"America was indebted to immigration for her settlement and prosperity. That part of America which had encouraged them most had advanced most rapidly in population, agriculture and the arts." - James Madison
In order to spark some debate in the United States there are a few hot buttons. One is abortion, another is student loans, another is the state of the economy and still another is immigration. I recently read a very interesting article that sides with allowing more immigration into the world's rich countries. This is contrary to most schools of thought and certainly against the wishes of congress, so I thought I would provide the other side of the argument to tweak your interest as there is definitely some merit to allowing more immigration.
Some of the most successful modern economies of the world are a direct result of immigration. Immigrants either settled or were exported to Australia and America just to mention a few obvious ones. Currently however both of these countries are avid supporters of stiffer immigration requirements in order to protect the jobs of the local worker. This argument goes that by keeping immigrants out, there is more work for the local residents. The merit of this argument is questionable as a lot of the work that immigrants perform locals would not do such as janitorial or construction labor work. Recently there was a Business Week article posted how Americans will not do the dirty work and rely on immigrants to perform these tasks. That aside immigrants have far greater benefit to rich economies than performing just the grunt work. Looking back in history the evidence is clear by looking at the success of those countries which grew into modern successful economies on the back of those original immigrants. So keeping the immigrants out it is very short sighted.
Furthermore when immigrants migrate to a new country they create Diasporas or groups of people that share a common bond on their original country. The Huguenots, Scotts, Jews and British are great examples. These groups provide a good economic base from which to gain a foothold in the new country. Once established they then provide a wonderful link back to the original country as not only do they understand the local customs and language, but they can find gaps in the market that can be filled with exports from their new home. This business expansion provides jobs to locals and helps the economy grow. It has been shown that immigrants are very successful at opening new markets for their new country.
A study shows that more than 3% of the world's total population are immigrants. If this were a nation it would be larger than Brazil in terms of population. With this large a mass of people international trade becomes far easier. Knowledge of local cultures is of critical importance in international trade. Just ask anyone who has tried to break into China or Japan. I remember a relative of mine tried to expand from South Africa to Australia expecting that the cultures were similar. How wrong he was and while the business remained successful and thrived in South Africa it fell flat in Australia. Had he had an Australian immigrant to show him the ropes things may have turned out differently.
Rich economies are constantly training foreigners in their ways. Not only do we spend a fortune educating them we also spend a fortune teaching them our ways of trade and finance. The amazing part of the equation is that once we have trained and educated them we often send them home. A large swath of innovative ideas are thought of by this group of people and these ideas are repatriated to their countries. Keeping them in the country that educated them would help stimulate growth. Think about this, a person that has the capacity and drive to leave their home country and explore the world is far more likely to think outside the box than a local who has never left their county. Rich nations need this edge to remain competitive.
Obviously opening borders to let anyone enter is absurd particularly if you are a rich nation bordered by poor ones. The flood of people would overwhelm the system and bring with it a lot of the dregs of society that no country wishes to house. That said closing the borders and keeping everyone out is a loosing battle that is very short sighted when you consider the benefits of recruiting highly skilled entrepreneurial people from other countries. China is rapidly overtaking the United States in innovation. To me this is a direct result of education being provided in the United States being exported back to China rather than trying to employ these engineers to innovate in the United States and maintaining the benefit long past the school tuition costs. Think of it in terms of sport. Recruiters spend countless hours scouring the world for the next big talent, why not do the same in business? Well it is done in business however many times companies find the talent and then are unable to bring that talent in house as the laws prevent them from doing so.
This is a very politically charged situation. Opening the doors to immigrants while unemployment is high is political suicide, however exporting talent that we created back to their countries is short sighted and gives our competitor nations an edge. Immigration will always be a problem area, but we should consider letting more of the A-team in.
Friday, February 24, 2012
Friday, February 17, 2012
Fix The House And You Fix The Mess
"I'm living so far beyond my income that we may almost be said to be living apart." - E.E. Cummings
As I have mentioned in many previous blog posts that in order for the economy to turn and get on a solid footing there has to be a recovery in real estate. The real estate market makes up more than 10% of total GDP and when you factor in all the subsidiary businesses that number increases to more than 15%. It is one of the largest employers in the United States and provides most of the world with their nest egg. A continually depreciating housing market points to trouble and unless we can solve this one problem there will be a long period of slow growth ahead.
