Debating Jeremy Siegel & Stocks for the Long Run

Over the years, I have debated Wharton (University of Pennsylvania) Professor Jeremy Siegel numerous times. He is a very nice fellow who wrote the widely read book Stocks for the Long Run (aka SFTLR).

If I were to take the other side of the SFTLR argument, I would focus on 3 things:

My main critiques are:

1) Buy & Hold delivers inferior returns. Even worse, most Humans have a hard time sticking to it.

2) A simple system of either Valuation — think Shiller’s 10 Year Cyclically adjusted P/E — or Tactical application of Moving Average — Mebane Faber’s 10 Month moving average — significantly improves returns by reducing equity exposure and volatility as markets crash or have major corrections;

3) The current Fed driven markets (indeed, from 1981-2011) is an aberration that STFLR does not (and indeed, can not) anticipate. To quote either Jan L. A. van de Snepscheut or Yogi Berra: “In theory, there is no difference between theory and practice. But, in practice, there is.”

4) There are a myriad of data issues with SFTLR, particularly Survivorship bias, as described by jason Zweig in the WSJ and Birinyi Associates.

Regardless of my views, I want to crowd-source the arguments pro and con for SFTLR — What does Siegel get right, what does he get wrong? What is the weakest and strongest parts of his viewpoints?

What say ye?





Bonds for the Long Run (August 9th, 2012)

140 years of Equity Yield vs US Bond Yield (September 4th, 2012)

Bonds Beat Stocks: 1981-2011 (October 31st, 2011)

Revisiting Stocks For The Long Run (August 20th, 2012)

Jeremy Siegel is not having a good year (July 11th, 2009)

At Some Point the Hat Runs out of Rabbits; First Catalonia, Now Basque Separatists Call for Independent Country; El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

Calls for the splintering of Spain have picked up steam. Euskal Herria Bildu (EHB, a left-wing, Basque nationalist party) has called for "A Great National Act" in Favor of Independence according to El Pais.
EH Bildu has called "a great national political act" in favor of the independence of the Basque Country for the next October 13 in the BEC Barakaldo (Bizkaia), announced its candidate for lehendakari, Laura Mintegi in an appearance before the media at EA headquarters in Bilbao.

Mintegi explained that the purpose of the meeting is to claim a free Basque state in Europe. The nationalist left has led in recent times to BEC, in a space with a capacity for 15,000 people, some of his most important acts to demonstrate their ability to mobilize. force.

The sovereignist coalition vindicate independence there to say "clearly and directly" to those "who do not want to hear, who kidnap our rights in the name of the Constitution imposed on us" you want "a free state in Europe."

Mintegi has defended "the pressing need to build a framework sovereign" in the Basque country that allows this community to have the tools to address their own economic, social and employment. "Only from the sovereignty we orient our policies towards true social justice," said the candidate.

In his view, "it is truly reckless remain at the expense of a corrupt system like Spanish, you're sacrificing the rights and freedoms of all the people to ensure the interests of a political and economic elite." With the "corrupt system" called on "break ties".
El Pais Survey Shows 43% Catalans For Independence, 41% Opposed

According to El Economists, Catalan Separatists Not Quite at Absolute Majority.
About the option of independence for Catalonia, El País published a survey in which, in case of a referendum, 43% would vote for secession, compared with 41% who would decide against.

The complete data interpretation contrasted with other numbers registered in June, when only 21% of respondents said anti-secession and another 21% abstained. The current difference can be understood as a translation of abstention towards not to Catalan independence, which in June this survey enjoyed the favor of 51%.

Various surveys seem to be fluctuating wildly so I am not sure any of the are accurate at the moment. That said, it is clear anger over austerity measures is picking up steam. Protests in numerous countries is proof enough.
At Some Point the Hat Runs out of Rabbits

I am sticking to my long held belief that "Eventually will come a time when a politician will hold up a copy of the EMU treaty, declare it null and void, and the debt null and void right along with it. That politician will be elected."

Yields have come down since my July 24, appearance on Capital Account: Discussion of Social Media Panic in Italy, Soaring Yields in Spain, and the Upcoming 20th Euro Summit, Bound to be Another Failure so it appears there was another rabbit left at the time.

