Chuck Ponzi March 8th, 2010

One of the most powerful experiences that investment bubbles can teach us collectively is how conservative we should  be when burned multiple times.  Unfortunately, for many of those newly exiting business schools or unaffected by a downturn show an uncanny ability to ignore others’ experiences.  The most powerful lessons of this past “lost decade” in the US (if we will but open our eyes to learn it) is that outsized returns cannot be depended on, and that risk does not equal reward, it just means risk.

CALPERS, the California Public Retirement Pension fund is about to learn that lesson the hard way. Formed in the 30’s, but built on the back of the 50s through the 80’s, it’s investment options expanded from solely bonds to real estate, to equities.  During this time, America experienced the greatest growth of real estate, equity, and bond values.  But most of all, of leverage.  Sadly, most of the value “growth” in the US over the past 20 or so years has been attributed directly to monetary growth.  Indeed, as yields on lower risk returns shrink, perception of higher risk equity values go up.  Unfortunately, for many, this mirage has much more power, and this perception that trees grow to the sky and all charts go up and to the right meant that there was little risk in promising free healthcare and pensions to the moon for all who worked for the grand state of California.

Except that it can’t.  The high profile failure of CALPERS has been nothing short of stunning.  Having lost more than 30% of its total value in 2008, it is unclear how the future promises made to state employees can be filled.  Especially when those promises are built on expectations that returns are 7.75% over the long run.

SFGate recently reported that they are considering lowering their benchmark rate above.  As reported:

Larry Fink, CEO of the giant money management firm, BlackRock Inc., with which CalPERS has invested, told its board in July, “You’ll be lucky to get 6 percent on your portfolios, maybe 5 percent.”

Even that might be optimistic.  When mortgages were returning 10% and you could expect a 1% chargeoff ratio and a 1% management fee, you could maybe meet the goal with a moderate amount of leverage.  When mortgages are yielding sub 5% and chargeoffs and management fees eat up most of that, you’d have to create an insane amount of leverage, which only increases your risk, to make it even rationally feasible, if even possible.

Why is this important?  Well, the benchmark rate determines the contribution rates, both of members and the State Government.  This is only one of many elephants in the room in California that noone wants to talk about it.  At precisely the time when the state can least afford to spend even more money, it may be required to.  Which only makes the situation more dire.  State and local government employees in California (in many, but not all cases) already enjoy higher pay than their private enterprise counterparts.  In addition to that, they are afforded better health benefits, vacation packages, and generous pay packages and benefits upon retirement.  When the world has all but forgotten pensions, many state employees enjoy the grandaddy of them all, a defined benefit pension plan.

It even seems quaint to talk about it since few still understand the difference between the defined benefit and defined contribution pensions.  It will suffice to say that the defined benefit is almost always much, much better, and much, much more expensive.  It’s quaint because most people who are not state employees in California do not even have a significant 401K, much less a crappy pension.  This is nothing compared to the Cadillac pension plan that virtually ALL state employees get.

So, to sum it up, California faces a budget shortfall of epic proportions.  It has parlayed every non-GAAP accounting trick in the book to delay the day of reckoning, hoping that pink ponies save them, but they have not.  The bill is quickly coming due, and indeed, the state may have even more troubles.  There is no way out.  Without serious pension reform (hand their asses back to them), taxes will have to be raised.  Given that the state already recalled one governor over licensing fees, I see this one going over like a lead balloon.  Meg Whitman has been campaigning that she can fix this mess.  I’m sorry, but there is nothing that will fix that mess except for a miracle or much higher taxes.  This still will need to invent something seriously out of this world to make that happen, or bite down on the bullet of austerity to balance the budget and maybe put something away for a rainy day (if it gets any rainier, this place is going to figuratively float away).

We need another investment bubble.  Luckily, the goldrush of 1849 proves that there is significant gold in them thar hills.  Perhaps we can put a tax on pickaxes and heavy machinery that will help us cover some of the shortfall.  With the bubbly prices that gold is now fetching, it might just do the trick.  However, I wouldn’t expect the Marijuana tax proposed earlier to make a big dent.  We’d need some serious potheads to move here to make it work (and they’d have to be stinkin’ rich to boot).

No, perhaps we we all need to collectively do as Californian’s is to do what CALPERS will in the end be forced to do.  Lower our expectations.  But, when have you ever known Californians to do that?

