China 2010, Japan 1989?

"Li Nan has real estate fever. A 27-year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700-sq.ft. apartment in west Beijing. Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment. ... In the last 12 months, such apartments have doubled or tripled in price, to about $400 per square foot. 'This year they'll be even higher,' says Li. ... Some local officials are even building towns from scratch in the desert, certain that demand won't flag. And if families can swing it, they buy two apartments--one to live in, one to flip when prices jump further. ... The real estate rush in fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments. ... On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that 'property prices have risen too quickly.' He pledged a crackdown on speculators. ... In some places, demand for upper middle class housing is so hot it can't be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. ... In Beijing's Chaoynag district--which represents a third of all residential property deals in the capital--homes now sell for an average of nearly $300 per square foot. That means a typical 1,000-sq.-ft. apartment costs about 80 times the average annual income of the city's residents. ... How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing's half-trillion-dollar stimulus plan all made funds readily available. ... Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively', my emphasis, Dexter Roberts at Businessweek, 11 January 2010, link:

http://www.businessweek.com/magazine/content/10_02/b4162030091917.htm.

"China has told banks to stop giving commissions to real-estate agents for introducing mortgage customers, as Beijing tries to rein in its property market and unscrupulous lending practices. ... The China Banking Association said Wednesday that the new guideline on housing-loan commissions has been in effect since Jan. 1. ... 'High commissions paid by banks to real-estate agents have seriously disturbed the [financial and real-estate] markets and impacted banks' credit business,' the association said. ... The practice isn't unique to China but has raised regulatory concerns, as banks often reduced lending rates or relaxed lending practices to secure individual mortgage loans, a lucrative sector to lenders, while real-estate agents helped borrowers forge mortgage documents to get higher commissions. ... Central-bank data show that banks extended 952 billion yuan ($139.45 billion) worth of individual mortgage loans in the first three quarters of 2009, nearly four times the amount issued in the same period of 2008. ... In December, prices of new housing in Shanghai rose to an average of 20,187 yuan per square meter, up 8% from November, government data show", my emphasis, Rose Yu at the WSJ, 14 January 2010: http://online.wsj.com/article/SB10001424052748704675104575000322691746914.html.

"Fresh steps to rein in China's booming housing market--one of the engines that has put the country on the cusp of becoming the world's second-largest economy--triggered an international selloff in stocks, as investors grew concerned about the Asian giant's continued growth. ... Wag Shi, head of China's biggest property developer, China Vanke Co., said last month his country is at risk of a Japan-style property bubble if rapid price gains spread beyond major cities. ... Bank of China Ltd. will stop making new loans for the rest of the month, while several smaller banks will have to hold more funds in reserve, according to people familar with the situation. .. Loans from state banks are the cornerstone of the stimulus programs China put in place amid global slowdown more than a year ago. ... Prices of new residential property are now rising at an annualized rate of more than 20% nationwide. ... Both November and December saw a record volume of construction starts, which are up 75% from a year earlier for the quarter. Koyo Ozeki, the Tokyo-based head of Asian credit research for bond-fund manager [PIMCO], says that comparisons of China's real-estate boom with Japan's speculative bubble are overdone, in part because Japan's economy was much more mature in the 1980s than China's is today. ... Even without a crash, a housing market that serves only a narrow slice of the urban elite could turn into a political problem for the rulers in Beijing", my emphasis, Andrew Batson at the WSJ, 21 January 2010, link: http://online.wsj.com/article/SB10001424052748703405704575014703152997616.html.

China today looks like 1989's Japan or California in 2005. From 1989 to 1999 Japanese real estate fell about 80%. Here in Houston, a 1,000 sq. ft. condominium will bring between $40,000 and $175,000 depending on the area. Compared to Beijing, Houston real estate is dirt cheap! Apartments for 80X Beijing's average annual resident income. Wow! Two apartments! Shades of Argentina years ago, when people bought two stoves or televisions not to hold Argentine pesos. "Low interest rates", hear that Zimbabwe Ben, low interest rates can cause bubbles.

