My good friend Ricardo Torres in his tradingcafe blog has again hit the nail on the head. We have done nothing to change bankers' compensation packages and everyone with experience with the system, from Ricardo to Dominique Strass-Kahn is again warning that the ridiculous bonuses paid to bankers because they earn fees for their banks not necessarily profits for their clients is a sick system based on simple and venal greed.
At the height of the financial crisis in 2009, we, society, talked a lot about changing the bonus system to force bankers to wait to receive their variable compensation until the deals they structure actually show a profit. If the compensation is supposed to be based on the success of investments that have components of risk, then make it so. You only get the bonus when the profits of the deals are realized.
As ever, talk is cheap and the rhetoric of two years ago has gone away, replaced by a new wave of outsized and unproved bonuses. Where are you SEC, US Congress, CVM, Banco Central, FSA and all the other supposed regulators of the financial system? Your lack of action is condemning us to more rounds of bubbles and recessions.
Tuesday, February 22, 2011
Sunday, February 20, 2011
Inflação em Brasil
Na terra de tudo bem, não é. Depois de 15 anos sem inflação séria, estamos começando uma nova onda do tipo de aumento de preços que vivemos nos anos 80 e 90. Os jornais de hoje estão cheios de materiais sobre esforços, válidos e fajutos de controlar preços. O que nos na blogasfera podemos fazer é sinalizar a alerta, o semáforo amarelo.
No seu blog, tradingcafe, meu colega Ricardo Torres está contando a historia do preço absurdo do pequeno bloco de chocolate, Diamante Negro, que chegou em equivalente de 2 libras britânicas. Uma reflexão verdadeira do nome dele. (E hoje ele fala dos carros)
Hoje, minha vez. Minha esposa me mandou hoje para farmácia para comprar uma nova garrafa de bloqueador solar que ela gosta. Ano passado, pagou R$34,95. Este ano, R$34,95. Tudo bem. Ano passado, container teve 200 ml. Este ano, 120 ml. Uma redução de 40%. Ou seja, uma inflação de preço de 40%. Que absurdo. Com o preço de transporte público, preço de Diamante Negro, estamos vivendo uma inflação estúpida, sim. Espero que nosso governo acorda para os perigos e pôr esta tendência sobre controle AGORA.
Também, siga este link e você verá uma charge ótima sobre o que o custo dos celulares está fazendo para nossas bolsas. Em Israel, fiquei chocado com quanto nós pagamos aqui em comparação a soma pífia das contas dos primos meus.
No seu blog, tradingcafe, meu colega Ricardo Torres está contando a historia do preço absurdo do pequeno bloco de chocolate, Diamante Negro, que chegou em equivalente de 2 libras britânicas. Uma reflexão verdadeira do nome dele. (E hoje ele fala dos carros)
Hoje, minha vez. Minha esposa me mandou hoje para farmácia para comprar uma nova garrafa de bloqueador solar que ela gosta. Ano passado, pagou R$34,95. Este ano, R$34,95. Tudo bem. Ano passado, container teve 200 ml. Este ano, 120 ml. Uma redução de 40%. Ou seja, uma inflação de preço de 40%. Que absurdo. Com o preço de transporte público, preço de Diamante Negro, estamos vivendo uma inflação estúpida, sim. Espero que nosso governo acorda para os perigos e pôr esta tendência sobre controle AGORA.
Também, siga este link e você verá uma charge ótima sobre o que o custo dos celulares está fazendo para nossas bolsas. Em Israel, fiquei chocado com quanto nós pagamos aqui em comparação a soma pífia das contas dos primos meus.
Freelancing Foreign Ministers
Just as we were leaving Israel last week, Avigdor Lieberman, the Foreign Minister, announced on television that two Iranian warships would be passing through the Suez Canal. Yet another pronouncement about all those countries that hate Israel and wish her ill. Ok, Iran does hate Israel. According to Ahmadinejad, Iran’s President, Israel should be wiped off the face of history.
But, what was Lieberman’s purpose in calling yet another press conference? To scare the heck out of Israelis, sure. To urge the Egyptians to bar passage or to exert some other form of diplomatic pressure, obviously not. Lieberman’s word does not count for much in Arab capitals. Beyond the populist cry against Israel’s enemies, Lieberman’s purpose was domestic politics. He wants to show that he and his party, Israel Beitenu (Israel Our Home), are the real strong voices against these terrible provocations by Iran, to prepare himself for another run at the Prime Minister’s office at the next election.