However, the government of Portugal recently had to back off announced austerity measures following a mass protest, and additional protests elsewhere have become more frequent and more violent.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Presenting The World’s Biggest Hedge Fund You Have Never Heard Of

The world's largest hedge fund is not located in the top floor of some shiny, floor-to-ceiling glass clad skyscraper in New York, London, Hong Kong or Shanghai. It isn't in some sprawling mansion in Greenwich or Stamford which houses a state of the art trading desk behind a crocodile-filled moat. Instead it can be found in tiny, nondescript office in Suite 225 located on 730 Sandhill Road in Reno, Nevada.

"That's not possible" one may say - the world's largest hedge fund is Ray Dalio's Bridgewater, which at last check had about $100 billion in AUM (and which has so far had a less than stellar performance in 2012, underperforming the S&P by a substantial margin). Turns out it is: the fund which was at $117.2 billion as of June 30, and which has lately been growing at a pace of about $15 billion per quarter (which would put it at about $130 billion currently), is none other than Braeburn Capital, a Nevada-based asset management corporation.

Who is Braeburn?

Braeburn is a subsidiary of another far more famous company, which since 2006 has had one simple task: manage the cash of the parent company.

At Braeburn's inception, the cash pile was modest, yet absolutely massive in unlevered terms, at just over $10 billion. Fast forward 6 years, and the massive cash pile has now grown to be epically gargantuan. Of course, the parent company in question is none other than Apple, whose publicly reported cash horde at June 30, 2012 was a whopping $117,221,000,000. This is the AUM of Braeburn.

Any substantial follow up diligence on Braeburn will not reveal much if anything.

CapitalIQ has the following description of the firm: "Braeburn Capital Inc. is the asset management arm of Apple Inc. The firm invests in the public equity markets. Braeburn Capital Inc. was founded in 2006 and is based in Reno, Nevada." And that's it - there is no breakdown of which "public equity market" investments Braeburn is invested in, as is to be expected.

Bloomberg provides the following minimalist information:

Some more useful information cn be found in the Nevada Annual Report of tax-filing entities:

  • Filing Status: Active    
  • Date Filed: 10/03/2005
  • Type: Domestic Corporation    
  • File Number: E0667452005-7

It also lists the firm's principals:

Gary Wipfler
730 Sandhill Road
Suite 225
Reno, NV 89521

Gene Levoff
730 Sandhill Road
Suite 225
Reno, NV 89521

Michael Shapiro
730 Sandhill Road
Suite 225
Reno, NV 89521

The LinkedIn profile of Braeburn CIO Steve Johnson is also rather bland:

As is that of Braeburn Portfolio Manager Ted Mulvaney, who before taking over capital allocation of tens of billions worked at a fund named for a Douglas Adams planet.

Oddly enough, the only actual personnel link between Braeburn and Apple can be found in the profile of principal Gary Wipfler who just happens to be the official Treasurer, and thus as expected, the person responsible for the mega cash stash of the behemoth tech company.

For some other clues on Braeburn one has to go to the NYT, and a certain article discussing AAPL's ability to legally and quite successfully bypass American corporate tax laws.

In 2006, as Apple’s bank accounts and stock price were rising, company executives came here to Reno and established a subsidiary named Braeburn Capital to manage and invest the company’s cash. Braeburn is a variety of apple that is simultaneously sweet and tart.


Today, Braeburn’s offices are down a narrow hallway inside a bland building that sits across from an abandoned restaurant. Inside, there are posters of candy-colored iPods and a large Apple insignia, as well as a handful of desks and computer terminals.


When someone in the United States buys an iPhone, iPad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Then, when those investments turn a profit, some of it is shielded from tax authorities in California by virtue of Braeburn’s Nevada address.


Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe.

Naturally, Apple is less than eager to discuss the role of its Nevada asset manager:

Apple declined to comment on its Nevada operations. Privately, some executives said it was unfair to criticize the company for reducing its tax bill when thousands of other companies acted similarly. If Apple volunteered to pay more in taxes, it would put itself at a competitive disadvantage, they argued, and do a disservice to its shareholders.

