Tag Archives: real esate

Economics Misconceptions, Part 2

From James Altucher: FINANCIAL FRIDAYS: WHY TODAY IS THE DAY YOU HAVE TO REINVENT YOURSELF

It’s going to be a shitstorm and I hope I have my umbrella.

For the financial elite, it’s the best of times. For everyone else, maybe not so much, but by many metrics, living standards have improved. Never before has there been a better time to be smart and rich than in America today. Elon Musk, for example, who embodies both wealth and intellect, is part today’s new ‘ruling caste’, or as some in NRx call the ‘Mandarins’ or ‘Brahmins’. Silicon Valley and Manhattan are the centers of the world right now, where America’s best and brightest tend to converge, forming insular enclaves of prosperity.

However, James’ essay is rife with misconceptions, or at least things that should be clarified or put into context.

Incomes are getting lower every year. This will never stop.
Since 1993. Income for people ages 18-35 have gone from $36,000 to $33,000. This seems like a small amount.
It’s not. It’s the first time ever that income has gone down over such a long period (more than a year).
This means: relying on a college, job, promotion, security, stability, retirement pension, retirement income == thing of the past.

Despite a bunch of searching, I was unable to verify the veracity these findings. I suspect he cherry-picked the worst age bracket (18-35) and ignored the others.

The data suggests that although real wages are flat, nominal wages are rising:

There is also evidence that purchasing power has actually doubled since 1950:

According to this (publicly available) data, the price-level (CPI) has increased by about a factor of 10 since 1948. But the average nominal wage rate has increased by a factor of 25. (There is, of course, considerable disparity in wage rates across members of the population. But I am aware of no study that attributes significant wage or income heterogeneity to monetary policy. Of course, if readers know of any such studies, I would be grateful to have them sent to me.)

The figure above implies that the real wage (the nominal wage divided by the price-level) has increased by a factor of 2.5 since 1948. This is undoubtedly a good thing because it implies that labor (the factor we are all endowed with) can produce/purchase more goods and services. More output means an increase in our material living standards (Though again, I emphasize that this additional output is not shared equally. But surely a laissez-faire world advocated by some is not one that would generate income equality either.)

Purported median real household income growth is also dependent on the choice of ‘deflator’ used. The most optimistic deflator shows 35% growth; the worst shows just 5%, which is the one most commonly cited:

Although it’s often cited that the ‘US dollar has lost 95% of its value in the past 100 years’, it’s worth noting that purchasing power as measured by ‘utility’ has surged, meaning cheaper goods and higher living standards. And second, wages have also gone up. Generations ago, it took months of saving to buy a TV; now it only requires a week’s worth of wages to buy one, and the TV is of a much better quality, as I explain in Malls, Marxism, and the Future:

According to this price guide, a typical TV set cost $500 between 1950-1960. Average hourly wages were about $2/hour, give or take. Thus, you had to work 250 hours to buy a TV. A high-quality TV set today still costs about $500, but median hourly wages are $25, so you have to work far fewer hours to buy it, and the TV is obviously of a much better quality. Even if real wages are stagnant, utility is always improving, which is really what matters.

But it’s not just TVs – this surge in utility and purchasing power is also observed for a wide variety of goods – computers, clothing, and food:

Source: Carpe Diem by Mark Perry

However, there are caveats. Although tangibles (computers, TVs, clothes, etc.) have gotten cheaper, both nominally and relative to wages, many services (healthcare, tuition, concert and sporting event tickets, daycare, insurance, rent, phone bill, internet bill, cable, etc.) have become more expensive, or so-called ‘bifurcated inflation‘, which I have discussed numerous times on this blog.

From The Great Debate: Automation, Jobs, Wealth Inequality, Basic Income, Post Scarcity:

However, while automation is lowering prices for some goods, on the other hand, despite recent trends in automation, prices for other goods & services like healthcare, education, phone bill, day care, cable & internet, have risen when adjusted for inflation, a phenomena called bifurcated inflation. So while a computer is very cheap, the electricity, software, and internet required to make the computer functional will negate the inflation adjusted savings. The same for TV – the hardware is very inexpensive and the picture of good quality, but the cable bill is very high. The quality may be better, and there may be more features, but it won’t be cheaper, as illustrated by the crudely-drawn graph below:

Microsoft Office is still expensive, 20 years later.

