Human Collective Behavior Modeling

The following is an introduction on the study and understanding Human Collective Behavior Modeling. By inspecting our motivators we can get an understanding of why we are where we are. 

There have been social structures that have survived longer than the "capitalist model" that we are presently "enjoying". (Egypt, Rome etc.)

For those systems to have lasted as long as they did, they had to have put in impediments in their structures that would minimize the constant driving motivators inherent in everyone.

If you look at the historical documents you will see them.

I will summarize ...

1. Motivator #1 "I want to have a better life than my parents and I want my children to have a better life than I have"

The "problem" with complex systems analysis, if you want to call it a problem, is that it doesn't necessarily unfold in terms that are predictable, convenient, exacting and numbers-specific. In cultures that have evolved to value all of those things, it's difficult for people to understand why this perspective is so important. Fortunately, through the use of modern computer technology, there are ways in which we can visualize important aspects of these complex systems, such as emergent behaviors.

There are obviously no perfect representations of reality, but agent-based models can still provide valuable insights into complex dynamics. The following is an introduction to the development of agent-based models and, specifically, the modeling of collective human behavior.

Modeling Collective Behavior

Intro

The fox knows many things but the echidna knows one big thing. Archilochus

We all carry with us in our heads a worldview, or mental model, of how the world works and our place in it. These worldviews are shaped throughout life from a number of influences, family, school, church, peers, but we rarely stop to examine these models, or to question the assumptions behind them.

UC Berkeley Professor Philip Tetlock in a study of the accuracy of predictions found that people who carry many models in their head, the foxes, are right far more often than people who carry one big model, the hedgehogs. Even better than foxes, however, are people who can create formal models. These are people who can put their assumptions about the world on paper (or rather a computer), and then test those models by running simulations through time with them.

People often misinterpret the purpose of formal models, thinking the intent is to make exact predictions, but this is only true in cases where precision is really needed such as engineering or physics. There is a whole world of complex systems and behaviors out there that is far more qualitative than quantitative, far more subjective than objective, far more unexpected and unpredictable, but this world too can be explored using models. Not with precise tools like those used in engineering, but with tools like agent based models.

What are agent based models?

Agent based models are at their heart a set of simple rules for behavior that are applied iteratively across a collection of agents, typically represented as cells on a grid. In fact, some of the very early models were developed not on early computers, but on playing boards from the game "go". Each iteration represents a step in time, and the outcome of the rules for a given time step is represented by the visual state of the agents, usually a change in color or position on the grid.

Note that these are simple rules based models and not behavioral or "rational actor" models familiar to economics and game theory.

One of the very first agent based models was John Conway's "game of life", also known as Cellular Automata. In this model a grid cell, or agent, has only two states: either alive or dead. Each agent is given two very simple rules for behavior:

(1) If the agent is already alive then the agent will only stay alive if 2 or 3 neighbors are also alive, otherwise it will die.

(2) If an agent is currently dead, then the agent will come to life if exactly 3 neighbors are alive, otherwise it will stay dead.

Sounds simple enough, but what came next was a real surprise. Depending on the starting configuration of the grid, those two simple rules when applied iteratively across all grid cells would often give rise to very complex patterns. When run over a number of time steps there also would arise complex "motions", not because the agents themselves were moving, they only had the two states of alive or dead, but because the patterns formed would exhibit aggregate behavior that appeared to grow and move across the grid.

 

Fig 1. Screenshots of "game of life" cellular automata. From left to right, starting position, after about 100 time steps, after about 1000 time steps

This was perhaps the most surprising observation of all, that a few very simple rules applied iteratively across a collection of agents could self organize into very complex patterns and behavior. Yet there was no way that outcome could have been predicted from the simple behavior rules alone. It was entirely emergent from the aggregate behavior of all the agents collectively.

Collective behavior and Sorting

This observation that agent based models can have unexpected behavior, that the macro behavior of agents is more than the sum of their micro motives, was further explored by Thomas Schelling in a model of social segregation. It has been observed that large cities typically have similar patterns of racial and economic segregation.

 

Fig 2. Racial segregation in New York city. Red is caucasian, blue is african american, yellow is latino, and green is asian.

