a sample from our e-book, the renaissance paradox, due for release in may 2014
Financial
journalist and former CNN anchor Ali Velshi was often fond of describing the
next several years of America's future as a potential "New Economic
Renaissance," citing advances in natural gas and crude oil production, as
well as a housing recovery. Not to be left out of course is the dramatic rise
in the equities sector, specifically the large capitalization companies that
constitute the major indices such as the Dow Jones Industrial Average and the
S&P 500. If only partisan politics would get out of the way, Mr. Velshi
reasons, then we could truly realize the catalyst we are sitting on. “There is
no impetus for Congress to do the right thing,” he lamented last year. “They
choose career and self-preservation over the good of the country, and that
frustrates me to no end.”
(click pic on left to download full sample of "The Renaissance Paradox")
But is it merely politics that is capping the economy's potential? While there's no doubt that partisan bickering has sidelined important developments, such as the Keystone Pipeline project which according to a State Department environmental report concluded that it will not have a big impact on carbon emissions, it's difficult to make a case that Washington acrimony is the Hoover Dam to nationwide prosperity. First, political gridlock is hardly new and past administrations have had to deal with enormous challenges irrespective of the fluctuations in macro-economic cycles. The argument that the Obama administration is uniquely argumentative with the Republican party may be true based on a number of embarrassing incidents that have occurred under his office's watch and his ever eroding popularity, both within the United States as well as international powers that have routinely challenged the White House's authority. However, do party lines always dictate economic performance? The greatest boom in stock market valuation occurred during the double terms of President Bill Clinton, a Democrat if there ever was one, while the severest financial collapse in modern history happened at the tail end of George W. Bush's administration, in many ways assuring that the perceived anti-business Democrats would once again wrest control of the executive branch.
Second, it's not clear that the economic engines that Mr. Velshi referred to will actually perform as intended. For instance, the natural gas revolution that is supposed to arise via hydraulic fracturing, colloquially known as "fracking," has several critics, primarily citing cost inefficiencies. According to information provided by Green Tech Media, conventional natural gas production may have peaked during the mid-1990's, raising concerns about the higher costs associated with newer extraction methods negating profitability, and the uncertainty of readily available fuel supplies. Also, despite the nominal increases in domestic natural gas production, its spot price, or the price found in the open market, has only soared : even though some of the price increase is understandable due to the statistically anomalous weather patterns that were experienced during this recent winter season, a single incident does not account for the wide breadth of the amplified market trend.
Even if political acrimony could be completely excised, what exactly would that accomplish? Is the acrimony responsible for the 47 million Americans that are on food stamps, roughly 16% of the entire population? Has Obama's executive orders, or the residual policy ghosts of George W. Bush that always seems to haunt the liberal "blogosphere," rendered the millions who are looking for work permanently unemployable? If Mr. Velshi's assertions were true, a collective hug fest and a random singing of Kumbaya by members of Congress is all that would be necessary to get us on that Renaissance track! But time after time, we come to the realization that key economic metrics, dismal as they are, are even worse when dismissing the government's creative accounting. Much worse, in fact, for certain indicators such as the labor market, where a Forbes report suggested that real unemployment stands at 14.3%, a far cry from the official rate that meanders around the 7.5% mark.
As far as housing is concerned, the heavily touted recovery by mainstream publications such as Money magazine have operated under a false mathematical premise. According to their April 2013 edition, which ran with the unambiguous headline, "HOUSING IS BACK," the financial publication cited price increases, some as high as 23% in Phoenix and 17% in San Francisco, as well as sales volume rising in 69 of the top 100 markets, with 35 showing double-digit gains. Notwithstanding their open admission that 2014 will likely be a "transition year" due to forecasted instability in the short-term picture, the editors of Money magazine appear to take considerable liberties as to what the term "recovery" means. Citing mere price increases are irrelevant unless those nominal prices are compared against the average purchasing price of those millions of Americans who suddenly found themselves underwater. It's journalistically irresponsible to state that the Phoenix market lifted 23% without also revealing how far it collapsed under the real estate bubble. Otherwise, we're not only comparing apples to oranges : we're just comparing apples, period. Percentages have a strange way of saying everything and nothing, hence the expression "lies, damned lies, and statistics."
One must further take exception at the term "sales volume." Volume is another fancy metric that is often touted by biased parties attempting to sway a particular discourse in their favor, but in reality, the term has very little meaning outside of proper context. Real estate volume has elements in common with the volume metrics cited in commodities trading. In both cases, they establish a running record of the nominal transactions that were conducted, but not much else. In order to gauge which entities are executing the transactions, as well as the net number of "completed transactions," or transactions that result in the transfer of ownership of an asset, we must reference what commodities traders call open interest. This is critical in establishing the overall sentiment of the market.
