Housing Bubble

Bob Shiller and Karl Case have an today's op-ed in the WSJ, which I have to go to the library to read. I thought the op-ed's were free? Check out the graph of American housing prices over the last 116 years. Scary stuff. Hat tip to Nouriel Roubini. The graph looks fairly stable and cyclical, with no long-running trends. That is until the start of the 83% rise in 1997. Did someone say irrational?

Dependency Ratios

Malcolm Gladwell has just published a New Yorker article that I recommend highly.

FOO Camp Tag Clouds

3 Different tag clouds available: using semantic analysis, company/institution, and foo campers own supplied tags.

Terence Tao

Remember that famous William James "equation":

Well imagine being around this guy. Let's see: he finished his bachelor's and masters at 17, his Ph.D. from Princeton at 20, and was a Full Professor at UCLA at 24. By all accounts this guy is the Math stud at this point in time. Fortunately, he is apparently a very nice guy.

Actually, a lot of Fields Medalists were young phenoms, so his being a tenured Full Professor at 24 is not unusual in that population.

I Know He's Bearish

Nouriel's post on the state of the housing market is unusually bearish, even for him. If the housing slump deepens, all bets are off:

... Even more ominously, futures markets now expect that house prices will fall during 2007. Following the lead and prodding of Robert Shiller – the maverick Yale professor who predicted the 2000 stock bust and is now predicting a housing bust - the Chicago Mercantile Exchange opened this spring a new futures market for house prices in ten U.S. cities. While this market is very new and still relatively illiquid, it is now predicting that U.S. house prices will fall in 2007 at the national average level, for the first time in over fifty years. The index of this futures’ market for the entire US is projecting a 5% price fall in 2007. And the futures contracts for individual cities show expected declines in housing prices even larger than 5% for Miami, New York, Boston, San Francisco, Boston, San Diego, Miami, New York and Las Vegas.

The likely fall in median home prices in 2007 may actually turn out to be larger than the 5% priced in the futures markets. In fact, one of the peculiar features of the latest housing cycle has been the presence of a large housing bubble: prices were going up well above economic fundamentals because of the speculative demand coming from expectations of increased housing prices that were feeding further speculative demand: "condo flipping" is the popular term for this speculative demand. Now that the bubble is bursting the fall in prices will be sharper than the one implied by medium term fundamantals as the initial price increase was due to a bubble that is bursting and leading to a fall in speculative demand: with prices now falling homeowners and speculators have no incentive to buy new homes as they expect prices to be lower in the future. So, expected prices fall leads to fall in speculative and fundamental demand and triggers actual larger than otherwise fall in actual prices. The speculative excess of a price bubble will now bring the bust of this price bubble. While the effect will be slower than in asset markets where prices adjust instantaneously (due to the sluggish nature of housing prices and their slow adjustment to increased inventories) eventually this price adjustment will occur - as it is now - and it will be very persistent over time. So, you can expect falling housing prices throughout most of 2007.

So, the simple conclusion from the analysis above is that this is indeed the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices. By itself this slump is enough to trigger a US recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession. And on top of the housing bust, US consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher and higher debt servicing ratios. This is the tipping point for the US consumer and the effects will be ugly. Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession.

And the housing bust is not going to be only a US phenomenon. As I will discuss in another blog, housing bubbles festered in many other economies including many European ones. Thus, the combination of high oil prices, delayed effects of rising interest rates and slump of housing that is now leading to a US recession is a phenomenon that is common to many other economies, including several European ones. So, expect the same deadly combinations of three ugly bears (slumping housing, high oil prices and rising interest rates) to hammer Goldilocks and sharply hurt Europe and other economies in the world.

Asian-Style vs. Legacy Admissions

One of my pet peeves is Legacy Admissions: if the U.S. is to be a truly merit-based society, we need to get rid of this form of "Affirmative Action". Affirmative Action can be justified, but Legacy Admissions? These are people with an upper hand: their parents went to the prestigious schools they are applying to. Make no mistake, besides the fact that they are likely to come from better schools:

... Although university officials state that legacy preferences are used only as a tipping factor in admissions, the strength of the programme is actually quite strong. According to a study by two Princeton academics, Espanshade and Chung[1], legacy preference admits are given an equivalent of 160 point boost in their SAT scores (out of 1600) and can account for as much as a 300 point boost. However, this is actually a smaller advantage than for recruited atheletes or affirmative action, which give equivalent boosts of between 185 and 230 points.