The problem with falling prices is that they exacerbate the problem. Irving Fisher was a Yale University professor who published a paper in 1933 entitled "The Debt-Deflation Theory of Great Depressions." In this paper he produced the theory that the pressure from excessive debt forces distressed selling by creditors which results in a broad decline in asset values, profit, output and employment. The problem is that while asset values shrink the level of debt remains fixed. As long as prices continue to decline there is a larger and larger incentive to default on the debt and walk away from the asset. The lender takes the asset back but the value of this asset is now less than the balance owed so they rush to offload the asset dragging the price lower thereby setting off more defaults. We are seeing this first hand at present and the cycle has yet to end mainly due to the problem of over-leverage.
Banks at the peak of the market got greedy for fee income and loosened the underwriting standards just at the time that they should have been tightening them. The result is that they are now having to write-off billions in mortgage values. This is crimping their balance sheets and so the Federal Reserve is providing them with capital. Even so the banking industry is still reeling from the mess and and have now been forced to tighten the underwriting criteria making it harder and harder for a strapped consumer to obtain a loan. This reduces the demand for housing resulting in continued prices declines.
This will all come to an end once the price of housing falls to a level where it pays to buy over rent and I believe that we are rapidly approaching that level, however as with most falling markets it does not reach a rational price and stop. It often overshoots the mark before turning around however once the market prices are too low this creates demand from speculators and investors. If we take a look at the current inventory of housing that is underwater (the owners owe more than the house is worth) it will take at least another two or three years to clear out this inventory before pricing stability is achieved.
Another fly in the ointment is the Federal Housing Administration (FHA) insured loans. One of the outfalls of the housing crisis was the bankruptcy of private mortgage insurers so the FHA stepped in. To date the FHA has backed more than $1.1 trillion in home loans. Without this backing the housing crisis would have been exacerbated but now it appears that the FHA itself may be severely short of funding to handle this level of burden. Some analysts estimate that the FHA is more than $50 billion in a hole while others estimate that number to be closer to $100 billion. Unless the housing market can stabilize this could be another disaster waiting to happen and one in which the taxpayer will once again be on the line to pay for. Removing the support of the FHA will undermine any recovery in the real estate market as lenders will be even more skittish to lend than they currently are.
On the plus side interest rates are at historic lows. This means that those that can afford to buy a house are paying as little in interest as has ever been recorded. This has always been a catalyst to house price appreciation and I believe that it will once again assist in supporting the market however it is the lack of liquidity that is the current constraint. Tied to that is a high level of unemployment and this nasty combination is causing the drag on the housing recovery. I remember a number of years ago the Economist magazine writing that the world property markets had increased by over $30 trillion. While a lot of that gain has been eliminated the hangover from that party will drag on for a while and cannot be repaired by a few trillion dollars of Federal Reserve input.
Keep a close eye to the data that comes out of this sector as an indication that the market is on a strong footing will point to good times ahead however the economic indicators are pointing to a long period of slow growth ahead of us and one that has plenty of potholes to derail any form of a recovery.
As I have mentioned in many previous blog posts that in order for the economy to turn and get on a solid footing there has to be a recovery in real estate. The real estate market makes up more than 10% of total GDP and when you factor in all the subsidiary businesses that number increases to more than 15%. It is one of the largest employers in the United States and provides most of the world with their nest egg. A continually depreciating housing market points to trouble and unless we can solve this one problem there will be a long period of slow growth ahead.
The problem with falling prices is that they exacerbate the problem. Irving Fisher was a Yale University professor who published a paper in 1933 entitled "The Debt-Deflation Theory of Great Depressions." In this paper he produced the theory that the pressure from excessive debt forces distressed selling by creditors which results in a broad decline in asset values, profit, output and employment. The problem is that while asset values shrink the level of debt remains fixed. As long as prices continue to decline there is a larger and larger incentive to default on the debt and walk away from the asset. The lender takes the asset back but the value of this asset is now less than the balance owed so they rush to offload the asset dragging the price lower thereby setting off more defaults. We are seeing this first hand at present and the cycle has yet to end mainly due to the problem of over-leverage.
Banks at the peak of the market got greedy for fee income and loosened the underwriting standards just at the time that they should have been tightening them. The result is that they are now having to write-off billions in mortgage values. This is crimping their balance sheets and so the Federal Reserve is providing them with capital. Even so the banking industry is still reeling from the mess and and have now been forced to tighten the underwriting criteria making it harder and harder for a strapped consumer to obtain a loan. This reduces the demand for housing resulting in continued prices declines.
