@RobertJShiller and the #EMRATIO.

There's been a tendency, every spring since the start of the Lesser Depression, for the business community to express, hopefully, that "this will be the year things turn." The first post I wrote noting this theme was on March 8, 2013. I thought this morning that, two years later to the day, I'd revisit the question.

Civilian Employment-Population Ratio

Federal Reserve Bank of St. Louis

available at http://research.stlouisfed.org/fred2/graph/?g=13nE

I've been keeping an eye (thanks to Brad DeLong) on the Civilian Employment-Population Ratio from the St. Louis Fed for some time. It is generally the best measure of labor market conditions. If the economy rallies strongly, this is the ratio that should change substantially.

In March of 2013, the ratio was at 58.5. As of February 2015, it's at 59.3; the graph is on the right. There's essentially been no movement.

At the same time, though, the Shiller P/E Ratio, as of February 13, 2015, passed its pre-financial crisis high. This past week, the NASDAQ closed above 5,000 for the first time since the dot-com bubble. There is some local evidence of a speculative real estate bubble. Shiller himself recently released a new edition of his "Irrational Exuberance," where in the preface he expresses surprise at the events that have followed “the bursting of the speculative bubbles that led to the 2007-9 world financial crisis”:

"[E]vidence of bubbles has accelerated since the crisis. Valuations in the stock and bond markets have reached high levels in the United States and some other countries, and valuations in the housing market have been increasing rapidly in many countries."

So the data is there to support a narrative of asset price inflation unsupported by fundamentals, rather than the hopeful mantra of Main Street.

It is, of course, the why of this situation that is so puzzling to so many. If the economy presents meager prospects, shouldn't prices adjust to reflect? It is always tempting to fall back on Thomas Sargent and simply say that in an economic equilibrium, people are satisfied with their choices, and to add Herbert Stein's observation that "[i]f something cannot go on forever, it will stop."  But Shiller himself offered a potential explanation on why this phenomenon recurs, and I found that his point resonated, and so I link to his piece in the New York Times from last month:

"When there is unusual uncertainty about the future, and if not enough new business initiatives can be found to increase the supply of good investments, people will compete to bid up existing investable assets. They may go so far in bidding up prices that even though the assets may have horrible prospects, people will still want to hold them because they feel they have to save somewhere."

Nothing So Dear as #cheapmoney

Over the past few years, I've heard from time to time in conversation the desire to take advantage of "cheap" fixed-rate money, before inflation sets in. 

Board of Governors of the Federal Reserve System (US)
10-Year Treasury Constant Maturity Rate [DGS10]
retrieved from Federal Reserve Bank of St. Louis [FRED]
January 30, 2015, available at http://tinyurl.com/kmtq4sl

On the right is a graph (it's actually a composite of some screenshots) from the Federal Reserve Bank of St. Louis.  I've marked when I was born, and when I graduated from high school. At my birth and graduation, the yield on the 10-Year Treasury was nearly identical (~7.5%, ~33 basis points apart). Between those dates, the yield was almost always higher, often much higher; since then, it's almost always been lower, mostly much lower. As of 30 January 2015, the yield is 1.64%.

Everyone carries a memory of economic history in their head. As Owen Zidar points out here, it changes more slowly than the speed of circumstances. Brad Delong has consistently argued for the necessity of all of us to "mark our beliefs to market." He maintains a list of prominent economists and institutions who've argued inflation was the foremost concern facing the U.S. economy since 2007 -- and not for the purpose of congratulating them.

Like the economists Brad lists, our formative memories were constructed during a different time. Inflation expectations became anchored. But there are few atheists in foxholes during combat, and for similar reasons, I suspect that inflationistas in debt are rare during deflation -- for falling prices routinely bankrupt entrepreneurs. There is oftentimes nothing so dear as "cheap" money.

Why Travel Matters.

Back in November of 2012, I ran across this article in the Economist, arguing that the United States was on pace to become the world's largest producer of oil by 2020, and would be able to produce enough energy to be self sufficient by 2035. I recall thinking how dramatic a change that would be -- and I saved the PDF, meaning to blog about it.

