Investing Curiouscatblog

Category: Economics

  • Sound Canadian Banking System

    Worthwhile Canadian Initiative by Fareed Zakaria

    Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it’s Canada. In 2008, the World Economic Forum ranked Canada’s banking system the healthiest in the world. America’s ranked 40th, Britain’s 44th.
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    Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1.
    …
    Canada has been remarkably responsible over the past decade or so. It has had 12 years of budget surpluses, and can now spend money to fuel a recovery from a strong position. The government has restructured the national pension system, placing it on a firm fiscal footing, unlike our own insolvent Social Security. Its health-care system is cheaper than America’s by far (accounting for 9.7 percent of GDP, versus 15.2 percent here), and yet does better on all major indexes. Life expectancy in Canada is 81 years, versus 78 in the United States; “healthy life expectancy” is 72 years, versus 69. American car companies have moved so many jobs to Canada to take advantage of lower health-care costs that since 2004, Ontario and not Michigan has been North America’s largest car-producing region.

    Related: Canadian Banks Avoid Failures Common Elsewhere – International Health Care System Performance – Greenspan Says He Was Wrong On Regulation

  • Housing Rents Falling in the USA

    Apartment Rents Fall, Vacancies at 4-Year High

    U.S. apartment rents fell in the fourth quarter from the third as the national vacancy rate climbed to a four-year high of 6.6 percent
    …
    Asking rents fell 0.1 percent from the previous quarter, to $1,052 on average, their first quarter-to-quarter decline in almost six years. They rose 2.4 percent from a year earlier. Effective rents, what tenants actually paid, fell to an average $996 last quarter, down 0.4 percent from the prior quarter and up 2.2 percent from a year earlier.

    U.S. rental market set to slow down amid housing glut

    “Unsold properties being turned into rental units are creating a shadow market that’s driving up the vacancy rate and slowing the growth of rents,” Chandan said. “Areas that saw the most speculative investing, particularly in condos, will see the biggest pressure on rents.”

    Anthony De Silva said he was not happy that he had become a landlord. He bought a two-bedroom condominium 18 months ago on the ocean in Hollywood, Florida, expecting to sell at a $100,000 profit. Instead, he is now looking for tenants at $1,700 a month.
    …
    “Increasing vacancies does not bode well for rental incomes,” said Nabil El-Hage, a professor at Harvard Business School. “We’ve seen a softening in apartment REITs as a result.”

    So for renters nationwide this is one possible silver lining to the current economic crisis. Granted not a large one but in these times any good news is worth appreciating. For real estate investors the news is not as good. The Washington DC market is forecast to go against the trend for reduced rents in 2009.

    According to Marus and Millichap, Metrowide vacancy is expected to rise 60 basis points this year to 6.5 percent. Asking rents are projected to advance 3.1 percent to $1,410 per month in 2009, while effective rents increase 2.8 percent to $1,351 per month. Rent growth will lag slightly in Suburban Maryland. Of the 43 rental market they track they project San Francisco to see the largest increases in rent in 2009, followed by San Diego and Washington DC.

    Related: Home Values and Rental Rates – Rent Controls are Unwise – posts on housing – How Walkable is Your Prospective Neighborhood

  • GDP Down 3.8%, Worst Since 1982

    GDP slides 3.8%, worst since 1982

    That was the steepest drop since a 6.4% decline in 1982, easily surpassing the downturns seen during the 1990-91 and 2001 recessions. It also provided the second consecutive drop in GDP, after the 0.5% drop in the third quarter of 2008.
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    “All of this points towards real GDP declining faster in the first quarter than the fourth quarter,” Levy said. Another bad portent was a sharp decline in exports. U.S. sales to other countries had been strong in recent years, boosted by high demand overseas and the relatively low value of the dollar. But that situation reversed sharply in the last three months of 2008, with exports plummeting 19.7%.

    According to the International Monetary Fund, the decline in the U.S. is matched by other leading economies, which contracted about 5.5% in the fourth quarter of 2008.

    The decline was a bit less than anticipated but obviously shows an economy in serious trouble. U.S. GDP Falls At 3.8 Percent Pace In 4th Quarter

    The figure showed how rapidly the economy was contracting. In the previous quarter, the economy slipped 0.5 percent. For all of 2008, GDP rose 1.3 percent, the slowest growth since 2001, when the economy expanded 0.8 percent. In 2007, the GDP increased by 2 percent.

    The Commerce report showed consumer spending – which accounts for a whopping two-thirds of U.S. economic activity – fell another 3.5 percent in the fourth quarter after declining 3.8 percent in the third quarter. Spending on durable goods such as cars and furniture plunged 22.4 percent, the steepest decline since the first quarter of 1987.

    As I have been saying for awhile the economy is in trouble and 2009 looks to be difficult. We should be happy if a recovery is underway in the 4th quarter of 2009 and we have not too drastically increased the burden on the future to pay for current spending.