There is much more in the NYT article, but in short, while Apple for now uses Braeburn primarily in its capacity to find legal tax loophole all around the world and avoid paying taxes, there is no denying that with a cash balance that in a two years may be well over $200 billion, applying even a modest amount of leverage would make AAPL the best capitalized bank, mutual fund or asset manager in the world.

What's more, Braeburn has no reporting obligations: there is no Investment Advisor Public Disclosure (IAPD) entry on Braeburn for the logical reason that it is not an investment advisor: it merely manages an ungodly amount of cash for AAPL's millions of shareholders. There is also now SEC filing 13-F filing on Braeburn's holdings. As such, not confied by the limitations of being a "long-only", it is in its full right to hold any assets it feels like, up to and including CDS on housing, puts on Samsung, or Constant Maturity Swaps that pay if the 10 Year collapses. It just doesn't have to report any of them.

Nobody knows: and that's the beauty of Braeburn. It is the world's largest hedge fund that is not really a hedge fund, nobody has heard of, and nobody knows just what assets it holds.

Which is precisely what Apple wants. Incidentally, what Apple probably wants more is to keep the status quo as is. However, with the topic of finding effective tax loopholes which are perfectly legal, yet which apparently are unfair, serving as the basis of the entire presidential race to date, what Apple can be absolutely certain of is that once the farce culminating on November 6 is over, the government's eye will finally turn to minimizing "externalities" among such companies which have been able to pass through corporate tax savings to end consumers by abiding within the legal system that countless other muppet congressmen, senators and presidents have developed over the ages.

Because while AAPL may have built the iPhone, very soon it will be only fair that it share its profits acquired over the years, and thus its cash balance, which at last check was double that of the US Treasury, with the general public.

At that point Braeburn will almost certainly be a household name.

CNN = Corporate National Network……..Evil Plan 89.0 (by BDI)


Maria Bartiromo kissing up to GE corporate titan Jack Welsh


Good afternoon Slope-a-Dopes, I certainly hope I haven't offended any of you with these insanely inappropriate incendiary images.  Some will undoubtedly consider them way over the top, and write me off as just another idiotic senseless sensationalist savant. However, after careful cautious consideration, I choose to press on regardless in a determined effort to definitively demonstrate that this horrifying hyperbole is much closer to the terrifying truth then most are willing to wonder. Thus, I positively proclaim that these pesky perky presstitutes are indeed a patently perilous problem for the plainly pliant people!

Investigative Reporting Case 1:

In March of 2012, Amber Lyon, a three time Emmy awarded CNN reporter was unexpectedly abruptly fired by Time Warner Corporation's top brass, in a blatant attempt to silence Ms. Lyon and suppress her award winning iRevolution investigative documentary. The highly acclaimed film, had boldly brilliantly covered the brutal military crack down of the Arab Spring protesters in Bahrain by a repressive US backed regime. The probing piece received prestigious journalism awards, including a 2012 Gold Medal from New York Festival's Best TV and Films, and Amber, along with her segment producer Taryn Fixel, were also named as finalists for the 2011 Livingston Awards for Young Journalists.

On September 4th, 2012 Amber Lyon went proudly public with her stunning story in The Guardian, a well respected MSM national newspaper out of the UK.  I urge you to read the article below, as it dramatically reveals CNN's outrageous and lamentable practice of corporate boardroom directives forcing self-censorship of the genuine actual real news!

"Why didn't CNN's international arm air its own documentary on Bahrain's Arab Spring repression? 

A former CNN correspondent defies threats from her former employer to speak out about self-censorship at the network."

The Guardian:

Here is the awfully attractive Amber in her own words. I realize that some may discount this media source, as Alex Jone's does regularly showcase cooky conspiracy theories, but in this particular startling sexy segment, the classy candid content completely out weighs any reservations concerning the decidedly dubious media outlet.  I for one believe every word!  See for yourselves:



Investigative Reporting Case 2:

Last Fall of 2011, I went down to NYC's Zuccotti Park to see for myself what the OWS fuss & fury was all about.  Here is an excerpt of BDI's very own investigative reporting direct from Evil Plan 13.0: 

As promised, I went down to New York city's Zuccotti Park today, to check out for myself the epicenter of the OWS (Occupy Wall Street) movement which is sweeping through the Nation.  Apparently, they have now set up chapters in over 100 U.S. cities.  I was both impressed & depressed by what I saw.  Half the protesters are patriotic libertarian Americans, a la Ron Paul, and the other half are an assortment of rag tag progressives, socialist, and anarchists.  However, the one rallying cry that does indeed unite them all, is their disdain & distrust of the all powerful corporate state, and it's int'l banking elites. 