Contrast that with how Asian Universities handle admissions -- you sit for an entrance exam and your admission depends on how you do on the test, period. Business Week has a nice article on how students from a small village in India are getting into I.I.T. : they study like crazy for years. This is replicated across all the top schools in Asia (University of Tokyo, Kyoto University, Beijing and Beijing Normal University, Shanghai University, National University of Singapore, Seaoul National University, University of the Philippines, etc.): you pass tests to get in. Your parents can't help you get in, you have to perform. The founder of Infosys (the largest software company in India) had to send his kid to Cornell, because the kid couldn't get into I.I.T.

Heck even President Bush, a likely beneficiary of Legacy Admissions, now opposes it!

Patagonia

Business Week has a great article on Patagonia, the sports clothing and equipment company based in Ventura County, CA. Patagonia is a Triple Bottom Line company, and quite profitable. The article gives a good peek inside the culture of the company. Nine hundred résumés per job opening! Why don't more companies embrace the Triple Bottom Line? Here is a not-so-small company doing well, while paying attention to more than the bottom line:

Patagonia aims to produce top-quality products while doing the least possible harm to the environment. It's a mission that attracts and holds top-notch talent.

... Patagonia enjoys an unrivaled reputation among outdoor aficionados, and its green philosophy is gaining broader appeal as more Americans embrace sustainable consumption. Chouinard's goal for Patagonia's own sustainability: "I look at this company as an experiment to see if we can run it so it's here 100 years from now and always makes the best-quality stuff," he says. That means keeping growth relatively slow but steady, at about 5% per year. Revenues were up a healthy 7% last year, to $260 million. Operating margins typically come in at the high end of the 12% to 15% industry average, according to people who have seen the numbers, and that's after it donates 1% of revenues to environmental groups. Patagonia, which declined to comment on its financials, is owned by a Chouinard family trust.

Chouinard calls himself a reluctant businessman. He disdains cell phones and laptops as much as he does quarterly-earnings-obsessed executives. (As you might imagine, he's as likely to take the company public as he is to club baby seals.) Yet he finds that concern for quality and sustainability doesn't pose a conflict with running a highly successful business. "Every time we do the right thing, our profits go up," he says.

Odd as it may sound, Chouinard gets a lot of business done standing waist-deep in water. He has coined a term -- MBA, or managing by absence -- that sums up his leadership philosophy. At the office, he's totally plugged in. But he spends much of his time traveling around the world doing outdoor things and talking to outdoor people about their likes and dislikes. Sometimes the best way for new CEO Casey Sheahan to get face time with Chouinard is to meet him on the water. Last year, the two were fishing for steelhead in British Columbia when they noticed that their feet were cold. Clearly their Patagonia waders weren't up to the job. They decided to launch a series of quality meetings to review and improve the company's products.

Chouinard and Sheahan are hardly the only Patagonia employees to enjoy "Eureka!" moments in the great outdoors. Getting away from the office regularly is a job requirement -- considered essential for dreaming up the next generation of products. Whenever employees play outdoors, they're testing the newest gear or coming up with improvements. Regularly, teams of 20 to 30 people, including outdoor professionals Patagonia calls its ambassadors, go on excursions where they climb, fish, ski, or surf.

... Few Patagonians are in it just for the money. The company recently raised salaries to adjust for the cost of living, and everybody gets an annual bonus based on profits, but, overall, Patagonia pays at, or just slightly above, the market rate. However, the most significant rewards aren't monetary. One popular perk is a program that allows employees to take off up to two months at full pay and work for environmental groups. Lisa Myers, who works on the company's giving programs, tracked wolves in Yellowstone National Park during her sabbatical. The company also pays 50% of her college expenses as she pursues a wildlife biology degree. "It's easy to go to work when you get paid to do what you love to do," she says.

Patagonia's culture makes it a magnet for talented people. The company receives an average of 900 résumés for every job opening, so it can afford to be picky. Top outdoor industry executives want to work there, too. Sheahan just lured Damien Huang from much larger rival North Face to run Patagonia's product development group.

Can others capture some of Patagonia's magic? Most companies -- especially ones with demanding public shareholders -- simply can't let employees take a surfing break. They can, however, foster creativity and provide a sense of purpose. Perhaps the most valuable and easily applied lesson from Patagonia's experience is this: To think outside the box, sometimes you need to get out of the cubicle.

Reducing Our Footprint

I love Al Gore, and would support him if he decides to run for President. In a recent SF Chronicle article, Hoover Institution researcher Peter Schweizer writes:

... For someone who says the sky is falling, he does very little. He says he recycles and drives a hybrid. And he claims he uses renewable energy credits to offset the pollution he produces when using a private jet to promote his film. (In reality, Paramount Classics Pictures, the film's distributor, pays this.)

