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Bernard's Top 10: Why housing is eating the economy; What 10 year bunds under 1% means for everyone; Why 'Uncle House' wants to sell; Cartoons galore; Dilbert

Bernard's Top 10: Why housing is eating the economy; What 10 year bunds under 1% means for everyone; Why 'Uncle House' wants to sell; Cartoons galore; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz

See all previous Top 10s here.

My must look at is the cartoon between #1 and #2 from Tom Scott. It is the cartoon of the campaign so far. The one from Rod Emmerson between #3 and #4 is almost as good.

1. Just buy houses and land - This piece from Tim Fernholz on Quartz is a thoughtful discussion of how the ownership of wealth has changed over the last 100 years and about the conclusions Thomas Piketty reached in his 'Capital in the 21st Century' book.

Some people think the main reason why a greater share of income and wealth has gone to the top 10% (in America at least) is the big increase in house prices.

Some critics of Piketty say he's wrong about his idea that capital returns are always above economic growth because of the role of housing.

Others say Piketty's now famous r (capital returns) > g (economic growth) formula may be wrong because of that, but that the problem of inevitably rising inequality is still there -- again because of this housing issue. Interestingly, the suggestion therefore that freeing up urban land for housing is a good way to reduce inequality.

Fernholz reckons it all boils down to scarcity of land and land usage restrictions in cities.

It's certainly thought provoking. The conclusion is that housing is eating the economy. Here's Fernholz:

When you take housing out of the equation, the increase in capital in recent decades is much smaller—in fact, it is small enough to suggest that capital isn’t an easy substitute for labor, and that diminishing returns on capital mean that R>G isn’t true, and the wealthy won’t just keep getting wealthier. Piketty, in this telling, is tricked by the housing booms in many wealthy economies.

And yet: Rising housing prices have real consequences that people have to live with—just ask the first-time US home-buyers—and returns on real estate investments are meaningful. The explanation for the huge increases in housing prices isn’t embedded in the buildings, but in land.

First, cities have become increasingly important economic hub. The old adage “location, location, location” is still important, and it’s one reason for the UK’s massive property boom, centered on London. Second, regulations on urban land use have prevented the supply of housing from keeping up with demand. That’s one reason San Francisco has wildly high home prices.  It’s also why reducing restrictions on land use made our list of ten ways to fight inequality.

But despite the 2008 crash, there’s no sign that home price increases are slowing, and, along with it, growth in capital. Even Rognlie concedes that Piketty could be right about capital taking over even as he is wrong about the specific mechanism. “The story about the increasing role of capital could be right, but it’s this weird, inverse image,” he told Quartz in June. “Scarcity of housing will continue to go up, and land it sits on will start claiming a larger and larger share of our resources.”

In other words, housing will eat the economy—everybody needs it, but it will be worth more and more, and land-owners will be the capitalists in command, unless we do a better job increasing the supply of housing.

2. The problem in Europe - Ambrose Evans Pritchard points via The Telegraph at the slow-rolling train wreck that is Europe's economy. The chart below (particularly for Italy) is sobering, showing real GDP still nearly 9% below its 2007 levels.  German 10 year bund yields are now below 1%. Here's Ambrose:

Eurozone strategy is in tatters after economic recovery ground to a halt across the region and France demanded a radical shift in policy, warning that austerity overkill is driving Europe into a depression.

Growth slumped to zero in the second quarter, with Germany contracting by 0.2pc and France once again stuck at zero. Italy is already in a triple-dip recession.

Yields on 10-year German Bunds fell below 1pc for the first time in history, beneath levels seen during the most extreme episodes of deflation in the 19th century. French yields also touch record lows. Much of the eurozone is replicating the pattern seen in Japan as it slid into a deflation trap in the late 1990s.

3. Sacre bleu - It seems the French are getting particularly antsy. Here's Ambrose again:

It is unclear whether tumbling yields are primarily a warning signal of stagnation ahead or a bet by investors that the European Central Bank will soon be forced to launch quantitative easing, buying government bonds across the board.

Michel Sapin, France’s finance minister, sent tremors through European capitals with a defiant warning that his country would no longer try to meet its deficit targets and would not inflict further damage on its economy by tightening into the downturn. “I refuse to raise taxes to close any budget gaps,” he said.