Who is Lieberman speaking for? The Foreign Minister of a country is her external spokesman. The government itself, in the person of the Prime Minister, should be supporting the Foreign Minister’s pronouncements. In the week since Lieberman’s press conference, Benjamin Netanyahu has kept a discreet silence.
So, an urgent question. Is Lieberman freelancing or speaking for the Israeli government? The danger if he is freelancing and has not cleared them with the Prime Minister or the Defense Minister is that his remarks become policy de facto. They are looked upon by the world as representing the position of the government.
From his previous ill-considered and undiplomatic pronouncements and from his open disagreements with Prime Minister Netanyahu over key appointments (e.g., UN Ambassador), it’s clear that Lieberman is not thinking about the Israeli government and policy coordination among ministries when he pops off.
The implications can be grave. Can the Iranians treat his remarks as a provocation and use it to trigger a military attack? No one has much confidence that the current Iranian government has patience or sophistication. In fact, the Iranians capitalized on Lieberman’s press conference to assert that yes, they were sending ships to Syria through Suez and the Israelis could lump it. In Europe, Latin America and around the world, Lieberman earned another own goal for Israel in terms of public relations.
Can Israel afford to continue to leave its foreign policy and its image abroad in the hands of an unsophisticated populist like Lieberman? Netanyahu needs the Israeli Beitenu votes in the Knesset, but at what cost to the country as a whole?
One last contrast with other countries. This last week, Hilary Clinton was acting the ascerbic school marm with Arab governments over their repression of protest rallies. While this did not make many friends in the region, it did have the clear and overt support of President Obama, showing that although US foreign policy is nowhere nearly as coordinated as they would like to believe, at least the Secretary of State acts in concert with her boss, and not as a somewhat out of control freelancer.
But, what was Lieberman’s purpose in calling yet another press conference? To scare the heck out of Israelis, sure. To urge the Egyptians to bar passage or to exert some other form of diplomatic pressure, obviously not. Lieberman’s word does not count for much in Arab capitals. Beyond the populist cry against Israel’s enemies, Lieberman’s purpose was domestic politics. He wants to show that he and his party, Israel Beitenu (Israel Our Home), are the real strong voices against these terrible provocations by Iran, to prepare himself for another run at the Prime Minister’s office at the next election.
Who is Lieberman speaking for? The Foreign Minister of a country is her external spokesman. The government itself, in the person of the Prime Minister, should be supporting the Foreign Minister’s pronouncements. In the week since Lieberman’s press conference, Benjamin Netanyahu has kept a discreet silence.
So, an urgent question. Is Lieberman freelancing or speaking for the Israeli government? The danger if he is freelancing and has not cleared them with the Prime Minister or the Defense Minister is that his remarks become policy de facto. They are looked upon by the world as representing the position of the government.
From his previous ill-considered and undiplomatic pronouncements and from his open disagreements with Prime Minister Netanyahu over key appointments (e.g., UN Ambassador), it’s clear that Lieberman is not thinking about the Israeli government and policy coordination among ministries when he pops off.
The implications can be grave. Can the Iranians treat his remarks as a provocation and use it to trigger a military attack? No one has much confidence that the current Iranian government has patience or sophistication. In fact, the Iranians capitalized on Lieberman’s press conference to assert that yes, they were sending ships to Syria through Suez and the Israelis could lump it. In Europe, Latin America and around the world, Lieberman earned another own goal for Israel in terms of public relations.
Can Israel afford to continue to leave its foreign policy and its image abroad in the hands of an unsophisticated populist like Lieberman? Netanyahu needs the Israeli Beitenu votes in the Knesset, but at what cost to the country as a whole?
One last contrast with other countries. This last week, Hilary Clinton was acting the ascerbic school marm with Arab governments over their repression of protest rallies. While this did not make many friends in the region, it did have the clear and overt support of President Obama, showing that although US foreign policy is nowhere nearly as coordinated as they would like to believe, at least the Secretary of State acts in concert with her boss, and not as a somewhat out of control freelancer.
Saturday, February 12, 2011
Save Fannie and Freddie
The Obama Administration weighed in yesterday with a its list of options for the reform of the US housing finance system. I've just downloaded the report and will read it over the weekend and have some more commentary on it from back in São Paulo this week.
However, I do have some preliminary impressions based on a number of press reports.
