Blogger Mark Kleiman, who lives in LA, did. What if you don't have a house in a bubble market? Well, now you can buy and sell derivative contracts based on median sales prices of existing single-family homes, as released each quarter by the National Association of Realtors (NAR). Available markets include NYC, Chicago, SF, LA, SD and Miami.
The problem is, it's the smart money (short interest) looking at these new derivatives. The dumb money is out there flipping houses with no-interest mortgages! In addition, it may take a few years or more for this bubble to deflate...
Tuesday, May 31, 2005
Monday, May 30, 2005
Price to rent ratios II
This San Francisco Federal Reserve report shows data going back to 1982. The current period is clearly anomalous (it recalls P/E ratios during the tech bubble 1995-2000). I expect to see a repeat of the bump seen earlier in the late 1980s to early 1990s; note the inevitable reversion to the mean. It won't be pretty given new phenomena like zero-interest and sub-prime mortgages, and home equity loans. (Compare to Japan's 20 year housing bubble, discussed in an earlier post. Ours may take another decade to unwind as well.)
Below is some data recently published in the Times. Note the nationwide uniformity of price-rent ratios in 2000, as opposed to today. The bay area leads the nation with a ratio that has almost tripled in the last 5 years.
It is possible that replacing home price by monthly mortgage payment in the numerator would account for most of the 2000-2005 increase in national average price-rent (from 11.6 to 17.1), but this doesn't come close to explaining the frothier regions on the coasts.
Below is some data recently published in the Times. Note the nationwide uniformity of price-rent ratios in 2000, as opposed to today. The bay area leads the nation with a ratio that has almost tripled in the last 5 years.
It is possible that replacing home price by monthly mortgage payment in the numerator would account for most of the 2000-2005 increase in national average price-rent (from 11.6 to 17.1), but this doesn't come close to explaining the frothier regions on the coasts.
Thursday, May 26, 2005
"Three billion new surfers on the wave of globalization"
Clyde Prestowitz's new book Three Billion New Capitalists: The Great Shift of Wealth and Power to the East is a more thoughtful, less breathless, version of Tom Friedman's The World is Flat.
Prestowitz discusses at length the advantages and disadvantages of globalization and free trade. His is the first popular book I know of to cite the work of Baumol and Gomory on problems with the usual Ricardian arguments of comparative advantage (see also this article by Samuelson). Prestowitz draws on his background as a trade negotiator in the Reagan administration to find real world examples which deviate drastically from the usual efficient market assumptions, including cases involving Japanese companies dumping their products in the US, and later raising prices once American competitors are eliminated.
Prestowitz advocates government support of R&D, as well as occasional intervention in markets. However, he doesn't seem to understand that while government intervention can lead to better outcomes, it may not on average do better than the market left to its own devices. See Samuelson for a nice discussion of this point.
Prestowitz discusses at length the advantages and disadvantages of globalization and free trade. His is the first popular book I know of to cite the work of Baumol and Gomory on problems with the usual Ricardian arguments of comparative advantage (see also this article by Samuelson). Prestowitz draws on his background as a trade negotiator in the Reagan administration to find real world examples which deviate drastically from the usual efficient market assumptions, including cases involving Japanese companies dumping their products in the US, and later raising prices once American competitors are eliminated.
Prestowitz advocates government support of R&D, as well as occasional intervention in markets. However, he doesn't seem to understand that while government intervention can lead to better outcomes, it may not on average do better than the market left to its own devices. See Samuelson for a nice discussion of this point.
Tuesday, May 24, 2005
Wormholes, NEC and all that
The BBC and New Scientist articles seem to have generated a lot of interest in this topic. Odd how my colleagues can hear me loudly discussing this stuff for six months with my postdoc and grad student, but only after the BBC decides to write about it do they want to know more :-)
The original papers are listed below. Both have been revised since posting on arxiv.org - if you want a more up to date version please contact me.
http://arxiv.org/abs/hep-th/0504003 (wormholes)
http://arxiv.org/abs/hep-th/0502203 (instability and NEC)
There is a longer version of the instability analysis forthcoming, by Buniy, Hsu and Murray.
Let me make some comments here for physics readers:
1) Our original interest was in dark energy. The observational data suggest (although not strongly - see comments) that w = p/rho < -1, which violates various energy conditions. We wanted to understand how easy or hard it is to build models with w < -1. With some collaborators at Caltech, I had obtained a result in classical scalar models that w < -1 implies instability. We wanted to generalize this result.
2) Our strongest results are in the contexts of classical field theory (including both gauge and scalar fields) and perfect fluids. There is a quantum loophole involving renormalization that allows for small violations of the NEC (well-known examples are the Casimir effect and black hole spacetimes).
3) When applying this to wormholes, we are considering the exotic (NEC-violating) matter necessary to stabilize the wormhole. This matter must have large energy-momentum tensor T_mn. We focus on wormholes which have nearly-classical spacetimes (the other type is less useful for Sci Fi). We show that this condition is strong enough to require that the exotic matter evolves semi-classically - i.e., it is subject to our results in classical field theory.
4) Some readers (esp. from the relativity community) have misinterpreted our results as claiming that the Casimir or black hole vacuum is unstable, but this is not the case (see point (2) above). In the wormhole case, the key point is that semi-classical wormholes cannot result from exotic matter which violates the NEC via quantum effects.
The original papers are listed below. Both have been revised since posting on arxiv.org - if you want a more up to date version please contact me.
http://arxiv.org/abs/hep-th/0504003 (wormholes)
http://arxiv.org/abs/hep-th/0502203 (instability and NEC)
There is a longer version of the instability analysis forthcoming, by Buniy, Hsu and Murray.
Let me make some comments here for physics readers:
1) Our original interest was in dark energy. The observational data suggest (although not strongly - see comments) that w = p/rho < -1, which violates various energy conditions. We wanted to understand how easy or hard it is to build models with w < -1. With some collaborators at Caltech, I had obtained a result in classical scalar models that w < -1 implies instability. We wanted to generalize this result.
2) Our strongest results are in the contexts of classical field theory (including both gauge and scalar fields) and perfect fluids. There is a quantum loophole involving renormalization that allows for small violations of the NEC (well-known examples are the Casimir effect and black hole spacetimes).
3) When applying this to wormholes, we are considering the exotic (NEC-violating) matter necessary to stabilize the wormhole. This matter must have large energy-momentum tensor T_mn. We focus on wormholes which have nearly-classical spacetimes (the other type is less useful for Sci Fi). We show that this condition is strong enough to require that the exotic matter evolves semi-classically - i.e., it is subject to our results in classical field theory.
4) Some readers (esp. from the relativity community) have misinterpreted our results as claiming that the Casimir or black hole vacuum is unstable, but this is not the case (see point (2) above). In the wormhole case, the key point is that semi-classical wormholes cannot result from exotic matter which violates the NEC via quantum effects.
Monday, May 23, 2005
BBC on wormholes
We get a mention in this nice BBC article. Here is the latest version (PDF) of the talk Roman Buniy will give on Tuesday at a conference at Vanderbilt.
Wormhole 'no use' for time travel
By Paul Rincon
BBC News science reporter
Artist's impression of a wormhole Image: SPL
Wormholes contort the fabric of the Universe
For budding time travellers, the future (or should that be the past?) is starting to look bleak.
Hypothetical tunnels called wormholes once looked like the best bet for constructing a real time machine.
These cosmic shortcuts, which link one point in the Universe to another, are favoured by science fiction writers as a means both of explaining time travel and of circumventing the limitations imposed by the speed of light.
The concept of wormholes will be familiar to anyone who has watched the TV programmes Farscape, Stargate SG1 and Star Trek: Deep Space Nine.
The opening sequence of the BBC's new Doctor Who series shows the Tardis hurtling through a "vortex" that suspiciously resembles a wormhole - although the Doctor's preferred method of travel is not explained in detail.
But the idea of building these so-called traversable wormholes is looking increasingly shaky, according to two new scientific analyses.
Remote connection
A common analogy used to visualise these phenomena involves marking two holes at opposite ends of a sheet of paper, to represent distant points in the Universe. One can then bend the paper over so that the two remote points are positioned on top of each other.
[The wormholes] you would like to build - the predictable ones where you can say Mr Spock will land in New York at 2pm on this day - those look like they will fall apart
Stephen Hsu, University of Oregon
If it were possible to contort space-time in this way, a person might step through a wormhole and emerge at a remote time or distant location.
The person would pass through a region of the wormhole called the throat, which flares out on either side.
According to one idea, a wormhole could be kept open by filling its throat, or the region around it, with an ingredient called exotic matter.
This is strange stuff indeed, and explaining it requires scientists to look beyond the laws of classical physics to the world of quantum mechanics.
Exotic matter is repelled, rather than attracted, by gravity and is said to have negative energy - meaning it has even less than empty space.
Law breaker
But according to a new study by Stephen Hsu and Roman Buniy, of the University of Oregon, US, this method of building a traversable wormhole may be fatally flawed. In a paper published on the arXiv pre-print server, the authors looked at a kind of wormhole in which the space-time "tube" shows only weak deviations from the laws of classical physics.
These "semi-classical" wormholes are the most desirable type for time travel because they potentially allow travellers to predict where and when they would emerge.
The Tardis (BBC)
The concept is a favourite of science fiction writers
Wormholes entirely governed by the laws of quantum mechanics, on the other hand, would likely transport their payloads to an undesired time and place.
Calculations by the Oregon researchers show a wormhole that combines exotic matter with semi-classical space-time would be fundamentally unstable.
