Saturday, December 20, 2008
Notice that during the early 90’s housing bubble, that there was not a rapid expansion of credit as can be seen by the case-Shiller index staying relatively flat.
Also Notice the precursor to the current bubble; the Case Shiller Index starting a rapid rise in 1998.
My question is what was the trigger? the Gramm-Leach-Bliley Financial Services Modernization Act ( this act removed The portion of the Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services) wasnt passed until 1999 when a rapid rise in the case-Shiller index had already occurred. perhaps a secondary effect of the Dot.com bubble?
Another question is: Is the case-Shiller (CS) data adjusted for inflation in some manner? if the CS data is adjusted for inflation then we have a very long way to fall to get back to historical norms.
IF it is not adjusted, i treated the value of the CS data as a dollar value and used the online BLS calculator to adjust the the 1998 CS value (approx 8000) for 2008. That adjustment comes to approx 10,500.
While this method is certainly not rigorous, i figured that it would give me a rough estimate since the CS value is ultimately based on the dollar value of home sale transactions.
The NY CS index is currently at 19,000. A reversion to mean , using the rough inflation adjustment i described above would give us a target of 10,500. However a reversion to mean usually overshoots.
I extended the trend lines for the CS data on one of the charts at the link above, As a VERY rough estimate, if current trends continue, then the CS Composite-10 could see a bottom in 2012. But if the area covered by the CS NY data continues on its current trend then it wouldn’t bottom until sometime around 2017.
One argument we have on this blog is how well (or not0 the NY area will hold up during the RE deflation. I argue that we will see a big drop in the next 2 years and that the NY area will come into line with the CS composite 10 and CS composite 20. Data for the last 20 years show that the NY area has NOT been substantially different from the other 2 indexs. The difference has only arisen lately, since about 2004.
i argue that this divergence is due in large part to the inflation of the financial services industry in the Ny area and the huge amounts of cash that were pumped into regional housing as a side effect.
i think that the Ny region will see a bottom before 2017 but after 2012. My guess is the NY region will bottom sometime around 2014 and then stay stagnant for a long period.
The driving factor that allowed the price divergence in 2004, the huge amounts of money loaned out by the banks with little to no regard for the quality of the loan, and the sky high salaries seen around the region will not exist to support the divergence anymore
my 1.25 cents
have fun tearing it apart!
Tuesday, October 28, 2008
Wednesday, October 15, 2008
How much trouble is our banking system in? Visualizing data can be helpful, so here we go.....
First, the US economy has been a consumer driven economy as has the world for the last 20+ years. here is the result: (click to enlarge)
You may want to note that this chart is almost perfectly exponential! Consumer credit in the USA has been growing exponentially for decades. The ultimate implications of this are that no matter how hard the government may try, they will not be able to restart the consumer economy. It was entirely based on deficit spending at the consumer level and now the consumers are spent as economic engines.
Now for the topic of the year, derivatives. Banks have used derivatives to leverage themselves to insane heights hoping to drive their returns ever higher without accounting for the related level of risk involved. How deep in did the banks go? JP Morgan Chase alone, has 91 Trillion in derivatives and only 1 trillion in assets. But wait, don't forget that a certain chunk of those assets are mark-to-model, not mark-to-market. The real value of JPM Chase's assets is less then the stated value. How much is anyone's guess. The following chart shows the exposure of the top 25 commercial banks. The top 25 banks account for 97.7% of all exposure. Total exposure amongst the top 25 banks in the US, is currently $181 Trillion ($181,669,224,000,000)
Exposure by Percentage:
Source Data for the above charts (http://www.occ.treas.gov):
The damage to the banking system goes even further. As of November 2007, 100% of all required cash reserves held by US banks were borrowed, loaned to the banks by the Federal Reserve.
The banks have been burning through cash just to maintain daily operations. This is the first time since the data has been recorded (1959) that Non-Borrowed reserves has gone negative. The best part of the deal is that since the bailout was passed, the federal Reserve now pays the individual banks interest on the BORROWED reserves! To bad American Express wont pay me interest on monthly credit card balances. (data source: http://www.federalreserve.gov/releases/h3/hist/)
One of the current debates that is still heard in the mainstream media is whether or not we are in a recession. The answer depends on who's calculated GDP numbers you prefer, the government's or independent groups. Independent calculations show the growth of GDP has been negative for over a year now. (see shadowstats.com).
