Financial topics

[gerald]

John, I will be most interested in your comments regarding the real estate bubble. 1995 is when my real estate values began to really take off.
Since then, I have reduced my holdings and debt substantially. As you may know, once you get to be known in the business, one is constantly being contacted by commercial real estate brokers. I have just received a multi building listing in a middle class (not the best) area in Chicago. The listing indicates that the properties are below market in price , and this deal is a bank owned "short sale" (bank wants to unload asap and is probably taking a big hit). The interesting thing about this deal, is that you could probably make money by buying the buildings and selling the materials in them. Meaning they are being sold for a fraction of replacement cost. This is not good.

[jldavid47]

-- 8/21/2009 P/E ratios from Decision Point

John, I believe we are in the crazy bull market that Harry Dent, etc., forecast would end around 2009. They didn't see the real estate/derivatives bubble popping first. Where would the stock market be today if that hadn't happened? I shudder to think about it. Could be Dow 40,000.

Impossible. Without the massive increase in liquidity that caused the bubble the Dow would never have gotten even to 15,000, let alone 40,000.

[Higgenbotham]

-- 8/21/2009 P/E ratios from Decision Point

John, I believe we are in the crazy bull market that Harry Dent, etc., forecast would end around 2009. They didn't see the real estate/derivatives bubble popping first. Where would the stock market be today if that hadn't happened? I shudder to think about it. Could be Dow 40,000.

Impossible. Without the massive increase in liquidity that caused the bubble the Dow would never have gotten even to 15,000, let alone 40,000.

If the real estate/derivatives bubble hadn't popped (in 2007) there would be more liquidity in the system today than there was in 2007. Hence, stock prices would be higher than they were in 2007 due to liquidity considerations alone. Then given the propensity to chase stocks that seems to exist in 2009 (possibly for the reasons Dent and others predicted) stocks would be proportionately even higher than they were in 2007 compared to other asset classes.

[abs]

I don't think Dent anticipated that the real estate bubble would have been "goosed" so much by government policies. His original estimates were based on a larger percentage of dollars flowing into the stock market.

[John]

Here's a quote from an interview today of Jack Ablin, Harris Private
Bank CIO on Bloomberg tv:

> We've got this stockpile of cash on the sidelines, with the
> average investor about as skeptical as you all. And so, as the
> stimulus maybe helps improve things, and investors become from
> skeptical maybe to sanguine, and at some point maybe even
> optimistic, I could see a lot of that sidelined cash filtering its
> way back into the market, helping propel prices higher.

I can't believe these guys. I'd call this guy a total moron, but he
probably makes half a million dollars a year, so I'm the one who's
the moron.

If you move sidelined cash into the stock market, all you do is
increase the size of the bubble. He apparently has NO IDEA of the
concept of value.

If you move "sidelined" cash into the purchase of tomatoes, then the
price of tomatoes will be forced up, but it doesn't mean that the
tomatoes are any different.

This is the kind of thing that I've been seeing for years. The
reason that these "experts" ignore as-reported earnings, and stick
with bloated, meaningless "operating earnings" is because they REALLY
BELIEVE that earnings are irrelevant. To these "experts," the only
thing that matters is how much money can be poured into the stock
market, irrespective of the underlying values.

John

[John]

-- Income inequality

I've often wondered about the income inequality statistics. I've
been reading for years that income inequality has been increasing,
and I felt intuitively that this had to be related to the
generational financial cycle. But I've been able to find the data.

Krugman ran a column a couple of weeks ago providing a graph
showing the inequality figures.
http://krugman.blogs.nytimes.com/2009/0 ... re-gilded/

He drew the data from a paper by Emmanuel Saez at the University of
Berkeley.
http://elsa.berkeley.edu/~saez/
http://elsa.berkeley.edu/~saez/saez-USt ... s-2007.pdf

Here are a couple of graphs from the paper:



These graphs prove the point. Income inequality is a generational
value. Income inequality increases substantially during the credit
bubble, and then crashes along with the stock market.

