During the Great Depression of the 1930’s the banks, trust funds, and stock market lost 90 percent of their value. If you had a thousand dollars saved up or invested back then, you were left with one hundred dollars. If you lost your job there was no unemployment or Social Security. Deflation became a very serious issue; nobody had any money left to speak of. If you had been living paycheck to paycheck, all you could lose was your job (a rather anemic understatement).
March forward to today. No depositor has lost a dime in the banking system. All of the foreclosures will be bought by the government. Unemployment is collectible for two years. There has been no 90% loss of savings. The government has printed dollars to cover all bank failures.
Millions of people are collecting unemployment and not producing anything, but they are consuming product using their government check. At the same time, tax collection revenues have been decreasing at an alarming rate while government expenditures have been increasing geometrically.
Our government has no increased tax revenues coming in unless you count the new health care. They are printing money to pay the bills. At some point this leads to inflation. Deflation cannot happen, everyone has their dollars. The unemployed are consuming the products we savers chose forego, when we deposited our money in a retirement account. Our savings were a way to defer consumption into the future.
As long as retirement redemptions are minimal, inflation does not even enter the picture. The product produced matches the printed dollars spent. We will see inflation when the baby boomers decide to spend some of their deferred consumption.
The Economic rhetoric from Bernanke claiming his actions will save the country from a deflationary spiral, is pure nonsense. The Emperor is wearing no clothes, claiming otherwise changes nothing. Inflation is the name of the game, and hyper inflation is our destination. It cures all of Fannie Mae’s and Freddie Mac’s problems. They don’t have to mark down to market; they get to mark up to market.
At one point the government had a choice of deflation or inflation to solve this bubble. If we had done nothing, we would have had the 90 percent haircut and deflation just like the 1930's did. We chose to solve the problem differently with a printing press.
What’s it mean? The government can’t stop the inevitable; they can only slow it down. Our dollar will be the new dime of the 21st century. We still get the 90 percent haircut. The money borrowed was squandered on consumption. It is gone, it can't be undone. This is not something that can be reversed with a printing press. The government is only increasing the number of dollars chasing a decreasing inventory of product.
Where to from here? 15 trillion in debt and we have a President who keeps on saying “We are not out of the woods yet.” If you owe 15 trillion dollars, why get out of the woods? Stay there and hide!
Sunday, June 27, 2010
Wednesday, June 23, 2010
Robbery Royale at Fannie Mae
Karl Denninger of the Market Ticker had a bit today on Fannie Mae giving everyone the green weenie. It’s worse that what he stated. Fannie Mae has a delaying tactic. They have a deed for lease program where you can rent back your property from them at the current market rental rate. Here is a Link. So, instead of a walk away home that gets stripped, you have a home that is being lived in by the previous owner. The lease is for one year and that could extend for many more if you read the tea leaves.
This program delays real estate from hitting the market in the form of a foreclosure. The inventory is eased into the market gradually instead of all at once. This is the hidden inventory that everyone talks about. The other thing is their great financing program for new buyers, here is a link.
If you read their boilerplate carefully, you don't need to pay for an appraisal, which costs dollars. My question, would the property appraise for what they are trying to sell it to you for? Probably not, it is called rip off the poor and uninformed, sell them that dream of home ownership. A dollar down moves you in. If you look this gift horse in the mouth, you would walk away.
Fannie will give you 3 1/2 percent of the home’s value for closing costs or whatever. You need to have 3% down, but you could get a check cut for 10% of the home’s value for repairs. Oh goodie free money.
Here is an article I wrote showing my frustration with what they were doing two years ago link . The couple that bought this home both worked at a movie theater making $8 per hour. They got $10,000 for repairs and spent it on a bike and a pick up. It ended up going back to the bank (Fannie Mae). It only cost them a dollar to move in.
The thing to take pause at here are the Realtors. Commissions are 6% so we know whose raking in the real money.
