“By itself th[e housing market] slump is enough to trigger a U.S. recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession,” Roubini said. Housing has accounted, directly and indirectly, for about 30% of employment growth during this expansion, including employment in retail and in manufacturing producing consumer goods, he said.

In the past year, consumers spent about $200 billion of the money they pulled out of their home equity, he estimated. Already, sales of consumer durables such as cars and furniture have weakened. “As the housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy,” Roubini said.

In all honesty, this sort of possibility needs to be made a priority in election public debates asap.

There are ways to prevent “serious” recessions. The Basic Income Guarantee, if coupled with a Land Value Tax and taxes on Oil/Gas to get rid of the morass of tax-code, keep marginal income tax rates low and provide people emergency spending money to reduce the economic consequences of unemployment and to keep consumer spending high and deal with our serious foreign oil addiction.

But we need to be willing to take this sort of threat seriously and be willing to act and make adjustments soon. We could phase in the oil/gas taxes, so they wouldn’t be in effect during this winter and to give people time to get more fuel efficient cars and other stuff. In a worse case scenario, a serious recession could also be coupled with serious destabilization in the Middle East and a currency run on the US, not unlike what has happened in Asia or Latin America recently.

dlw

This will have implications for crop yields (1% of the world's energy supply goes to making fertilizer; N. Korea is starving to death because they can't get fertilizer), interest in your bank account (how can banks make money when every day in the future the businesses they loan money to have less energy with which to ship their products to market?), the structure of American and European cities, the ability to travel the world, the ability to ship food to distant places."

I believe him. I think it is a travesty that we only seem to care about short term solutions that keep the oil/gas prices lower temporarily. What we need to do in the US is phase in over the coming years a tax on oil/gas at EU-levels, coupled with income transfers to offset the impact and to make the tax politically feasible. This will delay the worse impact of the Peak Oil problem and give us more time to develop, in cooperation with the rest of the world, good long-term alternatives. It will also give us an important policy lever to use against oil-producing countries with human rights problems and may be a peaceful way to prevent more oil-motivated wars.

This needs to become a serious issue in the coming elections.

dlw

And if I'm right that V is Valerie transmogrified then it's an interesting piece of cultural/political subterfuge...

dlw

dlw

This idea is not completely new with me. Here is an article that describes how a similar idea was considered during the Clinton Admin. The bottom line is that

The projected annual rate of return on U.S Treasury securities held in the Social Security trust funds is 2.7 percent, after inflation. In contrast, stocks generated an annual return of about 7 percent above the inflation rate from 1900 to 1995. If past serves as prologue and stocks continue to significantly outperform Treasuries in the future, diversification would bolster the trust funds.

Now my idea has some significant differences from the above idea. Differences that address some legitimate concerns about the politicization of the fund and the use of its market power. US Mutual would target a 6% control of the US Companies in the NYSE. According to Wikipedia, that would make the targeted holdings .84 Trillion or 840 billion, approximately half of the 1.7 trillion that was in the Social Security Trust Fund at the end of calendar year 2004. This would be seriously larger than other mutual funds, like the Vanguard Group with only .1 Trillion in holdings. However, as a public mutual fund, it would not compete with other mutual funds.

It would be a new form of index fund that would be low-cost and have a wide diversification and have a low turnover in its long holdings(it would also have short holdings.). It would determine its weekly holdings using a simple algorithm that would use 29 weeks of publicly available NYSE weekly valuations and embody a conservative investment strategy.

The key to the algorithm is that it would use more robust median AR(1) statistics to predict the weekly log-return(=ln(1+return)) and its standard deviations. Log-returns would be used because they are easier to predict in stock markets and usefully underweight large gains and overweight large losses. It will make predictions conditional on the past week's values and unconditional predictions. It will combine the unconditional and conditional predictions, giving the unconditional predictions twice as much weight since their values would vary less on a weekly basis. The result would be predicted values of the median weekly log-return and its median standard deviations for all the US stocks that have been traded publicly on the NYSE for at least 29 weeks. An index will be formed that would weight the predicted median standard deviations twice as much as the predicted median log-returns.

Then, using predicted values of the total market capitalizations for stocks as weights, US Mutual will use 2/3rds of its investments to buy long on the top 20% of stocks based on the index formed. This would result in holdings of an average of 20% in these stocks. The individual stock holdings would be determined by taking the index values for the stocks bought and standardizing their index values and using the standardized values as weights.

