The Yield Driven World

It is becoming increasingly clear in this country that we do not care one bit about our children, their children, or their children’s children.

When I say we, I mean Americans.  

Republicans, Democrats, Whites, Blacks, Catholics, Jews, Attorneys and Firemen alike have continually kicked the can down the road (whether as taxpayers that elect legislators, or as legislators themselves).  Blaming any of these people individually of course is more effective at creating arguments than it is solving problems, so being an argumentative lot, we tend to blame each of them whenever it is convenient.  Unfortunately, that doesn’t actually solve the problem at hand, which is in essence, a very simple one:  Marginal cost exceeds marginal revenue in everything government does.  If this were to happen in a firm, the firm would reduce output until marginal cost was equal to marginal revenue.  However, legislators can’t do that and continue to get elected, so they continue to increase output and further widen the MC-MR gap.  This is very stupid.

What it means for us as Americans though is that at some point, one of two things will happen:

1) Shutdown condition.  Again, in private firms, if revenue received from a sale of a good/service cannot cover the variable cost of production of that good/service, the proper course of action for the firm is to shut down.  Unions be damned.  Applied to government, a program that cannot cover its variable costs from new tax revenue it generates should be immediately revoked via new legislation.  I haven’t done any formal studies, but it is probably safe to say this is not how government operates.

2) Asset classes and currencies will have wild fluctuations in their values relative to what we currently think of as normal.

Since the second scenario is far more plausible than the first, it is probably worth considering what we should do to survive in that scenario.

Outside of a “Guns and Gold” doomsday approach, it is slightly more practical to consider that values of assets are no longer as important as what they can yield/produce.  A farm can produce crops, cattle can produce meat, and houses can produce rent, so long as people continue to prefer food and shelter to famine and homelessness.

So if we take it as a given that housing can be viewed as a yield producing asset class, it is important to note that houses are not currently valued based on what they yield.  They are currently based on the retail price an owner occupant or non-owner occupant investor is willing to pay.  This makes housing different from other asset classes… most markets are either determined by what the risk/yield equilibrium determines, or by what a retail buyer is willing to pay.  Typically they do not switch from one methodology to the other based on the market participants.  But housing is doing precisely that, right now, as we speak.

If housing is switching to being a yield driven market, then there is probably a housing product that is best in breed at producing yield.  There are a lot of arguments to be made for different markets, but the murder capital of the country (Flint, MI) is probably a good place to start.  I will outline its outstanding ability to produce yield in an annoying amount of detail in future posts, but suffice it to say that I have elected to test it out as a yield producer, and the initial results have been outstanding.

As you can imagine, there will also be some interesting anecdotes that come up in the world of $5,000 houses, and the people that rent them.

Check back soon!