4. Chinese house prices falling - Here's a Wall St Journal piece on how many officials are rushing to sell their luxury homes before the other corruption hunting officials catch up with them. Apartment prices in China have been falling for the last two or three months.

In one case late last year, an Inner Mongolia political leader named Wu Zhizhong was convicted of corruption, accepting bribes and embezzling public funds. Investigators said Mr. Wu owned 33 properties in China and one house in Canada. Xinhua, China's official news agency, said the keys to all of his homes could fill up an entire handbag.

Cai Bin, a former Guangzhou official dubbed "Uncle House" on social media, was also convicted last year for accepting bribes. Investigators said he and his family owned more than 20 homes. Those cases, and others like them, have raised alarm bells among local government leaders.

According to roughly a dozen property agents interviewed by The Wall Street Journal, officials are now afraid to buy luxury pads, and several are trying to offload properties that might raise red flags.

The dumping of properties is the latest iteration of fear that has spread through the Chinese government at all levels as President Xi Jinping's anticorruption campaign rolls on. Already, government officials have toned down lavish banquets, gift-giving and travel.

And it comes at a bad time for China's property market, which is facing a slump that many economists say poses the greatest risk to the country's economy. Housing sales in the first seven months this year fell 10.5%, according to official data issued last week.

According to real-estate agents, government officials make up as much as 20% of owners in the luxury housing market, and the agents say they simply aren't buying much anymore.

5. How it's done - This detail in the WSJ article on the mechanics of officials buying luxury property is fascinating.

Another drag on the real-estate market: Beijing is paving the way for a nationwide system to tax and register property, which would make it much easier to identify modestly paid government officials who buy multiple homes. However, draft rules on a property-registration system issued Friday indicated the public would have only limited access to such a registry.

In a study from the University of Pennsylvania, economists found that Chinese government officials buy larger and more lavish homes than nonbureaucrats, despite earning typically 14% less in monthly income. Some officials also receive a price discount of nearly 4%, according to the study, which said that the size of the discount appears related to the power the official wields among local developers.

Bureaucrats in the study accounted for 7.1% of buyers—a much higher percentage compared with the 0.86% proportion of bureaucrats in China's total population.

Many officials mask their homeownership by using the IDs of their chauffeurs, relatives or surrogate buyers, according to real-estate agents.

6. The Great Chinese exodus - Andrew Browne, who I once worked with in Singapore, reports for WSJ from Beijing about how many wealthy Chinese residents are looking to leave for cleaner air, better schools and more opportunity.

Again, the details are instructive.

A college professor, who insisted on anonymity altogether ("Just call me an intellectual," he says), takes a darker view of China's prospects as he prepares to emigrate to the U.S., joining his two children, who both have postgraduate degrees from U.S. colleges.

Like many Chinese academics, the professor has a business or two on the side, although he hardly looks the part of an executive, unshaven and with crumpled pants riding 6 inches above his open sandals. In China, he pronounces, "Once you get rich, they arrest you."

That is an exaggeration, of course, but there is a propensity for entrepreneurs who appear on lists of the richest Chinese to end up in jail.

His real concern is that to get ahead, he's had to make compromises with his principles (he doesn't say bribes, but that is what he means). "I've been forced to prostitute myself," he says, and now he worries that it could all be snatched away. In China, a weak, corrupt legal system may sometimes work in favor of entrepreneurs while they're clawing their way up, cutting corners along the way, but it is almost always a liability once they've made it.

First-generation businessmen—the ones who powered China's economic rise—now dream of a secure retirement. That means legal safety in places like the U.S. and Canada.

7. Just what we need - The Economist Intelligence Unit has again labelled Auckland as the World's 10th most liveable city, with Melbourne at number 1, Adelaide at number 5 and Sydney at 7.

No wonder the buyers are flooding in from the rest of the world to park their money in Auckland.

The top cities have not changed much over time. The EIU notes that they “tend to be mid-sized cities in wealthier countries with a relatively low population density.” Hence those of us in London, San Francisco and Shanghai must endure the rat-race, and dream of dwelling amid Viennese coffee houses or Vancouver’s sailing and skiing.