US Mutual would also capitalize on the information in its algorithm by using 1/3rd of its funds to sell short(meaning we make money when the value goes down)on the bottom 5% of stocks evaluated by the index, with the individual levels determined by weights formed as above. What this would do is have US Mutual profit some from exerting some market power on unstable underperforming stocks that are likely overvalued. It would also help US Mutual to have a low beta, as it would buy long in more stable stocks (that likely have lower betas like Berkshire Hathaway), and sell short in unstable stocks (that likely have higher betas). This would hedge well against a worse-case scenario of a general downturn. It would also affect a general change in stock-market behavior, discouraging high turnover strategies that tend to increase stocks' volatility.

The algorithm described above is designed with the goal to determine holdings mechanically in a way that would be stable and easy to replicate. This serves to both keep the costs of the fund down and to prevent its "managers" from being corrupted or influenced in their stock-holdings. Attempts at arbitrage would be limited by how the limited levels of weekly fund turnover would be staggered over the course of the week, using algorithms that would make use of the information in the conditional predictions.

So, so long as the buy long holdings do not vary significantly over time(as could be verified easily using historical data), the considerable market power of US Mutual would serve to help stabilize the market. As for the impact of its short interests, there would likely be a transition phase where some unstable stocks would leave the market, but eventually the fund would simply bleed regularly the more volatile and overvalued stocks in the market, perhaps in exchange for helping to reduce the general volatility of the market. A reduction in volatility would attract more capital to the market and increase the growth rate of our economy. It would also make it easier for smaller investors and corporations to trade and raise capital on the market.

So that's the idea. We set up protections around the SSTF and allow it to grow by investing half of it in the US Companies in the NYSE. We do this with low overhead, using a strategy that hedges well against a general downturn. All that remains is to make the idea simple and compelling. And in the worse case scenario, whenever a Republican brings up the privatization of Social Security, we can counter with this idea, making them wish that they'd never brought up the subject...

dlw

It's not posted on the web at the blog of the union of Philippines journalists, but I have permission to repost it in its entirety.

NATIONAL UNION OF JOURNALISTS OF THE PHILIPPINES

www.nujp.org

Statement

July 19, 2006

KILLING OF MINDANAO BROADCASTER SHOWS GOV'T INABILITY TO PROTECT JOURNALISTS

Another colleague is dead.

Armando Pace, 51, hard-hitting commentator of Radyo Ukay dxDS in

Digos City, was felled on Tuesday, (18 July 2006) by two motorcycle-riding

men who shot him as he made his way home after hosting his program.

Pace was the 82nd journalist slain in the country since 1986, the 42nd

under President Gloria Macapagal-Arroyo's watch - the worst record of any

administration - and the ninth thus far this year, already two more

than last year's toll and with five more months to go.

Lest we forget, it was in 2005 that the country was given the dubious

title of "most murderous for journalists" for the 14 journalists murdered the

previous year.

News reports on Pace's death all describe him as a hard-hitting

anchorman who often attacked corrupt politicians and the illegal drug trade.

We will again point out, as we have done so in the past and, given the

trend, we are afraid we will continue to do so in the future, that the

utter failure of government and its security forces to stop the killings and

bring all those responsible to account has nurtured a culture of impunity

that emboldens those who ¯ officially or not ¯ wish to silence the truth and

stifle the free flow of information and ideas.

Whether Pace was killed by a crooked politician, a ruthless criminal,

or a government thug, the manner in which he was killed follows the all too

familiar pattern of motorcycle-riding gunmen that has become the common

denominator in the murders of journalists and activists.

Because nothing has been done against this modus operandi, killers of

all stripes and inclination have found what amounts to a convenient cloak

of anonymity.

This merely bolsters our contention and that of human rights

organizations that the continued refusal or inability of the very institutions and agencies mandated to protect our lives and liberties to fulfill their

sworn duties is tantamount to culpability.

Reference:

JOSE TORRES, JR.

Spokesperson

National Union of Journalists of the Philippines

09209010013

4117768

I believe that this could happen if we helped to save Social Security by starting a public mutual fund, US Mutual, like what I've described before.

The idea is that US Mutual would be a low overhead mutual fund that would use 28 or so weeks of data and conservative median log-return(=Ln(1+return)) predictions and their median standard deviations to rank stocks with an index. It would then use the same index to determine its long holdings in the top 20% of common stocks(weighted for total valuation) and short holdings in the bottom 5% of stocks.

