On occasion, after reading about a topic over and over, something suddenly clicks, and you can make sense of it. It happened for me twice today. The second instance, I think, more meaningful than the first.
-Paul Krugman helped me (finally) to wrap my head around the concept of Say's Law and why it draws so much attention (it's also worth clicking on the link within Krugman's post). And, oddly, I don't think Keynes was so off in calling what he did into question within the neoclassical framework. Which is not to say that his prescriptions are the right ones in my opinion...
-The second moment of zen came from stumbling onto The Radical Subjectivist blog. He is a thinker in the Austrian tradition, but he satisfies the Steve Keen criteria of moving past the equilibrium requirements of most mainstream economic constructs. And he also remains skeptical of what government can and should do. In other words, he's convinced me that I need to spend some time reading Ludwig Lachmann.
Thursday, January 19, 2012
Monday, January 16, 2012
I relate...
Courtesy of Gene Callahan:
"I don't know if I have a single reader who finds this topic interesting, but, as I have mentioned before, for me this blog is a writer's journal that happens to have readers."
"I don't know if I have a single reader who finds this topic interesting, but, as I have mentioned before, for me this blog is a writer's journal that happens to have readers."
In the land of ivory towers...
From over the weekend, Krugman continues his attacks on Romney. Now, I am not wont to defend Romney as I have no view towards voting for him -- but I think this piece shows that Krugman is nothing more than a lab-based academic who lacks any real world experience. Better yet, it is just another example where his critical eye seems to be on vacation as it relates to those arguments which confirm his thesis.
In this case, Krugman seems appalled at the notion of re-trading because he has zero understanding of how a deal gets done. When Bain is the high bidder, the process doesn't end there -- next comes due diligence, where the potential buyer gets to take a more thorough look under the hood of what it's buying. And it's entirely possible (and quite common) that something will come up that leads to a reduction on final pricing.
That Krugman thinks this "revelation" is some sort of black eye for Romney and Bain only speaks to his own lack of sophistication on the topic (and many others I would guess) while providing more slop to feed to his predisposed audience.
In this case, Krugman seems appalled at the notion of re-trading because he has zero understanding of how a deal gets done. When Bain is the high bidder, the process doesn't end there -- next comes due diligence, where the potential buyer gets to take a more thorough look under the hood of what it's buying. And it's entirely possible (and quite common) that something will come up that leads to a reduction on final pricing.
That Krugman thinks this "revelation" is some sort of black eye for Romney and Bain only speaks to his own lack of sophistication on the topic (and many others I would guess) while providing more slop to feed to his predisposed audience.
Interesting Alternatives
While my overall understanding of economics remains very basic, I think that I have picked up enough to be at least a little uncomfortable with all the different mainstream schools. Not surprisingly, then, I have come to appreciate those voices that reject the traditional and offer up ideas and stories that run counter to the way things were perceived pre-2008.
Surprisingly, though, one such voice is a guy named Steve Keen, who endorses the ideas of Keynes, but not in the way that they have been distorted by guys like Hicks and Krugman. What I like about his writing (and others like him) is that he convincingly demonstrates how all the competing schools still operate from the same faulty framing issues, and are unable to appreciate how their models of a complex economy become useless any time after T-zero. Even the Austrians fall into the same dichotomy problem, specifically government versus markets, as if it was really that simple.
Now, I am not yet convinced that stimulus will provide the answer, but I am at least receptive to the logic of this camp, since they fall under the heading of folks who saw what was coming. And part of my reluctance to embrace them is perhaps because of my own priors -- namely, I remain skeptical of how effective the government can be given it's lack of a profit/loss gauge to guide it to efficient decisions.
Surprisingly, though, one such voice is a guy named Steve Keen, who endorses the ideas of Keynes, but not in the way that they have been distorted by guys like Hicks and Krugman. What I like about his writing (and others like him) is that he convincingly demonstrates how all the competing schools still operate from the same faulty framing issues, and are unable to appreciate how their models of a complex economy become useless any time after T-zero. Even the Austrians fall into the same dichotomy problem, specifically government versus markets, as if it was really that simple.
Now, I am not yet convinced that stimulus will provide the answer, but I am at least receptive to the logic of this camp, since they fall under the heading of folks who saw what was coming. And part of my reluctance to embrace them is perhaps because of my own priors -- namely, I remain skeptical of how effective the government can be given it's lack of a profit/loss gauge to guide it to efficient decisions.
