don’t get this at all, Karen Shaw Petrou among them. She wants to cordon off the woonerf and stop anybody driving through it, despite the fact that it’s the one part of the credit markets which is still actually functioning.
Regulators around the world should put a clicker into the CDS slots and hold speculative trades in it as is. Then, an orderly work-out of the $60 trillion market can be gradually implemented–without the forced selling and resulting liquidity cataclysm currently caused by desperate CDS traders covering "naked" bets made without the necessary backstop of actually holding the bond against which the CDS are pledged.
This wouldn’t work: the whole reason why the CDS market works so well is the fact that if the markets move against you tomorrow, you can scale back your positions tomorrow. If you set today’s CDS positions in aspic and stopped people being able to change them as the markets moved, the total losses would skyrocket.
But never mind the fact that Petrou’s plan is unworkable: the bigger point is that it’s based on a false premise. There was no "forced selling and resulting liquidity cataclysm" caused by "desperate CDS traders". People like Petrou think that there was: I’ve heard many times that Bear Stearns and Lehman Brothers were brought down by their CDS desks. But they weren’t. Their CDS desks were actually functioning perfectly well, and as far as anybody can tell were making money all the while.
Yes, there is systemic risk embedded in the CDS market. And yes, it’s a good idea to move CDS trading onto an exchange so as to minimize that systemic risk. But the cataclysmic chain of counterparty failures that everybody’s so worried about hasn’t happened yet: the proximate cause of today’s financial meltdown was not the CDS market. And in fact there’s a strong case to be made that the very visibility of the systemic risks in the CDS market was responsible for the fact that it so far hasn’t failed. Banks were well prepared for the big obvious risks, including counterparty risk in the CDS market. They weren’t prepared at all for the big non-obvious risks, like their super-senior CDO tranches being marked down by 40 or 50 or 60 cents on the dollar.
So by all means fix the CDS market, and make it safer. But bear in mind, too, that people drive faster when they’re wearing seatbelts.
"I feel safer with Warhol than with U.S. Treasury bonds."
David Galbraith goes down the litany of problems with US banks which is familiar to any European in the US or, most likely, to anybody who even knows a European in the US. Most of it surrounds the ridiculous difficulty of moving money from A to B: in Europe, it’s easy and free, online, or with a phone call. In the US, it’s difficult, expensive, and nearly always involves some kind of paper check and the US mail.
The reasons for this are fundamentally regulatory — and are the same reasons why there won’t be any global banking regulation in the foreseeable future.
David wonders whether there’s a connection between the ridiculously behind-the-curve state of US banks (I give chip-and-PIN a decade before it appears over here) and the problems that the US banking system finds itself in. The simple answer is no — the problems are simply unrelated to the operation of consumer checking accounts. But more subtly, the single biggest obstacle between US banks and Europe-style checking accounts is the fact that the US banking system is ridiculously fragmented, overseen as it is by no fewer than twelve different Federal Reserve banks (not even counting all the federal regulators), and featuring as it does thousands of small and tiny banks which collectively are very good at stymieing attempts at sophisticated regulation.
So while Sarkozy and Brown are likely to get their desired New York summit on the global banking system, they’re not even going to come close to a system of global regulation. Getting all of Europe’s banks under one regulatory umbrella is one thing; getting America’s under the same umbrella is something else entirely.
The U.S. is particularly queasy about international oversight of big banks. A senior Bush administration official said "ideas like that are probably political nonstarters in the United States, and in a number of other nations."
Remember that it was pretty much impossible even to get US banks into Basel II — in the end the big ones did join, and the small ones didn’t. America, even after the current wave of banking consolidation is over, will have many more small and tiny banks than just about any other country; the (excellent) credit union next door to me, for instance, has total assets of less than $20 million. And while no one wants to bring small and tiny institutions under international oversight, those banks can still derail the idea if they get an inkling that members of the big boys’ club will have any kind of competitive advantage as a result.