8. Why aren't Americans revolting  - This piece in the New York Times asks why the struggling poor and middle income earners in America aren't using the electoral system to improve their situation.

It seems ignorance is a reason.

Researchers at the University of Hannover in Germany propose a simpler reason: Voters don’t demand more redistribution because they don’t grasp how deep inequality is.

Using data from the International Social Survey Programme, in which respondents were asked to locate their relative income status on a scale of 1 to 10, Carina Engelhardt and Andreas Wagener built a measure of perceived inequality, defined as the gap between the median income, smack in the middle of the distribution, and the average income of the population.

Evidently, nobody has a clue: In every one of the 26 nations, most of them in the developed world, for which they collected data, people believe that the income gap is smaller than it really is. And using perceived rather than actual inequality, the median voter theory works much better: Where people believe inequality is worse, governments tend to redistribute more.

9. Totally irrelevant article to take you away from it all. This is a piece in The New Yorker about Nina Simone, who I'm a huge fan of. An amazing and damaged woman. Made me think a bit about this Ferguson mess.

The civil-rights songs were nevertheless what she called “the important ones.” And the movement is where she gained her strength. It’s also where her private anger took on public dimensions, in the years when patience gave way entirely and the anger in many black communities could no longer be tamped down. Onstage in Detroit, on August 13, 1967—two weeks after a five-day riot had left forty-three people dead, hundreds injured, and the city in ruins—Simone, singing “Just in Time,” added a message to the crowd: “Detroit, you did it. . . . I love you, Detroit—you did it!” She was met with roars of approval, which one Detroit critic said he presumed had come from “the arsonists, looters and snipers in the audience.” Another critic, however, wrote that her show let white people know what they had to learn, and learn fast. Was she the voice of national tragedy or of the next American revolution?

10. Totally John Oliver on the riots in Ferguson.

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13 Comments

So much for petrol rationing and oil running out in one to two years...

Also from AEP

"Brokers Sanford Bernstein call it the new order of "global energy deflation". Technology momentum is unstoppable, and one-way only.

"The US shale revolution has caused natural gas prices in North America to collapse. With a long delay, and by convoluted means, this effect is spreading to Asia, where liquefied natural gas (LNG) prices have halved this year.

In the end, oil must converge towards gas prices since vehicles can be designed to use either source, or both. The new Cummins Westport ISX 12G gas engine released last year competes directly with diesel. Natural gas lorries are expected to take around 4pc of the US market this year as new taxes and pollution laws come to bear."We think a large portion of the freight market could utilise LNG and penetration rates could ultimately top 40pc," said Citigroup.Navigant Research says the global gas fleet will reach 1.9m lorries and 1.8m buses by 2022. The switch to gas is spreading to pick-up trucks and passenger vehicles as the technology gets cheaper. The gas option for the new bi-fuel Chevrolet Silverado has fallen to $9,500. Even railroads are dipping their toes in the water. CSX is testing a hybrid that can run on natural gas or diesel.

It is possible that gas and LNG prices will converge upwards, rather than oil coming down. That seems unlikely. America's gas ouptut has risen from 440 to 720bn cubic metres (bcm) in six years - 20pc of global production - and is still rising. The US Energy Department expects it to reach 960bcm by the end of the decade. These are huge volumes.

The "oil intensity" of global GDP has already halved since 1980s. We are becoming more frugal.
"

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Natural gas, except,

http://peakoil.com/consumption/natural-gas-as-a-fuel-for-trucking-failing-to-deliver

"So far, though, in spite of US natural gas prices that are a third of global levels, substitution has been limited. Presently, natural gas used as transportation fuel constitutes only about 0.1 % of total US consumption"

8><---

"In the long term, the price advantage enjoyed by US consumers for both oil and gas will almost certainly reduce as imports fall and exports rise. Taken together, the potential rise in natural gas prices coupled with the capital costs of converting from diesel to natural gas may not favor a long-term conversion of fuels in the trucking industry and may explain why the rail industry is moving very cautiously in converting existing locomotives or ordering new one’s outside of specific rail road/client programs."