As we all remember, abuses of the housing finance system, both at the retail level and at the securitization level caused the financial crisis that the US is still trying to recover from — the Great Recession. Impossibly generous loans were made to people who could not afford them. Fannie Mae and Freddie Mac bought mortgages without studying or understanding the makeup of the pools that were selling off. Investment banks (RIP, Lehman Bros.) then chopped up these guaranteed mortgage investments and further securitized them with all manner of alphabet soup investment products, most of which were doomed to fail.
So, after the $135 billion federal bailout and takeover of Fannie and Freddie (should be called a takeback since they started out as federal institutions and were hived off to the private sector in a previous wave of conservative transference of power from the "socialist" US government to the private sector), both the Obama Administration and especially the conservative Republicans who arguably hold sway in Congress want to privatize the system even more and do away with Fannie and Freddie (very gradually and based on the rate of recovery in the housing market) according to Timothy Geithner, US Treasury Secretary.
The Obama Administration is offering three alternatives to replace the current system, all of which greatly reduce the government presence in the housing market. Unfortunately, I believe that all will prolong the housing crisis in the US by making lenders less willing to take on new borrowers and keep housing prices depressed especially in middle-class areas of America's cities. They will prolong the crisis by raising the rates that banks will need to charge for housing loans to meet the charges they will have to pay.
Why does the US government participate so actively in the housing market? Since the Great Depression of the 1930's, it has been a goal of the American government to encourage housing ownership and has supported mortgages for lower-income Americans through a variety of programs that guarantee loans for these borrowers and provide a long-term home for loans that banks make so they can recycle the money to make new loans. This is the securitization that led to the problems in 2007 - 2008. Fannie Mae and Freddie Mac (along with a number of other parallel institutions for specialized markets that the government never turned over to private administration) were the institutions created for this purpose. Banks sell pools of their mortgages to the securitizers who then package them into investment instruments that that for many decades were a safe, sound investment vehicle.
Then, both the board of Fannie and Freddie along with the private mortgage industry got "cute". All in the name of expanding the opportunities for Americans to participate in the dream of owning their own home. It is not my purpose here to review the gamut of abuses of the system that took place during the last decade, but the system became distorted beyond recognition.
Now, the solution in government is to throw the baby out with the bathwater. Killing off Fannie and Freddie (no matter how gradually) and replacing the core system of mortgage securitization with some watered down, pablum version represents a serious withdrawal from America's commitment to housing availability.
It would be a much better solution to focus on the lending standards and standards for securitization and leave versions of Fannie and Freddie in place to provide the tool for banks, particularly in smaller communities, to resell their mortgages and encourage the health of the housing market. In another effort stemming from the Dodd-Frank financial reform bill, government agencies are struggling to define what is a qualifying mortgage, one that makes it much less likely to fail. These efforts (called QRM or qualifying residential mortgage) are keeping lobbyists employed in Washington right now. Defining a standard that will reduce abuse potential but keep reasonable loans available will occupy the industry's attention for much of 2011. The target date for a federal regulation, April 21, simply will not be met. There are too many interests involved trying to defend their turf.
However, the QRM battle and both government and exchange rules about some of the housing related derivatives that no one managed to understand even in their heyday are the correct arenas to have these reform discussions, not killing Fanny and Freddie because they were abysmally administered.
I can understand Republicans and Tea Partiers not wanting any "government" participation in the housing market. After all, that's their meme. But, I'm sad to see President Obama retreat so far from his commitment to fundamental American goals.
However, I do have some preliminary impressions based on a number of press reports.
As we all remember, abuses of the housing finance system, both at the retail level and at the securitization level caused the financial crisis that the US is still trying to recover from — the Great Recession. Impossibly generous loans were made to people who could not afford them. Fannie Mae and Freddie Mac bought mortgages without studying or understanding the makeup of the pools that were selling off. Investment banks (RIP, Lehman Bros.) then chopped up these guaranteed mortgage investments and further securitized them with all manner of alphabet soup investment products, most of which were doomed to fail.
So, after the $135 billion federal bailout and takeover of Fannie and Freddie (should be called a takeback since they started out as federal institutions and were hived off to the private sector in a previous wave of conservative transference of power from the "socialist" US government to the private sector), both the Obama Administration and especially the conservative Republicans who arguably hold sway in Congress want to privatize the system even more and do away with Fannie and Freddie (very gradually and based on the rate of recovery in the housing market) according to Timothy Geithner, US Treasury Secretary.
