Flesh eating fish and a dolphin

As I read about the developments in the national residential real estate market I am struck the images. First is the return of the flipper. Whereas five years ago every cab driver and school teacher in Florida and Nevada was playing the home edition of Monopoly and lining up houses on Baltic Avenue, today it is a more sophisticated and serious investor. Some might say vulture. They do their homework, look at distressed houses with a dispassionate eye and a full checkbook. Scores of investors with hearts of stone are nibbling like Chinchin Yu (the Chinese dead skin munching pedicure fish)on the housing market and cleaning up the dead skin.

From an economic perspective this is a good thing. Whereas the banks and government have played a game of extend and pretend with the financial side of housing, until prices reach a level for existing housing stock to clear, the pain will be prolonged.
The price of a house is that at which buyer and seller agree. It is not the price that the bank holding the amalgam of sub-prime mortgages wants it to be.

The foreclosure process forces banks to recognize an asset as worth much less than the balance sheet would like. Like the Japanese banks of the past twenty years, pretending that the underlying collateral of loans is worth as much as the debt outstanding when the market says it is not is the only thing that keeps the bank solvent and unable to lend in the interest of economic growth. There have been serious and workable solutions to the housing overhang, but they would require banks recognizing the pain and creating a "housing appreciation note." Such a vehicle would mean the possibility of the bank being made whole at some point in the future, but also of recognizing the diminished current value while trying to clear the logjam.

Rather like my wife saying to me, "you are never sick BECAUSE you never go to the doctor!" It is a system that has focused more on emergency triage than well banking care.

Emerged Markets

For the past decade the emerging market investment theme has been the most compelling long term. Traditionally the lesser developed nations have depended on export of raw materials and labor cost arbitrage. You can still build a computer more cheaply in India than in San Francisco and South African chrome, indonesian rubber jamaican bauxite still live or die with the general state of global industrial demand. Other things have changed however.

The less established political and legal framework of these erstwhile backwaters has long been an impediment to structural stability of the likes of the U.S., Europe and Japan. But now the history of IMF life support to nations in fiscal and monetary disarray is no longer the standard. It is now the developed nations which are looking like banana republics with unfunded spending and economic policies that seem set upon shifting sand.

The compelling demographics have been clearly visible for many years. The populations of the underdeveloped nations are younger and growing richer even if only by living standards much lower than our own. But the man who buys one refrigerator after a life of none or increases his caloric intake from subsistence levels to a healthier diet is of increasing global impact.

The financial data coming out of the IMF regarding the emerging markets is compelling, particularly when put next to that of the developed economy.

While we in the "industrial" economies groan under current account deficits the IMF reports the emerging markets had a current account surplus of $355 billion, forecast to grow to $550 billion this year. The developed markets have a deficit of $262 billion forecast to decline to $161 billion in 2010.

Emerging markets had GDP growth of 1.7% in 2009 and forecast to increase to 5.1% in 2010. Advanced economies had GDP contraction of 3.4% in 2009 forecast to grow 1.3% in 2010.

Emerging nations had gross national savings rates of 33% in 2009 while developed nations had aggregate savings of 17% in 2009.

The combination of cyclical and secular factors indicate a comfort with an increased allocation to emerging market is warranted including fixed income instruments. The inflation rates of emerging markets have long been where the wheels fell off. While forecast inflation in the aggregate emerging markets is higher than in the developed nations where deflation has taken hold, higher but declining inflation as forecast would not threaten bondholders excessively.

John Barnyak

Bob Farrell on the Mountain

Bob Farrell's Top Ten Market Rules

Bob Farrell was the Chief Stock Market Analyst at Merrill Lynch for 25 years and retired in 1992. The list below has been reprinted and repeated so often because it captures the human element of investing.

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras -- excesses are never permanent. (This time it's different)

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. (The market can remain irrational longer than you can remain solvent)

5. The public buys the most at the top and the least at the bottom. (buying sizzle, not steak)

6. Fear and greed are stronger than long-term resolve.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend.

9. When all the experts and forecasts agree -- something else is going to happen.

10. Bull markets are more fun than bear markets.

The Last Real Estate Boom

A generation ago there was a real estate boom and bust on the other side of the globe not so different than the one we have just experienced. On the last business day of 1989 the Nikkei reached 38,957. Today it sits at 11,097, less than one third the level of that day twenty years ago. Does that mean that U.S. markets will follow? According to Mark Twain, history doesn't repeat itself, but it rhymes.

