The Big Picture

Bill Black: The Heritage Foundation Makes Up Its Numbers
Fleetwood Mac, Jones Beach Theater
Succinct Summations of Week’s Events 6.28.13
Homebuilders Hurt by Housing Hangover
Questions for Investors At 2013′s Halfway Mark
10 Friday AM Reads
Comedians In Cars Getting Coffee: David Letterman

Bill Black: The Heritage Foundation Makes Up Its Numbers

Posted: 29 Jun 2013 02:00 AM PDT

The Heritage Foundation: Where 7.8% Growth is "Moderate" and 4.4% is "Spectacular"

Heritage Foundation is run by Jim DeMint, the former Tea Party legislator. Heritage promptly demonstrated the impact of its new leadership with its purported study of the benefits and costs of immigration that ignored the benefits and inflated the costs. Even other conservative groups were appalled – and that was before one of the co-authors of its studies' past writings on the inferiority of certain minorities that purportedly made assimilation fail became public. Heritage is one of many anti-think tanks where anyone with a progressive thought is shown the door.

I wondered how the new Heritage was handling Ecuador. Ecuador is a particular problem for entities like Heritage. Heritage has an "economic freedom index." "Freedom" has a specialized meaning to Heritage – financial regulation and regulation to protect workers' health and safety tends to be treated as a decline in freedom. Simply having the government spend money – even if the spending dramatically increases health, safety, and education – can be treated by the index as making a nation less "free." Like the competitiveness indices created by the World Economic Forum, the Heritage indices represent faux empiricism in the service of ideological dogmas.

Heritage sculpted its index to attempt to support its view that regulation and government spending reduce economic growth. Nations like Ecuador expose the fallacies of Heritage's index. Heritage's index has a "quick facts" component that reports that Ecuador's economic growth was 7.8% and unemployment was 4.9% (unemployment is now down to 4.1%, the best in Latin America).

As I have explained in prior articles, Ecuadorian President Rafael Correa has dramatically increased spending in precisely the categories that the Washington Consensus claimed Latin American governments should concentrate their spending – health, education, and infrastructure.

A million Ecuadorians have been brought out of poverty (in a nation of 15 million) under the Correa administration. The enormous emigration of Ecuadoreans prior to his leadership has been replaced by net immigration.

Ecuador poses existential threats to Heritage's index and ideology. First, President Correa is a top economist whose policies are based on the view that Heritage's proposed policies are self-destructive, immoral, and economically illiterate. Correa's policies are working brilliantly and are exceptionally popular in Ecuador. Better education, health, and infrastructure are essential to spur economic growth, but they are also steps that dramatically reduce human misery and powerlessness and expand freedom. Polls showed Correa had the highest approval rating of any head of state in the Americas.

Second, the three areas of government spending that President Correa has dramatically increased are the areas that the Washington Consensus said should be Latin America's top priorities. This reveals how extreme the ideological dogmas are that shaped Heritage's faux "freedom" index. The Washington Consensus, taken as a whole, is an exceptionally anti-governmental product of conservative neoclassical economic theories. Heritage, however, treats important aspects of the Washington Consensus as if they were the Communist Manifesto.

Third, Correa's policies have proven so successful not despite Ecuador receiving a terrible rating in Heritage's fake freedom index, but because Ecuador did so. Heritage ranks Ecuador as 159^th in the world, and falling, and classifies it as "Repressed" – its lowest category. It is a mistake to see Ecuador and Correa as clones of Venezuela and Hugo Chavez. Correa and Ecuador have demonstrated that deliberately adopting policies that produce a lower Heritage score can increase growth, add dramatically to the quality of life, and expand the citizens' freedom.

Heritage responds by disparaging Ecuador's success. In its narrative accompanying its index, Heritage claims that Ecuador's "economic growth has been moderate." A 7.8% growth rate is "moderate?" I found Heritage's description of Ecuadorean growth dubious so I looked to see what descriptors they used to describe growth rates for Heritage's ideological allies. Heritage published an article trying to give Republicans credit for spurring economic growth by forcing a tax cut on President Clinton during his second term. Heritage claimed that the result of the tax cut was "spectacular growth" – "the economy grew at an annualized rate of 4.4 percent."