This result relies in part on a previous paper in which Hsu and Buniy argued that systems which violate a physical principle known as the null energy condition become unstable.
"We aren't saying you can't build a wormhole. But the ones you would like to build - the predictable ones where you can say Mr Spock will land in New York at 2pm on this day - those look like they will fall apart," Dr Hsu said.
Tight squeeze
A separate study by Chris Fewster, of the University of York, UK, and Thomas Roman, of Central Connecticut State University, US, takes a different approach to tackling the question of wormholes.
Amongst other things, their analysis deals with the proposal that wormhole throats could be kept open using arbitrarily small amounts of exotic matter.
Fewster and Roman calculated that, even if it were possible to build such a wormhole, its throat would probably be too small for time travel.
It might - in theory - be possible to carefully fine-tune the geometry of the wormhole so that the wormhole throat became big enough for a person to fit through, says Fewster.
But building a wormhole with a throat radius big enough to just fit a proton would require fine-tuning to within one part in 10 to the power of 30. A human-sized wormhole would require fine-tuning to within one part in 10 to the power of 60.
"Frankly no engineer is going to be able to do that," said the York researcher.
The authors are currently preparing a manuscript for publication.
Supporting view
However, there is still support for the idea of traversable wormholes in the scientific community. One physicist told BBC News they could see problems with Hsu's and Buniy's conclusions.
"Violations of the null energy condition are known to occur in a number of situations. And their argument would prohibit any violation of it," they commented.
"If that's true, then don't worry about Hawking radiation from a black hole; the entire black hole vacuum becomes unstable."
The underlying physics was not in doubt, the researcher argued. The real challenge was in explaining how to engineer wormholes big enough to be of practical use.
Cambridge astrophysicist Stephen Hawking is amongst those researchers who have pondered the question of wormholes.
In the 1980s, he argued that something fundamental in the laws of physics would prevent wormholes being used for time travel. This idea forms the basis of Hawking's Chronology Protection Conjecture.
Wormhole 'no use' for time travel
By Paul Rincon
BBC News science reporter
Artist's impression of a wormhole Image: SPL
Wormholes contort the fabric of the Universe
For budding time travellers, the future (or should that be the past?) is starting to look bleak.
Hypothetical tunnels called wormholes once looked like the best bet for constructing a real time machine.
These cosmic shortcuts, which link one point in the Universe to another, are favoured by science fiction writers as a means both of explaining time travel and of circumventing the limitations imposed by the speed of light.
The concept of wormholes will be familiar to anyone who has watched the TV programmes Farscape, Stargate SG1 and Star Trek: Deep Space Nine.
The opening sequence of the BBC's new Doctor Who series shows the Tardis hurtling through a "vortex" that suspiciously resembles a wormhole - although the Doctor's preferred method of travel is not explained in detail.
But the idea of building these so-called traversable wormholes is looking increasingly shaky, according to two new scientific analyses.
Remote connection
A common analogy used to visualise these phenomena involves marking two holes at opposite ends of a sheet of paper, to represent distant points in the Universe. One can then bend the paper over so that the two remote points are positioned on top of each other.
[The wormholes] you would like to build - the predictable ones where you can say Mr Spock will land in New York at 2pm on this day - those look like they will fall apart
Stephen Hsu, University of Oregon
If it were possible to contort space-time in this way, a person might step through a wormhole and emerge at a remote time or distant location.
The person would pass through a region of the wormhole called the throat, which flares out on either side.
According to one idea, a wormhole could be kept open by filling its throat, or the region around it, with an ingredient called exotic matter.
This is strange stuff indeed, and explaining it requires scientists to look beyond the laws of classical physics to the world of quantum mechanics.
Exotic matter is repelled, rather than attracted, by gravity and is said to have negative energy - meaning it has even less than empty space.
Law breaker
But according to a new study by Stephen Hsu and Roman Buniy, of the University of Oregon, US, this method of building a traversable wormhole may be fatally flawed. In a paper published on the arXiv pre-print server, the authors looked at a kind of wormhole in which the space-time "tube" shows only weak deviations from the laws of classical physics.
These "semi-classical" wormholes are the most desirable type for time travel because they potentially allow travellers to predict where and when they would emerge.
The Tardis (BBC)
The concept is a favourite of science fiction writers
Wormholes entirely governed by the laws of quantum mechanics, on the other hand, would likely transport their payloads to an undesired time and place.
Calculations by the Oregon researchers show a wormhole that combines exotic matter with semi-classical space-time would be fundamentally unstable.
This result relies in part on a previous paper in which Hsu and Buniy argued that systems which violate a physical principle known as the null energy condition become unstable.
"We aren't saying you can't build a wormhole. But the ones you would like to build - the predictable ones where you can say Mr Spock will land in New York at 2pm on this day - those look like they will fall apart," Dr Hsu said.
Tight squeeze
A separate study by Chris Fewster, of the University of York, UK, and Thomas Roman, of Central Connecticut State University, US, takes a different approach to tackling the question of wormholes.
Amongst other things, their analysis deals with the proposal that wormhole throats could be kept open using arbitrarily small amounts of exotic matter.
Fewster and Roman calculated that, even if it were possible to build such a wormhole, its throat would probably be too small for time travel.
It might - in theory - be possible to carefully fine-tune the geometry of the wormhole so that the wormhole throat became big enough for a person to fit through, says Fewster.
But building a wormhole with a throat radius big enough to just fit a proton would require fine-tuning to within one part in 10 to the power of 30. A human-sized wormhole would require fine-tuning to within one part in 10 to the power of 60.
"Frankly no engineer is going to be able to do that," said the York researcher.
The authors are currently preparing a manuscript for publication.
Supporting view
However, there is still support for the idea of traversable wormholes in the scientific community. One physicist told BBC News they could see problems with Hsu's and Buniy's conclusions.
"Violations of the null energy condition are known to occur in a number of situations. And their argument would prohibit any violation of it," they commented.
"If that's true, then don't worry about Hawking radiation from a black hole; the entire black hole vacuum becomes unstable."
The underlying physics was not in doubt, the researcher argued. The real challenge was in explaining how to engineer wormholes big enough to be of practical use.
Cambridge astrophysicist Stephen Hawking is amongst those researchers who have pondered the question of wormholes.
In the 1980s, he argued that something fundamental in the laws of physics would prevent wormholes being used for time travel. This idea forms the basis of Hawking's Chronology Protection Conjecture.
Friday, May 20, 2005
PIMCO bullish on long bonds?
In his latest commentary, Bill Gross of PIMCO (perhaps the most influential bond trader in the world) comes very close to sounding bullish on long bonds. This is a rather amazing turnaround, since over the last couple of years he has been warning repeatedly about an interest rate meltdown.
Gross now seems convinced that our Bretton Woods II currency regime will survive another 3-5 years, and that the dominant trend is deflation exported from China. He reasons that several years of nearly zero (real) interest rates have failed to produce significant inflation in the US economy. Thus, once the stimulative effect of low interest rates goes away, we are in for a period of deflation, which will be kind to bonds - he is bold enough to predict 10 year yield as low as 3%!
Gross: "Future finance-based consumption, however, is limited by our ability to keep pumping lower and lower yields, which in the past have led to higher and higher TIPS, home, stock, and associated asset prices. Let me do the TIPS math for you and then you can draw the implications for other asset classes. The 14% 5-year TIPS capital gain over the past few years that Alan Greenspan has been able to manufacture probably can only go up by 5 more points, because a 0% real yield for a 5-year maturity TIPS serves as a practical limit that investors will tolerate during deflationary, and most low inflationary environments. A 5-year TIPS moving lower in yield from 1% to 0% goes up 5 points. Even if the Fed continues to “Pump,” then, we are ¾ of the way complete in terms of the Fed’s ability to continue to stimulate asset prices, because its 21st century journey started at 4%, we are now at 1%, and 0% is the practical limit. That doesn’t mean that the housing “bubble” can’t keep going because it likely will if the Fed “Pumps” real yields closer to 0%. But there are limits, and we are heading down the home stretch of this U.S. race towards prosperity based on asset price appreciation.
Our point on the “Pump” then, is to suggest that in combination with a globalized free trade-based economy exhibiting a surfeit of cheap Asian labor, it will be difficult to generate U.S. inflation higher than our current 3% even if interest rates fall further. If 3% inflation is all we can get from the past 5-years’ asset inflation, it’s hard to believe that we get more from what’s left. The potential to reflate via interest rates is nearly over. We draw the same conclusion for Euroland and Japan. Japan, of course, is the primary example of how 0% nominal yields can fail to generate any inflation whatsoever, is it not? Continued disinflation not reflation, then, will rule our fragile future kingdom, with the potential for 1-2% CPI prints in most years between 2006 and 2010 throughout much of the global economy. Readers may remember our past few years’ Secular Forum descriptions of the tug-of-war between disinflation and reflationary forces. We have proclaimed a winner based on our observation of massive fiscal and monetary global stimulation described above, the limited inflationary response, and the lack of further ammunition. Long live our disinflationary King.
If we had to forecast (and we do), we believe a range of 3 - 4½% for 10-year nominal Treasuries will prevail during most of our secular timeframe..."
Gross now seems convinced that our Bretton Woods II currency regime will survive another 3-5 years, and that the dominant trend is deflation exported from China. He reasons that several years of nearly zero (real) interest rates have failed to produce significant inflation in the US economy. Thus, once the stimulative effect of low interest rates goes away, we are in for a period of deflation, which will be kind to bonds - he is bold enough to predict 10 year yield as low as 3%!