Firms are not going to let their earnings fall due to automation and will make up the difference elsewhere, and that will come from ancillary services. Look at how much entitlement spending has surged in recent decades, despite the promise of lower prices through automation. Automation and robots will make some stuff cheaper, not not nearly enough to create the ‘post-scarcity’ economy many hope for.

Ancillary services such as internet, as well as planned-obsolescence and increased purchasing quantity are ways around hardware-based deflation:

Due to technology, competition, and mass production, certain goods like TVs, clothes, appliances and computers become cheap relative to inflation adjusted wages. The difference has to be made elsewhere for economic growth to not fall. We hypothesize this causes the price of intangible services to surge, resulting in the so-called bifurcated inflation, to counteract the deflation of falling prices of tangible goods. An example is why you can buy a new computer for $300 today instead of $3000 in 1984, but the internet subscription fees have not gotten cheaper on a real basis. If internet costs $50 a month you’ll pay roughly the same $3000 for the lifetime of the new computer. Another way to get around this is to make the new computers less reliable, if the new computer becomes obsolete faster than the old one, or the consumer substitutes computers for other goods . So instead of buying one $3000 computer, they may buy five $300 computers – one for each member of the family and one air $1500 hockey table. But if this does not happen, there will be a shortfall.

Although – as James mentions – tuition has surged, so too has financial aid. Healthcare prices have surged, but so has government expenditures such as Medicare, Medicaid, Obamacare, and emergency room treatment for the uninsured. The result is that although prices are surging, Americans almost never pay the full sticker price out-of-pocket.

There are other improvements: improved medical care, for all socioeconomic levels. George Washington, despite his high social status and access to the ‘best’ care possible, literally bled to death at the hands of doctors in an effort to ‘cure’ a throat infection, a notable example of iatrogenesis or iatrogenic effect. Nowadays, infections can be treated with antibiotics, to give an idea of how far medicine has progressed.

However, I disagree with James in his opposition to college and home ownership. Give the abundance of financial aid and that college graduates earn more money, those with high IQs stand to benefit by going to college. If, according to James, everything is becoming more expensive, going to college seems like a good hedge against inflation, since college graduates have seen their real wages fare much better than those without college degrees:

Even worse: asset values have gone up (houses, stocks, educations, etc). So prices for things you want to buy have gone up but incomes and job satisfaction have gone down.

Of course a key to survival that I’ve written about many times is: don’t buy a house, don’t go to college, don’t contribute to 401Ks that rob your money, and either don’t get credit cards OR stop paying back your debt.

That seems contradictory – if assets such as real estate are rising, wouldn’t it be prudent to buy instead of rent? For many regions, rent has out-paced inflation and wages:

Real estate in sought-after regions have produced significant inflation-adjusted returns since the 80′s. Home prices in the Bay Area are up 5-fold since the mid-90′s, and some regions of Palo Alto have doubled in price just since 2011. Even less desirable regions have produced real gains. With renting, however, you’re constantly pissing away money every month that could otherwise be invested appreciating assets like real estate or index funds. $2000 in rent every month, compounded at 7%/year in the S&P 500, over many years is a lot of money. The landlord is getting rich, and he will keep raising your prices, not you. If you’re renting into your 30′s and beyond, you’re almost never going to be able to amass significant wealth by retirement age. An excellent article by riskology, The Absolute Insanity of Not Buying a Home When You’re Young, shows the math behind why buying is better than renting. If you’re like James – someone who is exceptionally talented and a member of the ‘creative class’ – maybe you can rent all the time and still have a lot of money, but investments in real estate and stocks are how ordinary, average-intelligence people, over a period of many decades through many small contributions that are compounded, amass wealth.

