Better Late than Never

In the Chronicle of Higher Education, Joseph Cronin and Howard Horton ask, "Will Higher Education Be the Next Bubble to Burst?" (Hat Tip: Dr. Paul Price). Readers of this blog may recall that we raised this question in a post on October 1^st of last year, and later noted two subsequent Forbes articles on this question.

Becoming Sweden

I'm not a frequent viewer of The Daily Show, but I have to give a little credit where credit is due. By suggesting that if certain liberal policies are enacted we'll be in danger of "turning into Sweden", some conservative commentators floated a big softball over the plate. The Daily Show took a swing at that softball with the video below. This is pretty funny, so let it play first. I'll leave a few more comments below the video.

The Daily Show With Jon Stewart	M - Th 11p / 10c
The Stockholm Syndrome
thedailyshow.com
Daily Show Full Episodes Economic Crisis First 100 Days

The conservative pundits warning about Sweden missed two obvious points. The first is that, as the video above shows, Sweden seems like a pretty nice place. Better to invoke the specter of a not-so-nice place when warning of the potential consequences of enacting liberal policies. The second point is that even if our tax burden and our government spending as a share of our economy were as high as Sweden's, that wouldn't make us like Sweden. Sweden is known for (among other things) honest, effective government. As Wolfgang Münchau of the Financial Times has noted, Italians have a tax burden similar to that of the Swedes, but get far less effective government from it. Similarly, invidious comparisons between us and Sweden (e.g., the international education comparisons brought up by The Atlantic when they posted on this Daily Show video) are specious because of the homogeneity of Sweden's population. There is a non-trivial number of Americans of Swedish ancestry; I'd bet they'd do fine in any objective comparison with their cousins in Sweden, if anyone wants to compare apples to apples.

Instead of ominously warning that we're in danger of turning into a pleasant European country if certain liberal policies are enacted, conservatives would be smarter to point out that, regardless of what policies are enacted here, we'll still be Americans, and this will still be America. We need to keep our differences in mind when considering policies: e.g., as we suggested in a recent post, the sort of energy policy that works for a small country that juts out into the North Sea might not work for another country that spans a continent.

Another thought: the bit at the end of the video with the Swedish pop star was a cleverly chosen example of Swedish egalitarianism, but it's worth noting that Sweden has produced its share of extreme wealth as well. For example, the Swede Ingvar Kamprad, the founder of Ikea, is listed as the fifth-richest man on this year's Forbes list of billionaires (Kamprad moved to Switzerland though, presumably at least partly for tax purposes). One nice touch in that video was the inclusion of the ominous theme from Dune. You can hear more of that theme at about 40 seconds into the trailer below:

First Trust's First Quarter GDP Estimate

In their Forbes column today ("Brace Yourselves for First-Quarter GDP") Brian S. Wesbury and Robert Stein of First Trust Advisers estimate that Q1 GDP contracted at a 4.2% annual rate (preliminary Q1 GDP data will be released tomorrow). They see the uptick in consumer spending and draw down in inventories in the first quarter as good signs going forward, and predict that GDP will be flat in Q2 and will grow at a 3% annual rate in Q3.

Undertaxed America

Prompted by the recent trend of anti-tax tea parties, Bruce Bartlett writes in Forbes that the United States is a low tax country ("Tax Tea Party Time?"):

The truth is that the U.S. is a relatively low-tax country no matter how you slice the data. The following tables illustrate this fact by comparing the U.S. to other members of the Organization for Economic Cooperation and Development, a Paris-based research organization.

[...]

[T]otal taxation (federal, state and local) amounted to 28% of the GDP in the U.S. in 2006. Only four of the 30 OECD countries had a lower tax ratio. Taxes averaged 35.9% for the OECD as a whole and 38% in Europe. Citizens of Denmark and Sweden paid very close to 50% of their total income in taxes.

I suspect that the complexity of the tax system in the U.S. partly explains why many Americans think they pay higher taxes than they actually do. Also, it's possible that many workers pay more attention to the large amount of taxes that are withheld from their paychecks and pay less attention to the amount that gets refunded to them every year. Bartlett goes on to note that higher taxes in many OECD countries are offset by generous transfer payments. He also notes the effect of government health care spending:

Another way that workers in other countries benefit is in having almost all of their basic health care expenses covered by the government. According to the OECD, 19 of its 30 member countries cover 100% of health care costs, and another eight cover more than 89% of costs. Of the three remaining countries, Turkey covers two-thirds of health expenses, and Mexico pays for half.