And they’ll probably derail any move towards chip-and-PIN, too, or schemes which make it easier to transfer money from one bank account to another.
The USA is based around regional banks; while there are now three banks which might have aspirations to being national (Bank of America, JP Morgan Chase, and Wells Fargo), all of them have enormous gaps in their national presence, and none of them is based within 500 miles of either of the others. When Hank Paulson wanted to get the CEOs of America’s biggest banks in the same place at the same time, he took advantage of the fact that they were all in Washington anyway for the annual meeting of the World Bank. (And even then he had to make do with what he could get: the chairman — not CEO — of Wells Fargo, and the CEO — not chairman — of Citigroup.)
In other words, the US probably has less ability to herd and regulate its banks, or force them into a new global architecture, than any other major country. And we should all be prepared for disappointment when this summit finally happens.
In her Fishbowl NY exit interview, Rachel Sklar says that she’s “excited to do stuff in other verticals”. Earlier today, a friend of mine in the media unselfconciously used the words “surface” and “obsolete” as verbs in rapid succession. Both of these people are editorial-side employees. Or would have been considered such, anyway, before the distinction between editorial- and business-side started blurring so much.
The WSJ has the story; don’t say I didn’t warn you.
Treasury Has No Authority to Coerce the Banks
Worldwide Financial Crisis Largely Bypasses Canada: Thanks to a worthwhile initiative or two.
Four Magic Words: "We Are Providing Capital"
Jokes about the financial crisis: "What’s the capital of Iceland? About $20."
Andrew Lahde isn’t running money any more, and boy is he glad to be out of the game. His final letter to investors is a true classic, and even ends with a paean to marijuana:
I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck… Give up on leaving your mark. Throw the Blackberry away and enjoy life.
So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all…
I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life…
The evil female plant — marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources.
Well done on dropping out, Andrew. Virtually everybody in finance is getting too much stress and too little sleep these days, from Kevin Warsh "working almost around the clock seven days a week" to another former Treasury official who’s started sending ill-tempered and ill-advised missives to bloggers at all hours of the night.
So here’s my bailout plan: everybody should start making like David Einhorn, and take a regular nap every afternoon. It’s a guaranteed way of improving everybody’s decision making. And if you want Lahde-like returns, maybe they should fire up a doobie once in a while, too.
Has there been a more demoralizing and disappointing major stock market, over the course of the past 20 years, than Japan’s? It reached its nominal all-time high of 38,957 in December 1989; it closed today at 8,693, just 800 points or so north of its 2003 low.
The plight of Japanese shareholders is germane to anybody thinking of buying stocks today. Japan’s companies are well-run, and its financial institutions, as we saw with the MUFG deal, are today more part of the solution than they are part of the problem. And yet, as Tim Price notes,
the entire Japanese stock market is left trading close to book value at levels, in real terms, equating to where it traded in the early 1970s.
Japan, of course, knows what it’s like to go through a credit crisis and a vicious deleveraging — and it’s had two decades to reconfigure itself into a viable post-crisis economy. Which is not to say that Japanese stocks are a screaming buy right now, but which is to say that if you think that stocks in the US are cheap, maybe you could look across the Pacific and find some equally-attractive assets which are even cheaper. Or, to put it another way, the lesson of Japan is that even cheap stocks can continue to decline for decades.
The US will never again drive the global economy in the way it has done for the past 60 years, and the presence of multinationals on the Dow does not make it a proxy for world stock-market performance. Japan still accounts for a large chunk of global economic activity; it might makes sense, if you’re not invested there already, to rotate some small part of your funds into a country which learned many painful lessons over the course of the 1990s. Assuming, that is, that you still have any faith at all in equities as an asset class.
On November 2, the Economist is returning to the magnificent Gotham Hall for its debate series, part of its Off the Page weekend of events. The first debate features bloggers Clive Crook and Will Wilkinson attacking the idea of corporate social responsibility. Here’s how the website anticipates what they’re going to say:
They argue that corporate social responsibility efforts encroach on what should be the proper business of government; that CSR is a sideshow; and that it involves playing with other people’s money–a hot topic in today’s stressed global markets.
