about Jim Scott

The recent political circus in  Florida illustrates how foolish the Supreme Court was when they allowed the creation of Super PACs. Stephen Colbert excepted, this new political monster is going to make a bad system even worse. It reminds me of those old black and white Japanese movies when Godzilla crushes everything in its path. Apparently five justices wanted to establish a new level of corruption in our now corruption-free political process. It is like this, why not have one more pit bull in the backyard when you have four there now? Makes perfect sense to me.

Take Florida. Mr. Romney outspends Mr. Gingrich five-to-one. He wins big reversing his earlier beat-down in South Carolina. Two conclusions are possible; people in Florida are not very bright and watch a lot of television, or people in Florida like Mr. Romney more. I would like to believe it is the latter and that the GOP voters ignored the noise created by Mr. Romney’s army of corporate pirates. These guys want to set things up for later in the event Mr. Romney wins this fall.  They can come to town and cash in all of their chits with their go-to guy in the White House.

Private unlimited and often secret funding of political ads by PACs is going to revolutionize the campaign this year. The  advertising will reach depths one could not imagine possible.

I recognize they are supposed to be independent of the candidate, but if you believe that, call me as I have a fine bridge to sell you.

My college student called me yesterday
and asked if our family was part of the ‘one percent’. You know, the
villains of the Occupy Wall Street movement, those at the top of the
economic pile. The question came up in his sociology class, the
professor wanted to know how many students thought their families
were ‘one percenters’. I am happy as a parent that my son was not
sure where we stacked up.

His impression was there was little
sympathy for or connection with the protesters. Safe and warm in
their private university, this is probably not a surprise. Political
movements are driven mainly by those with skin in the game, people
who have a personal stake in effecting change. If you doubt this,
take a look at antiwar movements since 1965. The presence of a
citizen-draft drives the size and intensity of the movement; it is
all about whose ox is being gored.

The Occupiers have no specific agenda
other than a demand for economic redress. They believe government can
and should provide solutions to their problems. They do not have
specific proposals, they only know their personal economies need
better prospects. They are petitioning the elites with their
grievances and they are in the streets because they have no access to
the system.

The political stalemate in Washington
is driving these disparate and chaotic movements. It is contained at
the moment to those at the societal margins and our leaders are
loathe to act, given the fact there are so few voters camping out.
Members of the shadow congress, the army of lobbyists that run
Capitol Hill, are not collecting fees from the Occupiers.

The pathetic charade of the
Super-Committee is almost scripted. When the committee’s deadline
arrives on the 23^rd of this month and the failure becomes
official, Congress will foist some new political snake oil on us. The
masses will dutifully swallow this dreck as the country will remain
captive to a determined minority. This paralysis will end only if
this economic malaise spreads from the sidewalks. The irony is that
the scruffy and determined activists are perhaps the best hope for
those comfortable kids in that classroom. Sooner or later, they will
be looking for the American Dream.

Those of us who have travelled to Greece know what a magical country it can be for a tourist. History, breathtakingingly gorgeous islands, and charming villages are just part of the charms of Greece.

So it pains me to see that this country has devolved into the scapegoat for everything the West has done wrong economically. I know the people there have inefficient business and governmental institutions. Citizens are not too hard-working and get to retire early and well. Unfortunately, most of this lifestyle has been financed by foreign creditors.

Lest we feel too smug about all of this, I think Greek economic behavior has not been much different that we Californians. We are the poster children for the famous Ronald Reagan diet, “Eat all of the chocolate you want, don’t exercise, and lose weight” To put it another way, we want services and benefits as long as someone else pays for it. In the case of the residents of Santa Monica and Athens, that means borrowing it from somewhere else.

We are all suffering through this financial morass and will continue to do so until the body politic accepts the idea of no free lunch. The Greeks just had less money and natural wealth to start with so they are the first to crash.

Californians in the post-Prop 13 era enjoyed 30 years of fake prosperity. All of us lived beyond our means and financed the folly with equity lines and foreign debt. Since we have little credit left and our equity lines are maxed out, the masses are clamouring for more government cuts. This is exactly the wrong path to take. We need government spending on many levels; on roads and not on senseless wars, on schools and not on sports stadiums, and on infrastructure and no public spectacles. Oh yes, the other shoe must drop, taxes.

I like the way taxes have been referred to by pols as “revenue enhancements”.

Last week, against the backdrop of the ten year anniversary of 9/11, I went to a military reunion in San Francisco.  The event was the 45th anniversary of class 1-67 of The Basic School. (yes, the T is capitalized) This was a group of 183 freshly minted Marine Second Lieutenants organized into a training company at Quantico, Virginia. The mission of The Basic School has not changed over the years, it is still a five month course in learning to be a rifle platoon commander.