My take on this burgeoning movement is as follows:

If they zoom in, and focus exclusively on the main message that actually does unite this diverse cross section of Americans, namely; the nearly universal disgust with excessive corporate greed, it's undue influence over American politics, and the deplorable unrestrained impact of the int'l banking elite, they may well be able to obtain the critical support of the silent majority.  However, if they go off the reservation by espousing every zealous progressive / socialist cause known to man.....they will simply self destruct, as that would surely turn off at least 80% of the U.S. population......

I did my part. I located the media center at the heart of the Park, and found the most intelligent, articulate protesters amongst them.  Handed them about 100 fliers, and spoke to them at length regarding sharpening, and concentrating their message to only include 10 key points, which I outlined as "OWS Articles of Intent".

You can reliably read the rest of Zuccotti Park EP 13.0, along with the many digital photos I shot during my amateur hour investigative reporting, right here on the un-censored Slope of Hope:

Later that same Fall, another more notable professional reporter, the effervescent Erin Burnett also covered the same story.  After egregiously ignoring the clearly important national protest for weeks on end, CNN eventually got Ms. Burnett off her beautiful bodacious bedroom butt.  She reluctantly made the ginormous globe-trekking journey all the way from midtown to downtown Manhattan, and finally got down to some actual hands on investigative journalism.  She clearly prefers her jet-setting trips to Dubai, the main purpose of which seems to be for us to all watch her, as she actively assists her precious petulant camels to drink bottled Evian water.

As it turned out, her regrettably rotten report had a very clear insidious intent, with only one specific bogus gross goal in mind, which was to make a complete and total mockery of OWS.  She did her utmost to film the most pitifully pathetic of the protesters wearing ridiculous cockamany costumes, and interview only the lamest lousy lost representatives of the wonderfully worthy crucial critical cause. Her shameful systematically biased reporting was a blatant misrepresentative masterpiece, which skillfully painted the whole event as a silly superficial circus for her national audience to  absolutely altogether absorb.  A deplorable display of CNN used as a formidable corporate fascist tool to sway public opinion away from any discernible intelligent discourse on the real issues pertinent to the prolific numbers of principled protesters. See her despicable work for yourselves below.  As an aside, the embedding of this video has been curiously blocked by request.  You will have to click on the "Watch on YouTube" link at the center of the screen in order to view it. Corporate censorship perhaps?


One can only imagine what might have been, had CNN focused their mighty media machine on this young passionate principled protester, instead of intentionally distorting the news for their own soulless self serving fascist satisfaction.


Seriously shameful that the elegant intelligent Erin Burnett, ex-CNBC fabulous frolicking financial reporter, and well-informed Williams graduate, an elite prestigious American college founded by Colonel Ephraim Williams officer in the Massachusetts revolutionary militia, was not moved enough to interview this fine young man's fresh fiery face.  




The Federal Reserve, the Mega Banks, and Multi Nationals own our Government, our Military, and now control our Nation's Press.  We the people are nothing more than pitiful patriotic piss ants.Cnn-lies   CNBC Cnn_crap_news_network 

                                            EVIL PLAN 89.0



BDI SOH's Idiot Savant

‚Will American Innovation Slow If We Go ‚Cuddly‘?‘

I hope you read the post by Lane Kenworthy in today's list of links, but let me highlight one section in particular (there's quite a bit more in the full post):