"Alberta Energy Firms Face Harsh New Reality"

Jeffrey Jones, Jeff Lewis, Carrie Tait

The Globe and Mail, November 28, 2014.

available at http://tinyurl.com/pgeky5l

I wasn't quite sure what to say, though. But spending a little bit of time in Calgary really focused the issue for me. The Alberta business section of the Globe and Mail is on the right (the oil price was also front page news).  I've linked to the main article here.

The recent oil price slide will probably completely eliminate the Canadian federal budget surplus. That creates serious problems for a government that has fixed expenses (salaries, pensions, debt service) but falling revenues. Most of the world at this point has, or soon looks to have, the same problem as Canada.

A nice way to understand this situation is to read a brief blog post of Paul Krugman's from October 15, entitled "1937." He noted that markets are signaling that "once again the big risk is deflation or at least very sub-par inflation."  He measured deflation in that post by looking at the market for Treasurys, specifically the 10-year, showing the yield had fallen below 2%, potentially a sign of recession, deflation, or both.

When I tucked the Economist article away for future reference in 2012, I never would have thought that a falling nominal oil price could be a bad thing.  Today, though, I'm not so sure.

And I'm not the only one.

What Do Bubbles Look Like?

Sentinel Media Services

"Midcentury Modern in Sonoma"

 The San Francisco Chronicle, Nov 19, 2014

screenshot taken Nov. 19, 2014

 available at http://tinyurl.com/lu93z8y

The San Francisco Chronicle gets my attention today.  On a fairly regular basis, the paper features a particular piece of real estate for sale somewhere around the San Francisco Bay Area.

Today, they're publishing about a property on Austin Avenue, in the Prestwood neighborhood of Sonoma.  The asking price is $2,295,000. The house is a little under 1,900 square feet.

You can see the location here. One nice thing about Zillow is that it will show you the recent sale history of the property.  I took a screenshot of that, and that's on the right, too.  

The Zillow history shows that William Grecian tried to sell this property back in November of 2010 for $445,000; he couldn't find any takers.  He dropped the price to $420,000 in April of 2011, but still didn't find a buyer.  He dropped the price another $12,500 -- and that's when Laura and Richard Tackett made their offer, for $407,500 on July 15, 2011.  

Zillow.com
"826 Austin Ave, Sonoma"
 screenshot taken Nov. 19, 2014
available at http://tinyurl.com/krxbtzh

Laura and Richard held the property for 872 days.  On December 3, 2013, they listed it for sale at $648,000, a 59% price increase.  Laura and Richard figured the change in the real estate market meant that they'd just made an investment with approximately a 20% annual rate of return.  Of course, Richard and Laura were wrong; the property didn't sell for $648,000. 

Instead, it sold 17 days after listing for $730,000. 

More like a 26% annual return.  

The property was purchased by an LLC, which is more or less the general practice in California with real estate projects that are expected to appreciate significantly.  The registered agent for the LLC is Patrick Doyle of Petaluma, who's a general contractor and is the manager of the LLC. The Deed of Trust on the property (which I checked) reveals the equitable owners. The Deed of Trust is a public record and if anyone's particularly excited to find out who put up the money for this deal, feel free to head to the County of Sonoma's Recorder's office -- they're open 8-5 Monday through Friday.  

The LLC listed the property for sale on November 5, 2014.  The LLC held the property for 320 days.  I can't calculate the annual rate of return, because the calculator I use presumes that the values change monthly; here, the ∆ in the price is so substantial that the number of days included can change the implied rate of return.  But it looks like about a 215% presumed annual rate of return.

Comments, "Midcentury Modern in Sonoma"

Sentinel Media Services

The San Francisco Chronicle

screenshot taken Nov. 19, 2014

 available at http://tinyurl.com/lu93z8y

There are a great many things I could say about this situation. I'm going to hold those observations, and I think I'll revisit this blog post in a couple of years (months?), perhaps updating it with the transaction history of the address.  

At this point, though, I do want to draw attention to the comments about the house on the Chronicle's web site.  

One poster thought the property looked like a good "flip."  

Another wrote that "I can't believe anyone would pay over 2 million for this toy house."

Interesting.

Kintsugi and Courts.