In the U.S., however, the government covered only 27.4% of health costs in 2006. And almost all of that went either to the elderly in the form of Medicare or the poor in the form of Medicaid. The American average worker either had to pay for his own insurance in the form of deductions from his pay or go without.

In 2008, employer-provided health insurance reduced the cash wages of American workers by 7.9%, according to the Bureau of Labor Statistics. If businesses didn't have to pay for health insurance, they could afford to pay their workers 7.9% more and be no worse off. If workers paid 7.9% more of their income in taxes to pay for national health insurance, they would also be no worse off.

To a large extent, this is exactly what happens in other countries. Workers see the higher taxes they pay the same way Americans view the deduction from their pay for health insurance--not as money down a rat hole, but as the payment for a tangible benefit.

This isn't necessarily an argument for national health insurance. There are lots of reasons why it may be preferable to maintain the largely private health system we have in America. No one thinks it would be a good idea to pay higher taxes in return for having the federal government provide us with food. Variety and quality would undoubtedly suffer a great deal. The same would be true if the federal government took over the provision of health care.

A Different Kind of Banker

From Forbes, "The Banker Who Said No" (Hat Tip: Carpe Diem):

While the nation's lenders ran amok during the boom, Andy Beal hoarded his money. Now he's cleaning up--with scant help from Uncle Sam.

[...]

Andy Beal, a 56-year-old, poker-playing college dropout, is a one-man toxic-asset eater--without a shred of government assistance. Beal plays his cards patiently. For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making. One director asked him: "Are we a dinosaur?"

[...]

Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. He is buying bonds backed by commercial planes, IOUs to power plants in the South, a mortgage on an office building in Ohio, debt backed by a Houston refinery and home loans from Alaska to Florida. In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion, while such banks as Citigroup and Morgan Stanley shrink and gobble up billions in taxpayer bailouts.

Beal has barely got a dime from the feds. A self-described "libertarian kind of guy," Beal believes the government helped create the credit crisis. Now he finds it "crazy" that bankers who acted irresponsibly are getting money and he's not. But he wants to exploit their recklessness to amass his own fortune. "This is the opportunity of my lifetime," says Beal. "We are going to be a $30 billion bank without any help from the government." (A slight overstatement: He is quick to say he relies on federal deposit insurance.) Not much next to the trillion-dollar balance sheets of the nation's troubled banks, but the lesson here might be revealed in the fact that this billionaire is not playing with other people's money--he owns 100% of the bank and is acting accordingly.

You should read the whole thing, but here's one more brief quote from it:

In the last 15 years Beal says he has bought only one stock. If he ever thinks of investing in hedge funds or private equity, he says, "Just shoot me."

If you read the rest of article, you'll understand why Beal limits himself to buying distressed debt: he has access to more information than he would investing in a publicly-traded stock, he's built his own methodology, and he's good at it. He seems to be better at it than most of the hedge fund managers who invest in this asset class. The article notes that Beal got his start buying distressed debt during the last credit crisis.

The photo above, of the headquarters of Beal Bank, comes from the company's website.

PhotoChannel in Forbes

Earlier this week, Forbes asked Stephen Roseman, the founder of hedge fund Thesis Capital, for his small cap picks ("Small Stocks Worth Buying"). One of the three stocks Roseman mentioned was PhotoChannel:

Finally, Roseman likes Photochannel Network (otcbb: PHCHF.OB^[sic] - news - people ), a stock that investors might be wary of because its $45 million market cap suggests a lack of liquidity though its 54,000 average share volume suggests that there is a market in the stock.

"As the world is still migrating to digital photography, this is very much a growth business trading at a 'value' valuation," Roseman says. "They are benefiting from the recession-resistant nature of the industry (same-store sales were up 28% in the September quarter and 40% in the December quarter), and their gross margins are getting better as they do more volume--they have gone from 50% several quarters ago to over 70% in the December quarter. While they have an adequate balance sheet, they are growing their revenues and cash flow rapidly and have a bright future with strong technological tailwinds. There are only a few analyst estimates out there because the company isn't well-covered, but by my estimates, it's trading at a single-digit multiple, while growing in excess of 100% per year."

The image above comes from the Forbes article.