I use to sell VA repos, and that was on an auction basis. High bid won. Now we have a candy ass program; Fannie Mae will finance your dream, if you agree to pay their price. The people at Fannie Mae need some jail time.
This program delays real estate from hitting the market in the form of a foreclosure. The inventory is eased into the market gradually instead of all at once. This is the hidden inventory that everyone talks about. The other thing is their great financing program for new buyers, here is a link.
If you read their boilerplate carefully, you don't need to pay for an appraisal, which costs dollars. My question, would the property appraise for what they are trying to sell it to you for? Probably not, it is called rip off the poor and uninformed, sell them that dream of home ownership. A dollar down moves you in. If you look this gift horse in the mouth, you would walk away.
Fannie will give you 3 1/2 percent of the home’s value for closing costs or whatever. You need to have 3% down, but you could get a check cut for 10% of the home’s value for repairs. Oh goodie free money.
Here is an article I wrote showing my frustration with what they were doing two years ago link . The couple that bought this home both worked at a movie theater making $8 per hour. They got $10,000 for repairs and spent it on a bike and a pick up. It ended up going back to the bank (Fannie Mae). It only cost them a dollar to move in.
The thing to take pause at here are the Realtors. Commissions are 6% so we know whose raking in the real money.
I use to sell VA repos, and that was on an auction basis. High bid won. Now we have a candy ass program; Fannie Mae will finance your dream, if you agree to pay their price. The people at Fannie Mae need some jail time.
Monday, June 21, 2010
The Low Bond Yield Conundrum (Reprinted)
This is an edited reprint from November 19, 2006 which demonstrates what large swings in interest rates can do of the bond market. Note the interest rates are off a bit; at the time of writing, there was less than 100 basis points between the 30 year Treasury bonds and the one year T-Bills. The 30 year interest rates have remained constant, the short term rates have gone to hell. Greenspan was the man in charge at the time.
The bond market is at a point right now that leaves an awful lot of long bond holders (buyers of the 30 year) very vulnerable.
With the coming vaporization of the second trust deed market, there should be a scarcity of funds. Add to that, marking to market of foreclosed homes adds even more to this up and coming "enterprise." Seventeen interest rate increases by the Fed and the long term rate comes out very little changed.
In Greenspans speech to Congress last year June 9, 2005 he is quoted:
What it really boils down to is; there is a very large demand for long term bonds. More than the market can supply. Otherwise interest rates would rise to attract buyers (this may not seem obvious, but as the price of a bond drops, its interest rate increases and vise versa). The Baby Boomers could be going to less risk in their portfolios. An insurance company locking in rates on an annuity for thirty years, this would be a smart call.
Where it gets kinky, is the fact that everyone is loaning 30 year money at close to the rate paid for the one year Treasury. Look at a 30 year bond issued today at say 5%.
Value of Face amount-------interest rate--------interest paid
----$1,000,000-----------------5%-----------------$50,000
No problem with the investment, but if the interest rate went to 10%, the dynamics change. Using that same 1,000,000 bond we now have:
Value of face Amount-------interest rate--------interest paid
------$500,000------------------10%-----------------$50,000
What this shows, is that your market portfolio could, if marked to market have a haircut of 50 percent. Notice however, if you hold on to maturity, there is no "real" loss of principle. 30 years is a long time to wait if you are already 60 (I turned 60 yesterday).
The real pure play for the bond market is to buy when the market is at 10% and sell when it goes to 5%. That play, a reverse of the first example, would net a cool half million. This is where the money is made in the bond market. (Note if you were to buy at 10% and it swung even lower to 20%, your jaw could hit the floor rather hard.)
The only thing that makes today a buying opportunity, is the belief that the interest rate will drop to 2.5%, this would double your bond portfolio's value, and it just ain't going to happen.
Another thing that Greenspan mentioned, that people were willing to accept more risk with less reward. Everything except Delta Airlines Bonds are trading as if they are US Treasury's (admittedly an exaggeration, but the rates commanded are rather unrealistic if not pathetic).