Heritage considers 4.4% annual growth "spectacular" when Republicans (allegedly) produce it, but a 7.8% annual growth rate is only "moderate" if Correa produces. A conservative website notes our economy grew at an average annual rate of 3.4 percent under President Ronald Reagan.

I also looked at how Heritage's fake freedom index described growth rates in Latin American nations that came closer to sharing Heritage's ideological dogmas. Heritage describes Peru's annual economic growth rate of 6.9% as "strong." Heritage characterizes a 6.9% growth rate for a (relatively) conservative nation as "strong" but a 7.8% economic growth rate for Ecuador as "moderate" because (a) it detests Correa and (b) ideology trumps facts and logical consistency.

In Ecuador, GDP growth under Correa is particularly important because it has reduced inequality and poverty and led to an improved standard of living for virtually all citizens. Another measure of economic growth is the growth in real (adjusted for inflation) wages. Heritage has presented a chart in which it endorses the application of the phrase "Rapid Growth Scenario" to an annual growth rate in real wages of 1.4 percent.

In 2012, the real growth in wages in Ecuador was 3.0 percent. That is over twice the growth rate that Heritage described as "rapid."

Modern theoclassical economics has made an art form of fake empiricism produced by fake think tanks that shape their product to please their corporate founders/donors. The products may look like science, but it is simply dogma misrepresenting reality in an intellectually dishonest manner. President Correa drives entities like Heritage nuts because Ecuador has been so successful while he has been president because he championed policies they despise. It is time for the United States to embrace this success.

It is bizarre that the Obama administration, which purports to support most of Correa's economic policies, shares Heritage's implacably hostility to the Correa administration. The Obama administration is already acting like Ecuador's grant of asylum to Julian Assange is a hostile act to the United States and there is great danger that it will become even more hostile towards Ecuador should Edward Snowden be granted asylum by Ecuador.

A personal plea to President Obama and Secretary of State Kerry

When you find you are taking your policies against Ecuador from Heritage's playbook it should alert you of the need to stop, rethink, and reboot. President Correa was reelected by a huge margin on the basis of popular support for policies that he – and you – made the heart of your electoral platforms. President Correa has been able to put those policies in place to a far greater degree than you have Mr. President – and the results have been a spectacular success. You can disagree about some foreign policies while still being strong supporters of President Correa's education, health, and infrastructure policies and the Ecuadorean peoples' support for those policies, their President, and Ecuadorean sovereignty.

Fleetwood Mac, Jones Beach Theater

Posted: 28 Jun 2013 04:00 PM PDT

Last weekend, on a gorgeous evening, I took the missus to see Fleetwood Mac at Jones Beach Theater.

They were never my kinda band, although I will admit to liking the album Fleetwood Mac. Their breakout hit, Rumors, was too commercial for me, lacking much of an edge. (Bill Clinton adopted Don’t Stop (thinking about tomorrow) as his campaign theme song)

The years have treated the songs surprisingly well — they more or less hold up. My guess is because of what an interesting and brilliant guitarist Lindsey Buckingham is. (I had no idea prior). Stevie Nicks has a huge fan base who adore her, but I found her sincere but a bit ditzy, and she seemingly messed up the lyrics to Rhiannon.

They are doing a national tour, and I assume they are going to get tighter as the shows go on. If you are a fan, you are encouraged to go. Everyone else can skip it.

