Saturday, 3 March 2012

GUEST POST: Houses are homes, not investments

Guest post by Vedran Vuk of Casey Research 

Recently, my parents were considering purchasing some real estate. As the financial professional in the family, they asked me, "What do you think? Will it go up in value? You know... not now, but eventually?" I've heard the same thing over and over again. In response, I shared my opinion: "Would you pay the current market price to live there even if its value never increased?" If the answer is yes, buy the property." Essentially, is the house worth it as a home, not as an investment?

In the past few decades, the concept of home ownership has been completely turned on its head. Previously, homes were considered a very long-term consumption good. Do you think anyone in the 18th, 19th, and prior centuries ever considered tripling the value of their homes by retirement time and selling them to move beachside? In the vast majority of cases, such ideas never crossed their minds.

Yet, somehow along the way, this became a reasonable investment expectation. Even today, home buyers still make their purchases with the hopes of escalating prices. But are homes really wise investments?

Consider the difference between your house and an investment such as Apple (NASDAQ: AAPL) stock. At a major company, the opportunities can be truly limitless. Apple can produce cashflows from computers, iPods, iPads, and future innovations that are just dreams and concepts today. If the local market is oversaturated, Apple has the option of spreading out all across the world. As a result, Apple's stock price has gone from $17 in 2005 to $540 today. Can your house do the same? Unless there's a hyperinflation ahead or your house is located in the New York City or London of the 21st century, the answer is no. Why? Because your house is ultimately a product--and products have an upper bound to their prices.

To understand this difference, there's no need to drag out the Case-Shiller Index or analyze complex statistics. Suppose one bought a single-family house over a decade ago for $200K. At the peak of the housing bubble, the price reached $500K; to his joy, the owner sold it and moved thereafter to retire in the Bay of Plenty. Can the house's price go higher from here? With Apple, the stock price can just keep climbing with greater profits and innovations. But is that true with real estate?

For the sake of argument, let's say that prices do keep rising. Eventually, the second owner sells to another buyer for $1 million a decade later. Guy number two also peacefully retires in bounty. Well, where does that leave the third guy? Unless real salaries make an incredible jump in the same time period, no one will be able to afford the home next. The median worker earning $51K won't be selling such a house for retirement; instead, it will take him until retirement to afford it. In many ways, this "investment" more closely resembles a Ponzi scheme. (Yes, Ponzi schemes work: for those who get in early and get out - as the recent real-estate bubble demonstrated.) Ultimately, there's an upper bound to housing prices - they can't continue rising perpetually with no end.

The same is true of any product. At $300 for the newest iPod Touch, Apple might be doing well, but at $10,000 per unit, there likely would be very few buyers. As a homeowner, you're not holding a company that can innovate, cut costs, and enter new markets. You're ultimately holding a product which must be either sold to the next user or leased to the next renter. Houses are a good created for a specific use - to put a roof over one's head. They are not magical money machines. Previous generations understood this very simple concept. One built a home as a place to live and escape the elements - and worse yet, the squalor of tenement housing. Homes were not retirement tools, but rather long-term goods.

Unfortunately, policy makers still view homes as investments and are always worried about low prices. But is it really healthy to play another round of the same Ponzi scheme? Suppose the Reserve Bank manages to inflate housing prices again. There will be another boom in which some folks will make a tremendous amount of money. Eventually, housing prices will hit an unrealistic upper bound. Again, home prices will violently drop, resulting in homeowners deeper underwater than now. Of course, the banks will again take a hit as the mortgage holders. As long as real incomes trail the rise in housing prices, there will ultimately be a correction of some sort.

So, do I think the current real estate market is just fine? No, of course not; but I don't think shocking houses prices back into a bubbly stratosphere is the solution. Ideally, I'd like to see increasing housing prices, but only at the pace of real growth in society's wealth. Over the last few decades, houses grew in value for good reasons and bad. On the good side, the economy had been expanding. On the bad side, central banks’ low-interest-rate bubble artificially inflated housing prices beyond what made sense for economies to sustain.