This will all come to an end once the price of housing falls to a level where it pays to buy over rent and I believe that we are rapidly approaching that level, however as with most falling markets it does not reach a rational price and stop. It often overshoots the mark before turning around however once the market prices are too low this creates demand from speculators and investors. If we take a look at the current inventory of housing that is underwater (the owners owe more than the house is worth) it will take at least another two or three years to clear out this inventory before pricing stability is achieved.
Another fly in the ointment is the Federal Housing Administration (FHA) insured loans. One of the outfalls of the housing crisis was the bankruptcy of private mortgage insurers so the FHA stepped in. To date the FHA has backed more than $1.1 trillion in home loans. Without this backing the housing crisis would have been exacerbated but now it appears that the FHA itself may be severely short of funding to handle this level of burden. Some analysts estimate that the FHA is more than $50 billion in a hole while others estimate that number to be closer to $100 billion. Unless the housing market can stabilize this could be another disaster waiting to happen and one in which the taxpayer will once again be on the line to pay for. Removing the support of the FHA will undermine any recovery in the real estate market as lenders will be even more skittish to lend than they currently are.
On the plus side interest rates are at historic lows. This means that those that can afford to buy a house are paying as little in interest as has ever been recorded. This has always been a catalyst to house price appreciation and I believe that it will once again assist in supporting the market however it is the lack of liquidity that is the current constraint. Tied to that is a high level of unemployment and this nasty combination is causing the drag on the housing recovery. I remember a number of years ago the Economist magazine writing that the world property markets had increased by over $30 trillion. While a lot of that gain has been eliminated the hangover from that party will drag on for a while and cannot be repaired by a few trillion dollars of Federal Reserve input.
Keep a close eye to the data that comes out of this sector as an indication that the market is on a strong footing will point to good times ahead however the economic indicators are pointing to a long period of slow growth ahead of us and one that has plenty of potholes to derail any form of a recovery.
Friday, February 10, 2012
Dr. Copper Breaks Out
"The meek shall inherit the earth, but not all its mineral rights." - J. Paul Getty
The world runs on oil, but copper points directly to global growth. In the commodity world the metal is referred to as Dr. Copper as it is a wonderful indicator of global growth. As there is plenty of copper available the price is very sensitive to changes in demand. More demand pushes the price up and less demand results in lower prices. As such the price is very elastic or sensitive to changes in demand for the product.
Copper is used throughout the world and is a base metal. Think about it, copper is used in pretty much everything from cars to building to electronics and infrastructure. As it is in most every manufactured product sold throughout the world plus in all building and infrastructure projects, increased demand for copper points to global growth. So when Dr. Copper breaks out to the upside I take notice.
Following is a chart of the copper prices since October 2011 and as you can see the price has been in a relatively steady uptrend. It appears with the most recent breakout that global demand for the commodity is growing pointing to global growth. Once again thought this comes with a caveat - demand for copper can spike as governments such as China stock pile the commodity in anticipation of future growth. There have been times when this growth has not materialized and the price collapses pretty quickly. However this chart seems to point to some sustained growth and unless Greece and Europe spoil the party it does appear that global growth is on an uptrend.
If the housing market would start to recover I really believe that we may have a sustainable rally but until such time I am hesitant to become too bullish particularly when it is based on such a volatile commodity as copper. Furthermore as you will see in my blog on housing next week we have a long way to go before we can call any kind of a recovery sustainable and this breakout could (as with any chart analysis) be a head fake.
The world runs on oil, but copper points directly to global growth. In the commodity world the metal is referred to as Dr. Copper as it is a wonderful indicator of global growth. As there is plenty of copper available the price is very sensitive to changes in demand. More demand pushes the price up and less demand results in lower prices. As such the price is very elastic or sensitive to changes in demand for the product.
Copper is used throughout the world and is a base metal. Think about it, copper is used in pretty much everything from cars to building to electronics and infrastructure. As it is in most every manufactured product sold throughout the world plus in all building and infrastructure projects, increased demand for copper points to global growth. So when Dr. Copper breaks out to the upside I take notice.
Following is a chart of the copper prices since October 2011 and as you can see the price has been in a relatively steady uptrend. It appears with the most recent breakout that global demand for the commodity is growing pointing to global growth. Once again thought this comes with a caveat - demand for copper can spike as governments such as China stock pile the commodity in anticipation of future growth. There have been times when this growth has not materialized and the price collapses pretty quickly. However this chart seems to point to some sustained growth and unless Greece and Europe spoil the party it does appear that global growth is on an uptrend.
