November 2009

We are getting some pretty depressing data out of some shops and some pulses out of others.  From Casey Research, I get the following ominous note yesterday:

As I have discussed often in these musings, the U.S. economy is increasingly being taken over by government. And while the Democrats, led by loathsome populists such as Nancy Pelosi and Barney Frank, are worthy of being held in especially low regard, the track record of modern-day Republicans offers no hope either.

And so, the “solutions” being proposed almost entirely focus on more government, more regulation, more spending, and more taxes. In other words, pretty much the exact opposite of what the economy now needs.

The debt levels of this country are still at record levels, but yet the government’s grand scheme is to ratchet those debt levels even higher. It is doing so by offering cheap money, incentives to take mortgages that people can’t afford, and by running trillion-dollar-plus deficits of its own.

So we have a morally, philosophically, and financially bankrupt government, encouraging a morally, philosophically, and financially bankrupt public to place even more faith in the ability of said government to lead the nation on to greener pastures.

And to do so largely by borrowing trillions of dollars to dump back into failing institutions and make-work projects, and by levying yet more taxes on businesses and high-income earners – who, it should be noted, are already paying a record percentage of total federal tax receipts (the top 5% now pay over 60% of all taxes).

Then from local real estate gurus, Ben del Carmen and John Rula in their monthly report, I get this:

Greater Nashville Home Sales Up 22.7 Percent

There were 2,145 home closings reported for the month of October, according to figures provided by the Greater Nashville Association of REALTORS®. This figure is up 22.7 percent from the 1,748 closings reported for the same period last year. This is the first time since October of 2006 that Greater Nashville home sales have recorded and increase in home sales on a year-to-year compari- son for the month.

How to reconcile these two?  Side by side headlines in Builder e-zine this week:  “Housing Starts,Permits Slide in October” and “Builder Confidence Remains Steady In November”  Unfortunately, I fear they are both right.  Consider the following:

Government Spending

…and this assumes that the numbers are accurate.  These numbers also do not reflect the impact of an additional $1.0 trillion + (?) health care reform measure nor the possibility of an enormous environmental push for cap and trade.  I fear that the housing “rebound” is being fueled by the tax credit, which was just extended into next year, and the continued malfeasance of Fannie and Freddie.   Consider this from the November 11, Wall Street Journal:

Through this program, taxpayers are directly subsidizing homeowners who borrowed more than they could afford, or more than their house is now worth, or both. The government is doing this under the cover of losses at Fannie and Freddie because Congress and the White House know these programs are both expensive and unpopular with the poor saps still paying their mortgages on time.

The dynamic duo’s delinquency rates also continue to climb, even on modified loans and on mortgages on which Fan and Fred have chosen to forbear from demanding repayment. The $400 billion that Congress has appropriated to keep Fan and Fred afloat, in other words, has quietly morphed from emergency aid into a $400 billion housing subsidy program. On current trends this will all be spent before President Obama is up for re-election, and, judging by the results so far, taxpayers will have little to show for it.

Having ruined the U.S. mortgage market, Fan and Fred have become the tools for its continued nationalization and a never-ending bailout of mortgage borrowers. This is one reason we advised former Treasury Secretary Hank Paulson to put the companies into receivership and leave them in run-off mode when he had the chance.

Instead, Mr. Paulson placed them in conservatorship and sent them out to lend more and more. In the past year, they have all but erased the private mortgage market, at great cost to both the taxpayer and the integrity of the private financial system. They will roll snake-eyes for taxpayers for years to come.

Umm, so you mean the programs that got us into trouble in the first place are on-going and being expanded on the taxpayer’s nickel?  I hear you cry.  Sadly, without this tax credit program, housing sales could collapse, along with builder’s confidence.  But as the old saying goes – “this is no way to run a railroad.”  We cannot finance our way out of an over-supply/over-built condition by borrowing more money from the taxpayers.  That would be about as crazy as say – using the TARP money to pay down the deficit – an idea actually floated by the Administration last week.  We have long had the prejudice (and the tax law) towards single family housing ownership.  I’m all for it – if you can afford it.  If not, I am in favor of a robust rental economy with lots of price ranges.  There is nothing wrong with renting, and in fact, in some instances it is better for you financially in the long run.  But we are leveraging the future of our own grandchildren to accommodate a greedy generation’s (mine) desires and that is morally wrong.