Gross: "Future finance-based consumption, however, is limited by our ability to keep pumping lower and lower yields, which in the past have led to higher and higher TIPS, home, stock, and associated asset prices. Let me do the TIPS math for you and then you can draw the implications for other asset classes. The 14% 5-year TIPS capital gain over the past few years that Alan Greenspan has been able to manufacture probably can only go up by 5 more points, because a 0% real yield for a 5-year maturity TIPS serves as a practical limit that investors will tolerate during deflationary, and most low inflationary environments. A 5-year TIPS moving lower in yield from 1% to 0% goes up 5 points. Even if the Fed continues to “Pump,” then, we are ¾ of the way complete in terms of the Fed’s ability to continue to stimulate asset prices, because its 21st century journey started at 4%, we are now at 1%, and 0% is the practical limit. That doesn’t mean that the housing “bubble” can’t keep going because it likely will if the Fed “Pumps” real yields closer to 0%. But there are limits, and we are heading down the home stretch of this U.S. race towards prosperity based on asset price appreciation.
Our point on the “Pump” then, is to suggest that in combination with a globalized free trade-based economy exhibiting a surfeit of cheap Asian labor, it will be difficult to generate U.S. inflation higher than our current 3% even if interest rates fall further. If 3% inflation is all we can get from the past 5-years’ asset inflation, it’s hard to believe that we get more from what’s left. The potential to reflate via interest rates is nearly over. We draw the same conclusion for Euroland and Japan. Japan, of course, is the primary example of how 0% nominal yields can fail to generate any inflation whatsoever, is it not? Continued disinflation not reflation, then, will rule our fragile future kingdom, with the potential for 1-2% CPI prints in most years between 2006 and 2010 throughout much of the global economy. Readers may remember our past few years’ Secular Forum descriptions of the tug-of-war between disinflation and reflationary forces. We have proclaimed a winner based on our observation of massive fiscal and monetary global stimulation described above, the limited inflationary response, and the lack of further ammunition. Long live our disinflationary King.
If we had to forecast (and we do), we believe a range of 3 - 4½% for 10-year nominal Treasuries will prevail during most of our secular timeframe..."
Thursday, May 19, 2005
Cloning has arrived...
While the US sleeps, leading-edge stem cell research is being done at Seoul National University. (Well, at least California has woken up and is trying to counter the Bush administration's lack of support for stem cell research by using state funds.)
The Korean lab can produce one clone per 17 donor eggs. That means the cost per clone is similar to that of an IVF cycle - or less than $5k. I imagine in a decade wealthy people (perhaps everyone?) will have access to a supply of their own stem cells. Also, women who are past reproductive age could choose to have a clone child, using their own or a relative or friend's genetic material.
Of course, some US religious fundamentalists (like our president) will fight these developments. Are we ready for the coming clone war?
NYT: "In what scientists say is a stunning leap forward, a team of South Korean researchers has developed a highly efficient recipe for producing human embryos by cloning and then extracting their stem cells.
Writing today in the journal Science, they report that they used their method to produce 11 human stem cells lines that are genetic matches of 11 patients aged 2 to 56.
Previously, the same group, led by Dr. Woo Suk Hwang and Dr. Shin Yong Moon of Seoul National University, produced a single stem cell line from a cloned embryo, but the process was so onerous that scientists said it was not worth trying to repeat it, and some doubted the South Koreans' report was even correct.
Now things have changed.
"It is a tremendous advance," said Dr. Leonard Zon, a stem cell researcher at Harvard Medical School and president of the International Society for Stem Cell Research, who was not involved in the research.
The method, called therapeutic cloning, is one of the great hopes of the stem cell field. It produces stem cells, universal cells that are extracted from embryos, killing the embryos in the process, and, in theory, can be directed to grow into any of the body's cell types. And since the stem cells come from embryos that are clones of individuals, they should be exact genetic matches. Scientists want to obtain such stem cells from patients to study the origin of diseases and to develop replacement cells that would be identical to ones a patient has lost.
...But this time, with a handful of technical improvements that mostly involved such things as methods for growing cells and breaking open embryos, they used an average of 17 eggs per stem cell line and could almost guarantee success with a single woman's eggs obtained in a single month. And it did not matter if the patient whose cells were being cloned was young or middle aged, male or female, sick or well - the process worked.
"You almost have no reason not to do it," said Dr. Davor Solter, the director of the Max Planck Institute for Immunobiology in Freiberg, Germany.
In fact, Dr. Solter added, it now looks like it is much more efficient to clone and obtain human stem cells than it is to do the same experiment in animals."
The Korean lab can produce one clone per 17 donor eggs. That means the cost per clone is similar to that of an IVF cycle - or less than $5k. I imagine in a decade wealthy people (perhaps everyone?) will have access to a supply of their own stem cells. Also, women who are past reproductive age could choose to have a clone child, using their own or a relative or friend's genetic material.
Of course, some US religious fundamentalists (like our president) will fight these developments. Are we ready for the coming clone war?
NYT: "In what scientists say is a stunning leap forward, a team of South Korean researchers has developed a highly efficient recipe for producing human embryos by cloning and then extracting their stem cells.
Writing today in the journal Science, they report that they used their method to produce 11 human stem cells lines that are genetic matches of 11 patients aged 2 to 56.
Previously, the same group, led by Dr. Woo Suk Hwang and Dr. Shin Yong Moon of Seoul National University, produced a single stem cell line from a cloned embryo, but the process was so onerous that scientists said it was not worth trying to repeat it, and some doubted the South Koreans' report was even correct.
Now things have changed.
"It is a tremendous advance," said Dr. Leonard Zon, a stem cell researcher at Harvard Medical School and president of the International Society for Stem Cell Research, who was not involved in the research.
The method, called therapeutic cloning, is one of the great hopes of the stem cell field. It produces stem cells, universal cells that are extracted from embryos, killing the embryos in the process, and, in theory, can be directed to grow into any of the body's cell types. And since the stem cells come from embryos that are clones of individuals, they should be exact genetic matches. Scientists want to obtain such stem cells from patients to study the origin of diseases and to develop replacement cells that would be identical to ones a patient has lost.
...But this time, with a handful of technical improvements that mostly involved such things as methods for growing cells and breaking open embryos, they used an average of 17 eggs per stem cell line and could almost guarantee success with a single woman's eggs obtained in a single month. And it did not matter if the patient whose cells were being cloned was young or middle aged, male or female, sick or well - the process worked.
"You almost have no reason not to do it," said Dr. Davor Solter, the director of the Max Planck Institute for Immunobiology in Freiberg, Germany.
In fact, Dr. Solter added, it now looks like it is much more efficient to clone and obtain human stem cells than it is to do the same experiment in animals."
Tuesday, May 17, 2005
Bubble reaches Eugene
The other day I discovered a new development of big (3-4,000 sq ft.), expensive ($500-800k) houses in the SW hills of Eugene. Apparently there are others like it around the outskirts of our urban growth boundary. Five years ago you could have bought a house of that size for $300-400k. I was kind of surprised, as neither population nor income growth have been very large here in the last few years. Home prices were pretty flat here around 2000, and only recently accelerated. A realtor told me that "the market here is just so strong... it has nowhere to go but up!"
But, later she said "My husband and I worked our whole lives, and we can't afford any of these houses... Where do people get the money?"
Well, here's how:
WSJ: "More and more Americans are turning to debt to pay for lifestyles their current incomes can't support. They are determined to live better than their parents, seduced by TV shows like "The O.C." and "Desperate Housewives," which take upper-class life for granted, and bombarded with advertisements for expensive automobiles and big-screen TVs. Financial firms have turned credit for the masses into a huge business, aided by better technology for analyzing credit risks. For Americans who aren't getting a big boost from workplace raises, easy credit offers a way to get ahead, at least for the moment...
Utah vividly illustrates the changes credit has wrought in the U.S. Last year, 28 of every 1,000 Utah households filed for bankruptcy, twice the national average and nearly triple Utah's rate a decade earlier, according to Economy.com, a West Chester, Pa., consulting firm. Utahns often get married early and have the largest families in the nation on average. That makes for a lot of young parents with modest incomes looking for big homes and cars. The median monthly mortgage payment in Utah equaled 45.3% of a worker's average monthly income in 2002, the fourth-highest level in the nation, according to the Utah Foundation, a Salt Lake City think tank."
But, later she said "My husband and I worked our whole lives, and we can't afford any of these houses... Where do people get the money?"
Well, here's how:
WSJ: "More and more Americans are turning to debt to pay for lifestyles their current incomes can't support. They are determined to live better than their parents, seduced by TV shows like "The O.C." and "Desperate Housewives," which take upper-class life for granted, and bombarded with advertisements for expensive automobiles and big-screen TVs. Financial firms have turned credit for the masses into a huge business, aided by better technology for analyzing credit risks. For Americans who aren't getting a big boost from workplace raises, easy credit offers a way to get ahead, at least for the moment...
Utah vividly illustrates the changes credit has wrought in the U.S. Last year, 28 of every 1,000 Utah households filed for bankruptcy, twice the national average and nearly triple Utah's rate a decade earlier, according to Economy.com, a West Chester, Pa., consulting firm. Utahns often get married early and have the largest families in the nation on average. That makes for a lot of young parents with modest incomes looking for big homes and cars. The median monthly mortgage payment in Utah equaled 45.3% of a worker's average monthly income in 2002, the fourth-highest level in the nation, according to the Utah Foundation, a Salt Lake City think tank."