Will everyone be worse off if the United States turns social democratic? by Lane Kenworthy: Daron Acemoglu, James Robinson, and Thierry Verdier have a new paper that asks “Can’t We All Be More Like Scandinavians?” Their answer is no. The answer follows from a model they develop...
Acemoglu, Robinson, and Verdier say the model might help us understand patterns of economic growth and well-being in the United States and the Nordic countries — Denmark, Finland, Norway, and Sweden. The United States chose cutthroat capitalism, while the Nordics chose cuddly capitalism. The U.S. grew faster for a short time, but since then all five countries have grown at the roughly same pace. America’s high inequality encourages innovation. The Nordics can be cuddly and still grow rapidly because of technological spillover. If the U.S. were to decide to go cuddly, innovation would slow. Both sets of nations would grow less rapidly. ...
Will American innovation slow if we go “cuddly”?
The really interesting question posed by Acemoglu, Robinson, and Verdier is whether innovation would slow in the United States if we strengthened our safety net and/or reduced the relative financial payoff to entrepreneurial success. I’m skeptical, for three reasons.
The first flows from America’s past experience. According to Acemoglu et al’s logic, incentives for innovation in the U.S. were weakest in the 1960s and 1970s. In 1960 the top 1%’s share of pretax income had been falling steadily for several decades and had nearly reached its low point. Government spending, meanwhile, had been rising steadily and was close to its peak level. Yet there was plenty of innovation in the 1960s and 1970s, including notable advances in computers, medical technology, and others.
Second, the Nordic countries, with their low income inequality and generous safety nets, currently are among the world’s most innovative countries. The World Economic Forum’s Global Competitiveness Index has consistently ranked them close to the United States in innovation. The most recent report, for 2012-13, rates Sweden as the world’s most innovative nation, followed by Finland. The U.S. ranks sixth. The 2012 WIPO-Insead Global Innovation Index ranks Sweden second and the United States tenth. Whether or not this lasts, it suggests reason to doubt that modest inequality and generous cushions are significant obstacles to innovation.
Third, if Acemoglu and colleagues are correct about the value of financial incentives in spurring innovation, we should see this reflected not only in the United States but also in other nations with relatively high income inequality and low-to-moderate government spending, such as Australia, Canada, Ireland, New Zealand, and the United Kingdom. But we don’t. ...
There’s one additional possibility worth considering. If financial incentives truly are critical for spurring innovation, it could be the opportunity for large gains that matters, rather than the absence of cushions. Suppose we were to increase government revenues in the United States via higher taxes on everyone — steeper income taxes on the top 1% or 5% plus a new national consumption tax. And imagine we used those revenues to expand public insurance and services — fully universal health insurance, universal early education, a beefed-up Earned Income Tax Credit, a new wage insurance program, more individualized assistance with training and job placement. These changes wouldn’t alter income inequality much, but they would enhance economic security and opportunity. Would innovation decline? I doubt it. ...

An enhanced safety net -- a backup if things go wrong -- can give people the security they need to take a chance on pursuing an innovative idea that might die otherwise, or opening a small business. So it may be that an expanded social safety net encourages innovation.

As for the effect of reducing the financial payoff by raising taxes on high incomes to support an expansion in th esafety net, I don't think it's any secret that I think the distribution of income in recent decades has pushed too much income toward the top and too little toward the middle and bottom (relative to changes in productivity). That is, the distribution of income is distorted. To the extent that taxing high incomes removes these distortions, it's helpful rather than harmful.

And there must be diminishing returns to incentives in any case. If we take away $50 million in taxes leaving someone the prospect of earning "only" $100 million in net profit (i.e. taxes are 33%), would the person really decide to give up the project? Would someone really decide it isn't worth it to only earn $100 million and work less or give it up altogether? Or is it the case that by the time you get to that much income, a marginal increase of decrease in profit has almost no effect on incentives? I'd guess that's the case (and for those in the game simply to see who can accumulate the most, so long as the rules are the same for all, incentives won't change either). There could be an effect at the margin, i.e. profitable projects become unprofitable due to the increase in the tax rate, and that could impact innovation and growth. But growth doesn't seem to decline when taxes at the top are higher, so this case is hard to make.

Austerity Programs Hit France; Marchers Demand Vote on Treaty; Hollande Reneges on Campaign Promise

Following protests in Portugal, Spain, and Greece, a wave of Leftists march in Paris against austerity.
Thousands of leftists marched through Paris on Sunday demanding a referendum on the EU’s new fiscal discipline treaty in the latest of a series of anti-austerity protests in countries hit by the eurozone crisis.