A) DEMAND HAS GONE DOWN :
Because of outsourcing and automation, the basic equation of all economics throughout history has been reversed.
Supply is almost infinite (it costs nothing now to make an iPhone in China.)
Demand has gone down. I haven’t upgraded a computer or phone in years. They’ve stopped improving for 99% of the features I used to buy for.
For me, personally, I’ve thrown out everything I own.
Many people are, correctly (I have to admit), not going to that extreme but they are realizing the basic equation:

Hmmm…I guess Google, Disney, Microsoft, Facebook and Nike didn’t get the memo, and are reporting growing profits and earnings quarter after quarter, to no end. The consumer staples and discretionary indexes are at near 52-week highs. Evidently, people are still buying stuff. He’s using an anecdotal example (himself) to generalize for the whole economy.

Banks got bailed out. Bonuses went up. And a rich person puts the extra dollar in the bank and a poor person pays the rent.
So the money went into the banks, which then stopped lending money out to “high-risk” people because the Federal Reserve also started paying interest to banks on any excess reserves.
In other words, the Fed gave banks money, then gave incentives not to lend to avoid any lending catastrophes. But it backfired.

Ummm…but that’s what caused the crisis…by lending to ‘high risk’ groups. 4,000-square-ft McMansions for people earning less than $60,000 a year, with zero-down financing. Also, home ownership mandates under Clinton and Cisneros under HUD. Tighter lending standards should be praised, by lessening the risk of another meltdown.

1600 words…that’s enough…maybe I’ll review the rest later.

Chinese nationals pour more than $150 billion over five years into US real estate

Chinese nationals pour more than $150 billion over five years into US real estate

But during the same period, at least $127 billion went into US homes, and in the 12 months to March 2015 — the latest period for which relatively comprehensive data could be gathered — home purchases totalled $39 billion.

That put the Chinese past Canadians, who have long been the biggest foreign buyers of US residential real estate.

Geographically, Chinese buyers are concentrated in the most expensive markets: New York, Los Angeles, San Francisco and Seattle, but Chicago, Miami and Las Vegas have also drawn buyers.

But isn’t America supposed to be in decline due to wealth inequality, says the left? Or isn’t housing supposed to be a bubble, says Shiller? The wealthy, smart Chinese are ignoring the left, buying real estate in high-IQ regions like the Bay Area, and it makes the left angry that the Chinese are ignoring the doom and gloom. The left has been predicting a bubble in Bay Area real estate since 2012, and they keep being wrong. Same for that moron and human bullhorn Peter Schiff, who has been sounding the false alarm for crisis since 2009, to no avail. Smart, productive people will keep making the left look like fools. People who predict crisis are wrong 99% of the time and sit on the sidelines as everyone else makes money. Just as there is no bubble in technology, there is no bubble in high-end real estate. Instead, it’s a flight to quality as the wealthy Chinese look for safe havens to park their piles of cash. In bubbles, low-quality assets become overpriced. Even in web 2.0, only the cream of the crop (Uber, Air BNB, Snapchat, Slack, Pinterest) are seeing stratospheric but sustainable valuations, while low-quality companies like Jawbone, Fitbit, and Gopro smolder.

Related:

China’s investors find safe haven in American real estate
China and The Liberal War on Success

The Daily View : Stocks Plunge, RIP American Dream, Why Prescription Drugs are so Expensive

Here is the backstory behind the 5,000% price hike of Daraprim.

In Martin’s defense, the drug is classified as an ‘orphan drug‘, which means there is little demand due to the rarity of the underlying condition it is supposed to treat. In order for phrama companies to profit from orphan drugs, they have to charge a lot, and since the left says every life is sacred, no matter the cost, taxpayers will always front the bill in the end. The left wants it both ways: affordable drugs for everyone to treat even the most obscure of diseases, but provided the company that sells them is not allowed to make too large of a profit. Maybe Daraprim was unprofitable at $13 a pill, necessitating a price hike. Turing paid $55 million for the rights to Daraprim, but due to the low demand it will take a decade to turn a profit at the old price:

Let’s consider the case of Daraprim. The US market for this drug is actually quite small. Last year, American sales of Daraprim totaled only $5 million. While that would still amount to an 8% annual return on Turing’s $55 million initial investment, it is far below the billions of dollars in revenue and 30% profit margin of most blockbuster pharmaceuticals.

