The European Union announced an antitrust ruling against Intel today. The fine totals almost $1.5 billion. As a free market kind of guy, this ruling obviously bothers me. I find it hard to understand how consumers were actually hurt by Intel being aggressive with their partners and giving large rebates to those who bought more Intel chips. Maybe it is because I do not feel that chip prices are needlessly high. The price of microprocessors has gone down significantly over time while their performance continues to go up. I also have also studied monopolies a lot in my life (My junior independent work was on the Microsoft Monopoly) and it is unbelieveably hard to actually get and maintain a monopoly. This is especially true in a goods market like Intel is in.
With rulings against Microsoft and Intel, I can’t help but wonder if Google is in the EU’s radar. One of the things that really stuck out to me in the EU’s reasoning was Intel’s practice of forcing its partners to use them on an exclusive basis. Now I know for a fact that Google does the exact same thing by signing exclusivity contracts with many of its partners. If you do business with Google, they want to be sure that you are a committed partner and force you to sign exclusivity agreements. It is not even an implicit agreement. They don’t even make it extremely profitable for you to do it so that you wouldn’t even choose to go to another provider. They simply make you sign a contract that forbids you to do business with a competitor.
Now I don’t actually have a problem with that. If you do not want to do business with Google on their terms you are of course free not to do business with them. But the behavior, if you use the EU’s definition, is clearly anti-competitive and an abuse of monopoly power. As Google gets bigger and more successful they will continue to get hit on all sides. Everybody will want a part of them. How do you think Google will fare?
Economics 101 people. I just heard a financial reporter, Diana Olick of CNBC, say that housing prices will rise when more people start putting their home on the market.
To give context, the discussion was around the Zillow report saying that over 20% of homehowers are underwater. The numbers might be even worse than this because there is a large “shadow inventory” of homes. That is, there are a number of people, over 1/3 of homeowners, who wish to sell their home but have held off over the last few years for fear of owing more than their house is worth.
Olick pointed out that the sales number may be artifically low because the only thing that is selling are foreclosed homes and people who must sell. She argues that when more of these non-distressed people put their home on the market prices will rise becasue these people will not sell their homes at the low prices.
Umm, no. Prices are set by a confluence of supply and demand. Suppliers do not just get to set whatever price they want. They may wish for prices to be at a certain level, they may certainly not sell at a price they deem too low, but I can promise you prices will not rise because there is MORE supply. It makes no sense. I may want to sell my car at $20,000 even though it is worth about $10,000. I may refuse to sell if I can’t get $20,000 for it. But that just means my asks will not affect the market even more. And I promise you my bringing my home to the market will actually depress prices as buyers will feel they have a wealth of choices.
The other day I went to Costco and bought a hot dog. For those that do not know, Costco Hot Dogs are one of the best deals around if you like hot dogs. For $1.50 you get a pretty good size hot dog and a refillable drink. It has always been one of the best deals around.
But as I was eating my hot dog the other day, I got to thinking if it this hot dog deal was a “good” thing. I thought of the problem in two ways.
This is the type of thing that is leading America to be obese. The hot dog and soda is about 700 to 800 calories. All for $1.50. That is just nuts and encourages people to over consume.
This deal is a marvel of economic efficiency. You can get so much for so little.
Every time I see a deal like this, it makes me think of all the things that had to happen to actually get that product into my hand. A pig had to be raised and then slaughtered. The meat than had to be butchered and formed into a dog. This had to be packaged and then shipped to the Costco. A driver had to drive that dog to the Costco where it was unloaded. Someone took that dog and cooked it. All these people were paid for their time. The material costs include feeding of the pig, the packaging, and the cost of gasoline.
Now factor in the fact that the soda, taxes that are paid, and a typical retail margin of 10%, and that dog at the wholesale level is less than $1. That is simply amazing to me. We live in a society where so much is possible for so little. But perhaps things have come a little bit too easy. When you can consume that much for that little, is it any wonder why we have some of the health issues we do? What do you think, do the pros have having cheap and available food outweigh the cons of the health risks it presents?
I was listening to talk radio on my way home today (yes I know I am an old man) and the hosts were lamenting the rapid decline of local news due to the internet. You know the story. People want news, the internet provides it when they want it, this kills off local news as viewership has moved online.
I find the death of an industry to be a fascniating topic. I do not actually think we will see the death of local news. I think it will decline and change form. But there is no doubt that more and more people are giong to go online for their news and that means less and less people will turn to traditional news sources like newspapers and the nightly local news. The hosts argue that this would cause a decline in the quality of new available to people.