Sunday, May 15, 2005
Credit derivatives and volatility
Longtime readers of this blog know I have been puzzled over low implied volatility in equity markets over the last year or so. Recently we've had a spike in volatility (see the VIX index which tracks implied vol on the SP500), and this recent PIMCO report on credit derivatives suggests one explanation for recent behavior (CDS = credit default swaps; credit derivatives are valued by assuming a link between the volatility of the stock (e.g. GM) and the probability of default on the corporate debt (credit risk), hence the correlation trade strategy B described below):
"Interestingly, hedge funds are the largest users of credit derivatives and CDS. Several of the largest Wall Street firms estimate that 50-60% of their current trading volume in CDS is with hedge funds. These leveraged funds use CDX index products to gain a diversified exposure to credit, thus earning positive carry. Two trades, which have been popular with hedge funds, are long CDX index products/short individual CDS names (Strategy A) and long CDX index products/short equity calls (Strategy B).
...Strategy B is an income generation strategy (which is also being implemented by $10 billion closed-end income generation funds started in the past year). This strategy seeks to produce income via long exposure to spread product, yet gives up any large equity upside by selling calls. Both hedge funds and closed-end funds have been aggressive sellers of equity call options over the past year, suppressing implied equity volatility. This created an illusion of calm waters. However, as soon as equities fell and volatility spiked, these calm waters got surprisingly rough in a short amount of time as investors shifted into "risk reduction" mode and unwound long credit positions, bought equity put options and bought protection on CDX index products. This leveraged unwind trade caused credit spreads to widen sharply, put downward pressure on stocks and caused implied volatility on CDX options to spike."
"Interestingly, hedge funds are the largest users of credit derivatives and CDS. Several of the largest Wall Street firms estimate that 50-60% of their current trading volume in CDS is with hedge funds. These leveraged funds use CDX index products to gain a diversified exposure to credit, thus earning positive carry. Two trades, which have been popular with hedge funds, are long CDX index products/short individual CDS names (Strategy A) and long CDX index products/short equity calls (Strategy B).
...Strategy B is an income generation strategy (which is also being implemented by $10 billion closed-end income generation funds started in the past year). This strategy seeks to produce income via long exposure to spread product, yet gives up any large equity upside by selling calls. Both hedge funds and closed-end funds have been aggressive sellers of equity call options over the past year, suppressing implied equity volatility. This created an illusion of calm waters. However, as soon as equities fell and volatility spiked, these calm waters got surprisingly rough in a short amount of time as investors shifted into "risk reduction" mode and unwound long credit positions, bought equity put options and bought protection on CDX index products. This leveraged unwind trade caused credit spreads to widen sharply, put downward pressure on stocks and caused implied volatility on CDX options to spike."
Friday, May 13, 2005
Are we getting smarter? Why?
It is well known that raw scores on IQ tests have been increasing at a rate of what would be about 3 IQ points per decade (the so-called Flynn effect). This means that, were the result of the test not rescaled so that the average is 100 by definition, the average IQ would have risen to 130 over the last century - i.e., the average person today scores better than all but 2 percent or so of the population in 1900. Malcolm Gladwell discusses this effect and its possible causes in this week's New Yorker, reviewing a new book claiming that modern society, with its fast-paced multimedia entertainment (including video games, computers, TV, etc.) actually improves our cognitive skills.
Gladwell: "Twenty years ago, a political philosopher named James Flynn uncovered a curious fact. Americans—at least, as measured by I.Q. tests—were getting smarter. This fact had been obscured for years, because the people who give I.Q. tests continually recalibrate the scoring system to keep the average at 100. But if you took out the recalibration, Flynn found, I.Q. scores showed a steady upward trajectory, rising by about three points per decade, which means that a person whose I.Q. placed him in the top ten per cent of the American population in 1920 would today fall in the bottom third. Some of that effect, no doubt, is a simple by-product of economic progress: in the surge of prosperity during the middle part of the last century, people in the West became better fed, better educated, and more familiar with things like I.Q. tests. But, even as that wave of change has subsided, test scores have continued to rise—not just in America but all over the developed world. What’s more, the increases have not been confined to children who go to enriched day-care centers and private schools. The middle part of the curve—the people who have supposedly been suffering from a deteriorating public-school system and a steady diet of lowest-common-denominator television and mindless pop music—has increased just as much. What on earth is happening? In the wonderfully entertaining “Everything Bad Is Good for You” (Riverhead; $23.95), Steven Johnson proposes that what is making us smarter is precisely what we thought was making us dumber: popular culture.
...As Johnson points out, television is very different now from what it was thirty years ago. It’s harder. A typical episode of “Starsky and Hutch,” in the nineteen-seventies, followed an essentially linear path: two characters, engaged in a single story line, moving toward a decisive conclusion. To watch an episode of “Dallas” today is to be stunned by its glacial pace—by the arduous attempts to establish social relationships, by the excruciating simplicity of the plotline, by how obvious it was. A single episode of “The Sopranos,” by contrast, might follow five narrative threads, involving a dozen characters who weave in and out of the plot. Modern television also requires the viewer to do a lot of what Johnson calls “filling in,” as in a “Seinfeld” episode that subtly parodies the Kennedy assassination conspiracists, or a typical “Simpsons” episode, which may contain numerous allusions to politics or cinema or pop culture. The extraordinary amount of money now being made in the television aftermarket—DVD sales and syndication—means that the creators of television shows now have an incentive to make programming that can sustain two or three or four viewings.
...It doesn’t seem right, of course, that watching “24” or playing a video game could be as important cognitively as reading a book. Isn’t the extraordinary success of the “Harry Potter” novels better news for the culture than the equivalent success of “Grand Theft Auto III”? Johnson’s response is to imagine what cultural critics might have said had video games been invented hundreds of years ago, and only recently had something called the book been marketed aggressively to children: (Johnson) Reading books chronically understimulates the senses. Unlike the longstanding tradition of gameplaying—which engages the child in a vivid, three-dimensional world filled with moving images and musical sound-scapes, navigated and controlled with complex muscular movements—books are simply a barren string of words on the page. . . .
Books are also tragically isolating. While games have for many years engaged the young in complex social relationships with their peers, building and exploring worlds together, books force the child to sequester him or herself in a quiet space, shut off from interaction with other children. . . .
But perhaps the most dangerous property of these books is the fact that they follow a fixed linear path. You can’t control their narratives in any fashion—you simply sit back and have the story dictated to you. . . . This risks instilling a general passivity in our children, making them feel as though they’re powerless to change their circumstances. Reading is not an active, participatory process; it’s a submissive one.
He’s joking, of course, but only in part. The point is that books and video games represent two very different kinds of learning. When you read a biology textbook, the content of what you read is what matters. Reading is a form of explicit learning. When you play a video game, the value is in how it makes you think. Video games are an example of collateral learning, which is no less important."
Gladwell: "Twenty years ago, a political philosopher named James Flynn uncovered a curious fact. Americans—at least, as measured by I.Q. tests—were getting smarter. This fact had been obscured for years, because the people who give I.Q. tests continually recalibrate the scoring system to keep the average at 100. But if you took out the recalibration, Flynn found, I.Q. scores showed a steady upward trajectory, rising by about three points per decade, which means that a person whose I.Q. placed him in the top ten per cent of the American population in 1920 would today fall in the bottom third. Some of that effect, no doubt, is a simple by-product of economic progress: in the surge of prosperity during the middle part of the last century, people in the West became better fed, better educated, and more familiar with things like I.Q. tests. But, even as that wave of change has subsided, test scores have continued to rise—not just in America but all over the developed world. What’s more, the increases have not been confined to children who go to enriched day-care centers and private schools. The middle part of the curve—the people who have supposedly been suffering from a deteriorating public-school system and a steady diet of lowest-common-denominator television and mindless pop music—has increased just as much. What on earth is happening? In the wonderfully entertaining “Everything Bad Is Good for You” (Riverhead; $23.95), Steven Johnson proposes that what is making us smarter is precisely what we thought was making us dumber: popular culture.
...As Johnson points out, television is very different now from what it was thirty years ago. It’s harder. A typical episode of “Starsky and Hutch,” in the nineteen-seventies, followed an essentially linear path: two characters, engaged in a single story line, moving toward a decisive conclusion. To watch an episode of “Dallas” today is to be stunned by its glacial pace—by the arduous attempts to establish social relationships, by the excruciating simplicity of the plotline, by how obvious it was. A single episode of “The Sopranos,” by contrast, might follow five narrative threads, involving a dozen characters who weave in and out of the plot. Modern television also requires the viewer to do a lot of what Johnson calls “filling in,” as in a “Seinfeld” episode that subtly parodies the Kennedy assassination conspiracists, or a typical “Simpsons” episode, which may contain numerous allusions to politics or cinema or pop culture. The extraordinary amount of money now being made in the television aftermarket—DVD sales and syndication—means that the creators of television shows now have an incentive to make programming that can sustain two or three or four viewings.
...It doesn’t seem right, of course, that watching “24” or playing a video game could be as important cognitively as reading a book. Isn’t the extraordinary success of the “Harry Potter” novels better news for the culture than the equivalent success of “Grand Theft Auto III”? Johnson’s response is to imagine what cultural critics might have said had video games been invented hundreds of years ago, and only recently had something called the book been marketed aggressively to children: (Johnson) Reading books chronically understimulates the senses. Unlike the longstanding tradition of gameplaying—which engages the child in a vivid, three-dimensional world filled with moving images and musical sound-scapes, navigated and controlled with complex muscular movements—books are simply a barren string of words on the page. . . .