If US companies such as Apple are creating greater abundance in society, it makes sense for US housing prices to grow with greater wealth. But, bringing house prices higher on a wave of printed cash does not make anyone wise investors, but rather willing participants in a Ponzi scheme where someone else will be left holding the bag. Though that might be an attractive solution for those underwater on their mortgages, it's no solution for the economy as a whole--nor for the next buyer, or the next but one.

Vedran Vuk is a senior research analyst with Casey Research

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Friday, 2 March 2012

Myth-busting, or ‘Things you know that ain’t so.’ #366: Chinese wages

There’s another myth that’s done the round for years.  That globalisation is a “race to the bottom.” In the way it’s usually couched, we hear that cheap Chinese goods produced by cheap Chinese labour will lower labour costs (i.e., wages) all round the world.

This obviously ignores the enormous benefits to everyone who can buy these cheaper goods for less money, leaving everyone free to spend their remaining income on things they couldn’t afford before (making everyone’s real wages higher, even if their nominal wages stay the same).

It ignores the historical evidence from the likes of Hong Kong, South Korea, Taiwan and Japan, which in only the last half-century have leapfrogged from being low-cost low-wage economies producing objects of some scorn to places producing high-cost, high quality goods and services at wage levels higher than those of their western customers.

Not to mention that it ignores what is happening to Chinese wages themselves. And the fact to grasp hear is that as China itself grows wealthier, the gap between Chinese wages and American wages (which as we all know are higher than our own)will plummet:

US manufacturing wages were 22 times that of China's in 2005. Today, that wage gap is under 10 times and likely will be under five by 2015.

And if China continues on this path (which, for all sorts of reasons, is not guaranteed) then by 2025 …

the wage gap is shrinking

Meanwhile, if we continue to set up barriers to this new wealth (as so many local idiots continue to call for) our wages will be going the other way.

Somebody tell some of the local idiots.

[Hat tip TVHE who asks“Why fear labour market globalisation?”]

Myth-busting: Things you know that ain’t so. #365: “the numbers of people on welfare plummeted under Labour”

There are more myths afoot in the political arena than anywhere else. No wonder, when it’s full of people who lie for a living.

Here’s one doing the rounds in Wellington at the moment: that “less than ten years ago” beneficiary numbers were reduced to “historical lows.”

Fortunately, Welfare Myth-Buster Lindsay Mitchell is all over this one:


And this is without counting all the hundreds of thousands of middle class families turned into beneficiaries by Labour’s Welfare for Working Families election bribe.

“Historical lows”? Really?

Send the truth to Duncan Garner and Gordon Campbell.


Good news about good drinking

Since drinking is in the news again, courtesy of Jesse Ryder drinking enough to attract the Herald’s sub-editors, perhaps (I thought) I could help redress the balance a little bit from the usual headlines suggesting “drinking is bad” “drinking is dangerous” “drinking should be banned.”

So here’s two recent pieces of research on this important topic that never made the Herald, indicating drinking can be good. I offer them to you as a public service.First, alcohol encourages creativity; or, as Science News reports, “a boozy glow may trigger problem-solving sights”:

A moderate alcoholic high loosens a person’s focus of attention, making it easier to find connections among remotely related ideas, [psychology graduate student Andrew Jarosz of the University of Illinois at Chicago and his colleagues] propose online January 28 in Consciousness and Cognition

The reason suggested is simple enough: drinking alcohol “lowers the ability to control one’s thoughts,” allowing the drinker to jump outside his canalised ways of thinking about a problem and finding instead new and more inventive ways to think about it.  Sounds like a more fun way to solve a problem than sitting in a room “brainstorming” about it.

    Jarosz and University of Illinois psychologist Jennifer Wiley, a study coauthor, suspect their finding applies to musical and artistic inspiration. “A composer or artist fixated on previous work may indeed find creative benefits from intoxication,” they say.

Composers, artists and writers through the ages from Aristophanes to Mozart to Hemingway would undoubtedly agree with them—as would anyone who’s ever jotted down a great idea produced while wetting their throat in the pub.

