Recent Articles

Optimistic Sign #8: Traffic

Categories

I've noticed in the past few weeks that morning rush hour traffic has been getting worse.

Now, my commute is not very long (less than ten miles), and the traffic on the particular highways I drive has never been that bad to begin with.  If traffic jams really are getting worse generally (and not just for me), then this is a sign of an improving economy.  More traffic at rush hour means more people going to jobs, which means more people employed.

10%

Categories

Today I reached 200 miles on my trike for 2009.  The goal is 2,000 miles for the year, so I'm 10% of the way there.

2,000 miles will be a push, so making this milestone by the end of April is a good start.

Our Geothermal Adventure (Chapter 2)

Categories

We've had a couple of months to investigate installing a geothermal heat pump system for our home, and now it's Decision Time.

This whole process started back in January when our old, conventional furnace went kaput on one of the coldest nights of the year.  It was past its expected life expectancy, so we started researching geothermal.  A geothermal heat pump uses the ground under the house as a gigantic heat sink, pumping heat underground in the summer (when the air conditioning runs), and pumping heat out in the winter (when it acts as a furnace).  This takes considerably less energy than conventional heating and cooling.

Financially speaking, a geothermal system costs more upfront, but less to operate.  The payback time is long enough that most people would be (understandably) reluctant to install one without some sort of financial incentive.  Fortunately, there are incentives aplenty:

  • The Fiscal Stimulus Package offers a 30% rebate to new EnergyStar rated geothermal installations from the federal government.
  • Xcel Energy, our power company, offers a special "dual fuel" electric rate: if we have a conventional backup and let them turn off the electric heat pump occasionally to manage demand, they cut the electric rate in half.
  • Xcel also offers a rebate of $150/ton for installing a new geothermal heat pump system.

Doing the Research; Running the Numbers

Going into this process, we were helped by the fact that my parents installed a geothermal system a little over a year ago.  They've been generally happy with it, but had some issues (more on that later), and they were able to provide some hard numbers.  We figured it would cost about $25,000 to replace our furnace.

We identified several local geothermal contractors and invited them to our home to inspect the existing system and offer ideas and bids.  The contractors we did invite represented a cross-section of major heat pump brands, and all passed our initial screen of good histories on Angie's List.  We did not talk to the installer my parents hired, after hearing some of their negative comments and seeing other customers' complaints.

Our home presents a couple of unique problems for this installation.  First, we actually have two furnaces, separated by about 30 feet.  One is for the main part of the house, and the other is for an addition built before we moved in.  Ideally, we would want to replace both units with a single heat pump and tie the ductwork together, since a second heat pump adds considerable cost to the system.  There also isn't very much room around either of the existing furnaces for new equipment, making it difficult to find room for a conventional gas backup furnace (and without that special electric rate, the numbers don't make sense).

None of the contractors we spoke to thought it was feasible to put in only a single heat pump to replace the two furnaces: there just is not enough room to run the needed ductwork without cutting through bearing walls.

The space constraints also knocked out one of the manufacturers, which simply didn't have any way to give us both the heat pump and the gas backup in the space we have available.

We settled on a system from a local WaterFurnace contractor with many years of experience, and which could show us examples of how they'd handled similar problems for other customers.  The total cost will be about $40,000, and this will include two heat pumps, a natural gas backup furnace, a hot water holding tank, a desuperheater to use waste geothermal heat to preheat domestic hot water, and a whole-house on demand gas water heater.  The cost is split approximately one-third for equipment, one-third for drilling the geothermal wells, and one-third for installation and other components.

This will be a six ton system total (heat pumps, like air conditioners, are measured in "tons" of capacity), with four tons serving the main part of the house, and two tons serving the addition.  Only the main part of the house will get the backup gas furnace, but that will be sufficient to keep the addition warm (though not totally toasty).

Given that the total cost will be so much higher than we expected, we went back and did a more careful analysis of the payback.  Working in our favor is that we are also getting a new water heater in the bargain (which we would probably need in a few years anyway), so we can count the avoided cost of a new water heater towards the geothermal system.

After figuring out the various rebates and backing out the cost of two new furnaces, two air conditioners, and a new water heater, we estimate that the geothermal system will cost about $11,000 more than replacing everything with the conventional equivalents (after rebates).  It will save us about $900/year in heating costs, and $250/year in hot water (since the hot water will be essentially "free" when the geothermal system is running), and pay for itself in ten years.

I didn't figure in any air conditioning savings, since last summer we barely ran our A/C at all.  However, if we do have a hot summer, the savings will increase very quickly because the efficiency improvement for geothermal air conditioning is even more dramatic than for geothermal heat.  This could easily be hundreds of dollars more in savings.