This implies that at the individual level people have some tendency to be snobs or racist, but if you ask people most will say with some honesty that no, they are okay with a mixed neighborhood. Schelling tested this by creating an agent based model that gave each agent a threshold for how many neighbors of a different race or class could be tolerated. Beyond a given threshold the agent would move to a random empty spot on the grid until the threshold was tested again at the next time step. When all the agents were finally "happy" the simulation would stop.

What happened next was a surprise. Even when agents had fairly low thresholds, that is they could tolerate a fairly high number of different neighbors, there still occurred a high level of sorting behavior and patterns of distinct segregation emerged just like those seen in actual cities. 

Fig 3. Agents in Schelling's segregation model, starting with a random distribution on the left. Even with a low threshold of 40% similar, which is a fairly high tolerance for 6 out of 10 "different" neighbors, the end result on the right is segregation with agents enjoying 80% similar neighbors.

Once again, we see unexpected collective behavior not predicted by individual behavior rules. Complex systems self-organize, not from top down directives or even from strong individual motives, but from simple rules that lead to emergent aggregate behavior.

Collective behavior and peer effects

Mass movements of all kinds, social, political, economic, can be hard to predict. What are the factors that prompt some people to join in collective action, but not others? In Mark Granovetter's model of peer effects we explore this question of tipping points. Each individual agent is given a threshold representing the number of other agents that must be seen participating in an activity before the agent will join in.

Thus the simple behavior rule can be stated as:

• If the number of agents in the movement is equal to or greater than my threshold, then I will also join the movement.

In this example we look at a fictional fashion movement that asks how many agents can be prompted to wear a purple hat.

In the first scenario the agents have a low threshold. Agent 1 with a threshold of 0 will wear a purple hat no matter what. This prompts agent 2 with a threshold of 1 to also wear a purple hat. This then prompts agents 3, 4, and 5 with a threshold of 2 to also wear a purple hat, at which point all the agents have joined and are now wearing purple hats.

Fig 4. A group of agents with low thresholds for wearing a purple hat. Even if only one or two agents start wearing a purple hat it will have a large peer effect.

The agents in the second scenario also have low thresholds. However, no agent has a threshold of 0 and therefore no agents start wearing a purple hat.

Fig 5. Another group of agents with low thresholds for wearing a purple hat. However, because no agents have a threshold of 0 then no one starts wearing a purple hat.

In the third scenario there is a high diversity of thresholds. The average threshold of the group is 2.5, which would seem to indicate that most of the agents would prefer not to wear a purple hat. However, because agent 1 has a threshold of 0 this prompts agent 2, which in turn prompts agent 3, and so on until all the agents are wearing purple hats. One agent was able to act as "the tail that wags the dog" and prompt a group with a diversity of relatively high thresholds to join in and wear purple hats.

Fig 6. Another group of agents, this time with a diversity of thresholds for wearing a purple hat. Despite the fact that the group has a high average threshold of 2.5, the presence of even one agent with a threshold of 0 eventually prompts all the other agents to wear a purple hat.

Thus we see that given the presence of at least a few "extremists" who initiate an action there are two scenarios that could lead to a mass movement. First, a low diversity of low thresholds in which everyone is more or less predisposed to peer effect and easily prompted to action. Second, a high diversity of thresholds in which the more who join, the more likely those with high thresholds will also join. The tail wagging the dog, so to speak.

Conclusion

Obviously complex adaptive societies and human behavior are far more complicated than these simple models can even begin to capture, and there are a number of other agent based models that explore the world in more detail. But, if our goal is to be better thinkers about the world, then even these few simple formal models are going to help us improve our mental models - to help us to be foxes instead of hedgehogs.

Now when we see reports about mass protests and other uprisings we have some simple models of collective behavior that can help us think more clearly about these events. For example, the recent Arab Spring, in which protests turned to revolutions that swept nations. Entire regimes fell before the masses of people out on the street. Was it because people collectively had very low thresholds for action, and therefore were already primed for revolution? That may easily be true for one area, maybe even a whole country, but extrapolating that across the entire region seems a bit of a stretch. Perhaps it was more an example of a few high visibility events, such as what happened in Tunisia, acting as the "tail wagging the dog" and provoking people with a diversity of thresholds into action.