This also supports the concept of the lethal combination of
nihilistic, greedy Gen-Xers along with incompetent, greedy Boomers.
(In generational theory, this is the nihilistic, greedy Nomad
generationa, along with the incompetent greedy Prophet generation.)

Notice that the income inequality graph really spikes up after 1982.

1982 is a very interesting year. If you look at the stock market,
there was a bear market from 1966-1982. After that, the market went
up almost continually, until the Nasdaq crash in 2000.

1982 was also the year that Paul Volcker "saved" the economy by
raising interest rates and bringing down that 10%+ inflation rate.

I don't think that it's a coincidence that the inflation rate fell at
exactly the same time that the stock market began an 18 year rally.

1982 is also the time when the Boomers reached middle management
positions. This was as significant as the 2003 time frame, when the
Gen-Xers reached middle management positions.

What the graphs show is that similar things must have happened in the
1920s, thanks to the nihilistic, greedy Lost Generation, combined
with the incompetent, greedy Missionary Generation.

But there's another point too. I often get criticized for seeming to
blame all Gen-Xers for the current crisis. Actually, there are
millions of decent, hard-working Gen-Xers who would never defraud
anyone.

But we have to face the fact that the current financial crisis
perpetrated mostly by Gen-Xers.

This income inequality graphic supports the view that only a small
number of Gen-Xers are benefiting from fraud, and the vast majority
of Xers get screwed as much as the rest of us do.

John

[xakzen]

You are absolutely right to say that the same shysters are still at the helm:

http://www.breitbart.com/article.php?id ... _article=1

Wall Street may have discovered a way out from under the bad debt and risky mortgages that have clogged the financial markets. The would-be solution probably sounds familiar: It's a lot like what got banks in trouble in the first place.

In recent months investment banks have been repackaging old mortgage securities and offering to sell them as new products, a plan that's nearly identical to the complicated investment packages at the heart of the market's collapse.
...
In recent months, banks have tiptoed toward a possible solution, one in which the really good bonds get bundled with some not-quite-so-good bonds. Banks sweeten the deal for investors and, voila, the newly repackaged bonds receive AAA ratings, a stamp of approval that means they're the safest investment you can buy.

"You've now taken what was an A-rated security and made it eligible for AAA treatment," said Richard Reilly, a partner with White & Case in New York.

As for the bottom-of-the-barrel bonds that are left over, those are getting sold off for pennies on the dollar to investors and hedge funds willing to take big risk for the chance of a big reward.
...
That's how the safe stack of bonds gets it AAA rating, which is crucial to the deal. That rating lets banks sell to pension funds, insurance companies and other investors that are required to hold only top-rated investments.

"There's no voodoo going on here. It's just math," said Sue Allon, chief executive of Allonhill, which helps investors analyze such hard-to-price investments.

Financial gurus call it a "resecuritization of real estate mortgage investment conduits." On Wall Street, it goes by the acronym Re-Remic (it rhymes with epidemic).

"It actually makes a lot of fundamental sense," said Brian Bowes, the head of mortgage trading at Hexagon Securities in New York. "It's taking a bond that doesn't necessarily have a natural buyer and creating two bonds that might have a natural buyer for each."

The risk is, if the housing market slips even more, even the AAA-rated investments may not prove safe. The deal also relies on the rating agencies, which misread the risk at the heart of the subprime mortgage crisis, to get it right.

And then there's the uncertainty about the value of the underlying investments, which FBR Capital Markets analyst Gabe Poggi called "totally combustible." Poggi likes the deals because they appear to have breathed some life into the market, but he said it only works if everyone knows exactly what they're buying.

The Obama administration is also working on a plan to get banks buying and selling risky bonds. But the public-private partnership announced this spring is still in the works and has yet to help investors figure out what those bonds are worth. By creating Re-Remics, banks can help start the process themselves.

The concept has been around for years, but it has become increasingly popular lately as a way for banks to sell off bonds backed by commercial properties such as malls and office buildings. Analysts say they've seen a few dozen deals aimed at repackaging debt held over from the mortgage boom. Investment banks have also dabbled in turning collateralized debt obligations, or CDOs, into Re-Remics.

That's where Allon gets nervous.