So the numbers still make sense--the system will pay for itself before the warranty runs out.

That said, this will be a financial strain.  First, we have to pay for the whole system in one big lump, whereas if we were to replace our furnaces, hot water heater, etc., as they failed, we would be spreading the cost out over several years.  Second, we don't get the federal rebate (well over $10,000) until we get our 2009 tax refund sometime in 2010.  That means that it will be over a year between the time we spend the money and when we get that part of the money back.

Finally, the $40,000 number doesn't include relandscaping the front yard.  Drilling the wells will leave the yard a mess, and we're going to have to spend some money getting it repaired and cleaned up.  We had been planning to do a some significant landscaping within the next few years, so this will also get moved up to this spring.

Avoiding the Pitfalls

Part of making the numbers work is making sure we actually can claim all the rebates and incentives for this project.  My parents discovered this the hard way, when they went to do their 2008 taxes and learned that the model of heat pump they installed wasn't EnergyStar rated and therefore not eligible for the federal rebate.  The rebate in 2008 was limited to $3,000, so they weren't counting on it to the same extent that we are, but it was a rude surprise nevertheless and a warning for our project.

I've verified that both of the heat pumps we'll be installing qualify for the federal rebate, but we still need to contact Excel and make sure we have all our ducks in a row for both of their programs.

I also expect that there will be some as-yet-unknown gotchas.  We don't yet know where all our utility lines are, so we don't know where the wells can be drilled and where the connection to the house will have to go.  There's the chance that something will turn out to be unsuitable and put the kabosh on the whole project.

The Plan

If all goes well we'll probably have our new system installed by the end of May.  We need to get a permit for drilling the wells, and plan where everything will go.  Drilling will be in early May, with the mechanicals shortly thereafter.

Puppy Spam

Categories

Comment moderation has been turned on--it didn't take long for the spammers to flood one of my entries with a couple hundred spam comments advertising what appeared to be puppy spam.

At least the cleanup was quick, thanks to mass delete.

The moderation policy is that any reasonable and unspammy comment will be allowed through, but no promises on the time.  This blog is very much a part-time hobby, so I'll get to comments when I get to them.

Cornering the Market in Money

Cornering the market is a (generally illegal) form of market manipulation where someone buys or controls enough of something--a stock, commodity, etc.--so as to effectively control the market price for that item. It can be very profitable, since the person who has cornered a market can force buyers (at least those buyers who have no alternative) to pay essentially any price.

For example, you might corner the market in frozen concentrated orange juice by going out and buying up all the OJ you can find, then entering into contracts with the OJ plants to buy their production. At some point, someone wanting to buy frozen concentrated orange juice would be forced to come to you, and pay whatever price you ask.

In practice, there may actually be more OJ futures available to buy in the market than actual OJ production, since a significant fraction of the market is not actual buyers or sellers of the physical commodity but speculators who trade futures contracts expecting to close their positions without ever touching any actual juice (except perhaps at breakfast). So when those futures contracts start to mature, the speculators discover that they are obligated to deliver actual frozen concentrated orange juice (which is unavailable) or buy back their contracts at some absurd price. You have, in effect, created an artificial shortage of OJ to your own benefit.

Cornering a market is very expensive, since you have to have enough capital to lock up most of the supply. It can also be very risky, since if you try and fail to corner a market, you can wind up paying too much for a huge amount of something you don't actually need. Nevertheless, every so often someone tries to corner a market; and occasionally someone succeeds.

The most profitable, and most difficult, market to corner would be the market for money itself. Money is in some respects a commodity like any other: it can be bought and sold, you can create derivatives, and you can write contracts which obligate the delivery of a certain amount of money under certain conditions. If you could corner the market for money, you would drive up the value of money (otherwise known as "deflation") by creating an artificial shortage (aka "liquidity crisis"). The people you traded with would be unable to deliver the money they were obligated to under their contracts, so you would be able to demand whatever other hard assets they might have instead.

Cornering the market in money would be hard, but maybe not impossible. The best way would be to buy up a whole lot of some financial contract which is normally relatively inexpensive, but under the right (very rare) circumstances obligates the seller to give you a hundred or a thousand times the capital you invested. Ideally, the seller would view the contract as safe (so the price would be low), but could be triggered by some crisis.

A Credit Default Swap (CDS) fits the bill pretty well: pre-2008, you could buy a contract for a few tens of thousands of dollars per year which would obligate the seller to give you $10 million upon the failure of some big investment bank or blue-chip corporation.