Is Chinese real-estate in a bubble? You decide. Imagine, commissions paid real-estate agents could lead to conflicts of interest. Whodathunkit? I wonder if anyone at the OCC has read this? Nearly four times. Wow! 20,187 per square meter is $275 per square foot (20,187 / 6.83 = $2,956; $2,956 / 10.76 = $275). This is not cheap. You can buy new homes in Houston for $100 a square foot.

Disagreeing with Pimco, what difference does it make the Japan's 1989 economy was more mature than China's today? If cap rates in China are about 2-3%, which is what I think they are, China's real estate is overvalued. Stop here. Are China's state banks its answer to Freddie and Fannie? 20% annualized! Shades of Los Angeles 2005!

Pimco, the New Vampire Squid

"A switch in how state regulators size up insurers' risks will save the industry more than $5 billion in capital requirements, New York officials said Monday. ... In ditching the ratings firms, the regulators said they had lost faith in the ratings firms' ability to size up risk in insurers' big holdings of residential-mortgage bonds. In choosing Pimco for the high-profile assignment, they cited the rating firms' widely publicized shortcomings in initially rating many of the bonds as triple-A, the highest rating, then last year downgrading waves of the bonds to 'junk' status. ... Some have critcized the regulators for changing their methodology in a way that could lead to a more-lenient outcome for the insurance companies, saying the move could weaken protection for policy holders", Leslie Scism at the WSJ, 5 January 2010, link:

http://online.wsj.com/article/SB10001424052748704350304574638823927363010.html.

Apparently Pimco is our new Vampire Squid (VS) as old VS developed a foul odor since it claimed to do "God's work". Neal Kasksahri formerly of VS and Treasury recently went to work for Pimco. When will Hank Paulson and Robert Steel decamp to Pimco? Will this regulatory change do anything for insurance company policyholders? Why ask?

NYT Exposes Zimbabwe Ben-Finally

"Millions of Americans are paying a high price for a safe place to put their money: extremely low interest rates on savings accounts and certificates of deposit. The elderly and other on fixed incomes have been especially hard hit. Many have seen returns on savings, CD's and government bonds drop to niggling amounts recently, often costing them money once inflation, fees and taxes are considered. ... Interest on one- and two-year Treasury notes was just 0.40 percent and 0.89 percent as of Monday. ... 'The unemployment situtation and the general downturn in the economy had an impact, but what's going to happen now as CD's mature is that retirees and the elderly are going to take anywhere from a half to three-quarters of a percent cut in their incomes,' said Joe Parks, a retired accountant in Houston on the advisory board of Better Investing, an organization that works to help people become savvier investors. 'It's a real problem.' Experts say risk-adverse investors are effectively financing a second bailout of financial institutions, many of which have also raised fees and interest rates on credit cards. ... 'What the average citizen doesn't explicitly understand is that a significant part of the government's plan to repair the financial system and the economy is to pay savers nothing and allow damaged financial institutions to earn a nice, guaranteed spread,' said William H. Gross , co-chief investment officer of the Pacific Investment Mnagagement Company or Pimco. 'It's capitalism, I guess, but it's not to be applauded'," my emphasis, Stephanie Strom (SS) at the NYT, 26 December 2009, link: http://www.nytimes.com/2009/12/26/your-money/26rates.html.

Yes SS. I've said this for years. What's safe about leaving your money in a bank? Here I go again: "Got gold, get more. Got bonds? Sell immediately". Remember: Interest is what the government promises to pay to to steal your principal. Well Gross, you manage hundreds of billions. Will you close Pimco as a sham and tell your "investors", i.e., fools buy gold? Don't you have enough money Gross? Do you still need to work?