The friendly chaps at the Economist have given me a pair of tickets to give away; your choice of this debate or any of the other events of the weekend. The winner is the person who finds the piece of writing by either Crook or Wilkinson (it doesn’t need to be a blog entry) which would be most embarrassing to them in this debate.
If you leave a comment here, or put up your own blog entry in response, make sure to email me as well so I know how to get in touch with you: I don’t have access to the email addresses collected by the comments system. You have til Monday; I’m anticipating a very small response to this contest, so there’s a good chance that just about any entry will win.
Annie Deakin is acting editor of the website mydeco. The header of the homepage says this:
Home furniture and interior design: beds, sofas, curtains, paint, wallpaper, tables and chairs
Not on the list? Art. You can get that at mydeco too: an "art photography print" of cars is yours for just £20.
Image available in many sizes and options! Choose canvas, acrylic, or huge variety of framing options. Wallpaper and window roller blinds also available.
All well and good, if you’re into such things. But then mydeco crosses the line, with a big link to a video explaining "Why you should invest in art NOW" — a theme Deakin picks up in a column for the Independent:
The art market seems the only safe bet for investors right now…
Word in exhibition halls is that "art is the new gold". My father, a goldsmith for over forty years, says, “Gold has more than doubled in value in four years. People bury it in the garden and it won’t corrode. They can touch it.” In a world where financial markets are alarmingly ‘virtual’, a painting, like gold bullion, is reassuringly tangible…
For infinity and beyond, art will be worth something – which is more than can be said about a Lehman share.
Paddy from Artfagcity asks whether I could respond.
First, at the risk of stating blindingly obvious, Deakin is talking her book. She works at a website devoted to selling art; of course she’s going to paint it as a good investment. But here’s something maybe a little less obvious: there’s no such thing as impartial expert advice on the subject of art as an investment. If you’re an expert, that means you’re in the art world. And if you’re in the art world, that means, to use the financial jargon, that you’re long art. You own it, or you’re trying to sell it, or you’re trying to make money from people who own it or sell it. And therefore, you’re not impartial.
Second, there are lots of things which are "reassuringly tangible". Gold might be one of them — although at $788 per ounce today, it’s no longer twice the price it was four years ago, and it’s fallen by more than 20% from its highs. Other reassuringly tangible things might include stuffed animals, hardback books, and chopped wood. Being reassuringly tangible doesn’t make anything a store of value: it just makes it stuff. And, just like other stuff, 99% of art will never again be worth the money that was paid for it.
In the case of the art on sale at mydeco, you can reasonably make that 100%. You might absolutely love your window roller blind with a picture of cars on it, but it doesn’t have any resale value. If you want decorative art with which to brighten your home, the internet’s a great place to look. But please, whatever you do, don’t kid yourself that you’re making any kind of "investment": the only return you’ll ever get on your money will be aesthetic, not financial.
At the very top of the art market, when you start talking about the sort of artists who sell at auction for millions of dollars, then you can start resting assured that what you’re buying will be worth more than zero if you try to sell it. But will it be worth more than you paid for it? If you’re buying now, that’s very unlikely. Art is the last bubble to burst, this time round — it often lags the stock market by as much as a year. But the big drivers of art-market gains in recent years have been Russians and hedge-fund managers. The former are hurting badly: the Russian stock market is down more than 70%. And hedge-fund managers are precisely the sort of people who think they must be very astute when the value of a painting they buy turns goes up dramatically. Once they think they’re very astute, they buy more and more — causing the bubble. Which is now about to burst.
But Deakin isn’t talking about the very top of the market. She’s talking about art in general, and the kind of decorative art you buy because you like it in particular. So to get an idea of what happens to the value of that kind of art, don’t look to the auction houses. Instead, go visit your friends and neighbors — not the serious art collectors, just the regular folk. Go look at the art on their walls. Almost all of it was bought, at some point, for cash. I’d be surprised if any of it is was worth more today than was initially spent on it. Most of it is, literally, worthless, at least financially.
