Overvalued, overrated, over there.

[peterbirks]

About 18 months or so ago, I recall reading on certain blogs how the property boom in the US (particularly in Las Vegas) was "different this time". Older cynics like us commented that "they always say that".

This morning's Bloomberg refers to the US housing market currently being a bloodbath. Not only have the bottom-of-the-barrel borrowers, some of whom apparently got rates of 1% for a couple of years, interest only, and have therefore seen their repayments more than quadruple (the "exploding ARMS" tale), got into trouble, but now the 30-year rate has gone up half a point in only five weeks, hitting the "solid" mortgage market as well.

And for the US, this is a new phenomenon. Variable mortgage rates and a "sophisticated" mortgage market tend to require a sophisticated sales and customer base, else you can get into a lot of trouble. And that is what the US housing market is in right now. Be thankful if you didn't buy anywhere in the US in the past two years, because the worst is yet to come.

Some of this will permeate to the UK over the next couple of years, I am sure of it, which is one reason for me not being unhappy about the purchase of downstairs falling through. Balancing economic and non-economic factors as part of a big financial decision is always difficult, but I am becoming more and more convinced that we have finally reached the housing peak in London.

As is observed in a comment in the FT this morning, what do you do when all asset classses are overvalued? Logically, this shouldn't be possible, until you bring into play the concept of time. If everyone is buying stuff today with tomorrow's money, then it's quite possible for all asset classes to be overvalued. One interesting solution was to find anything that no-one wants. At the moment, that would appear to be the US dollar.

It's an interesting strategy and, since a few of my liquid assets are in US dollars, one that I've been following, albeit in an unplanned, poker-winnings, kind of way. My US liquid investments pay better than my UK ones, so, if the US dollar is not going to decline to $2.20, then shifting further into that asset class makes sense. However, just because something is undervalued (which in terms of purchasing power, the dollar most definitely is), that doesn't mean it won't become more undervalued before fundamentals reassert themselves.

++++++

While channel surfing yesterday night I came across a US programme called "Gay, Straight or Taken", which was riveting for about three minutes. The format is roughly that a woman meets three attractive guys (all the same height, mysteriously) and has to decide which of the trio is straight and single. If she is right, then they both go on a cruise. If she is wrong, then the guy she picks goes on the cruise with his partner.

Anyhoo, the woman duly selected the straight guy who was already in a relationship. She then said to camera "story of my life. If there's a choice between the guy who is available and the guy who is taken, I pick the one who's already in a relationship".

Now, this actually makes some interesting sociolgical (and game theory) points. Here we have a woman who has narrowed the situation down to two guys she thinks are straight, but she knows that one of them is in a relationship. If she selects the guy who is not, then she gets a prize.

And yet she still chose the guy who was taken.

Now, look at the gamble from the woman's point of view. Obviously the taken guy was the one that she wanted to go on the cruise with, but she would have preferred a cruise with a single guy to no cruise at all.

So, her most preferred result is

(a) cruise with guy I like best

Second is

(b) cruise with guy I like second-best

followed by

(c) no cruise.

If she chooses the guy she likes second-best, and turns out to be wrong (i.e., the guy she liked best was the one who was available), she is seriously gutted, because she has missed out on her most preferred result. So it makes sense for her to gamble on (a), and choosing the guy she likes best.

But, and here's the rub, there's likely a high probability that the guy she likes best will be the guy who is taken.

What's the percentage? 80% 70%? I don't know. So now the rational game-theorising woman has to balance a 4-to-1 against chance. Do you want a 20% chance of a cruise with the guy you liked most, or an 80% chance of a cruise with the guy you liked second-best?

I guess that it comes down to how much more she "liked" the guy who was taken.

BTW, I've eliminated the gay contestant from this calculation, as it seemed that the woman had little trouble spotting that he was sexually unavailable.

Comments

[real-aardvark.livejournal.com]

More game theory than you think, I suspect.

Taking a position on the identity of the person selecting the game (ie picking the men), I would hazard a guess that it is an American TV executive of some kind. This means that

(a) The occasional ringer will be thrown in as a gay guy. Not too often, but just often enough to make it "hilarious" when the woman picks him.
(b) The married guy will always be more attractive (superficially, ie photogenically) than the single guy. Think of the advertising lost to the howls of the Christian Right, otherwise.

So, your percentages are probably wrong.

In the second derivative of what I am pleased to see is the living incarnation of Keynes' "beauty contest," said executive might be smart enough to pick a porker as the married guy.

But I doubt it.

