Whither Steve Jobs?

Steve Jobs passed away in October of 2011 and it now appears that Apple-The-Magnificent  passed with him.

Apple's stock has been in decline for several weeks as it ran into two immutable facts. The first is the law of large numbers. That is, the larger the company, the more difficult it is to grow. The second is that Tim Cook is not Steve Jobs.

And, in case you don't watch the financial news, Apple stock is getting absolutely hammered today. I personally own some and I had to sell about half my holdings to avoid the bloodbath.

I'm working my way (slowly) through Steve Jobs biography. The book is not as easy a read as I expected because the author spends a lot of time in the minutiae of Apple's internecine spats over product design, office layout, dress codes - you name it.

What I'm learning about Jobs, though, is that he was a truly extraordinary businessman. Henry Ford changed American life with the Model T and mass production. Steve Jobs is the Henry Ford of our time and he changed the way we live our lives in ways that we don't yet appreciate.

But Steve Jobs is gone and Apple has run into the law of large numbers. Tim Cook is not Steve Jobs and Apple is now just another big company. It's a pity.

US Housing Prices Over Recent Time

Huh? No clever title to grab your attention and pull you in? Well, maybe next time.

Here's an interesting graph covering US housing prices since 1975. For those too young to remember, that gray vertical bar around 1990 is what we called the Savings and Loan Crisis. This was the little brother of our more recent sub-prime fiasco and the 2008 crash.

You see, you young whipper-snapper, there used to be a type of bank called a Savings and Loan (S&L). These were local banks chartered by the government to serve mostly local business and the housing markets. George Bailey in "It's a Wonderful Life" ran a Savings and Loan bank.

Well, in the late 1980s the US Congress had the bright idea of arbitrarily increasing the deposit guarantees. If my memory serves (without Googling it) the amount went from $30,000 per account to $100,000 for no particular reason other than an influential congressman's pressure.

Once that happened, money flooded into the Savings and Loans around the country as what we call the risk-free money pool increased dramatically. This created a housing bubble which burst in the late 1980s-to-early 1990s and took down a good number of Savings and Loan banks with it.

The government saved the day (after creating the mess) by creating an agency that bought bad loans from the S&Ls and then sold them into the mortgage market as a discount. The price for this was the shutter the S&Ls involved and allow them to re-open as traditional banks, if they could qualify.

Thus ended the S&L version of a bank.

Honestly, I thought when our current problem started in 2006-2007, that the government would do something similar because it actually worked very well. In fact, the original TARP program was just that but it morphed very quickly into the bank bailouts which are now all so familiar.

So, whither Fannie and Freddie which played a similar role as the deposit guarantee did in the S&L fiasco? Why do they still exist?

Up Up and Away?

Home prices are rising too fast. At least that's what CNBC says in this web article. Although I hardly consider CNBC to be an authority on this topic, it is an interesting take on the now firm rebound in real estate.

The other day I was perusing Zillow.com and Trulia.com for the local real estate market and came across a few listings where the asking price had been raised (that's right, raised!) in the last bit of time. Of course, CNBC is all over this with worry. Oh, well.

As soon as I find something authoritative and graphical, I'll make another post. I suspect this is mostly the famous old "reversion to the mean" in practice.

You Say You Want a Revolution?

There aren't any pretty graphs with this one but here's a link to an article on US domestic oil production and consumption at The American Interest. Our 2012 imports of oil are the lowest in 25 years.

If you're inclined to think that our struggles with the Middle East in recent history have been wars for oil (which they have, but that's a different topic) then here's how to end those wars. Drill baby drill!

In separate new articles, I've seen that at the current rates of production increase, the US will be a net exporter of oil by 2020. Here's hoping.

Can The U.S. Go Bankrupt?

Okay, there will be no suspense on this one. The answer is no.

Why? Because the U.S. (like Japan, Mexico, Canada, etc.) is a currency issuer. That is, if I'm a currency issuer and I have bills to pay then all I need to do is make more currency. The noise in the United States about defaults is caused by the debt ceiling mechanism inside the U.S. law.

Now, one of my favorite bloggers is Cullen Roche at Pragmatic Capitalism and he's a proponent of Modern Realism (MR) which I have not studied formally. (I have formally studied Milton Friedman's monetarism theories, by the way.)

This won't be a sexy as most of my scintillating entries but Cullen has a very interesting short take on the "can we go broke" question that I'll cut and paste here.

"It’s important to understand what govt spending is in the first place.  Most people don’t get this right.  When the govt taxes it takes from Peter to pay Paul.  When the govt spends in excessive of tax receipts it must sell bonds to finance the spending.  So, they sell a bond to Peter to pay Paul AND issue Paul a bond.  So, the deficit spending results in a redistribution of existing money AND the issuance of a net financial asset (the bond).  So, govt spending is really just a perpetual redistribution mechanism.  It’s not really money printing as most people call it (unless you want to call bonds money which is not correct).  The govt sells the bonds basically by bribing the banks to be their dealers.  So the govt doesn’t “run out of” buyers.  Auctions are literally designed not to fail.  But all this spending can cause inflation.  And the issuance of net financial assets can cause healthier private balance sheets to leverage up by borrowing from banks (who are the real money printers).  This whole process can cause inflation which is the real constraint.  Spending in excess of productive capacity could cause the economy to overheat and could cause any number of problems from asset bubbles to real declines in living standards.  So always remember that high inflation is the constraint."

So, there you have it. The real risk in the Federal Reserves perpetual QE is inflation. If you're a seasoned observer as I am then you'll remember the high inflation 1970s. When will QE lead to inflation, if it ever does? Tune in next time.

Crowding Out and Other Things

I still, for the life of me, don't understand why the term "crowding out" hasn't returned to popularity. In the 1970s it was a very popular term which meant that the U.S. government's use of debt was crowding private economic players out of the market.

This chart comes from a fabulous collection of charts at Business Insider - 50 Important Charts. They cover a lot of topics but they make for a very useful snapshot of our world at the moment.

In the one I've included directly, what you see is the result of increased debt financing of the government. Above a certain level of public debt, each additional borrowed dollar produces less and less output. Or to put it another way, so much money goes to servicing the debt that less and less true investment takes place. Or to put it another way, when the government is hoovering up all the national debt capacity, then more efficient and productive private players are crowded out ... and so productivity declines.

A sad tale but true.

A Balance Sheet Recession - Connecting the Dots

Ignore the political storms of the moment. The best financial description I've heard of our current economic malaise is calling it a "balance sheet recession". Or to put it another way, all the private players in the American economy (and a lot of the rest of the world) were over-leveraged going into 2007. And now all the private players are de-leveraging (or reducing debt).

I remember predicting to a friend in early 2008 that it would be 2012 before we started to climb out and 2017 before we are back to the historic norms. Unfortunately, my prediction seems to be close enough.

Take a look at this article in Pragmatic Capitalism by Jan Hatzius where he goes into the details. In the long run, the news is good. In the short run, there's more pain ahead and more political shenanigans by our ruling class can be expected.