The word "investment" is massively overused these days; I’ve objected in the past to its being applied even to real estate. But at least when people say that house prices have gone up, that applies to house prices in aggregate: your house, my house, all houses. If you owned a house in America over the past ten years, you almost certainly — unless you were unlucky enough to live somewhere like New Orleans or Detroit — saw it rise in value.
But when people talk about art rising in value, they’re talking about a minuscule portion of the huge amount of stuff which could reasonably be considered art. If you have some art on your walls, and art has gone up in value, does that mean that the art on your walls has gone up in value? Emphatically not. Chances are that its financial value, too all intents and purposes, is zero.
I admire and encourage anybody who wants to buy or collect art. But whenever you do so, it’s worth asking yourself one question first: would I be happy spending this much money if I knew that the resale value of the work was zero? So long as the answer is yes, go ahead and buy. But if the answer is no, then there’s a good chance you’re deluding yourself about the financial value of what you’re buying.
I was recently flattered to be on a list of media winners from the credit crisis. But arguably the biggest winner of all wasn’t on the list: Suze Orman, who’s the subject of a mildly skeptical article in today’s WSJ.
For some reason, people are often surprised when I say I’m a fan of Orman. Maybe they don’t really listen to her advice, and just consider her another blonde celebrity. But if you’re looking for someone who’s been consistently grounded and sensible, since long before the current crisis hit, look no further.
Thanks to her job, Orman’s also in touch with many more real Americans than most of us living in the coastal-elite bubble. What the comfortably-off consider fear-mongering, Orman sees as just being realistic:
Ms. Orman says she is simply giving her audiences the facts, and that its members really are living on the edge. "I haven’t changed anything that I have said all these years," she adds. "For those people who are in credit-card debt… those who have already been foreclosed on… They are the people calling my shows, and they are in bread lines."
I’m reminded of Barbie Snodgrass, the overworked and underpaid Ohio woman who talked to TNY’s George Packer:
The two jobs that kept her “constantly moving” brought in a little more than forty thousand dollars a year, but after the mortgage (a thousand a month), car payments (three hundred and fifty), levies for supplies at the girls’ public high school, fuel, electricity, stomach medicine, and a hundred dollars’ worth of groceries each week (down from eight bags to four at Kroger’s supermarket, because of inflation) there was basically nothing left to spend…
The circumstances of Snodgrass’s life made it impossible for her to imagine that there could possibly be enough taxable money in Obama’s upper-income category [over $250k/year] –which meant that he was being dishonest, and that she would eventually be the one to pay. “He’ll keep going down, and when it’s to people who make forty-five or fifty thousand it’s going to hit me,” she said. “I’d have to sell my home and live in a five-hundred-dollar-a-month apartment with gang bangers out in my yard, and I’d be scared to death to leave my house.”
Joe the plumber notwithstanding, there’s an enormous number of Americans who don’t know anybody earning more than $250,000 a year; Suze Orman can speak to these Americans — and especially the women among them — like no one else in or out of government. When she does so, she gives good advice. That advice might not always be followed to the letter, but thanks to Orman, there are now millions of Americans who have a very good idea what they should be doing, financially.
Yes, Orman’s doing very well herself out of the crisis: the endorsement offers are rolling in, and she’s more in demand than ever. But that’s not a conflict. As far as I’m concerned, the more that Orman gets out in front of the public the better: she’s a constant reminder of the virtues of spending no more than you earn, paying down high-interest debt first, and other such basics.
Orman’s hardly the only person to have become a multi-millionaire by giving out financial advice. But with her there’s a difference: most of the people in that group give out bad financial advice, with an emphasis on getting rich off your investments. Orman gives out good financial advice. And so I don’t begrudge her her success in the slightest.