[jaybee66.livejournal.com]

"It's an interesting strategy and, since a few of my liquid assets are in US dollars, one that I've been following, albeit in an unplanned, poker-winnings, kind of way. My US liquid investments pay better than my UK ones, so, if the US dollar is not going to decline to $2.20, then shifting further into that asset class makes sense. However, just because something is undervalued (which in terms of purchasing power, the dollar most definitely is), that doesn't mean it won't become more undervalued before fundamentals reassert themselves."

US$ is one fiat currency I don't want a part of. It is over-valued from here onwards with the printing presses devaluing the dollar every time the US needs to get bailed out of one mess after another.

It will lose its status as the only reserve currency and lose its purchasing power, which it only gains through the US military's ability to coerce people into using it.

Short: The whole USofA

PS - More articles about money and game theory Pete. I sold my house and have a big wad in the back pocket. Forget the cards, nothing good ever came of that.

[real-aardvark.livejournal.com]

Nope, I'm with Birks on this one.

I have sat, with happy joy, for the last five or so years wondering at the munificence of the Bush adminstration, which has almost designed a tailor-made fiscal strategy to ensure that the dollar reaches absurd lows against even the Euro, for God's sake. My own earnings in that period have been paltry, but I have still been able to buy an Italian suit in Palo Alto for £95 ... ah, the wonderful consequences of several economic fuck-ups combined, including that of Macy's.

Of course, we could be headed for the same beggar-thy-neighbour policies that perpetuated the 1930's slump. But I think not, in this case. First of all, to cast our minds back to the 1990s, the Clinton administration managed to reverse the stupendous deficits produced by design in the Reagan years. It's not that they were particularly clever. It's just that the USA is a large enough economy to have the leverage to do this. It still is.

Secondly, I don't see holders of securities based in dollars going hog-wild and selling them any time soon. What would they sell them in to? Gold? (cf the 1930s.) Basically, the Far East is on a hiding to nothing unless a few political perceptions change, and they rebalance in some way.

Thirdly, Birks is right. Other commentators here seem to want to sell the dollar short (technically, obviously) for good reason -- the Feds have buggered up the interest rate/inflation curve since around 1999, and the housing market is imploding faster than a punctured lightbulb. I agree with all this. I wouldn't be surprised to see the dollar at 2.4 or so to the pound in the next eighteen months. I'd be very surprised not to see it back around the norm of 1.5 within three years or so.

Looks like a good bet to keep track of, to me.

Not that bad, not that good

[geoffchall.livejournal.com]

I don't think it's going to be quite that apocalyptic. I expect the dollar to hit it's trough somewhere around the $2.10 point towards Spring 2008. If the Democrat primary season results in a conclusive winner (I'll take Obama please) then I think things will turn on the assumption that sanity will return.

But even when swung back the other way I'd be surprised to see it fall back below $1.80 for a long time.

I wouldn't mind buying property in the States once they reach their trough both in price and currency rate terms. The only drawback is where? Not Vegas and not the West Coast.

Re: Not that bad, not that good

[jaybee66.livejournal.com]

I'm not sure why people are setting a dollar stop limit when Federal Reserve Chairman Ben Bernanke has stated that the US's economic weapon of choice is the printing press. And is the reason why M3 supply is no longer reported in the US.

So long as the US prints dollars without tangible increase in value then the dollar devalues. To increase the value of the dollar the Fed will have to buy back T-Bonds from China. With what? The eurodollars that buy T-bonds go straight into the furnace.

The US prays that nobody cashes in their T-bonds. But one day they will flood back and the US tanks.

What says The Birks? Shame there is no Regency Bar to sit in and get talked at by the money man.

Re: Not that bad, not that good

[peterbirks.livejournal.com]

The perpetual printing of the dollar is a long-term problem, for sure. But the current weakness of the dollar is indicative of sympathy rather than fundamentals. Strong Sterling survived for nigh on a century, despite printing masses of money, because it remained the currency reserve of choice. As Pete points out, where are the currency accumulators going to shift their cash? Not gold, not sterling, and certainly not the yen. All that leaves is the euro. Now, this gradual shift is taking place, but it is not in the interests of countries already holding masses of dollars to see the dollar weaken dramatically. T-Bonds will never "flood" back. It will be a gradual decline over decades.

Another difference between the long-term decline of sterling and the threatened long-term decline of the dollar is that the US is a country of vast natural wealth, which Britain is not. In that sense, the US can afford to print a lot of dollars -- not as many as it's printing at the moment, true, but more than people tend to think.

Why is this? Because the T-Bonds can be exchanged for the wealth the US generates. Although the US is printing money for consumption today that it will have to pay for in a distant tomorrow, it's also the case that the US may well be able to pay for that with its vast wealth-generating capacity.