One word of warning about this, however. People don't think as clearly when their bladders are full.

Second, in further news that will astonish those who write the Herald’s headlines, "People who consume alcohol earn significantly more at their jobs than non-drinkers..."

The study published in the Journal of Labor Research concluded drinkers earn 10 to 14 percent more than teetotalers, and that men who drink socially bring home an additional seven percent in pay.
    "Social drinking builds social capital," said Edward Stringham, an economics professor at San Jose State University and co-author of the study with fellow researcher Bethany Peters.
    "Social drinkers are out networking, building relationships, and adding contacts to their BlackBerries that result in bigger paychecks" …
    The researchers found some differences in the economic effects of drinking among men and women. They concluded that men who drink earn 10 percent more than abstainers and women drinkers earn 14 percent more than non-drinkers.

Good news all round really.

But it must be countered with another word of warning: apparently drinking could also make you carry a Blackberry. Perhaps because you’ve been blinded by endorphins.

So it’s not all good.

[Hat tip Geek Press]

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Wednesday, 29 February 2012

Gould, Morgan et al: Hopeless

imageIf you’ve ever wonder why Gareth ‘Bloody’ Morgan’s alleged investment company is the worst performing of all the Kiwisaver providers, perhaps the answer is that their economic analysis is as risible as the analysis in the books churned out by their principal.

Consider for example the Pollyanna like pronouncements by their “senior economist” John Carran recently that everything is about to become all rosy in the garden again—that official Chinese GDP figures (measuring the construction of empty cities, empty shopping malls and the like) are to be believed; that European banks have been inoculated from Greece’s by oodles of printed paper; that all the printing by all the world’s central banks will (sometime soon) bring about a second Land of Cockaigne; and that the US is one of these place in which Milk and Honey will soon be flowing. 

Or the equally insipid “analysis” by their “senior equity analyst” Nathan Field, who also pins his hope on a fabled US recovery while appearing not to realise that the US stock market has been rising recently for no other reason than all the phony paper money pumped into markets by The Fed, and that there is and had been no credible signs of a US recovery (about which more below).

_BryanGouldThe level of reasoning on display is so dim it almost makes the analysis in the Herald this morning by failed British Labour Party MP Bryan Gould look good. Basing his “analysis” on facts both historical and from out of yesterday’s papers, Mr Gould reckons that  a recipe of spend, spend, spend is the answer to today’s economic woes. And he’s wrong on virtually everything he says, both factually and analytically.

_Quote_IdiotIn the 1930s [for example, says Gould], there were those, like Herbert Hoover, who insisted that austerity - cutting government spending - was the way to beat recession.

In fact Hoover did nothing of the sort, as he himself boasted in his 1932 presidential campaign.  Instead of doing nothing, he crowed, “we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic.”  “Gigantic” then meant raising spending by nearly one half, and adding a deficit where before there was none:


Spot any fiscal or monetary austerity there? (Note: these are not “gee-whiz graphs.” There is a zero baseline.)

The result of this non-austerity was to make the situation worse, not better---with even worse to follow when his successor, Franklin Roosevelt, followed the same medicine.

The myth of Hoover’s do-nothingness is just one of many myths from the Great Depression [PDF[ that are still peddled by the know-nothings of today to justify their own nostrums. It should be known to Mr Gould (who has the same pretensions to historical acumen as Mr Morgan and his colleagues at his lacklustre firm have to economic acumen) since the spending, debt, and deficit numbers are all given in tables published every year with the president's proposed federal budget [PDF]. So he really has no excuse. Because as often as this myth is repeated, the truth is the reverse: that Herbert Hoover was a big-government man who did not trust the free market whose meddling turned an ordinary depression into a Great one.

Not that accuracy is any part of Mr Gould’s intentions (even as a failed politician, lying was one of his professional talents) since he then goes on to suggest, quite erroneously, that the reason for the failure of Portugal, Ireland, Spain and the UK to get off the floor is not the enormous debts with which they’ve saddled themselves, which all have increased in the last four years, but some alleged “austerity” which all have inflicted on themselves.

