from the hip

Something is seriously wrong in a country when a vast majority of its population say that the country is headed in the wrong direction:

81% in Poll Say Nation Is Headed on the Wrong Track

Americans are more dissatisfied with the country’s direction than at any time since the New York Times/CBS News poll began asking about the subject in the early 1990s, according to the latest poll.

In the poll, 81 percent of respondents said they believed “things have pretty seriously gotten off on the wrong track,” up from 69 percent a year ago and 35 percent in early 2002.

This poll was reported by the New York Times. These are numbers, frankly, that would not have surprised me if they had been from a poll conducted in the Soviet Union before glasnost and democratization. But numbers like this, in a democracy, is astonishing, to say the least!

A majority of nearly every demographic and political group — Democrats and Republicans, men and women, residents of cities and rural areas, college graduates and those who finished only high school — say the United States is headed in the wrong direction. Seventy-eight percent of respondents said the country was worse off than five years ago; just 4 percent said it was better off.

There is still considerable uncertainty concerning the results from the election in Zimbabwe. To my knowledge, official resultats have still not been released.

However, the Danish newspaper Politiken cites two prominent members of Mugabe’s ruling party (names withheld), who give the following results:

Tsvangirai’s MDC: 48.3%
Mugabe’s ZANU-PF: 43%

According to Politiken, there will be a new election within three weeks. However, New York Times writes that there are negotiations about Mugabe’s retirement under way:

Negotiations May Lead to Mugabe’s Exit in Zimbabwe

By THE NEW YORK TIMES

HARARE, Zimbabwe — The opposition leader Morgan Tsvangirai is in talks with advisers to President Robert G. Mugabe of Zimbabwe, amid signs that some of those close to Mr. Mugabe may encourage him to resign, a Western diplomat and a prominent Zimbabwe political analyst said Tuesday. The negotiations about a possible transfer of power away from Mr. Mugabe began after he apparently concluded that a runoff election would be demeaning, a diplomat said.

The Times, BBC-News, and Dagbladet also bring reports about negotiations. This is what Times writes:

Intensive diplomatic efforts were under way tonight to secure a face-saving exit for Robert Mugabe after 28 years as President of Zimbabwe.

His closest cohorts informed him last night that he had failed to win an outright victory in the country’s weekend presidential poll.

Despite tampering with the results from the countrywide elections, the Zimbabwean Electoral Commission was set to announce that the main opposition leader, Morgan Tsvangirai, had taken 48 per cent of the vote, against 42 per cent for the 84-year-old incumbent.

So, in conclusion, there is considerable uncertainty, but strong indications that Mugabe has lost. Whether he will retire in a peaceful manner or not is still not clear. According to BBC-News a deal is “close”.

As more and more facts and numbers about the current crisis in the US emerge, I find myself wondering just how deep this recession is and how long it is going to last. A number of people, among them Stiglitz, have indicated that it is deep and severe. But still the question remains: How severe?

This is what The Guardian (UK) writes:

America looks like it is already in recession, one that threatens rapidly to become the biggest slump since the 1920s. The collapse a week ago of the country’s fifth-largest investment bank, Bear Stearns, signalled that the crisis sweeping the world’s credit markets had taken a decisive turn for the worse.

Maybe it is a sign on the depth of the crisis that The Independent (UK) today brings an article entiteled:

USA 2008: The Great Depression

Food stamps are the symbol of poverty in the US. In the era of the credit crunch, a record 28 million Americans are now relying on them to survive – a sure sign the world’s richest country faces economic crisis

.. Forty states are reporting increases in applications for the stamps, actually electronic cards that are filled automatically once a month by the government and are swiped by shoppers at the till, in the 12 months from December 2006. At least six states, including Florida, Arizona and Maryland, have had a 10 per cent increase in the past year.

So, an inreasing number of American families have problems putting food on the table. Meanwhile, in Washington the republican government is concerned about proposing a plan for regulating the financial institutions, and launches a plan many commentators (Wall Street Journal) say is mostly “dead on arrival” (New York Times). And, one might add, a plan that will only, at best, be relevant to the next crisis – the current one is here and regulation is not going to make it disappear.