Obama's Slush Fund

"The Obama administration insists it wants to 'partner' with private investors for its new toxic-asset purchase plan. But the more details that emerge, the more it seems Treasury wants to work with only a select few companies. This is no way to conduct a bank clean-up. The investment community was already suspicious last week when Secretary Timothy Geithner unveiled his plan, announcing that Treasury would select four or five companies as 'fund managers' to purchase toxic securities. Given that the whole idea is to create a liquid market for these assets, we'd have thought Treasury would encourage as many players as possible. ... Treasury rules also say the $10 billion limit must be comprised of commercial and residential mortgage-backed securities that as 'secured directly by the actual mortgage loans, leases or other assets and not other securities.' ... While dozens of banks and insurance companies today hold more that $10 billion in toxic securities, the vast majority are trying to get these assets off their books--not lining up to buy more. ... 'This is ugly,' says Joshua Rosner, ther managing director of Graham, Fisher & Co., an independent research firm. 'As long as they are experienced, there is no rational reason for creating limitations on who becomes a bidder and manager of assets. It doesn't serve the public good, though it may serve those few large firms that appear to have a privileged relationship with Treasury.' ... If this program is a roaring success, Treasury is guaranteeing that a select group of hand-picked firms are set to reap enormous profits, via a program that was largely underwritten by taxpayers", my emphasis, Editorial at the WSJ, 1 April 2009.

This is excellent. SecTreas Geithner can polish his resume while on the public payroll. Of course it is a "way to conduct a bank clean-up". The selected parties will do just that.

Following Bill Gross

"William H. Gross has buying power few can match. The founder of money manager Pimco in Newport Beach, Calif. oversees $790 billion, most of it invested in fixed income. But now there's a new bully on the block: Uncle Sam. ... In the past year, the 64-year-old King of Bonds has bought $100 billion of preferred shares and senior debt of financial companies receiving taxpayer loans. His bet is that the government will throw good money after bad rather than let them fail. ... With stocks down 40% this year, he predicts Americans will shift from risk to thrift for at least a generation. ... Gross' theory is that the government will arrange to get itself paid back and that his investors can safely travel on the government's coattails. ... There is no chance, Gross says, that the U.S. will let AIG walk away without paying [$200 billion] back. ... 'No government coming to the rescue [like this] would allow us to go back to the prior stasis.' Expect, he says, a 'lower standard of living, a threat to the dollar as a reserve currency and a decline in U.S. hegemony'," my emphasis, Bernard Condon at Forbes, 12 January 2009.

With "good money [thrown] after bad", AIG paying Uncle Sam and an end "to the dollar as a reserve currency", why own bonds? How will AIG pay Unc? Unc will print the paper, and AIG will give the printed paper back.

Eugene Fama's Revenge

"The stock-market downturn could force the Pennsylvania state employees' pension fund to make cash payments of $2.5 billion or more to trading partners on Wall Street. ... The blowup is yet another example of the wide-ranging damage caused by sophisticated investment strategies peddled to pension funds and other institutional investors when the stock market was soaring. ... The idea behind portable alpha is that it's easy to match the market. If you do it using derivatives like futures, you can tie up less cash and get the same return you would get using an index fund. Then you can use the rest of your cash to beat the market. ... But this year, the portable alpha portion of their portfolio, worth about $6.4 billion at the start of the year, is trailing the market by an estimated 15 percentage points, indicating that with U.S. and world markets down by 41%, they have lost more than 55% of their value. ... Portable alpha was pioneered in the mid-to-late 1980s at [PIMCO], led by the famed William Gross, and by corporate pension-fund manager Marvin Damsma at Amoco Oil Co., according to the book, 'Capital Ideas Evolving,' by Peter Bernstein", Randall Smith at the WSJ, 1 December 2008.

Did anyone ever hear of the "efficient frontier"? I long ago lost respect for Bill Gross. This is another nail in his intellectual coffin. I am amazed anyone fell for this. Shades of 1980s portfolio insurance.

California's Begging Bowl

"California hoped passage of the $700 billion rescue plan Friday would avert financial disaster for the most populous U.S. state, which a day earlier had called for a possible emergency federal loan. Its precarious financial position is an example of how the credit crunch has spread to states and municipalities. ... State Treasurer Bill Lockyer will go ahead with a planned $7 billion bond offering, but market conditions remain dire. ... Schwarzenegger said that if the state couldn't borrow on its own, it would again 'go to the federal government and ask for help.' ... Tom ... Dresslar ... added that the U.S. Treasury has the authority to grant an emergency loan to the state and that the rescue bill reinforces those powers. ... At the local level, 'there are examples every single day of counties hitting the wall,' said Jacqueline Byers, research director for the National Association of Counties, an organization that represents 3,066 counties in the U.S. ... In California, property tax revenue is falling becaue plummeting home prices have resulted in lower assessments, even as cities are tied up by long-term labor contracts, said Mark Moses, chief financial officer for Stockton, Calif. That makes many California cities vulnerable to involvency, he said", my emphasis, WSJ, 4 October 2008.