Robert Aliber has a peculiar op-ed in the FT, presenting a TARP plan "that should revive the market in mortgage-related securities, greatly enhance bank capital and earn several tens of billions of dollars for the US Treasury". It’s peculiar because just as the world and Hank Paulson is finally coming around to the fact that US banks are facing a solvency crisis rather than a liquidity crisis, Aliber still uses the kind of back-of-the-envelope calculations we saw a lot of in early 2007 to assert that there’s no solvency crisis at all.
The distress in the US credit market reflects that MRS are no longer priced on a rational basis. Rather, a few companies with a desperate need for cash have sold these securities for 25 cents on the dollar; the accounting conventions require that this price is used to value similar securities owned by other banks.
There are 40m mortgages on residential real estate in the US. Ninety seven per cent or 98 per cent of homeowners make their mortgage payments on a timely basis. The median home price in the US is $250,000. Assume 1m homeowners are subject to foreclosure and that the lenders incur a loss of $100,000 each time a borrower defaults. The losses to the lenders then would total $100bn. If 4 per cent of the homeowners with mortgages default, the losses to the lenders would total about $150bn…
US banks already have reported losses approaching $350bn, or more than twice the estimate of eventual losses of $150bn.
Using this reasoning as a starting point, Aliber then proceeds to come up with a clever plan for essentially monetizing the difference between the $350 billion that banks have written off and the $150 billion that they will eventually lose.
But if you really think that US banks will ultimately suffer no more than $150 billion in mortgage-related losses, I’ve got a triple-A-rated super-senior collateralized Brooklyn Bridge obligation to sell you. The reason banks aren’t lending to each other is that they’re convinced the final losses will be much bigger than the ones already taken, rather than much smaller. (Although, in a piece of good news, the TED spread is now back down to less than 400bp this morning. I doubt that means banks are lending to each other yet, but it’s definitely a move in the right direction.)
The fact is that if there’s $13 trillion of housing wealth in the US, and house prices end up falling by 25%, then that’s $3.25 trillion in paper losses. Of course, not everybody bought or refinanced at the high — but many people did. And when real-estate losses start ticking up into the trillions — and remember, this is just residential, we haven’t even started on commercial real estate yet — it’s improbable, to say the least, that mortgage losses will be capped at $150 billion, especially when most of those loans were extended in an era of easy no-money-down mortgages.
And then, of course, there’s credit cards, and all the other loans banks have made which are much more likely to go sour over the course of a long and painful recession. This is why a bank recapitalization plan makes a hell of a lot more sense than concentrating, as Aliber would have us do, solely on bad mortgage assets.
O frabjous day! Jim Surowiecki now has a blog! It’s called The Balance Sheet, and he put up no fewer than six entries yesterday alone. The RSS feed is here: go add it to your feed reader now.
LIBOR Stress could = $730B in damage already
Chart of the Day: The Magic Hour: These crazy end-of-day swings are actually a new phenomenon.
A Simple Hedge Fund Outflow Model: Last in, first out?
Gold darn it: "When Crimnex opened for trading, it fell $50 in about 3 minutes. In 25 years watching gold trade, I don’t recall ever seeing such a drop in such a short time. It’s as if all traders move aside and a seller sold into thin air." What’s Crimnex?
Joe the Plumber’s Big Tax Bill: An extra $900, max. Related: Cowen.
Back in March, when his company, Las Vegas Sands, was trading at over $80 a share, I reckoned that Sheldon Adelson’s bubble was ripe for bursting. Today, it’s bumping along at about $11. Is Adelson still the richest Jew in the world? According to Forbes, he’s not even the richest Jew in America: that would be Mike Bloomberg, with a net worth of $20 billion.
Google co-founders Larry Page and Sergey Brin are worth more than Adelson, too. Adelson was worth just $11 billion on October 1, and that was with LVS trading at almost three times its present level; he’s down in single digits at this point. I hope he’s diversified: Las Vegas Sands has almost $11 billion in debt and less than $1 billion in cash; a large chunk of its assets are unbuilt casinos in Macau. If Adelson can’t refinance when he needs to, LVS could go to zero.