    Related: Financial Market Meltdown (Oct 2008) – Cracks in US Economy? (Dec 2006) – Fed Continues Wall Street Welfare – Forecasting Oil Prices – Crisis May Push USA Federal Deficit to Above $1 Trillion for 2009

  • Our Capacity Remains Undiminished

    President Barack Obama’s Inaugural Address

    We remain the most prosperous, powerful nation on Earth. Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week, or last month, or last year. Our capacity remains undiminished. But our time of standing pat, of protecting narrow interests and putting off unpleasant decisions — that time has surely passed. Starting today, we must pick ourselves up, dust ourselves off, and begin again the work of remaking America.

    That sounds nice I believe however, it is fairly irrelevant. Economic demand is what is down, not production capacity. We are “no less productive than when this crisis began.” Ok, that is probably true. So what. That implies that the crisis has something to do with productivity. If we say the color of our eyes is the same as when the crisis began it is obvious that is a non-sequitur. Well so is the quote by the new President, though that is less obvious.

    Our demand was definitely over stimulated using massive federal government budget deficits, massive trade deficits, massive amounts of consumer debt, massive amounts of unjustified mortgage debt and massive amounts of leverage. None of those things has anything to do with capacity in the implied sense – capacity to produce. They have to do with the capacity to consume. And while our capacity to consume has not declined. The funding that allows that consumption (foreign lending, high leverage, junk mortgages…) has decreased.
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  • Employees Face Soaring Health Insurance Costs

    The costs to employees for health insurance keep increasing, even as employers pay more also. A Premium Sucker Punch:

    Her employer picks up 50 percent of the coverage for her family, up from 33 percent a few years ago. But because insurance costs have soared, she says she’s actually paying $200 a month more in premiums. Her co-pays also have risen to $30 from $20.
    …
    The Corporate Executive Board found in its survey that a quarter of officials from 350 large corporations said they had increased deductibles an average of 9 percent in 2008. But 30 percent of the employers said they expected to raise deductibles an average of 14 percent in 2009. Mercer, a global benefits consulting firm, surveyed nearly 2,000 large corporations in a representative poll and found that 44 percent planned to increase employee-paid portion of premiums in 2009, compared with 40 percent in 2008.

    The economic slowdown, according to analysts, is making it more difficult for many employers to subsidize health care costs at previous levels. On average, experts say, benefit packages contain the biggest increases for workers since the recession of 2001. Workers’ health costs are rising much faster than wages.
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    Premiums for employer-sponsored plans over a decade on average have risen to $12,680 a year from $5,791, according to the Henry J. Kaiser Family Foundation. The median deductible for the plans was $1,000 in 2008, compared with $500 from 2001 to 2007, according to a survey of 2,900 employers conducted by Mercer.

    The broken health care system in the USA has been a huge drain on the economy and people’s standard of living for decades. The longer we allow the system to decline (increasing costs, declining results) the more damage the economy suffers and the larger the costs to implementing fixes become.

    Related: Personal Finance Basics: Long-term Care Insurance – Medical Debt Increases as Economy Declines – International Health Care System Performance – Many Experts Say Health-Care System Inefficient, Wasteful – posts on improving the health care system

  • Myths About Adam Smith Ideas v. His Ideas

    Gavin Kennedy is a professor and director of contracts at Edinburgh Business School. He authors the Adam Smith’s Lost Legacy blog discussing the mis-attributions to Adam Smith, which are all too common now. A good example is, Perpetrators of Myths Mislead Generations of Students, Some of Whom Grow Up to (mis)Advise Legislators:

    The notion that Smith had a ‘theory’ of ‘an invisible hand’ leading all players in markets to act in pursuit of their self-interests and raise annual output and annual employment is a myth, invented (‘made up’ would not be too strong a charge) by advocates of pro-corporate capitalism, then becoming rampant in the USA in the 1950s.
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    Smith’s intellectual arguments, and personal warmth for the growth of commercial society, were driven by the conviction that growth across agriculture, industry and specific, targeted public expenditure, such as defence, justice, and public works and public institutions, would assist the spread of opulence, especially to the labouring poor and their families, albeit slowly and gradually, but steadily too, if legislators and those who influenced them were careful not to approve monopoly schemes to narrow markets and restrict competition, not to indulge in spasms of ‘jealousy of trade’, protectionism, forming loss-making colonies and conducting wars for trivial ends (i.e., not for defensive purposes only).

    Introducing, a mystical or miraculous force at work in markets detracts from the real and detailed policy measures that may required from time to time to ensure steady growth, competition, and liberty for all, and not just for the amoral ends of privileged monopolists and their cronies.