I find arguments like this to be hilarious. Yes, news delivery will change but I do not expect it to be “worse”. In fact, I would argue it will probably get a lot better. News will be both more focused and more dispersed. I think it will be more focused in the large national news stories. I do not think resources more thinly dispersed across more reporters equate to better coverage. If you take the same amount of resources, and foucs them on fewer reporters, you could argue it will raise the bar required to report the news and thus only good reporters will actually survive.
On the other end of the spectrum it will be easy for someone small to reach a large audience. So if someone truly stands out and is an excellent source of news, it will be much easier for those people to reach more vast audiences. We see this time and again as more and more small bloggers become vital sources of news for some people.
Things always change and wishing that technology would not change the “good old days” is just silly. I am sure people were initially concerned for the horse and buggy maker and the blacksmith with the advent of the car but I think few would argue that all our lives are a lot better off because of this. The same for mail delivery and e-mail. I never send snail mail if I can avoid it. Bad for the postman, pretty good for me.
I do wonder if I will ever get to the point that I am lamenting how technology is improving our lives. What do you think? Can you think of any technology change that you wish never happened?
I recently read The Logic of Life: The Rational Economics of an Irrational World by Tim Harford. I generally really like these type of books, books that try to bring economic theory to the masses. Similar books like Freakonomics do a really good job of trying to explain simple economic principles and apply them in very interesting ways.
The book particularly caught my interest because I really would like to believe that people actually make rational choices. Now that does not mean that I think people make good choices or even sane ones. This is not what rationality is about. Rationality, as defined by economist, is about how people respond to incentives. If you make something more expensive, a rational person will consume less of it. Make it cheaper, and a rational person will consume more of it. As they try to decide what to do, they take into account other things in their life, not just this one choice, and they weigh the cost and benefit of this choice amongst the other choices they have. Now notice there is no value judgment in this definition. And that is important. Also note that the cost of something can be more than just monetary; costs can include time, danger, pleasure, etc. People can rationally make a choice that you and I think is totally crazy because they value something very differently than you or I would. Having this view on life would allow us to make decisions and policies that would essentially “fix” many problems rather than throwing our hands up by simply creating the right incentives.
The book starts out strong. It first starts out with an explanation of sex. With such a start, who would not be instantly pulled in? It explores why oral sex is rising in popularity among teenagers when compared to previous generations (teenagers act rationally to the threat of life threatening diseases like HIV). The book continues to explore such interesting topics like, “Is Divorce Underrated”, “Why Your Boss is Overpaid” and “Is Racism Rational?”. The best parts of the book site either studies that economist have used to try and add credibility to certain theories or how economic theory can lead to certain surprising conclusions. Here are some of the better ideas.
The theory of comparative advantage means that men are not typically the breadwinners because they are better at it than women. They might just be that much worse at helping around the house and being parents. This might mean that women are actually better at everything but our society just adapted to the fact that women were comparatively so much better at raising the family.
Divorce is a good thing. Studies have show people who are divorced are happier one year after they are divorced than when they were married. He argues that an increase in divorces might be caused by women having more options than they have had in the past both family and career wise. Few would argue that this is a bad thing. This actually could have caused a feedback loop and has made husbands behave better less their partner file for divorce. Data bears this out as domestic violence has fallen substantially over the last several decades.
Tournament theory suggests your boss needs to be overpaid not because she does a good job but because the only way to encourage those under her to perform is to provide a very strong incentive. At the top, performance is harder to translate into fair compensation and incentives are often misaligned. This leads to the conclusion that it does not matter what the CEO at a company does. He could do nothing and it might still be a good idea to pay him the high salary!
Ghettos can be caused by perfectly rational people behaving in a way that is not at all racist if people have even the smallest preference to be around people similar to themselves.
An interesting experiment took place which demonstrates how random things can lead to big difference in the amount of education any group decides to get and even to what looks on the surface to be racism. It demonstrated a vicious cycle where one group did not get education because they could not get hired and that group was not hired because they did not get an education. All of this when all groups started on a perfectly level playing field but through random chance made choices that effected the group later on.
Are system of special interest in government is perfectly rational even if it produces results that is bad for all of us. It is the exploitation of the many by the few but makes sense since a few citizens with a lot to gain will fight much harder than a huge group with very little to lose.
Overall the book is good and worth reading if you have an interest in economics and how little, seemingly inconsequential details can have far reaching effects. It starts to fade a little bit at the end as the author starts to dive more into theory and less into studies that produce interesting results. It becomes a lot more speculative at the end rather than concrete, but I believe this was the author’s intent. The book ends kind of disappointingly and kind of abruptly, but overall worth a read if you enjoy economics.