"Kintsugi," Wikipedia. 

available at http://en.wikipedia.org/wiki/Kintsugi

“The world breaks everyone and afterward many are strong at the broken places." Ernest Hemingway, A Farewell to Arms

A "thank-you" to Pat Brown first, for linking to an image of a piece of Japanese ceramic ware. The picture illustrates Kintsugi, the Japanese technique for repairing broken pottery, using a lacquer or resin sprinkled with powdered gold.

The æsthetic value of Kintsugi comes from the marks of wear, an inevitability for the handiwork of humans in a land of earthquakes (like Japan or California). Kintsugi highlights the cracks and repairs as simply an event in life, rather than allowing service to end at the time of the damage. Kintsugi does not attempt to hide the injury, but instead "the repair is illuminated," illustrating the vicissitudes of existence.

"Napa County Courthouse Plaza," Wikipedia.

image available at http://tinyurl.com/lg26yxc

Given the beauty of the bowl pictured, it made me think of the recent damage to the Napa County courthouse in the 2014 South Napa Earthquake.  I have an emotional attachment to the structure, having been sworn in as an attorney there before my first trial. How fitting would it be, I thought, to embrace Kintsugi in the context of the High Victorian Italianate architecture of the historic 1878 structure?

Such a reminder seems somehow particularly appropriate for a building dedicated to law. To quote Holmes, law is a series of painful steps and world-shaking contests "by which mankind has worked and fought from savage isolation to organic social life." Law does not flow from some mysterious omnipresence in the sky, but is instead the consequence of the work of minds and hands. It is subject to crisis, disillusionment, and despair, much like pottery inevitably suffers breaks, knocks, and shattering in daily life.  Yet the æsthetic value shared by precious pottery, and even-more-precious justice, when joined by illumination, can make each more beautiful, and perhaps both even stronger for the history -- not less.

Trust Levels of News Sources.

I caught this on Twitter yesterday, and found it revealing. The Pew Research Center (previously came up here and here) conducted a survey across the United States to determine which media sources are the most trusted.  However, the researchers introduced nuance into their model, by investigating the ideological identification of the respondents.

One irony of the survey is that the sources that Americans trust the most are the Economist (a British newspaper masquerading as a magazine) and the BBC (the British Broadcasting Corporation).   The most trusted American sources are NPR and PBS, followed by the Wall Street Journal (which happens to be the only publication more trusted than not across the spectrum).

One interesting feature is the "hard shift" in this table, where the spectrum doesn't gradually adjust from one side to the other through the "equally trusted and distrusted" data point, and instead goes right to "distrusted" -- and where the "mixed" group also distrusts the source.  There are only three -- The Daily Show, Sean Hannity, and Glenn Beck.

I also note (without comment) that even those who identify as "mostly conservative" express skepticism towards Rush Limbaugh, who is the least trusted generally known figure in the table ...

Dual Immersion Enhances Attention.

The benefit of dual immersion in education has come up here before; the Prospero blog on Economist.com is the reason that I again return to the subject.  Earlier studies pointed to the benefit of bilingual education by noting enhanced executive function and delayed mental decline; but new research has special relevance for the screen-time enhanced, short attention span generation we all seem to be raising.

Roberto Filippi led a team that investigated the ability of bilinguals -- not those with a modest ability in a foreign language that is rarely employed, but in those who are required to use the language frequently in daily life -- to avoid distraction when concentrating on speech.  The study assessed listening comprehension while interfering conversations, first in English (understood by all subjects), and then in Greek (understood by none), were played at the same time.  The bilinguals exceeded the controls in both measures, supporting the hypothesis of the researchers that switching languages constantly exercises the mind; Prospero compares it to Crossfit for the brain.

This topic came up for David Brooks in the New York Times about four months ago, in his column "The Art of Focus."  Brooks suggested we're all losing the attention "war," living distracted lives, unable to focus on what we want to or should focus on.  Brooks cited research showing that two-thirds of the subjects in a comprehensive study of white collar professionals reported they do not have the ability to focus on one thing at a time at work. For the concerned parent, this is a strong argument that the impact of a dual immersion education, as our students move through their academic and professional careers, may stretch far beyond the obvious power it grants to communicate in more than one language ...