Books are also tragically isolating. While games have for many years engaged the young in complex social relationships with their peers, building and exploring worlds together, books force the child to sequester him or herself in a quiet space, shut off from interaction with other children. . . .
But perhaps the most dangerous property of these books is the fact that they follow a fixed linear path. You can’t control their narratives in any fashion—you simply sit back and have the story dictated to you. . . . This risks instilling a general passivity in our children, making them feel as though they’re powerless to change their circumstances. Reading is not an active, participatory process; it’s a submissive one.
He’s joking, of course, but only in part. The point is that books and video games represent two very different kinds of learning. When you read a biology textbook, the content of what you read is what matters. Reading is a form of explicit learning. When you play a video game, the value is in how it makes you think. Video games are an example of collateral learning, which is no less important."
Wednesday, May 11, 2005
US math-science education
We often hear about the miserable (or at best mediocre) performance of US students on international tests of science and mathematics. Certainly there is a lot of room for improvement, but it is important to note that differences in average test scores are largely due to America's struggle to deal with a social underclass.
Consider the Trends in International Mathematics and Science Study eighth-grade science test, for instance, and the scores achieved by Colorado, Connecticut, Iowa, Maine, Massachusetts, Minnesota, Montana, Nebraska North Dakota, Oregon, Utah, Vermont, Wisconsin and Wyoming. Had these states -- none of which has a substantial underclass -- been treated as separate nations, each of them would have been outscored only by Singapore. The significant variation in averages by state should be no surprise to anyone who has looked at average SAT scores.
Take a minute to consider this -- eighth graders from Oregon outscored their counterparts in countries like Japan, Korea, Netherlands, Hungary, etc. Who would have believed it?
I doubt that American high school seniors would have performed as well compared to their counterparts, as our high school curricula are particularly lacking in rigorous science and math. Nevertheless, these results show that our K-12 system isn't completely dysfunctional.
Consider the Trends in International Mathematics and Science Study eighth-grade science test, for instance, and the scores achieved by Colorado, Connecticut, Iowa, Maine, Massachusetts, Minnesota, Montana, Nebraska North Dakota, Oregon, Utah, Vermont, Wisconsin and Wyoming. Had these states -- none of which has a substantial underclass -- been treated as separate nations, each of them would have been outscored only by Singapore. The significant variation in averages by state should be no surprise to anyone who has looked at average SAT scores.
Take a minute to consider this -- eighth graders from Oregon outscored their counterparts in countries like Japan, Korea, Netherlands, Hungary, etc. Who would have believed it?
I doubt that American high school seniors would have performed as well compared to their counterparts, as our high school curricula are particularly lacking in rigorous science and math. Nevertheless, these results show that our K-12 system isn't completely dysfunctional.
Sunday, May 08, 2005
FX sterilization costs
The latest Morgan Stanley economic digest has several interesting commentaries.
Andy Xie predicts no near-term yuan revaluation: "China’s ability to sterilize hot money inflow is still plentiful. China’s yield curve is below the US dollar’s yield curve – i.e. sterilization is still profitable. The inflationary pressure is still limited to cost pass-through from higher commodity prices. We forecast a 3.5% inflation rate for 2005. Neither the inflation rate nor the yield curve is a problem in terms of China sticking to the peg."
I've heard the same observation before re: Japan. Higher dollar yields mean that issuing renminbi-denominated bonds to absorb dollars (and reinvesting those dollars in US fixed income securities) is a profitable trade for the central bank. However, this ignores the huge future losses that will be incurred from a devaluation of the dollar (see Economist coverage here, and earlier discussion by Brad Setser here).
Andy Xie predicts no near-term yuan revaluation: "China’s ability to sterilize hot money inflow is still plentiful. China’s yield curve is below the US dollar’s yield curve – i.e. sterilization is still profitable. The inflationary pressure is still limited to cost pass-through from higher commodity prices. We forecast a 3.5% inflation rate for 2005. Neither the inflation rate nor the yield curve is a problem in terms of China sticking to the peg."
I've heard the same observation before re: Japan. Higher dollar yields mean that issuing renminbi-denominated bonds to absorb dollars (and reinvesting those dollars in US fixed income securities) is a profitable trade for the central bank. However, this ignores the huge future losses that will be incurred from a devaluation of the dollar (see Economist coverage here, and earlier discussion by Brad Setser here).
Friday, May 06, 2005
Three books on modern China
Reviewed in the Economist. I like Shenkar's book (I linked earlier to a nice interview with him on Tech Nation), and the one by Ms. DeWoskin looks amusing.
"...Oded Shenkar's succinct and thoughtful book, “The Chinese Century”, argues that the rise of China has more in common with the rise of the United States than with that of the other Asian “tigers”. China's huge domestic market quickly gave it global bargaining power. More important, it opened up early to foreign investment and trade. As a result, says Mr Shenkar, a management professor with a long interest in China, the country is rapidly climbing the technological ladder by learning and stealing from foreigners. And its large, cheap labour force means that, unlike Japan or South Korea, it can retain its cost advantage in manufacturing as it moves up the value curve. China's greater tolerance of entrepreneurship, he argues, means that its impact will ultimately be more far-reaching and sustainable than Japan's.
One can debate the technology point. The fact that China's businesses are at the mercy of government whim and political favour, and private entrepreneurs are starved of capital, has discouraged long-term research and promoted unsustainable price wars as a way of grabbing market share. Nor has China benefited as much as it might have done from foreign “technology transfer”, despite the scant legal protection offered to intellectual property. Still, Mr Shenkar makes some powerful points about China's tradition of innovation (gunpowder, paper), its readiness, unlike Japan's, to open up its educational system, and the extent to which it has benefited, again unlike Japan, or even India, from a large, rich, educated and entrepreneurial diaspora.
...Ms DeWoskin is at her best when recounting the contradictions of modern China. Her friends brim with optimism. They switch jobs, start businesses and crave western goods. Yet they also remain suspicious of western values, socially conservative and jingoistic. In the soap opera, the author plays a ruthless “foreign babe” who steals a nice young Chinese man from his wife. Yet by the end, his traditional family has come to accept her, partly because she genuinely loves him, but mostly because she promises to take him to America with her. Ms DeWoskin's portrait of the complexities of urban China is not uncritical. But her book is written with enormous warmth for its people. And it is all the better for avoiding neat conclusions."
"...Oded Shenkar's succinct and thoughtful book, “The Chinese Century”, argues that the rise of China has more in common with the rise of the United States than with that of the other Asian “tigers”. China's huge domestic market quickly gave it global bargaining power. More important, it opened up early to foreign investment and trade. As a result, says Mr Shenkar, a management professor with a long interest in China, the country is rapidly climbing the technological ladder by learning and stealing from foreigners. And its large, cheap labour force means that, unlike Japan or South Korea, it can retain its cost advantage in manufacturing as it moves up the value curve. China's greater tolerance of entrepreneurship, he argues, means that its impact will ultimately be more far-reaching and sustainable than Japan's.
One can debate the technology point. The fact that China's businesses are at the mercy of government whim and political favour, and private entrepreneurs are starved of capital, has discouraged long-term research and promoted unsustainable price wars as a way of grabbing market share. Nor has China benefited as much as it might have done from foreign “technology transfer”, despite the scant legal protection offered to intellectual property. Still, Mr Shenkar makes some powerful points about China's tradition of innovation (gunpowder, paper), its readiness, unlike Japan's, to open up its educational system, and the extent to which it has benefited, again unlike Japan, or even India, from a large, rich, educated and entrepreneurial diaspora.
...Ms DeWoskin is at her best when recounting the contradictions of modern China. Her friends brim with optimism. They switch jobs, start businesses and crave western goods. Yet they also remain suspicious of western values, socially conservative and jingoistic. In the soap opera, the author plays a ruthless “foreign babe” who steals a nice young Chinese man from his wife. Yet by the end, his traditional family has come to accept her, partly because she genuinely loves him, but mostly because she promises to take him to America with her. Ms DeWoskin's portrait of the complexities of urban China is not uncritical. But her book is written with enormous warmth for its people. And it is all the better for avoiding neat conclusions."
Wednesday, May 04, 2005
More Friedman...
This is from his column of April 29, 2005. He is co-teaching a class with Summers on globalization, which must be quite interesting...
"For the first time in our history, we are going to face competition from low-wage, high-human-capital communities, embedded within India, China and Asia," President Lawrence Summers of Harvard told me. In order to thrive, "it will not be enough for us to just leave no child behind. We also have to make sure that many more young Americans can get as far ahead as their potential will take them. How we meet this challenge is what will define our nation's political economy for the next several decades."
Indeed, we can't rely on importing the talent we need anymore - not in a flat world where people can now innovate without having to emigrate. In Silicon Valley today, "B to B" and "B to C" stand for "back to Bangalore" and "back to China," which is where a lot of our foreign talent is moving.
Meeting this challenge requires a set of big ideas. If you want to grasp some of what is required, check out a smart new book by the strategists John Hagel III and John Seely Brown entitled "The Only Sustainable Edge." They argue that comparative advantage today is moving faster than ever from structural factors, like natural resources, to how quickly a country builds its distinctive talents for innovation and entrepreneurship - the only sustainable edge.
Economics is not like war. It can always be win-win. "But some win more than others," Mr. Hagel said, and today it will be those countries that are best and fastest at building, attracting and holding talent.