Most people who read this blog can probably guess I’m not in favor of raising taxes on the wealthy to support more government programs. I would prefer we get back to a place where we have smaller government and less taxes for EVERYONE. But yet in one of these ironic twists, this part of Obama’s plans probably bothers me the least. Now how on earth can someone with my views write this?
Well if you know me, you know I HATE the tax system. I seriously think it may be the evilest tax system in the world. I prefer any plan which makes the tax code simpler and more fair. While I do not think this makes the tax code simpler, it makes it more complex, it does make it more fair. But it is not more fair in the way most people think of it. I honestly do not care to tax the rich more than the poor. What I do not like is when there are deductions in the tax code. The more deductions you have in the tax code, the more loopholes you have. The more deductions you have, the more you distort economic behavior.
By essentially giving rich people less deductions, you are distorting their behavior less. If housing prices and charitable giving drop because rich people can no longer deduct these things I have absolutely no problem with that. If people need a deduction to be charitable then we have some other problems. If housing is only high because government subsidizes it at the expense of non-landowners and it falls, oh well. What I would actually prefer is to get rid of these deductions for EVERYONE. While there are other tax systems I prefer over the flat tax, I would at least concede that a flat tax would be better than the current system we have today which just does not make any sense.
This weekend, I thought about where I want to be invested over the next several years. I want to be building the foundation of my investment strategy now while we are in the midst of an extremely weak market. I thought long and hard about which types of sectors and companies will be winners three, five, and even ten years down the line so that I can start to take positions that reflect better times.
But I kept coming back to the same conclusion, the US equity market probably in not going anywhere but down over the next several years. Why am I so negative? We are in the midst of a secular bear market. These things can last twenty or more years. I think we started in 2000 with the popping of the tech bubble and will continue for another decade. The run up we saw from about 2003 up until 2007 was an illusion created by our government, temporary relief in an otherwise grim picture Here are the facts that I just cannot get past.
American’s are net debtors both as individuals and as a nation. This debt is going to come due, and it is going to come due faster than any of us would like. We have gone form creating net value and exporting it to other countries, to importing that value and sending away debt that we cannot really afford. That brings us to the next problem.
Inflation. It is pernicious when it strikes, and it is looming around the corner. Anyway you slice it, inflation is almost inevitable. Foreign countries hold vast amounts of our currency. These same countries are growing at an alarming rate as they modernize. They will compete with us for the same resources causing inflation in commodity prices which is the basis for all goods. You couple this with really low interest rates that we have now, a result made by our government because they are printing money and you can see that there is no other logical outcome then we will have inflation.
Boomers need to retire. This is demographics, and you cannot fight demographics. Most of their assets are tied up in real estate and the stock market. That means this very large and wealthy group will become net sellers. This will cause the price of all assets to drop as supply will greatly outweigh demand.
Interest rates will rise. This will have negative effects on bond prices and the stock market. This is a direct result of the first point. At some point, other countries will get sick of our debt. However, we will have no choice but to keep borrowing. The only way to do this is to raise the interest rates we are willing to give on those bonds.
So given all of this, I am rethinking some of my long term investment strategies. I’m not so sure I will continue to short the market from here, I think we are going to see a short term rally very soon, but I will look to invest very differently in my long term holdings. Sure, I might buy some U.S. equities, but it will have to be a very solid company I am sure can reach international markets.
I will mainly be looking to short U.S. treasuries. Something that can be done very cheaply now as everyone is fleeing to safety. I will also look to a few more commodity plays. The price of real assets, especially those denominated in U.S. dollars, is likely to soar over the next few years. Luckily, these assets have sold off with the rest of the market. This should provide an excellent buying opportunity now, something we probably won’t see again anytime soon.
Today, Obama announced his housing rescue plan. It basically boiled down helping out “responsible” home builders by giving them access to low cost financing so long as they are not too underwater on their mortgage. It also created some incentives for lenders to modify loans for “at risk” homeowners who are in danger of defaulting.
All of this will be in vain. I really just do not understand how others, supposedly smarter people do not understand this. Let me try to explain in very small words.
Rising housing prices is bad. If housing rises faster than incomes, then you are pricing out a class of people, new homeowners. People who get happy when the price of their primary residence rises are foolish. It does absolutely nothing for you if everyone’s house is rising in price as fast as yours. If you sell your house, you are going to buy another one. Rising housing prices will in fact hurt you because you pay taxes as a percentage of your house’s value. You also pay closing cost and other real estate fees when you sell your house as a percentage of the sale. So you are paying more and more for each of these transactions.