The wildly excessive speculation in real estate was the catalyst to a still deeply ingrained deflationary economy and slow growth in Japan which is now entering the third decade. Unlike the typical US post WWII recession, Japan's lingering state of affairs was a credit and banking crisis. Rather than deal with the destruction of capital loaned, the bank instead kept assets on the books which were badly impaired and never to return. To confront the crisis honestly and accurately would have brought about the recognizable insolvency of the banking system. Instead it was papered over. It is at that time that we were introduced to the term "zombie banks."




(click on image to expand)

The unwillingness to treat the banks according to market rules rather than political expedience will prolong the pain, not remove the dysfunctional.

The chart above is intended not to predict the future of our own market, but to serve as an illustration of what CAN happen. The similarities are too many and the performance too similar to ignore.

“Before I draw nearer to that stone to which you point,” said Scrooge, “answer me one question. Are these the shadows of the things that Will be, or are they shadows of things that May be, only?”

Still the Ghost pointed downward to the grave by which it stood.

“Men’s courses will foreshadow certain ends, to which, if persevered in, they must lead,” said Scrooge. “But if the courses be departed from, the ends will change. Say it is thus with what you show me!”


John Barnyak

The Trend Is Your Friend.....sorta

For many the investment experience which sticks in our minds as the "norm" is the 1980's and 90's when people were checking their IRA accounts twice a day and celebrating their investment skills. The fact that the broad market was up 1000% during the period was apparently incidental to our brilliance.

One of my favorite pictures for a 30,000 ft look at the markets has long been the Rydex Historical Trend chart. For a good perspective of stock market behavior, 113 years ought to give us something usable. Regardless of the alternating cheerleading and lamentations of Money Magazine, Bloomberg and dozens of other pundits, historical precedent is not found between station breaks.

Secular markets, that is, long term markets, are born of fundamental change. This could be a change in interest rates, changes in inflation expectations or demographics or valuation. Secular markets are not overnight sensations but rather long plodding affairs both upward and down.

Back in the late 90's I doubt there was not a retail adviser who didn't tell a client, "it's not timing the market, it's time IN the market." Since about the time that aphorism was hitting its high water mark, market buy and holders have lost just a bit less than 5% in the past decade.

When the investment advertising budgets reach fever pitch listen for those idioms, they are a canary in the coal mine.



(Click on image to increase size)

Given the current valuations on longer term historical averages and the challenges still confronting global economies I wouldn't be looking for the next upward glide path to start anytime too soon. And if you weren't IN the market last year be patient, and if you WERE in the market, moving to more a defensive stance would be prudent.

John Barnyak

Mortgage Modification Program - Audio

Barry Ritholtz has been ahead of the curve over recent years. Hear what he thinks about the new mortgage modification program.

The Fox and the Price of a Chicken Dinner

In looking at markets and economies there are really a number of subjects which although interconnected are not moving in lockstep. The fear of two years ago that the financial system was on the precipice of Armageddon has abated. Whether that sanguine attitude is justified is another issue.

The palpable fear of the autumn of 2008 was clearly lessened. The eyes fixed on the coming tsunami have adjusted their gaze. Although the impending violence of the imminent implosion has passed, have the deep and stiller waters receded? I think not. The underlying issues of nonfeasance still exist. There is no more oversight into the activities financial institutions and risk assets than before.

Derivatives, what Warren Buffet called the “financial weapons of mass destruction” are still without serious oversight. The Commodity Futures Modernization Act of 2000 (CFMA), mandated that derivatives were completely exempt from ALL regulation. Whether it was Collateralized Debt Obligations (CDOs) or Credit Default Swaps (CDSs) that single act required that the fox run the chicken coop. How? The CFMA mandated it. No supervision was allowed, no reserve requirements for potential future payouts were mandated, no exchange listing requirements were put into effect, all capital minimums were legally ignored, there was no required disclosures of counter-parties. Derivatives were treated differently from every other financial asset — stocks, bonds, options, futures. They were uniquely unregulated. (And we rail about welfare to the poor?!) Our grade for dealing with the systemic problems that was the Petri dish of the breakdown is a “D.”

The second stool leg would be the investment markets. Clearly the blast off from a year ago to the current stock market levels has been impressive. It has fueled a collective sigh of relief while 75% of the public missed it. While the gnomes of Wall Street enjoyed trillions of dollars of investment liquidity, bailout funding and friendly accounting standards those on Main Street continued to focus on unemployment, diminished retirement funding by employers and fiscal panic in local economies.