Another indicator that can be more direct then looking at commodities is the Baltic Dry Index (BDI). The Baltic Dry Shipping Index (BDI) is a key gauge of shipping rates for the world's busiest 24 key shipping routes.
The Baltic Dry Index is a daily average of prices to ship raw materials. It represents the cost paid by an end user to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The Baltic Exchange is similar to the Nymex Holdings (NMX) in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. The exchange maintains prices on several routes for different cargoes and then publishes its own index, the BDI, as a summary of the entire dry bulk shipping market. This index can be used as an overall economic indicator as it shows where end prices are heading for items that use the raw materials that are shipped in dry bulk. A drop in shipping is the first sign of the national and global economy slowing down.
A drop in shipping rates is the first sign of a national and global slow down. here is a chart of recent BDI rates. The BDI has fallen through the floor since June of this year.
The end result is that the consumer economy is over. It worked great for a decade or so, but the American consumer has now taken on staggering levels of debt, The top 25 banks combined carry $181 trillion in outstanding derivatives ( 14 times the US GDP) and one bank alone, JPM Chase, has $91 trillion in outstanding derivatives (7 times the US GDP). While all of these derivatives will not lose money, even a small loss to a bank that is leveraged to 7 times the entire US GDP can and will be devastating.
Monday, October 6, 2008
Friday, September 12, 2008
Here is the Data in graph form, based on the tables generated by Bank Implode-O-Meter. Note that there are 3 categories on the chart
Banks In Red: Banks with a Texas Ratio of 100 or greater
Banks In Yellow: Banks with a Texas Ratio between 80-100
Banks In Green: Banks with a Texas Ration less then 80.
Note that Bank Implode-O-Meter used the Level 1 Equity ratio as a measure of distress and that there is minimal difference between the 2 measures in terms of this simple chart.
What is the Texas Ratio?
Click on image to enlarge
Friday, July 11, 2008
Friday, July 4, 2008
I have used a substantial amount of information from the EIA, IEA and The Oil Drum in this presentation.
Monday, June 30, 2008
Modern civilization runs on oil. Everyone knows this, but they do not realize what the implications are. A significant portion of the energy in the food we eat comes from oil, but how vulnerable are our food sources to supply fluctuations of oil.?
From corporate mega farms to family farm operations, most farmers are heavily reliant on fertilizer. Modern intensive farming techniques would fail within a season or 2 without the constant application of fertilizers, and many areas that are currently farmed would be unsuitable with out current fertilizer application methods. If you take fertilizers out of farming, no amount of crop rotation or organic (as in non-oil based) fertilizers would be able to maintain the level of intensive farming or the high yields per acre that are depended on today. Like modern economies farming is all about increasing yields and any decrease in yields can have disastrous impacts on world food markets.
The basis of fertilizer is NPK (Nitrogen, Phosphorous, Potassium). These are 3 base elements that nearly all modern crops need to one level or another. The level of nutrients required for intensive farming practices is beyond what natural nutrient cycles can provide, hence farmers step in with fertilizer. The fourth member of this group is Sulfur. Sulfur is used heavily in the fertilizer industry, both as a nutrient that is directly applied to crops, as well as a critical component in the processing of NPK into its final fertilizer products
Nitrogen is produced using the Haber-Bosch process to create ammonia. The ammonia can be applied directly to crops or it can be further processed into urea/ ammonium nitrates. Ammonia is also used as part of the Odda process that creates NitroPhosphates
Phosphorous is mined in the form of phosphate rocks. The phosphate rock is then further processed into phosphoric acid as well as used in the Odda process.
Morocco holds 50% of the worlds reserves of phosphate rocks, the USA holds 10%
Potassium is mined as potash
85% of the world reserves are held in North America (mainly Canada, and some in the USA) and in Russia.