We seem have a market running on the herd mentality of "If it works, go with the flow." At some point there will be a demand for funds that could raise the interest rate to quite a spectacular level, even if for a short period of time. It is at that point, that cash can buy into the bond market and make a killing.
A stock has to double to double your money. With a bond a 50% drop in the interest rate doubles your return. The thing to remember in a panic, it's like going into a pawn shop with a $10,000 wedding ring, you're not going to get list price or anywhere near it. You're are going to take what you can get according to how desperate you are for cash funds.
What you really have, is a mistake being made by retirement funds, that will take them 30 years to fully appreciate. Your clients only have 15 to 35 years to live. They just might need the money before the call date. The real culprit is unperceived inflation --your monthly retirement check might only buy a weeks worth of groceries. I guess this is how you get "saved" from a severe deflationary spiral--more government printing.
The Conundrum is, why invest in bonds? You're guaranteed a loss at present interest rates.
The bond market is at a point right now that leaves an awful lot of long bond holders (buyers of the 30 year) very vulnerable.
With the coming vaporization of the second trust deed market, there should be a scarcity of funds. Add to that, marking to market of foreclosed homes adds even more to this up and coming "enterprise." Seventeen interest rate increases by the Fed and the long term rate comes out very little changed.
In Greenspans speech to Congress last year June 9, 2005 he is quoted:
Among the biggest surprises of the past year has been the pronounced decline in long-term interest rates on U.S. Treasury securities despite a 2-percentage-point increase in the federal funds rate. This is clearly without recent precedent. The yield on ten-year Treasury notes, currently at about 4 percent, is 80 basis points less than its level of a year ago. Moreover, even after the recent backup in credit risk spreads, yields for both investment-grade and less-than-investment-grade corporate bonds have declined even more than Treasuries over the same period.
What it really boils down to is; there is a very large demand for long term bonds. More than the market can supply. Otherwise interest rates would rise to attract buyers (this may not seem obvious, but as the price of a bond drops, its interest rate increases and vise versa). The Baby Boomers could be going to less risk in their portfolios. An insurance company locking in rates on an annuity for thirty years, this would be a smart call.
Where it gets kinky, is the fact that everyone is loaning 30 year money at close to the rate paid for the one year Treasury. Look at a 30 year bond issued today at say 5%.
Value of Face amount-------interest rate--------interest paid
----$1,000,000-----------------5%-----------------$50,000
No problem with the investment, but if the interest rate went to 10%, the dynamics change. Using that same 1,000,000 bond we now have:
Value of face Amount-------interest rate--------interest paid
------$500,000------------------10%-----------------$50,000
What this shows, is that your market portfolio could, if marked to market have a haircut of 50 percent. Notice however, if you hold on to maturity, there is no "real" loss of principle. 30 years is a long time to wait if you are already 60 (I turned 60 yesterday).
The real pure play for the bond market is to buy when the market is at 10% and sell when it goes to 5%. That play, a reverse of the first example, would net a cool half million. This is where the money is made in the bond market. (Note if you were to buy at 10% and it swung even lower to 20%, your jaw could hit the floor rather hard.)
The only thing that makes today a buying opportunity, is the belief that the interest rate will drop to 2.5%, this would double your bond portfolio's value, and it just ain't going to happen.
Another thing that Greenspan mentioned, that people were willing to accept more risk with less reward. Everything except Delta Airlines Bonds are trading as if they are US Treasury's (admittedly an exaggeration, but the rates commanded are rather unrealistic if not pathetic).
We seem have a market running on the herd mentality of "If it works, go with the flow." At some point there will be a demand for funds that could raise the interest rate to quite a spectacular level, even if for a short period of time. It is at that point, that cash can buy into the bond market and make a killing.
A stock has to double to double your money. With a bond a 50% drop in the interest rate doubles your return. The thing to remember in a panic, it's like going into a pawn shop with a $10,000 wedding ring, you're not going to get list price or anywhere near it. You're are going to take what you can get according to how desperate you are for cash funds.