Not that all of us became infantry officers, over half became pilots and the rest of us were scattered amongst many other crafts. This is a stellar group, 21 were graduates of the Ivies. 182 of us spent thirteen months in Vietnam. 16 died there and several more in training accidents and causes related to the war.

My roomie at TBS, Bob Schmitt, has been the guy to research people, organize the reunions, and write the newsletter. Bob was a Notre Dame grad and fancied himself a modern day Yossarian. His attempt to be as crafty as the central character of Catch 22 was a miserable failure as he ended up flying 424 missions in the back seat of an F4.

We know the whereabouts and fates of about 150 classmates and for the most part, everyone has done fairly well in life. There has been only one suicide that I know of, and he was probably tired from a life of constant physical pain resulting from wounds. The rest of us seem to be at peace and oddly enough there was only one retired person among the 25 at the reunion.

People who show up at reunions, and there have now been four spaced five years apart, are sometimes thought of as not representative of the class but in this case I think they were. These old warriors, when you poke them, have their tales and scars and this time around I learned even more about this group. Sometimes you have to get the story from someone else, the participant doesn’t want to talk about it.  The rest of know, we are brutally honest with each other. The emotions run so close to the surface you can feel it.

Since we parted ways in late 1966, most of us need to be reminded of names and faces at these reunions. Once we recognize and remember, we are as close as we were then, a bond that only those who did these things can know about.

To me the highlight of the event was at the banquet Saturday night. People were giving one and two minutes speeches around the room and a two tour infantry guy told a story in the third person.  It described a young officer, leaving the field for a hot shower, and flying eight hours to meet his wife in Honolulu for R&R. He told of how when they met they both recognized the gorilla in the room, that the 120 hour clock was ticking, the amount time they had before, as he put it, “saying goodbye or maybe saying goodbye for the last time.”

As he told this tale about this fictional officer and his wife, I listened to him but I was drawn to watching his spouse. She smiled up at him, both proud and happy. As the story went on to the part about the 120 hour clock, her face told anyone watching the rest of the story.     

So I was at the gym this morning on the bike. All of the cardio machine are facing and up against a wall of windows. In the morning, it is necessary to close the blinds so that one can see the television. So this guy walks in front of my machine, keeping in mind there are about 15 machines and only two occupied, opens my blinds without some much as an acknowledgment. Then he plops down two machine over and begins his workout. OK, I am almost finished so I will let this slide, but then I was overwhelmed by his smell–he must have just finished a cig or two before coming in the gym. He reeked so much I cut my workout short and left.

I know this is small stuff but come on. He was about my age but with wire rimmed glasses, long flowing white hair and matching beard. The goatee portion extend at least 4 inches below his chin. Maybe he does not have a calendar. In is not 1965 and Jerry Garcia is dead.

I wrote this early in the week and yesterday the Administration announced several far-reaching programs to shore up the price floor on houses. This is discussed below:

This year home prices and sales have slightly declined in most San Diego markets. Although the rate of foreclosures and default filings are lower than 2010, these numbers shed little light on the future of local residential real estate. Going forward I think we should use a different standard to evaluate the market ; winning should be defined as not losing. Price stability, with moderate or little appreciation, is the new benchmark of success in real estate, and this market will achieve that standard over the next five years.

This recession has gone viral. Most of the denizens of Western economies are in the woodshed, taking a licking for living large on cheap debt. In addition, First World governments have under taxed and over promised–plus the ugly hangover from ladling out too many fat retirement packages neither businesses nor governments can long endure. There is a direct line between allowing Greeks to retire at 58 with nearly a full salary and your neighbor’s underemployment. Like it or not, when French banks stumble everyone in this country is suddenly poorer.

In spite of all of this, I am optimistic about the safety and economic viability of San Diego real estate. Our central bankers are implementing policies designed to protect the existing price structure of real estate; this is needed to protect the nation’s recovering banking system.

The first of these is that mortgage and interest rates will be kept low for at least the next three years. The Fed can print money, as it has done with QE1 and QE2, and thereby push bond prices up and interest rates down. People getting new loans over the next few years and those with variable rate loans will be huge winners. I think this policy will remain in effect until the unemployment rate drops below 7%.

Second, the troika setting economic policy has figured out that the real estate correction has gone far enough and that prices should be stabilized. If real estate continues to deflate, there will be no meaningful recovery or job growth, perhaps leading to an American version of Japan’s Lost Decade. Ordinarily the economic impact of rising housing sales and prices has led the country out of past recessions. The customary monetary tool used to invigorate home sales is low interest rates, but this time around this usually reliable panacea has not delivered.