This has been a trader’s market with the mantra, “the trend is your friend,” leading the charge. Our grade for market evolution over the past year is clearly a resounding “A”. The market is telling us that the economy is right behind and ready to swing into action creating jobs and profits in a typical post war recession recovery.

The final issue is value. Separating the idea of price from that of value is difficult. Ask those in the hot housing markets of the early part of the last decade. Real estate was priced at the last sale plus a profit. In most markets it delinked from such value parameters as the rental market or the cost of materials. The sky was the limit and living (and lending) was easy.

Today the stock market is again delinking from traditional historical valuation measures. With the exception of the period from 1997 and 2007 the cost of “the market” is back in bubble territory. But it is hard to be analytically cold blooded when the streets are running with soup instead of blood.

Economists are forecasting modest growth of the next several years. Although corporate earnings generally grow more quickly than the economy coming out of a recession, the aggressive forecasted earnings growth is utterly detached from historical precedent. Equity analysts are expecting earnings to grow 25% in 2010, 20% in 2011 and 14% in 2012.

Corporate sales are forecast to 5.5% this year and 7% next year which will mean record profit margins. If we assume that corporate profit margins reach unprecedented levels, the market is already at a valuation far above the norm. If profit margins revert to more historical average levels of slightly above 6% instead of the projected 10% the market would be VERY overvalued at the current level.

Regardless of mood and sentiment and trend, this is not a time to underestimate risk in investment markets.

John Barnyak
Stonehouse Asset Management

Over Bought

After the debacle of 2008 the rebound in 2009 of the stock market feels to many like a resumption of business as usual on the inexorable path upward. Unfortunately once the human feel-better psychology and sentiment is peeled back we are again in on of the most over bought, over valued markets ever.

In 2007, prior to the market collapse, stocks were an extreme valuation with rich valuation multiples measured with inflated, abnormal profit margins. With investor belief that 2007 represented a norm forecasting a decline to more historically attractive levels presents a significant challenge. However for the true investor (as opposed to speculator/trader) the market risk is not worth taking when measured against a reasonable sustainable outcome. The combination of valuation, market psychology and action should not entice fresh money off of the sidelines and currently invested money should remain defensive.

We have lived from bubble to bubble for quite some time and are conditioned to expect the next bubble to be profitable and benign. Much like the tech and housing bubbles before?

The challenge for investors now is to have patience to an extent anathema to our CNBC conditioned primitive brains.

John Barnyak
Stonehouse Asset Management

Duct Tape and String

Sometimes things hold together for the damnedest reasons. I had a silver Rambler that continued running because of a piece of rusty wire I found on the New York Thruway. I was not just relieved, I was proud. Broken down in the middle of nowhere and in a McGiver moment I had us back up and running. Sounds rather like Ben Bernanke and the economy. It's running, but won't pass inspection, but damn weren't we clever to avert catastrophe?

Like Silver Cloud, that Rambler's unlikely name, eventually that rusty wire will give up the ghost but hopefully we'll limp to a safe destination and really fix it. Unlike Silver Cloud we can't scrap the economy for a new one, although god knows, it seems like we could get more easily get financing for a trillion than a new clunker.

FASB, the accounting standards board continues to allow banks "substantial discretion" in valuing their assets. But a financial system without a clear standard for valuing assets if impaired. Currently unless a debt is in foreclosure, it appears banks are reluctant to modify mortgages or restate delinquencies in order to obscure valuations.

This development is exactly how Japan became a stagnant economy for the past twenty years with constrained lending activity and business growth. The unusual and growing gap between delinquencies and foreclosures indicates an increasing need for resolution. As we are progressing now, zombie banks will continue to operate at public expense while performing their function as lenders to private endeavors suboptimally.

The accounting industry needs to force greater disclosure discipline on the banks, however following the recent revelations about Ernst & Young and Lehman Brothers that may be too much to expect. Until things are fixed right, it's anyone's guess when we will again grind to a halt.

John Barnyak
Stonehouse Asset Management

Recognition Phase

The most significant damage done in markets often happens in the recognition phase. That moment when reality and optimism diverge. As I see the reality I can't help thinking of the apocryphal tale of General George Custer shouting above the din of battle, "Take no prisoners!" Looking across the spectrum of the economy Ben Bernanke might feel similar.

Using fundamental measures of market value, from 1929 until the late 1990's, the market has carried a higher valuation only twice. In late 1972 prior to a two year 50% decline and in summer of 1987 before the market plummeted in the autumn.

