Explaining Southern California's economy

Why Ron Paul and Mark Spitznagel will not go quietly into the Republican night

Ron Paul Begins Final Campaign Swing Through Iowa Before Caucus

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Ron Paul speaks during a campaign event. He plans to go to the Republican National Convention in Tampa and be placed on the nominating ballot.

Mitt Romney may be the presumptive GOP presidential nominee, but Texas congressman Ron Paul never planned to go away quietly before the Republican National Convention in Tampa in August — and neither did one of his staunchest supporters, L.A. hedge fund investor Mark Spitznagel.

It’s partly Spitznagel’s doing that Paul held out for delegates at one of the campaign's final acts, the Nebraska state Republican Party Convention, which took place a week and half ago, more than a month after the state's primary. (Paul failed to gain a plurality, dooming his chances at speaking in Tampa.) All along, the hedge funder helped keep Paul in the race, both by raising money and by providing the campaign with intellectual oomph.

Spitznagel, who runs Universa Investments, which he founded in 2007, lives in Bel Air and operates out of an office in Santa Monica. Why is the Michigan native so far out west, anyway? After all, hedge funds are supposed to be in Connecticut. Or at the very least, Manhattan. That wasn't Spitznagel's scene. "I wanted to get out of that groupthink of Wall Street," he said on the phone recently. "Everyone there is crammed into a handful of blocks." But it's perhaps more than just the non-NYC quality of L.A. that has made it a comfortable place for Spitznagel. 

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Is the bottom history? Southern California home prices continue to move up

Long Term Mortgage Rates Fall To Historic Lows

Justin Sullivan/Getty Images

Pedestrians are reflected in a window as they walk by a sign displaying mortgage rates inside a Bank of America office on June 7, 2012 in San Francisco. Mortgage rates are at record lows and home prices are rising in Southern California.

In April, Southern California saw a 3.6 percent year-over-year increase in the median house price, to $290,000, according to DataQuick, a company that tracks housing data. In May, that trend — if you can call two consecutive months and trend — improved: the median price moved up 5.4 percent, to $295,000.

The good news here is that we're no longer seeing price deflation. In March, were weren't seeing very much of a year-over-year price decline — it was a barely perceptible 0.2 percent. But it was there. It was worse in February. In fact, the median price didn't increase in Southern California for two years: the April uptick was the first sign of life.

But before we get to excited, it's worth noting that prices are still dauntingly off their 2007 highs. That was a bubble, of course. But what we need to see now is a sustainable trend of year-over-year price increases. This will remove the risk of a return to deflating home prices, which can be reinforcing: buyers expect prices to fall in the future, so they don't buy today, and that creates a disastrous spiral. It doesn't matter how far interest rates fall. Savvy buyers avoid investing in a declining asset. Smart buyers invest in a rising asset while it's still cheap and they can borrow cheaply to buy it. 

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Ben Bernanke tells Congress that we need negative interest rates

Bernanke Testifies Before House Financial Services Committee

Chip Somodevilla/Getty Images

WASHINGTON, DC - FEBRUARY 29: Federal Reserve Bank Board Chairman Ben Bernanke testifies before the House Financial Services Committee on Capitol Hill February 29, 2012 in Washington, DC. Bernanke was testifying about the Fed's Semiannual Monetary Policy Report. (Photo by Chip Somodevilla/Getty Images)

Federal Reserve Chairman Ben Bernanke testified this morning in front of the House Financial Services Committee. Reuters has a nice, brisk summary of his main responses to questioning from members of Congress. There were two very interesting exchanges, resulting in some cryptic replies from Big Ben. Here's the first, on interest rates, which the Fed wants to keep as low as possible through 2014:

It is arguable that interest rates are too high, that they are being constrained by the fact that interest rates can't go below zero. We have an economy where demand falls far short of the capacity of the economy to produce. We have an economy where the amount of investment in durable goods spending is far less than the capacity of the economy to produce. That suggests that interest rates in some sense should be lower rather than higher. We can't make interest rates lower, of course. (They) only can go down to zero. And again I would argue that a healthy economy with good returns is the best way to get returns to savers.

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Visual Aid: What's dragging down the mortgage market

There are plenty of homes for sales, both in California and the nation. But new homes sales fell again in August, continuing a six-month trend of decline. What gives? Interest rates are at historic lows, and Federal Reserve monetary policy for the past two years has been designed to keep them there — and drive them even lower. The above chart, from the Federal Reserve Bank of Cleveland, is telling. To sell a house, you need three things: a seller, a buyer — and a bank that will write a mortgage. What we have right now is a distinct absence of banks willing to make loans, or only willing to make loans on restrictive terms. Until that changes, we're looking at below-average mortgage-origination levels for a while.

Also note that refinancing originations don't look too good, either. This is proof that plenty of borrowers are too far underwater in their homes to make refinancing an option. 

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