If only they had.

It is not an austerity programme when you debt keeps rising—as it has in all these jurisdictions. It is not an austerity programme when you raise taxes—as all have done. The UK for example

raised capital gains taxes from 18% to 28%, which is the taxes that hit business formation the most.  Raising capital gains decreases the return on investing in new economic activities and investors can easily decide not to invest their capital so this tax reduces economic activity more quickly than other taxes.  If the UK had not raised taxes, they would most likely now be experiencing an economic boom.

It is not an austerity programme when governments spend beyond their means, and it is not a real rescue when the the real causes of the financial crisis [PDF] not only have not gone away but have been given more legs.

So what’s the argument Mr Gould gives for the success of his plan to spend more money?  It’s the wonderful success story of the United States of America in the last four years, wherein “President Obama's stimulus programme - bitterly opposed and relatively timid as it was - is pulling the US economy around.”


Mr Gould seems to be reading the same poorly performing tea leaves as Mr Morgan’s poorly performing staff. Because far from recovering, as they both suggest, the latest data doesn't indicate a recovering US economy at all but precisely the reverse: a place wherein all that the Fed's phony paper money is sloshing around the highly inflated stock markets while  every real measure of recovery is on the floor or falling.

The evidence of an improved labor market, higher corporate earnings and the return of the housing market are all based upon misleading data [observes Charles Biderman in Forbes magazine]…

  • The only increase in cash since the March 2009 has been the Federal Reserve giving newly created money away as payment for government expenses… The combined $4 trillion deficit, when added to the $1.4 trillion given away to banks to buy their worthless mortgages equals the $5 trillion increase is US debt.
  • Corporate after-tax income is growing at just under 3% year-over-year, not keeping up with inflation… The reality is that if income tax collections are not growing very fast than neither are the number of new jobs. That calls into question the recent BLS press release that said jobs are growing fast.
  • Without seasonal adjustments unemployment claims are currently down the same 10% year-over-year as the past six months. In other words, by counting year-over-year numbers there is no improvement…
  • Real-time data, ignoring seasonal adjustments and counting year-over-year numbers, indicate both prices and sales of new and existing home sales are pretty much unchanged from year end 2011…
  • Yes the stock market has been going up, but that does not have to mean the U.S. economy is improving. While U.S. and European stocks have been going up, gold keeps rising faster. That means it is not gold that is a chimera, or a phantom, it is the U.S. currency that is a phantom.

This is not anything like the US of Mr Gould’s dreams then. This is the real US data from just yesterday--real data that doesn't corroborate an improving U.S. economy

Real data indicating Messrs Gould, Morgan, Carran, Field—and Pollyanna—have all been talking through their hats.

So perhaps instead of talking about some non-existent “austerity” of today, or talking up the failed super-Keynesian stimulus of the 1930s, they might instead look at the last time a serous economic depression was seriously allowed to play itself out by adopting the real hands-off approach Mr Gould erroneously attributes to Mr Hoover.

It was the Great Depression of 192o.  The Great Depression you’ve never heard of.

And the reason you’ve never heard of it before?  Because the hands-off real austerity turned around a bigger crash than 1929’s plunge in less than eight months.

And oddly enough, it was similar policies that eventually allowed most of the non-US western world to recover from the Great Depression , while Franklin Roosevelt (following Mr Gould’s recipe, which includes every ingredient necessary to stop a recovery in its tracks) was busy making it impossible for America to recover.

But don’t expect to hear that from a failed politician. Or Gareth Morgan’s “experts.”

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DOWN TO THE DOCTORS: A systemic problem in the system

Unlike the Prime Minister, Libertarianz leader Dr Richard McGrath is unsurprised to learn a convicted sex offender has these last few years been alive and well and driving children around in his school’s van.

Isn't it reassuring to know that whatever their many other manifest failings, our robust justice and education systems can at least ensure that New Zealand children won't be put at risk by having convicted sex offenders teaching them in our taxpayer-funded factory schools.

Well, mostly.

