weblog/wEssays     home

Presidential Race Musings and More   (week of August 25, 2007)

For more stimulating ideas, please visit the Of Two Minds blog and Readers Journal.

Harun I.

Your analysis (Presidential Race Musings, 8/18/07) was very good. This shouldn't have shaken anyone, you merely pointed out the statistics. You even covered what would cause an outlier event.

What I do find disturbing is that the statistics don't center around character, instead they center around personality. The "Big Idea" is usually nothing more than an unkept promise or an outright swindle. Hitler had a "Big Idea" too, as does every despot, miscreant and would-be tyrant. Despite history people are caught hook, line, and sinker.

Our country will get the president, or to be all encompassing, the government it deserves. It can be no other way. In a democratic republic, to exist at a low psychological level almost ensures failure as apathy and inaction are not compatible. To borrow a cliche, a nation of fools and a democratic republic soon do part.

How many people have studied the Constitution if for no other purpose than to be familiar with its content?

I am sure that I am not alone in the observation that all too often "free speech" is tolerated only when what we are hearing is agreeable. Funny, I didn't find any "offensive clause" in the 1st amendment. Our animal spirits tell us that much less energy is required to shout down, intimidate, or censure unpopular or offensive ideas than to gain cooperation and understanding through reasoned debate.

But perhaps the reason for apathy toward our Constitution is because of the increasing tendency of our high courts to make political rather than legal decisions. Our legislative branch rarely if ever consults the Constitution when drafting law. And the executive branch currently finds law burdensome.

We are in a spiral, although not an irreversible one. Just how far we will descend before awakening remains to be seen. It will not be a new American president that takes us in a new direction, it will be and has to be a revolution in the American collective conscious.

Michael Goodfellow

A couple of comments (on Presidential Race Musings, 8/18/07):

- The rearranged primary schedule means it's all over when California votes in early Feb. The state has so much clout, the rest of the country would have to swing behind a different candidate to pull it away from whoever wins in California. Unlikely.

This means the primary season is nearly over now. We have Sept, Oct, Nov, Dec for a candidate to raise $100 million, get out there and make an impression. Current money totals and poll results are going to be very hard to turn around. Nov/Dec are lost because of the holidays. People won't focus on any of this until January, then it will be too late. I don't see another major candidate getting into this race. Time is nearly up even for Thompson.

People hate Hillary, but on paper, she's the ideal candidate. She's a white southern lawyer who has been in politics forever. She's had 8 years in the White House. She's got Bill in the wings if she needs any help. The Democrats want to show they are idealistic, not like the horrible cold Republicans. Every aging boomer Democrat would pat themselves on the back for electing the first woman president.

Even the Republican pundits are admitting they could do worse. On healthcare, she's going to be cautious, since she was burned so badly the first time. In any case, everyone on both sides wants to "do something" about health care. On defense, she's the hawkish Democrat. She has access to the Clinton network of advisors, so she'll be experienced. She's such a die-hard politician, she's always going to have her finger to the wind, and not do anything radical. She's been solid as a senator.

Her only real negatives are 1) her personality, 2) Bill hanging around -- why didn't she divorce him, and is he really going to be "first husband" or is this another "co-presidency", and 3) Bush/Clinton/Bush/Clinton, yikes! Surprisingly, her being female is not a negative at all. We really are ready for a female president, I think.

Obama could have taken it away from her, but is looking like an empty suit lately. We're tired of "hope" and nothing else. He'll have to get hugely better in the next three months to win it.

Edwards is just too much of the same. The party is not going to skip over the chance to elect a woman or a black and go for some blow-dried lawyer who sheds crocodile tears over the poor.

- You are right that hard economic times next year will dominate the discussion. The Dems will all "feel our pain" and promise bailouts, with varying degrees of conviction. The Republicans will downplay it and do "the economy is basically sound." What else can they do besides badmouth yet another part of the system that they are seen as standing for? Can you imagine Romney or Guiliani badmouthing Wall Street? If the Iraq war is a mess still, or Iran is trouble, or N. Korea is trouble, or Afghanistan is trouble, they have no chance. Two dismal failures, both foreign policy and economics, and they can't really propose much different. All the leading Republicans are hawks.

Ron Paul has nothing to offer in times of trouble. He's a crotchety old crank who wants a gold standard (and I say this as a Libertarian myself!) Without giving up every shred of his beliefs, he can't offer a bailout. All he can do is blame the current system for all our problems. A lot of people will listen to that, but not enough to push him into serious contention. People are going to be screaming "I'm losing my house to foreclosure!" and his only answer is "Well, they shouldn't have loaned you the money." That's not going to fly.