• Deflation , Delusion , Denial
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Chuck Ponzi January 20th, 2010

Unfortunately, this bad dream, this nightmare is what we are living through.  I believe we have reached the tipping point.  If the morally decrepit cannot be removed through nonviolent means (voting), they will most assuredly provoke a sleeping giant.  I don’t think Americans can take much more evil, graft, stupidity, and lawlessness.

“Could it all be a bad dream, or a nightmare? Is it my imagination, or have we lost our minds? It’s surreal; it’s just not believable. A grand absurdity; a great deception, a delusion of momentous proportions; based on preposterous notions; and on ideas whose time should never have come; simplicity grossly distorted and complicated; insanity passed off as logic; grandiose schemes built on falsehoods with the morality of Ponzi and Madoff; evil described as virtue; ignorance pawned off as wisdom; destruction and impoverishment in the name of humanitarianism; violence, the tool of change; preventive wars used as the road to peace; tolerance delivered by government guns; reactionary views in the guise of progress; an empire replacing the Republic; slavery sold as liberty; excellence and virtue traded for mediocracy; socialism to save capitalism; a government out of control, unrestrained by the Constitution, the rule of law, or morality; bickering over petty politics as we collapse into chaos; the philosophy that destroys us is not even defined.

We have broken from reality–a psychotic Nation. Ignorance with a pretense of knowledge replacing wisdom. Money does not grow on trees, nor does prosperity come from a government printing press or escalating deficits.

We’re now in the midst of unlimited spending of the people’s money, exorbitant taxation, deficits of trillions of dollars–spent on a failed welfare/warfare state; an epidemic of cronyism; unlimited supplies of paper money equated with wealth.

A central bank that deliberately destroys the value of the currency in secrecy, without restraint, without nary a whimper. Yet, cheered on by the pseudo-capitalists of Wall Street, the military industrial complex, and Detroit.

We police our world empire with troops on 700 bases and in 130 countries around the world. A dangerous war now spreads throughout the Middle East and Central Asia. Thousands of innocent people being killed, as we become known as the torturers of the 21st century.

We assume that by keeping the already-known torture pictures from the public’s eye, we will be remembered only as a generous and good people. If our enemies want to attack us only because we are free and rich, proof of torture would be irrelevant.

The sad part of all this is that we have forgotten what made America great, good, and prosperous. We need to quickly refresh our memories and once again reinvigorate our love, understanding, and confidence in liberty. The status quo cannot be maintained, considering the current conditions. Violence and lost liberty will result without some revolutionary thinking.

We must escape from the madness of crowds now gathering. The good news is the reversal is achievable through peaceful and intellectual means and, fortunately, the number of those who care are growing exponentially.

Of course, it could all be a bad dream, a nightmare, and that I’m seriously mistaken, overreacting, and that my worries are unfounded. I hope so. But just in case, we ought to prepare ourselves for revolutionary changes in the not-too-distant future.”

• Delusion , Free Speech , Rants
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Chuck Ponzi November 25th, 2009

I have nothing against Donny.  Love him to death.

Still, is this what is going on in people’s minds?

While the rest of the world starves, we’re paying double on our housing so that Congress can feel like they did something?

Why can’t we get more Ritholtz on TV and less Osmond?

Meanwhile, the housing bottom?  Not Even Close.

Sucks to be buying a house right now in Coastal California.

Meanwhile, HALF OF ALL BANK LOSSES NOT YET BE RECOGNIZED?

Seriously, we are champions of denial.  Extend and Pretend.  and Pretend some more.  Southern California is right at the heart of that.  Repeat after me… Extend…. Pretend…  Say it 10 times and it’s kinda soothing.

• Delusion
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Chuck Ponzi October 22nd, 2009

“We didn’t truly know the dangers of the market, because it was a dark market,” says Brooksley Born, the head of an obscure federal regulatory agency — the Commodity Futures Trading Commission [CFTC] — who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country’s key economic powerbrokers to take actions that could have helped avert the crisis. “They were totally opposed to it,” Born says. “That puzzled me. What was it that was in this market that had to be hidden?”

• Bubble , Debt , Deflation , Delusion , Speculation , Unintended Consequences
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Chuck Ponzi September 17th, 2009

This post is being put out for those readers who are seeing the unfolding of 2009 and wonder if we are at a housing bottom. Indeed, volumes have increased dramatically, and one can hardly turn on the tv, radio, or internet without being barraged with news that the housing market has hit bottom and is quickly recovering. I understand why one would be confused. After all, the housing market has improved, and the global stock market is deeply in rally territory after hitting rock bottom in March. However, this is time time when one has to ask themselves why they were waiting to buy a house in the first place. Was it because it was too expensive? Was it because you were worried about prices slipping more? Or, was it just because you wanted to catch the bottom and look like a genius in 10 more years? Well, if any of these motivations, you’ll have different answers of when to buy.