Anyone who has read Bringing Down the House, the story of the MIT blackjack "team", knows when the odds are good you pull up a seat at the table and when they are not, you walk away. If the fundamentals of valuation look iffy, what could drive the speculative values higher? The monetary stimulus of the Obama package can hardly be replicated in 2010. The consumer driven economy will be lackluster at best with high levels of unemployment and constrained consumer credit. The outsized gains in the market during 2009 have already discounted a normal recovery a couple years into the future. This is not a normal recovery and a couple years in the future, is just that, somewhere over the horizon.




The chart above shows what more than a decade of buy and hold has down for investors. What was it good for? Absolutely nothin'.



John Barnyak
Stonehouse Asset Management





"Custer,was a man of boundless confidence in himself and great faith in his lucky star."

The Wizard of Wall Street

Much like in Oz, the closer one gets to the seat of power the more bombastic the dialogue becomes and the more smoke filled the room. "Pay no attention to the man behind the curtain!" Do not pull back the drapes lest the origin of the booming voice and stentorian tones is discovered to be a charlatan at worst or more likely hopeful and biased.

My continued skepticism about the economic recovery and remarkable market drive of the past twelve months is grounded in the fact that the United States is an economy based on consumer spending. Approximately 70% of our economy is consumer driven and based on income, dissaving and debt. All of these factors have been, and continue to be severely constrained. Unemployment and underemployment is about 16%. Saving rates are rising back toward historical levels up from negative numbers. Finally, credit has fallen at dramatic rates as banks seek to repair their balance sheets and become solvent. This is a view. Let's look at the raw data that brought the financial writers to their collective feet last week to cheer.

The headline is that retail sales rose by a surprising, seasonally adjusted, 0.3% in February. One of the wizard's wands is the seasonal adjustment. It is a useful tool but can also be an obscuring one. To compare apples with apples let's look at how February normally behaves using the raw data. Eliminating the seasonal adjustment, sales actually declined by 1.6% from the previous month, rather than rose by 0.3%. This in and of itself is not meaningful. However the unadjusted sales when compared with each February over the past decade is not very promising. On average February unadjusted retail sales are down by 0.4% month to month. So compared with the past ten years of Februaries, sales were down 4x normal.

Pulling the numbers apart yet further, retail sales are equal to January 2006. The population is higher by 4.3% and sales are not. If we throw inflation into the mix, sales on a per capita basis are down to 1996 levels. Don't get me wrong. I don't see anything wrong with steady inflation adjusted per capita spending and I expect it to fall longer term as we move back to a sustainable spending level. But it does tell us that productivity gains have been illusion.

Stay cautious.

John Barnyak
Stonehouse Asset Management

Creative Accountants

For years a famous line from Shakespeare's historical play King Henry VI has been usefully been taken out of context. I confess I have enjoyed twisting its original meaning to support an argument. The intent of that line was to state that without guardians of independent thinking chaos would ensue and the speaker, Jack Cade, pretender to the throne would like just that. But, "the first thing we do, let's kill all the lawyers".

Today's reading of the independent review of the Lehman Brothers bankruptcy brought those words to mind with a small twist. "Let's kill all the accountants!" The report on the event and the factors leading up to it does not put their accountants, Ernst and Young in a very favorable light. In fact it seems to me that E&Y is in danger of following Arthur Anderson into the sunset as they did post Enron.

E&Y was culpable of non disclosure of material information about the balance sheet. They were aware of and chose to remain silent on creative accounting by Lehman. If Enron was enough to take AA down, Lehman is much bigger. With E&Y's knowledge Lehman was moving tens of billions of assets off the balance sheet in a overnight cash transaction intended solely to give the appearance of greater liquidity than existed at quarter end. "Repo 105" was intended to do one thing, deceive shareholders and creditors into keeping faith in Lehman's solvency. Ernst and Young signed off on the financials as true and accurate representations of the state of Lehman's financial state. They knew that to be untrue as billions of dollars assets left and billions in cash came in overnight to tart up the books.

From Enron to Parmalat to Lehman it appears when push comes to shove outside accountants provide no value. Management generally dislikes the cost of outside audits running into the millions of dollars and investors receive no value in terms of adequate and honest disclosure of the state of a company. Let the vested interests outside of the company provide the audit function because those on the inside are sitting at the table with the dealer they have chosen. The rest of us? If you can't tell who the sucker is at the table, it's you.

John Barnyak
President

Poof it's gone!

What's in Your Wallet?