Sulfur can be applied directly to some crops but the majority is used in the production of H2SO4 (sulfuric acid). Sulfuric Acid is a primary component in the benefaction of NPK. That is the chemical alteration of NPK into forms that plants can readily use.
Approximately 60% of the world’s sulfuric acid is used in fertilizer production. The majority of the world sulfur currently comes from the de-sulfurization of sour oil (oil that has high sulfur content) and from the stack collection of sulfur compounds from industrial operations as is required by environmental laws in the USA and Europe.
How does this tie into oil? As of the mid 90's 2% of the world’s energy consumption and 5% of the worlds natural gas consumption went to fertilizer production
Another factor to consider is that Phosphorous and Potassium are both generally considered to be non-renewable. This means that over time as supplies of these nutrients becomes constrained; you will see similar volatility and political strife over the sources of these critical nutrients. It also means that as the easy sources of these nutrients are exhausted and producers are forced to go after lower quality/ harder to access sources that prices will rise even though supply may be maintained. Like oil, the demand for fertilizer is relatively inelastic.
For a piece on the idea of peak phosphorous take a peak here
For additional information of the link between natural gas and ammonia check this article:
The following article gives very good data showing a tight link between nitrogen fertilizer and the cost of natural gas.
While this post isn’t on quite the level of my previous ones I plan on exploring this link further in a near future post. But the take away here is that ultimately, the food we eat is dependent on oil. If you remove oil from the equation there will be significantly less food available and at a much higher price on a global scale. While this may not appear dire to a country that is capable of growing its own food,; this linkage of food and oil poses a dire risk to nations and populations that import any significant amount of their food. This will be the root of large-scale starvation as the supply of oil becomes more constrained.
For who are more financially minded, this also means that there will likely be substantial run ups and drops in prices of material directly tied to the food industry and fertilizer. One good example is the recent behavior of sulfur.
In only a year the price of sulfur has risen more than tenfold from $50/metric ton to $500, according to ICIS, the chemicals-pricing service. Editor Stephen Burns writes to clients today that Mideast sellers have mentioned $900/metric ton as minimum target for second-half sulfur contracts, with up to $1,000 possible…..
Demand for sulfur, long an ugly yellow waste product of petroleum refining, is surging because it's needed to make sulfuric acid, which in turn is essential to the production of fertilizer. U.S. market continues to see a long-term slowdown in sulfur supply from reduced production at oil refineries.
The rabbit hole goes deeper…
To Be Continued
Saturday, May 31, 2008
There are a few points I would like to respond to
Question for all those who think 10k a year in property taxes in a basic home in a middle class neighborhood is outrageous:
What amount of property taxes do you think would be fair?
would 10k in taxes be “fair” (in receipt of a commensurate level of services) if your hypothetical homeowner had two children in public school?
Taxation should generally be in line with the level of services provided by a government ( local, state, or federal). In the case of local taxes, the tax system is set up so that the community as a whole pays for the education of its children. Everyone pays taxes that go to education, not just the parents. The system is setup in this manner on the idea that having a communities children receive a basic education is in everyones best interest and so that a basic education is not limited to only the middle and upper class.
unfortunately taxation in NJ has far exceed its original intent. I have looked at the Montclair NJ district school budget as an example. While the taxes associated with the Montclair school budget are generally representative of much of NJ there are likely to be exceptions, both positive and negative.
This chart shows the Annual Montclair NJ district school budget from 1999 to 2008 and my projections of the school budget out to 2021. The school budget was projected forward by calculating the average (mean) annual budget increase (6.53%) as calculated from the annual increases between 1999-2008 (data source)
This chart shows that the Montclair school budget is increasing exponentially. The tax issue here is an exact match to the previous post in this blog, Our Greatest Short Coming, and that is that most people fail to recognize that a constant increase (linear growth rates) give rise to exponential growth.
An in depth analysis of the Montclair school budget would be needed to identify the source of the exponential growth. But the point here is that exponential growth is not sustainable by the tax payer and is not justified due to growth of student population, growth of inflation, or any other factors.
