Common Sense Added

I caught this from Gary Shilling:

“Conventional monetary ease is now impotent with the federal funds rate close to zero , the money multiplier collapsed and banks sitting on hoards of cash and over $1 trillion in excess reserves. Sure, large banks report to the Fed that they are easing lending standards for small business, but after the intervening financial crisis, many fewer potential borrowers are deemed creditworthy than in the loose lending days. Furthermore, the small business trade group, the National Federation of Independent Business, reports that 91% of small business owners have had their credit needs met or business is so slow that they don’t want to borrow. The Fed is pushing on the proverbial string.”

Makes sense. Easy to agree with. However, how come the economic types across the board never write about the obvious:

1. Empty commercial space is everywhere. What fills it up? When? Further, commercial space is being arbed away by the internet. Do movie theaters, sporting venues, book stores, electronics store, etc. survive in the face of home theaters and online shopping? The real question for me are empty stadiums. Small cities can’t support them. Jacksonville, San Diego, etc. have empty pro sports stadiums. Canary in the coalmine of future issues?

2. Everyone knows the Feds pulled out their credit card (funded by us) to pay off our credit card. Where is the economic development there? Sure, people can rap on about aggregate economic statistics, but to what end? If all economic activity is just Federal credit card spending, growth estimates and recession debates serve little purpose.

19 thoughts on “Common Sense Added

  1. A point about excess reserves: banks can invest directly too, lending isn’t their only option. Do they not see any investments worth the risk?

  2. I agree Ken, but I don’t see the next iPhone as innovation. Not saying you are saying that, but I think we need to get past the hypothetical as a country and get real.

    Unless we can make planes go faster, eliminate the need for fossil fuels or extend life — not sure where the innovation will come from that could any time soon pass the innovation of the internet/wireless.

    Look at MSFT. No innovation for 20 years, but all the capital in the world. What if companies are keeping cash because there is no where else to put it?

    In the face of that how does the average person who was trained to have a job …survive better than their parents and grandparents?

  3. Ken says: “Innovators can make an economy grow.”

    I doubt if innovators are driven by the desire to “make an economy grow”. They’re most likely motivated by their own self interests. The behavior of an economy emerges from the aggregate behavior of individuals and needs no explanation from the actions of anyone.

  4. Also, to get economic growth I don’t think we necessarily need revolutionary innovation. We just need new and better products and services. It’s true, new versions of products from corporate giants are not particularly innovative, but they generate billions of dollars in revenue, people buy them. That is economic growth.

    Alot of people don’t realize this, but in the last 10yrs, despite the dotcom bust and all the other problems, the economy actually grew about 30%. Even with the latest crisis we had what, one year of negative GDP growth? Despite all the “end of the world” talk we had a 5% overall drop in GDP? Man, are we spoiled as a country or what!

  5. I don’t care what the “numbers” say … residential real estate is dead on arrival. Commercial space? I have never seen more empty space across more cities. Typical jobs? We know the story there.

    Not to beat the dead horse, but the internet is arbing way the need for human capital/commercial office space at a breathtaking speed. There is no innovation that is counteracting that.

  6. As the internet eliminates the need for people and office space — and that is no hypothetical — what happens to those people and that space? Look ahead 5 years. 10 years. To me that looks great for anyone who understands that is where we are headed, but it sure looks awful for people betting on the tide rising (again as the recent past) and just carrying them along with society wide benefits.

  7. The market will clear one way or another.

    Innovation occurs naturally, or else we’d still be living in what we consider hovels, but would have been normal 100 years or a 1000 years ago. We just don’t feel it’s innovation, but things change, and we won’t really know until it’s taken for granted.

    People who are hungry enough, literally or emotionally, will find new occupations or create new opportunities out of sheer necessity as well as imagination, or they’ll disappear. The Lindsey Lohan self-denial (a/k/a “I don’t have an addiction”) also present in all real estate markets will resolve itself one way or another, with all paths possibly involving pain for someone, investor or taxpayer, in quick fashion or dragged out over time. Empty spaces get redeveloped or abandoned. Sometimes the “true” price is zero and then the market clears at last, maybe also for “LL” and CRE. Who knows?

  8. Fair enough Ed, but we have an idea how things can go when we look at the Nasdaq for the last decade and Japan for the last 20 years. Meaning, yes, in the long run you are right about prices — question how long is that?

    As far as innovation…it is still up against the Internet arbing away human capital and office space. No one anywhere is talking about that.

  9. Michael: You’re quite right to ask “how long” and I just don’t know how long it takes but I do agree that the Internet arbitrage definitely helps those who are NOT betting on the rising tide carrying “old” boats (and benefits). I’m grateful for the arbitrage, as it has been helpful for my situation, but unfortunately many others are not set up to benefit from the changes.