"Chevrolet Silverado" trouble is the economics still look poor and with a life span of 20 years and an un-certian time preiod for low gas prices a big risk,

"As an example, using federal government estimates the report assumes that a typical American family puts 12,000 miles on a car. At 25 miles per gallon, they will consume 480 gallons/year, resulting in a cost of about $1,920 at $4 a gallon. Natural gas at an equivalent price of about $2.50/gallon would save the family $720 a year. However, if that savings comes at the cost of a $10,000 vehicle purchase price premium it is no more compelling than that for electric cars with similarly high upfront costs"

"The "oil intensity" of global GDP has already halved since 1980s"  the trouble with that statement is a lot of the 'switch" is to instruments of mass financial destruction and away from making and transporting of actual goods which takes energy.

"In the end, oil must converge towards gas prices" unlikely due to the un-suitability of Ngas in many instances, its far more likely Ngas will converge with high oil prices. Its a demand thing I'd suggest.

regards

 

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When are we going to start petrol rationing?

The oil intensity is driven by better fuel economy "average efficiency of new cars in the US has risen by 4.6 miles per gallon (mpg) since 2008". Check the graph from 1980 it is fairly linear not sure where the "insturments of financial mass destruction" pop up.

In the UK alone diesel related pollution is responsible for 1000's of deaths every year. Surely it is a better bet to go for gas conversion rather than expensive green fantasies like CO2 storage or offshore wind. Brazil seems to get a along well with duel fuel vehicles.

"We think a large portion of the freight market could utilise LNG and penetration rates could ultimately top 40pc," said Citigroup.

Given trasportation uses about 50 million b/day of oil there is plenty of scope to cut oils lunch and save a few lives at the same time.

I'm sure the world can adapt - the solution is already there - especially if we start ration petrol like you suggest.

 

 

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Oh Im sure the world will be fine, human society as it is today, not so much so.  The economy to support it is too fossil fuel energy intensive.  So the future is local, the beehive will be a far away place not in our lives overly much.

Rationing, well in effect we are rationing right now, its done via price, so while we can pay 215cents a litre developing nations like Pakistan, not so much. Even then its slowing our and indeed the developed nations economy, almost choking it to death in effect.  

Real rationing, as in "sorry you get 10litres this week" well that is a big Q.  A short term event like say a middle east war would lead very quickly to speed restrictions, and limitations.  The how of rationing with un-manned petrol pumps these days is an interesting Q to get around.

Beyond that do we continue to ration via price?  an interesting Q.  So rich lawyers in type 7 BMWs buy all they want while the poor do without altogether?  So the poor all sit on welfare as they cant get to jobs that the rich lawyers have to pay for via tax? that would go down well I bet.  Not have welfare? you start to open a pandoras box then.

regards

 

 

 

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Good stuff Profile! North Dakota has upped oil and gas production 600% since 2005. And then we have the promise of coal-water (not a typo); an anthracite/ H20 slurry that combusts with compression like diesel. The CSIRO AU have operating 3.9l engine banging away in their Newcastle lab now - and we have thousands of years supply of the stuff here in NZ. There will be many other options hitherto unknown too - don't worry, have a happy driving life.

Ergophobia  

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Cheers Ergo - oddly enought I've been recently reading about those coal-water slurry engines. Very interesting. I didn't realise there was so much progress with small diesel engines. Is that the DICE project?

 

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Shale plays have indeed been amazing, until a) You look at the cost to do it, b) the wells peak and drop off in a very short time span, c) only some parts of plays (and sme plays) are economic d) one of the biggest and the next big wing over in california got canned, downgraded by 96?% or something. e) US Shale oil will peak as early as 2016~2019 and then decline quite sharply, so the USA has gained a 5 years of supply, then its back to importing.  Oh and despite the US's second coming oil is still $100 a barrel.

a) Anthracite is the highest coal grade and pretty much used up, so forget that as a coal source for the mixture in cars, or much else. 

b) What Nz has is some decades of lignite which as brown coal is barely coal, ie its the worst grade and carries huge slag/ash problems. In fact the problems are so severe its not even nice to burn in a conventional steam/water boiler let alone a combustion engine. 

c) Options unknown, so you are going to pary for one to drop out of the sky? great plan.

regards

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Ah, the list comes out.