If you waited to buy a house because it was too expensive, ask yourself, is it too expensive now?  This is the easiest concern to get over.  In the throes of the housing bubble, you would have been told by your agent that you should just lower your expectations.  Buy a smaller place.  Buy a place further out.  Buy a place you don’t want, but can afford.  I’ll dispel any myths, there is no such thing as a crystal ball.  Just as I tell you that scamsters like Gary Watts didn’t know was going to happen, we also only operated on verifiable information.  All information is telling us that while a bit of affordability has returned, the underlying problems with the housing market still exist.  Let’s outline those quickly:

1.  Housing exceeds healthy income limits for much of Southern California (inland areas are back to a healthy level, so this really only refers to coastal areas, and some pockets throughout.

2.  Interest rates are low, masking the affordability problems mentioned above.  Rates are low because the Federal Reserve is intentionally targeting mortgage rates by purchasing up to 50% of all issued mortgage paper.  This is only intended to be temporary, and at some point, not only will this be removed, the current leverage must be unwound.  It is likely that interest rates will proceed higher.  While noone can know for sure when this will be done, it is likely to have an impact in the 2nd half of 2010 and into 2011.

3.  Unemployment in Southern California is increasing.  This is a known fact, and is expected to peak sometime in 2010 if things immediately improve.  However, it is expected that the decline will be less than steep, and high unemployment could persist for up to 5  more years after the recession ends.  Add in that California has become a very difficult place for many businesses to continue due to high taxes and infrastructure problems, and many companies are looking at alternatives if they upstaff.  Only lower wages will attract them back.  Lower wages do not increase home prices.

4.  The option-arm Tsunami has not come yet.  With an expected default rate that is much higher than subprime, and a concentration in coastal California, much of pain that inland areas sufferend is expected to occur in the more expensive areas.  If this materializes, buyers today are “catching the falling knife”.  The option arm recasts are expected to peak starting this quarter and cresting late 2010 and not declining until 2011 or 2012.

5.  The move-up market is dead.  The most starkly different part of this bust versus prior busts is that many, many people over-leveraged their houses even more than their increase in value.  Indeed, so many people are underwater at prices that locals can afford that it’s impossible for the majority of home buyers to move up at all.  This is one of the reasons that the low end is the most active areas.  Higher areas are simply over-priced for locals who fear for their jobs and have suffered a calamitous stock market setback.

6.  The banking system is unhealthy.  Leverage, and indeed money supply is decreasing.  This is the backside of a debt-fueled overcapacity bubble.  First, it was businesses that were overleveraged.  Then it was households.  Soon, it will be government, and there won’t be enough income to support the levels of debt and still account for imperfections in the system.  Someday, we’ll worry about

So, if you’re still interested in buying after knowing all of that, don’t say nobody warned you.  I understand, sometimes the social peer pressures push us to do irrational things.  Just look back at the bubble.  And, with the seemingly invincible Federal Government pulling out all stops to stimulate housing sales and ownership, it might seem that you just want to throw in the towel and give it up.  I know, I’ve wondered if it’s worth the wait.  I won’t think bad of anybody who buys now.

However, if you’re waiting for prices to come down more, I believe they will, but don’t fool yourself, no one will intentionally catch the bottom.  I don’t believe we’ll see the bottom until noone cares anymore, that’s how bubbles work historically.  We are, however, still pulling demand from the future.  We’ll overshoot by that much, at some point.  It can be fast and painful, or it can be slow and painful.  Either way, we haven’t had pain in the coastal areas yet.

Besides, if you’re wanting people to think you’re a genius, you might be surprised to find that no one likes the smartest guy in the room.  I know a lot of Goldman Sachs employees are finding that out.

• Deflation , Delusion , Denial
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Chuck Ponzi August 27th, 2009

Do you agree with Davidowitz?

Seems pretty bleak to me too. I’m trying hard to be an optimist, but it doesn’t seem like anything has improved, only gotten worse. In fact, California is now showing a 11.9% unemployment rate.

Even the supposed venerable and indestructible Los Angeles has an 11.6% rate and bulletproof Orange County has 9.2%. Those are all depression-era numbers when factoring in the

• Delusion , Denial
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Chuck Ponzi June 18th, 2009

If there was ever any doubt in your mind about whether there was an intended sinister motive behind a financial collapse, consider the following:

1.  The Federal Reserve aided and abetted the Nasdaq/tech bubble.

2.  The Federal Reserve intentionally created the housing bubble.

3.  The Federal Reserve’s member banks held our federal government hostage in a modern “Financial Terrorism” world where if they don’t get trillions, they’ll blow up our economy.

