Thursday, 22 July 2010

F, F, F-itty F

After 6 days I am at sickness symmetry, which is to say that I now feel the same level of shite as I did 6 days ago. Which is a world and a half better than I felt Sunday through Tuesday, when I wanted to shoot myself in the head. When you have to steel yourself and hold on tight to a door frame just to do something as mundane as swallowing, you know life is just a big plate of birthday cake. Of course in the grand scheme of things, a few days on the bench with a very temporary malady is a walk in the park. But has that ever stopped me from bitching before? I thought not.

The bigger issue of course is that I don't want to still feel like toasted ass at Lost River. I'm taking off work tomorrow to go out there and everything, making a big deal out of it. Got to get better about taking vacations anyway. Haven't taken multiple days off since fall of '08. That's freaking sad. But in any case, I haven't got the kind of margin where I can afford to be less than prime at a race like Lost River. Less than prime means I will get to the finish less than on time.

The back of my mind is a crowded place right now. I'm co-founding a startup venture, which should be a great thing on a lot of fronts. It's probably net neutral in that it's a lot of fun to work on and it's really interesting to me, but it does take a lot of time. My real job project is at a crawl right now (external factors is all I can say - I was fully prepared to have this open at Memorial Day, if you can believe that), so there's some extra time to put into the other thing.

A few years ago, I was super apocalyptic on the housing market and believed that the equities markets were wildly overvalued. Both of these beliefs wound up having a great deal of validity. They were founded on super simple principles - the housing issue on the fact that though our household income is not inconsequential, we were totally - TOTALLY - priced out of any housing we found attractive. But, you could sign up for as big a loan as you could imagine. Not hard to figure out that the market was being driven up by funny money, and funny money eventually proves finite. As it did. Many studies have shown that when things are paid for with non-cash alternatives (debit cards, credit cards, loans, EZ-passes, etc), that prices immediately rise relatively unencumbered. When money turns from cash into an abstract concept, it gets easier to think irrationally about it and not pay attention to it.

The equities markets were super obviously in a speculative mode. The underlying fundamentals were obviously not enough of an engine to drive the share price gains. Money was just needed a place to go to get returns, and so it went blindly into the equities market. Money coming in and not coming out makes prices rise, until eventually the emperor is shown to be naked as a jaybird, and the market goes down by 50% or so. I believe we're seeing another round of that right now, a bubble which keeps trying to inflate but can't quite do it. Remember - the miracle of compound interest isn't so miraculous when your annual gains are 2%. No one wants to wait 35 years to double their money, and no one can retire when it takes 35 years to double your money (or at least not many people). I still believe that we are going to see a pretty massive bear market, and that there will be widespread deflation. And that, my friends, is mayhem.

The biggest underlying thing I see, and this is truly the monster in the closet, is the fundamental end of consumer capitalism. In the grand scheme, I'm still taking lots of notes for my book on the subject, so there are a lot of gaps in my thinking. But the long and the short of it is that our economy is totally driven by consumer spending. Some consumer spending is absolutely necessary - you have to buy food, clothing and shelter, you have to heat your homes, etc. But our corporate culture and entire means of production has been endlessly driven towards lowering costs and increasing prices. Margins must always improve. Growth equals survival. Eventually, lower costs means less gainful employment for workers. Workers are consumers. Consumers have shown that they will consume above their ability to afford said consumption (it has been well proven that access to easy credit creates consumer confidence and satisfaction at the same rate as wage increases, which is psychotic when you think about it), but eventually the music stops on that. The credit cards get maxed. Your monthly payments exceed your income. Whoops. Well, my postulate is that we're about there. No workers equals no consumers. Anyone who hear the phrase "jobless recovery" and wasn't immediately smacked in the face by what an obvious oxymoron this is, well, you'll need to pay more attention.

The thing I can't quite get is how is this going to change things? Are we all going to go into some "back to nature" deal and be anti-consumerist hippies? To some degree, I think we are. You see seeds of this sprouting up all over the place. But I don't think there's any magic wand that's going to wave in this new utopian era. I think it's going to take horrible pains and huge disruption along the way. The shorthand way I've described it when I've discussed it so far is that I think it's the western equivalent of the collapse of the Soviet-style planned economy. For a number of reasons, I don't think it will be quite THAT bad, but I think it will be horrible. The scarier part is that the average person living under a Soviet system wound up with a better standard of living when the transformation ran its course. I think that the average western person will see a pretty serious decline in standard of living. Assuming of course that our metrics for measuring standard of living are/were valid, and they continue to be used. A new set of yardsticks may be on the way. It's free to live a longer and healthier life, for example. But the Escalade that was previously a measure of a high standard of living is to some degree antithetical to that.

All right, enough. If I throw up on you at Lost River, I apologize in advance. As Gus knows, I'm probably not contagious.


Jim said...

>>>When you have to steel yourself and hold on tight to a door frame just to do something as mundane as swallowing, you know life is just a big plate of birthday cake.