    Related: Not Understanding Capitalism – Ignorance of Capitalism – Monopolies and Oligopolies do not a Free Market Make – Estate Tax Repeal, Bad Policy

  • International Development Fair: The Human Factor

    I am a big fan of helping improve the economic lives of those in the world by harnessing appropriate technology and capitalism. It is wonderful what can be done to improve the lives of so many people with some intelligence and effort. This talk does a great job of showing how engineers thinking about the economic realities in the much of the world can design solutions to help. Without understanding the economic realities you cannot be effective.

    Smith recounts other ventures: a bicycle pedal-powered, corn-shelling machine in Tanzania, which entrepreneurs can rent out, and which saves hours of drudgery for women who traditionally remove kernels of corn by hand; a backpack for storing hundreds of doses of vaccine that can be delivered as an inhaled powder and therefore require no refrigeration; cell phone services that allow Brazilian day laborers and bosses to vet each other in advance, and permit Indian health workers to follow up on TB patients.

    Concludes Smith, “Something like 90% of the world’s resources creates products and technologies that serve only the wealthiest 10% of the worlds’ population. There’s a revolution afoot to promote R&D to get designers to work on technologies for the other 90%.”

    Related: Nepalese Entrepreneur Success – Creating a World Without Poverty – Engineering a Better World: Bike Corn-Sheller – High School Inventor Teams @ MIT – Smokeless Stove Uses 80% Less Fuel

  • USA Standard of Living in Jeopardy

    US living standards in jeopardy by James Jubak

    At 2.3% growth, the $14.4 trillion U.S. economy (as of the third quarter of 2008) would produce an increase in economic activity of $331 billion in a year. That activity would generate money we could use to pay off the debt we’ve run up to end the current crisis, to buy better education and health care, to protect the environment, to improve our living standards, to spend and, for a few, to save.
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    the difference would get larger each year as the two rates were compounded. After 10 years at 2.3% growth, the U.S. economy would grow from $14.4 trillion in the third quarter of 2008 to $18.1 trillion, after accounting for inflation. At 3%, however, the U.S. economy would reach $19.4 trillion in gross domestic product.
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    The official unemployment rate hit 7.2% in December. Factor in part-time workers who would like to work full time and discouraged people who have stopped looking for work, and the real rate is more like 13.5%.

    Some of those people won’t go back to work even when this recession is over because the relatively meager safety net supporting the unemployed in the United States will have given way beneath them. They will have suffered so much personal and family damage that they will never regain their full pre-recession productivity.

    Related: Bad News on Jobs – The Economy is in Serious Trouble – Why Investing is Safer Overseas

  • The Impact of Credit Scores and Jumbo Size on Mortgage Rates

    Since August of 2008 conforming mortgage rates are have declined a huge amount. Jumbo rates have fallen a large amount also, but much less (for example for a credit score of 700-759 the jumbo rates declined 73 basis points while the conventional rate declined 172 basis points.

    chart of 30 year fixed mortgage rates by credit score from May 2007 to Jan 2009

    For scores above 620, the APRs above assume a mortgage with 1 point and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio. You can see, with these conditions the rate difference between a credit score of 660 and 800 is not large (remember this is with 20% down-payment) and has not changed much (the difference between the rates if fairly consistent).

    Related: Low Mortgage Rates Not Available to Everyone – 30 Year Fixed Rate Mortgage Rate Data – Real Free Credit Report (in USA) – Jumbo Mortgage Shoppers Get Little Relief From Rates – posts on mortgages
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  • Medical Debt Increases as Economy Declines

    The health care system in the USA is broken, as I have written about previously: USA Paying More for Health Care, International Health Care System Performance… One of the many problems created by the current system is ruined person finances for millions of people in the USA due to health care costs. The Rising Costs of Care And a Failing Economy Drive More Americans Into Medical Debt

    New York’s Commonwealth Fund has reported that 72 million adults under age 65 had problems paying medical bills or were paying off medical debt in 2007, up from 58 million in 2005. Many had insurance, and 39 percent said they had exhausted their savings paying for health care.
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    Medical debt can quickly snowball. Consumers with unpaid bills can wind up in court defending themselves against lawsuits filed by doctors and hospitals, which typically charge the uninsured full price for care, without the hefty discounts negotiated by health plans. Debtors’ wages can be garnished, liens can be placed on their homes, and their future job and housing prospects torpedoed by bad credit ratings.
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    Unwilling to wait for federal action, a handful of states, most notably Massachusetts, have passed laws designed to expand health coverage or to protect medical debtors. An Illinois law passed last year caps rates that hospitals can charge the uninsured, while a New York statute bars foreclosures intended to pay off medical bills.

    Purchasing health insurance against the risk of medical costs is critical to any financial plan. The concept (buying health insurance) is simple but securing that coverage is not as easy as knowing it is required for a sensible financial plan.

    Related: Broken Health Care System: Self-Employed Insurance – Resources Focused on Improving the Health Care System – Excessive Health Care Costs