So you buy CDSs on a bunch of big low-risk corporations at 2006 prices (which is to say, dirt cheap). Since the CDS isn't directly tied to an actual bond issued by the company, you can actually buy more CDSs than the company has outstanding debt. Then, recognizing that there's a cascading effect, you also buy CDSs on all the companies who sold you the first set of CDSs--since if Lehman Brothers has to pay out on all those swaps, they'll have a good chance of defaulting as well. Since the CDS market is almost completely opaque, nobody will know how many contracts you've bought up or what the aggregate value is.

At 2006 prices, you could have invested a few billion to buy CDSs which would pay (in aggregate) a trillion dollars or more if the companies started failing. Lots of investors have a few billion to throw around. Almost nobody--other than the U.S. Treasury which prints its own money--has a trillion.

The corner happens when one of the companies you bought CDSs on starts getting into a little trouble. Every company has rough spots, so this is bound to happen sooner or later.  That will make the market value of the CDSs you own go up, and lets you demand more collateral from the companies you bought the CDSs from.

That, in turn, requires those companies to come up with cash quickly, and hurts their financial stability--which drives up the value of the CDSs on those companies, and lets you demand more collateral from a different set of counterparties.

If it all plays out right, in fairly short order every company which sold you CDSs is selling every asset they can get their hands on in order to meet their contractual obligations to you. Cash becomes the most valuable commodity because nobody can find enough of it. It's financial armageddon, but you win big.

The only flaw--and it's a big one--is that the government can create new cash any time they want.  Normally they don't like to do this, because it can lead to inflation.  But if the government discovers what's going on early enough, they can print more money, give it to the foolish companies who wrote those CDSs (like AIG) to make good on their promises, and break the cycle of collapse by making money less scarce.  This excess cash can (at least in theory) be taken out of the system at a later date once things have stabilized, in order to prevent hyperinflation.

So....do you bet on the Federal Reserve being on top of things and pumping the cash to the right place at the right time? Or do you bet that nobody will figure out what's going on until it's too late?

Optimistic Sign #6: Housing Starts Bottoming?

Categories

Today's big economic news was that February's housing starts--the number of new homes which began construction during the month--jumped in a big way from January.  One month does not make a trend, but a lot of people smarter than I think that housing starts are a leading indicator for when we enter or exit a recession.

The pessimistic counter-argument would be that housing starts have fallen almost 80% from the peak, and since they can't go negative there has to be a bottom somewhere.

Which would also be my point: there has to be a bottom somewhere.  We may be at that bottom right now, though we won't know for sure for several months to come.

You Are Hereby Sentenced to Life in California

Categories

Sara Jane Olson, the middle-aged Minnesota housewife and convicted terrorist, is scheduled to be released on parole soon and she wants to return to Minnesota.

The local police want none of it.  They want her to have to serve her parole in California, where she was tried and convicted of her crimes.  (Apparently it is routine for parolees to be allowed to move to other states if they want.)

Not because she's dangerous.  Far from it: she may have been involved in a violent militant group back in 1975, but by all accounts her radical impulses faded with disco and polyester suits.  Since then the wildest thing she seems to have done is maybe put a drop or two of Tabasco in her hotdish for the lutheran potluck.

Rather, as the head of the local police union said, "She should serve her debt where she committed her crimes."  In other words, letting her return to Minnesota wouldn't be punishment enough.  Justice can only be served by forcing her to live in California.

Minnesotans like to make fun of California sometimes (and I suspect the reverse is also true), but this is the first time I can remember a member of Minnesota's law enforcement system actually seriously suggesting life in California as criminal punishment.

Optimistic Sign #5: Retail sales bottoming?

Categories

Retail Sales statistics for the month of February were released this morning, and they are down only 0.1%.  Just as important, the January number was revised up (1.8% growth from the original 1.0% growth).  Some sectors were better than others, and car sales were among the worst.

This relatively stable statistic--still subject to revision of course--suggests that some of the fear we saw in the last few months of 2008 may be starting to subside.

Optimistic Sign #4: Wholesale Used Vehicle Prices Rebound

Categories

According to Calculated Risk, wholesale prices for used cars and trucks rebounded significantly in February, after a huge drop in January.  Indications are that buyers are making larger down payments and taking out shorter duration loans.  It appears that many people are switching from buying new cars to used.

I view this as optimistic for several reasons.  First, it shows that these durable assets (cars, that is) do have value and are not plummeting to zero.  That gives more confidence to both buyers and lenders that they're not just throwing their money down the toilet.  Second, it shows that there is still fundamental demand for vehicles despite the inventory overhang, and there is a price where people will buy.  Third, it indicates that the demand for used vehicles is matching the supply, and some of that demand will eventually spill into new vehicles as the supply of used cars diminishes.