Photos after the jump

Fleetwood Mac, Jones Beach Theater, Wantagh, NY

Opening Song

~~~
~~~

Moon Climbing Over Bandshell

~~~

Fleetwood Mac does their best Pink Floyd imitation

~~~

Stage plus screens

~~~

Encore

Second Hand News
The Chain
Dreams
Sad Angel
Rhiannon
Not That Funny
Tusk
Sisters of the Moon
Sara
Big Love
Landslide
Never Going Back Again
Without You
Gypsy
Eyes of the World
Gold Dust Woman
I’m So Afraid
Stand Back (Stevie Nicks song)
Go Your Own Way

Encore:
World Turning (Drum Solo)
Don’t Stop

Encore 2:
Silver Springs
Say Goodbye

Source: Setlist

Succinct Summations of Week’s Events 6.28.13

Posted: 28 Jun 2013 12:30 PM PDT

Succinct Summations week ending June 28, 2013.

Positives:

1. S&P 500 rallied ~55 handles (3.5%) off Mondays lows and snapped a 2 week losing streak.
2. Case-Shiller 20-city index soared 12.05% y/o/y
3. U.S. new home sales for May came at 476k (+2.1% m/o/m)
4. World fails to end, Q2 will be Gold's worst quarter in 45 years!
5. U.S. weekly jobless claims came in at 346k
6. Durable Goods for May came in at 3.6%
7. U.S. personal income for May came in at 0.5%; personal spending for May came in at 0.3%
8. UofMi Consumer confidence strong at 84.1
9. Tourism spending shows fastest growth in 2 years, via WSJ
10. Bloomberg confidence gauge hit their highest levels since 2008
11. The Richmond Fed index rose to 8 in June from -2 in May

Negatives:

1. Bond funds saw their largest weekly outflows ever as investors worry about Fed tapering.
2. Q1 GDP growth was revised down to 1.8% annualized from the 2.4% estimate we saw last month.
3. Q1 Consumer spending was cut down to 2.6% from 3.4%.
4. Shanghai Composite tumbled 5.3% Monday — its largest one-day % drop in 3 years.
5. Chicago PMI fell to 51.6 v expectations of 55.
6. Kansas City Fed manufacturing index dropped to -5 v expectations of +3.
7. Volatility continues, with the Dow having 14 consecutive sessions of 100+ point ranges.

Thanks, Batman!

Homebuilders Hurt by Housing Hangover

Posted: 28 Jun 2013 10:00 AM PDT

The Distressing Gap
click for ginormous graphic

Chart via Calculated Risk

Yesterday, I posted a chart showing how weak New Home Sales were relative to existing home sales.

Mark Hanson wanted to flash some color on that — here is his 3 part explanation as to why the Builders are having such a difficult time:

1) No Flippers: The reason that New Home Sales is still down 60% from the peak while existing is only down 25% is due to the new-era private and institutional “buy to flip/rent” investor. They don’t call Hovnanian for buy to flip or rent opps.

This shows how powerful a force new-era investors — driven by the QE inspired quest for yield — really ‘were’. I say ‘were’ because at 2.5% on the 10s a house yielding 3% doesn’t look as good as it did with 10s at 1.5%. If institutional investors leave this housing market Existing Sales and prices will look a lot like they did after the 2010 Tax Credit sunset and the 18 month stimulus “hangover” ensued.

And with Foreclosures/short sales down up to 70% in the most popular legacy “Bubble Years”/new-era “recovery” regions I think it’s safe to say that investors will turn into net sellers soon, if they not already are.

2) EHS Double Count Flipping: Moreover, it is very important to note that “flipping” is at a high meaning Existing Home Sales are being counted TWICE in a year in many cases…the first time when the bank REO or short sale is done. And the second 3 to 12 months later after it’s been rehabbed/remodeled. This could be boosting Existing Home Sales by 3-5% per month. When you “flip-adjust” the past year of Existing Sales they are not so spectacular either…pretty flat in the context of “post-crash”.

3) Overcounting Distressed Market Values: Lastly, counter intuitively the distressed market — now at 6 YEAR LOWS in terms of volume (due to OVER 6 MILLION “new-vintage, higher-leverage, worse-than-Subprime loans AKA: loan mods) — was responsible for an outside percentage of the Existing house price “appreciation” we are seeing. That’s because when I buy a dump for $150k, put $50k into it (cost basis $200k) and resell for $230k, the popular price indices — included Case-Shiller if owned over 6 months by the investor — pick it up as $80k “appreciation” when in fact it’s only $30k…and a suspect $30k at that.