The Occupy Wall Street movement, on the other hand, has so far barely made a ripple. Why? Is it because peoples thresholds are still too high for a mass movement to take off? Would a few more high visibility events make a difference in provoking people to action? Considering the media attention that the movement attracted at its height, it is probably the former. Should, however, economic or political events conspire to lower people's thresholds for action, then that could quickly change and we could see the movement take off again.

Further reading

A good article in the Atlantic about the early days of agent based models Seeing Around Corners

NetLogo is free software for building and exploring agent based models NetLogo

However, George Soros' Open  Society project in the social unrest. He made his billions based on an understanding of complexity theory. Through Heisenberg's uncertainty principle and the resulting observer effect, his Quantum Fund optimized its returns based on the unbalanced markets created by the imperfect and biased observer.

As long as we maintain bias (racial discrimination for example), the system is easily gamed against the weak hand by the strong hand. How hard is it to buy real estate on the good side of the tracks when you know buyers are fearful of crossing over to the bad side of the tracks? Then as a strong hand once the value is driven out of the ghetto, you simply move in with a redevelopment plan that is sufficiently large to reset the belief system with bulldozers and fresh landscaping. It's nothing more than the investor monetizing the racial bias of people who would prefer to fear their neighbor while willingly transferring wealth to a hedge fund.

The question for the agent is simple: yes or no, truth or lie, alive or dead? We each answer the question, but rather than listening to the still, tiny voice inside, we listen to anything and everything else. That's how the gamers game you everyday. Turning the tables on them is easy. Changing your beliefs?... not so easy.

In a classic example, we're getting ready to witness this again in the wake of the MERS mortgage fraud settlement. The bar is being set extremely high for the liquidation of foreclosed and bank owned properties and special opportunities are being offered exclusively for large funds to roll up these properties. The Department of Housing and Urban Development requires a $1 billion minimum investment and hand-selected their own list of Managing and Marketing Contractors (mostly former executives and politicians) that will be allowed to hand this windfall of publicly insured (i.e. Fannie, Freddie, etc.) money over to their cronies. .

Classical/Neo-Classical Economics: Wages/Rents - Real Estate 4 Ran$om:

Classical/Neo-Classical Economics: Skill/Privilege & Wages/Rents – “We have been distracted from the economic principles that effect our lives!” – video

This is an Australian produced film, but the principles carry. – I would not focus on land to the exclusion of financial assets like stocks, and other vehicles for producing income and capital gains, that allow speculators to game the system. (which is subsidized by the wage earner.

Watch video at bottom of this post.

The US internet bubble for example. had nothing to do with land per se. And the Florida land boom in the US preceded by several years the stock market boom that led to the Crash of 1929.

And it was financialization, the application of fraudulent valuation and securitization leverage, that gave the US credit bubble its kick.

Financialization permits the transmission of the speculation to a broader audience, in the most recent collapse a global audience, and widens the scope and duration of the Ponzi scheme through its interlocking web of counter party risks.

The most common thread in destructive bubbles is official complicity, often seen in regulatory capture, and the almost willful suspension of disbelief achieved through influence in the media and the steady application of messaging, often so intense that it borders on overt propaganda.

Certainly it does involve the silencing of whistleblowers and critics through access denial, ridicule, and other forms of soft censorship. And if it is followed by the obstruction of justice so that the perpetrators may go forward unimpeded, they will work their cons and carny magic on something else again.

If this simple explanation of speculation does not have a sufficient pedigree, perhaps this more refined and weighty pronouncement from the Bank of England may serve to persuade.

“Under one equilibrium, patience wins the day. When long-term investors start in the ascendancy, prices tend to correct towards fundamentals. The performance of untested investors pursuing momentum strategies falters, while those pursuing longterm strategies flourish. The fraction of long-term investors rises. The self-correcting tendencies of market prices are thus reinforced, further supporting long-term investors. The patience gene thrives, the impatience gene dies. Natural selection results in a self-improving cycle, as with dieting, happiness and exercise.

But there is a second equilibrium where this cycle operates in reverse gear. With a large fraction of momentum traders, prices deviate persistently from fundamentals. Among untested investors, momentum strategies now flourish while long-term fundamentalists fail. The speculative balance of investors rises, increasing the degree of misalignment in prices. The patience gene falls into terminal decline. Natural selection results in a self-destructive cycle, as with drug, alcohol and food addiction.”