Wall Street regulation is not going to solve it. Not now.

The real interest rate in the US after the last rate cuts by the Fed – the interest rate adjusted for inflation – is negative. Is that good or bad? Seems to me, reading about this in New York Times, that both Obama and Clinton hold much to narrow views on the crisis, and think it is mostly a financial crisis that can be solved by stimulating the economy and regulating the credit market.

Every time the rate has been cut in the last six months, the stock market has reacted positively. And the Fed has been looked upon as an institution that actually does something to reverse the current crisis in the American economy. The rate cuts have been said to stimulate the economy, and so on.

And, yeah, guess what, lower interest rates are great for the stock market. Always have been, always will be. Simply because lower rates means that on the average, and everything being equal (ceteris paribus, it’s often called), and all of that, stocks become more attractive as investment instruments compared to other instruments.

So, if the crisis facing the US had been a financial crisis, that would have shored up things neatly. But the current crisis is not financial – it only has some financial aspects. The crisis in 2008 is structural (I’ve discussed this a bit in previous post, and will get back to it as well in later posts).

Structurally, for the real economy, negative interest rates may be bad news, even if they are good for the stock market and for financial institutions in trouble.

If you think about if, you will quickly realize that negative interest rates simply mean that almost any investment that have a yield equal to the rate of inflation becomes a profitable investment. So, the lower the interest rate, the stupider the investments, so to speak.

And low interest rates were one of the main causes of the current housing crisis (quote from Bonfire of the Builders, Business Week):

A diverse cast of characters combined to launch the once-in-a-lifetime housing boom of the past five years. Traditional mortgage companies and banks unleashed a barrage of loans, many to borrowers with iffy credit histories who didn’t bother to read the fine print about upwardly mobile interest rates. Wall Street egged on the often-reckless underwriting by buying vast quantities of home loans for repackaging as securities. Now that the boom has fizzled and foreclosure rates are rising, the important role of large homebuilders as lenders is also coming into sharper focus.

In addition to spitting out subdivisions, many of which now stand half-empty, builders jumped into the mortgage business to a degree they never had. Wall Street provided the same encouragement it offered other lenders. Even as the housing supply began to exceed demand last year, builders kept sales brisk by pushing adjustable-rate, interest-only, and other risky loans. In some cases they attracted clientele who couldn’t afford conventional mortgages.

So now, with low interest rates, there is the risk of fueling the same speculative building spree again. And also, to make investors spend precious capital on low-yield projects that look good today, but will surely be bad once interest rates come up again.

In my opinion, and I’ll say more about this later, the American economy currently need high interest rates (something like a real interest rate of +3-4%) to ascertain that capital is spent on smart projects and to reduce non-productive speculative investments.

I have always admired the fact that Americans devote so much time, energy, effort and money to charities. To me, this is one of many great things about American society.

However, I have often found myself to be pretty naive, too. And I may have been just that in this case as well.

While it is true that Americans do give, and some quite heavily, to charities, American charities may not be any better than charities in other parts of the world. I’ve seen many analyses of charities where 80 per cent, 90 per cent of the money, and in some cases even more, never reach the targeted group or purpose.

Lavish spending, bad subcontracting, high salaries, lawyers fees, and lots of other things have, in the bad cases, explained how the money have simply disappeared.

In a report by four professors who specialize in nonprofit accounting, the amount of loss as a result of fraud in non-profit organizations was estimated to be 40 billion dollars.

the typical theft from a charity was committed by a female employee with no criminal record who earned less than $50,000 a year and had worked for the nonprofit at least three years. The amount she stole was less than $40,000.

The most costly cases, the study found, involved male executives earning $100,000 to $149,000 a year. The thieves in such cases had typically been with the organization the longest.

..