It would exhibit economies of scale, targeting a 6% control of NYSE with 4% spread out over the top 20% and 2% focused on the bottom 5%. The selling short on the unstable underpeformers is what would reduce the overall volatility of the NYSE.

Some have brought up the issue of market power. I agree that the initial weeks of starting US Mutual would probably require expert assistance and maybe a little bit of persuasion, as the top companies would need to be reminded of how it is in their interest to maintain the stability of their stock value and the good will of the US gov't by not let the selling price for their stock rise up too dramatically.

It would be more of a matter of negotiation, a win-win situation for the companies and US Mutual that would ensure that the US public will benefit from these preferred stocks.

I think that it bears corroboration with historical data and simulations. I've already done some preliminary work that shows that median log-return regressions predict better than mean or median return regressions or mean log-return regressions. These stats are critical to the algorithm in that they help to keep the holdings patterns more stable so the levels of buying and selling of stocks on a weekly basis would be limited and US Mutual would use its considerable market power more as a force for stability than instability in the NYSE.

dlw

http://sodsbrood.com/antimani/2006/07/13/a-simple-thought-experiment-on-us-mutual/

It seems that US Mutual, in order to reduce the volatility of the NYSE and hedge against a worse case scenario of a general downturn, would need to reduce its guaranteed return. However, the system, as described at my main blog, would still be an improvement over the current social security system and have an advantage over other mutual funds with its lower overhead costs. One can also argue that the reduced volatility of the NYSE would be in the public interest for the promotion of greater economic stability.

dlw

I have been in contact with a Language Education grad student in the Philippines, George Bradford Patterson.

Here is the letter he sent me today.

the CIA is using protestant evangelical fundamentalist

missions as a cover for their subversive activities which is

contributing to

the destabilization of this country because it is TRUE! It is true and

all

of you should know this1 I absolutely refuse to sugarcoat the reality

of

what is happening here right now with journalists and activist,

including

church leaders, being slaughtered left and right by hitmen who are

perpetrating these atrocities with impunity. Absolutely no compromise

on

this point! It is a matter of principle and the truth, and the truth

must be

stated; even if it is uncomfortable for a lot of compllacent middle

class

North Americans to hear.This is the reality of the situation, and

militant

activists would articulate it much more forcefully! I have written

around

forty senators about this , putting my life in danger, in which my life

has

been threatened by an American CIA covert operative. You just do not

understand the situation...

I reiterate that you along with many others just do not have the

context

to really appreciate the urgency of this situation which is becoming

worse,

including the massive poverty and hunger due to these abhorrent

policies of

globalization, neoliberalism, and laissez faire/liberal capitalism

which the

Bush administration along with the other G7 industrialized countries ,

including the IMF, WOLRD BANK, AND WTO have thrust upon this beleagured

country. Agriculture has been virtually destroyed by these terrible

policies, contributing to the massive hunger and poverty; and it is

getting

worse and worse; as well as the mounting human rights violations and

repression in this country. Crucial industries, like the steel

industry,textile industry, and tire industry have been destroyed, thus

preventing the heavy industrialization to extricate this country from

from

marginalization and dependency. Dr. Alejandro Lichauco, an economist

and

journalist, who did his Ph. D. in Economics at Harvard, has written

extensively on this in the DAILY TRIBUNE. So we reiterate if you were

here,

you would understand much better since you would have the context to

truly

see the situation.

What you and others could do is to inform the honorable Senators

about

this grave situation. That definitely would help a lot. By the time

you do

this, if you do decide to do it; I might not be alive.

Gary Satre, an American journalist, who has lived here much longer

than me

will corroborate this to you. He is married to an Ilocano and he did

his

Masters Degree in Journalism at the University of the Philippines,

Diliman

where I am completing my dissertation in Language Education. He has an

intimate knowledge of this society, much more than me in many ways

since he

is a part of the masses who are being screwed left and right by virture

of

being masrried to an Ilocano whose late father would scoff at the

complacency of you and other middle class North Americans.

All of these issues are being addressed much more forcefully by

human

rights organizations and the civic society, including the Church;

AMNESTY

INTERNATIONAL along with the local branch that is headed by my dear

friend

Jessica Soto, the Executive Director of AI PILIPINAS, of which I am a

member. In fact, my lawyer friend told me how two of his clients are

in

hiding upon his advice, since their lives are threatened by hit men

associated with government security forces. And your government is

contributing to the mayhem by its meddling in the affairs of this

country!

Internatonal pressure will definiely help in relieving and ultimately

resolving the present situation. This is where you and your people can

come

in. It is up to all of you. And we stand by our previous positions.