If we were to conduct an "open interest" analysis for the real estate sector using data provided by the Department of Housing and Urban Development, we would see that most of the aforementioned sales volume is recently occurring within segments of the population that already own real estate. The metric that few in the mainstream talk about, purchasing trends for first-time buyers, is actually quite bleak. Wealth concentration, a distinct problem within the stock market where a majority of public equity shares are owned by a small minority of Americans, is also prevalent in the housing market.
Are politics responsible for this financial dichotomy as well, where a recovery in either property or security related investments are only enjoyed by an elite few and the rest of middle-class America are left fighting for the crumbs? Hardly! Forward guidance and protocol, whether provided by a Democrat or Republican, can hardly exert that much leverage towards the fundamental fissures that malign the current economic infrastructure, one that substantially threatens any substantive resurgence.
Words, as we know, are cheap. Actions speak profoundly and carry infinitely greater weight. If the government could talk its way out of its problems, surely it would! What better tool, should such a ridiculous concept exist, to utilize in order to extract what so many people believe is utterly impossible? When the money flows, no one is the wiser. If there are criticisms, they would swiftly be drowned out by the quiet complacency of a heartily employed constituency. In most corners of politics, there are only winners when the economy itself is the biggest one of all.
But once the money pot dries up, guards are instantly raised. Daniel Kahneman and Amos Tversky, in their work, "Prospect Theory," quantifies the unbalanced emotions people experience during moments of financial decline. Their study revealed how individuals are much more upset by prospective losses than they are pleased by equivalent gains, an unsurprising conclusion especially in the current political environment, where some of President Obama's ardent supporters have noticeably kept their distance. It stands to reason, then, that if an artificial stalemate was the only impediment to robust economic growth, that path would have been the first one chosen.
Instead, we may have found ourselves in an ironic plot twist, a fiscal M. Night Shyamalan story before he himself lost the plot (Lady in the Water, anyone?). Actually, we have no need to become that existentially vague but must simply come to the realization that it is the dog that chases the tail, not the other way around. The empty talk and scripted posturing by both sides of the Capitol Dysfunction is a natural byproduct of desperation, a painful acquiescence that the last bullet has been expended but not painful enough to cease the transaction of moral integrity for a perceived allotment of time, or at least enough of it to survive another election year.
Nearly six years removed from one of the worst stock market collapses in the history of the United States, how much more can the government do? On surface level, this may sound like a ridiculous question, and perhaps it is. Nevertheless, the question remains and one that should not be confused for Washington apologetics. The government has bailed out some of the nation's mainstays, such as General Motors and American International Group. Even private firms, such as J.P. Morgan, were instrumental in bringing together a workable solution to the banking crisis, which saw centuries-old Lehman Brothers, an investment firm that first started business a decade before the American Civil War, go belly up. And not to be outdone of course is the Federal Reserve, the starlet of an ongoing fiscal drama that is resigned to play a bipolar character in front of an equally demented audience.
(click pic on left to download full sample of "The Renaissance Paradox")
But is it merely politics that is capping the economy's potential? While there's no doubt that partisan bickering has sidelined important developments, such as the Keystone Pipeline project which according to a State Department environmental report concluded that it will not have a big impact on carbon emissions, it's difficult to make a case that Washington acrimony is the Hoover Dam to nationwide prosperity. First, political gridlock is hardly new and past administrations have had to deal with enormous challenges irrespective of the fluctuations in macro-economic cycles. The argument that the Obama administration is uniquely argumentative with the Republican party may be true based on a number of embarrassing incidents that have occurred under his office's watch and his ever eroding popularity, both within the United States as well as international powers that have routinely challenged the White House's authority. However, do party lines always dictate economic performance? The greatest boom in stock market valuation occurred during the double terms of President Bill Clinton, a Democrat if there ever was one, while the severest financial collapse in modern history happened at the tail end of George W. Bush's administration, in many ways assuring that the perceived anti-business Democrats would once again wrest control of the executive branch.
Second, it's not clear that the economic engines that Mr. Velshi referred to will actually perform as intended. For instance, the natural gas revolution that is supposed to arise via hydraulic fracturing, colloquially known as "fracking," has several critics, primarily citing cost inefficiencies. According to information provided by Green Tech Media, conventional natural gas production may have peaked during the mid-1990's, raising concerns about the higher costs associated with newer extraction methods negating profitability, and the uncertainty of readily available fuel supplies. Also, despite the nominal increases in domestic natural gas production, its spot price, or the price found in the open market, has only soared : even though some of the price increase is understandable due to the statistically anomalous weather patterns that were experienced during this recent winter season, a single incident does not account for the wide breadth of the amplified market trend.