If the $40 billion figure is accurate, then the money lost to fraud equaled the combined giving by corporations and foundations in 2006, said Diana Aviv, president and chief executive of the Independent Sector, which represents nonprofit groups.

But Ms. Aviv expressed skepticism about the report, noting that it relied on the fraud examiners association’s estimate of overall fraud across all sectors, including government and corporate.

“They’re lumping all those sectors together, and it could be that the for-profit sector experiences a higher level of fraud, while the nonprofit sector and government experience lower levels,” Ms. Aviv said.

Nonetheless, she said, “even if the figure is $20 billion, that’s still a huge amount and needs to be addressed.”

Now, 40 billion USD is approximately 13% of the money given to charities in 2006. That means, that on the average, 13 cents of every dollar you give disappears. That’s pretty bad!

So for the future, study your charity closely before you give. You may be paying for somebody’s retirement fund in a Swiss bank!

There is a good, in-depth article about “The Foreclosure Machine” in the US in New York Times today. For readers interested in the housing crisis in the US, it is highly recommended.

The price fall in the US continues and accelerates. According to The Independent:

The price of the average home was 11 per cent lower than a year ago, the S&P Case-Shiller index showed yesterday, as repossessed homes flood the market – and economists predict that the price adjustment may belittle more than half over.

…. “It does not look like early 2008 is marking any turnaround in the housing market,,” said David Blitzer, S&P index committee chairman. “Home prices continue to fall, decelerate and reach record lows across the nation. No markets seem to be immune from the housing crisis.”

Other indexes point in the same direction. But actually all these indexes most likely underestimate the problems in the housing market for the moment. The reason for this is that a large number of sellers are holding back. So at the same time the market has slowed down (New York Times):

Sales of new U.S. single-family homes fell to the slowest pace in 13 years

On the other hand, real interest rates are now negative. And the Fed is pumping liquidity into the market. So it’s easy to think that the housing market will pick up relatively soon.

However, I don’t think that’s the case. Given the huge structural imbalance in the housing market and the time it will take to achieve balance, on one hand, and the need the Fed has to also look at factors in the much bigger recession picture on the other hand, they can’t and shouldn’t maintain negative real interest rates for an extended period of time. And smart buyers, I think, know this.

Because the bigger picture is a federal budget out of control, a foreign trade deficit that is monumental, a continued weakening of the dollar as a result of low interest rates, low productivity (see NYT, Feb. 7) growth in the economy (see also OECD), cautious lending by the banks (reacting to the current uncertain situation), and the danger of a substantial imported inflation.

Then add to all this that a negative real interest rate most likely is exactly the opposite of what the American economy needs over the slightly longer term, as cheap capital will lead to decline in productivity.

Taken together, these factors should imply that a negative interest rate – which just is plain stupid but may momentarily be necessary – will and should only be maintained until the financial institutions are over the worst.

More to come!

A new, little cool gadget is quietly conquering the US. A camcorder. Not produced by any of the big name manufacturers. Not a brand name at all, actually. And not conquering the market by means of huge marketing campaigns. In a year, it’s captured 13% of the US market. And it’s a bestseller on amazon.com.

Actually it is less advanced, rather than more advanced than its competitors. That’s not all that common as far as electronic gadgets are concerned, in our day and age.

It’s a sweet little story actually. This little device, the Flip and its successor, the Flip Ultra, produced by Pure Digital, is winning in the marketplace in the old-fashioned way: It’s very easy to use – anybody can use it and have fun – and it’s real cheap.

You want to know more? From New York Times:

Now, understanding the appeal of this machine will require you not just to open your mind, but to practically empty it. Because on paper, the Flip looks like a cheesy toy that no self-respecting geek would fool with, let alone a technology columnist.

The screen is tiny (1.5 inches) and doesn’t swing out for self-portraits. You can’t snap still photos. There are no tapes or discs, so you must offload the videos to a computer when the memory is full (30 or 60 minutes of footage, depending on whether you buy the $150 or $180 model). There are no menus, no settings, no video light, no optical viewfinder, no special effects, no headphone jack, no high definition, no lens cap, no memory card. And there’s no optical zoom — only a 2X digital zoom that blows up and degrades the picture. Ouch.