The demonstration, the biggest political rally in France since May elections brought Socialist president François Hollande to power, followed protests on the streets of Madrid and Lisbon on Saturday.

The communist-backed Left Front and 60 other organisations backing the Paris march said tens of thousands of supporters turned out for the protest, timed to coincide with the opening this week of a parliamentary debate on ratification of the fiscal treaty, which Mr Hollande had originally vowed to renegotiate.

Jean-Luc Mélenchon, the Left Front leader, said austerity policies were “dangerous for all the people of Europe”. Demanding a vote on the treaty, he added: “Democracy is sicker than we thought.”

analysts worry that the recent upsurge in political unrest in Portugal, Spain and Greece – where the neo-Nazi Golden Dawn party has risen to third in national surveys – could be a sign of more trouble ahead as repeated rounds of austerity bite even further into daily lives.

“The cracks are showing in Spain’s social and economic fabric,” said Nicholas Spiro, a London-based sovereign risk consultant. “The risk is that in seeking to retain as much domestic ownership of the terms attached to any [EU rescue] programme, the government [of prime minister Mariano Rajoy] overdoes it and sparks an even more intense social and political backlash.”

In Portugal, tens of thousands of trade unionists turned out in Lisbon’s central square for a peaceful protest against terms of the country’s €78bn EU-IMF bailout.

Greek unions have also vowed to hold big protests if the government moves forward with a new €13.5bn austerity programme agreed last week by the coalition government.

The recent upheavals in Portugal – where there had been widespread bipartisan support for the bailout since it was launched 16 months ago – has come as a particular shock to eurozone leaders, forcing Lisbon to reverse a rise in social security taxes designed to hit mandated budget targets.

Hollande Reneges on Campaign Promise

Recall that Hollande ran on a platform to rework the Merkozy Treaty.

We now clearly see that was just another campaign lie. However, Hollande has followed through on all of his economically destructive ideas including massive tax hikes, lowering retirement age, and pressuring companies to not lay off workers.

Destructive follow-through of the worst ideas, with no follow-through on the best campaign ideas is typical of presidential elections everywhere.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List

Exposing China’s Shadow Banking System

We have in the past attempted to take on the gargantuan task of exposing the multi-trillion Chinese Shadow Banking system (not to be confused with its deposit-free, rehypothecation-full Western equivalent), most recently here. Alas, it is has consistently proven to be virtually impossible to coherently explain something as decentralized and as pervasive as an entire country's underground economy, especially when the country in question is the riddle, wrapped in a mystery, inside an enigma known as China. Today, however, courtesy of AsiaFinanceNews we get a report as close as possible to the most comprehensive overview of what may soon be (especially if rumors of tumbling Chinese municipal dominoes are correct) the most talked about subject in the financial world: China's Shadow Banking empire.

From Chinese Shadow Banking System

China presently has five state-controlled megabanks operating within the supervision of the central government, of which the government is a majority shareholder, and seventeen additional “shareholder banks.” Because China’s state banking sector operates as a direct subsidyfunding channel for state-owned enterprises (as opposed to acting in the capacity of risk analytics based credit institutions), the largest state-owned banks have required periodic recapitalization every decade over the past sixty years as the constant generation and cumulative exposure to non-performing loans exceeds the banks’ total equity. The circumstances comprising the present situation, however, will include monetary exposure by international asset management firms which have acquired both direct equity-stakes in the banks as well as exposure to Hong Kong-listed shares.