We

will not give an inch because we are right; and ultimately we will

prevail.

I didn't clean it up to emphasize that it was a real email letter. I googled the names mentioned and they checked up, after a few spelling errors were corrected.

If you google search "Arroyo "political persecution"", you will find evidence that the current president of the Philippines is abusing her power seriously.

This is serious. We need to get on this, now...

dlw

I wrote back to him the following.

I think your ideas and mine can be complementary. I have a problem with basing the investing on "professional experts", inasmuch as there are (1) considerable problems with the potential for corruption, (2)simply too much variety across the wide range of stocks invested in the NYSE to compare and pick stocks based on qualitative factors,(3)Stocks aren't like probability distributions, they are subject to booms and busts due to psychological factors, including future expectations.

My approach would be a conservative strategy that would still improve the return, hedge well against a general downturn, and remove the potential for corruption by basing its holdings on relatively simple and replicable statistics.

I think it is compatible with having a defined-benefit pension entry age normal actuarial cost method. It would also maybe help during the imminent retirement wave of baby-boomers if we let some of the would-be illegal immigrants as guest workers continue to pay into Social Security and also receive the long-term benefits from US Mutual.

dlw

The rest of the idea is at my main blog here.

dlw

An example of the reliable statistics used is the total predicted NYSE market valuation. It would be based on the sum of the predicted total market valuations for all of its stocks that have been in the stock market for at least 27 weeks. The predicted valuation for each stock would be based on the median trends of their valuations from the previous 27 weeks. These predicted values would then be used as weights in the investment decisions and a simple panel-data regression that would be used to decide the weekly holdings of the mutual fund.

The secret to the algorithm, what would make it a conservative investing strategy, would be that all the stocks in the stock market would be valued on the basis of their weekly log-returns, the log of 1 plus the percentage weekly return in value for a stock. 26 weeks of data would be used in a simple mean regression to predict the next week's log-return for each stock. The weekly log-return would have several advantages over the weekly return for the evaluation of stocks. It would fit with what has been shown to be human nature in Prospect Theory. People tend to be more averse towards losses in wealth than gains in wealth. The log-return would weight losses more than gains and mute the importance of larger gains while increasing the importance of large losses in value. To illustrate this:a 20% loss would have a log-return of -.097, a 10% loss would have a log-return of -.046, a 10% increase would have a log-return of .041, a 20% increase would have a log return of .079. This measure of value would reward stable stocks and penalize unstable stocks.

The fund would then each week invest two-thirds of its funds, based on the target of maintaining a 6% control of the predicted total stock market valuation, in buying long in the top 20% of the stocks (weighted by their predicted total market valuations) and the remaining one-third would be used to sell short(making money for the fund off of a decline in stock value) in the bottom 5% of the stocks. This would reflect a chastened optimism that would hedge well against a worst case scenario of a general decline in the stock market value. The higher concentration in the selling short would be to compensate for their higher volatility. The specific holdings of each company in both groups of stocks(the ones the mutual fund would buy long on or sell short on) for each week would be based on a standardized value of their predicted weekly log-return.

This sort of strategy could easily be tested using historical stock market data, including the 1987 stock market crash, or even the Great Depression. Although the Mutual fund would likely perform better due to its considerable market power. I am convinced that if it targeted 6% control of the NYSE that it would save Social Security and provide more stability for the US Stock Market. It would maybe force out some of the more volatile stocks, discourage stockbrokers from trying to time the market, and reward long-term investment strategies like that of Warren Buffet and Berkshire Hathaway. I also think that the overall reduced volatility of the market would then attract more capital away from hedges like bonds so that it can be allocated more productively.

If this issue were paired with requiring companies to list compensation under employee option plans as a direct business expense, it would make a decent rallying point this fall for economically progressive candidates, perhaps especially in Conneticut.

dlw

dlw

dlw

The Basic Income Guarantee is explained well by the US Basic Income Guarantee Network.

It combines the virtue of drastically simplifying the tax code, making its future alterations more simple and transparent.

It affirms the fairness of a flat marginal tax rate that constrains class warfare and points to the need to raise more revenue through alternative means(like taxes on oil, advertising, contributions to politicians/parties, pollutant emissions...).

It also affirms the import of trusting the local community to hold people accountable for how they spend their money, instead of trying to regulate it through cumbersome fed'l regulations.

I don't understand why a progressive organization like TPMCafe can't foster more dialogue on this sort of issue!

dlw