There is  this guy who taught at eight schools around the country before he was rumbled.  The Prime Minister is puzzled.

John Key said it was known that the offender was "a fairly devious person.” "But we just don't know exactly why the system has failed to pick them up and it's just absolutely critical we restore that confidence," Key said. 
            The Government saw the case as a "potentially very serious issue" that may involve a number of agencies. "We want to make sure we understand fully what's gone on here, whether there is potentially a systemic problem in the system or whether it's a one off situation that it would have been very, very difficult to pick up," Key said.

Not just a problem in the system or a systemic problem. This is a fully fledged “a systemic problem in the system.” That  puts it in a whole other league of fuck up altogether. One that needs “a very full understanding” to work the fuck out.

Or not. Perhaps it’s actually very simple.

And it is.

The problem, John, is that our justice system gives special treatment to sex offenders, particularly child-rapists. It’s as simple as that. It separates sex offenders from other prisoners; it protects their anonymity, regularly suppressing sex offenders’ names at the time of their conviction; it fails to "rehabilitate" them—and fails to care that it doesn’t, (while continuing to reward the programmes that haven’t); and it neglects to keeps a close eye on sex offenders once they are released from prison—invariably at a much earlier date than their victims would have anticipated, and often without their victims even having been told. 

In short, it’s a shambles, John.

In fact, it took a member of the public to tip off one of your eight government schools—where said dirtbag was head of the Maori "department"—that this sexo was driving kids around in the school van. This, despite the dirtbag being on an obviously mis-named Extended Supervision Order.  Proof if proof were needed, John, that it takes more than fine words and naming an order “Extended Supervision” to make any of that supervision happen.

So while the “systems” in place in the Injustice Department are set up to help the sex offenders, while ignoring their past and future victims, the systems in place in the factory schools are more focussed on teachers delivering the Department’s latest warm and fuzzies, instead of focussing on who those teachers are and what they’re doing to the children delivered to them by the state.

There is an alternative to this farce, however. A clear alternative. Indeed, you could say a completely new system. One in which the folk who matter get to pay the piper and call his tunes. One in which parents themselves would have control over the purse strings, and a real say in what (and by whom) their children are educated. Competition between schools would weed out incompetent and predatory teachers quick smart. Of course the mainstream parties would never want anything that extreme.

No, sir, the current system is just fine by them, thank you very much. It’s only a systemic problem in the system, after all. So if it ain't broke, don't fix it.       

See ya next week!
Doc McGrath

Tuesday, 28 February 2012

Still laughing at Wikileaks. And Stratfor.

I don’t know if you noticed, but Julian Assange’s Wikileaks just released a boatload of documents hacked or otherwise acquired from Stratfor Consultants, a global research firm that (in the words of Atlantic magazine) “brands itself as a CIA-like ‘global intelligence firm.”

Except, as The Atlantic also points out, “only Julian Assange and a few over-paying clients are fooled.” 

For comparison's sake, [says The Atlantic] The Atlantic often sends our agents into such dangerous locales as Iran or Syria. We call these men and women "reporters." Much like Statfor's agents, they collect intelligence, some of it secret, and then relay it back to us so that we may pass it on to our clients, whom we call "subscribers." Also like Stratfor, The Atlantic sometimes issues "secret cash bribes" to on-the-ground sources, whom we call "freelance writers." We also prefer to keep their cash bribes ("writer's fees") secret, and sometimes these sources are even anonymous.

Basically, they conclude: Stratfor Is a Joke and So Is Wikileaks for Taking It Seriously.

[Hat tip Glenn Reynolds/ Diana Hsieh ]

Glendowie Montessori Open Day

imageIf you’ve ever wanted to see and get the feel of a proper Montessori environment—there being so many Montesomething classrooms around instead, being just Montessori in name only—then this Sunday at Glendowie Montessori Preschool is your chance.

Come along and look around and talk to Directresses Carol and Cathy.

