ERICOPOLY

I haven't seen data on this, but I think you'll probably find a correlation between rising total Canadian mortgage debt as a % of Canadian GDP and rising housing prices. When mortgage debt is on the rise as a % of GDP, home prices rise faster than trend, and they rise slower than trend (or fall) when the ratio of mortgage debt to GDP retreats. This is what Steve Keen does in Australia and it seems fairly convincing. He's not just looking at population trends as a measure of demand, but rather looking more closely at the financial demand.

Not me. I just learned about options by thinking about them mainly. For example, the $2 strike BAC 2014 call option has an "ask" of $6.3. I can buy it in my Roth IRA where margin loans aren't permissible. I can get about 1.33x leverage by purchasing that option. $6.30+$2=$8.30, which is a 17 cent premium above the market price of BAC. 17 cents is 8.5% of $2, so 4.25% (plus foregone dividend yield) is roughly the interest rate on the loan, except you have the disadvantage of having to put up the interest costs upfront. You also have the huge advantage that there are no margin calls and there is an embedded put -- if the stock price declines considerably, the rising value of the put will soften the blow of your losses. Second example is that if you fear high consumer price inflaiton is you can put 100% of your margin account in TIPS, and then write deep-in-the-money puts on something like BRK class B shares, or perhaps your other favorite company. As the CPI rises, so does the value of your TIPS, and hopefully the underlying stock value of whatever you wrote puts on (maybe just an index ETF). Etc... etc... I find thinking about options in these practical terms to be more productive than studying academic theory on volatility pricing, etc...

Why would they get permission when they haven't even asked? just sayin that if they don't get permission whether they ask for it or not, and the other banks get permission, they will be perceived as weaker than the others. there may be speculators in the stock who think they may get permission when the others do. just a theory. may not happen. remember when all the banks had to take TARP at once, even though some didn't want to? It was to counter the perception that some banks were weaker than others. now it may be that the market already knows that they won't get to do a buyback when the others do. in that case it's clear sailing. :) My crystal ball is pretty hazy so I have no grounds to argue. The significant thing about the Fed test results that I'm anticipating is this: 1) encouraging that a 33-50 cent dollar can survive 13% unemployment, market meltdown, 7% GDP hit, and 20% real estate decline. 2) The other banks will get positive news on their dividends and buybacks, and this should lift their valuations. Given that BAC is trading relative to the others, it will also lift BAC.

Why would they get permission when they haven't even asked?

Buy more shares now if you want more shares, instead of waiting for the bank to buy. The Fed should start giving thumbs up/down in a couple of weeks regarding the stress test.

Yup, he's pretty stupid and annoying. Pretty bad rug too! ;D Cheers! I think Buffett (part 6) tells him that he (Buffett) is sitting in the fertilizer factory (presumably Joe's show).

Just curious about how this would be discounted. Is it fair to say it would cost them $8b in extra costs? That's $80b decline in collateral value with 10% default. I believe they have about $400b in mortgages, so an $80b decline in collateral value would assume that 100% of their mortgages are already with 0% equity value (which is clearly an exaggeration). I suppose if the underwater performing mortgages are already not marked anywhere near reality it may not be an exaggeration... would the "exaggeration" be canceled out or would the $8b climb to $12b or something? Of course, if those people were going to default anyway then it's only the "extra" costs that we care about from the 20% further decline, so we're back at $8b maximum damage. The 10% default rate was picked as intentionally high to simulate a surge in strategic defaulters. Is it even fair to have a 10% default rate though?

I think looking at trends in job postings would be helpful, but I don't know where to find that data. You'd think that if you can easily count rail cars as a proxy of activity then job postings could be done too.

That only measure the people who are looking for work but can't find it. If you advertise a new job and two previously discouraged people come out of the shadows to apply for it, the unemployment rate goes up. The perma-bears have told us time and again that unemployment is really much higher than it looks due to the number of discouraged workers who have given up looking. Now is their time to jump out and make the denial that I am making (I doubt they will, because they are called perma-bears for a reason).