Catching Up
I like to read, but I find that if you ask me about a book anywhere from 3 to 12 months after finishing it, I am apt to remember little in the way of insights or important conclusions. Maybe my mind is simply going to mush with age. Thus, if for nothing else, this blog has served its purpose as the place where I can memorialize my initial reactions and big takeaways from the literature on my self-created "syllabus". Three more from late 2011/2012...
-There's Always Something to Do by Christopher Risso-Gill. The story of Peter Cundill, nicknamed the Canadian Warren Buffett for both his investing success and his adherence to the Benjamin Graham method. Nothing remarkable about the book, but it briefly mentions one of his interesting tactics: each year Cundill would visit the country that had the worst performing stock market over the prior 12 months, searching for opportunities.
-Hot Commodities by Jim Rogers. I probably would've found this book more interesting had I read when it first came out in the mid 2000s. Nevertheless, it is interesting to note how lukewarm Rogers is about gold at the time (versus his attitude now).
-Economics and the Public Welfare by Benjamin Anderson. A financial history book for the period 1914-1946 based on the observations of one of the key players of the time (chief economist at Chase). Generally, I am receptive to writing that deals with the depression of 1921, as it is often viewed as a compelling example of a deep slump that resolved itself rather quickly in spite of minimal government intervention. So what does Anderson (who was neither Austrian nor Keynesian) have to say? He points out that government expenditures from 1920-1923 went down every year (albeit from a higher base following the war) and that taxes were lowered slightly, with the result a net surplus from 1921 to 1923 (i.e., no deficit financing). Wages declined slightly and production lowered dramatically between 1920 and 1922 -- in other words, there was no stimulus to prop up prices. The markets were allowed to clear and the recovery was quick. He contrasts it with Japan, where there was coordinated effort between central bankers, politicians, and industry to prevent prices from dropping, followed by a 7-year period of stagnation, and then a banking crisis. Also of interest to me, the book looks at some of the data that has been argued by certain Austrian thinkers to demonstrate a credit-fueled boom in the '20s (masked by a natural period of deflation) that led to the '29 Crash -- Anderson identified a tremendous expansion in credit (sparked by easy money) which precipitated speculative behavior. Finally, the book spends a great deal of time looking at many of the New Deal policies and makes an argument that would seem to support the "Regime Uncertainty" thesis of Robert Higgs.
-There's Always Something to Do by Christopher Risso-Gill. The story of Peter Cundill, nicknamed the Canadian Warren Buffett for both his investing success and his adherence to the Benjamin Graham method. Nothing remarkable about the book, but it briefly mentions one of his interesting tactics: each year Cundill would visit the country that had the worst performing stock market over the prior 12 months, searching for opportunities.
-Hot Commodities by Jim Rogers. I probably would've found this book more interesting had I read when it first came out in the mid 2000s. Nevertheless, it is interesting to note how lukewarm Rogers is about gold at the time (versus his attitude now).
-Economics and the Public Welfare by Benjamin Anderson. A financial history book for the period 1914-1946 based on the observations of one of the key players of the time (chief economist at Chase). Generally, I am receptive to writing that deals with the depression of 1921, as it is often viewed as a compelling example of a deep slump that resolved itself rather quickly in spite of minimal government intervention. So what does Anderson (who was neither Austrian nor Keynesian) have to say? He points out that government expenditures from 1920-1923 went down every year (albeit from a higher base following the war) and that taxes were lowered slightly, with the result a net surplus from 1921 to 1923 (i.e., no deficit financing). Wages declined slightly and production lowered dramatically between 1920 and 1922 -- in other words, there was no stimulus to prop up prices. The markets were allowed to clear and the recovery was quick. He contrasts it with Japan, where there was coordinated effort between central bankers, politicians, and industry to prevent prices from dropping, followed by a 7-year period of stagnation, and then a banking crisis. Also of interest to me, the book looks at some of the data that has been argued by certain Austrian thinkers to demonstrate a credit-fueled boom in the '20s (masked by a natural period of deflation) that led to the '29 Crash -- Anderson identified a tremendous expansion in credit (sparked by easy money) which precipitated speculative behavior. Finally, the book spends a great deal of time looking at many of the New Deal policies and makes an argument that would seem to support the "Regime Uncertainty" thesis of Robert Higgs.