"I think that's trouble," she said.

CDOs are already complicated. Repackaging them makes it harder to figure out what the investment is worth. The more obscure the concept, she said, the more likely the deal has gotten too creative.

Wall Street has a tendency to push the boundaries of good ideas, Bowes said. But he said banks are still smarting from the market implosion and are unlikely to rush into new, risky ventures.

The gall and contempt for the intelligence of the general public is astounding to me. That they think we'll actually fall for this again?!?

[John]

> You are absolutely right to say that the same shysters are still
> at the helm:

> http://www.breitbart.com/article.php?id ... _article=1

I described how AAA-rated CDOs are created from worthless securities
a couple of years ago.

** A primer on financial engineering and structured finance
** http://www.generationaldynamics.com/cgi ... .cdo080123

I'm not surprised this is being tried again because, as you say, the
same people are in charge.

In the first round, the CDOs were backed by RMBSs (residential
mortgaged-backed securities), based on the assumption that real
estate prices would increase exponentially forever. As soon as the
real estate bubble popped, the RMBSs lost value, and the CDOs became
worthless in "real value." However, the CDOs retained their bloated
nominal value as long as they weren't sold, or as long as they didn't
have to be marked to market for some reason.

You occasional see financial "experts" on tv blaming the whole crisis
on mark to market rules, requiring CDOs to be valuated at their actual
market value. These experts claim that if these CDOs can only be
allowed to retain their bloated nominal values, then the crisis will
be over. These are the morons who get 6 and 7 digit salaries.

The Breitbart article you've quoted is yet another scam for allowing
them to keep their bloated nominal values.

We'll now have a new set of super-CDOs, backed by the old CDOs. But
since the old CDOs are being valuated at bloated nominal prices, the
new super-CDOs will also have bloated nominal prices.

It'll be interesting to see if Moody's and Fitch play along this
time.

People ask me how I can be so absolutely certain that the crisis has
only begun and isn't anywhere near ending, and this is a great
example. They've learned nothing in the last two years. It makes me
want to vomit.

John

[The Grey Badger]

"We won't be fooled again" - the Guess Who. :

[aedens]

August 25, 2009 - 8:50 PM Wegelin bank to pull out of US
Swiss private bank Wegelin announced on Tuesday that it is to stop doing business in the United States.
The St Gallen-based bank, Switzerland's oldest, said the decision had been taken in response to stricter measures introduced in the US against tax dodgers and planned changes to estate tax, which would make some non-US citizens liable to tax if they inherited US securities.

In a letter to investors it said Swiss banks were likely to find themselves in an untenable position, as they would be expected to know which clients were liable to pay US tax – "an impossible undertaking", given the lack of clear definitions in the matter.

The danger of inadvertently making false declarations to the US tax authorities will be too great, it explained.
It added that it believes the US overestimates its attraction as a financial centre, and is advising its clients to get out of all US securities.
The decision comes a week after US tax authorities reached a deal with the Swiss government which will see bank UBS hand over details of almost 4,500 suspected tax cheats. swissinfo.ch
Spring notes: turn Cold winter reality.
It is characteristic of current political thinking to welcome every suggestion which aims at enlarging the influence of government. Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes. If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will decline more and more, until finally it disappears completely. The most serious dangers for American freedom and the American way of life do not come from without. What is needed to prevent any further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligations in full compliance with the terms of the contract.
If you have to convince a group of people who are not directly dependent on a solution of a problem, you will never succeed. Only to bureaucrats can the idea occur that establishing new offices, promulgating new decrees, and increasing the number of government employees alone can be described as positive and beneficial measures. The issue is always the same: the government or the market. There is no third solution.
As a result, while attempts to clean up and recapitalize the US and European financial systems make sense, and are needed to support any eventual recovery, this will not immediately stop the process of financial contraction and economic decline. Fiscal stimulus similarly can soften the blow of the recession but will not directly address the underlying problems, and many countries are constrained by high debt levels. "What a pity that he who steals a penny loaf should be hung, whilst he who steals thousands of the public money should be acquitted."