^[Sic]Forbes includes the old, invalid symbol for PhotoChannel. The current, correct one is PNWIF.OB. Perhaps because Forbes didn't use the correct symbol, this article didn't come up under "Headlines" on Yahoo! Finance.

"The Great College Hoax"

In a post on October 1st ("The Next Bubble to Burst in the Deleveraging Process: Higher Education?") I wrote,

Like housing, spending on higher education has been fueled by cheap credit facilitated by a government sponsored enterprise (Sallie Mae, in the case of higher ed). As with housing (up until the burst of that bubble), all this cheap credit has led to higher prices (interestingly, politicians who call for increased spending on higher ed every election year never seem to consider that this increased spending may have helped drive up tuition costs). Now, the common sense observation that, for many, college is a waste of money and time has started to seep into the mainstream.

[...]

How long until a clear-eyed consideration of the return on investment (of time and money) of college educations becomes part of the conventional wisdom?

Later that month, as I noted in another post ("The Coming College Bubble"), Forbes published an article with a similar thesis. The current issue of Forbes features another article on the topic, "The Great College Hoax", by Kathy Kristoff. Below is an excerpt from it.

Higher education can be a financial disaster. Especially with the return on degrees down and student loan sharks on the prowl.

As steadily as ivy creeps up the walls of its well-groomed campuses, the education industrial complex has cultivated the image of college as a sure-fire path to a life of social and economic privilege.

Joel Kellum says he's living proof that the claim is a lie. A 40-year-old Los Angeles resident, Kellum did everything he was supposed to do to get ahead in life. He worked hard as a high schooler, got into the University of Virginia and graduated with a bachelor's degree in history.

Accepted into the California Western School of Law, a private San Diego institution, Kellum couldn't swing the $36,000 in annual tuition with financial aid and part-time work. So he did what friends and professors said was the smart move and took out $60,000 in student loans.

Kellum's law school sweetheart, Jennifer Coultas, did much the same. By the time they graduated in 1995, the couple was $194,000 in debt. They eventually married and each landed a six-figure job. Yet even with Kellum moonlighting, they had to scrounge to come up with $145,000 in loan payments. With interest accruing at up to 12% a year, that whittled away only $21,000 in principal. Their remaining bill: $173,000 and counting.

Kellum and Coultas divorced last year. Each cites their struggle with law school debt as a major source of stress on their marriage.

The clever picture above, by Alex Nabaum, is from the article.

"The Arab Sole"

Whoever writes the headlines at Forbes, wrote a clever one for Tunku Varadarajan's column today about Muntader-al-Zaidi, the Arab journalist who threw his shoes at President Bush during the President's recent joint press conference in Baghdad with Iraqi Prime Minister al-Maliki, "The Arab Sole". Below is a brief excerpt from Varadarajan's column:

The Arabs, who once upon a time boasted Averroes and Avicenna, are now reduced to eulogizing a boorish act of agitprop as a heroic achievement. America gave us Martin Luther King; South Africa gave us Mandela; India gave us Gandhi; the Arab world gives us ... Muntader-al-Zaidi. A people who invented the zero are now reduced, themselves, to zero. Only a people who live under the boots of their rulers celebrate the throwing of a shoe at a guest.

A commenter on Varadarajan's column on Forbes's website objected that zero was actually invented by the Hindus. According to Scientific American's take on this question, by former Harvard professor of mathematics Robert Kaplan ("What is the origin of zero? How did we indicate nothingness before zero?"),

The first recorded zero appeared in Mesopotamia around 3 B.C. The Mayans invented it independently circa 4 A.D. It was later devised in India in the mid-fifth century, spread to Cambodia near the end of the seventh century, and into China and the Islamic countries at the end of the eighth. Zero reached western Europe in the 12th century.

The symbol changed over time as positional notation (for which zero was crucial), made its way to the Babylonian empire and from there to India, via the Greeks (in whose own culture zero made a late and only occasional appearance; the Romans had no trace of it at all). Arab merchants brought the zero they found in India to the West.

"The Coming College Bubble?"

On October 1^st I speculated that higher education could be the next bubble to burst in the deleveraging process ("The Next Bubble to Burst in the Deleveraging Process: Higher Education?").

I just came across it today, but on October 23^rd, Forbes published an article with a similar thesis, "The Coming College Bubble?".

Is the Credit Crisis hurting the Real Economy?