Already there appears to be a new policy amongst lenders to restrict the supply of foreclosed properties on the marketplace. Loan servicers are delaying foreclosures and lenders are holding seized properties in their inventory for a longer period of time. In addition, the idea that holders of failed mortgages, mainly FNMA and FHMC, should become long-term landlords is gaining political traction and if fully implemented would do wonders for arresting future price declines. None of this is going on without the implicit consent of the Fed and the FDIC.

The FDIC may also force lenders to modify their underwriting standards so that those who need newer and cheaper mortgages can qualify and avoid default. There is a natural reluctance at the Fed, not to mention Congress, to let the banks off of their short leash; we all know what happened last time they set the rules.

The Administration in late August proposed such a plan. It is based on recognizing the reality on the ground and two lessons from history which suggest these two approaches above could work. The Resolution Trust Corporation debacle of 1991-94 illustrates the foolhardiness of dumping failed properties willy-nilly on the marketplace. And during the Depression, the New Deal’s Home Owners Loan Corporation refinanced homes with generous terms and staved off thousands of foreclosures. When the agency was finished in 1951, it not only protected families and neighborhoods, it also turned a profit. It was a simple idea; give a temporary hand to those in need and collect the cost on resale.

Third, the Fed has a doomsday weapon– adjusting its’ inflation target. This is a way to stabilize house prices by discouraging strategic defaults. There is risk in a policy that will move up the target inflation rate to 4 to 6% , so it will be employed only as a weapon of last resort. This is an unilateral loan-write down for creditors, both foreign and domestic. They will not be pleased.

I have heard all of the arguments against these ideas, but the boat is foundering and it makes little sense to worry about the moral hazard of bailing out failed homeowners or the Tea Party aversion to big government. Owners of bad mortgages are loathe to manage property but we should make them do so. There is a qualified work force in place as there are thousands of licensed property management firms in this country. It may take ten years to bleed out hidden bank inventories, but that is a small cost when considering the alternative. The current strategy of thoughtlessly dumping seized homes on the market only depresses prices further.

Residential and apartment investments have far better prospects than everything else that competes for your investment dollars. I recognize renting appeals to many discretionary buyers, but the Fed is making home purchasing very attractive. Consider this: taxpayers will subsidize your house payment by allowing you to deduct mortgage interest and property taxes. The Fed will keep a floor under the current price levels by restricting the supply of bank-owned homes or by inflating the dollar. Prices have drifted to 2004 levels. So why wait?

You have probably heard the political joke going around, “Read my lips, no new Texans.” That was funny a week ago but with Governor Perry’s new poll numbers, one has to wonder about the state of science in country. Here is the de facto leading GOP presidential candidate, who has prayed for rain, does not believe in global warming and may even think the earth is flat.

Is it a wonder the Chinese and Indians are handing us our lunch? I often think how many Alzheimer’s victims there are out there that might have been saved because the last Texan in the White House placed his religious beliefs over science and humanity. Now we have a Bush II (I do not count the Good President Bush in this gallery of rogues) blowing in from the dry Texas plains. Oh, I forgot, the rain must be coming. Ricky Perry prayed on it. 

Us pawns, being along for the ride without being asked, are about to take a real beating in the markets.  Unless the Beltway Circus decides to be serious about matter, it is looking more and more than the country will be looking as some form of technical default.  Not that we will, this country would never default, the threat of such action is nothing more than a political tool.

At this moment the House has a bill that no Democrat will go along with which means we have nothing. This weekend will feature many late nights and political theatre but little real movement. If the statemate persists until the deadline, it could be nothing will happen and this will drag on for the rest of the month. I am certain Treasury will find a way to keep most functions running until there is some agreement.

The latest Case-Shiller numbers out yesterday merely reinforce what every professional in the residential real estate business knows already; this market has gone nowhere the past two years. Looking forward, prices of San Diego residential real estate will probably not be much different than today. Too many institutions have a vested interest in maintaining stability for some period of time. The fix is in.

All of the stakeholders have struck an unspoken bargain. The Federal Reserve Board will keep mortgage rates as low as the international markets will allow. Banks and other creditors will not dump their huge inventories of foreclosed homes on the market. Instead they will bleed their properties onto the marketplace in an orderly fashion, carefully watching the inventories of homes on the market. Lenders will also slow down the pace of seizing homes. They have decided this is in their best interest as reducing the number of defaults help prop up values in neighborhoods and of course reduces the headaches of managing, rehabbing and selling homes as bank-owned properties.

Buyers are also part of this deal. There is a consensus that prices and rates are relatively favorable. Risk in prices is built in to the bargain. Larger down payments and a financially strong buying cohort will insure against another colossal collapse; today’s buyers are stronger financially than the ones that bid up these prices in the first place. In short, new and returning buyers are the survivors and will have the means to keep their homes in the future.

The last bunch of failed owners who purchased in the Great Run-up needed only one small financial reverse to sink them and their investment. This will not happen this time around.