Maybe the profits from Daraprim will be used for new research. We don’t have the full story. The left does not understand that the development of new drugs is very expensive (around $1-2 billion per drug), with a high failure rate, and a long development time (10-15 years from conception to approval). Out of 10,000 chemical compound, maybe only 250 will show promise for tests on mice and other small mammals, of which only 10% of drugs will qualify for tests on humans. Of these, only 21% pass clinical trials. Finally, just because a drug clears all the regulatory hurdles doesn’t mean it will succeed commercially. A notable example is Provenge, an expensive custom vaccine-based treatment for terminal prostate cancer, that received regulatory approval in 2010 but still failed because sales were not high enough to recoup the enormous expenses. As someone who follows stocks, I lost count of the number of biotech companies that have failed, but it’s a high percentage. Biotech companies need high profits on existing drugs to finance the development of new drugs. Perhaps Shkreli’s approach was wrong, and in his AMA he concedes he could have handled it better.

—————–
Some say the American dream is dead. However, I argue that it’s merely being redefined. We all have varying ‘dreams’ attainable within our cognitive capacities. Smart people have more options than less intelligent people, but that’s the way the cookie crumbles, as unfair as it may seem.

He’s right about the growth of freelancer and ‘temp’ economy. We’re seeing a major shift in the labor market from salaried jobs to freelancer jobs:

These jobs, while not paying as much as traditional labor, may create more economic value for employers than regular jobs.

——–

No Stock Prices Plunge In Unprecedented Two-Week Slide

Don’t see a compelling catalyst for a bear market, but this decline is getting pretty bad, with the S&P 500 now twelve percent below the record highs of 2130. More likely, stocks will make a comeback later in 2016. The ‘experts have been saying to sell stocks, yet every year the market keeps going higher. So being a rationalist, the rational thing to to is heed the empirical evidence that we’re in a bull market until proven otherwise. None of my ‘sell’ indicators have been triggered. But the past two weeks have been pretty dreadful though.

Stock prices plunged again Friday and are down more than 8 percent in just two weeks, an unprecedented slide for a start of a year.

The vicious drops feel even more unsettling because they’re such a departure from the placid and strong returns that investors had been enjoying for years. Like vacationers returning from a warm beach to a slushy commute to work, the shock of change is making something already painful even more so.

——–
Chinese Cash Floods U.S. Real Estate Market

But the left says that US economy is supposed to be weak and the housing market a bubble. If America is as awful as the left insists it is, why is all this foreign cash flowing here?

——–

Post-2008 Capitalism: A Guide

From n+1 magazine, After Capitalism:

HOW WILL IT END? For centuries even the most sanguine of capitalism’s theorists have thought it not long for this world. Smith, Ricardo, and Mill pointed to a “falling rate of profit” linked to inevitable declines in agricultural productivity. Marx applied the same concept to industrial production, suggesting that the tendency to replace workers with machines would lead to a chronic and insurmountable lack of demand.

The only thing that has as good of track record as capitalism are predictions of capitalism’s demise.

Fiscal austerity is general, taxes remain low, and debt levels continue to rise—which means that Western countries, by selling treasury bonds to the rich through capital markets, are actually paying their elites in bond yields to avoid having to go through the politically impossible process of taxing them. Absent any political recourse to countercyclical fiscal policy, central banks in the US, the Eurozone, and Japan have kept interest rates low and pumped trillions of dollars of fiat money into the financial system, keeping banks and dot-com companies liquid and driving the rich to put their money into the condos now flooding Manhattan, all while leaving median wages pleasantly low.

That is similar to the process I describe in an earlier article, Post-Labor Capitalism. But instead of post-capitalism, it’s more like post-labor capitalism; capitalism remains intact. As well as other factors like the petrodollar, the ‘flight to safety‘ is keeping yields low and the dollar high. The author seems cynical about how money is flowing into tech companies, but tech companies offer among the best growth prospects of all sectors. * Amazon stock, up 200% in the past few years, has been a great place to put your money; Diamond Offshore, a drilling company whose stock is down 50% this year, has not, because of weakness in emerging markets, depressing commodity prices. In a post-2008 era of slow growth, Web 2.0 is where the growth is.

Getting less work seems unlikely to come about without the fight for solidarity, the chief intellectual achievement of the workers’ movement, and one that none of the accelerationists see fit to mention as an ideal worth preserving or even renovating. This is despite the fact that automation—or, more broadly, the increasing precariousness of labor through technologically assisted means—has always been dialectically connected with it.