The Obama Administration is offering three alternatives to replace the current system, all of which greatly reduce the government presence in the housing market. Unfortunately, I believe that all will prolong the housing crisis in the US by making lenders less willing to take on new borrowers and keep housing prices depressed especially in middle-class areas of America's cities. They will prolong the crisis by raising the rates that banks will need to charge for housing loans to meet the charges they will have to pay.
Why does the US government participate so actively in the housing market? Since the Great Depression of the 1930's, it has been a goal of the American government to encourage housing ownership and has supported mortgages for lower-income Americans through a variety of programs that guarantee loans for these borrowers and provide a long-term home for loans that banks make so they can recycle the money to make new loans. This is the securitization that led to the problems in 2007 - 2008. Fannie Mae and Freddie Mac (along with a number of other parallel institutions for specialized markets that the government never turned over to private administration) were the institutions created for this purpose. Banks sell pools of their mortgages to the securitizers who then package them into investment instruments that that for many decades were a safe, sound investment vehicle.
Then, both the board of Fannie and Freddie along with the private mortgage industry got "cute". All in the name of expanding the opportunities for Americans to participate in the dream of owning their own home. It is not my purpose here to review the gamut of abuses of the system that took place during the last decade, but the system became distorted beyond recognition.
Now, the solution in government is to throw the baby out with the bathwater. Killing off Fannie and Freddie (no matter how gradually) and replacing the core system of mortgage securitization with some watered down, pablum version represents a serious withdrawal from America's commitment to housing availability.
It would be a much better solution to focus on the lending standards and standards for securitization and leave versions of Fannie and Freddie in place to provide the tool for banks, particularly in smaller communities, to resell their mortgages and encourage the health of the housing market. In another effort stemming from the Dodd-Frank financial reform bill, government agencies are struggling to define what is a qualifying mortgage, one that makes it much less likely to fail. These efforts (called QRM or qualifying residential mortgage) are keeping lobbyists employed in Washington right now. Defining a standard that will reduce abuse potential but keep reasonable loans available will occupy the industry's attention for much of 2011. The target date for a federal regulation, April 21, simply will not be met. There are too many interests involved trying to defend their turf.
However, the QRM battle and both government and exchange rules about some of the housing related derivatives that no one managed to understand even in their heyday are the correct arenas to have these reform discussions, not killing Fanny and Freddie because they were abysmally administered.
I can understand Republicans and Tea Partiers not wanting any "government" participation in the housing market. After all, that's their meme. But, I'm sad to see President Obama retreat so far from his commitment to fundamental American goals.
Wednesday, February 9, 2011
More Israel Thoughts
As our marvelous six-week adventure is coming to an end in five days, I wanted to give you some more impressions I have of Israel. This trip has allowed us to live almost like Israelis do, as we are totally focused on family and not on tourism. Also to answer a few questions I've received off-line.
Israel is an unusual country in many ways. One is that it imports almost everything. Heavy industry outside the defense sector is relatively small. However, Israel is a hot bed of technical creativity and many products and technologies manufactured elsewhere are developed here. Check Start-Up Nation, an excellent book on Israeli entrepreneurism to see how Israeli businesses are able to develop and sell their technologies around the world.
As such, you would have thought that Israelis suffered seriously during the Great Recession. However, not so. GDP only declined in three quarters, the fourth quarter of 2008 and the first and fourth quarters of 2009 . On an annualized basis, GDP increased 7.9%, 4.2% and 7.7% for 2008, 2009 and 2010. Unemployment as well did not spike dramatically as it did in the US and Europe. It remained in the range of 6.5% to 8.0% throughout the period of the recession. Nominally, inflation has also been low, 2.2% in 2010, well under control.
Like Brazil, Israel weathered the recession with only mild effects. Like Brazil, the credit in part goes to the strong hand the Central Bank, the Bank of Israel, along with its Governor, Prof. Stanley Fischer, has taken to regulate markets, interest rates and foreign exchange.
However, there are some worrying signs this year. Prices of key commodities such as gasoline have risen dramatically and are really biting into the income of Israelis. Gas costs about 7.20 shekels per liter at the pump. At current exchange rates (about 3.65 shekels = US$1), that amounts to US$1.972 per litre (not gallon). Compared to Brazil, it's a little less than double the cost of filling the tank. Ouch! As Israel moves largely by road, everyone is talking about the price.