Friday, January 13, 2012
Basic Conventions
In my current gig as an investor in multifamily real estate, I've encountered the interesting and bizarre. And while nothing I'm about to write will re-invent the wheel as it pertains to my chosen profession, I still felt it was worth a little bit of ink spilled to jot down some thoughts.
-There are really three ways to measure an investment when you're underwriting:
1) Cap Rate, or year 1 yield on purchase price
2) Price Per Pound, or price paid for each unit
3) IRR, which tells you the annualized rate of return over the life of the hold period (however long that is)
From my standpoint, number 3 is total bullshit. Especially when it's used to analyze a deal more than 2 or 3 years out. The notion that you can possibly make a good prediction on rental growth rates and the trajectory of repairs and maintenance expense some 7 to 10 years in the future is foolish. It also provides the analyst with a lot of flexibility to paint a bullish or bearish picture, depending on the mandate. So, it's a little slippery. But, for whatever reason, most funds market themselves on the basis of exactly that -- "we're going to hold our assets for 8 years and anticipate low 20 returns during that time".
The other two can provide more insight, but context is very important. Starting with cap rates, you could have a situation where a 4-cap is a better deal than a 6-cap. If the former is coming off of depressed numbers because of recession but it's an asset in a good market, and the latter is peak pricing in a tertiary market during boom boom times, you can probably make the case for the "more expensive" investment. Again, context matters. The same can be said for price per pound. Is $150k per door reasonable in light of comparable trades and repro cost? Hopefully you can answer that question based on a thorough analysis of the market you're dealing with. Thus, when price per unit is used in tandem with a cogent and thoughtful view of cap rates, you put yourself in a position to invest well. And, if you have the ability to assess the current macro story reasonably on point, you're really in good shape.
-I saw the news that Morgan Stanley real estate funds got an extension on Fund VII, granting them the right to spend roughly $2.1 billion in equity over the next 12 to 18 months. If I had any assets in the markets they're looking at, I would consider hitting the bid during that time.
-There are really three ways to measure an investment when you're underwriting:
1) Cap Rate, or year 1 yield on purchase price
2) Price Per Pound, or price paid for each unit
3) IRR, which tells you the annualized rate of return over the life of the hold period (however long that is)
From my standpoint, number 3 is total bullshit. Especially when it's used to analyze a deal more than 2 or 3 years out. The notion that you can possibly make a good prediction on rental growth rates and the trajectory of repairs and maintenance expense some 7 to 10 years in the future is foolish. It also provides the analyst with a lot of flexibility to paint a bullish or bearish picture, depending on the mandate. So, it's a little slippery. But, for whatever reason, most funds market themselves on the basis of exactly that -- "we're going to hold our assets for 8 years and anticipate low 20 returns during that time".
The other two can provide more insight, but context is very important. Starting with cap rates, you could have a situation where a 4-cap is a better deal than a 6-cap. If the former is coming off of depressed numbers because of recession but it's an asset in a good market, and the latter is peak pricing in a tertiary market during boom boom times, you can probably make the case for the "more expensive" investment. Again, context matters. The same can be said for price per pound. Is $150k per door reasonable in light of comparable trades and repro cost? Hopefully you can answer that question based on a thorough analysis of the market you're dealing with. Thus, when price per unit is used in tandem with a cogent and thoughtful view of cap rates, you put yourself in a position to invest well. And, if you have the ability to assess the current macro story reasonably on point, you're really in good shape.
-I saw the news that Morgan Stanley real estate funds got an extension on Fund VII, granting them the right to spend roughly $2.1 billion in equity over the next 12 to 18 months. If I had any assets in the markets they're looking at, I would consider hitting the bid during that time.
Just A Reminder
Whether Monetarist or Keynesian, there is a consensus amongst economists that FDR served the country well in 1933 by revaluing the gold exchange rate from $20.67 per ounce to $35 per ounce. Thus, when you hear about NGDP targeting or any other monetary stimulus plan, bear in mind that each idea represents some derivative of the FDR policy (i.e., expand the money supply and create inflation). So, I ask -- how could you possibly be anything but bullish about the prospects for gold?
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