Balance Sheet Recessions
Video: Richard Koo discusses ‘balance sheet recessions’ and how the U.S. is in a similar position to Japan. Very interesting.
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Value Added Tax?
“A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. Value-added tax is most often used in the European Union. The amount of VAT that the user pays is the cost of the product less any of the costs of materials used in the product that have already been taxed.” -Investopedia
Opinions on the value added tax are wide ranging. Here’s Martin Feldstein and Robert Reich debating:
What do you think of the value added tax?
read moreNew Industries & Old Markets
The social media world continues to grow and as Peter Lang, Social Media Strategist, very convincingly puts this growing trend… its bullish. While I agree that the social media industry is far from done, I recently wrote a post describing a phenomenon that compares quite well to the social media environment: Life Cycles in Financial Markets.
One of the first social media networks we saw was Myspace. It was a hit and everyone was talking about the potential IPO opportunities it could have. You could see the dollar signs in eyes of the founders. But like every product, there is a life cycle. Competing products come into the market and attack the “big dog” and eat away at the market share. The biggest market grabber (and essentially chopping the legs out from under Myspace in the process) was Facebook.
As Facebook grew in popularity, it detracted from the searches for Myspace because everyone was moving to a new social network.
But Facebook is not the only social networking site. Professional networking sites like LinkedIn are increasing, Twitter the micro-blog has exploded, gaming sites like Zynga, community involvement like Yelp, and geo-tagging applications like Foursquare are all growing in popularity. So my question is… how do you determine value in a market like social media that changes “every nine months?”
Myspace received venture capital as have Facebook and Zynga. But with declinig usage Myspace has faced several problems: in early 2009 one of the cofounders steps down, by mid-2009 they were planning on cutting 300 international positions, and by early 2010 the CEO was stepping down. That is never a good sign for any company especially one operating in dynamic environment. Which brings us to the bid daddy right now: Facebook. It is receiving venture capital but where is the the future? Life cycles are a virtual certainty in this industry. Yelp received an offer from Google for $500 million but instead it received investments totaling $50 million from investment firms. Is this a short term investment or are they hoping for long run returns?
That’s the problem with these type of companies going public and issuing stock. They must create value for the stockholders once they have them. How can this be done when companies rise and fall so fast? It seems like it would be almost reckless to allow companies like this to go public and eventually fall, wiping out retirement accounts with them. This is one of the new issues facing old financial markets. How will they collide?
read more‘Google Trends’ Reveals Other Trends
Where are the hardest hit real estate markets you can think of? Las Vegas instantly pops into mind. Florida and California quickly follow and the reason is because these were some of the hottest real estate markets in the U.S. leading up to the crash. These have also lead to some of the worst hit areas as far as unemployment numbers go.
Google Trends allows another method to dig through the data and see underlying trends. What Google Trends allows us to do is search a topic based on keywords and see the location that has searched that term the most often. It’s a fun little tool but also useful. Here are some of the interesting statistics that I found:
Second mortgage was a popular search back in 2006 when home prices were at or near their peaks. Fast rising home prices meant you could take out a lot of the equity out of the house and use it to purchase other items. Markets with booming real estate developments meant you could take out high levels using this loan process.
Loan modifications are a much more recent topic which allow an interest rate reduction in existing loans. This is beneficial to people who have high payments and would otherwise not make them. This is a long term solution for people who have loans that are unlikely to be repaid in many cases.
Unemployment searches could have a very wide range of possibilities. Whether it is inquiring about unemployment benefits or numbers, it is a popular search in one of the most decimated areas, Las Vegas, and one of the areas that experienced a large amount of unemployment with the financial crisis, New York.
Bankruptcy is a popular search again because of the housing market collapse. Other hard hit areas beyond Vegas were searching for this trend including Cleveland and Phoenix.
Foreclosure is the mother of them all as far as search trends and reality go. Three of the hottest real estate markets in the U.S. were Vegas, Florida, and Arizona. These areas also experienced some of the deepest crashes. Foreclosures became big in this area as many homes could not even be sold and were defaulted on instead.
Notice any interesting parallels between those searches? Vegas is tops on all except one! That shows just how bad the situation is in Vegas. The citizens in Vegas are searching these topics because its more than just ‘what’s happening’ in the world. Instead its happening to them and they want to know what’s may or may not happen in the process. This is the power Google has to show us what’s happening and who its happening to.
read morePop Those Bubbles!
NY Federal Reserve Bank President William Dudley gave a speech today before the Economic Club of New York titled Asset Bubbles and the Implication for Central Bank Policy. In it he discusses reasons the Fed should regulate asset price bubbles, a bubble being any spike in asset prices without rational basis. While there are many sides to the argument of whether bubbles even exist or not, Dudley goes a step further and addresses how and why central banks should address asset bubbles.
There are many difficulties in attempting to pop a bubble with the primary problem being identification of the bubble. Bubbles are hard to identify because they can crop up in different sectors and industries and the deviation from fundamental values is hard to discern, particularly in a bull market.
One important aspect of Dudley’s speech I like is where he talks about each bubble having unique characteristics and that any rules-based strategy “is likely to be ineffective and that tackling bubbles to diminish their potential to destabilize the financial system requires judgment.” Many economists who have been on the pro-bubble side believe that rules need to be in place to make sure markets understand what constitutes a bubble and to prevent any abuse of the central bank.
The Obama administration has pushed for greater regulatory and supervisory power for the Fed rather than restrict the power of the central bank. Time will only tell who will win.
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