Based on surveys by the American Association of Individual Investors (AAII) and the Investment Company Institute (ICI) the answer to the above question is either, still a little, or not much. The AAII surveys individual investors who have been less convinced that the coast is clear or are still licking their wounds from 2008. That group is currently sitting with a liquidity stash that is just about in the middle of the range as far as % allocation to cash. In other words neither dramatically excessively liquid or illiquid. As each uptick pains the remaining cash off the sidelines the upside is limited as is the downside risk at the moment. My concern with the data is that the time frame is again limited to the period beginning only with the 1980's when a new secular bull market was evolving


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On the institutional side of things, as surveyed by the ICI tells a slightly different story, but consistent with the theme of the past year of institutions in the market and individuals out. Portfolio managers have been so worried about missing up moves in the market and thereby lagging their benchmarks they have decreased cash holdings to less than 4% from nearly 6% last year. This is the largest decline in 19 years. It does beg the question of how much the thumb of government was on the scale in 2009. This cash level ties for the lowest level of cash in twenty years, matching the levels of 2007 before the markets turned southward. Conversely corporate bond fund managers are holding cash positions at the high end of the range of the past two decades.



Government liquidity goosed the market last year in 2009. Where will liquidity come from this year as the government faces strong resistance to further deficit spending?

John Barnyak
President

No Harm No Foul...no gain

While the 80's and 90's were "mainlining" stock market investments, the 00's have been mid-lining those indexes. A period of at best, consolidation is in the stars.

John Barnyak
President

Much ado about nothing

If we look back twelve years to the first financial industry bailout, Long Term Capital Management (LTCM), it really is quite like Disney's Magic Mountain. Full of swoops and climbs but getting out pretty much exactly where we started.

Dave Rosenberg of Gluskin Sheff makes the following points with a 30,000 ft perspective on the markets. When we look at the last 12 years, dating back to LTCM and the bailout that ensued, we have endured a 60% rally, followed by a 50% selloff, followed by a 100% rally, followed by a 60% selloff, followed by a 70% rally. Over 12 years the Dow is up about 10 percent, or less than one percent per year. But wasn't it fun to celebrate and commiserate and pontificate for the last decade?

The equity market is basically flat for a buy-and-hold investor. The really important lesson though is that this is a great case for active portfolio management, also a lesson that investors will not lose out by going long after a 50% collapse from the high; nor are they likely to feel much pain from selling into a 70% rally from the low. Chasing performance at this juncture is probably unwise.

John Barnyak
President

All the Way Baby!

One of the things I noted early in my career, at the time with a large natural resources company, was that graphs tended to go in one direction. If the market was poor it was forecast to go down continually, if it was good it went to heaven. Being optimists with billion dollar investments, when it was beginning to turn down, it was forecast to bounce back shortly.

Investment professionals are no different. There is a habit of expectations based on the extrapolation of the short term past. The fact that those extrapolations are at odds with historical relationships often is dismissed.

Over the past thirteen years, the S&P 500 has underperformed Treasury bills. "Investors" ignored valuations in the late 90's and let them again rise to unsustainable levels in 2004-2007. Unfortunately we are again at a high valuation.

As the accounting standards has gotten more stringent, we should begin to see with greater clarity the true state of corporate affairs in the banking sector. This greater clarity should make investment decisions more rational.

Stay tuned the next couple months are critical although I expect policymakers to continue to kick the can down the road to avoid dealing with the issues.

John Barnyak

A Sacred Cow

I confess I have been waiting for the first mainstream rumblings to arise about the issue of home ownership in the U.S. Certainly for as long as we can remember the home as castle has permeated the psyche of Americans. I think Professor Shiller's editorial in yesterday's NY Times may be the edge of the wedge for a future national debate. I personally doubt that the mortgage deduction, long taken for granted will survive. The subsidization of home purchases provided through taxes has been a trickle up affair from renters to more affluent homeowners. It should be a long and heated battle.

What say the readers?

John Barnyak
Stonehouse Asset Management

Mom, Apple Pie and Mortgages

By ROBERT J. SHILLER

Published: March 5, 2010

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It’s important to remember this as we consider re-engineering our institutions as the crisis ebbs.

Federal subsidies for housing essentially began in the Great Depression with, among other things, the creation of the F.H.A. in 1934 and Fannie Mae in 1938. It all started for a simple reason: more than a third of all the unemployed were identified, directly or indirectly, with the building trades. At the time, there seemed to be no way to reduce unemployment without stimulating housing, and much the same is true today.