Andrew G. Haldane, Patience and Finance

And it is the government and the regulators, the Federal Reserve and the Bank of England, the FSA, SEC and CFTC for example, whose sworn duty it is to protect the financial markets from the ravages of rampant speculation and fraud.

And such a destructive condition cannot occur over a period of time unless they do not honor their oaths, for whatever reasons and rationales they may wish to provide.

The reliability of self-regulation is a fairy tale for dreamers and fools. Self-regulation requires an extraordinary moral nature, to hold itself virtuous against the temptation of concentrated power without impartial oversight. Quis custodiet ipsos custodes? It has NEVER worked, and is the guise assumed by wolves as they mingle with sheep. Trust us.

When speculation is allowed to flourish unchecked, whether through laxity or complicity or both, there is the inevitable and corrosive mispricing of risk that leads to disparity of fortune between the perpetrators and their marks, and the inevitable economic collapse as rude reality intrudes once again.

Didn’t quite catch their trick that last two times? Watch as they do it again.

And for whatever it may contribute, speculation in land and other means of production is but a child’s toy, as compared to the powerful engine of destruction, the destroyer of wealth, that is engaged by the systematic abuse and debasement of a nation’s currency, much less the premier currency of the world.

While greed and gullibility act in partnership, the allure of easy money never gets old, and recurs again and again throughout history.

“The commercial world is very frequently put into confusion by the bankruptcy of merchants, that assumed the splendor of wealth only to obtain the privilege of trading with the stock of other men, and of contracting debts which nothing but lucky casualties could enable them to pay; till after having supported their appearance a while by tumultuary magnificence of boundless traffic, they sink at once, and drag down into poverty those whom their equipages had induced to trust them.”

Samuel Johnson, The Rambler, January 7, 1752

“No free government, or the blessings of liberty, can be preserved to any people, but by a firm adherence to justice, moderation, temperance, frugality and virtue, and by frequent recurrence to fundamental principles.” – George Mason, The Virginia Declaration of Rights

                                                               ~{END}~

Krugman "Knocked out of Neoclassical Orbit" by Super Hero Aussie Steve Keen's Meteoric Rise!

I never thought in my life that Russia would have the most honest and objective TV news. 

The RT presenter Lauren Lyster is superb, Before joining RT, Lauren was a reporter for Time Warner Cable News where she investigated miscarriages of the criminal justice system focusing on wrongful murder convictions.

She has a background in finance to RT, having worked previously as a senior equity research analyst covering publicly traded US and European companies. she's smart, informed, and attractive. Good on her.

Economics has been TRYING to prove it is a science for decades...so it embraced equations and algorythms -- it totally blows the human factor - we live in a human world no?! the day human emotions can be forecasted with formulas......blah blah blah.

Not only that -- but it is dominated by the most linear, male-brained dorks ever isolated into one "profession".

Krugmans is proven wrong time and time again but rather than admit it he always creates some lame excuse such as it was not tried long enough, it was done for too long, the size of it was too small, the size was too big, etc. Krugman is not aware of ever having been mistaken, He always claims that his directions simply were not followed closely enough. 

Finally, There is NO Nobel Prize for Economics? WTF? 

Strip this Kurdeman of his bullshit award. 

Aussie Steve Keen Is a Super Hero! Check him out, http://en.wikipedia.org/wiki/Steve_Keen

Japan Brimming with Fruit Flavor?

April 1 is a new beginning in the Japanese calendar and coincides roughly with the much anticipated arrival of cherry blossoms. The first ethereal pink was sighted last week on an otherwise naked branch of a cherry tree in Kochi Prefecture, on Shikoku Island. Now blossoms have appeared in Tokyo. Full bloom is expected by Friday. Last year, after the horrific Great East Japan Earthquake and tsunami that took over 18,000 lives, most cherry-blossom viewing events and festivals had been canceled—at great cost to the industry that has sprung up around cherry blossoms. But this year, people appear eager once again to go places and spend money during the festivities. April 1—this year, April 2—is also the beginning of the corporate year. Newly recruited college graduates show up for their first day of work and are welcomed with entrance ceremonies and speeches. When universities spit them out in March at the end of the academic year, they need to have a job offer in hand. If they don't, their chances of ever entering a career are minimal due to the rigidities of the system. By Japanese standards, the employment picture for graduates had been morose for years—“lost generation” they’re called. Then the financial crisis hit and hiring fell off a cliff. In 2008, 88.7% of the graduates had job offers. By 2011, it was down to 77.4%. Nearly a quarter of all graduates saw their visions of becoming a pillar of Japanese society vanish.