What you really have, is a mistake being made by retirement funds, that will take them 30 years to fully appreciate. Your clients only have 15 to 35 years to live. They just might need the money before the call date. The real culprit is unperceived inflation --your monthly retirement check might only buy a weeks worth of groceries. I guess this is how you get "saved" from a severe deflationary spiral--more government printing.
The Conundrum is, why invest in bonds? You're guaranteed a loss at present interest rates.
Wednesday, June 16, 2010
Read Between the Lines
Tuesday's San Diego Union Tribune ran a front page story; the county's median home prices were up 15.3 percent.
It makes you wonder a bit about their chart below, until you look at the new homes for May 2009 and compare them with new homes for May 2010. [double click for a clearer image]
Looking at it realistically, the buyer lost $77,000 if they bought a new home last May (highlighted in yellow). And now there are a lot of 600K "used" homes that are now selling for 400K. The condo sales don't make much sense unless the new units in downtown San Diego (previously selling at 600K) have been reduced to move at 250K. Just try and find a banker that will finance a condo.
The other thing to realize is that used home totals are actual, new home sales are usually 2/3's of those listed; they are counted the minute the contract is signed and a lot fail to close. Another item to take into account, the tax incentive just expired so the totals for May stole from June.
You can't fault the newspaper for printing "Good News."
San Diego County home prices, which were falling at double-digit rates a year ago, are now rising rapidly as investors grab the last remaining bargains and upper-end buyers find deals to their liking.
It makes you wonder a bit about their chart below, until you look at the new homes for May 2009 and compare them with new homes for May 2010. [double click for a clearer image]
Looking at it realistically, the buyer lost $77,000 if they bought a new home last May (highlighted in yellow). And now there are a lot of 600K "used" homes that are now selling for 400K. The condo sales don't make much sense unless the new units in downtown San Diego (previously selling at 600K) have been reduced to move at 250K. Just try and find a banker that will finance a condo.
The other thing to realize is that used home totals are actual, new home sales are usually 2/3's of those listed; they are counted the minute the contract is signed and a lot fail to close. Another item to take into account, the tax incentive just expired so the totals for May stole from June.
You can't fault the newspaper for printing "Good News."
Thursday, June 10, 2010
The Anatomy of a Bubble
In order to understand a bubble, one has to examine two conditions of our environment. One, there is a randomness with the way we interact with our economic community; everybody works, but we all have different types of jobs. Two, our resources are finite; they can be exhausted by consumption.
The first step of a bubble is the severe misallocation of resources. Production focuses on one particular item. The misallocation, means that we are about to allocate most of our resources towards that one goal. This starts out gradually and then progressively consumes more and more resources.
In the second step of a bubble, a large group of people are no longer interacting with the economy in a random fashion; they are all pursuing the same wealth creation formula. This too, starts out with a normal amount of people employed in the bubble sector of the economy. As the bubble gets more robust, more people with a desire for riches join in with lost abandon.
As we enter step three, there is the comfort that everyone participating in the bubble, feels sort of group camaraderie (the herd mentality). Notice as people acquire more riches from their venture, they come to accept the fact that they’re just MORE intelligent than ordinary people. At this point greed and stupidity mix well; double your investment and in turn, double your profit.
Then we come to the final stage (step four) loss of control; the resources are exhausted and the bubble collapses. The damage has been done and it is real.
Examine these two bubble examples from the past:
A river boat ferry, in India 20 years back, was packed with 600 people. Two teenagers in love were going to jump off the boat and commit suicide (their parents wouldn’t let them get married). Needless to say 600 people rushed to one side of the ferry to witness the event. The ferry capsized with a very large loss of life. What happened was sudden and very unexpected by all involved.