There is a real sense of urgency in India and China about "catching up" in talent-building. America, by contrast, has become rather complacent. "People go to Shanghai or Bangalore and they look around and say, 'They're still way behind us,' " Mr. Hagel said. "But it's not just about current capabilities. It's about the relative pace and trajectories of capability-building.
"You have to look at where Shanghai was just three years ago, see where it is today and then extrapolate forward. Compare the pace and trajectory of talent-building within their population and businesses and the pace and trajectory here."
India and China know they can't just depend on low wages, so they are racing us to the top, not the bottom. Producing a comprehensive U.S. response - encompassing immigration, intellectual property law and educational policy - to focus on developing our talent in a flat world is a big idea worthy of a presidency. But it would also require Mr. Bush to do something he has never done: ask Americans to do something hard.
"For the first time in our history, we are going to face competition from low-wage, high-human-capital communities, embedded within India, China and Asia," President Lawrence Summers of Harvard told me. In order to thrive, "it will not be enough for us to just leave no child behind. We also have to make sure that many more young Americans can get as far ahead as their potential will take them. How we meet this challenge is what will define our nation's political economy for the next several decades."
Indeed, we can't rely on importing the talent we need anymore - not in a flat world where people can now innovate without having to emigrate. In Silicon Valley today, "B to B" and "B to C" stand for "back to Bangalore" and "back to China," which is where a lot of our foreign talent is moving.
Meeting this challenge requires a set of big ideas. If you want to grasp some of what is required, check out a smart new book by the strategists John Hagel III and John Seely Brown entitled "The Only Sustainable Edge." They argue that comparative advantage today is moving faster than ever from structural factors, like natural resources, to how quickly a country builds its distinctive talents for innovation and entrepreneurship - the only sustainable edge.
Economics is not like war. It can always be win-win. "But some win more than others," Mr. Hagel said, and today it will be those countries that are best and fastest at building, attracting and holding talent.
There is a real sense of urgency in India and China about "catching up" in talent-building. America, by contrast, has become rather complacent. "People go to Shanghai or Bangalore and they look around and say, 'They're still way behind us,' " Mr. Hagel said. "But it's not just about current capabilities. It's about the relative pace and trajectories of capability-building.
"You have to look at where Shanghai was just three years ago, see where it is today and then extrapolate forward. Compare the pace and trajectory of talent-building within their population and businesses and the pace and trajectory here."
India and China know they can't just depend on low wages, so they are racing us to the top, not the bottom. Producing a comprehensive U.S. response - encompassing immigration, intellectual property law and educational policy - to focus on developing our talent in a flat world is a big idea worthy of a presidency. But it would also require Mr. Bush to do something he has never done: ask Americans to do something hard.
Sunday, May 01, 2005
Robert Wilson quote
In 1969, when Wilson was in the hot seat testifying before the Congressional Joint Committee on Atomic Energy, Sen. John Pastore demanded to know how a multimillion-dollar particle accelerator improved the security of the country. Wilson said the experimental physics machine had "nothing at all" to do with security, and the senator persisted.
"It has only to do," Wilson told the lawmakers, "with the respect with which we regard one another, the dignity of men, our love of culture. It has to do with: Are we good painters, good sculptors, great poets? I mean all the things we really venerate in our country and are patriotic about. It has nothing to do directly with defending our country except to make it worth defending."
"It has only to do," Wilson told the lawmakers, "with the respect with which we regard one another, the dignity of men, our love of culture. It has to do with: Are we good painters, good sculptors, great poets? I mean all the things we really venerate in our country and are patriotic about. It has nothing to do directly with defending our country except to make it worth defending."
Primer movie
I finally got to see the indie film Primer, written and directed by Shane Carruth, a former math major who worked in software development before getting into independent film. The movie is about a couple of engineers working on a tech startup who accidentally build a time machine. The plot is quite complex, with characters on intersecting temporal loops interfering in the lives of their past selves. The viewer is forced to reconstruct the plot from fragmentary information. While some find the film baffling, others have become obsessed with unraveling the plot and analyzing its self-consistency (see discussion on the Primer website, linked to above). Here is A.O. Scott's NYTimes review of the movie.
The director's commentary on the DVD is fascinating. Carruth gives very detailed information about how he managed to shoot the film on a $7K budget. Writing the script took a year, and editing two years, (both in Carruth's spare time, on his home computer) although the shooting itself was done in 5 weeks. Personally, I like the look of the film very much - it was shot on 16mm and then digitized for editing. Carruth comes across as a somewhat geeky but tremendously effective and determined guy. I can't wait to see his next film.
I am often struck by the similarities between indie film and doing a startup. Both require years of dedication and teamwork in the face of risk and skepticism.
The director's commentary on the DVD is fascinating. Carruth gives very detailed information about how he managed to shoot the film on a $7K budget. Writing the script took a year, and editing two years, (both in Carruth's spare time, on his home computer) although the shooting itself was done in 5 weeks. Personally, I like the look of the film very much - it was shot on 16mm and then digitized for editing. Carruth comes across as a somewhat geeky but tremendously effective and determined guy. I can't wait to see his next film.
I am often struck by the similarities between indie film and doing a startup. Both require years of dedication and teamwork in the face of risk and skepticism.
Saturday, April 30, 2005
Temporary yuan float
This is a weird story - the value of the yuan was allowed to float up slightly from 8.276 to 8.270 to the dollar for 20 minutes on Friday. The Times article suggest it may have been due to human error, but other sources report that the unpegging was deliberate.
NYT: Traders used to seeing a flat line on their screens day after day for the value of the yuan were especially transfixed by the brief surge because it came the same day that a state-run newspaper, The China Securities Journal, ran an article on its front page that seemed to depart from previous government statements ruling out any shift in currency policy soon.
The article asserted that China's financial system and currency regime were finally ready for the yuan to rise, provided that the rise was only a few percentage points.
The People's Bank of China, the central bank, issued a public denial by midafternoon that it had received any formal instructions from the country's political authorities to push the yuan to a new level. But the brief movement of the yuan prompted some economists to say that China may have been testing its ability to manage a small fluctuation in the value of its currency, as a possible preparation for managing an eventual change in the yuan's value.
From a comment on this housing bubble blog: "BTW, I just read a news from China saying China's central bank is going to unpeg Chinese yuan for a few hours before most Chinese start taking the week-long May 1 holidays in China. Apr 30 is like the Friday after Thanksgiving in China that most traders and brokers are on vacation, so volume is usually very light and the best time to test the market."
NYT: Traders used to seeing a flat line on their screens day after day for the value of the yuan were especially transfixed by the brief surge because it came the same day that a state-run newspaper, The China Securities Journal, ran an article on its front page that seemed to depart from previous government statements ruling out any shift in currency policy soon.
The article asserted that China's financial system and currency regime were finally ready for the yuan to rise, provided that the rise was only a few percentage points.
The People's Bank of China, the central bank, issued a public denial by midafternoon that it had received any formal instructions from the country's political authorities to push the yuan to a new level. But the brief movement of the yuan prompted some economists to say that China may have been testing its ability to manage a small fluctuation in the value of its currency, as a possible preparation for managing an eventual change in the yuan's value.
From a comment on this housing bubble blog: "BTW, I just read a news from China saying China's central bank is going to unpeg Chinese yuan for a few hours before most Chinese start taking the week-long May 1 holidays in China. Apr 30 is like the Friday after Thanksgiving in China that most traders and brokers are on vacation, so volume is usually very light and the best time to test the market."
Wednesday, April 27, 2005
PIMCO on Bretton Woods II
The "Bretton Woods II" currency arrangement, under which China, Japan and other nations are fixing their currencies at undervalued levels relative to the dollar by funding the U.S. current account deficit, will be a key topic at PIMCO's upcoming 2005 Secular Forum.
Commentary by PIMCO MD Chris Dialynas: It is interesting because the presumption that we have a semi-fixed exchange rate system is a farce because the greater the imbalance, the greater the inclination to speculate against the debtor country in favor of the large creditor countries. This suggests that there will be a lot of speculation in Chinese assets, including property, for purposes of not only the productivity of the asset or property, but to capitalize on the revaluation of the currency as well. That means this presumed stable exchange rate regime has engendered a much riskier financial environment because as the trade imbalances grow and grow, then the risk associated with speculation against the debtor country currency becomes lower and lower.
The recycling of money is in essence providing externalities in the form of a higher U.S. dollar than should otherwise be the case, lower U.S. interest rates than would otherwise be the case, much tighter credit spreads because foreign investors are such huge buyers of U.S. corporate bonds, and lower mortgage rates because they are also investing in U.S. mortgage-backed securities. And they obviously own a lot of Treasury and agency securities. So the U.S. has much lower interest rates generally. This process has led to artificially low interest rates, low inflation rates, and an overvalued currency, and it probably manifests itself in the domestic economy in much higher housing prices, so perhaps a housing bubble as well.
The system that is advertised as Bretton Woods II, a semi-fixed exchange rate stable system, by virtue of the system itself, creates greater imbalances and a much more speculative environment. That takes us to the commodity complex. The natural equilibrating mechanism for trade balance is exchange rate adjustment and under BWI, the transfer of gold from one country to another settled trade imbalances. Gold was the stable value global asset.
If you think the dollar is at some point vulnerable to a decline in purchasing power then you obviously want to purchase hard assets now because those hard assets will retain their value in global terms if they are globally traded assets like gold, diamonds, or oil, among many other commodities. This is particularly true if the yield on dollar denominated bonds is very low.