That's why most people spit instead. Or so I hear.

>>>I'm still taking lots of notes for my book on the subject, so there are a lot of gaps in my thinking. But the long and the short of it is that our economy is totally driven by consumer spending.

Man. Why do you guys who become converts to Hayekianism take so long to drink all the Kool Aid? Guzzle it man! No sips! You are sooooo close to becoming an Austrian...

Though it might turn you into the reincarnation of Ludwig von Mises, you might want to think about the role of government subsidies (and winner/loser picking) in creating consumer demand behaviors, with subsidized cheap mortgages, homebuyer tax credits, etc.; or permitting tax writeoffs on insanely risky investments. It seems the public responds to changes both in monetary, and fiscal policy... While government subsidies encourage growth on the one hand, the easy money boom (encouraged by "free money" stemming from government monetary policy) sows the seeds of its own destruction. That's why some of us Hayekians are against most behavior-changing government intervention in the markets -- because it warps the mechanisms that allow the market and the players in it to naturally adjust to changing circumstances, resulting in delirious bubbles that pop with a huge bang.

>>>how is this going to change things?

It is changing things already. A lot of us are focused on paying off debt; among those who are solvent, the savings rate has been climbing over the last 18 months or so. Ever heard of this little country called "Japan", and this long lost decade called "the 90's"? The uncertain regulatory picture has businesses sitting on a ton of liquidity because they are afraid of getting invested and extended, and then the market gets radically changed by govt intervention... so business has changed at least in the short term, not for the better if you're looking for work.

The effort to cushion the public from the consequences of their own actions ultimately creates a bigger bubble that, when it becomes unsustainable, pops more loudly. It'll be interesting to see what comes of the housing double dip that is occurring now that (the market-warping) $8k homebuyer credit has ceased.

Chuck Wagon said...

Couldn't spit either. That was worse.

The government has definitely bastardized people's thinking and actions, that's for sure. Hillary had some wondrous populist sound bites during the '08 campaign, which when you contrast them with what Lloyd Bentsen was saying, make it really easy to see why we get the government we deserve. Honesty and reason get booed off the stage.

Term limits would go a hell of a long way.

But it's not just Uncle Sam. I would say that quarterly reporting by public firms has as much to do with who we've become as anything else. As has advertising. Certainly media has made life on the farm completely 100% absolutely intolerable for every Paris Hilton wannabe that ever was. The UAW really thought that people with high school diplomas and 25 years in should retire with pretty much full pay and benefits in thanks for stamping out sheet metal 8 hours a day (with guaranteed overtime scheduled well in advance) for a few decades.

You know I'm the first to raise his hand when the "does government bastardize how people act" question gets raised, but this "American Dream" that's owned our minds for so long has many, many components. I mean, I read "The Lexus and The Olive Tree" and literally wanted to punch Tom Freeman in the face. He thinks there's a blossoming bed of roses for every person who'll just get off his ass and get "retrained" whenever his current job gets offshored. Maybe I should introduce him to the conga line of Bar-members who've applied for jobs as legal assistants at my wife's firm? I mean, really, you know better than most that there's nothing higher on the food chain than an ATTORNEY. What can they "retrain" themselves for?

It's a tapestry of fucked-up-ed-ness, with many many different weavers.

And yeah, not much good news coming from the housing sector now that our friend the "shouldn't have that big of an effect, really" tax credit is bye bye.

Batten down.

Calvini said...

Funny how the rational investor, which is at the center of Hayek's philosophy, remains intact, even as events continue to cast doubt on the idea.

And I'm not just talking about the market failures we've witnessed.

Computers now dominate trading; most of their trades are short term, as in owning a company for a fraction of a second. Tell me how that adds value to the economy please.

Milton Friedman described the government as the umpire of the economy, enforcing the rules that make the game work. Government needs to step up and not merely slap blatantly illegal practices with token fines (see Goldman). It needs to change the rules of the game, and to enforce them.

I like your point about consumption, Dave. Consumption is merely extremely short-term investment that yields nothing in terms of production--I can't think of a better description of trades today. Extremely short term, without dividend.

Hayek didn't get the short-term / long-term thing, and many investors don't either. That's why Keynes' quip ("in the long run, we're all dead") rings true. Short term effects--sticky prices, sticky wages, irrational exhuberance--can influence the long term. If, for example, a majority of investors imitate other investors, you've got a problem (a housing bubble, for example).

Subsidies create a lot of problems, sure, but don't blame the downfall of the housing mortgage system on subsidies. People were irrational. Lenders were irrational. Banks were irrational. Investers were irrational. Accept it. Be humbled by it.

TerribleTerry said...

Love the post. 2 things. You said...."you have to heat your homes" No- you have to heat rooms. It's crazy that americans have central heat and air (heating 4000sq ft of space so that the 240 I occcupy are comfortable).

Read this blog (ignore the Druid parts)

I went back and started reading from the beginning 2006 and have made it to about may of this year.