Now, this may be just fine if you are in housing already. You can swap houses with other homeowners and pay more and more for that asset. But at some point, for the asset to really be worth more, you need outside money to come in and buy the asset from you. For you to “move up” you have to get someone to buy your starter home. How is this going to happen if your price is too high for the average person to afford? It won’t.
This is a simple economic fact. Housing prices will not stabilize until an average family can afford the average house and we are still far away from that. Anything that attempts to prevent the housing price correction, such as this plan, is only stalling the inevitable. This plan does not and cannot create demand at the bottom. It actually does the exact opposite by keeping demand artificially low by keeping prices artificially high. The government can throw however many billions or trillions they want at the problem. Until someone addresses the question of how the average American can become a homeowner, prices are either coming down or we are staying flat for another dozen years.
Before I write this post, I will admit I have not read in detail the plan in front of Congress. Part of this is my cynicism. I know I will not like any sort of plan that comes out of Washington because it will be filled with special interest or policies that have no real chance of doing what they meant to do. If they do happen to have a positive effect, it will be almost completely by accident. Worse, it will put our government even further debt. Debt that will eventually be paid by you and me.
The plan, as far as I can tell, revolves around two main goals. Create new jobs and stabilize the housing market. Most of the plan seems to revolve around these key points
Give tax breaks to individuals to encourage spending
Business tax cuts for capital investments
Increase the tax credit for home buyers
Let us forget for a second I think it is a completely idiotic thing to try and stabilize the housing market. The best thing to do would be to let housing find its natural equilibrium and we would get to the true price of housing sooner rather than later. Why people think high housing prices, higher than is justified given national income levels, is a good thing is beyond me. But nothing in the plan that I can see actually will do what the government hopes to accomplish.
The housing problem is almost intractable. You cannot, over the long haul, create artificial demand for an asset. That is all the government will do if it tries to prop up housing prices. But lets just say they really want to do this. Rather than just give money in the form of a tax credit, they should make the long term value of owning a home very attractive. They could do all sorts of things with the tax code to encourage the long term viability of owning your home. They could make it such that anyone who buys a home to live in over the next two or three years could write off DOUBLE the interest that they pay on the mortgage. While it sounds radical, and it is, it would certainly spur demand for housing.
Any who on earth would you try to create jobs by giving individuals tax cuts and business tax cuts for investment. Rather than that, why not do this. For any business who increases their workforce over the next two years, they can write off certain percentage of that employee’s salary based on how large they actually increase their workforce. This would be a tremendous incentive for companies and would directly address the issue of employment. Why try to be cute with the plan? Why not just get to the heart of the matter and create a direct incentive for the behavior you want to see? Want more jobs? Make it very attractive for companies to hire more workers.
I obviously follow the market and the economy quite closely. The thing that you hear most often these days are comparisons to previous bear markets. I cannot turn on CNBC and not hear someone state that, “this is the worse market since 1929″ or that “We are in the midst of recovery because recessions typically last 15 months”. The thing I find most hilarious about these comparisons is that they are completely incapable of describing the current economic climate.
We as humans tend to have a need to compare. People judge how well off they are by comparing themselves to their neighbor. Hence the “keeping up with the Jonses” mentality. People compare their own relationships to others to determine how how happy they are in their current relationship. So it is no surprise that when it comes to economics, we wish to use the past to tell us what the future holds. But just as in the stock market, you cannot determine future economic conditions by looking at past results.
To make it even worse, the data just is not there even if you want to make comparisons. There have been about a dozen bear markets in the last hundred years. That is simply not enough data points to make any sort of model. If you add in bear markets during recessions and during credit crunches you whittle this number down to one or two other instances, and that is definitely not enough to give you any sort of statistical significance. Of course people will say, “But, but it is only an extrapolation”. While true, any model has to have at least some similarities. And seriously, we have not seen anything like this before.
The job numbers came out from ADP. They used some funny math this time around, but it just confirmed what I already knew. The job situation is getting worse, not better. We have at least several more months of companies making cutbacks before we see any relief in sight. The market took this news and dropped about 3% today. I expect it to continue to go down and trade in a wide range. 850 on the S&P can come faster then you think.
Work, Save, Invest. This is the formula for a successful life. I have used it to make a good life for myself and I hope I can share my thoughts and experiences to help you in yours. more about »
by Tim Harford. I generally really like these type of books, books that try to bring economic theory to the masses. Similar books like 
do a really good job of trying to explain simple economic principles and apply them in very interesting ways.
Work, Save, Invest. This is the formula for a successful life. I have used it to make a good life for myself and I hope I can share my thoughts and experiences to help you in yours.