But consider what will happen once the economy is again operating at full capacity. Basic economics tells us that when Americans, over all, spend more on housing, they must ultimately spend less on something else. Why should housing consumption be better than other consumption, or investments that people might choose?

This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.

In his classic 1985 book, “Crabgrass Frontier,” Kenneth T. Jackson of Columbia University delineated the complex train of thought that over the last two centuries has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.

Back in 1899, in “The Theory of the Leisure Class,” Thorstein Veblen described homeownership, particularly of large and expensive dwellings, as “conspicuous consumption.” By that, he meant that it was undertaken substantially for the purpose of impressing others by showing the amount of money one can afford to waste on space one doesn’t need.

What is specifically American here — though it’s increasingly seen in other countries, too — may be the modern sense of equal citizenship, engendered by the illusion that we can sustain conspicuous housing consumption even among a majority of the people.

In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today. A cardinal tenet is that people should diversify — meaning they shouldn’t put nearly all of their financial eggs in one basket, which is what homeownership now means for so many people.

American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky because home prices can and do decline, as we have learned so painfully. Leverage a risky investment 10 to 1 and you can expect trouble — and we have plenty of it today. More than 16 million homeowners owe more on their mortgages than their homes are worth, according to Mark Zandi of Economy.com.

If we choose to keep subsidizing individual homeownership, we must also commit to adding safeguards so that homeowners are less financially vulnerable. Of course, that will require some creative finance.

But first, we should rethink the idea of renting, which could be a viable option for many more Americans and needn’t endanger the traditional values of individual liberty and good citizenship.

Switzerland, for example, is a country with strong patriotism, a fighting spirit of national defense, a commitment to freedom and tolerance, and a low crime rate. Yet its homeownership rate is just 34.6 percent, versus 66.2 percent for the United States, according to the two countries’ 2000 censuses.

Swiss national identity doesn’t depend on homeownership. Instead, Riccarda Torriani, a historian at the Swiss Federal Department of Foreign Affairs, links the country’s sense of identity to such things as its system of direct democracy, which enforces popular participation in government; the idea that its citizens are frontier people (living in or near the rugged Alps); and a history of collective courage in defense of freedom, even when outnumbered.

BUT America isn’t Switzerland. Our values and habits of thought are very different. Moreover, our homes are largely scattered in vast suburbs, often with distinct features. If many of these homes needed to be converted to rental units, home prices might well drop.

A stock of apartment buildings in central cities, of course, makes rental management much easier. This is true in Switzerland, as well as in American cities like New York, which aren’t typical of the rest of the United States. We need to consider a gradual transition toward new kinds of housing finance institutions — entities that may lead us to a different kind of housing, yet preserve our core values. Although such innovation isn’t likely to end subsidies, it should refocus them on enhancing the qualities of life that we really value.

We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience — and not on efficient-market economics, which disregards human psychology and assumes that our basic institutions are already perfect.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

From GARP to SIRP

With so much of the economy's health and direction dependent on people actually working, buying and paying taxes, it remains difficult to get too excited about our prospects.

This morning the headline was that layoff data for February reached a four year low. According to the Challenger analysis layoff announcements fell to 42,090 for the month. The ADP report showed job losses of 20,000 but government numbers released on Friday will likely be somewhat worse because of the methodology. ADP counts employees who worked no hours during the survey week as employed while the Bureau of Labor Statistics counts non-working employees as unemployed. The flattening of the slope of decline is certainly encouraging but what awaits across the recessionary valley remains very challenging.

Assuming employment cannot logically go to zero, the stabilizing is a modest light at the end of the tunnel. During the tepid economic recovery we have continued to lose jobs with over 1 million lost during the recovery period. Since the recession began the loss of jobs has reached 8.4 million. The workforce today is the same as in 1999 with both a larger economy and population. Depending on one's perspective, we are either wonderfully productive or woefully underemployed.

Total unemployment and underemployment is close to 17% and 40% of the unemployed have been without work for over six months. These are depression like figures. The U.S. economy is 12 million jobs below full employment. Estimates of time until we reach previous levels of full employment range from 5 to 10 years. Against that backdrop we would continue to expect to see a deflationary investment theme. The threats to that view would be from the public sector debt should policy begin to monetize debt, significantly weaken the dollar and become less attractive to foreign buyers of US treasury debt. All of those are possible.

The investment theme will continue to be safety and income at a reasonable price (SIRP), a far cry from the growth at a reasonable price (GARP) investment tune of not so long ago.

John Barnyak
Stonehouse Asset Management
(412) 849-3723