Reasonable and sustainable tax growth would be linear and would be tied to inflation, student population growth etc. you would also see a decrease in per student costs as the effect of economies of scale would increase as the student population grows. This applies to essentially all taxes not just school taxes.
Lets look at linear budget/tax rate growth vs exponential budget/tax rate growth:
Chart 2 shows the real Montclair Budget which exhibits exponential growth plotted against its annual % growth rate.
Chart 3 shows the calculated Montclair budget exhibiting linear growth plotted against its annual % growth rate.
What these two charts show us is that any budget/tax rate that exhibits a year-on-year (YOY) % growth rate that is greater than or equal to zero(0) ( YOY ≥ 0) exhibits exponential growth and a situation that will quickly become unsustainable.
A budget/tax rate that exhibits a year-on-year (YOY) % growth rate that is less than zero(0) ( YOY<0), exhibits linear growth and a situation that is most likely sustainable.
Chart 4 below shows a comparison of exponential and linear growth in relation to the Montclair district school budget. Note that the real budget ( that exhibits exponential growth) doubles every 10 years, while the calculated linear budget doubles every 17 years. Another point to consider is that if the growth rate of an exponential system is small enough, then it will appear to be linear for a period of time depending on how small the exponential factor is. In the real world growth rates that average around 1% or less for 10-20 years will show approximately linear growth. Even at 1%, after about 15-20 years a recognizable difference in growth can be seem in comparison to a linear system. Of course the easiest way to determine whether a system demonstrates linear or exponential growth is to to look at the net YOY growth rate and check to see if the value is less than zero (<0) or "greater than or equal to" zero (≥0)
So what is my point? My point is that tax growth must remain linear in order to be sustainable in the long term. Any tax system that is not linear will eventually become unstable. That instability can take many forms, form the exodus of the core tax base that is beginning to occur in NJ, to voters removing a large number of incumbent politicians in demand of tax relief etc. of course the other side of that coin is that any bureaucracy whether local, state or federal will fight to maintain every penny of tax revenue and to ensure exponential growth continues.
What I find interesting about the bureaucracies fight for continuous growth, is that I sincerely believe that very few if any of the individuals that influence/lead tax policies at any level actually understand the concepts that I have discussed here. The ultimate issue is that very few people understand how to consider non-linear implications. Lets hope that our politicians, and fellow citizens learn this lesson soon.
Sunday, May 25, 2008
Modern economies and societies are often based on the idea of continuous growth. Unfortunately there is a fundamental flaw in any such design. Any given resource, while potentially having vast reserves will always have some eventual limit. The question then is when do you reach that limit.
Any system with a constant growth rate will experience exponential growth. Whether we are discussing a national economy that experiences 2% growth every year for decades, or bacteria growing in a petri dish dividing at a constant rate.
The hazard of an exponential system is that by the time you realize that you are approaching a limiting factor, it may be to late to react. Observe the example chart below:
This chart shows series1 and series2. These are plots of US coal consumption at a constant growth rate of 2% per year but at different starting annual consumption. Series1 has a total reserve lifetime of 260 years and series2 has a total reserve lifetime of 120 years. Notice that in both cases after 50% of the available reserves have been consumed, only 30 years worth of reserves remains (this is because both series have the same growth rate).
How many people would become concerned about the amount of a vital resource available when you still have 50% of your initial supply available? Many people would consider becoming concerned when 75% or perhaps 80% have been used. The point to be taken from this graph is that by the time most people become concerned about the state of a vital resource, it may very well be too late to react. In series 2 it takes 90 years to consume the initial 50%, but only 30 years to consume the final 50%. if you wait until you have used 75% of your reserves in series2 then you would only have about 15 years to react. How long would it take for a society to recognize that a resource is becoming depleted and then make the required infrastructure changes to shift to a new resource? Historically it takes decades. This means that in a society experience constant growth, if you have not begun to shift to an alternative resource once you have used 50% of a resource, it is highly unlikely that you will be able to transition without the potential for significant disruption.