"California State Controller John Chiang warned Tuesday that the state's revenues and cash flows are deteriorating quickly, in another sign of how the financial downturn has spread beyond Wall Street to state and local governments. In a statement, Mr. Chiang, ... said California is already short $1.1 billion after the first three months of its fiscal year", WSJ, 8 October 2008.

"With credit markets in New York in crisis last week, California Gov. Arnold Schwarzenegger sent an extraordinary letter to Treasury Secretary Henry Paulson asking for $7 billion. Although the governor has since withdrawn that request, it testifies to the dire state of his budget. ... Actually, the state's budget woes should give voters pause--especially since high-speed rail is a fantasy that has as much chance of delivering on its promises of creating 450,000 jobs, vanquishing road congestion and lowering greenhouse gases as 'Conan the Barbarian' had of winning the Oscar. The Golden State's finances are a mess. California's general obligation debt has tripled in the past six years and is now almost equal to the state's $145 billion annual budget. ... But there is little reason to believe [high-speed rail] cost or revenue projections. ... To attract riders, California's rail will have to out-compete cars and airplanes by keeping a lid on commute times and fares. ... It seems California is promising to build a train that is faster, cheaper, more efficient and serves more riders than any high-speed train in the world. And all it has to do to pull off this miracle is defy the laws of economics and physics. This is the kind of creative thinking possible only in the land of Hollywood, but odds are that eventually reality will sink in and California will have to abandon its rail just like Texas, Florida and Southern California were previously forced to do with their far less ambitious proposals", Shikha Dalm, at the WSJ, 11 October 2008.

The credit crunch? Or California government wild spending? These idiots want to give 5 million illegal aliens government services, let 'em. The rest of the US should not pay for it. The idiots thought real estate would increase 20% in value yearly forever and found it won't. Tough. Go bankrupt.

"Credit crisis" or no, California would be insolvent.

The California high-speed rail project looks like another boondoggle. Now wouldn't it be nice if the WSJ applied this kind of thinking to the Paulson Plan and wrote an editorial, "Just Say No" as Nancy Reagan used to say.

Mogambo Guru on Barron's

"I got a big Mogambo Laugh (BML) out of the cover of Barron's this week, which proclaimed 'How Taxpayers Can Profit On The Bailout", with the subhead 'The $700 billion rescue plan could do more than stabilize markets and ease the credit crunch. It may turn a tidy profit too.' Hahahaha! 'Tidy profit'! Hahaha! ... I naturally tell [the Barron's receptionist] 'I want to speak to the top dog in charge of Barron's, because your newspaper is full of idiots! ... The place is full of morons, and I want to tell the halfwit publisher to get his or her stupid butt in gear! That's what I want!' ... I wonder what $700 billion is worth in loaves of bread at $2 per loaf of bread, and I calculate that the bailout is equivalent to 350 billion loaves. ... Junior Mogambo Ranger (JMR) Steve F noted that 'the monetary base expanded by 7.65%!! In 2 weeks!! ... That's 15.3% inflation in the money supply per month, without compounding!!!! ... I quickly calculated the price of bread four years into the future after suffering a 15.3% monthly inflation, and found that, in four years, a loaf of bread that costs $2 today will then cost $1,857.11! ... That means that a house today would be worth $538 at $2 per loaf. Hahaha! [T]here is no freaking way that the taxpayer will show a real, inflation-adjusted profit from this bailout crap", Mogambo Guru at http://www.atimes.com/, 2 October 2008.