Public records reveal that as Gore lectures Americans on excessive consumption, he and wife Tipper live in two properties: a 10,000-square-foot, 20-room, eight-bathroom home in Nashville, and a 4,000-square-foot home in Arlington, Va. (He also has a third home in Carthage, Tenn.) For someone rallying the planet to pursue a path of extreme personal sacrifice, Gore requires little from himself.

Then there is the troubling matter of his energy use. In the Washington, D.C., area, utility companies offer wind energy as an alternative to traditional energy. In Nashville, similar programs exist. Utility customers must simply pay a few extra pennies per kilowatt hour, and they can continue living their carbon-neutral lifestyles knowing that they are supporting wind energy. Plenty of businesses and institutions have signed up. Even the Bush administration is using green energy for some federal office buildings, as are thousands of area residents. But according to public records, there is no evidence that Gore has signed up to use green energy in either of his large residences. When contacted recently, Gore's office confirmed as much but said the Gores were looking into making the switch at both homes. Talk about inconvenient truths.

Gore is not alone. Democratic National Committee Chairman Howard Dean has said, "Global warming is happening, and it threatens our very existence." The DNC Web site applauds the fact that Gore has "tried to move people to act." Yet, astoundingly, Gore's persuasive powers have failed to convince his own party: The DNC has not signed up to pay an additional two pennies a kilowatt hour to go green. For that matter, neither has the Republican National Committee.

Maybe our very existence isn't threatened.

Coincidentally, I've been thinking about this issue recently. For too long, we in the developed world have been consuming so much of the planet's resources. We need to consume less and downsize our homes. Seriously, billions of people in the worlds live in much smaller spaces. Actually, people in Western Europe and Japan, live in smaller houses than we Americans. A thousand square feet should be enough for a family of four. What do you think?

Down Time

We are getting some down time this week, and are off to enjoy Southern Humboldt County. It's been a busy August for us. Having great house guests/ house sitters has made our cat miss us less :-)

Tax Breaks and the Energy Sector

James Hamilton breaks it down:

... Unsurprisingly, oil and gas producers are projected to do well in the 2006-10 period. While unconventional fuel producers also do well, interestingly the current plans (as of March 31) seem to show declining "tax expenditures" for unconventional fuel producers in the out years.

... In brief, for the 2006-2010 period, going to corporations for (i) expensing exploration and development of oil, natural gas and other fuels, $5.6 billion; (ii) excess of percentage of cost depletion, 5.3 billion; (iii) tax credit for unconventional fuel production, $8.8 billion; and tax credit for production from renewable resources, $29.4 billion. Going to households for (i) tax credit for purchases of new and existing qualified energy efficient homes, $0.6 billion; tax credit for purchases of energy efficient appliances, $0.2 billion; and (iii) tax credit for purchases of alternative technology vehicles, $0.8 billion.

Current.tv A Year After

Good that they are feeling optimistic. As far as I can tell, the profitability calculation is a rough estimate. From the SF Chronicle:

... The best news of all for Hyatt, who is Current's CEO, is that the operation is making a small profit, according to Derek Baine, a senior analyst with Monterey-based Kagan Research.

And some of the TV industry observers who once mocked Current have begun to change their minds as several networks, such as CNN and the CW -- which is a combination of the former WB and UPN television networks -- are now embracing user-generated content.

But while Current may have been ahead of the curve on this trend, the next challenge it confronts is tougher: Many in the channel's targeted 18-34 demographic may not be able to afford the premium-tier service of some digital cable systems, where Current is carried. Others may prefer lapping up videos online in YouTube's free-form format rather than on Current's more organized site. Critics continue to ask: Is Current focused on the wrong medium?

Current "caught the (viewer-created content) trend early, but it is kind of surfing by them," said John Higgins, business editor at Broadcasting & Cable magazine, a trade publication for the television industry. "These guys (at Current) had all the right ideas and all the same machinery in place that YouTube did, but they didn't quite do it. Lighting struck 10 feet to the left of them.

"Do you ever hear people say, 'Did you see that video on Current?' No. They say, 'Did you see that video on YouTube?' " Higgins said.

Hyatt said Current is trying to position itself as the thinking person's YouTube -- "a premium offering" where the best of user-generated content will gravitate to TV.

Part of Current's strategy is rooted in the belief that while YouTube may be serving up 100 million videos a day to 6 million unique visitors, the 18-to-34 set still watches and appreciates a lot of television. But while that age group watches an average of three hours and 55 minutes a day, it is far less than older folks. The over-50 crowd sees nearly six hours daily, according to Nielsen Media Research.