Constant growth in the context of this description does not mean or require that a system grow at exactly X%. It simply means that if the average (mean) growth rate for a given time span is greater then zero, then the system has experienced exponential growth (this sort of growth is also referred to as geometric growth/geometric progression). Therefore a system can experience negative growth, zero growth and positive growth all within the same time period and as long as the average growth rate is positive then rates of consumption are exponential.
Next time you hear an economy, a budget, or any other system is experiencing continuous growth, consider what the actual implications are. But also consider that this is not always a bad thing. Exponential growth is the power behind saving for retirement. By investing early at a continuous rate you can achieve substantial gains in the long term.
Lets look at the potential that coal may or may not hold....
From EIA (Energy Information Administration)
Annually, EIA reports remaining tons of coal in the demonstrated reserve base (DRB), which is comprised of coal resources that have been identified to specified levels of accuracy and may support economic mining under current technologies. As of January 1, 2007, the DRB was estimated to contain 491 billion short tons and recoverable reserve base to contain 264 billion short tons.
There are four major ranks of coal in the U.S. classification scheme. In the United States, coal rank is classified according to its heating value, its fixed carbon and volatile matter content, and, to some extent, its caking properties during combustion. The coal ranks from highest to lowest in heating value are:
- anthracite (53%)
- sub-bituminous (9%)
- lignite (1.5%)
Of the four ranks, bituminous coal accounts for over half (53 percent) of the DRB. Bituminous coal is concentrated primarily east of the Mississippi River, with the greatest amounts in Illinois, Kentucky, and West Virginia.
All sub-bituminous coal (37 percent of the DRB) is west of the Mississippi River. Most sub-bituminous coal is in Montana and Wyoming.
Lignite, the lowest-rank coal, accounts for about 9 percent of the DRB. Lignite is found mostly in Montana, Texas, and North Dakota.Anthracite, the highest-rank coal, makes up only 1.5 percent of the DRB. Anthracite is concentrated almost entirely in northeastern Pennsylvania.
The price of coal varies widely depending on the state that it is being purchased in (states that are coal producers tend to pay substantially less for the coal that is mined within the state). price also varies widely according to the quality/type of coal being bought
Averaged 2006 US Coal Prices ($/Short Ton)
How does US coal consumption compare to US petroleum (all oil products) consumption?
the annual consumption of coal in 2007 was 1,128,836,000 short tons. Annual consumption growth from 1973 to 2007 averages 2%.
the annual consumption of petroleum in 2007 was 7,554,000,000 barrels (7.5 billion). Annual consumption growth from 1973 to 2007 averages 1%.
In order to make these two energy sources comparable we will look at the energy supplied (BTU's, a unit of energy) by source ( data from EIA)
in 2006 the US consumed 2.26 Quadrillion (1015) Btu of coal and 43.8 Quadrillion (1015) Btu of oil ( assuming an average of 5,800,000 BTU/barrel).
These figures show that the US uses approximately 19 times more oil energy the coal energy
How much Coal does the US have and how much oil can we replace?
the US has 264,000,000,000 (billion) short tons of coal in proven reserves. At out current rate of consumption (1.1 billion short tons) and assuming our current rate of growth in consumption (2%) remains constant then we have an estimated 260 year supply of coal. Well that sounds like a substantial resource, so what happens if we replace some of our oil consumption with coal?
Per EIA 69% of US oil consumption is for transportation, so lets assume that we replace the non-transportation oil consumption with coal (30%). 30% of current oil consumption(43.8 quadrillion BTU) in BTU's is 13 quadrillion BTU. Assuming coal averages 2.2 million BTU/ton (per EIA) then in order to replace all non-transportation oil use at 2007 consumption rates would require an additional 20,000,000,000 (billion) tons per year. that's about 20 times our current coal consumption
If we replace the non-transportation oil consumption with coal and assume the same average energy consumption growth rate for coal as above (2%) then current proven coal reserves would last about 120 years.
if we maintain our current rate of coal consumption and do not increase out utilization of coal outside of our average growth rate current proven reserves would last about 250 years
What does it all mean?