Likewise, food prices, including one of Israel's primary export crops, citrus fruits, are rising as well. Also gets at consumers where they really know pain.
Housing is a third area that worries Israelis. A number of people I've spoken with on this trip have been complaining that real estate prices are soaring well beyond the means of working and middle-class Israelis. Every street in Tel Aviv has projects underway, whether it is new construction or rebuilding. One building a friend pointed out to us has sea front apartments for the mere bagatelle of 25 million shekels. Ironically he pointed this out from the almost totally derelict half-acre site that functions as his painting studio. But, he admits, by next year, it will be under construction.
Whether this real estate boom constitutes a bubble is as yet difficult to say. I don't know how much housing finance is securitized, how firmly lending standards are enforced, etc. But, financing is generally easy to come by at very attractive rates. A relative showed me a term sheet for a loan for the purchase and reconstruction of his apartment that has an a.p.r. in 2011 of 3.3%. (Brazilians control yourselves, that's annual, not monthly).
Another fun interest rate comparison with Brazil. Bank overdrafts in November 2010 had an average rate of 9.8%. Yes, that's annual, not monthly.
These recent price rises have gotten politicians attention recently. Likud (ruling party) members of the Knesset are yelling at the Prime Minister that he must address people's concerns about prices quickly or they will lose the next election. He is not taking this too seriously. His response: I was a former Minister of Finance; I know what I'm doing. I think I've heard that before somewhere.
The reality is that relatively, Israel is enjoying a robust economy in relative terms. I'm sure the Spaniards and the Greeks would love to have Israel's level of problems.
Much more difficult is what to do about Egypt and Jordan, Israel's only two relatively friendly neighbors in the region. If the IDF suddenly has to pay attention again to its southern and eastern borders as well as Lebanon and Gaza, things could get more interesting here — and not in the good sense.
Israel is an unusual country in many ways. One is that it imports almost everything. Heavy industry outside the defense sector is relatively small. However, Israel is a hot bed of technical creativity and many products and technologies manufactured elsewhere are developed here. Check Start-Up Nation, an excellent book on Israeli entrepreneurism to see how Israeli businesses are able to develop and sell their technologies around the world.
As such, you would have thought that Israelis suffered seriously during the Great Recession. However, not so. GDP only declined in three quarters, the fourth quarter of 2008 and the first and fourth quarters of 2009 . On an annualized basis, GDP increased 7.9%, 4.2% and 7.7% for 2008, 2009 and 2010. Unemployment as well did not spike dramatically as it did in the US and Europe. It remained in the range of 6.5% to 8.0% throughout the period of the recession. Nominally, inflation has also been low, 2.2% in 2010, well under control.
Like Brazil, Israel weathered the recession with only mild effects. Like Brazil, the credit in part goes to the strong hand the Central Bank, the Bank of Israel, along with its Governor, Prof. Stanley Fischer, has taken to regulate markets, interest rates and foreign exchange.
However, there are some worrying signs this year. Prices of key commodities such as gasoline have risen dramatically and are really biting into the income of Israelis. Gas costs about 7.20 shekels per liter at the pump. At current exchange rates (about 3.65 shekels = US$1), that amounts to US$1.972 per litre (not gallon). Compared to Brazil, it's a little less than double the cost of filling the tank. Ouch! As Israel moves largely by road, everyone is talking about the price.
Likewise, food prices, including one of Israel's primary export crops, citrus fruits, are rising as well. Also gets at consumers where they really know pain.
Housing is a third area that worries Israelis. A number of people I've spoken with on this trip have been complaining that real estate prices are soaring well beyond the means of working and middle-class Israelis. Every street in Tel Aviv has projects underway, whether it is new construction or rebuilding. One building a friend pointed out to us has sea front apartments for the mere bagatelle of 25 million shekels. Ironically he pointed this out from the almost totally derelict half-acre site that functions as his painting studio. But, he admits, by next year, it will be under construction.
Whether this real estate boom constitutes a bubble is as yet difficult to say. I don't know how much housing finance is securitized, how firmly lending standards are enforced, etc. But, financing is generally easy to come by at very attractive rates. A relative showed me a term sheet for a loan for the purchase and reconstruction of his apartment that has an a.p.r. in 2011 of 3.3%. (Brazilians control yourselves, that's annual, not monthly).
Another fun interest rate comparison with Brazil. Bank overdrafts in November 2010 had an average rate of 9.8%. Yes, that's annual, not monthly.