I think of a University of Chicago economist joke. There are such things? Yes. Two U of C economists are walking down a street and one sees a $100 bill. They look at it and leave it there. Why? If it was a $100 bill someone would already have picked it up! Laugh. Now. Or else. Suppose one had a real profit opportunity here, what would have happened? Bill Gross (Pimco), quoted in the article, would have called Lloyd Blankfein (Goldman Sachs) and said, "Lloyd old buddy, there's billions for us here. All we have to do is grab it". "How's that Bill"? "There's $700 billion in undervalued assets here. You raise the gelt with your sterling reputation, we manage the asset pool". "Go on Bill". "Sure, we split a 2% syndication fee, $7 billion for your mob, $7 billion for mine. Then we split 50 basis points a year to manage the assets, $1.75 billion a year for each of us". "Sounds good Bill, let's do it". Alternatively, Lloyd would have called. Gross may be a communist. Why? He made the same error Stalin's economists made in the 1930s, he assumed capital is a "free good" with no alternative uses. Stalin eventually realized even in his worker's paradise, capital has alternative uses and therefore "costs". When I read the article, I thought this is one of the stupidest things I've read in a while. The quality of thought in Dow Jones's publications has deteriorated in recent years. The monetary base was 843,841 million on 10 September and 985,899 million on 8 October 2008 a 16.83% increase in four weeks. Who now doubts the Fed is running a highly inflationary policy? 16.83% every four weeks compounds to a 656% money stock increase in 52 weeks. Do the arithmetic. Does anyone remember the "Lost in Space", 1965-68, robot, who said, "Warning Will Robinson ... ". I say warning to anyone holding US dollar paper. You will be lost in space.

Note to reader TVOH: you win, it's Zimbabwe, and only Zimbabwe Ben from now on!

Mish Skewers Bill Gross

I must hand it to Pimco's Bill Gross (BG). He is well named! Mike Shedlock debunks the fallacies behind BG's "thinking", if you can call it that at Mish's, 4 September 2008. Here's a link: http://globaleconomicanalysis.blogspot.com/2008/09/bill-gross-wants-treasury-to-buy-assets.html. BG's proposals are laden with fallacies exploded over 100 years ago! I don't know how anyone can take BG's proposals seriously today. One quote from Mish, "The reality is banks need to fail and financial wizardry needs to come to a screeching halt". Amen brother!

They're Kidding

"When the history of this era is written, what will it say about the financial crisis of 2008? ... Contributing to the gloom over the financial sector is something artificial--mark-to-market accounting. The rules say that banks have to value derivatives like swaps and mortgage securities at their current market prices. The rules make no provision for what to do when there is no market. ... These paper writedowns of mortgage-related assets have real consequences. ... The question here and now is how investors can be on the winning side of history. My answer is to buy some of the debt and preferred issues of high-quality, too-big-too-fail financial institutions that are being forced to raise capital to comply with the accounting rules. When was the last time AA- and A-rated institutions had to pay 8% for capital? Would you believe the early 1990s?", my emphasis, Richard Lehman (RL) at Forbes, 30 June 2008.

"Bond-fund king Bill Gross called on the Democratic presidential candidate to double the federal budget deficit to $1 trillion by fiscal 2011 if he becomes president. 'The economy will need an additional jolt of $500 billion or so of government spending real quick,' wrote Mr. Gross, manager of the $128.8 billion-in-assets Pimco Total Return mutual fund, in a letter to 'President' Obama posted on Pimco's Web site. ... Gross noted that this year's budget deficit should be about $500 billion. By doubling that to $1 trillion in three years, that would put the deficit at about 6% of gross domestic product, 'a mere pittance by Japanese standards.' ... 'While the Republicans will blame you for years and label you "Trillion Dollar Obama" in future campaigns, there is in fact not much that you or any other President can do,' Mr. Gross said. 'You've inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions that have managed to support Ponzi-style prosperity in recent years',"my emphasis, WSJ, 1 July 2008.

RL shows he is a fool. He will not buy paper which has "no market". No, RL wants to buy TBTF institution paper on the premise that as TBTFs, RL is buying a "call option" on an expected Fed TBTF bailout like that which facilitated JPMorgan's Bear Stearns purchase. I wouldn't buy Citigroup 8.5% series F perpetual preferreds RL recommends. What accounting problem is RL talking about? If the paper in question is worth more than say Citigroup has it on the books for, someone has a good opportunity. RL, Vikram Pandit (VP) and say Robert Rubin and Robert Steel can each resign his position and form a vulture fund to buy the paper in question and clean up. I'm sure Steve Schwartzman will want a piece of this action too. With thousands of recent Citigroup layoffs, VP's vulture fund could easily assemble a team to create and sell the fund. Hey, there's such a great opportunity, I expect dozens of KPMG partners to want to work for the fund. I wonder if James Suglia called VP already to get the ball rolling. I won't hold my breath.