That is, after all, the political rationale for enacting the Paulson plan: that the credit crisis on Wall Street is, or will cause significant harm on Main Street. That was also the subject of many of the questions Congressmen asked of Secretary Paulson during his testimony last week. Doubts that the problems on Wall Street will effect Main Street are one explanation proposed for the popular opposition to the Paulson Plan. Although the conventional wisdom among pundits seems to be that, if unchecked, the credit crisis on Wall Street will have dire consequences on Main Street, there are some skeptics. Below are a few examples.

- Binyamin Appelbaum, writing in the Washington Post last week ("Smaller Banks Thrive out of the Fray of Crisis"):

Banks throughout the United States carried on with the business of making loans yesterday even as federal officials warned again that their industry is on the verge of collapse, suggesting that the overheated language on Capitol Hill may not reflect the reality on many Main Streets.

[...]

"We collect money from local savers, and we lend it in the local community," said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J. "We're doing fine. There are 9,000 financial institutions out there, and most of them are small and most of them are doing fine."

- Alex Tabarrok, writing on his blog Marginal Revolution last week ("Where is the Credit Crisis"?):

[H]ere we are in September and bank credit continues to look very robust.  As Robert Higgs points out consumer loans are up, commercial and industrial loans are up, even real estate loans are up.  Overall, total  bank credit is up with just a slight sign of leveling off in recent weeks.  So where is the credit crunch?

[...]

I wonder how much real lending was actually being generated by asset backed securities. Could it not be that most of the funds generated were used to buy more asset backed securities? (The growth in these securities is certainly suggestive of that possibility). If that is the case then it explains why the real economy has been remarkably resilient to the "credit crunch."

- Alan Reynolds, writing in Forbes yesterday ("Bank Loans Have Not 'Dried Up'):

Contrary to many comments, consumer and industrial loans actually increased in the latest week. Troubled giant banks have cut back on lending, but smaller banks have picked up the slack. Consumer and real estate loans dipped insignificantly through Sept. 17, remaining much higher than they were a year earlier.

If all the recent hysterical chatter about lending being "frozen" or "shut down" refers to anything real, it is not about banks loans (through Sept. 17) but about such arcane financial markets as asset-backed commercial paper or loans between banks. But this too is mainly about financial firms, not Main Street. Non-financial commercial paper increased from $156 billion at the start of the year to more than $204 billion from Sept. 3 to Sept. 17, dipping only modestly since then."

Subprimes and The Efficient Market Theory

Many active investors who don't believe that markets are fully efficient (if they did, of course, they wouldn't be active investors) nevertheless believe that markets are mostly or frequently efficient (see, for example, Warren Buffett making this point in his 1988 Berkshire Hathaway Chairman's Letter). How then to explain the yawning gap between the market prices of certain mortgage-backed securities and their supposed hold-to-maturity or intrinsic values?

Brian Wesbury, chief economist of First Trust, reiterated on CNBC today a point he made in a recent Forbes column: if 100% of the mortgages in a subprime mortgage CDO defaulted, owners of the security would recover something -- perhaps 40 cents on the dollar -- from the sale of the houses. And yet, two months ago, Merrill Lynch unloaded some CDOs for about 22 cents on the dollar (Barry Ritholtz argued at the time that, since Merrill was financing about 75% of the sale itself, the actual sale price for the assets was about 5.47 cents on the dollar).

If what Wesbury says is right (and it seems reasonable), why aren't institutional investors lining up to bid on subprime-backed paper for 22 cents on the dollar?

Trouble in Russia

With all the excitement in the U.S. markets this week, the crash in the Russian stock markets, and the subsequent suspension of trading Tuesday (The Financial Times: "Russia halts trading after 17% share price fall") didn't get as much attention as they might have otherwise. Now Forbes reports that the Russian stock markets are set to reopen tomorrow ("Inside Russians Stock Market Panic").

A couple of months ago, I mentioned an e-mail I received from friend who worked for a Moscow-based brokerage. I've sent him an e-mail to see what his thoughts are on the current situation there.

Hemisphere GPS in the Mainstream Business Press

Hemisphere GPS (HEM.TO) was recommended by Lisa Hess in her column in the July 21st issue of Forbes, as company to invest in to benefit from the commodity boom. She also recommended Titan International (TWI) in this space. Titan manufactures the giant tires used by mining and agricultural vehicles.