So by March we will have our two major candidates, and we'll be sick of them soon after. Neither will look like a solution for hard times. A third party has a real chance if it can get it's act together. Unfortunately, you still need organization. You need to get on the ballots and select a decent candidate. The only ones already on the ballot are the Green Party, old Perot Reform Party and the Libertarian Party. I don't think any is on the ballot in all 50 states, or has a candidate at this point (nothing on the web sites.) So it's pretty much too late for them. Most states make it really hard to qualify for the ballot. And if by some miracle they did field a candidate and win the popular vote, what about the Electoral College? How could a third party possibly win there?

I predict a close election due to the number of people who just sit it out. I don't think any of the leading Republicans can motivate the base. Hillary will win by default if she just shuts up for most of next summer, and blames the Republicans for the current mess overseas and in the markets. If she keeps looking calm in debates, she'll be seen as the safe choice in difficult times. And after all, a "likeable" woman would have been seen as too soft to win. It would only take a slight change in perceptions to turn "unlikeable" into "tough." One good speech at the right time could do it.

Of course, after the election, she'll actually have to do something about all this crap. She'll probably wish she'd stayed in New York.

Here is an entire week's worth of Readers Journal feedback for you to enjoy/ponder.

First up, Jed H.'s Haiku on the mortgage/lenders meltdown:

Banks, Lenders Seek FOOLS
Playing an OLD MAID card game
WISE men, Pass on DEALS ?

Jed also recommended this story: Fed cash not reaching mortgage players forcing sale.

In a related development, I received a desperate offer from Merrill Stench (Lynch), offering to "leverage my home equity with rates as low as 7.50% APR." Since when did investment bankers/brokers send out sleazy HELOC (home equity lines of credit) pitches? Since they're desperate for fees, as all their mergers fees and derivatives plays are evaporating like rain hitting hot desert sand? So now they've sunk to trolling for HELOCs?

Desperate doesn't do justice to ML's pitch. Time to short the Stench? Maybe.

Next up, Ron C. with an excellent analysis of rent/housing prices:

Home price/rent ratios have generally been negative for a number of years based on HPA (home price appreciation) the past ten years. The traditional price/rent ratio used a 100-200x monthly rent to generate a resale value for the home. With SFH (single family homes) entering into a long period of declining HPA it will become critical for true investors to use price/rent ratios property or their investment will quickly become a a monthly negative cash flow.

Using current home values in my area neighborhood Zip code 95476, 2br/2b homes are on the market for around $525K with rents averaging $1250 per month. These homes were selling in 1995 to 1997 in the $112K to $150K. If use the price/rent ratios as a range these homes today should be selling from a low of 100x 1240= $112K to a high of 200 x $1250= $250K.

It is easy to show that homes today that are listed for $525K in fact should be offered closer to $112k to $250k which would make them both affordable and a good investment and bring them much closer to the 1995 to 1997 price range.
Longtime correspondent azvitt made a telling comment about the blogosphere's leading role in analyzing/drawing attention to the lending/housing/debt bubble which is bursting:
It's really remarkable that the bloggers that I have been following for about a year and a half have led the way. I mean how many times have I seen Nightline or the network news reference, quote, or show a computer monitor view of many of the following sites?

And I doubt any of these bloggers could get a job at a mainstream outlet. Aw the beauty of the internet and the Average Joe!














Lone Cowboy checked in with a revealing account from the front lines of the housing bust:

So, in my business, I tend to get a lot of "come and mow this property, the weeds have taken over" either from a banker/real estate agent or from someone who has just purchased a foreclosed house. So, this one I went to yesterday was in a nice neighborhood and it had NOTHING. No landscaping, no deck, not even a concrete driveway. I actually initially went to the wrong house because next door has 3' high weeds also. (all are acre plus lots). Turns out no one lives at that one either, but it's not for sale (probably in foreclosure process).

This house was built 5 years ago and a large family lived in it and never did anything to it(basically paid rent in one I suppose). They paid $422,000 5 years ago. It needs $50,000 worth of landscaping (really it has nothing, just weeds) and I have no idea what's wrong with the inside. BTW, this "new high quality construction" house is already losing it's roof (shingles all over), the air conditioning unit is sitting there, but it's not hooked up and dirt is falling underneath the walkway (poor compaction) and all the trenches from the utilities are falling in also (also poor compaction). And of course, builders grade furnaces, hot water heaters, etc all need replacement at 8 to 10 years.

This guy paid $301,000 at auction for it. That's a 120,000 haircut for the bank. Plus the auction fee (usually 10%), plus foreclosure fees, cleanup, etc. The guy told me that the exact same house is about 3 blocks away (same development) but it faces E470 (the freeway) and it's still for sale at $479,000. I don't' think they are ever going to get 479k for that one, this one is now the comparable.

Just thought the whole thing was interesting.

