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Saturday, April 03, 2010

I'm Alive!

Don't walk - run over to Mark at Illusion of Prosperity's post on real estate malinvestment.

More on his conclusion later (whenever I get to it, 'cause I'm hip deep).

Comments:
Been there,sent it to folks.made me think...and I am VERY glad you are alive,stay that way for a while.
 
I'll be very interested in hearing your conclusions.

There's so much to think about.

When I turned bearish in 2004, the replacement-cost value of structures never even entered my thoughts. I was too busy dwelling on the insane mortgage offers filling my mailbox.
 
I just tried applying the theory to the stock market.

A Grand Unified Theory of Stock Market Malinvestment

My word verification is "cowerful", lol.
 
Mark,it was nice to see you posting at CR.To me "Replacement Cost" has a very particular meaning derived from having a father who was an Appraiser and having held such a license myself.It means a like structure of equal utility and is very distinct from "reproduction cost".I am also very aware of how much such costs can vary over time in terms of the dollar outlay and the differences in quality.In my area during the boom anyone who could stagger upright and hold a hammer could work construction and the builder cut so many corners the houses should have been lopsided ovals.This mindset is why I will need to reread your work and digest it.Have a JOYOUS EASTER!
 
Tom,

In my area during the boom anyone who could stagger upright and hold a hammer could work construction and the builder cut so many corners the houses should have been lopsided ovals.

That is a very amusing visual!

I would add that the quality of some of my recently purchased durable goods leaves much to be desired. A few years ago I bought a cheap vacuum cleaner as a replacement. It was so powerful that it literally ate carpet. It died in a puff of smoke and sparks during the warranty period and I got a full refund at Costco. I bought a German made vacuum cleaner instead. It wasn't cheap but it was worth it.
 
Definitely glad you're OK.

How is the aggregate value of durable goods out there established? I'm guessing there must be some form of depreciation assumptions applied, else it would be necessary to keep track of the scrapping of every car, microwave oven, and vacuum cleaner...if that's correct, then the number would be very sensitive to the depreciation assumptions.
 
David,

It would seem like a monumental task.

I've got a small broken air conditioner for example. I'll be needing to buy another one this year. It lasted just 4 seasons. It wasn't nearly as durable as the air conditioner I grew up with.

At the other end of the extreme is my computer and my car. I've been using the PC for nearly a decade. I'm still using Windows 2000. For my purposes, it depreciated far slower than the computers I've used in the past. I drive a 1996 Camry and it has less than 80k miles on it.

Cars become much more durable once people don't need to commute to work. I wonder if that is factored in. There are a lot of unemployed people right now.
 
I did another one based on small businesses.

A Grand Unified Theory of Small Business Malinvestment

I've also added all of them together.

A Grand Unified Theory of Malinvestment

Had I realized that I'd be making so many of these, I would have saved the "grand unified" title for the kitchen sink model. Oh well!
 
Mark, my sole observation is a funny thing about markets ... usually they overshoot.
 
Who Struck John,

Mark, my sole observation is a funny thing about markets ... usually they overshoot.

In order to have a valid average value, you must spend as much time below it as above it. Sigh.
 
RE: air conditioners and vacuum cleaners. We've had the same experience with both. Two through-the-wall AC units replaced two that were a couple of decades old. Both of the new units have needed costly repairs, and one will be replaced again this year.

Cheap vacuums are a curse. We bought one that looked pretty good at Walmart. The first time we ran over something it didn't like, I discovered that a key part was made of cardboard.
 
Mark is well off, you didnt know he invented the game.......

Well I will leave it alone.
 
Gordon,

We're very happy with our Sebo vacuum cleaner. I vacuumed up a sock once and it just went right in the bag. No harm done to either the sock or the vacuum. Go figure!
 
Mark, that analysis was wonderful! My thought for the last, I dunno, 9 years maybe, was that true-value housing prices is some combination of what the physical house is worth and how much you stand to earn by being in the house's location. You managed to wrap those factors up in a nice neat X-Y graph. Congratulations!

Actually, I found your analysis to be rather hopeful. The deviation begins in 1997, the same year everything else deviated. Undershooting the mean is a matter of 15 years, not a new Dark Ages.

Oh, and as far as vacuum cleaners go, Kirby models still seem to be made like tanks.
 
Neil,

"Actually, I found your analysis to be rather hopeful. The deviation begins in 1997, the same year everything else deviated. Undershooting the mean is a matter of 15 years, not a new Dark Ages."

There certainly is some hope, but what if we're on the back side of the peak prosperity mountain?

Real Durable Goods Per Capita

I find it hard to believe that we can ever make it back to that trend line.
 
Mark,

Why? This is still America, and we are all still Americans. There's a lot of things holding down our productivity right now, but they're mostly marginal for now--meaning that relatively small changes in cash flow now will produce big changes in the out-years. Even the demographic situation will turn around in ten years or so.

The dark future we see is the future in which there's no entitlement reform, and in which a corrupt Washington D.C. solidifies its control over the economy. This is only one possible future, and there is still much room for hope.

I do admit, though, that the venture capital and angel funding regulations being snuck into the new financial regulation bill do terrify me.
 
Neil,

This America now has trillion dollar deficits for as far as the eye can see.

$1 trillion per year is over $3,000 per man, woman, and child in this country per year. We can't pay it now of course, but we hope our unborn grandchildren might. It just keeps piling up though.

Meanwhile, we're doing everything we can to get a billion Chinese to drive cars?

I just don't see how it will end well. I feel like a locust in the swarm trying to make sense of our long-term exponential growth plan.
 
The trillion-dollar deficits are the plan going forward. For the most part they have not yet been incurred. Even the entitlement explosion is something that has been promised, not something that has been delivered. There is still time, if we choose to use it wisely.
 
Neil,

I certainly hope you are right. Just because I can't see a way out of our mess, doesn't mean that there isn't a way out. There is far more that I don't know than I do know.

That said...

The most merciful thing in the world, I think, is the inability of the human mind to correlate all its contents. - H.P. Lovecraft

The more I correlate, the more worried I get.
 
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