The second case was in Africa 50 years ago. Wealth was measured in cattle. The more cattle you owned, the more wives you could afford (this also produced a lot of kids that had to be fed). Cattle production shot through the roof over several years, everyone was getting rich. Even the people growing the hay to feed the cattle were making money. The price of cattle feed started to increase; there wasn't enough supply to meet demand. The cattle were starting to exhaust their food supply. Farmers found it difficult to feed all of their cattle, so more went to market for sale. Prices started to drop and the cattle market collapsed. The livestock died off in mass and the general population faced the aspect of starvation. There wasn’t any drought that brought this famine on, just the misallocation of resources.
Identifying a bubble is at best, very difficult in the early stages. The housing bubble over time has become obvious. Medicare is a bubble in progress. Resources are limited more so than is apparent; high costs in the past have kept medical demands in check.
The national debt is also a bubble but the concept of what constitutes resources (real money) is one of those magic acts, that go on forever. An increase in the interest rate to 9% could spell doom for the US Treasury and the national debt (of course that could never happen).
The ferry boat (our Ship of State) is full and pushing away from the dock; I wonder if Romeo and Juliet are on board?
The first step of a bubble is the severe misallocation of resources. Production focuses on one particular item. The misallocation, means that we are about to allocate most of our resources towards that one goal. This starts out gradually and then progressively consumes more and more resources.
In the second step of a bubble, a large group of people are no longer interacting with the economy in a random fashion; they are all pursuing the same wealth creation formula. This too, starts out with a normal amount of people employed in the bubble sector of the economy. As the bubble gets more robust, more people with a desire for riches join in with lost abandon.
As we enter step three, there is the comfort that everyone participating in the bubble, feels sort of group camaraderie (the herd mentality). Notice as people acquire more riches from their venture, they come to accept the fact that they’re just MORE intelligent than ordinary people. At this point greed and stupidity mix well; double your investment and in turn, double your profit.
Then we come to the final stage (step four) loss of control; the resources are exhausted and the bubble collapses. The damage has been done and it is real.
Examine these two bubble examples from the past:
A river boat ferry, in India 20 years back, was packed with 600 people. Two teenagers in love were going to jump off the boat and commit suicide (their parents wouldn’t let them get married). Needless to say 600 people rushed to one side of the ferry to witness the event. The ferry capsized with a very large loss of life. What happened was sudden and very unexpected by all involved.
The second case was in Africa 50 years ago. Wealth was measured in cattle. The more cattle you owned, the more wives you could afford (this also produced a lot of kids that had to be fed). Cattle production shot through the roof over several years, everyone was getting rich. Even the people growing the hay to feed the cattle were making money. The price of cattle feed started to increase; there wasn't enough supply to meet demand. The cattle were starting to exhaust their food supply. Farmers found it difficult to feed all of their cattle, so more went to market for sale. Prices started to drop and the cattle market collapsed. The livestock died off in mass and the general population faced the aspect of starvation. There wasn’t any drought that brought this famine on, just the misallocation of resources.
Identifying a bubble is at best, very difficult in the early stages. The housing bubble over time has become obvious. Medicare is a bubble in progress. Resources are limited more so than is apparent; high costs in the past have kept medical demands in check.
The national debt is also a bubble but the concept of what constitutes resources (real money) is one of those magic acts, that go on forever. An increase in the interest rate to 9% could spell doom for the US Treasury and the national debt (of course that could never happen).
The ferry boat (our Ship of State) is full and pushing away from the dock; I wonder if Romeo and Juliet are on board?
Saturday, June 05, 2010
Live Rent Free, Don't Give the Bank the Keys (Reprinted)
Here is a reprint from this blog back 3 years ago, September 6, 2007. The probability of it, has come to pass.
Everyone is talking about all of the foreclosures and how rental rates will rise because of the demand from all of the displaced owners. Maybe there is one item that has been overlooked.
When banks foreclose and get title, there is a year or two wait to complete the process. We are talking about the actual deed, not a note saying that the title was conveyed and it is free and clear. The paperwork takes a while.