The Luddite Fallacy will likely remain a fallacy, but the composition of the labor force is changing to one of more lower-paying service sector jobs, as well as the rise of gig, freelancer, and temp jobs. The result is a bifurcated workforce: lots of low-paying jobs and a handful of good-paying jobs occupied by the cognitive elite and creative class. This is an example of how technology and automation provides a deflationary force through lower wages.

But overall, when pundits proclaim ‘capitalism is dead/dying’, they may be referring to an antiquated meaning or idealization of capitalism that does not take into account how capitalism is changing, but this does not mean capitalism is dead -hardly by any stretch of the imagination – instead, it’s evolving to a more efficient, technological, network-driven, ad-based, winner-take-all version of capitalism that we have now. Capitalism, like much of the post-2008 economy, has become bifurcated, with winners being high-IQ capitalists and ‘high-IQ’ capitalist endeavors, and less intelligent people and ‘low-IQ’ businesses are struggling.

Perhaps post-2008 capitalism is characterized by the following ‘themes’:

1. high-IQ favoritism – both in the business/investing world and individually, with smarter people and smarter businesses succeeding over their less intelligent peers

2. winner-take-all/bigger-is-better (small business failure at record highs, expensive real estate regions keep getting more expensive, web 2.0 valuations at record highs for a handful of companies, etc)

3. flight to quality (similar to #2) – observed in the investing world, venture capitalism, Bay Area real estate, and strength of the treasury bond market & US dollar vs. weakness of foreign peers

4. capitalism is getting smarter, choosier and pickier (** *) Lending standards are more stringent than ever, despite profits & earnings for multinationals at record highs, whereas in the pre-2008 era it was much easier to obtain financing for home or business. This is good because it reduces the likelihood of a crisis like in 2008, but perhaps frustrating for many who are unable to get financing at competitive rates. But this should not be confused for total risk aversion. Valuations for Silicon Valley tech firms keep going up, so money is flowing into the sectors and regions where the quality is perceived to be the highest, resulting in a bifurcation of very high valuations for quality and very low valuations for everything else.

5. capitalism is confusing, partly due to the new rules and trends that many don’t understand. That’s why I wrote this guide to help readers better understand how the landscape of capitalism has changed.

This high-IQ favoritism is also evident in the stock market since 2008, with the best performing sectors being information technolgy, pharma/bio/healthcare, payment processing, investment banking, and consumer discretionary. The biggest losers, have been ‘blue collar’ sectors like mining, shipping, commodities, energy, etc. The only ‘blue collar’ sector that has thrived since 2008 is …auto parts, because consumers, squeezed by a weak labor market and other lingering effects of the recession, are not replacing their cars as often. Maybe also housing, catering, daycare, and landscaping in the Bay Area to cater to the new tech rich.

Besides IQ, the ‘bigger is better‘ theme also dominates in our post-2008 world. The failure rate for small business is higher than ever, party due to low interest rates and plunging treasury yields, making it easier for large companies with access to cheap capital to expand, thus crowding out small businesses. The most valuable web 2.0 companies keep going up in value. In late 2013 Uber and Snapchat were worth $30 billion combined. Now it’s over $100 billion or so, depending on the source.

This bigger is better/IQ favoritism trend is also observed in Bay Area real estate, which keeps going up long after other regions have stagnated. Bay Area home prices are well-above the 2006-2007 highs, yet the national average still well-below the old highs. Expensive homes in high-IQ regions keep getting more expensive, year after year, with calamitous events such as the 2006 housing bubble resembling merely speedbumps in an otherwise uninterrupted trajectory of higher prices.

San Jose home prices, which were already expensive, are higher than their 2006 highs, while the less-expensive national average is still 10% below the old highs.

This is all part of America’s meritocracy, which while intact, is harder to understand. A lot of people are finding themselves left behind, either because they are not smart enough or because they don’t understand how the post-2008 economy works, they don’t understand how to get rich in our new era:

That’s the way you get rich in the smartist era – with stocks, Bay Area real estate, web 2.0…stuff like that. Overpaid, low-IQ, redundant salaried jobs are becoming obsolete, replaced by automation, temp-workers, outsourcing, or eliminated altogether. Due to the supply of labor vastly exceeding demand, employers not only have the luxury of choosing the cream of the crop out of a huge pool of applicants, but to save money and avoid bad PR, employers are becoming increasingly trigger-happy, thus no one’s job is safe.