Instead, the Flip has been reduced to the purest essence of video capture. You turn it on, and it’s ready to start filming in two seconds. You press the red button once to record (press hard — it’s a little balky) and once to stop. You press Play to review the video, and the Trash button to delete a clip.

There it is: the entire user’s manual.

It is point and shoot. It’s simplicity incarnated! It is “less is more”.

The video and audio quality is surprisingly good — not as sharp as a tape camcorder or even digital still cameras, but far superior to cellphone video. It has TV resolution (640 by 480 pixels, 30 frames per second), with softer images than you’d get with a real camcorder.

The shocker is the Flip’s low-light abilities, which trump even $1,000 camcorders. Not only is the video grain-free, but recorded dim scenes actually look brighter than they looked to your naked eye.

Once you’ve shot a few scenes, you slide a button and — sproing! — a U.S.B. jack pops out at 90 degrees to the camera body. This, too, is part of the Zen of Flip. You’re spared the hassle of storing, tracking and finding a U.S.B. cable.

…. “Look what my first grader did with it all by herself,” one guy told me. “We’re using them in schools to teach narrative structure,” said a teacher at a conference. “I bought two of ‘em: one for my 80-year-old grandmother,” said a neighbor, “and one for my 5-year-old.”

Pretty neat, is what I think! No cables, no fuss, ok pictures without 200 pages and manuals and advanced computer programs. And real, real cheat. What do you think?

Another popular, somewhat more refined way of explaining away the current crisis in the American economy is to refer to the crash of the sub-prime marked, and its leveraging by means of C.D.O’s (collateralized debt obligations), and perhaps throwing in some blame for Moody’s as well. That’s really blaming the instruments, not finding the cause.

Still, that’s the version presented to the American public today by New York Times. It has all the marks of a great story, and I’m willing to bet it’s going to sell well. While appealing, it doesn’t hold up as more than a partial explanation.

Because the huge mountain built by these three factors – sub-prime loans, CDO’s and high rankings by Moody’s – didn’t stumble upon itself. It wasn’t iself the reason it fell, that is to say.

It fell because the housing marked finally burnt itself out. As it has to. Because for a long time capital (in terms of the real interest rate) has been far too cheap in the US. The US used cheap capital to buy its way out of the last crisis (as indeed it has several times in the past), and it resulted in a far too high rate of construction in the housing sector. As it had to. When capital is cheap, it’s put to use for lots on non-productive purposes.

At the same time, of course, cheap capital means it’s also cheap to borrow for people wanting new homes or wanting to speculate in real estate. So there was supply, and there was demand. And for a long time, – and I am sure history will confirm this – too long a time actually, demand kept up with supply due to speculation using cheap capital.

But even under these circumstances, when the discrepancy between supply and need for capital goods such as housing grow too big, the fun is over, as the demand for these goods are more limited (bounded) than for some other types of goods.

This is one part of the real explanation for the current recession, I think. Not the instruments (C.D.O.’s, subprime loans, or Moody), but the structure on which they rested.

More to come!

Following the coverage of the current crisis in the US, I strongly feel the news media in the US attribute far too big a role to the current prices of oil as a factor causing or contributing to the recession.

For instance, New York Times a few days ago published a graph showing the inflation adjusted price of oil, and pointed out that oil now was more costly than in 1980, and at its highest ever price (after the most recent price adjustments) (illustration from New York Times):

While this is obviously true, it is also only true when viewed from an American point of view. If the declining value of the dollar in international currency markets it factored in, oil is actually still 30-40% less expensive now than it was in 1980.

So to my mind, Americans, and most certainly American media, are looking in the wrong direction when explaining the crisis to the American public. To the extent that their explanations are believed, this may slow down the appropriate and necessary adjustments to the current challenges facing the American economy. It is necessary to look elsewhere.

More to come!