Cheer up Steven - here's a list for you. Reasons to be Cheerful.

http://www.rationaloptimist.com/blog/reasons-to-be-cheerful-%281%29.aspx

as for your list.

a) cost, recovery getting better all the time as technology moves forward.

b) does anybody dispute this fact? Is it a big deal? Some wells still produce oil for 20- 30 years after the frack.

c) thats the nature of natural resources - you win some you lose some,

d) They will figure out the Marcellus oil resource. As a gas play it didn't exist ten years ago and now produces 15 billion cf per day. Not bad. Bit of energy there to play with while they figure out the right oil recipe. People working on it right now.

e) yeah it will slow down at some stage - we were suppposed to be out of oil by now. Other countries have bigger shale resources than the US. Look at what Chevron is achieving in Argentina at the moment. And as above oil isn't as important as it once was given improved fuel efficiency and the sea of gas available. See above.

As for $100 oil, the US is lifting its weight, it can't help if the rest of world is a basket case. Though going by the reuter article the other day Oil Nationalism is on the wane so you'll see a more rapid transfer of US tech to the rest of the world. Chevron/Argentina case in point. Didn't you tell us abotu five years ago (and last week) we would be out of oil in 1-2 years?

a) Then use a lower grade of coal and take the ash out first.

b) I don't think anyone is suggesting lignite slurry.

c) No need to pray. It just happens - going by the last 15,000 years of history.

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That is old and rubbish, the rational optomist, isnt...more like praying.

a)  is EROEI, plant may well get a % better but the quality of the remaining resource gets worse faster at some point, we are pretty close to that.

b) there is producing for 20 years and there is meaningful production. So sure some wells are still being extracted, but at 2 or 3 barrels per day its meaninglless. As long as that oil is worth more than the pumping costs, yes OK.

e) out of oil by now? Im not aware anyone has said that, at peak oil, yes +/- 5 years, sure....or are you still unable to fathom max per day output v out of? no worries neither are many others.

a) No you have to burn the brown coal and dump the ash....tahst how its done, I assume you never have.   the coal is really some % that burns closely mixed in with slag.

b) Lignite slurry, looked like it, and as I said there is no 1st grade coal left worth speaking of, ergo developing an engine tech for a fuel taht doesnt exist is pointless.

c) the past isnt a gauge of the future when you get a paradigm shift ergo rational optimist, just like jumping off a cliff its a great feeling the wind in your hair until you impact the canyon floor.

Oh and notice the upticks in his graphs on lighting...and especially petrol, some climb back up that.

regards

 

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old and rubbish - he only posted last week! Yeah there are some upticks in the light graph technology moves in leaps not incrementally. Sure is a trend there though.

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"Re-fracking" - oh the humanity! I hope someone thinks of the children.

"In 2009, Consol Energy Inc. drilled half a dozen natural gas wells in Center Township, Greene County, that weren't its best producers.

The Cecil-based energy company was a novice in the Marcellus Shale at the time, as were most companies tapping the largest and then newest shale play in the United States.With five years of experience and leaps in data and technology under its belt, Consol decided to give those old wells another go this year.

It hired oil and gas services companyHalliburton, which re-entered the horizontal wells, shot more holes through them, fracked those holes and forced out far more gas than the wells ever produced before.

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Indeed, or its decided to see if its a cheaper way (cant blame them), or because its running out of alternative good drilling spots.

Also its more gas and not more oil...and diminishing returns.

regards

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Back to the substance:  #1 - Doctor Housing Bubble is a SoCal RE type who has blogged the RE bubble there for well over a decade now.

 

He notes that late family/household formation, driven at least partly by student loan debt (itself, collateral damage from the Higher Ed bubble), and stagnant incomes (in real terms) mean that the FHB is 'pummelled in the market'.  Sound familiar?

The money shot:

"More people should mean more housing demand. But that is not always the case.What really matters is household formation."

 

Note that no-one has any cogent idea about how to unwind the bubble's excesses, because they entangle too many people and institutions.  Can't Debt-Jubilee our way outta This mess.... 

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