Bottom line, the distressed market was “the” housing market for years. It’s what everybody wanted. It has been absolutely responsible for the short squeeze in housing over the past 18 months and a large percent of house price gains (of course, the 30-year fixed mortgage rate being forced down in QE3 from 5% to 3.5% was worth 15% to house prices as well). And the artificial lack of distressed due to loan mods, new anti-foreclosure laws, and perma foreclosure timeline extending — coupled with rates back to pre-QE3 levels — will be responsible for “Hangover 2″ that follows.

There you have it, from Mark Hanson.

Questions for Investors At 2013′s Halfway Mark

Posted: 28 Jun 2013 05:30 AM PDT

Here we are, on the last day of Q2 2013.

It is no exaggeration to say that this has been an unusual and exciting year. I suspect most investors would prefer their markets with a lot less excitement. Perhaps we can begin a movement to bring back boring banking.

Regardless, we don’t have to wait until New Years Eve to look back. The end of the 2nd quarter presents an opportunity to review what you have done this year, and consider what changes you may wish to make. And since its Friday, we will be sure to slip in a little philosophy when no one is looking.

I don’t claim to have all the answers, but I do have many of the questions:

Questions for investors at the midpoint of 2013

• What surprises should you have anticipated this year? What did you get right, and what did you miss?

• Where’s the inflation?

• Did you ever assume we would become Japan (at least pre-Abenomics Japan, where they tried to become us).

• On a scale of 1-10, how passively or actively managed are your portfolios?

• What genuinely surprised you in a way that could not have been foreseen as a risk factor in 2013?

• Did you consider the probability that rates would start to reverse sometime in 2013? If not, why didn’t you? If you did, what steps did you take to moderate the impact?

• What are you doing to improve your process?

• What did you buy this year because of a terrific story, a narrative that suckered you in?

• What did you not buy because your risk aversion was acting up?

• How much are you paying so far this year in fees, costs & commissions? What can you do to lower that?

• Have you constructed your portfolio so it can withstand the inevitable rate increases?

• How are your alternative investments — hedge funds, venture capital, private equity — doing so far this year? Net of fees?

• Do you have a plan? Are you sticking with it, or making tweaks to it?

• What regulations have interfered with your investments? What Regs have helped them?

• What emotional decisions have you made this year that you regret? What can you do to avoid these in the future?

• How much financial television have you watched in 1H ’13,? How many investment related books have you read over that same period?

• Gold: A terrible investment, or the worst investment of all time?

• What are you doing to make yourself into a better investor?

If you can answer these honestly, you will make yourself into a better investor. It is a painful, self-relfective process, one that is necessary if you want to grow as a capitalist . . .

10 Friday AM Reads

Posted: 28 Jun 2013 05:00 AM PDT

My morning reads:

• Yellen Betting Defies 100-Year Jinx of Fed No. 2 Never Elevated (Bloomberg) see also Summers? Geithner? White House Makes Shortlist for Bernanke’s Job (WSJ)
• Wall St boom, Main St bust (FT Alphaville)
• Yes, We Have No Inflation (Economix) see also In Japan, Prices Stabilize for the First Time in Months (NYT)
• Record $13B ETF Outflows In June 2013 (Index Universe)
• Gold Traders Split as Rout Resumes in Bear Market (Bloomberg) see also The Chart That Best Illustrates How Gold Was A Bubble (Business Insider)
• Fashionable ‘Risk Parity’ Funds Hit Hard (WSJ)
• Greeks try farming as a backup plan (Washington Post)
• Racism Is a Tough Sell: The Real Reason Everyone Dumped Paula Deen (Daily Beast)
• The State of Google Reader Replacements (TidBits)
• Japan Is Counting on Friendly Robots to Save Its Economy (Atlantic)