In recent weeks there have been many, many articles and reports on who will be the new Chairman of the Board of Governors of the Federal Reserve System and when, not whether, the Federal Reserve will begin to "taper" its purchases of securities from the open market. So, after four years of excesses, people are now looking for the Fed to get back to routine central banking practices.
Perhaps as succinct a description of the Fed's attempt of quantitative easing comes from the pen of Raghuram Rajan, the new appointed head of the central bank of India. Rajan, a highly respected economist from the IMF who taught for years at the University of Chicago gave this assessment of quantitative easing in his book "Fault Lines." Quantitative easing, Mr. Rajan wrote, is a "Hail Mary pass." He goes on: 'We don't know where it's going to end up. We don't know how to exit from it."
Thus we approach the exit of quantitative easing and we all have to deal with the aftermath. The crucial things for investors to be aware of is that times of transition like this offer opportunities to make a lot of money. During quantitative easing, as markets adjusted to the new Fed behavior, many opportunities came about to profit. I have written about many of these over the past two to three years. The latest post of this nature was put up yesterday.
We have also seen how hedge funds and other wealthy investors have made money through purchasing foreclosed properties and buying other properties in bundles to "flip" them as the housing markets continue to improve as the economy rides up. And, given the Fed's excessively loose monetary policy pumping up housing prices, there is substantial protection against downside risk.
Anytime the federal government changes the structure of how things are done opportunities arise. The secret here is to look for where "bubbles" are being created or where there are price "dislocations" that provide opportunities to profit. And, as the federal government continues to push things in this direction, the downside risk is low.
However, one must still be nimble when the federal government reverses policy. Then you have to move to the next "game" in town.
The next "game" with respect to monetary policy is connected with the opportunities that will arise due to the Federal Reserve's "tapering" of security purchases and the return of Fed operations to "more normal" central bank activities. Keep your eyes open!
The Wednesday morning newspapers provide another possibility for economic gain. President Obama "Backs Limits to U. S. Role in Mortgages." That is, the president wants to reduce the federal government's role in granting and guaranteeing mortgages in the United States.
Binyamin Applebaum writes in the New York Times that "Washing Edges Warily Into Housing: Financing Overhaul Is a Perilous Quest."
Mr. Applebaum states that "Fannie (Mae), Freddie (MAC) and the Federal Housing Administration backed 87 percent of new mortgage loans over the last five years … In the years before the (financial) crisis, less than 40 percent of the market was government-backed."
Now, the idea is for the federal government to back off from such a prominent role in housing finance and let mortgage lending become more of a private sector function once again.
One has to remember that after during the Great Depression, the federal government started to get involved in housing as home ownership took became more and more important to the politicians. However, the really big move in government involvement began in the 1960s. Sometimes it is hard to believe that there were no mortgage-backed securities in existence in the late 1960s and by the end of the 1970s, they became the largest segment of the capital markets.
Further efforts were made to allow more and more families to get a mortgage and get their own homes as the century moved on to its end. Politicians became almost hysterical promoting new possibilities for housing finance as time passed. And, given all the credit being pumped into the housing market, house prices never fell!
And, there was a lot of money to be made in the housing/mortgage area. Thrift institutions thrived. So did construction firms. Mortgages originators profited as did mortgage-bundlers. And, so on and so forth. The mortgage market became a world-wide phenomena. Now, we are going to move back, restructure, the mortgage market to allow it to be more in private hands.
But, you can bet on one thing … the federal government … the politicians … are going to support housing for the people … as many people as possible.
So, you have the government moving to privatize the housing/mortgage market. You have the politicians still supporting the idea that as many Americans as want to should own their own home. And, you have all the financial innovation in place that was created over the past fifty years.
There has to be very profitable opportunities in here. And, since the federal government is still going to "underwrite" in whatever way it can, home ownership, there is downside protection.
Where are the opportunities going to arise? Will you be one of the ones to find out where they are?
Whenever government gets involved in something and determines what the "outcomes" connected with that "something" are, incentives are created for people to make profits. And, the more extreme are the government efforts, the more downside risk is provided.
No matter how "good" the government "outcome" might be, there are opportunities for others to help "deliver" the outcomes. I know this sound crass, but this is the way the world works. Somebody is going to take advantage of the opportunities. And, taking advantage of the opportunities is not against the law. So, you might as well be one of the success stories.
Over the last fifty years the federal government set up rules for what it was trying to achieve and threw lots and lots of money into the effort. People learned how to work with the system and profit from it. That is, they learned how to "play the game."
Now, it seems as if there is a "new" regime coming into being. Efforts are being made to re-structure government programs and thereby re-structure the economy. Investors should adjust to the change in direction.