4.  The Federal Reserve inentionally stayed far behind the curve of the housing crash to force their agenda on the Executive and Legislative branches, and capitulation into massive federal bailouts.

If ever there was a secret society, the Federal Reserve must be at the pinnacle; operating a private organization as a quasi-governmental branch that controls our currency and our banking system.  Even our Treasury Secretary, Timmy Geithner came directly from the Federal Reserve.

And now they want to control the whole of our financial world.  Can you believe this?

At least some of our congress persons are beginning to question letting the fox guard the henhouse.

President Barack Obama’s plan to transform the Federal Reserve into a super-regulator ran into skepticism Thursday from lawmakers who worry that the central bank is not the best suited to keep an eye on firms deemed so big and influential that their demise could hurt the economy.

Democrats and Republicans voiced misgivings as Treasury Secretary Timothy Geithner began a marathon day of selling Obama’s financial regulatory plan to give the Fed more authority, create a new consumer protection agency and bring unregulated sectors of the financial markets under government oversight.

“I do not believe that we can reasonably expect the Fed or any other agency to effectively play so many roles,” said Sen. Richard Shelby, R-Ala., noting that it also sets monetary policy, regulates banks and handles an array of other functions.

and

Committee Chairman Christopher Dodd, D-Conn., also raised questions about the use of the Fed for such an overarching task over the financial system and blamed it for “dropping the ball” on consumer protections. But he applauded the administration for including a new agency to protect consumers in their banking transactions.

Noting that banking interests already are criticizing the new agency, Dodd said: “The very people who created the damn mess are the ones now arguing that consumers ought not to be protected.”

Geithner said that in setting up the consumer protection agency, the administration was taking power away from the Fed even as it was adding to its authority.

“That is a substantial diminishment of authority, preoccupation and distraction,” he said.

It is likely the Fed itself will mount a defense to keep its consumer oversight duties. Fed officials believe their oversight of mortgages, credit cards and other products fits well with their duties to regulate banks, and that they have the right mix of experts — economists and lawyers — already on hand to do the job.

However, the Fed’s failure to crack down on shady mortgage practices during the housing boom has irked Congress and consumer groups. So has its decision not to speed up implementation of new rules providing consumers with better protections from abusive credit card practices.

Let’s hope to god that they do not succeed.

If your drunkard friend just crashed your car, why would you let them have an even nicer auto?  This is really scary that our legislator are so stupid that they would even consider such a notion.  We should be on a witch hunt right now, not involved in giving the “sorcerer” more power.  This is dangerous stuff.

• Delusion , Rants , Unintended Consequences
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Chuck Ponzi June 10th, 2009

It’s always good to look back from where we came.  Remember the go-go days of Real Estate in 2005 and 2006?  Wish you could capture the zeitgeist in a bottle and open it up every once in a while just to see what it smelled like?

Well, it’s a little rancid now, but keeps the mental olfactory nerves sharp.  Almost 100% of what Gary Watts wrote during his spastic fit of insanity in 2005 and sold to realtors and local boards as “research” is conjecture, misleading, or fabricated.  I dare anyone to find a single sentence in his entire 2006 projection that was not wrong in some way.

Lest anyone think I am unjustified in my relentless criticism of Gary Watts, I challenge anyone to find any point where he was right in the last 3 years.  Consider even the following said in December 2007:

I don’t see a recession in 2008 but should the economy begin to slow down more rapidly than expected or mortgage interest rates begin to rise, that could put a damper on our housing market. On the Pro side, usually election years are very good to real estate with low interest rates and increasing employment, thus increasing the demand for housing!

Whaaaa?

• Delusion , Gary Watts
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Chuck Ponzi May 20th, 2009

California’s budget problems just got bigger with the failure to pass outrageous legislation that came out in the special election.

Some good reads come from Yahoo!’s California One Step Closer to the Brink.

I’ll summarize the gist of the problem:  We spend more than we make as a state.

There are many culprits:

1.  We have a large immigrant population.

2.  We have a lot of crime

3.  We give a lot of entitlements to elderly and poor. (which we have a lot of)

4.  The rich can sidestep many of the taxes in California, or it’s not graduated enough to capture a meaningful percentage of their earnings.