Even if political acrimony could be completely excised, what exactly would that accomplish? Is the acrimony responsible for the 47 million Americans that are on food stamps, roughly 16% of the entire population? Has Obama's executive orders, or the residual policy ghosts of George W. Bush that always seems to haunt the liberal "blogosphere," rendered the millions who are looking for work permanently unemployable? If Mr. Velshi's assertions were true, a collective hug fest and a random singing of Kumbaya by members of Congress is all that would be necessary to get us on that Renaissance track! But time after time, we come to the realization that key economic metrics, dismal as they are, are even worse when dismissing the government's creative accounting. Much worse, in fact, for certain indicators such as the labor market, where a Forbes report suggested that real unemployment stands at 14.3%, a far cry from the official rate that meanders around the 7.5% mark.
As far as housing is concerned, the heavily touted recovery by mainstream publications such as Money magazine have operated under a false mathematical premise. According to their April 2013 edition, which ran with the unambiguous headline, "HOUSING IS BACK," the financial publication cited price increases, some as high as 23% in Phoenix and 17% in San Francisco, as well as sales volume rising in 69 of the top 100 markets, with 35 showing double-digit gains. Notwithstanding their open admission that 2014 will likely be a "transition year" due to forecasted instability in the short-term picture, the editors of Money magazine appear to take considerable liberties as to what the term "recovery" means. Citing mere price increases are irrelevant unless those nominal prices are compared against the average purchasing price of those millions of Americans who suddenly found themselves underwater. It's journalistically irresponsible to state that the Phoenix market lifted 23% without also revealing how far it collapsed under the real estate bubble. Otherwise, we're not only comparing apples to oranges : we're just comparing apples, period. Percentages have a strange way of saying everything and nothing, hence the expression "lies, damned lies, and statistics."
One must further take exception at the term "sales volume." Volume is another fancy metric that is often touted by biased parties attempting to sway a particular discourse in their favor, but in reality, the term has very little meaning outside of proper context. Real estate volume has elements in common with the volume metrics cited in commodities trading. In both cases, they establish a running record of the nominal transactions that were conducted, but not much else. In order to gauge which entities are executing the transactions, as well as the net number of "completed transactions," or transactions that result in the transfer of ownership of an asset, we must reference what commodities traders call open interest. This is critical in establishing the overall sentiment of the market.
If we were to conduct an "open interest" analysis for the real estate sector using data provided by the Department of Housing and Urban Development, we would see that most of the aforementioned sales volume is recently occurring within segments of the population that already own real estate. The metric that few in the mainstream talk about, purchasing trends for first-time buyers, is actually quite bleak. Wealth concentration, a distinct problem within the stock market where a majority of public equity shares are owned by a small minority of Americans, is also prevalent in the housing market.
Are politics responsible for this financial dichotomy as well, where a recovery in either property or security related investments are only enjoyed by an elite few and the rest of middle-class America are left fighting for the crumbs? Hardly! Forward guidance and protocol, whether provided by a Democrat or Republican, can hardly exert that much leverage towards the fundamental fissures that malign the current economic infrastructure, one that substantially threatens any substantive resurgence.
Words, as we know, are cheap. Actions speak profoundly and carry infinitely greater weight. If the government could talk its way out of its problems, surely it would! What better tool, should such a ridiculous concept exist, to utilize in order to extract what so many people believe is utterly impossible? When the money flows, no one is the wiser. If there are criticisms, they would swiftly be drowned out by the quiet complacency of a heartily employed constituency. In most corners of politics, there are only winners when the economy itself is the biggest one of all.
But once the money pot dries up, guards are instantly raised. Daniel Kahneman and Amos Tversky, in their work, "Prospect Theory," quantifies the unbalanced emotions people experience during moments of financial decline. Their study revealed how individuals are much more upset by prospective losses than they are pleased by equivalent gains, an unsurprising conclusion especially in the current political environment, where some of President Obama's ardent supporters have noticeably kept their distance. It stands to reason, then, that if an artificial stalemate was the only impediment to robust economic growth, that path would have been the first one chosen.
Instead, we may have found ourselves in an ironic plot twist, a fiscal M. Night Shyamalan story before he himself lost the plot (Lady in the Water, anyone?). Actually, we have no need to become that existentially vague but must simply come to the realization that it is the dog that chases the tail, not the other way around. The empty talk and scripted posturing by both sides of the Capitol Dysfunction is a natural byproduct of desperation, a painful acquiescence that the last bullet has been expended but not painful enough to cease the transaction of moral integrity for a perceived allotment of time, or at least enough of it to survive another election year.
Nearly six years removed from one of the worst stock market collapses in the history of the United States, how much more can the government do? On surface level, this may sound like a ridiculous question, and perhaps it is. Nevertheless, the question remains and one that should not be confused for Washington apologetics. The government has bailed out some of the nation's mainstays, such as General Motors and American International Group. Even private firms, such as J.P. Morgan, were instrumental in bringing together a workable solution to the banking crisis, which saw centuries-old Lehman Brothers, an investment firm that first started business a decade before the American Civil War, go belly up. And not to be outdone of course is the Federal Reserve, the starlet of an ongoing fiscal drama that is resigned to play a bipolar character in front of an equally demented audience.
