House price stability via direct government intervention

A comment I made here about the Australian housing bubble:

If the government is serious about cooling off house prices they need to be a little bit more proactive and not just focus on demand but also on supply. If the government can enter a market on the demand side by fiddling with tax laws and tax rates and, through the Reserve Bank, interest rates and the money supply, then perhaps they should also enter a market on the supply side as well.

This would mean that the government (at all levels, but mainly Federal) would actively build properties for the purpose of selling on the open market. With an increase in property supply, prices are more likely to cool off. Moreover, government built and owned housing could be refrained from sale in order to prop the market up if it ends up crashing. This would require counter-cyclical economic behaviour by the government since it would involve selling properties when prices are high and holding back on sales when prices are low. The government could even choose to purchase private properties on the open market.

Of course the goal of such an ongoing intervention in the housing market would be to maintain price stability and to prevent booms and busts. We don't want overpriced housing but we don't want a crash either. In a sense such an intervention would be akin to monetary policy except it is aimed at a specific market rather than the entire economy.

Nevertheless, affordability should be a major goal. House prices at the moment are ridiculous and a correction is needed. Two metrics would need to be used to determine fair property value. The first being the rent/house price ratio which, according to The Economist, shows Australian houses to be 50% or more overvalued. This metric is similar to the p/e ratio used in the share market. The second ratio should be a wage/house price ratio to ensure that house prices do not overshoot the owner's ability to repay it.

Of course such an intervention would be a radical departure from policy since the 1980s, yet in essence it is simply another way to maintain price stability by intervening in the market. Similar interventions in other parts of the economy (eg the share market) could also be made to prevent boom/bust cycles in specific markets.

This is an idea that's been floating around my head for a while: Price Stability to prevent unreasonable booms and busts may not just be solved by monetary policy (changing interest rates) but also by direct government intervention in specific marketplaces that would aim at both supply and demand.

For example, to adjust demand, the government could offer tax incentives or subsidies for buyers - which is what Australia does with Negative Gearing and the First Homebuyers Grant. To increase demand, more subsidies/tax breaks could be given; to decrease demand, tax increases or levies could be put into place. The government could also adjust demand by direct purchases or direct selling.

To adjust supply, the government could enter the market and simply create more - in the case of the housing market this would mean the government buying up land, building houses and then selling them.


Replay Gain sounds good

Just recently I converted all my music files to include Replay Gain. This now means that my music has been made "equal".

But allow me to explain just what is going on.

Have you ever noticed that one band/CD sounds "louder" than another? And that the "louder" music is actually newer? Well, welcome to the Loudness War.

Over the many years of the recording industry, bands and producers have had to make judgments over how loud music should be. Since increased volume comes at the expense of quality, earlier musicians tended to record their music at lower volume - even musicians and bands known for creating "loud" music. In the early 90s, however, the music industry discovered that albums/songs mixed at a higher volume stood out more on the radio and were more likely to sell. With the secret out of the bag, recorded music was released at higher and higher volume as the industry competed against each other to sound "better".

And those "remastered" CDs of classic albums from long past? They were simply made louder. That's all.

It occurred to me that something was up when one day I was listening to "Buy Me a Pony" by Spiderbait some years ago. The song is 1 minute and 36 seconds of searing, flammable rock'n'roll and was one of my more favourite JJJ songs back in the day. Following this song (on a compilation CD I had made of my own music collection) came "Anarachy in the UK" by The Sex Pistols. Back in 1976 this was an incendiary punk song but after listening to "Buy Me a Pony" it sounded pedestrian. More than that, it was soft. I knew that something was wrong. The same thing afflicted my Midnight Oil collection when played in comparison to Rage Against The Machine.

Numerous thoughts appeared in my head as to the explanation. One was that the recording techniques of newer bands were far superior to those from the past. Another was that the older music simply sucked more and the newer music was better. It came to a head when I bought Psychocandy by The Jesus and Mary Chain. I had heard that this was a seminal album, responsible for influencing all sorts of 90s grunge and alternative rock music. When I first began listening I was convinced that I had purchased a dud CD. The music was so soft that it sounded as though the band were playing underwater. I searched the internet, first to see if anyone else had bought a dud CD, then (once convinced that the CD was not a dud) anyone complaining of the bad mix. Nothing.

It was then I discovered the facts behind the loudness war, and I felt cheated. Increasing the volume on tracks made music unequal and made it appear "better" than what it was. Newer bands and musicians were "cheating" by not allowing their music to be listened equally to older music (though, to be fair, it was obviously record companies that were pushing this).

The workaround for this is simple: Turn it up. If I want to listen to Spiderbait and The Sex Pistols equally, then I turn down Spiderbait and turn up The Sex Pistols. If I want to listen to The Jesus and Mary Chain properly then I turn it up in comparison to other music. But of course this requires manual control - something not at all commendable in this day of digital music players. So. I thought. Surely there is a way for computer software to determine how loud a track should be and to simply add tags to the files, and have your music player adjust accordingly? Yes. Someone had thought it up years ago.