Purely my opinion, though I'm sure there is data out there that specifies how much of the overall consumer deleveraging is due to actual paydowns versus charge-offs. Yes the pop in jobs is weird (Though I think it is explained by an unseasonably warm winter, or perhaps....the data is wrong - see the first paragraph of page 6 of the attached document), but isn't job growth suppose to lag spending growth? If so, then wouldn't it take a little while for job growth to decline if spending is just now starting to decline? Employers have experienced increased consumer spending over the last quarter of 2011 thus they don't feel the need to shed employees. Just now consumer spending is starting to decline, so won't employers only just begin laying off workers right now, then accelerate it as spending declines even further? I added a bit to my prior post fleshing out why it's crazy to pre-pay any amount of principle on an amortizing 30 yr fixed mortgage. I expect people to be rational but that's probably a mistake to expect people to work for their best self-interests. Regarding jobs: Refinancing and spending a few hundred bucks a month LESS on the mortgage payment is actually better for the economy than getting an extra few hundred bucks a month MORE from your employer. The reason is that the employer doesn't feel the pinch. This may explain how you can have hiring in the face of declining personal income growth. The household gets the same boost without the employer getting an offsetting pinch. This situation probably hasn't existed in the rest of the historical data that he is looking at, thus potential for an error if he isn't thinking about it. Well, we'll see.

Yes it makes sense. Hence my question. Why a large sudden pop in hiring in month #5 when the data suggests that it should be weakening? What will employers know in month #6,#7,and#8 that they don't already know now? Where is the data that quantifies the amount of extra (above the minimum) principle payments households are making? I don't see this passed around commonly, but I'm sure somebody must have it. I also believe that most of the household debt is in mortgages, in which case nobody needs to make extra principle payments (the amortization schedule will get a historically rather large mortgage paid off in 30 years at a low interest rate without making extra payments). You either have a smaller (normal size) mortgage at historically normal (relatively large) interest rate, or a significantly larger mortgage at a low interest rate (today's rates). The payment might be exactly the same and in 30 years either way the debt is entirely repaid. So why stress about paying it off faster than you normally would? Paying it down faster doesn't serve your best interests at all because: 1) it's a 30 yr fixed rate amortizing mortgage -- the payment size is fixed and doesn't drop month-to-month no matter how much principle has been pre-payed 2) paying it down early reduces the risk to the bank and increases the risk to yourself. So it's self destructive to do so.

I wish the interviewers had asked him why the recent jobs numbers have been so good if they are following 5 months of declining personal income growth. He himself argues that the jobs numbers should be trending down over the next few months because of the declining personal income growth. Personally, I wonder if declining cost of servicing household debt (refinancing boom) can step in to help offset the declining personal income growth. He talks about history of recessions since WWII but has there been a period since WWII where there has been such a large reduction of consumer debt servicing costs going on at the same time? First he said this: jobs follow, they do not lead, consumer spending growth. I'd say in the next few months they'd start to lag. Then a moment later this: look at personal disposable income. that has been negative, now, growth for five months.

You want to me explain what Politicians were thinking? Thanks for an easy question. Based on history I would have to say they acted largely in self-interest. They presumably thought lowering the rate to 15% would help their reelection chances by either improving the economy or improving their fund raising, or some combination of both. I would agree that a dividend franking system makes sense, but they must have believed that the other side would attack them on it, or no one proposed it. Washington DC suffers from serious groupthink. I read the other day that on average US corporations have paid 25%. It did not detail how the calculated the figure, which would have been very helpful. In the last two years the article said the rate has plummeted to I believe less than 10% due to tax credits and the like. At the historical 25% effective rate it works out to 36.25% so that would be slightly higher, but pretty close. They had control of House/Senate/OvalOffice. It was a blown opportunity. The games played to keep your US corporate taxes low are somewhat less alluring when you know there will be no tax credits for you come dividend pay day. Perhaps some corporations would use less debt (it's enticing to use the interest expense to keep taxes down) and thus perhaps we could reduce risk in the system. I would even add that share buybacks should be taxed as if they were distributed dividends (because effectively they are a way of undermining the dividend tax). I don't expect that to be popular though. The Democrats may like the concession though as a means of approving a dividend franking system. This of course introduces the possibility of double taxation of capital gains but most people booking capital gains don't have a zero cost basis -- meaning the return of money to shareholders via buybacks is already in a huge tax advantage due to the tax only being applied to your gain (thus making it far more attractive than paying dividends if your cost basis is well above zero). It also means that you just pay a higher mix of dividends to use up your tax credits (buybacks are really only interesting from a tax-saving perspective).

Tim, Why did the Republicans favor the 15% dividend rate (potentially high combined 40+% rate) that taxes their profits higher than regular income (top 35% rate)? This is what they don't want (double taxation), yet they put that gun to their head themselves. It's a smaller caliber weapon now that the rate has been reduced to just 15%, yet still it's potentially a higher tax than the regular income rate of 35%. They could instead have opted for a dividend franking system where the recipient takes a tax credit for taxes already paid by the corporation. This guarantees that you pay no higher than the regular income tax rate and makes it largely unnecessary to worry about the tax effects of the corporate structure. Even today, they still don't talk about this. It's the most obvious route. Personally, I think many corporations pay a lower rate and then with the 15% dividend rate they wind up actually with an combined tax rate that it actually lower than the 35% top individual rate. Therefore, the Republicans certainly DON'T want to rock the boat on that good deal. Thoughts?