By spring Obama's campaign promises will not produce miracles. He also cited the "vulnerable political set up," "lack of unified laws," and "divisions among the elite," which becomes clear in these crisis conditions.

http://online.wsj.com/article/SB124692973435303415.html Mr. Obama and Democrats claim they can expand subsidies for tens of millions of Americans, while saving money and improving the quality of care. It can't possibly be done. The inevitable result of their plan will be some version of a NICE board that will tell millions of Americans that they are too young, or too old, or too sick to be worth paying to care for. National Institute for Health and Clinical Excellence, or NICE. Americans should understand how NICE works because under ObamaCare it will eventually be coming to a hospital near you.
http://www.openthefuture.com/2009/08/pa ... g_con.html
Benjamin Disraeli, then a young novelist,
If you establish a democracy, you must in due time reap the fruits of democracy. You will in due season have great impatience of the public burdens, combined in due season with great increase of public expenditure. You will in due season have wars entered into from passion and not from reason; and you will in due season submit to peace ignominiously sought and ignominiously obtained, which will diminish your authority and perhaps endanger your independence.


Mises observed:
When pushed hard by economists, welfare propagandists and socialists admit that impairment of the average standard of living can only be avoided by the maintenance of capital already accumulated and that economic improvement depends on accumulation of additional capital. History does not provide any example of capital accumulation brought about by a government. The consumers are merciless. They never buy in order to benefit a less efficient producer and to protect him against the consequences of his failure to manage better. They want to be served as well as possible. And the working of the capitalist system forces the entrepreneur to obey the orders issued by the consumers. The corruption of the regulatory bodies does not shake his blind confidence in the infallibility and perfection of the state; it merely fills him with moral aversion to entrepreneurs and capitalists. No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion. The final outcome of the credit expansion is general impoverishment.
As for me are you not still under an Ancient Roman edict to consumers then and now of Caveat emptor: Let the buyer beware? And let stockholders beware of wayward leadership.
Sum is that lingering element to date to preserve capital and serve the customer which to date is being exterminated by observation to its ideological burden they wish.
The preservation of our net cash flow to date consists only to serve the remaining customer base. We are in the mode to this hidebound reality since theories explain, but cannot slow the decline of a great civilization as they plan. I set out to be a reformer, but only became the historian of a decline. Aristotle in his Rhetoric (c. 322 B.C.) hit democracy as "when put to the strain, grows weak, and is supplanted by oligarchy. Since I am a consumer to vote every day in purchases will you listen or pass me by as I focus on things you consider important to me?
My friend behind the Great Fire Wall conveyed enjoy Democracy while it last some years ago. As we talked he conveyed how I kept my house over the years. We shared many thoughts of men who understood what is important. Some are here in this forum of reason. As conveyed earlier if you do not know a stock better than your wife please refrain.
Monetae cudendae ratio http://www.microsofttranslator.com/BV.a ... onete.html
His treatise De monetae cudendae ratione, 1526 (first printed in 1816), written by order of King Sigismund I, is an exposition of the principles on which it was proposed to reform the currency of the Prussian provinces of Poland. It advocates unity of the monetary system throughout the entire state, with strict integrity in the quality of the coin, and the charge of a seigniorage sufficient to cover the expenses of mintage.
03/22/09 Any effective global recovery strategy must therefore accord a central role to this group of nations. In addition to rapidly shrinking markets for their exports, they have experienced a huge cutback in private capital inflows. They need offsetting support from public investment, which only the International Monetary Fund can provide in sizable amounts on short notice. Countries are seeking to export their way out of the current crisis through competitive currency depreciation as well as by erecting new trade distortions. Testimony before the Subcommittee on Terrorism, Nonproliferation and Trade, Committee on Foreign Affairs, US House of Representatives
March 12, 2009

Any one with a compass knows this to be true. They are bent on destruction and the world will simply walk away and I do not blame them at all.

UBS agreed in February to pay $780 million and name some United States clients to resolve criminal fraud charges against it. However, this did not affect a separate demand from the IRS for the details of 52,000 UBS clients, in direct contravention of Swiss banking secrecy laws.