In the mean time, the neighbor across the way trades out his broken dishwasher with the one in the foreclosure. In California, the air conditioner would probably grow legs in two weeks. In a year’s time, there might not be much left. I’ve seen places that the neighborhood kids would use and by the time they are finished with it, you really wouldn’t want it at any price.
This can even get worse. Consider a foreclosure in Colorado, the pipes freeze and break. In Florida, a closed up house might mold over like a loaf of bread. Some states have laws on the books that allow the foreclosed owner two years to redeem the house after the event. So, clear title could be a very long wait.
Considering the length of time needed to sell a house lately, a year is not an unreasonable estimate of time. The note holder has a chance to lose big time. His asset could be run through the local recycler without his knowledge, copper pipes and all. It behooves him to have the house occupied.
The foreclosed home owner can’t lose if he plays his cards right. Walk up to the lender handling the foreclosure, and offer to keep living in the house rent free until it is sold, on the condition that you take care of the lawn and the house in general. Sounds crazy, but who the hell is going to buy it in this market? At least nobody is going to steal the air conditioner before you have a chance to sell it. At the present time, things aren't quite that bad, so you might have to pay monthly rent payments.
An impossible pipe dream? People living in foreclosed homes and not being tossed out?? It’s happened before, just not in the last 75 years. States even passed laws so it could happen.
Post-note June 5, 2010:
The property tax arrears on these homes could become a nightmare. They are not being paid and the states depend on the dollars for their budgets. Just who owes the money is the real question. Some states allow you to pick up a home for back taxes, others don't. In California it looks like the bank pays the back taxes from the proceeds of the foreclosure sale. If the home is upside down, the FDIC, FANNIE, or FREDDIE become the indirect guarantor of the taxes. It's just another way of saying this is a free ride on the taxpayer.
Everyone is talking about all of the foreclosures and how rental rates will rise because of the demand from all of the displaced owners. Maybe there is one item that has been overlooked.
When banks foreclose and get title, there is a year or two wait to complete the process. We are talking about the actual deed, not a note saying that the title was conveyed and it is free and clear. The paperwork takes a while.
In the mean time, the neighbor across the way trades out his broken dishwasher with the one in the foreclosure. In California, the air conditioner would probably grow legs in two weeks. In a year’s time, there might not be much left. I’ve seen places that the neighborhood kids would use and by the time they are finished with it, you really wouldn’t want it at any price.
This can even get worse. Consider a foreclosure in Colorado, the pipes freeze and break. In Florida, a closed up house might mold over like a loaf of bread. Some states have laws on the books that allow the foreclosed owner two years to redeem the house after the event. So, clear title could be a very long wait.
Considering the length of time needed to sell a house lately, a year is not an unreasonable estimate of time. The note holder has a chance to lose big time. His asset could be run through the local recycler without his knowledge, copper pipes and all. It behooves him to have the house occupied.
The foreclosed home owner can’t lose if he plays his cards right. Walk up to the lender handling the foreclosure, and offer to keep living in the house rent free until it is sold, on the condition that you take care of the lawn and the house in general. Sounds crazy, but who the hell is going to buy it in this market? At least nobody is going to steal the air conditioner before you have a chance to sell it. At the present time, things aren't quite that bad, so you might have to pay monthly rent payments.
An impossible pipe dream? People living in foreclosed homes and not being tossed out?? It’s happened before, just not in the last 75 years. States even passed laws so it could happen.
Post-note June 5, 2010:
The property tax arrears on these homes could become a nightmare. They are not being paid and the states depend on the dollars for their budgets. Just who owes the money is the real question. Some states allow you to pick up a home for back taxes, others don't. In California it looks like the bank pays the back taxes from the proceeds of the foreclosure sale. If the home is upside down, the FDIC, FANNIE, or FREDDIE become the indirect guarantor of the taxes. It's just another way of saying this is a free ride on the taxpayer.
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