The first thing to do is to have software capable of analyzing the music files and then applying the Replay Gain tag to it. I have done this with easyMP3Gain, a free open source gui program that uses a variety of other programs with it to work (mp3gain, aacgain and vorbisgain). All I did was add the folders and tracks of my CD collection, analyze them and change them accordingly - a process that took quite a few hours but is now complete. Here's a screenshot of three tracks  I've already mentioned:

As you can see, "Buy Me A Pony" has a track gain of -10.10, which means that in order to make the track equal, the program has lowered the volume by 10 dB. This is not a "permanent" change to the sound - all it does is add a small tag to the file. If you listen to the file on equipment that uses Replay Gain, it will automatically lower the volume. If you turn Replay Gain off, or if your media player does not support Replay Gain, the song's volume will be unchanged. You can also see there that "Anarchy In The UK" and especially the song by "The Jesus and Mary Chain" have very low track gains, which mean that they would've sounded "soft" in comparison to "louder" tracks.

Of course if you're going to try this out you also need a media player capable of Replay Gain. I use Amarok on my PC and use Rockbox on my Sansa Fuze and both have Replay Gain. If your media player does not have this feature then, as I've pointed out, the sound of your media files will be unchanged even after having the tags added to the file.

So what's it like to listen to? It's great. Suddenly Bob Dylan is competing with Them Crooked Vultures and The Rolling Stones are competing with The Eagles of Death Metal. Dylan especially is doing well in grabbing my attention - something he always struggled to do.

At this point in time I have no desire to go back to what it was like before. I am enjoying very much the experience of listening to music that has been adjusted by Replay Gain.

Note: easyMP3Gain has a number of annoying bugs which I was able to work around. The key to using it is to never "scroll down". And that guy with the bass is Steve Queralt.


US Recession Indicators - May 2011

Net Monetary Base vs Inflation (spread)

The growth of the Net Monetary base (M0 minus excess reserves) over inflation has been above the historical average since September 2010 and has increased even further with an April reading of 536. This is an increase from last month's reading of 529. Despite the high reading of 2011 Q1 over the average, GDP growth for this period was only moderate (confounding my own predictions of substantial growth).

Inflation readings in April continue to grow. The index reading of 224.433 implies annual inflation of 3.1% but the annualised monthly figure was 5.1%. Prices since December (220.186) have increased by 1.9%, which implies an annualised inflation rate of 4.6%, still uncomfortably high. As 2011 continues the momentum of these high monthly figures will translate into higher annual inflation.

Since the introduction of QE2 in November 2010, the net monetary base has increased faster than inflation. This unconventional policy by the Fed continues to provide the conditions for good economic growth.
Note: A negative result implies that inflation is growing faster than the money supply, an event which indicates that a recession will occur within 1 to 36 months (with an average of 12 months)
Note: A Decline in annual Real GDP per Capita is my definition of a "recession"

Data Series:
St Louis Fed


Federal Funds Rate vs 10 Year Bond Rate (spread)

The 10 Year Bond Rate has increased over the past few months while the Federal Funds rate remains at near zero. The April spread comes in at 336 basis points, well above the historical average and safely in positive territory.

Note: A negative result implies a highly restrictive monetary environment, an event which indicates that a recession will occur within 4 to 39 months (with an average of 22 months).
Note: If both the first and second graphs are negative at the same time it indicates that a recession will occur within 1 to 21 months (with an average of 11 months).

Data Series:
St Louis Fed



Real Interest Rates

Inflation in the past four months has picked up considerably, which means that Real Interest Rates in April dropped further to -3.0% - well below the historical average of 1.6%. This is now the 18th negative month in a row.

Since 1955 there have been five long periods of negative Real Interest Rates:

  • 1957-12 to 1958-10: 11 months (average -1.4%)
  • 1974-09 to 1977-09: 37 months (average -1.9%)
  • 2002-10 to 2005-04: 31 months (average -1.1%)
  • 2008-01 to 2008-11: 11 months (average -2.1%)
  • 2009-11 to 2011-04: 18 months (average -1.7%)

Note: Real Interest Rates are another way of measuring monetary conditions. While inflation implies that cash by itself is losing its value, a negative real interest rate implies that cash accounts in banks are losing value as well (even while earning interest). The IMF strongly recommends that economies keep real interest rates positive to preserve the value of money and to prevent investment bubbles from occurring.

Data Series:
St Louis Fed





Market Cap heading for adjusted US dollar fall?

I've adjusted the Russell 3000, an indice that measures market capitalisation, by the value of the US Dollar as measured by the USDX index, and I found this interesting thing:

Financial analysts have often used little thingys like lines of resistance or something like that. I don't fully understand it but it seems to show that a potential high has been reached and that maybe, just maybe, there'll be another drop. In the context of this particular graph, it would be either a drop in the value of the US Dollar or a drop in the value of the Russell 3000, or some combination of both.