Book Bubble

"Looks like the University of Illinois!"
--Joel Goodson (Risky Business)

Why do higher ed costs remain persistently high? Mike Shedlock hits it right on the nose. The reason is government subsidies. Loan programs like Sally Mae subsidize the market for higher ed. Subsidies always increase demand relative to supply. Consequentially, scarce resources are misallocated and prices rise.

Moreover, the 'cheap credit' structure of these subsidies has prompted borrowers to enter into larger commitments than they otherwise would. This should sound familiar, for it describe a process similar to the housing bubble.

How has this been operationalized on college campuses? Massive spending programs to build university capacity. Enrollment of students who would not have been admitted without subsidies--many of whom lack talent and motivation to do college level work. Diversion of resources away from those students with talent and motivation to do college level work. More debt. And, of course, higher prices.

Very few in the higher ed industry view this situation as bubblish. When reviewing the evidence, however, the familiar signs are there.

Which bids the question, what happens to these institutions and their stakeholders when the bubble pops, as bubbles always do?

Credit, No Credit

With hours left time on our sides
Now it's fading fast
Every second every moment
We've got to--we've gotta make it last
--OMD

Frank Shostak suggests that those equating a decrease in overall credit with deflation are wrong. He argues that only a decline in 'unbacked' credit reflects a deflationary condition.

While this may be true, the capacity of financial institutions to pyramid capital 10 to 1 or more suggests that the bulk of credit outstanding is indeed of the unbacked variety.

Indeed, bank leveraging lies at the heart of the inflation engine. When deleveraging occurs, the engine works in reverse.

Home Wrecker

I must've dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
--Genesis

Paul Wilham's fine blog has alerted me to concerns about the City of Cincinnati demolishing properties with little justification. To me, it seems criminal to be taking these properties down.

Now, it seems this may literally be true. The city appears guilty of negligence to say the least.

Certainly increases validity of the argument that city officials do not clearly think things thru before moving to demolish homes.

As Paul demonstrates, the economics of the current demolition policy makes no sense at all.

Fishing for Answers

"I miss the peace of fishing, like when I was a boy.
--Captain Marko Ramius

Great piece by Kevin Depew on the mechanism behind the debt crisis. In it, Pep cites work by economist Irving Fisher in the late 1930s published in Econometrica that outlines Fisher's 'debt-deflation' theory of a depression.

Fisher pinned the deflation dynamic primarily on the creation and destruction of debt, which certainly appears 'right' to me. Parenthetically, Fisher suggests early in his piece that his ideas were unique, although in my readings a number of others at the time were focused on similar thoughts.

Pep notes that the rising dollar step in Fisher's sequence is the one he's focused on. He sees DeMark trend exhaustion data lining up to support a major bottom in the USD in upcoming months.

Near the end of his piece, Kevin concludes that the debt-deflation phase will inevitably end in inflation, but that those positioning for that inflationary phase now are likely to feel significant pain.

I'm coming to a similar conclusion.

position in USD

Health Club

How will they hear
When will they learn
How will they know
--Madonna

Here is the smartest punch list for health care 'reform' that I've seen. The 4 elements that Professor Hoppe proposes are:

1) Eliminate all medical licensing requirements. Supply will rapidly increase and prices will fall. If buyers feel the need for some credentialing, then voluntary competing agencies will form.

This measure will increase search costs among health care consumers and drive more discerning choice.

2) Eliminate government restrictions on production and sale of health care products. No more FDA et al. Prices will fall and variety will increase.

Once again, this puts onus on the consumer to engage in more risk assessment. To the extent that consumer desire more information from producers, those sellers will be motivated to provide it in order to make sales.

3) De-regulate health insurance. Only private industry is capable of prudently insuring risk. Conditions that are not insurable will not be covered. Prices will fall; variety of insurance policies will increase.

4) Eliminate all subsidies to the sick and unhealthy. Subsidies create more of what is being subsidized. Eliminating subsidies increases motivation to live healthy lives.

The idea is to put market forces back in play. Despite what bureaucrats claim, our current health care system, and the system being proposed, is most certainly not market based.