These recent price rises have gotten politicians attention recently. Likud (ruling party) members of the Knesset are yelling at the Prime Minister that he must address people's concerns about prices quickly or they will lose the next election. He is not taking this too seriously. His response: I was a former Minister of Finance; I know what I'm doing. I think I've heard that before somewhere.
The reality is that relatively, Israel is enjoying a robust economy in relative terms. I'm sure the Spaniards and the Greeks would love to have Israel's level of problems.
Much more difficult is what to do about Egypt and Jordan, Israel's only two relatively friendly neighbors in the region. If the IDF suddenly has to pay attention again to its southern and eastern borders as well as Lebanon and Gaza, things could get more interesting here — and not in the good sense.
Sunday, February 6, 2011
Continuing the Bolha Imobiliário Dialogue
My friend Ricardo Della Santina Torres has contributed a number of new posts on the recent decline in real estate prices in the Brazilian market. The most recent details the returns you can expect to achieve from an investment in real estate compared to a safe investment in bonds.
First, read it. It's an education in the finances of housing investment.
Ricardo closes his post with this conclusion:
Our personal real estate is another thing, as I have argued in this blog previously. As I said as long ago as 1987, housing is a "special" good that has value for us well beyond the financial return we can gain. Which goes to show that not all goods are fungible — not all goods have the same opportunity costs. I'm willing to trade some value that I could earn from a bond for the view that I have from our apartment every morning or the convenience of the apartment to my principal place of work. As for the espaço gourmet . . . if it has a churrasqueira, I'm for it!
The danger is when markets price themselves out of the range of the people who need to live in the locale, such as been happening in São Paulo (and in Israel, where I am writing this). Families then have difficulties finding residences that fit within their budgets. They end up paying a much higher percentage of their monthly income to support mortgage (loan)/condominium/tax payments than they really can afford. Banks compound the problem when they lend money based on these elevated percentage of income levels as they know historically that the probability of default rises drastically.
Corrections, or price declines, themselves have problems. When the family paying for a mortgage sees that the value of the residence can no longer equal what they need to earn to justify the investment in financial terms, many families will not show patience and wait out the decline. They will sell out to "cut their loss" at an even lower price, thereby further depressing prices. This was one important aspect of the US housing price decline in 2008 - 2010. That can become a spiral with new families now acting on the same perception.
So, Ricardo's analysis of the finances of a house purchase is very on point for the current market in São Paulo. So is his observation that one factor that will dampen the declines and keep pressure off the banks to default mortgages of borrowers who are having trouble with their payments is that most of the mortgages they have remain on their books. They have not been securitized — sold off to investment pools.
First, read it. It's an education in the finances of housing investment.
Ricardo closes his post with this conclusion:
Right on, Ricardo. Investing in real estate for profit is one thing. For this, it's only the accounts that matter. How much we can gain from an investment in housing versus how much in other instruments.Não devemos comprar imóveis então? Em absoluto, sim. Mas devemos fazer contas. Nos preços atuais não faz sentido matematicamente. As taxas de juros estão muito altas e os preços dos imóveis não sobem infinitamente mais de 20% por todos os anos. Logicamente, não é só matemática que nos impele a comprar um imóvel: necessidade, gosto, status, família que cresce, espaço gourmet… Opa? espaço gourmet?
Our personal real estate is another thing, as I have argued in this blog previously. As I said as long ago as 1987, housing is a "special" good that has value for us well beyond the financial return we can gain. Which goes to show that not all goods are fungible — not all goods have the same opportunity costs. I'm willing to trade some value that I could earn from a bond for the view that I have from our apartment every morning or the convenience of the apartment to my principal place of work. As for the espaço gourmet . . . if it has a churrasqueira, I'm for it!
The danger is when markets price themselves out of the range of the people who need to live in the locale, such as been happening in São Paulo (and in Israel, where I am writing this). Families then have difficulties finding residences that fit within their budgets. They end up paying a much higher percentage of their monthly income to support mortgage (loan)/condominium/tax payments than they really can afford. Banks compound the problem when they lend money based on these elevated percentage of income levels as they know historically that the probability of default rises drastically.
Corrections, or price declines, themselves have problems. When the family paying for a mortgage sees that the value of the residence can no longer equal what they need to earn to justify the investment in financial terms, many families will not show patience and wait out the decline. They will sell out to "cut their loss" at an even lower price, thereby further depressing prices. This was one important aspect of the US housing price decline in 2008 - 2010. That can become a spiral with new families now acting on the same perception.