As for the Bernanke quote. Yes, I saw that too. If Bernanke means it, then I recommend that he read a book on Weimar in the 1920s, or Zimbabwe. Controlling the printing presses means naff-all. But just because bernanke has got this wrong does not mean that the dollar will tank.

PJ

Re: Not that bad, not that good

[peterbirks.livejournal.com]

My own line has long been that the dollar nadir will be about $2.20 (this view goes back to when I first went short on the dollar in mid-2003, at $1.66). And, serendipity indeed, it might well coincide with a near-nadir in the US housing market. Opportunity indeed! Actually, we could have the farcical situation where the dollar is kept from these depths because so many foreigners put their cash into US real estate rather than US T-Bonds. This, in turn, would prevent the US consumer getting his house in order, because interest rates would once again be kept artificially low by foreign money.

The difference would be that foreigners would not be buying stuff coming off printing presses (equals "I promise to pay you on some future date") but would be buying something physical.

I think that Pete D's timeline is too short. If there's one thing I've learnt about currency movements in the past four years, it's that the short-term is longer than you think. It could be a decade after the final slump before anything like $1.50 is seen again.

As to where in the US. Well, I have met middle America (they are the backbone of Vegas) and it isn't pretty. That said, there are places such as Alburqueque (all I need to do is remember how to spell it), that look like being the Boulders of the future (i.e., the west coast and New York in exile). The really cool thing to do would be to move over there and do to urban Detroit or urban Baltimore what has been done to much of urban London. The infrastructure (water, electricity) is there. If Islington comes, can organic shops and tapas bars be far behind?

PJ

Re: Not that bad, not that good

[real-aardvark.livejournal.com]

I think I said I "wouldn't be surprised;" I certainly don't expect it. However, the forex markets look a bit jittery to me at the moment, and any old black swan might do it.

There are, of course, several distinct housing markets in the US, partly demarcated by what you want to do with the property, partly demarcated on a regional or even local basis, and partly demarcated by plain silliness (I mean, who the hell would want to live in Malibu? The insurance alone is astronomical ... and think of the neighbors). To dismiss the entire West Coast in one swell foop is a little premature.

One possibility is to look for traditional "getaway" areas for Californians -- ie the other two West Coast states. Portland is interesting, from an investment point of view. (Beer's good, too.) Areas around the Sound such as Bellingham used to provide good value; not sure if that's still true.

As Birks says, the likes of Albuquerque are always worth monitoring. (And much as I hate Texas, Austin and San Antonio aren't too dismal.) Usually best to look for a big college town if it's in the Mid-West.

As for the East Coast, it's practically uninhabitable south of Metro Virginia. And bloody expensive north of there. But I expect there are exceptions.

Re: Not that bad, not that good

[(Anonymous)]

Actually the drawback of California is the distance in time terms. I'm thinking of somewhere that would be a holiday home of sorts where we could 'pop over' for a while and the flight time and the time-zone change for the West Coast is too much. If we were looking in CA I'd be likely to want to be by the coast - probably the Santa Cruz to Monterey stretch, or Marin. After all Santa Cruz is as near to a British seaside town as you get in California. And of course these areas are out of any sane price range.

The Northeast sounds nice but I don't really know it. However it doesn't really seem like a place to escape from a British winter now does it?

[andy-ward-uk.livejournal.com]

"the rational game-theorising woman"

I LOL'd. I know, it's a form of discrimination.

[(Anonymous)]

If I remember correctly, finding a partner is one of the special areas where people are generally risk takers. Not risk averse like in finance and cruising.

Given that it's not out of the question to chose the taken one on purpose! Cruise with bad company would be a nightmare.... Damn, I think I contradicted myself.

Aksu

[peterbirks.livejournal.com]

Hi Aksu:

Well, here the "how much do I prefer one over the other" factor, comes into play. Obviously if you can't stand two of the contestants, then you are right to choose the one whom you prefer. But what if it's fairly close between the two? Then, surely, the most important factor is "is he taken or not?"

I asked a female work colleague about this. Amber would happily admit that she is not at the top of the intellectual food barrel, but she has a lot of common sense. The first thing she did was spot that "well, it's all about getting the cruise", since you could play the game for "the guy" in a bar any Saturday night. She then observed that any woman actually playing this game would likely be too stupid to think about it in this way, and would simply eliminate the contestant she thought was gay, and then automatically choose the contestant she preferred, not even thinking about the odds of this one being "taken".

So, in this case, "finding a partner" is not what it's about. It's about getting the cruise. The question is, (and I mock Mr Ward's sexism here :-) ) what would be the best strategy for a hypothetical game-theory expert woman? And, to answer that, the woman has to ask herself "how likely am I to prefer a man who is taken to a man who is available?" For that, I guess she would have to conduct empirical experiments in advance....

PJ