So when the Ministry of Health, Labor, and Welfare reported that a still dismal 80.5% of the grads had accepted a job offer by February 1, it was greeted with relief. An estimated 800,000 new employees walked into their first jobs today, up from 776,000 in 2011, the lowest point since 2000 when collection of this data began. Banks went on a mini hiring spree. For example, Sumitomo Mitsui Financial Group hired 810 graduates this year, up from 709 last year, but down from 2,090 in 2009.

The overall jobs picture has improved as well. Unemployment for February, reported Friday, edged down to 4.5%, and unemployment among the 15-24-year-olds fell to 9.2% from 9.5%. With three jobs for four applicants, it was still dismal, but after nine consecutive months of increases, it was the best reading since November 2008. And a jump from November 2009, when there were more than twice as many applicants as job openings.

Even beleaguered Prime Minister Yoshihiko Noda got his first respite on the relentlessly steep slope down the approval ratings. All Japanese prime ministers since Koizumi slither down that slope for 8-15 months. When their popularity drops into the low twenties, Japan Inc. sees to it that they're axed. But on the way down, they have a brief uptick. And Noda is having his—a tiny 2.6 percentage points to 31.6%.

But not everything is suddenly rosy in Japan. Today, the Bank of Japan released its tankan quarterly survey of over 10,000 manufacturers: minus 4, unchanged from its lousy reading in December. While coddled large companies became more optimistic, small and medium firms (ominously) became even more pessimistic, in part due to the catastrophic power situation.

TEPCO, the bailed out owner of the Fukushima nuclear power plant, is trying to shove rate increases of 17% down the throats of its commercial customers—while rationing power at the same time. Power shortages will spread across most of Japan this summer as the last of 54 nuclear power plants will be taken off line in a few weeks. While pressure is building to restart some of them, public distrust and resistance run high, particularly after revelations seeped out about the nuclear industry’s controlling relationship with its regulators. Japan Inc. at work. The conspiracy had squashed stiffer regulations for nuclear emergencies. Five years later, the people of Fukushima paid the price. For that fiasco, the emails that documented it, its deadly and ongoing impact, and the anger it caused, read... A Revolt, the Quiet Japanese Way.

But it’s a two-edged sword. Shortages of up to 20% this summer are expected to strangle the highly industrialized Osaka area, and companies are shifting production overseas. Now a panel of the Osaka municipal and prefectural governments floated a plan for the city of Osaka to demand that Kansai Electric Power shut down its nuclear power plants permanently. Mayor Toru Hashimoto has come out in support. Largest shareholder with an ownership of 9%, Osaka has some pull though it is unlikely to prevail over almighty Kansai Power.

But on the Japanese internet, there has been something ... lighter. And utterly cynical. It shows just how much trust the people have left in TEPCO and the government. Read:  Nuclear Contamination As Seen By Japanese Humor (mostly pics).

As someone who lives in Japan, I too have to agree with the paper and not at all with pitz.

In Japan, housewives can stay at home, because the nation is so prosperous.

You can't be serious. Housewives often stay at home because companies aren't hiring, and removing themselves from the workforce for childbirth often permanently impairs career prospects. And then there's corporate culture: have you ever been out with Japanese colleagues and seen bright, hard-working, positive young women reduced to refilling drinks and cleaning tables? Ever seen a young woman interpret during a meeting while the young men are allowed to discuss business? How about serving tea (chakumi)? It's degrading, and companies get away with it because there are no jobs.

Further, when I say female careers are few, combine that with the reality that the female labor force participation is high after infant-rearing years (around 75%). They just work in low-wage service sectors.

The falling birthrate is an artifact of the vibrant and prosperous economy.  African economies that aren't prosperous, have high birthrates.  Since Japan is one of the world's most prosperous economies, it has the lowest birthrates.