BTW, people have 1 year jobs (can be laid off at any time) but we borrow money at 5 to 30 year times based on that one year job salary. Not too bright. Debtor's prison still lives.
Dan B. submitted a fascinating item on harbor traffic moving from Long Beach CA to a newly expanded port in Mexico:

Charles, I was looking at the I-35 super highway. You know,,,it's a 2 way highway. I was wondering what was going to move southbound. The Chinese company Whampoa is sick and tired of the expense and backlog at Long Beach / Los Angeles harbor. They also don't like paying wages to the Teamsters. (wikipedia entry on Hutchison Whampoa.)

They say that they can put in a new port at Lazaro Cardenas in just over a year. Actually, it's already there. They just have to gear up. Pacific deep-water port Lazaro Cardenas gears up to become No. 1 in Mexico.

There is also big talk about a port at Santo Tomas, south of Ensenada. Mexico plans an alternative to the jammed docks in L.A., Long Beach.

The cumulative effect will be to pull a lot of processing jobs away from California. It will definitely cut out a lot of Teamsters. It's just one more step in the ongoing battle to diminish the wages of Americans. One more nail in the coffin of middle class Americans. Where does that lead.

Back to the 2 way highway. It runs through the heartland of America . . . the bread basket. It's not hard to see the day coming when America's food is sold to the highest bidder,,, and Americans are starving. The USDA reported in 2002 that 34.9 MILLION Americans reported . . . not enough food.


If the largest economy in the world can't feed it's own people, what's going to happen when the country goes bust? You can bet your soup kitchen that Con-Agra will ship the food to the highest bidder. BURN through the energy!!
BURN through the water!!
BURN through the top-soil!
Profits and power at all cost. No suffering ,,, no sacrifice is too much!!
What a disgusting slide we've come to.
Mark D. made two astute comments, one on the Pareto Principle in biology and another on Bank of America's investment in Countrywide (CFC), a.k.a. "Countryfried" :

in biology, we use a form of this principle for requeueing things. we deveople a procedure that works 80% of the time or greater. take the failures, find what works for those 80 % of the time.

in two rounds, you are at 96% success.
three rounds, you are at 99.8% success.

of course it doesn't work out that way all the time, but it works pretty good. i'm sure the lending institutions break things down similarly based on repayment stats, risk, etc. obviously they got in trouble when they made the qualifiers go away. they are making up for it with loans greater than 30 years, what a joke.

I'm sure BofA's interest in countrifried is for real estate so they can relocate their offices. in general in the bay area, in case you haven't noticed, countrywide has EXTREMELY valuable locations. they perhaps lease them, but if any are owned, this would be a coup. i'm not sure why they think there is a market in insurance. as for why i'm a customer, it's only a matter of convenience for atm's for me. that to me is their best product. they are a far cry from the founder days of Giannini, financing the golden gate bridge, minority business, model branch location in outlying cities with excellent architecture like in hollister (they moved their branch there, totally stupid to facilitate drive-in banking which doesn't exist anymore and is a total waste of square footage. I had a family neighbor who knew the Giannini's, and she was extemely loyal to them. she worked at the bank for decades.
Michael Goodfellow raised a number of issues regarding yesterday's post on wages, Starbucks and wealth distribution:

You need to find different examples if you want to talk about rent inflation. The problem with places like Silicon Valley is they've restricted land use so severely that there's nothing left to build on. That's jacked up the price of an acre of land to hundreds of thousands of dollars. So the rent increase doesn't reflect a simple devaluation of the dollar. It's that plus a real increase due to legal restrictions. Also the increased costs of permits, taxes, etc. I forget how much of the purchase price of a house is purely permits (and delays caused by permitting), but it's tens of thousands of dollars. The Santa Cruz planning department was said to be larger than the one for Los Angeles, and it took months to get a house plan through them. This is not the case in places like the Midwest.

It would be interesting to compare rents in some place like Las Vegas which just annexed all the land it wanted for years when it grew. Or the empty parts of the west or upper Midwest. I wonder if they had rent increases above inflation?

Cities should of course build high rises when they run out of land, but NIMBY politics prevent that here. And there's a general desire in California to have businesses (which generate sales tax revenue) rather than homes (which require services.) The ideal for a city planner is a business core served by a bedroom community somewhere else. Funny how often you get that exact situation! Some people think this is a Prop 13 side-effect.

The rest of today's piece is the usual. Your background assumption is that the system "gives" people jobs. People create jobs by the exercise of their spending, and supply demand by the exercise of their skills. There are several root problems here, none of them "selfish rich people":

- China added a billion low-skilled and semi-skilled people to the world all at once. That's driven down the value of low-skilled workers.