Where do REITs stand in terms of this argument? The income is only taxed at the individual level and there is no legal recourse to the shareholder of the REIT (like if there is a hotel fire or something). It seems like in the case of the REIT the government is satisfied to not collect tax as long as the REIT income is distributed at a high payout ratio. The government could apply the same logic to any corporation (no tax as long as high payout rate) -- the government could allow Coca Cola to become a BPIT (Beverage Product Investment Trust).

Krugman is probably not referring to the free choices we have today under the current government, but rather commenting on the stated ambitions of the front-running Republican party hopefuls.

A pretty good read here if you have the time (I'm hoping it changes your tone): http://www.cato.org/pubs/briefs/bp87.pdf quote: On spending, both parties have blended together to form one giant Republocrat party. exactly anybody who believes the repubicans are any better at spending then demos just isn't paying attention. Yup! They all cater to their constituency and their lobbyists. Once they are out of office, who the hell is going to hire them...their constituency and their lobbyists! It's rare for a politician to actually stand up and do the right thing, rather than for those that pay or support their campaign. For example, 5 Super PAC's account for 85% of the money raised so far for the Republican party. Whose interests are these candidates representing? It's no different for the Democrats. The politician's nose is led by a fish hook! Cheers! This is also telling: Aaron Carroll of Indiana University tells us that in 2010, residents of the 10 states Gallup ranks as “most conservative” received 21.2 percent of their income in government transfers, while the number for the 10 most liberal states was only 17.1 percent. The message I take from all this is that pundits who describe America as a fundamentally conservative country are wrong. Yes, voters sent some severe conservatives to Washington. But those voters would be both shocked and angry if such politicians actually imposed their small-government agenda. Moochers Against Welfare http://www.nytimes.com/2012/02/17/opinion/krugman-moochers-against-welfare.html?scp=7&sq=Krugman&st=cse EDIT: Perhaps the residents of the 10 most Conservative states can give back their excess welfare and "shut up".

Both parties do. How many times have people called the pre-collapse years a "false prosperity"? Pull back the veil of prosperity, tax receipts plunge, unemployed ranks swell, voila!

A pretty good read here if you have the time (I'm hoping it changes your tone): http://www.cato.org/pubs/briefs/bp87.pdf quote: On spending, both parties have blended together to form one giant Republocrat party. That's from 2004--now extend all those pretty graphs to today and you will see what real spending is all about. Here are the numbers for U.S. discretionary spending: +16.7% (cumulative increase for Obama's first 3 years in office) +39.7% (cumulative increase for Bush's first 3 years in office)

A pretty good read here if you have the time (I'm hoping it changes your tone): http://www.cato.org/pubs/briefs/bp87.pdf quote: On spending, both parties have blended together to form one giant Republocrat party.

Buffett's proposal really isn't much different in spirit from the Minimum Tax, which the Republicans signed into law. The Republicans brought us the Minimum Tax in 1969 when Nixon signed the Tax Reform Act of 1969. The Republicans replaced it with the Alternative Minimum Tax in 1982 when Reagan signed it into law. Inflation has eroded the significance of the Minimum Tax, but it was originally a tax aimed at the wealthy earning an amount of at least one million in today's dollar terms (the same number that Buffett has in mind).

Neither do I, hence my comment about collateral damage.

I keep wondering why the Republicans don't ask questions about why Buffett's taxable income is such a pittance relative to his wealth, then I catch myself... "oh, of course, that's why". They can't shoot back without collateral damage. So we instead get these stupid responses. There, I've explained Christie's comment ;D

Well actually, the definition for productivity widely accepted among economists says just that (assuming they work the same number of hours on average). "Workforce productivity is the amount of goods and services that a worker produces in a given amount of time." (the value of those goods & services measured generally in a common currency) http://en.wikipedia.org/wiki/Labour_productivity Sadly, I still don't feel productive because this only talks about the productivity of labor (not investment income).

Here's why I brought it up. 1) Christie is a New Jersey official expressing displeasure with Buffett because Buffett wants to raise the Federal tax burden on the rich 2) Christie practices tax cutting that disproportionally favors the rich in New Jersey. I'm just trying to better understand the animal. I conclude that what bothers him is not just spending as you suggest, but rather he wants the rich to keep more of their winnings (which puts him at odds with Buffett). I established his desire to benefit the rich by introducing his New Jersey income tax cut (other tax cut options were available to him).