Birth rates that fall to sustainability are. Many families I talk to would like to have another child, but are worried about the cost of clothing, shelther, education, etc. They can't afford to move out of their 10-jo place. Women don't want to get married because they'll have to leave their careers to raise a child. These tradeoffs do not exist in many countries.

Japan's low birth rate is driven by high cost of living amid wage deflation and a tightened job market, period. Furthermore, there are consequences of this "prosperity"-driven aging: Japan will have to heavily raise the retirement age for the national pension, raise payroll taxes, or admit millions of immigrants.

They can live those 'cartoon' lives precisely because the economy is so prosperous. The housewife investors are evidence of this.

First off, Mrs. Watanabes aren't that major a force. Second of all, what are they doing? They're scraping to find yield outside of Japan, where deposits earn only a few bps. Last I checked, a 10-year CD at MUFJ or Mizuho would get you around 0.60%. It's a job with very small returns, if any (last I checked, they were getting burned on PRDCs.) The only people doing it are those with few other options. A large population of DIY day traders and currency speculators is not desirable for any country.

does not have the no-holds-barred cultural and political left-right polarization.

In other words, you haven't been paying attention to Japanese politics. We're on our fifth prime minister in four years, just had the DPJ lose massively in the upper house after the LDP lost massively in the previous election, have had several ministers (notably in Agriculture) kill themselves, finally got through the public humiliation of Ozawa's money handling, etc. There's no polarization only in that the population knows the system is broken.

Having many Prime Ministers shows the vibrance of the Japanese political system and the Japanese population's propensity for change.

The Yen continues to buy more goods than it did in the past, so even a 0% nominal return has been a positive real return.

Japans current savings. As for a strengthening yen's effect on an export-driven economy, it's definitely had a negative effect on a person's human capital, that is, the value of their expected earnings over time. Bonuses have gone from being 20%-ish of salary to being non-existent at several companies. On a purchasing power basis, Japanese most definitely perceive themselves as being worse off.

Seems to me that it is overly ambitious to pronounce a country/currency/society/economy dead until it actually falls over and starts stinking.  There are some great arguments about how resilient and cohesive the Japanese are.  Same could be said for other areas of the world as well.  Gauging a country solely by its "GDP" and such clap-trap is misleading.  Are they healthy?  Are they content?  Are they focused?  Are they secure?  Maybe a "GDA" is needed:  Gross Domestic Attitude.

Could Japan be Out Of Cans To Kick?

Japan's Trade and Current Account imbalances appear to be hitting some kind of terminal velocity and while neither JGBs nor CDS seem to reflect the ensuing chaotic recognition that perhaps the can that has been so faithfully kicked down the "Nishi-no-michi" or the West Road may have plunged over the lip of Mount Fuji (conjuring images of Mordor), FX markets recent and abrupt weakness brought on by yet more printing (a topic we discussed in great detail recently as the chosen heretical method du decade) may well be coming face to face with reality. We assume Azumi is faithfullywatching these market moves but we wonder at what point the quasi-intentional weakening of local currencies flares into a full-blown currency war - and instead of merely encouraging simpleton FX-carry strategies chasing momentum and leverage - quickly becomes the hyperinflationary super nova that many have been waiting for over the last decade. Dismal demographics aside, we wonder how long before Koo prescribes yet more of the same medicine for this constant state of deflation and at what point does inverted-Apple-looking charts for Trade and Current Account balances become simply too hot to handle...

The Japan trade balance has tipped into extreme freefall...

As has the Current Account balance...

or is it simply yet another false alert on the road to Mordor for Japanese Central Bankers?

In Summary Kids: Japan can and will buy its own debt, as long as there is a working computer available in Japan this process will continue, bare in mind Japan's debt is internally funded. While the US is financed from outside.

If Japan where to go, it will take a chunk of China with it, a total repatriation of funds out of Asia back to Japan. They nearly did that in 2011, but instead printed.

Scary part China/Japan both net importers of oil on a major scale.  Cue military tensions i.e Japans navy getting frisky.

They world is moving closer to major conflicts.

The global economy may not make it to the end of 2012.  The great bond market crash once hyper-inflation hits everywhere.  Starting with Europe.  China could blow out anytime, gauged on Aust terms of trade that is sinking (exports, AUD is heavy).  But oil going upward stagflation could rip into China.

So any oil spikes gift from Iran will tip the world into horror show stagflation or Israel drops some...