- Technology improvements across the board have also dropped the value of low-skilled work. Cheap communications means you can run plants anywhere in the world. Cheap transportation means you can get parts and finished goods from those far-flung plants. Automation makes the plants more flexible -- reprogramming is faster than retraining people. A short product life cycle means the plant is obsolete in a few years, so you can just restart somewhere else if labor costs have increased.

- At higher skill levels, the rest of the world is steadily catching up to the rich world standard. We can't assume that an American high school graduate is 10 times as productive as a third world graduate. I think it's only 2 times as good now. That advantage can be negated by cost differences.

To focus this, think of the call centers. In 1970, it would have been insane to try doing a call center in India. The phone call would have cost several dollars a minute. The $5 an hour you would have saved in labor costs would have been overwhelmed by the $120 an hour you'd pay for phone charges. Now, the phone charge is like $0.02 a minute, or $1.20 an hour, and shifting that work to India makes economic sense.

Second, in 1970, India would have refused the work, because of their socialist attitude towards inward investment (the same for China.) Now, they don't. And finally, India is now willing to train a person to sound very American and answer questions about products about as well as an American would (despite the stereotypes, this is definitely the case.) American high-school grads on the other hand, aren't any better than they were in 1970. Arguably worse if you get someone with an entitled attitude.

So like I said, none of this has to do with your usual bogeyman of rich elites shafting the little guy. The economic/technological climate has changed, and we are standing around like dinosaurs.
As is often the case, I responded to Michael's sharply reasoned points with a few of my own:

Good point about land use but as I wrote before, land use was restricted in the Bay Area 10 years ago too but houses in Albany and Berkeley (good schools) were selling for $160,000, not $560,000. Therefore some other factors (speculation, etc.) have been at work.

Las Vegas has other conditions which skew data--low /no taxes due to gambling, and well-paid no-skill service jobs.

My point was that no one thought $1.60/hr was "too much money" back in 1969 yet merely keeping up with official inflation would make $9/hr the min. wage--and employers would be screaming.

My other point was that purchasing power declines have impacted the lower wage workers. This has nothing to do with China/India, which have lowered the costs of importable goods. I think the issue is the destruction of the dollar which has cut purchasig power far more than official CPI suggests.

As for rich/vs. poor, you only have to examine tax policy to see that wage earners in general carry more of the tax burden than they did decades ago when corp. and capital gains taxes were effectively larger percentages of tax revenue. It's not that the rich are so much more productive, it's that they have better lobbies and get their taxes decreased at the expense of wage earners--mostly the higher-income ones.

The Big Picture blog referenced an analysis on 8/20/07 that 60% of the Bush tax cut flowed to the top 2%. Not exactly a "middle class" tax cut. A trillion here in tax cuts and a trillion there, and pretty soon you're talking real money.

I think I have written about this but if not, I should, as the stats are all very damning.
And in the "lies, damn lies and statistical lies" department, Bill Murath offered this commentary on the utterly bogus "new home sales rise" headline which was deployed to goose the flagging stock market:

Sales of new one-family houses in July 2007 were at a seasonally adjusted annual rate of 870,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 2.8 percent (12.0%) above the revised June rate of 846,000 and is 10.2 percent (12.3%) below the July 2006 estimate of 969,000.

I don't normally send along this stuff and I am sure that you know the above info. My few questions (obviously rhetorical for us and your readers): During my quest in the 70's and 80's trying the then fab mental diet of " Better Living Through Chemistry " I kept running into the same problem. Every single chemical I ingested was metabolized and wore off. And reality kept coming back. Is the better dope now? Or can the antidep's really make you and keep you this deluded that you believe this garbage?

Paloma ( who just turned 5 yesterday, on her first day at Kindergarten) could probably come up with the +/- 12% number. To me it is embarrassing to see something with that much statistical error, why bother.....because the losers with the government jobs producing this figures would be unemployable in the real world. I would barely rate +/- 12% an educated guess.

Of course on Bloomberg they said New Home Sales are up unexpectedly 2.9%. Of course when I read the headline I immediately called bullshit in my mind since the story left out the error nor neglected to mention that when times are good they do the y.o.y comparisons and when they are bad they do the month over month thing or which ever makes things look better.

Just mind boogling how stupid and inept the public has become here.
And for those interested in gleaning meaning from charts, frequent contributor Harun I. offered this chart of the Banking Index, plotted with its relative performance to the broader market, the S&P 500. I have taken the liberty of adding a few comments to the chart.

Thank you, readers, for an array of insightful commentaries and links.

Thank you, Michael K., ($20) for your generous donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

Thank you, readers, for such thoughtful contributions.

For more on this subject and a wide array of other topics, please visit my weblog.


format and content copyright © 2007 Charles Hugh Smith except as noted. All rights reserved in all media. All writers published herein retain the copyright to their own work.

The writers would be honored if you linked this Readers Journal to your site, or printed a copy for your own use.


  weblog/wEssays     home