I am in partial agreement with Gross. There is little the President can do. Imagine, 30-year Treasury bonds yield 4.53% as I write. People still buy them?

Congressional Theater of the Absurd

"I was watching the Big Oil execs testifying before Congress. That was my first mistake. If memory serves, there was lesbian mud wrestling over on Channel 137, and on the whole that's less rigged. ... The NOPEC bill is, in effect, a suit against OPEC, which if I recall correctly, stands for the Oil Price-Exploiting Club. ... But, before we start suing distant sheikhs in exotic lands for violating the NOPEC act, why don't we start by suing Congress? After all, who 'limits the production or distribution of oil' right here in the [US] by declaring that there'll be no drilling in the Guld of Florida or the Artic National Mosquito Refuge? ... More to the point, if the House of Representatives has now declared it illegal ' for the government of Saudi Arabia to restrict oil production, why is it still legal for the Government of the [US] to restrict oil production? ... So instead Congress hauls Big Oil execs in for the dinner-theater version of a Soviet show trial and then passes irrelevant poseur legislation like the NOPEC bill. ... But government 'change,' Obama change, NOPEC change is nothing to do with that. In fact, it obstructs real dynamic change", Mark Steyn (MS) at http://www.washingtontimes.com/, 26 May 2008.

"Gasoline prices are through the roof and Americans are angry. Someone must be to blame and the obvious villian is 'Big Oil' with its alleged ability to gouge consumers and achieve unconscionable 'windfall' profits. Congress is in a vile mood, and has dragged oil industry executives before its committees for show trials, issuing predictable threats of punishments, e.g., a 'windfall profits tax. 'But if there is a villian in all of this, it is Congress itself. ... Indeed, as oil industry executives reiterated in their appearance before the Senate Judiciary Committee on May 21, 15% of the cost of gasoline at the pump goes for taxes, while only 4% represnts oil company profits. ... On the other hand, supply has been curtailed by the cartel-like behavior of foreign national oil companies, which control nearly 80% of world petroleum reserves. Faced with little competition in the production of crude oil, the members of this cartel benefit from keeping the commodity in the ground, confident that increasing demand will make it more valuable in the future. Despite its pious denunications of the behavior of U.S. investor-owned oil companies (IOCs), Congress by its actions over the years has ensured the economic viability of the national oil company cartel. ... Domestic price controls ensured that the OEC cartel would face little or no competition in the production of oil. Price controls were exacerbated by other wrongheaded policies stimulated by the two 'energy crises' of the 1970s. One of the most egregious was the infamous 'windfall profits' tax, designed to punish oil companies for alleged profiteering. But since it applied to even newly discovered oil, its main empact was to discourage the exploration and drilling that would have increased oil supplies. ... For instance, Frank Zarb, who had been Jimmy Carter's 'energy czar,' predicted that decontrolling the price of crude oil would lead to gasoline prices of $10 a gallon", Mackubin Thomas Owens (MTO) at the WSJ, 29 May 2008.

"The British government, pressed for solutions to soaring fuel prices, said it will exempt about 30 existing North Sea crude-oil and natural-gas fields from some taxes and approved the development of two North Sea oil fields, which could begin production in early 2009. ... Tax changes to certain North SDea production operations will allow new oil and gas fields to be carved from unprofitable parts of 30 existing fields", WSJ, 29 May 2008.

"U.S. regulators disclosed a broad nationwide probe into potential oil-market manipulation and said they are expanding surveillance of energy markets. ... Lawmakers in Congress have been pressing regulators to crack down on manipulation, as politicians seek to demonstate ahead of the fall elections that they are responding to soaring gasoline prices. ... Many economists and oil-industry executives say possible shenanigans by market traders have little or nothing to do with the high price of oil. ... The CFTC has expanded an investigation, disclosed previously by the Wall Street Journal, into alleged short-term manipulation of crude-oil prices via a widely used price -reporting system run by Platts, a unit of McGraw-Hill Cos.", WSJ, 30 May 2008.