The rug has been pulled…but all too many people are stuck in a pre-2008 mindset, thinking that the old rules of business and life still apply. They don’t.

The fact 20 and 30-somethings are becoming millionaires or even billionaires in Silicon Valley, with apps and other technologies, while coders strait out of college are making six-figure salaries – is evidence capitalism is thriving, or at least thriving in high-IQ sectors and regions. Anyone with some coding and a good idea can become rich, almost overnight, and if that is not the epitome of capitalism, what is? Some call it a bubble, but assuming it is one (I don’t think it is), technologies are borne out of boom bust cycles, examples being the 90′s dotcom boom and the 80′s personal computer & video game console boom. After the dust settles, what was considered speculative becomes commonplace.

Since 2008, trillions of dollars of wealth has been created in stocks, real estate, and tech. The mobile and video advertising market, linking advertisers with social media platforms, is projected to be worth $100 billion by 2016. The new Star Wars movie is projected to earn over $2 billion, setting a box office record. That is capitalism. You can’t tell me capitalism is dead when you have all this activity going on – but – Capitalism may seem dead if you’re doing it wrong ** or if you’re looking at it through an old lens.

* Capitalism is getting smarter, as part of the post-2008 ‘flight to quality’ trend. In the pre-2008 world, money flow was careless (such as to subprime borrowers, energy companies with poor prospects, emerging markets, etc), but now it’s much more focused, and that’s why the most successful and valuable web 2.0 companies like Snapchat, Air BNB, Uber, and Dropbox keep getting more valuable with every passing year. The same ‘flight to quality’ trend observed in the stock market, which is why only a handful of companies (Microsoft, Google, Facebook, Amazon) accounted for all of the gains of the S&P 500 in 2015. As explained earlier in the article, a similar flight to quality/’winner take all’ pattern is observed in the real estate market. After many decades of trial and error, boom and busts, capitalism may have reached the pinnacle of refinement.

** The types of business endeavors that seem to be succeeding in the post-2008 era harness network effects or act as a middlemen, are scalable, have market dominance, and have low operating costs. Some examples include Uber and AirBNB, neither of which cost much to operate, are readily scalable, and act as middlemen by linking people with rooms or people with cars. There are millions of rooms and millions of routes for Air BNB and Uber, respectively. Facebook and Snapchat are scalable and harness network effects to generate billions of impressions for advertisers, making these companies very valuable even if they don’t produce any content. Facebook, LinkedIn, and Google’s profit margins are among the highest on Wall St. All these companies do is host a social media platform and an ad platform, and just sit back and watch the money flow in. None of these companies have viable competitors; over a decade later, despite many efforts, no one has been unable to unseat the dominance of Facebook and Google, and I predict nothing will.

China’s investors find safe haven in American real estate

From Yahoo finance: China’s investors find safe haven in American real estate

Commercial real estate isn’t the only type of property seeing large inflows of Chinese money. The country’s investors have also been active in the residential realty. They bought $28.6 billion in American residences, accounting for 28% of all foreign purchases by dollar volume, according to data from the National Association of Realtors. The homes they acquired tended to be on the luxury side; the average house in the U.S. sold for $255,600 but Chinese buyers spent on average $831,800 for their American homes.

What happened to the post-America era the left predicted in 2008 and 2009 would happen? So much for that.

As emerging markets suffer from low inflation-adjusted growth, high inflation, falling currencies, corruption, and divestment, and the left whines about wealth inequality and capitalism being dead – rich, high-IQ foreign investors cannot get enough of America and its most valuable real estate. Foreign applicants are inundating America’s fastest growing tech companies as well as Americas most prestigious institutions of higher learning. The left constantly criticizes America, but the rest of the world apparently cant get enough of America, and this probably makes the left irritated that the rest of the world isn’t sharing their post-America vision.

Related: Wealthy foreigners bought $100 billion in US real estate