Friday, February 3, 2012
A Rally In The Making?
"Better bread with water than cake with trouble." - Russian proverb
The markets in the United States continue to tear higher while around the globe rallies are starting to appear. The big question is whether this rally is sustainable or whether this is another head fake ready to catch out the unsuspecting sucker.
Taking the United States as a start it does appear that things are settling down after the last few years of fear. The housing mess seems to be contained and while the prices of homes are not on the rise the rate of price decline is slowing. Furthermore the system of allowing households to walk from their debt will ultimately allow the inventory to clear out faster and allow the consumer to recover faster than in other parts of the world where the balance owed still needs to be paid back. Employment is still weak but is not deteriorating and company earnings seem to be relatively stable.
On the European front it is generally agreed that while the Greek problem will not end well that it will be contained. I would imagine that on March 20th when the first Greek default is feared that there will be some kind of a settlement. If there is not then I fear the worst for global markets, but even a mix of different political and ethnic backgrounds will agree that not solving the problem in time is not an option.
Certainly the world is completely swamped with debt and I believe that this will create a drag on economic growth for many years to come (see my blog on Crowding Out) but on the surface it does appear that the worst is behind us (at least for now). Not that there are not plenty of issues that could derail us at a moments notice, but the markets are showing signs that the future is a lot more clear than it was late last year.
So is it time to jump in? I think that if you are a relatively short term trader that you can make money in this stock environment. Also there are a lot of stocks that are paying a decent dividend that look attractive. Looking back at history and the 70's which was considered by many in the business world to be a lost decade, the market during that period did not move. It entered the decade at around 100 and ended the decade around the same level. However looking at the monthly chart it shows some massive swings. The market peaked around 114 in 1973 and then nosedived to 65 by 1975 and recovered most of the losses by 1977 only to jitter around that level until the end of the decade. Not that we face all of the same issues, but I believe that the large global debt levels will create a drag on global economic growth for at least the next decade and that this drag will show up in new problems in the future. Rallies will be shorter and recessions more regular until such time as we can remove these large burdens. At that point in time we can look forward to robust growth, but for now I would remain predominantly in a cash position but I feel that the next three months could continue to produce upside. However, if the Greek deal does not go through then all bets are off the table. Remain cautious but for those of you with a high risk tolerance it may be time to dip your toe back into the water.
The markets in the United States continue to tear higher while around the globe rallies are starting to appear. The big question is whether this rally is sustainable or whether this is another head fake ready to catch out the unsuspecting sucker.
Taking the United States as a start it does appear that things are settling down after the last few years of fear. The housing mess seems to be contained and while the prices of homes are not on the rise the rate of price decline is slowing. Furthermore the system of allowing households to walk from their debt will ultimately allow the inventory to clear out faster and allow the consumer to recover faster than in other parts of the world where the balance owed still needs to be paid back. Employment is still weak but is not deteriorating and company earnings seem to be relatively stable.
On the European front it is generally agreed that while the Greek problem will not end well that it will be contained. I would imagine that on March 20th when the first Greek default is feared that there will be some kind of a settlement. If there is not then I fear the worst for global markets, but even a mix of different political and ethnic backgrounds will agree that not solving the problem in time is not an option.
Certainly the world is completely swamped with debt and I believe that this will create a drag on economic growth for many years to come (see my blog on Crowding Out) but on the surface it does appear that the worst is behind us (at least for now). Not that there are not plenty of issues that could derail us at a moments notice, but the markets are showing signs that the future is a lot more clear than it was late last year.
So is it time to jump in? I think that if you are a relatively short term trader that you can make money in this stock environment. Also there are a lot of stocks that are paying a decent dividend that look attractive. Looking back at history and the 70's which was considered by many in the business world to be a lost decade, the market during that period did not move. It entered the decade at around 100 and ended the decade around the same level. However looking at the monthly chart it shows some massive swings. The market peaked around 114 in 1973 and then nosedived to 65 by 1975 and recovered most of the losses by 1977 only to jitter around that level until the end of the decade. Not that we face all of the same issues, but I believe that the large global debt levels will create a drag on global economic growth for at least the next decade and that this drag will show up in new problems in the future. Rallies will be shorter and recessions more regular until such time as we can remove these large burdens. At that point in time we can look forward to robust growth, but for now I would remain predominantly in a cash position but I feel that the next three months could continue to produce upside. However, if the Greek deal does not go through then all bets are off the table. Remain cautious but for those of you with a high risk tolerance it may be time to dip your toe back into the water.
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