State Control and Politically Mandated Loans


The banking system is generally considered to represent the weakest link in China’s political economy. Loans are typically a form of direct subsidy by the central government to the various state-owned enterprises. According to Victor Shih, a professor at Northwestern University who specializes in China’s political economy and is considered an expert on China’s banking system, prior to 1997 there had been no comprehensive audits, nor general ledgers, nor any capital stock at any of the five largest banks, as such was considered unnecessary. The central government, which controls 98% of China’s financial sector, maintains control over the banks in order to finance various political and socio-economic policy objectives, maintain capital controls and set fixed interest rates, comprising in effect a self-referential sector,  resulting in inefficient capital allocation which deprives China’s small and medium-sized enterprises (“SMEs”) of access to credit through the supervised banking system


Rejection of Western Credit Practices: Global Financial Crisis Doomed Reforms


The government halted and subsequently reversed reforms, and began moving away from western banking practices in late 2008 in response to the global credit crisis, ordering banks to originate loans to both local and centrally-planned investment projects in order to prevent a rapid slowdown in growth. The credit expansion undertaken by banks in 2009 at the direction of Chinese president Hu Jintao resulted in approximately $3.1 trillion in new loans created by the end of 2010.5 The National Development and Reform Commission (“NDRC”) fast-tracked and granted approval of virtually 100% of all fixed-asset investment projects submitted for funding by local governments. The NDRC was created to address the response to a survey by the central government asking local government officials to identify those projects for they had been unable to obtain credit financing. The role of the NDRC is to approve the projects rejected by the banks, thus in essence having approved the worst projects for financing in 2009 and continuing to approve such projects through the present

Read on below (full pdf):


Analysis: Mark Zandi wrong about housing tax credit

Some of Mark Zandi's analysis has been excellent, but I think he is wrong about the housing tax credit and confused about some of the timing of the housing bust.

First, from Mark Zandi, chief economist at Moody’s Analytics in the WaPo: Obama policies ended housing free fall
Temporary tax credits also enticed home buyers to act sooner rather than later, breaking a self-reinforcing deflationary cycle in the housing market. Prospective buyers had remained on the sidelines, waiting for prices to stop falling, and their reluctance caused prices to drop still more.

The tax credits didn’t spark additional home sales so much as pull sales forward from the future; sales weakened sharply as soon as the credits expired. The credits also were expensive, costing the Treasury tens of billions of dollars, and much of the benefit went to home buyers who would have bought homes anyway. But the tax benefit gave buyers a reason to stop waiting, ending the downdraft in prices.

Critics charge that the government’s intervention was costly and ineffective, that the administration should have let the housing market sort things out on its own. This would have been a reasonable position if house prices had been too high when Obama’s policies kicked in; but they weren’t. By the time Obama took office, prices had fallen substantially; with low mortgage rates factored in, homes were as affordable as ever. Investors knew this, and as soon as they saw prices nearing the bottom, they began snapping up distressed properties. These investors weren’t house flippers, like those who fueled the housing bubble, but long-term players seeing bargains. Obama’s efforts to shore up housing were well timed.
First, house prices declined about 7.5% from January 2009 to the recent low earlier this year. In real terms, house prices declined about 16% from January 2009 to the recent low!. How can Zandi say the tax credit ended "the downdraft in prices"? That is incorrect.

Most of the decline in house prices happened before January 2009, but the decline since early 2009 would still have been the largest decline in house prices nationally from the Depression through 2006. Only a few regional house price declines (like California in the early '90s) were larger than the 16% real decline over the last 3+ years!

In fact the housing tax credit was expensive and ineffective. I opposed the tax credit early and often. The tax credit for buying new homes was especially dumb. A key problem during the housing bust was the excess supply of vacant housing units, and incentivizing people to buy new homes (and add to the supply) made no sense at all.

Of course the Obama Administration doesn't deserve all the blame for the housing tax credit blunder; the tax credit was originally proposed by Senators Johnny Isakson (R) and Joe Lieberman (I). 

Zandi makes another mistake when he conflates investor buying and affordability: "with low mortgage rates factored in, homes were as affordable as ever". The buy-and-rent investors really started buying in late 2008 and early 2009 - and those investors paid cash (low mortgage rates were NOT a factor). At that time the private label securities (Wall Street) were dumping foreclosed properties in mostly low priced areas, and investors responded by buying for the cash flow opportunity. It is correct that prices bottomed earlier in many of those areas (the "destickification" of prices due to PLS dumping), but prices declined in most areas for a few more years.

By now I'd hope that everyone would realize 1) that the housing tax credit was a policy mistake, and 2) most house prices declined significantly over the last 3+ years.

Summary for Week Ending Sept 28th
Schedule for Week of Sept 30th

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