Monday, April 12, 2010

The Dow is back over 11k, Newsweek proclaims America is Back, all is well....

The best stuff out there that I've seen tonight...

John Hussman on the market --

As of last week, the S&P 500 remained strenuously overvalued on the basis of normalized fundamentals. From that perspective, even if the trough we observed in March 2009 was the ultimate price low of the secular bear market since 2000, it's not likely to represent the ultimate valuation trough.

As for policy efforts to reduce delinquencies, I've long argued that it is a bad idea for policy makers to announce delinquency prevention plans that have, as their centerpiece, publicly subsidized reductions in mortgage principal. It's one thing to extend the loan in a way that preserves its present value, by swapping a claim on future appreciation in return for principal reduction, but it's quite another to offer to cut the principal outright. The reason is that instead of confining the assistance to presently troubled borrowers, you create a whole new set of borrowers who then choose to be troubled in order to get the assistance. According to a University of Chicago study, "strategic defaults" - where people choose to default on their mortgages even though they can afford to pay - accounted for 35% of all residential defaults in December 2009, up from 23% in March 2009. Offering public subsidies for this behavior, when too many homeowners are already legitimately struggling, does not smack of a bright idea."

On this second point, I think this might be a small contributor to the recent boomlet in consumer spending (if you believe the data). There is some anecdotal evidence that people are electing to skip paying their mortgage. These previously struggling consumers suddenly find themselves flush with an extra $1,000-$2,000/mth that they can blow on more junk to fill their underwater house.

Wow - This is a great interactive chart highlighting the individual state pension obligations. Illinois is in serious trouble, but you can click on the state of your choice to see the underfunded pension liability (NY State's Teacher Liability is particularly eye opening).

I really rely on locals on the ground to provide prospective regarding the Chinese property bubble. Andy Xie's latest comments are pretty telling and might make me nervous if my economy was buzzing because of China -- hint: you recently hosted the Olympics and your name rhymes with Sanada.

"China's property market is a massive bubble. The stock of residential properties, developers' inventories, and land that local governments have pledged to banks may exceed by three times the gross domestic product. Rental yields in most cities are too low to cover depreciation costs. In major cities, the price-to-income ratio, a measure of housing affordability, is routinely above 20, which means that it would take an average mainlander 20 years to buy the average property using their total income. The bubble can still continue because China's banking system has plenty of liquidity – thanks partly to hot money and because local governments have many levers to channel bank liquidity into the market. But the longer the bubble lasts, the more damage it will do to the economy.

The stability of a modern society depends on its middle class being in the majority and content with its situation. The high land-price policy is a form of tax on the middle class, which will slow its growth. China may become a country with a small group of the super-rich, a vast lower class with no property, and a small middle class. Such a social structure would not be good for long-term stability."

I love this photo of a remarkably resourceful professor.....


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