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Sat, 29 Nov 2008

Roubini Global Economics (RGE) has an interesting article called “Can China Adjust to the US Adjustment” that discusses, among other things, the relationship between foreign trade and the current credit ‘crunch.’ It’s a fascinating article both because of the interesting history it describes, and some of the predictions it makes.

Although we can’t say for sure, it is probably safe to argue that US savings rates will climb back to earlier average levels, or even temporarily exceed those levels, as American households rebuild their shattered balance sheets. If they return only to the mid-point of earlier savings rates, this implies that US household savings must rise by some amount equal to roughly 5% of US GDP, or, to put it another way, that all other things being equal US household consumption must decline by that amount.

Although it may just be that I haven’t been paying close enough attention, this is the first time I’ve seen anyone toss out a hard number estimate of how much they expect consumption to fall by. Pretty much everyone expects consumption to fall by some amount, but ‘how much’ is the real issue.

This decline — whatever it ends up being — will inevitably cause a decrease in China-to-U.S. imports, and that will have to be compensated by either an increase in domestic Chinese consumption, or a decrease in production. The article suggests, and I agree, that the former is highly unlikely. Although Chinese household spending is on the rise, there is just no way that it will rise fast enough or high enough to maintain the insane level of consumption that was until recently being bankrolled by the U.S. Hence, production there must fall.

Of course, falling production means factory closures and job loss, and that means domestic consumption will fall yet further, leading to a nasty downward spiral. The parallels drawn in the article between 1929 in the U.S. and 2008 in China seem pretty well-grounded; except, of course, that in 2008 Chinese regulators have volumes of economic theory and analysis written about 1929 at their disposal, if they choose to make use of it.

[Via MetaFilter.]

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Wed, 05 Nov 2008

Edward Wright, a British Conservative, has an interesting piece about the future direction of the Republican party here in the U.S., full of suggestions that the party leadership would do well to take to heart. There are many parallels between the defeat of the Tories in 1997, and what happened yesterday; both lost the trust of the public after economic turmoil, and both had spent too long drinking their own Kool-Aid while neglecting their stated reason for existing.

It is when parties deviate from their fundamental intellectual core that they suffer the most. The most important example of this in the current administration is public spending. Whilst tax cuts helped to keep the American economy growing their pre-requisite — low public spending — was ignored. It’s harder to demonise big government liberals when you have spent eight years turning a healthy budget surplus into a massive deficit, a deficit which represents a massive tax burden on future generations in the form of interest payments to Chinese bankers.

In Britain the ideological departure had serious underpinnings and serious consequences. The pragmatic conservatism of the previous 150 years was eschewed in exchange for the dynamic monetarism, privatisation and market liberalisation of the Thatcher revolution. To succeed once more the GOP must rediscover its own ideological core, an ideology that is found not in the anti-intellectual city-dweller baiting of Sarah Palin but in integrity in government, individual freedom and not just low taxes but low spending.

It is difficult, as a small-government Libertarian conservative, to find much of a silver lining in yesterday’s election; not only does it bring us dangerously close to one-party rule — just two Senate votes, at the time of writing, and that only if Senatorial filibuster rules are not changed — but it seems destined to lead to yet more government interventionism. About the only positive aspect of it that I can find, is that it might represent the death knell of the far-right, authoritarian “conservatives” that have monopolized the GOP brand for too long.

The ‘Evangelical Right’ should have always been the party’s fringe, not its core; by making it the latter, Republican leaders virtually guaranteed yesterday’s outcome sooner or later. The far-right just isn’t socially mainstream enough to form the core of a majority political party. That the strategy worked for as long as it did is remarkable, but — perhaps thankfully — it has found its limit.

The much-ballyhooed ‘silent majority’ was willing to nod along with social authoritarians — men and women who seemed more interested in what was going on in their neighbors’ bedrooms than in Wall Street boardrooms — so long as the economy was humming along and we were winning wars abroad. But once that ended, so too did the public’s tolerance for politicians who had built their careers obsessing over irrelevancies. And let’s be clear: to all but a hard core of religious conservatives, when Wall Street is melting down, concerns over fetuses and buggery are worse than irrelevant.

The question now is whether the Republican party will pull itself together in time to save the country from sliding disastrously far to the left. They have two years in which they must formulate a new message, or at least rediscover an old message that they seem to have forgotten, and take that message to the public, before mid-term elections. I sincerely hope that they can do it, because as bad as the two-party system is, a one-party system — which is what we’re looking at if the Republican party doesn’t adopt a ‘big tent’ platform very quickly — would be far worse.