The US holds about 25% of the world reserves of coal. We have the capacity to replace a significant amount of oil usage with coal but are the potentially substantial costs worth it? Coal is of vital important to the steel industry and substantial utilization of coal could have negative impacts on the cost and availability of steel on the open market. Modern day construction is highly depended on steel and there is no ready alternative.
Coal mining is highly disruptive to the environment and is often opposed by surrounding communities. Coal combustion produces about 2.7 tons of CO2 for every ton of coal burned. Given the potential concerns about human driven climate change does it make sense to increase coal consumption?
Coal combustion is also known as the major source of radioactive release into the environment
Oak Ridge National Laboratory(Coal Combustion: Nuclear Resource or Danger)
"Using these data, the releases of radioactive materials per typical plant can be calculated for any year. For the year 1982, assuming coal contains uranium and thorium concentrations of 1.3 ppm and 3.2 ppm, respectively, each typical plant released 5.2 tons of uranium (containing 74 pounds of uranium-235) and 12.8 tons of thorium that year. Total U.S. releases in 1982 (from 154 typical plants) amounted to 801 tons of uranium (containing 11,371 pounds of uranium-235) and 1971 tons of thorium. These figures account for only 74% of releases from combustion of coal from all sources. Releases in 1982 from worldwide combustion of 2800 million tons of coal totaled 3640 tons of uranium (containing 51,700 pounds of uranium-235) and 8960 tons of thorium."
Everyone must come to their own conclusion, I hope you have found this information useful and enlightening. Please remember that the scenarios described above are based on specific assumptions. If you change the assumptions of the scenarios, then the results are likely to change substantially.
Saturday, May 24, 2008
Thomas Robert Malthus (1766-1834)
An English demographer and political economist. He expressed views on population growth and discussed the idea of geometric population growth.
Marion King Hubbert (1903-1989)
A geoscientist who worked at the Shell research lab in Texas. He made important contributions to geology and geophysics, most notably the Hubbert curve and Hubbert peak theory (or peak oil),
These two individuals are just two of the many people who have laid the ground work for understanding the dynamics of humanities resource use patterns. However, these are two names that you will probably hear fairly often the more you look into peak oil and sustainability. take a look at their wiki articles, the back ground may help you understand some of the arguments that are based on their work and will allow to recognize when their names are just being uses as an appeal to authority.
Thursday, May 22, 2008
regarding yesterdays post on New Jersey Real Estate Report
italic;">On energy prices.
The producers blame the speculators. The investors blame demand and the dollar. The reg agencies say supply is fine, and are mum on the dollar. As dollar sinks further, they get on the demand band wagon. The refiners/distributors say they don’t set price and are only making a percent on the carry. Bottom line, all of these groups have a vested interest in one explanation of another.
Lets try to answer this in the near term - Putting aside longer term issues, as such dollar devaluation, peak oil, and global warming.
1.Was there an increase in demand porpotional to price increase, given the marginality of oil?
2.Was there at any time insufficient supply, before run up?
3.Did the rise in prices reduce demand, or even growth in demand?
4.Was the run in price, proportional to dollar slide against euro - given above factors?
5.What precentage of long interest are non-consumers or producers?
6.What percentage of consumer, distributor, and refiner purchases are stock piling to hedge against future increases vrs. near term needs?
The chart above (world crude supply/demand Vs Nymex Crude Spot) along with the previous chart ( US DOllar Index VS WTI Spot Price)should help to answer points 1 thought 4.
1.Was there an increase in demand porpotional to price increase, given the marginality of oil?
2.Was there at any time insufficient supply, before run up?
3.Did the rise in prices reduce demand, or even growth in demand?
No demand destruction is apparent yet, but more data is needed.
4.Was the run in price, proportional to dollar slide against euro - given above factors?No, the price of oil increased noticeably faster then any changes in the dollar index.
A visual presentation of the effect of gas prices on families at different income levels. The chart is based on families who make $25,000/yr, $45,000/yr, and $100,000/yr. 2002 US census data shows 20% of US families make $25,000 or less per year. The median US family income is $47,000, and that 20% of US families make 100,000 or more