5.  The Poor cheat the system and overtax it by bringin in more poor who do the same.

The failure of these ballot measures is not a surprise, though.

Prop 1A would have capped state spending, kept in place a tax hike for two years, while also establishing a so-called rainy day fund. That was the big one and it went down 65%-35%.

The one measure which did pass, comfortably: A rule limiting pay hikes for state politicians.

So now the onus is back on the legislature and the Governor to close the deficit, which stands at $21 billion. It’s going to be brutal. The only real areas to get those kind of savings are in core services like education, prisons, health. You know, the big things.

This state is screwed.  Its residents already pay some of the highest total taxes of any state.  Couple that with the high cost of living and you’ve got serious trouble brewing in the middle class (or what’s left of it).

But, if California defaults, other states won’t be be unscathed.  Or at least that’s how most see it.

And, Felix Salmon of Reuters weighs in on the topic.

And indeed the really nasty unintended consequences of a Californian default might well be felt outside the state, with the closing down of the municipal bond market nationally. Once California defaults, it’s hard to see any other state raising private general-obligation funds at any kind of interest rate it would consider acceptable.

Which brings us back to the moral-hazard play: maybe the Feds would bail out California, not for California’s sake, but rather for the sake of the municipal bond markets as a whole. But it’s hard to see where they would get the money, or how Congress would ever approve such an appropriation.

Although, I wonder how that might work when Californians just voted to NOT raise the money needed to pay it down?  In the end, it seems like voters and legislators have come to an impasse.  Legislators want to continue spending, while the citizens are done paying for it.  It is the epitome of what goes wrong when a liberal society votes on taxes.  It will never be able to pay for its own generosity.

Which brings me back to the crisis.  California cannot continue because it can’t pay its bills.  California cannot raise taxes (at least in the present formula) because it will not pass (and if it did, it would drive more of the actual taxpayers out).

So, the only thing left is to start cutting services and expenses.  That’s gonna be tough, and painful for some.  And, counterintuitive in a recession.  You see, accepted economics practice is to save some during your fat years so that in your lean years you have something to survive on and spend more to stimulate the economy with.  We have squandered our wealth in the fat years, and like the prodigal son will come back to Uncle Sam to save our fat butts.

We have to either permanently slow state spending or permanently raise taxes.  That’s bearish to owning real estate and living here in the long run.  If you decide to buy a house here, be sure you have an exit strategy.

“There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for you.”  – Robert A. Heinlein

• Delusion
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Chuck Ponzi May 12th, 2009

For loyal long-time readers, you may remember this one.  It was my very first Happy Birthday Socal post.  And, one of my favorites.

Yes, the SCREBC-famous Pepto Bismol House in San Clemente.

My assertion at the time was that there were several problems in order of increasing stupidity:

1.  Terrible Marketing, pictures, etc.

2.  Terrible Pricing… one year on the market, chasing it down and never being close enough to reality

3.  Terrible Location.  I’ll let the picture speak for itself:

Well, if you wondered what happened… it’s back up for sale.

Yes, a scant nearly 2 1/2 years on the market hasn’t deterred this delusional seller from trying to sell for higher than market prices.  It’s listed today for 649K, probably a full 150K higher than what it would take to move the property.  At least they came down from 875K in December 2006.  If they had been aggressive then, I believe they could easily have gotten 750K to 775K at the time.  Unfortunately, greed got the better of the owner, the listing agent, or both.

The post is a “What Not to Wear” for home listings.  And, remember in September 2007 when the bubble was still a debateable topic?  Yeah, I warned the sellers then that the next year was going to be tough.  It was.

And, it doesn’t seem to be getting any easier.  Keep in mind that one of the properties that I compared it to last time seems to have been foreclosed on and appears to presently be in shadow inventory land.  It (a 2700sq ft sfr built in 2001 with much better curb appeal) appears to have gone back to the bank in January at $568.5K.  That doesn’t bode well for the area.

Besides, I think the realtor must not have changed or learned much in the intervening 2 years about property marketing:

I think she learned to turn the camera on its side this time… projects height.

Luckily, the buyer bought in 2000 for $402K.  They’re almost assured a gain on the house unless they already spent it.  Let’s hope they didn’t.  If this doesn’t sell, it’ll always be shadow inventory, waiting for prices to tick back up.  Unfortunately, there are many better prices in the area this time around.  Even though the listing is now 225K lighter, I’m afraid it’s still in fantasy land.

Thanks and come again to Fantasy Island.

• Delusion , Denial , Housing Crash
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