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Tue, 04 Nov 2008

One of my favorite uses for Google Reader is to keep an eye on the feed of latest releases from Project Gutenberg and Distributed Proofreaders. Although the great majority of what they archive is of limited interest (at least to me), every once in a while something really cool comes through.

“Successful Stock Speculation,” (HTML version) originally published in 1922, is worth a read. Written as a handbook for the novice investor, just about everything in it is still good advice. I suspect that if more amateur (by which I mean, using their own, as opposed to someone else’s, money) speculators stuck to the very conventional wisdom in the book, far fewer people would lose their shirts in the process.

[The word ‘speculator’] refers to a person who buys stocks for profit, with the expectation of selling at a higher price, without reference to the earnings of the stock. … An investor differs from a speculator in the fact that he buys stocks or bonds with the expectation of holding them for some time for the income to be derived from them.

This is an important distinction which, sadly, seems to have been lost recently. There’s a fundamental difference between speculation and investment; people who buy and hope for a change in price of the underlying asset, so that they can sell and realize a profit, are not investing. They are speculating. This is true whether the underlying asset is stocks, bonds, or real estate. I’d argue that misunderstanding the difference between the two is the root cause of virtually all market ‘horror stories’ (Grandma and Grampa wiping out their retirement, the kids’ college fund, etc.).

As a usual thing, it is a good time to buy stocks when nearly everybody wants to sell them. When general business conditions are bad, trading on the stock exchanges very light, and everybody you meet appears to be pessimistic, then we advise you to look for bargains in stocks. […] When business is bad, nearly everybody thinks business will be bad for a long time, and when business is good, nearly everybody thinks business will be good almost indefinitely. As a matter of fact, conditions are always changing. It never is possible for either extremely good times nor for extremely bad times to continue indefinitely.

Sound familiar? There’s nothing new here; you could read practically the same thing in just about any Warren Buffett book. But the fact that it still works so well, so unusually well in fact, is a testament to how many people just don’t seem to get it.

The same could be said for the book’s advice on picking which stocks to buy:

We maintain that there is only one basis upon which successful speculation can be carried on continually; that is, never to buy a security unless it is selling at a price below that which is warranted by assets, earning power, and prospective future earning power.

Today we might call this “intrinsic value” or “fundamental value,” and this school of thought ‘Value Investing’ (although, for the reasons noted above, chances are it’s not really “investment” but rather ‘value-driven speculation’).

Although other strategies seem to get all the attention during bull markets, it’s the unsexy science of fundamentals that has seemingly withstood the test of time, and is still as useful today — regardless of what the future might hold — as it was in the early 20s.

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I was heartened to read this over at Calculated Risk earlier today. It’s mainly a link to a WSJ article, but the punchline is blunt:

Any attempt to keep house prices artificially high will just postpone the inevitable and delay the eventual recovery.

At least somebody seems to get it. Pity that ‘somebody’ doesn’t seem to include, oh, anybody in Washington. At least not yet, but the gist of the article is that the truth is beginning to sink in.

Unfortunately I think it’s too late for that truth to have prevented a costly and probably pointless bailout, but it might be in time to prevent too much meddling in the retail real estate market. Of all the markets that need a good cleansing burn, that’s it. However, it’s also the one prone to attracting the most interference from Congress, as idiots who forgot that a house should be a place to live first — and not an ATM or an IRA — squeal and moan as they learn that actions have consequences.

The most dangerous idea to creep in is that a decline in housing prices is, by itself, somehow bad. Whenever you see someone in a suit pointing to the decline in prices and suggesting that it is a problem to be solved, be afraid. It’s dangerous for two reasons: one, because it’s wrong — inflated housing prices were a symptom of the credit bubble, and their decline is quite natural as that bubble works itself out; two, because it’s an easy target for government intervention.

There’s nothing politicians like better than treating the symptoms of a problem; it’s so much easier, after all, than actually going after the root cause, and most of the time the public never notices the difference.

If the government succeeds in convincing the public (and Wall Street, who on the whole haven’t shown themselves to be much more savvy than the public at large anyway) that the decline in prices is a symptom that ought to be treated, and somehow find a way to prop those prices up at their inflated levels, a generation of financially responsible Americans will be effectively locked out of home ownership. I really can’t imagine anything more toxic to the long-term faith of the public in the markets than that.

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