Let me put this into perspective for you.  In the early 1900’s two countries vied for being the second largest economies in the world behind Great Britain: the United States and Argentina.  Our nation chose the continued path of rugged free enterprise which led to the Great Depression, but also to the longest and greatest period of economic expansion from World War II to the present.  This capitalist engine became the model of the world and today, despite all our troubles stands squarely atop the world in prosperity and opportunity.

In 1916, Argentina elected Hipolito Irigoyen on a platform of “Fundamental Change.” This new government installed mandatory health insurance, pension insurance and subsidized low income housing.  To finance this, they raised taxes to an extraordinary level on the “wealthy.”  Nevertheless, they could never collect the revenue to fund the programs.  They finished themselves off in the 1950’s with the arrival of Juan and Eva Peron.  Their path tilted towards outright communism then a military coup.  To this day, Argentina is a semi-failed state.  A tragedy – a country with abundant agriculture and resources, beautiful cities and so much hope.

Which path should we choose?



We are having some beautiful grilling weather here in middle Tennessee; you can smell the wood chips smoking in the early evening as folks enjoy their last shots at barbecuing without fleece on.  Earlier today we attended an excellent meeting of the Urban Land Institute’s Infrastructure Committee and I thought I would share some sites and articles on that topic for this week’s collection of links.  Bon Apetit!

1. Rain Gardens – Folks, I really believe that fresh water is the coming oil shortage problem within the next 20 years. I like small, local solutions to those types of issues and planting rain gardens is a very nice baby step we can all take to improve rain water filtration.

2. Conservatives for Public Transportation – short video interview with William Lind who co-authored with Paul Weyrich the book, “Moving Minds: Conservatives and Public Transportation.”  A compelling case for the benefits of public transit.

3. Bicycle Parking – one of the impediments to more bicycle commuting is where to stash the bike that you rode to work.  Take a look at the largest bicycle parking facility in the Western Hemisphere – downtown in my old hometown, Sao Paulo, Brazil.  Love hearing that Portuguese!

4. U.S. High Speed Rail Association – I am a HUGE fan of high speed rail.  Take a browse through this site to learn more about the efforts here in the U.S. Be sure to click on the interactive map and see where your city fits in.

5. Complete Streets – coming soon to a town near you!  Complete streets are a smart way to retrofit our urban grid and develop new streets more intelligently.

Have a great weekend, ya’ll!


God bless and thank you to all our veterans!

Bloomberg reported earlier this week that the Treasury Department will sell a record $81Billion in long-term debt next week.  Umm, that’s bad.  More from the article (emphasis mine):

The U.S. Treasury Department said it plans to sell a record $81 billion in its quarterly auctions of long-term debt next week and will replace the inflation- protected 20-year bond with a reintroduced 30-year security.

The Treasury will auction $40 billion in three-year notes on Nov. 9, $25 billion in 10-year notes Nov. 10 and $16 billion in 30-year bonds Nov. 12. The amounts were in line with the median forecast of $80 billion in a Bloomberg News survey of nine analysts.

The U.S. is headed for a second straight year of budget deficits exceeding $1 trillion, and the country’s legal limit on debt may be reached next month. Treasury debt-management director Karthik Ramanathan told bond market participants this week to expect another year of government debt sales of $1.5 trillion to $2 trillion, minutes of the meeting showed today.

A couple of key points about this data:

1. Replacing the 20 year debt with 30 year debt – both instruments automatically adjust to inflation.  They are telling us quite clearly to buckle down for inflation.  No one will buy our debt right now if there isn’t an inflation hedge.  Pushing the payment schedule out another ten years is an attempt to hold down the annual cash outflow…it’s like trying to pay the minimum on your credit card debt just to keep pushing it out.

Contrarian note here: Real estate is a good investment in inflationary times…but then, so is gold.

2. A second straight year of $1T deficits AND the legal debt limit will be reached.  This latter point isn’t that big a deal, it’s not like they will shut everything down and say “sorry you’ve reached your credit limit,” Congress will just vote a new ceiling in.  But it means that they will either have to print more money (inflation), raise taxes (lose jobs) or cut services at a Draconian pace (not going to happen).

Now my question is this: explain to me why they want to pass a healthcare “reform” bill that will add $1.2Trillion to the deficit?  (The $1.2T figure is the Congressional Budget Office estimate – little secret: they have no idea.  Government programs like Social Security, Medicare and Medicaid get passed with the rosiest of scenarios plugged in.)  Here’s another question – why would you pass “cap and trade” legislation that further slows the economy at a time when growth will be desperately needed just to pay our debt?

Waiting for answers…