Nostradoofus

Americans — and especially English-language media — commonly confuse wealth with prosperity. A primer:

• Prosperity is how much you make. Wealth is how much you have.
• Prosperity is revenue. Wealth is assets minus liabilities.
• Prosperity is what America has (high GDP per capita). Wealth is what America doesn’t have (we’re a net debtor, i.e. negative equity).

Once you make this distinction clearly in your mind, you see the error everywhere. For example, consider this Reuters article about subprime lending in expensive neighborhoods. Reuters mistakenly refers to overleveraged owners of expensive homes as “wealthy.” This is obviously wrong, since the source of their problem is insufficient equity, i.e. insufficient wealth. They are prosperous, but spendy, and hence not wealthy enough to stay in their homes.

Discovering a reasoning error is often enough to change behavior. If the wealth/prosperity distinction were clearly understood by more Americans, we would grow rapidly wealthier. China’s government and citizenry understand the distinction, which is a big reason they are advancing so fast.

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The GSE conforming mortgage limit, which went unchanged for 2008 — and which regulators currently insist is immutable and untouchable — will be raised or eliminated within 90 days.

How could an about-face occur so quickly? Because it is the style of this presidential administration to recognize emergencies late, initially deny their existence, then respond abruptly in a way that (i) benefits wealthy patrons and (ii) has no regard for future consequences.

The White House mortgage bailout plan of December 2007, for example, mainly bails out mortgage servicers, not mortgagees. By incentivizing hapless homeowners to continue paying teaser rates on homes with negative equity, defaults are spread over a longer period, allowing servicers to manage them more profitably. The loser is the mortgagee, who is led to believe he will somehow recover an investment that is already lost, when in fact his most logical action is to default or do a workout with the servicer.

With that in mind, the basis for today’s prediction is that subprime fallout has reached the prosperous (note: the Reuters article referenced here confuses “wealth” with “prosperity,” a common error in America). There was a brief window during 2005-2006 in which a family with an income of, say, $250,000 could “afford” a $2m home with no money down. Their situation is now every bit as untenable as that of a blue-collar family in Cleveland: they cannot qualify for a fixed-rate refi, because their income is too low; they cannot sell, because they have no equity; but they cannot stay where they are, because the payment reset will kill them.

Suddenly, election fundraisers are no doubt hearing, “I can’t donate to your campaign because I can’t afford my mortgage.” This is a problem the currently broken GOP can understand. We should expect White House-controlled regulators to drop everything and look for a quick fix. Allowing Fannie to hold mortgages on homes in Greenwich, Palm Beach and Newport Beach, which would drive fixed rates down on large mortgages, is such a fix.

Should it be done? Probably not. Will it? Yes. There are few other options. You heard it here first.

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This blog has previously chronicled Hotmail’s unsuitability for business. Now, at last, we have a solution to Hotmail’s error-prone spam filter.

To restate the problem: Hotmail has a terrible spam filter, which makes it hard for a legitimate business to deliver mail there. Hotmail misclassifies spam in both directions, but mainly rejects too much legitimate mail, failing to make the most obvious, basic inferences from user behavior. For example, if a user marks a message from A as “not spam,” then any other mail engine would assume all future messages from A are not spam. Not Hotmail. It doggedly continues to mark all mail from A as spam. Worse, every message in the spam folder is deleted without warning after only 72 hours, making it impossible for a legitimate e-goods business to prove delivery.

My efforts to register with Microsoft as a legitimate sender, via SenderID and other initiatives, were ignored. MSFT appears not to actively support these initiatives, and they certainly do not respond to inquiries. What to do?

Google Apps.

Google Apps provides hosted email, using Google’s mailserver to send your messages. Because Google is too big to ignore, Hotmail dutifully delivers whatever you send. Done.

Now, if you are a spammer, this probably will not work. Google will catch you and shut you down. But for legitimate senders, this is a total solution that costs $50 per year.

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(Contributed by Richard C Hsu)

A woman was waiting at an airport one night,

With several long hours before her flight.

She hunted for a book in the airport shop,

Bought a bag of cookies and found a place to drop.

She was engrossed in her book, but happened to see,

That the man beside her, as bold as could be,

Grabbed a cookie or two from the bag between,

Which she tried to ignore, to avoid a scene.

She read, munched cookies, and watched the clock,

As the gutsy “cookie thief” diminished her stock.

She was getting more irritated as the minutes ticked by,

Thinking, “If I wasn’t so nice, I’d blacken his eye!”

With each cookie she took, he took one too.

When only one was left, she wondered what he’d do.