    I remember reading about and admiring a computer company with a small group of employees, 37signals, who appear to benefit from what you’ve observed. They don’t need a lot of office space but they have created a significant business and brand name, without requiring an army of people or a big fancy building or corporate park to house them in. I have a feeling that is only growing, as a business trend, so you’re probably right with point #1 that you made above.

  10. “not sure where the innovation will come from that could any time soon pass the innovation of the internet/wireless.”

    I’ve been saying this for a couple of years now…where’s the new boom industry? What’s coming that would be big enough that it would make a respectable dent in the unemployment rate ? Cuz I just don’t see it (it ain’t green jobs). The Big 3 places to look are still Biotech, Nanotech, and Robotics. None of these industries are going to require massive hiring because IT departments are finally doing what they’ve always promised..leveraging IT resources to run leaner companies. And the people who DO work in these 3 industries are highly educated and trained. Seems to me this points to even more disparity of wealth in the future.

    And I really liked your point about commercial real estate. Stadiums and multiplexes are dinosaurs (as are many entire suburban areas). 3D movies and art films can potentially keep some of the movie houses open, but not enough to make a difference. I’ve always thought sports stadiums were dumb, at least for the tax payers. Multifamily housing is fine though, at least in my area (Republic of Texas). Disparity of wealth is going to help multi-family property (low to mid-range end of the market). Mobile home parks will be fine as well. Hmm maybe we should be investing in companies who make tents and camping equipment.

    I do agree that people who are “hungry” enough will be fine; they will innovate..but that’s always true, isn’t it? But who says that these innovators are going to need employees? If you eliminate most of your employees then you don’t need buildings, air-con, or in-house massage therapists.

  11. Wise points Gene.

    I remember thinking in 1995 after Netscape had gone public — wow this is going to radically change the need for office space. 15 years later…it is finally starting to happen.

    Also thought it would ease traffic congestion. Not sure if that has happened yet in major metro areas!

  12. If you’re wondering why unemployed zombies in America are wandering the streets past boarded-up industrial space, go to China! Seriously! It will blow your socks off. Thousands of towers going up, high tech everywhere, construction, jobs, environmental programs occurring at breakneck speed (the air in Tianjin went from unbreathable to blue sky in 4 months).

    If ever there was proof that the tide of economic power has turned this is it. Asia is no longer just cheap labour…they are coming up with their own innovations and investing in education to back it up. For example, there are more Chinese kids in private school than there are students in the US. That’s what happens when 2 billion plus people (Asia) grow their economy at 9% or more.

    While America plays politics and the blame game, Asia is getting on with business…better education, secure supply of raw materials, improved environmental standards, better living conditions for their people, more powerful military, greater world influence….and most importantly, lending money to their lazy bum brother-in-law, the US.

    Whenever I hear someone say, “The US taxpayer paid for that,”, I like to remind them that the Chinese paid for it. And beware the golden rule: He who has the gold, rules. The US will have to suck up to its bankers just as the countries of the world sucked up to the US when they were the banker….it’s already starting to happen.

    The US has an education deficit that has led to an innovation deficit…I hope we can catch up.

  13. I’m glad you brought up ReWork from 37signals, a great book! A while ago, I ordered it right after listening to a lecture, streaming over a phone, riding in a friend’s car. That same week, by coincidence I listened to a lecture, online, from Jason Fried at a TED-sponsored event.

    I also agree with Gene’s point about bio/nano-tech, and the potential rise of new “machine” industries, (biological, very small or autonomous) which could create a new class of jobs. He’s also right at hinting that the wealth effect is unpredictable (re:lean hiring), but I think these emerging industries may spawn complementary industries & services and hence new “careers” I can’t conceive of.

    My concern about the limits of prediction, goes beyond avoiding it in trading, as I think it may apply in broad macro concepts. A century ago, “experts” worried about the “pollution” from horse-drawn carriages overwhelming New York in the early twentieth century, but within less than a generation, automobiles and a class of automobile-workers emerged. A century later, only tourists take carriage rides and carriage houses have turned into apartments & homes.

    The pollution problem of petro-powered automobiles seems to have been already dented a little bit by the Internet’s ability to reduce travel needs, and that’s exacerbated further by the potential rise of new power systems for transport. An example is the Internet’s impact on postal and fax-related services, since the Internet is a faster & cheaper substitute for sending many documents. The arbitrage there: Delivery staff and fax machine makers have given way to programmers, printers & paper for hard-copies, and business budgets are redirected to other expenses or to allowing for more profit.

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