But just as importantly, if you think that this imbalance leads to the potential for more military action, then there would be a natural tendency, it would seem to me, for leaders of foreign countries to begin stockpiling assets that they might deem valuable in time of war. Just as the U.S., during an election year, refused to open the strategic oil reserve, then you would think there would be copycat countries that, if they had not already, would establish strategic oil reserves and fill them. In that event, you get precautionary demand for oil so that the oil comes out of the ground and goes right back in to the ground. The demand for oil looks very high and prices go up based upon not only commercial demand, but also actual precautionary demand and the speculative demand derived from this BWII system.
The BWII system results in speculation and instability. Importantly, the growth rates of "emerging" economies, like China, are quite high in a BWII system as are the infrastructure requirements. The transformation of growth to newly industrialized areas results in additional demand for commodities that are inputs to the infrastructure development, resulting in a structural demand for particular commodities.
Commentary by PIMCO MD Chris Dialynas: It is interesting because the presumption that we have a semi-fixed exchange rate system is a farce because the greater the imbalance, the greater the inclination to speculate against the debtor country in favor of the large creditor countries. This suggests that there will be a lot of speculation in Chinese assets, including property, for purposes of not only the productivity of the asset or property, but to capitalize on the revaluation of the currency as well. That means this presumed stable exchange rate regime has engendered a much riskier financial environment because as the trade imbalances grow and grow, then the risk associated with speculation against the debtor country currency becomes lower and lower.
The recycling of money is in essence providing externalities in the form of a higher U.S. dollar than should otherwise be the case, lower U.S. interest rates than would otherwise be the case, much tighter credit spreads because foreign investors are such huge buyers of U.S. corporate bonds, and lower mortgage rates because they are also investing in U.S. mortgage-backed securities. And they obviously own a lot of Treasury and agency securities. So the U.S. has much lower interest rates generally. This process has led to artificially low interest rates, low inflation rates, and an overvalued currency, and it probably manifests itself in the domestic economy in much higher housing prices, so perhaps a housing bubble as well.
The system that is advertised as Bretton Woods II, a semi-fixed exchange rate stable system, by virtue of the system itself, creates greater imbalances and a much more speculative environment. That takes us to the commodity complex. The natural equilibrating mechanism for trade balance is exchange rate adjustment and under BWI, the transfer of gold from one country to another settled trade imbalances. Gold was the stable value global asset.
If you think the dollar is at some point vulnerable to a decline in purchasing power then you obviously want to purchase hard assets now because those hard assets will retain their value in global terms if they are globally traded assets like gold, diamonds, or oil, among many other commodities. This is particularly true if the yield on dollar denominated bonds is very low.
But just as importantly, if you think that this imbalance leads to the potential for more military action, then there would be a natural tendency, it would seem to me, for leaders of foreign countries to begin stockpiling assets that they might deem valuable in time of war. Just as the U.S., during an election year, refused to open the strategic oil reserve, then you would think there would be copycat countries that, if they had not already, would establish strategic oil reserves and fill them. In that event, you get precautionary demand for oil so that the oil comes out of the ground and goes right back in to the ground. The demand for oil looks very high and prices go up based upon not only commercial demand, but also actual precautionary demand and the speculative demand derived from this BWII system.
The BWII system results in speculation and instability. Importantly, the growth rates of "emerging" economies, like China, are quite high in a BWII system as are the infrastructure requirements. The transformation of growth to newly industrialized areas results in additional demand for commodities that are inputs to the infrastructure development, resulting in a structural demand for particular commodities.
Pension funds make FX bets
It seems pretty clear to me that in the medium term the dollar will likely decline against a trade-weighted basket of currencies. But, I'm not sure it's a good idea to gamble pension money using FX derivatives. Our current low-return environment is great for hedge funds and advisors - big pools of money are forced to take risk in search of return, and need help doing it.
WSJ: Pension funds traditionally have kept the bulk of their money in U.S. stocks and bonds, where they are among the markets' biggest investors. Only in recent years have they begun to invest abroad. But with bond yields low and stocks volatile, an increasing number of pension funds are turning to the currency market in hopes of boosting their funds' returns.
This interest in currency trades reflects how an aging population and ballooning health-care costs are putting pressure on pension-fund managers to find more creative ways to increase returns. The difficult environment also is compelling many large investors to consider private equity, hedge funds, real estate and other areas they once would have dismissed as inappropriate.
Consultants such as Russell Investment Group, a Tacoma, Wash., firm with $133 billion in assets under management world-wide, are among those urging on the pension funds, saying a currency program offers several unique advantages and should be part of the typical investment portfolio. Since currency wagers are made with derivatives -- financial contracts whose value is based on the performance of an underlying asset -- funds don't need to raise large amounts of money. Currency movements also have low correlations with other markets, helping to reduce a portfolio's overall risk.
...
"Getting a meeting with pension funds in the past was very hard when clients were getting 20% returns from stocks," says Arun Muralidhar, a managing director at FX Concepts, a New York money-management firm with about $12 billion in assets. Now, he says, the firm is in talks with about a half-dozen pension funds that are preparing to hire a currency manager.
Foreign exchange is the world's deepest and largest financial market with a daily trading volume of $1.9 trillion. But paradoxically, it can also be one of the least efficient. That is because as many as three-quarters of the participants aren't dedicated to getting the best possible price, according to Deutsche Bank. These include exporters and importers, foreign stock managers, central banks, even tourists changing money.
International fund managers, for instance, weigh a company's share price, future earnings prospects, and broader economic considerations when determining the optimal time to buy a particular stock. Normally, they are less likely to hurry up or postpone a stock purchase based on how a currency is trading. That creates an inefficiency in the foreign-exchange markets that currency managers can exploit, says Robert Stewart, a portfolio manager for the J.P. Morgan Fleming currency-management group.
The California Public Employees' Retirement System, known as Calpers, is among the pension funds already active in the currency market. Earlier this month, the largest public pension fund in the U.S. received permission from its board to increase the size and aggressiveness of its currency bets. "We are looking into that possibility," says Eric Busay, a fund manager at Calpers.
WSJ: Pension funds traditionally have kept the bulk of their money in U.S. stocks and bonds, where they are among the markets' biggest investors. Only in recent years have they begun to invest abroad. But with bond yields low and stocks volatile, an increasing number of pension funds are turning to the currency market in hopes of boosting their funds' returns.
This interest in currency trades reflects how an aging population and ballooning health-care costs are putting pressure on pension-fund managers to find more creative ways to increase returns. The difficult environment also is compelling many large investors to consider private equity, hedge funds, real estate and other areas they once would have dismissed as inappropriate.
Consultants such as Russell Investment Group, a Tacoma, Wash., firm with $133 billion in assets under management world-wide, are among those urging on the pension funds, saying a currency program offers several unique advantages and should be part of the typical investment portfolio. Since currency wagers are made with derivatives -- financial contracts whose value is based on the performance of an underlying asset -- funds don't need to raise large amounts of money. Currency movements also have low correlations with other markets, helping to reduce a portfolio's overall risk.
...
"Getting a meeting with pension funds in the past was very hard when clients were getting 20% returns from stocks," says Arun Muralidhar, a managing director at FX Concepts, a New York money-management firm with about $12 billion in assets. Now, he says, the firm is in talks with about a half-dozen pension funds that are preparing to hire a currency manager.
Foreign exchange is the world's deepest and largest financial market with a daily trading volume of $1.9 trillion. But paradoxically, it can also be one of the least efficient. That is because as many as three-quarters of the participants aren't dedicated to getting the best possible price, according to Deutsche Bank. These include exporters and importers, foreign stock managers, central banks, even tourists changing money.
International fund managers, for instance, weigh a company's share price, future earnings prospects, and broader economic considerations when determining the optimal time to buy a particular stock. Normally, they are less likely to hurry up or postpone a stock purchase based on how a currency is trading. That creates an inefficiency in the foreign-exchange markets that currency managers can exploit, says Robert Stewart, a portfolio manager for the J.P. Morgan Fleming currency-management group.
The California Public Employees' Retirement System, known as Calpers, is among the pension funds already active in the currency market. Earlier this month, the largest public pension fund in the U.S. received permission from its board to increase the size and aggressiveness of its currency bets. "We are looking into that possibility," says Eric Busay, a fund manager at Calpers.
Sunday, April 24, 2005
Asian cellphone mania
Advertising via mobile (WSJ): Cellphones now are defining a generation of Asians. There's nothing geeky about calling a South Korean a "technosexual," explains Jaehang Park, a strategy executive for Korean ad agency Cheil Communications Inc. "Devices like cellphones define how trend-setting you are," he says. One-quarter of all South Koreans maintain "cyworlds," photo Web logs that can be updated using a cameraphone.
Experimenting in Asia, U.S. companies have already learned that cellphones offer access to consumers' deepest desires and concerns. In Japan, Procter & Gamble Co.'s Whisper brand of feminine-hygiene products has signed up 80,000 women to receive messages about their "happy cycle." A February message: "Your skin gets even more sensitive and dry, especially during this period. ... Try not to use new skin-care products."
Anti-Japan protests organized via text msg and email (NYT): "Chain letter" e-mail and text messages urged people to boycott Japanese products or sign online petitions opposing Japanese ascension to the United Nations Security Council. Information about protests, including marching routes, was posted online or forwarded by e-mail. Banned video footage of protest violence in Shanghai could be downloaded off the Internet.