So, Ricardo's analysis of the finances of a house purchase is very on point for the current market in São Paulo. So is his observation that one factor that will dampen the declines and keep pressure off the banks to default mortgages of borrowers who are having trouble with their payments is that most of the mortgages they have remain on their books. They have not been securitized — sold off to investment pools.
Friday, February 4, 2011
Bolha Imobiliário Redux
My good friend, Ricardo Della Santina Torres, comments in his blog today (see the post on Tradingcafe here) that he sees the Brazilian real estate market at an inflection point. The rapid rises of the last two years may be over. He doesn't see evidence of a bursting of the bubble and I agree, there does not appear to be one, yet.
However, I am, and have always been, more pessimistic than Ricardo about the Brazilian real estate market, as I indicated in this post. I believe the easy financing policies of the last two years will come back to bite the economy. The government actions that Ricardo comments on will stiffen financing requirements, a good thing in an overheated economy. Any negative trend in employment due to a slowing down of key sectors of the economy could drive Brazilians to default on their mortgages.
So, in my view, the statistic to watch is rate of credit defaults, inadimplência. That's where the bubble warning signs will come.
However, I am, and have always been, more pessimistic than Ricardo about the Brazilian real estate market, as I indicated in this post. I believe the easy financing policies of the last two years will come back to bite the economy. The government actions that Ricardo comments on will stiffen financing requirements, a good thing in an overheated economy. Any negative trend in employment due to a slowing down of key sectors of the economy could drive Brazilians to default on their mortgages.
So, in my view, the statistic to watch is rate of credit defaults, inadimplência. That's where the bubble warning signs will come.
Wednesday, February 2, 2011
Galantry - The Fall of a Strong Leader for the IDF
Last night, Prime Minister Benjamin Netanyahu finally pulled the plug on the nomination of Yoav Galant as the new head of the Israel Defense Forces (IDF), arguably the most important institution in an Israel surrounded by angry and unstable enemies. You can read Haaretz's story on the fall here.
The scandalette surrounding Galant's appointment has to do with a matter most Israelis treat as relatively trivial. His sin – he or his builders (it's not entirely clear who started the problem) expanded the area of the land surrounding his house in a moshav by absorbing public land into the site. The real question turned on when he knew about it and what he said in sworn documents to the Israel Lands Authority and a court hearing the matter. This kind of seeking approval a posteriori for small land acquisitions and in Brazilian terms doesn't approach the abuses of the latifundários of rural Brazil.
But, the head of the IDF needs not only to be above reproach but needs to be seen to be above reproach. So, the Controller-General of Israel issued a report that claims that Galant lies in the documents and the Attorney-General yesterday stated he could not support Galant's nomination in front of the Knesset or the judiciary. So, late last night, the PM finally pulled the plug.
Just before he received the summons from Netanyahu, Galant appeared on an investigative journalism program on one of Israel's main TV channels, Channel 2. I wish American politicians could see his performance. It was truly impressive. He stoically and directly answered the reporter's questions. He showed calm and forthrightness in asserting his innocence. He showed why he had been selected to succeed as the leader of the IDF in the first place. This is the type of personality we would want as the head of the country's armed forces.
However, the political context weighed too heavily against him. The Knesset is rivaling the Brazilian Congress in terms of the pursuit of self-interest by its members and has little respect from Israelis in general. Former PM Ehud Olmert is defending himself against corruption charges as are the sons of Ariel Sharon and current Foreign Minister Avigdor Lieberman. And, the list of corruption charges goes on. So, the public's tolerance for new scandals is at a low point. To have the candidate for the leadership of the IDF become the subject of daily headlines not because of his views on Iran or Hamas, but because of a petty land dispute is not what Netanyahu needs for his government.
Waiting until the last minute (the appointment was due to take effect in two weeks) to resolve this leaves the IDF in the hands of interim leaders until a new candidate can be vetted and appointed. This only gives the various political and bureaucratic factions more opportunity to promote their candidates and trash their opponents.
But worst, I think we have lost the services of a good person and potentially strong leader.