With a smile on his face and a nervous laugh,

He took the last cookie and broke it in half.

He offered her half, as he ate the other.

She snatched it from him and thought, “Oh brother,

This guy has some nerve, and he’s also rude,

Why, he didn’t even show any gratitude!”

She had never known when she has been so galled,

And sighed with relief when her flight was called.

She gathered her belongings and headed for the gate,

Refusing to look back at the “thieving ingrate.”

She boarded the plane and sank in her seat,

Then sought her book, which was almost complete.

As she reached in her baggage, she gasped with surprise:

There was her bag of cookies in front of her eyes!

“If mine are here,” she moaned with despair,

“Then the others were his and he tried to share!”

Too late to apologize, she realized with grief,

That she was the rude one, the ingrate, the thief!

(Contributed by Richard C Hsu)

Once again, the Fed has seemingly come to the rescue of the stock market. According to today’s New York Times, “presenting a bleak picture of a deteriorating national economy, Ben S. Bernanke, chairman of the Federal Reserve, strongly suggested on Thursday that the Fed would cut interest rates soon, perhaps by a large amount.” While Wall Street welcomed this with open arms by rising today, what people fail to realize is what worked for Greenspan after the Internet bubble burst won’t work for Bernacke after the housing bubble burst.

The reason that it worked for Greenspan is because homes had appreciated (along with the stock market) during the Internet bubble so there was plenty of equity lying around to deploy when interest rates were lowered. People could use their equity homes as an ATM in order to maintain spending and thus keep the economy going. Now it’s different: the raison d’etre for the bursting economy is precisely the DEPLETION of home equity so when the Fed lowers interest rates, there will be no equity to spend.

If the Fed tries to lower interest rates too aggressively, it will use all of its bullets and then what will be the stock market’s safety net?

Long-term real median productivity growth per capita is the perfect economic objective. It creates a simple objective function to measure all policy options.

Yes, growth should be distributed relatively evenly. Yes, there should be equality of opportunity. But all of that is contained in the above definition.

Median is used instead of average, because it makes the middle class a mathematical necessity. Equality of opportunity is similarly necessary to increase the median (though not necessarily the average).

“Long term” is a required qualification, because it prevents dumb short-term stimuli, such as fighting foreign wars to increase domestic employment.

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…if you place no value on your own time.

On the other hand, if your time is worth anything meaningful, the Mac is cheaper, because of the time saved in fiddling with printer drivers, software updates and other compatibility problems.

For a professional, the difference is dramatic. Saving 1 work hour a month is to save thousands of dollars per year.

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Much has been written about the speculation on whether the current economy is headed into a recession. Between the mortgage crisis and the inauspicious start of the market dropping 200 points on the first trading day of 2008, all signs seem to point in that direction. However, if there were any doubt, here is the nail in the coffin: this is an election year. Markets do not like uncertainty and this is the first time going back to 1952 when the Vice President of an incumbent President was not the default nominee for the outgoing party. Regardless of what the economy ultimately bears, the uncertainty of the election will cast a long shadow. Don’t look for any real legs in the market until after November.

(Contributed by Richard C Hsu)

My brother and I happen to work in the same industry and we recently got nearly identical new jobs. My boss turned out to be really difficult and as I struggled on a daily basis dreading to go to work every day, my brother was doing very well at his, getting lots of praises and even getting a mid-year bonus for excellent performance. And while I knew (intellectually) I was supposed to feel happy for him, I found myself becoming very envious which, in turn, actually made me feel worse about my own situation. I began to think, “why is the fact that his job is going so well affecting my attitude on my job (and life) when it has no impact whatsoever?” That is when I realized that the source of my envy was actually from a lack of empathy and that it is much more difficult to empathize with someone’s fortunes than misfortunes.

The reality is that empathy is far easier to feel when someone is having less fortune than you. When someone else loses a loved one, becomes ill or experiences some other tragedy, you empathize easily because you feel grateful to God for all your blessings – in other words, by putting yourself in their shoes, you realize your own fortune. However, it is much harder to put yourself in their shoes when they become a millionaire, buy a big house or land a high paying job. There is an old saying which says “nothing is as infuriating as seeing your neighbor get rich” but if you can truly be happy for someone else’s fortune, you have achieved the ultimate form of empathy.

Equity investors often feel obligated to remain fully invested, because equities have a much higher average rate of return, at least historically.

But you can think of cash as an option, conferring the right, but not the obligation, to pick up assets cheaply during panics. Unlike other forms of option, this one pays you a premium, and never expires.

This option is only useful if you can tell the difference between a cheap and an expensive equity.

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