"Text messages, instant messaging and Internet bulletin boards have been the main channels for discussing this issue," said Fang Xingdong, chairman of blogchina.com, a Web site for China's growing community of bloggers. "Ten years ago, this would have been unthinkable."
In Shanghai, the local police even sent out a mass text message to cellphone users the day before that city's raucous protest. "We ask people to express your patriotic passion through the right channel, following the laws and maintaining order," the message said. Some marchers saw the message as a signal to proceed, while others took it as a warning.
Experimenting in Asia, U.S. companies have already learned that cellphones offer access to consumers' deepest desires and concerns. In Japan, Procter & Gamble Co.'s Whisper brand of feminine-hygiene products has signed up 80,000 women to receive messages about their "happy cycle." A February message: "Your skin gets even more sensitive and dry, especially during this period. ... Try not to use new skin-care products."
Anti-Japan protests organized via text msg and email (NYT): "Chain letter" e-mail and text messages urged people to boycott Japanese products or sign online petitions opposing Japanese ascension to the United Nations Security Council. Information about protests, including marching routes, was posted online or forwarded by e-mail. Banned video footage of protest violence in Shanghai could be downloaded off the Internet.
"Text messages, instant messaging and Internet bulletin boards have been the main channels for discussing this issue," said Fang Xingdong, chairman of blogchina.com, a Web site for China's growing community of bloggers. "Ten years ago, this would have been unthinkable."
In Shanghai, the local police even sent out a mass text message to cellphone users the day before that city's raucous protest. "We ask people to express your patriotic passion through the right channel, following the laws and maintaining order," the message said. Some marchers saw the message as a signal to proceed, while others took it as a warning.
Saturday, April 23, 2005
Roubini parses Greenspan remarks
Nouriel Roubini's latest post dissects Greenspan's statement to the Senate Budget Committee. On the renminbi, Greenspan notes the negative effects of the peg on China's economy - mentioning sterilization costs and resource allocation distortion - and predicts a revaluation "sooner rather than later." He also distances himself from testimony in 2001 which seemed to support the Bush tax cuts. He now says (as Paul O'Neil claimed in his book) the cuts should have had built-in triggers, limiting them if large deficits resulted.
Sen. Paul S. Sarbanes (D-Md.) said he believed it was "fair to consider how your message would be taken" and that lawmakers saw Greenspan's 2001 remarks as "providing a green light" for tax cuts, which were enacted without triggers.
"I plead guilty to that," Greenspan said. "If indeed that is the way it was interpreted, I missed it. In other words, I did not intend it that way."
..."The federal budget deficit is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years," Greenspan said in his prepared testimony yesterday.
Sen. Paul S. Sarbanes (D-Md.) said he believed it was "fair to consider how your message would be taken" and that lawmakers saw Greenspan's 2001 remarks as "providing a green light" for tax cuts, which were enacted without triggers.
"I plead guilty to that," Greenspan said. "If indeed that is the way it was interpreted, I missed it. In other words, I did not intend it that way."
..."The federal budget deficit is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years," Greenspan said in his prepared testimony yesterday.
Credit boom ending?
Barron's: SPEAKING OF PICTURES that aren't very pretty, as we just were, take a gander at the two charts that adorn these scribblings. They're both lifted from Stephanie Pomboy's latest MacroMavens commentary and, frankly, they're more than a little ominous. For what they show is how dependent this quixotic economic recovery has been on IOUs.
The remorseless decline in wages as a percentage of personal income has reached an historic low of 62% (the chart to your left). Meanwhile, consumer spending as a percentage of wages continues to spiral upward (the chart to your right). In the past three years, Stephanie reckons, shop-happy consumers, cheerfully determined to live beyond their means, leaned a lot more heavily on borrowings ($675 billion of non-mortgage debt) than paychecks ($530 billion) to cover the $1.3 trillion increase in their spending.
Great while it lasts, but even the best of sprees -- and it hurts to be the bearer of sad news -- can't go on forever. And this one looks like its time is almost up. Higher interest rates, obscene gasoline prices and the rising cost of just about everything are starting to sap consumers' confidence, to say nothing of their capacity to consume. Retail sales this month, Stephanie takes somber note, have been the weakest since the last recession.
Over on the other side of the fence that separates presumed investment sophisticates from us poor civilians, risk-consciousness is suddenly the in thing. The spread in yields between junk and Treasury paper -- a handy gauge of how venturesome or apprehensive the folks who speculate in bonds are -- has begun to widen, and the flow of corporate bond issues is contracting sharply. Which Stephanie proclaims as clear proof of the dearth of liquidity in the corporate bond market.
Making things infinitely more disturbing is that the companies in the crosshairs, as she puts it, are the very creators of credit -- the likes of GM, Ford, Fannie Mae -- along with the facilitators (nice euphemism, Steph) of credit -- AIG, Ambac, MBIA, to name only a few.
That the demon debt is finally exacting its due from consumer and corporate borrower leads her to the melancholy but unsurprising conclusion that "the great credit boom is now drawing to a close." And here we were so hoping Mr. Greenspan could take his leave smiling.
The remorseless decline in wages as a percentage of personal income has reached an historic low of 62% (the chart to your left). Meanwhile, consumer spending as a percentage of wages continues to spiral upward (the chart to your right). In the past three years, Stephanie reckons, shop-happy consumers, cheerfully determined to live beyond their means, leaned a lot more heavily on borrowings ($675 billion of non-mortgage debt) than paychecks ($530 billion) to cover the $1.3 trillion increase in their spending.
Great while it lasts, but even the best of sprees -- and it hurts to be the bearer of sad news -- can't go on forever. And this one looks like its time is almost up. Higher interest rates, obscene gasoline prices and the rising cost of just about everything are starting to sap consumers' confidence, to say nothing of their capacity to consume. Retail sales this month, Stephanie takes somber note, have been the weakest since the last recession.
Over on the other side of the fence that separates presumed investment sophisticates from us poor civilians, risk-consciousness is suddenly the in thing. The spread in yields between junk and Treasury paper -- a handy gauge of how venturesome or apprehensive the folks who speculate in bonds are -- has begun to widen, and the flow of corporate bond issues is contracting sharply. Which Stephanie proclaims as clear proof of the dearth of liquidity in the corporate bond market.
Making things infinitely more disturbing is that the companies in the crosshairs, as she puts it, are the very creators of credit -- the likes of GM, Ford, Fannie Mae -- along with the facilitators (nice euphemism, Steph) of credit -- AIG, Ambac, MBIA, to name only a few.
That the demon debt is finally exacting its due from consumer and corporate borrower leads her to the melancholy but unsurprising conclusion that "the great credit boom is now drawing to a close." And here we were so hoping Mr. Greenspan could take his leave smiling.
Friday, April 22, 2005
Rent-buy arbitrage
The analysis below of bay area rent-buy arbitrage is taken from Bay Area Housing Crash, where you can find much more information on the housing bubble. The author claims that recent reported sales price numbers are inflated and that prices have already started to decline in certain bay area markets.
"There are great tax advantages to owning." FALSE.
It is now much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house. This is true even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost $600,000. Assume 6% interest ($3000 per month), $2000 closing costs, and a buyer loses $770 more per month buying than renting. Renting is a loss of course, but buying is a bigger loss.
Renting: Monthly Rent: $1,800.00
Buying:
Property Tax: $400.00 ($625 per month at 1.25% before deduction, $400 lost after deduction)
Interest: $1,920.00 ($3000 per month at 6% before deduction, $1920 lost after deduction)
Other Costs: $250.00 (insurance, maintenance, etc)
Total: $2,570.00
Buyers still have to come up with the principal payment as well, just to watch it wiped out as the value of their house declines.
Remember that buyers don't deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them.
Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
Under current conditions, a renter would be able to live in a house for 30 years, then buy that house outright with the saved principle payments, and have an extra $277,200 of savings on top of that: ($770 x 12 x 30). The renter comes out way ahead of the owner, and this doesn't even count the huge losses the owner will suffer as housing falls year after year for the next decade or more, just as in Japan.
Another way to look at it is that except for the rich, everyone either rents a house or rents money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. Owners with a mortgage seem to be renting their house from the bank, but there's an important difference. The bank takes no risk, the same as real renters take no risk. It's the owners who bear all the risk of falling house prices, and all the costs of repairs.
"There are great tax advantages to owning." FALSE.
It is now much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house. This is true even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost $600,000. Assume 6% interest ($3000 per month), $2000 closing costs, and a buyer loses $770 more per month buying than renting. Renting is a loss of course, but buying is a bigger loss.
Renting: Monthly Rent: $1,800.00
Buying:
Property Tax: $400.00 ($625 per month at 1.25% before deduction, $400 lost after deduction)
Interest: $1,920.00 ($3000 per month at 6% before deduction, $1920 lost after deduction)
Other Costs: $250.00 (insurance, maintenance, etc)
Total: $2,570.00
Buyers still have to come up with the principal payment as well, just to watch it wiped out as the value of their house declines.
Remember that buyers don't deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them.
Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
Under current conditions, a renter would be able to live in a house for 30 years, then buy that house outright with the saved principle payments, and have an extra $277,200 of savings on top of that: ($770 x 12 x 30). The renter comes out way ahead of the owner, and this doesn't even count the huge losses the owner will suffer as housing falls year after year for the next decade or more, just as in Japan.
Another way to look at it is that except for the rich, everyone either rents a house or rents money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. Owners with a mortgage seem to be renting their house from the bank, but there's an important difference. The bank takes no risk, the same as real renters take no risk. It's the owners who bear all the risk of falling house prices, and all the costs of repairs.
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