The scandalette surrounding Galant's appointment has to do with a matter most Israelis treat as relatively trivial. His sin – he or his builders (it's not entirely clear who started the problem) expanded the area of the land surrounding his house in a moshav by absorbing public land into the site. The real question turned on when he knew about it and what he said in sworn documents to the Israel Lands Authority and a court hearing the matter. This kind of seeking approval a posteriori for small land acquisitions and in Brazilian terms doesn't approach the abuses of the latifundários of rural Brazil.
But, the head of the IDF needs not only to be above reproach but needs to be seen to be above reproach. So, the Controller-General of Israel issued a report that claims that Galant lies in the documents and the Attorney-General yesterday stated he could not support Galant's nomination in front of the Knesset or the judiciary. So, late last night, the PM finally pulled the plug.
Just before he received the summons from Netanyahu, Galant appeared on an investigative journalism program on one of Israel's main TV channels, Channel 2. I wish American politicians could see his performance. It was truly impressive. He stoically and directly answered the reporter's questions. He showed calm and forthrightness in asserting his innocence. He showed why he had been selected to succeed as the leader of the IDF in the first place. This is the type of personality we would want as the head of the country's armed forces.
However, the political context weighed too heavily against him. The Knesset is rivaling the Brazilian Congress in terms of the pursuit of self-interest by its members and has little respect from Israelis in general. Former PM Ehud Olmert is defending himself against corruption charges as are the sons of Ariel Sharon and current Foreign Minister Avigdor Lieberman. And, the list of corruption charges goes on. So, the public's tolerance for new scandals is at a low point. To have the candidate for the leadership of the IDF become the subject of daily headlines not because of his views on Iran or Hamas, but because of a petty land dispute is not what Netanyahu needs for his government.
Waiting until the last minute (the appointment was due to take effect in two weeks) to resolve this leaves the IDF in the hands of interim leaders until a new candidate can be vetted and appointed. This only gives the various political and bureaucratic factions more opportunity to promote their candidates and trash their opponents.
But worst, I think we have lost the services of a good person and potentially strong leader.
Tuesday, February 1, 2011
Consumerism - Fantasy Prices on Car Rentals in Israel
First major grouse of the trip and a warning for foreigners travelling to Israel.
There is a mandatory insurance placed on all car rentals to cover liability and collision damage. You have to pay it. But the American car rental companies don't really want to tell you about it, so when you turn the car in you get a really nasty shock. An additional $14 to $16 per day of rental. After 30 days of renting with Avis, the total charge doubled over what they quoted to me on the internet.
Even if you check that you want all the insurance coverages, they still don't appear on the total you see on the internet so you are renting a car on a false basis. Boo hiss to Avis, Hertz, Budget etc.
However, there is a silver lining. The Israeli company Eldan (also a hotel chain and owner of an airline) tells you right up front what you are paying correctly. I am happily driving an Eldan car today, knowing that when I check it into the airport in two weeks exactly what I will be paying. Kol HaKhavod, Eldan. The price isn't pretty finally, but at least it's real.
American car rental companies are losing the plot when it comes to customer service. An agent at Budget had the brass to tell me it was my fault I hadn't read every word of the impossible-to-read-agate-type on the back of the contract. Don't be fooled.
Ironically, when I first arranged the rental, I decided against Eldan because the price was too high. My mistake. The price on Avis, etc. was a fantasy and the price of Eldan was real.
Live and learn.
There is a mandatory insurance placed on all car rentals to cover liability and collision damage. You have to pay it. But the American car rental companies don't really want to tell you about it, so when you turn the car in you get a really nasty shock. An additional $14 to $16 per day of rental. After 30 days of renting with Avis, the total charge doubled over what they quoted to me on the internet.
Even if you check that you want all the insurance coverages, they still don't appear on the total you see on the internet so you are renting a car on a false basis. Boo hiss to Avis, Hertz, Budget etc.
However, there is a silver lining. The Israeli company Eldan (also a hotel chain and owner of an airline) tells you right up front what you are paying correctly. I am happily driving an Eldan car today, knowing that when I check it into the airport in two weeks exactly what I will be paying. Kol HaKhavod, Eldan. The price isn't pretty finally, but at least it's real.
American car rental companies are losing the plot when it comes to customer service. An agent at Budget had the brass to tell me it was my fault I hadn't read every word of the impossible-to-read-agate-type on the back of the contract. Don't be fooled.
Ironically, when I first arranged the rental, I decided against Eldan because the price was too high. My mistake. The price on Avis, etc. was a fantasy and the price of Eldan was real.
Live and learn.
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