This is for anyone interested in Montessori education, whether as a parent, a friend of education, or you’re just interested to see and learn more about what makes a Montessori environment tick.

imageAfter all, it’s a ‘hands-on’ method of education. So take the chance to get ‘hands on’ with what the Montessori classroom has to offer, and have all those questions answered you’ve always wanted to know, like:

Or just send them a question of your own. They love questions.

(And if you already know you want quality Montessori education for your child, feel free to add your child’s name to their Wait List.)

Where: Glendowie Montessori Preschool, 227 West Tamaki Road, Glendowie, Auckland
When: Sunday 4th March, 3 to 4:30pm
What: Montessori Open Day!

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GUEST POST: Licensed Building Practitioners Don’t Read ‘Anthem’

Guest post from Citizen LBP113707

As of today I am Citizen LBP113707. I was once an individual. I was once a craftsman. But not anymore. My personal style and the techniques with which I used to ply my trade no longer stand for anything. I now have to perform my work arbitered by people who produce nothing and who yearn for nothing of spiritual value. Unfortunately these sorry souls have found a threadbare reason to force their lack of life on to me and countless other craftsmen, many of whom have no doubt come to the realisation that it is time to find another way of earning a living.

DBHTherefore, since the coming of Licensed Building Practitioner status to my ‘sector’ (the words ‘trade’ and ‘profession’ no longer being appropriate), I shall no longer refer to myself as ‘I.’ I am now either ‘we’ or ‘us.’ We are no longer an individual. We are a number. We are now units aggregated into the great(er) collective.

Our ability to adapt, improve and to innovate is no longer required. Instead we must conform to the grey mandates of the collective. No longer are we required to explore new ideas. We are able to formulate new ideas in our minds but we are not to take these ideas any further unless we have received permission from our grey leaders; those more equal than us.

So now that we are card carrying Citizen LBP113707, what is the benefit to collective society to which we now belong? We will find that small-business owner-citizens will disappear as costs incurred and newly-enforced red tape will suck up more working hours than is viable.

Also, while being  given ‘guidelines’ within which to build (the rigidity of which belies the name, the practices being spoken about being ‘enforced’ on us) we will nonetheless bear all responsibility when any of these guidelines fail. As they will. This means we will have to find ways to hide our finances to protect ourselves when our grey leaders come to clean us out regardless of whether we are to blame or not.

Click here to read more ... >>

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Monday, 27 February 2012

Stop patronising us - Pacific leaders

Here’s something very encouraging that happened over the weekend: the reaction of Pacific groups to in NZ to Paula Bennett’s patronising “green paper” on so called “vulnerable” children.

At the national conference of the Pacifica women’s council over the weekend, the Minister of Social Development was told bluntly her suggestions the Pacific family is the solution to child abuse and neglect is based on “a romantic myth.” [AUDIO REPORT HERE]

Basically, Bennett’s report recommends “recreating traditional island villages in cities as a solution to Pacific Child abuse and neglect.”  But the response of participants at the meeting was essentially: “Get real.”

The chief executive of west Auckland’s Waves anti-violence trust [for example] told the national conference of the Pacifica women’s council it is a wonderful fantasy.

The assertion, she says, that “taking care of the Pacific family automatically ensures healthy, safe children is a myth.”

And Peggy Fairburn-Dunlop, lecturer in Pacific Studies at AUT, says the suggestion is the Pacific family is the solution,

but it’s time to stop ignoring that it’s also a big part of the problem… We all know there are things that are not so good that go on within families, and we can no longer hide those and pretend we don’t see them.

A refreshing honesty that if transmitted more widely should itself begin to be part of the solution.

Equally, she says, it’s dangerous to make policy on the assumption all Pacific families are the same—suggesting at least implicitly that it’s time to start treating people as individuals rather than as “members” of some community predicated on skin colour.

And South Auckland youth worker Katrina Mika reckons young families of whatever colour  just need good parenting help, not (in my words, not hers) more patronising mush from Ministers.

And many suggested even the idea of calling these children “vulnerable” was itself patronising, which it is, and all children should be treated equally, whatever their race.

I couldn’t agree more.

And I couldn’t be happier hearing sentiments like these from those one so rarely expects it.