Rangy rallies till the Greek con job, 48hrs this market hits the March volatility.  

Going to be brutal starting Now!.

Marc Faber Previews Q2, Is Bullish on Japan...

Mark Faber was on Bloomberg TV earlier, presenting his latest outlook on markets and the economy, but first he summarizes 2011's first quarter which as repeatedly observed here before has so far been a mirror image of 2012, with the only different that while it ran up on 2010's QE2 back then, now it has surged on the transitory flow (not stock) impact of two back to back $1.3 trillion LTROs. "I think that if you look back at a year ago we made a peak of 1370 on S&P on May 4 and then dropped sharply to 1074 on October 4. Then we recaptured the lows in November and December. Since then, the first quarter has been very powerful and has surprised investors because of its strong performance. And I think now the expectations are very high. The market is no longer oversold the way it was in December. And everybody thinks that the race is on, go along with equities, the hedge funds have positioned themselves on the long side and optimism is high. I would be very careful at this stage." As for his outlook, he is "reluctant to short" in a money-printing environment, believes that Japan will provide the best equity futures returns (more easing from the BOJ appears imminent), is confident margins will roll over (as they already have) on the back of record for this time of year input costs, and thus thinks earnings will disappoint, sees inflation running 5-10% more than a year earlier, and is still accumulating gold every month. Overall, mostly as expected from the pony-tailed one.

Faber on whether he's finding more shorts in the equity market:

"In a money-printing environment I'm reluctant to short. But say whereas I recommended investors to increase their positions last October, November, December, now I think that if people are overweight in equities they should reduce positions somewhat…maybe cash. The U.S. dollar is desirable at the present time. And we have to say one thing. The market consists of thousands of stocks and the market consists of many different stock markets globally. The S&P has done exceptionally well relative to, say, emerging economy stock markets, most of which are still lower than they were in 2011. So, if you look at the advance-decline line of all the share markets in the world, then it is definitely being deteriorating. And I happen to believe that money printing will continue and I would probably buy financial shares and I believe that the Japanese market may outperform all the other markets against all expectations in 2012."

On saying that earnings will deteriorate and profit margins will shrink:

"First, I think there are some cost pressures creeping in terms of rising raw material costs, especially energy, and the problem with, say, a QE3 would be that you are doing it in an environment of very elevated oil prices. So, maybe the energy prices would go up more and squeeze the margins of some corporations. And certainly squeeze the consumer. And my sense is that the economy has bottomed out but is far from robust because the typical household is being squeezed by higher cost of living increases. There are various measurements. You can measure the CPI. It is rising by less than 3%. Everywhere I look I see households essentially paying between 5% to 10% more for goods and services than a year ago."

On whether Q2 will be as strong as Q1 for investors:

"I think that if you look back at a year ago we made a peak of 1370 on S&P on May 4 and then dropped sharply to 1074 on October 4. Then we recaptured the lows in November and December. Since then, the first quarter has been very powerful and has surprised investors because of its strong performance. And I think now the expectations are very high. The market is no longer oversold the way it was in December. And everybody thinks that the race is on, go along with equities, the hedge funds have positioned themselves on the long side and optimism is high. I would be very careful at this stage."

On why investors should have caution:

"Basically I think that earnings may begin to disappoint. That corporate profit margins could deteriorate. And I think we still have a lot of issues. Don't forget we have QE1, QE2 and Operation Twist. I think in order to really hold asset prices across the board much more QE3 would have to be gigantic. I'm not ruling out that stocks can continue to go up but I doubt they will go up at the same rate as the first quarter. And if you look at the technical under underpinnings of the market, they have deteriorated. The list of new highs is deteriorating. The short positions are way down. And we have an overbought condition in the market if we measure the number of stocks above the 50-day and 200-day moving average. So, generally I would say maybe April is traditionally still a month of seasonable strength but somewhere in the next six months I think you can buy the whole market much cheaper."

On QE3 having to be "enormous":

"It would have to be very significant to boost all asset prices including homes, stocks, bonds and commodities…Much larger [than QE1 and QE2]."