Perspective Directive

Things could be different
But that'd be a shame, 'cause
I'm the one who could feel the sun
Right in the pouring rain
--Lou Gramm

This afternoon I read some comments on a sell off in bond land. I headed to the charts to see what was happening. Below is a daily chart of the 10 yr Treasury note yield (TNX). Sure enough, 10 yr yields have rallied more than 10% since the beginning of October. Not a good thing for things like mortgage rates.

For longer term perspective I pulled up the TNX chart on a weekly basis spread over nearly 4 yrs. This chart looks a lot less 'urgent.' A small countertrend rally in a multi-year downtrend. Technically, there's nothing to get excited about unless the TNX rises thru about 38 (or 3.8% yield). That level what suggest a change in longer term trend.

The lesson here? Time frame, cookie. What appears true in one horizon may look different in others. Varying time horizons improves perspective.

no positions

Low Return World

Have we become a habit
Do we distort the facts
Now there's no looking forward
Now there's no turning back
--Pat Benatar

My sense is that the next few years are likely to offer pretty low investment returns. Sure, there may be some special situations, and intra-period volatility may permit catching a nice trend if you're saavy enough to trade 'em. But I doubt I'll be smart enough to do that in a meaningful way.

As such, I want to shed risk and hold lots of cash.

With the tiny returns on cash balances, the other thing that makes sense to me is to pay down debt. Taking my mortgage debt for example, I'm paying 4 5/8% which, after tax, seems pretty low. But if cash is earning 0 to 1% in a money market fund, then I'm actually better off 'investing' this cash in paying down by mortgage, as my real return will be a coupla percent--which beats nearly everything else in my investing universe as I'm seeing it.

Doing some what-if planning suggests that I could pay down my entire mortgage, originated at $194,100 K this past May, by the end of next summer. As it stands right now, this will be my primary personal finance goal for 2010. Debt free by the end of 2010.

position in USD

Marginal Thought

With a little perserverence you can get things done
Without a blind adherence that has conquered some
--Corey Hart

Last week, President Obama spoke at MIT about his energy policy. During the speech, he spoke of the 'opponents' to his policy as being 'marginalized.' He claimed these opponents are making 'cynical claims that contradict the overwhelming scientific evidence when it comes to climate change.'

He goes on to suggest that the largest obstacle in the way of getting his policy done is cynicism and pessimism. He argues that what we need is optimism that his policy is correct.

Well reasoned thought processes know that there's plenty to contest w.r.t. the validity of the 'science' of global warming. It's easy to view the president's plea as one to switch off critical thought and blindly follow the 'smart ones.' A rhetoric of compliance.

Hopefully individuals will engage their brains and carefully think this issue thru on their own.

Rose Colored Glasses

Now, the mist across the window hides the lines
But nothing hides the color of the lights that shine
Electricity so fine
Look and dry your eyes
--Joe Jackson

Interesting article on Charlie Rose. Am not a huge fan but the way he weirdly leans over that table when chatting with guests catches my attention.

During the meltdown last fall, the way he softballed questions to Warren Buffett, Tim Geithner, Hank Paulson et al in a manner that leads me to believe he has a core belief in the value of central planning and intervention.

I do like how he relies on private donations for his show. Although he operates on PBS, he refuses public sources of funds. So perhaps he's more market driven than I had suspected.

GM and Them

If you let them do it to you
You've got yourself to blame
It's you who feels the pain
It's you who feels ashamed
--The Who

Classic example of government intervention gone awry. When GM wanted to build a Cadillac plant that would straddle Detroit and the municipality of Hamtramck in the early 1980s, it approached local government for help in clearing out local residences.

Politicians were happy to oblige in the name of 'jobs' (read: votes). They wound up evicting protesting residents of Poletown to make way for the factory.

Det-Ham went down as one of the biggest disasters in facility layout and automation gone awry. Today it operates at a fraction of original capacity, and is tooling up for a big bet on the hybrid Chevy Volt.

Government intervenes in the name of big business. Big business bombs but persists. Citizens get hosed. Sound familiar?

btw, a picture of GMs Michigan area capacity, then and now.

no positions