Yet, in another sign that media consumption habits are unpredictable, the audience for short videos may not be as young as perceived. The highest percentage of YouTube's audience is between 35 and 49 years old, according to June measurements by Nielsen/NetRatings.

... Baine estimated that the company is turning a slight profit of $3 million this year based on estimated revenue of $47 million. He forecasts that Current's advertising revenue will increase next year to $19 million from $10 million this year. "For a network in its first year to not be losing money is pretty good," Baine said.

U.S. Foreign Policy and the Middle East

Based on this article from Seymour Hersh, Cheney and Elliot Abrams are outmaneuvering Condi Rice.

Skype

Great post on Skype and NAT (Network Address Translation), and how a pair of ex-Intel engineers may be on to something.

Quadrupled Bandwidth Speed

For an additional $10/month (for a total of $28/month), I just clocked my download speed at 4.85 megabits, and upload at 627 kilobits. A month ago I had download speeds of 1.1 megabits.

I was smart to pay that extra $10. Now let's see if I can do my part to support Net Neutrality.

Curb, Season 5

We just finished Curb Your Enthusiasm season 5 and it was hilarious. I think Curb is one of the best TV shows today, a logical successor to Seinfeld. Being on HBO, Curb has less restrictions than Seinfeld, so it takes things to another level. The philosophy is the same, cast talented comedians (usually stand-up comics), use funny observations about everyday things, and let the actors improv and riff through the scenes.

Go Netflix it as soon as possible. If you are not familiar with Curb, I recommend you watch the previous seasons as well.

Sudan

We heard a Catholic priest describe life for Christians in Sudan, and here are some of the disturbing claims made:

• The constitution favors Islam over other religions.
• For a Christian person to attend high school and beyond, he/she either has to convert, or adopt a fake "Islamic" name, to sneak into the school system.
• Christian people, especially pregnant women, avoid the public hospitals for fear that they would be given inadequate, or even bad, medical advice.
• He claimed that outside countries were funding the central goverment, and the systematic persecution of Sudanese Christians was part of a move to make the entire country Islamic.
  

Clearly he was emotional, and was probably wanting to communicate how desperate their situation was. But even if half of what he was saying was true, it is a bleak picture. For what its worth, even Wikipedia has an entry on this issue.

Earlier this year, I highlighted the inadequacy of the U.S. policy towards Sudan. Here's hoping that the MSM starts covering Sudan! Religious freedom, including the freedom NOT to worship, is something we in the West are lucky to have. Hopefully, our foreign policy promotes this basic right, not suppress it.

Robin Williams

If you want to take a break from the depressing news coming out of the Middle East, check out this hilarious Fresh Air interview with Robin. Enjoy!

Death In Gaza

HBO comes through again with this moving documentary shot in Gaza and the West Bank. Request your local library get a copy of it, or you can rent it over at Netflix.

Texas Surpasses California in Wind Energy

We just lost our bragging rights. I think its great that other states are stepping up:

As the U.S. wind energy industry stayed on pace for another record year, Texas for the first time supplanted historic leader California as the top state in cumulative wind power capacity, according to the American Wind Energy Association’s (AWEA) Second Quarter Market Report.

The report also shows that U.S. developers brought online a capacity total of 822 megawatts (MW) in the first half of the year. With the strong growth, the U.S.’s cumulative wind power capacity surged to 9,971 MW—within close striking distance of the 10-gigawatt (10,000-MW) milestone.

Texas ’s cumulative total now stands at 2,370 MW of capacity—enough to power over 600,000 average American homes—followed by California’s 2,323 MW. Texas edged ahead of California by adding a total of 375 MW, about half of the total amount installed in the country since the beginning of the year.

It’s a historic moment. California has led the nation in installed wind capacity uninterruptedly for nearly 25 years, ever since the first wind farms were built there in late 1981, and at one time the Golden State was host to more than 80 percent of the wind capacity in the entire world. However, energy and electricity prices tanked during the global oil glut of the 1980s, putting California’s wind power boom on hold.

But Texas by no means has been the lone state busy developing wind power projects. In fact, while Texas took the capacity crown from the perennial state leader, development activity in California has not exactly been dormant, with PPM Energy’s (PPM) 150-MW Shiloh Wind Project in Solano County and the Sacramento Municipal Utility District’s 24-MW project near Rio Vista coming online earlier in the year.

Music: Bebe

Bebe (a.k.a. Nieves Rebolledo Vila) is a Spanish singer-songwriter. Another great find courtesy of Morning Becomes Eclectic! I picked up her CD from my favorite music store, and I can't stop listening to it. Exciting things are happening in Spain, this is the second Spaniard that I have come to really dig, in the last couple of months.