On gold:

"As you know, I have been very positive about gold and I still accumulate gold every month. But I think that we had an intermediate peak at $1921 on September 6 of last year. Then we dropped sharply to $1,522 an ounce on December 29, 2011. Since then we've had a feeble recovery. I think that the correction period is not yet over. I'm not selling my gold because I don't trust governments and I don't trust the Federal Reserve, nor would I trust the ECB or other money traders in the world. They are all going to print money. I still recommend to hold gold."

On bad returns for gold in Q1:

"Yes, that's correct. But the returns have been very good since 1999 and year over year I think gold is still up 12%…I think that gold is in a correction period and we had an intermediate peak on September 6, 2011. And I always advise don't put all your money into gold because it doesn't have any cash flow. So you are really dependent on the price appreciation. That is different from owning, say, equities that have a dividend yield of 5%, which I can find in Asia."

Japan Real Estate Now Undervalued vs Asia

Japan's real estate stocks have rallied strongly as investor money returns to Japan real estate on the view it is now undervalued vis-a-vis other countries in Asia.

The government's land price survey, a lagging indicator, shows property prices are bottoming-out in urban areas. As of January, average prices in Tokyo, Osaka and Nagoya were down 1.6% versus a 2.5% YoY drop in Jan. 2011.  J-REITs are active, acquiring JPY714.4 billion of properties in 2011, including the purchase of Mitsubishi Heavy's headquarters building in 2011 by a consortium lead by Nippon Building Fund (8951). This is roughly triple the bottom in 2009. Property prices in the Tohoku region, hit hard by the March 11, 2011 disaster, are bouncing back as companies return to the region and begin rebuilding.

British real estate firm Grosvenor resumed investing  last autumn, buying upscale rental condominiums in Tokyo's Roppongi and Minami-Azabu districts, while Singapore and China sovereign wealth funds were buying 15 logistics facilities, as the spread between investment returns and long-term rates in Japan has widened to 5.12%, versus a mere 1.77% in Hong Kong and 2.07% in Singapore.

Japan Real Estate Institute publicized their research result on “Real Estate Market Index (Late 2011: July through December 2011) that investigated the market trend of apartments within the Tokyo 23-wards area. 

The research collected and analyzed the data of the rents of rental and condominium apartments and sales price of apartments as well as their yield rate within the Tokyo 23-wards area that are sorted by new or existing (10 years old), by sizes of large, average or small and by area of all 23-ward, the Central 5-wards(Chiyoda, Minato, Chuo, Shinjuku, Shibuya).

●Price of Apartments (new/existing) 

- The sales prices of large and average size, new and existing apartments in the Central Tokyo 5-wards and the Tokyo 23-wards areas remained the same or raised slightly compared to the preceding term as a reaction to the sales price drop after the earthquake disaster in the first half of 2011 as well as continuation of tax benefits and low interests.  However, the sales prices of small apartments that were affected less by such conditions have declined slightly. 

- The number of both new and existing apartment sales increased in the Central Tokyo 5-wards and Tokyo 23-wards areas in the latter half of 2011 compared to the first half of 2011 as well as to the latter half of 2010.    The market condition seems to be recovering from the flagging condition caused after the earthquake disaster. 

  

●Rent (New/Existing) 

- Generally, the rents of large apartments in the Central Tokyo 5-wards area has slowed down to decline and the rents of average size apartments shifted from decline to remaining the same.  The trend of the decline in rents seems to show a sign of its end.  Contrarily, the rent of small apartments has shifted from increase to decline. 

- The rents of all sizes of both new and existing apartments in the Tokyo 23-wards area continued to decline and there is no sigh of its end. 

- The number of newly-signed lease agreements of both new and existing apartments increased in the latter half of 2011 compared to the first half of 2011 and the latter half of 2010 in the Central Tokyo 5-wards and the Tokyo 23-wards areas.  The market condition seems to recover from the flagging condition caused after the earthquake disaster.

●Average yield (annual rents of rental apartments / sales price of condominium apartments) 

- The average yield declined slightly because the sales prices of large and average size, new apartments as well as average size, existing apartments rose slightly in the Central Tokyo 5-wards area.  Otherwise, the average yield of other types of apartments remained the same overall. 

The same tendencies applied to the Tokyo 23-wards area.  The average yield declined slightly because the sales prices of large and average size, new and existing apartments increased slightly.  Otherwise, the average yield of other types of apartments remained the same overall or increased slightly.