"With criticism mounting that pension funds are culprits in the run-up in gas and food prices, the pension industry is starting to mobilize to protect its ability to invest in commodities markets. ... But in recent days, critics from farmers to politicians have questioned whether trading by pensions and other institutional investors should be restricted. .. 'We're not driving up the price of rice in the Third World,' says Bob Greer, an executive vice president at Pimco. ... Since the end of 2005, index-linked commodity investments has doubled to $260 billion, according to Citigroup", WSJ, 30 May 2008.

I agree with MS. The NOPEC bill is a joke. It will be as big a flop as the windfall profits tax.

I remember Zarb's prediction. By 1986, oil was $10 a barrel. The attacks on Big Oil are absurd. Assume its executives are "greedy". Were the greedy yesterday, a week ago, a year ago, ten years ago, 100 years ago? Since they were always greedy, their greed does explain changes in the oil price. Thanks George Stigler for making this argument in your "Organization of Industry" class.

Apparently the Brits have taken half of Uncle Miltie's phrase to heart, i.e., "if you want less of something tax it". Apparrently the Brits want more oil.

Hasn't the CFTC anything important to do? I have an idea, shut the CFTC and let the SEC do the investigation. Why? The SEC harasses short-sellers. Since the CFTC is apparently after the longs, an SEC investigation would change the investigation's focus.

What are these index-linked investments? Irving Fisher's "compensated dollar" in action. See my 18 November 2007 post. Why shouldn't pension funds diversify out of dollars? Suppose they didn't? Would the Pension Benefit Guarantee Corp. or Department of Labor say they failed to properly discharge their fiduciary duties to the pensioners?

California Housing Crash

"Our friends said we were crazy. ... We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit--and a sign that the market had been pumped up beyond reason. ... For a while, we wondered whether we would prove to be the crazy ones as home values in Southen California overall continued rising through last spring. But a closer inspection of real estate sales data shows that signs of trouble were already appearing when we sold. ... The music's volume went up as real estate agents said that if we stuck to our plan to sell and then rent, we could be priced out of the hot Southern California market for good. ... Now that the bubble has burst, my friends think I am a master of market timing. Those who haven't had their financial legs taken out from under them by the real estate crash are asking when they should buy investment properties to ride the next big wave of rapid appreciation. ... The idea of an ever-rising real estate market was a favorite topic in much of the news media. ... About the time I was getting out of the market, Mark Kiesel was thinking about unloading his Newport Beach home. An executive vice president of the Pimco investment firm, Kiesel's day job involved studying the housing market. ... 'Basically, prices were inflated by incredibly cheap financing,' Kiesel said. ... He and his wife, a lawyer, invested their proceeds in energy, metals and mining stocks. ... They are still renting the apartment. ... As a general rule, financial planners don't advise people to sell their house at a profit and invest in stocks or mutual funds", Peter Yang (PY) at http://www.latimes.com/, 20 January 2008.

Bravo PY. I bought a Hollywood Hills condo in April 1998 which I sold in December 2006 for 391% of my purchase price. Since then condos in my old building have fallen 8%. Now a war story.

In 1996 I approached some of my tax clients to syndicate some Los Angeles (LA) area apartment buildings. Why did I think they were cheap? They were available at 12-14% cap rates. In 1996 financing them was difficult as every bank I approached demanded 30% down. So? If you buy a property with 30% down and pay 8% for the mortgage, with a 12% cap rate you make 21.3% on your money. How? .7 x .08 = .056; .12 - .056 = .064, .064 / .30 = .213. It looked good to me. This calculation excludes potential property appreciation. None of my clients would do it. They were scared. In 2002 some of them asked me, "What's good? Surely you know. What should I do now?" I told them, "I haven't a clue. Good opportunities usually look bad, but if I saw something really attractive, I would say so". Since 1996, LA area real estate cap rates have fallen and rents increased, such that the properties are triple their 1996 prices! Had we bought the properties in question, we would have realized a 33.4% internal rate of return for nine years, assuming we sold the properties at the end of 2005 for triple the initial purchase price. Not too shabby. But we didn't.