Mark Anthony

Sound Lending Practices in One Simple Sentence

Karl:

You are absolutely WRONG.

have you ever run a bank? If not how do you know what is sound lending practices and what isnot? Neither would the government know. So why would it be appropriate for the government to dictate what is sound lending? When does government intervention ever do any thing good to free market economy?

You must have the illusion that there could be banks that would never collapse. Such a thing does not exist. A bank that could never fail, never existed and never will. All bank businesses are inheritly risky, the question is only how big a risk there is.

I can assure you that any bank that operates at the principle as you suggested, would be closed three decades earlier than the banks that does NOT follow your suggestion. Because they simply will NOT be competitive. When a business is not competitive, it fails and goes out of business.

Lending, is inheritantly risky, there is always a certain possibility that you can not get your money back. A bank that does not lend a single penny, is absolurely safe, but such bank will be promptly closed on the first day it opens for business, because it could not generate revenue.

A bank operates on the principle of trying to maximize its revenue and maximize its attraction to both depositors and borrowers, while minimize the risks.

I think we should leave it up to the banks themselves to calculate the risks. But at the same time, there should NEVER be any government bailout of any bank failure, big or small. This is basic free market principle: You calculate your risks and you take your own risks. If you make money, it's yours, but if you lose, don't count on the public to bail you out.

As a matter of fact, I think having a FDIC is a bad idea as well. Because of the existance of FDIC, depositors are more careless about the safety of their money, because there will be some one to bail them out if the bank fails. If we do NOT have a FDIC, the depositors would scrutinize the security of their banks more closely, and they will try to diversify their riskmore. And so there will be less panic of a few banks fail.

Depositors need to understand that if they deposit money in a bank, there is a certain amount of risk that they may lose the money.This is a risk they must pay, to get paid interest. If you do not want the risk, there is always this home grown bank called your pillow bank.

If we abolish the FDIC, replacing it could be a public equivalent of pillow bank. There needs to be a central bank which accepts cash deposits. Such deposit shall receive no interest, ever, and no check shall ever be allowed to be drawn. The only withdraw is cash withdraw. As it pays no interest, it is equivalent to your pillow bank, and hence will NOT compete with privately run banks which pays interests but also bares risks.

'Too Big to Exist' Bill Would Impose Market Discipline

Why do we need a new bill. Isn't there already anti-trust laws? I remember some years ago they tried very hard to split Microsoft into two halves. The same anti-trust principles should be applied to financial institutions as well. If we did, nothing should be allowed to grow to the scale of "too big to fail".

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Jasper:

It's a common myth that short term treasury bills are "safer" than long term treasury bonds. If the US government can not pay off its debts in 30 years, what makes you think it can pay off it's debts in 2 years. If you get paid at all, you are probably getting paid because of a PONZI scheme. PONZI scheme is actually very profitable, and the profit is guaranteed, unless you are the last few investors who become the bag holders who lose everything.

You think the "money" is in short supply? It's true the commodity money, the precious metals, are in short supply. But the credit money, the paper money, are NEVER in short supply. Credit money is a promise money. Promises can be created out of thin air. The FED is not the only entity that can create money out of thin air. ANY ONE can do so.

Let me give you one example. Billionaire Warren Buffet goes to a picker game and he lost $500. He does not have $500 cash in his wallet. Therefore he pull out a piece of paper and write an IOU and give it to the guy. Of course who would question a billionaire's ability to pay back $500. Therefore his IOU is as good as money, maybe even better than actual US dollar cash. Then the guy with the IOU one day went to grocery shopping and he does not have enough cash. Therefore he gave Warren's IOU to the sales lady and who would reject a billionaire's IOU. The IOU is thus spent like it is a real $500 bill. The IOU could thus circulate again and again in all sorts of transactions, even though Warren himself may have forgotten he ever wrote an IOU. In such an instance, Warren Buffet had created $500 money out of thin air.

If the US government, with no credible capability to pay back the debt, can create money out of thin air, then every one with credible ability to pay back CAN create money out of thin air as well. Another example is industry producers, vendors and suppliers could supply credit to each other and that is also money.

Once again, credit money could never be in short supply. It is the trust in fiat money that is in short supply.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Dieuwer:

What's the rationale for shorting SHY? I see absolutely no reason to short or long SHY. SHY is treaury bond funds. If you look at the long term chart, it barely moves much between $80 and $84. By shorting SHY, you are betting that the value of the treasury bonds will drop RELATIVE to the value of the US dollar. That's rather foolish. Both will drop in value, almost proportionally. One dollar of T bonds will always be worth a bit more than one dollar of cash. The US government will always be able to print more dollars to pay the principal of the bonds. So you can not gain anything in shorting SHY. Long SHY or short SHY, you are both losers. You are merely holding one kind of paper versus another kind of paper. All paper will become worthless.

Long commodities is the way to go.

On Oct 14 04:04 PM dieuwer wrote:

> For example: Short SHY, buy GLD. Or use short SHY to get cheap loan.
>

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Dieuwer:

House price never goes up, in real term. House price goes up in dollar term because the dollar goes down. In real purchase power term house price is becoming cheaper. If I buy a house using gold coins, I spend less gold coins today, than I spend in 2000.

Of course, carrying a house has a lot of costs to maintain it in good shape and pay real estate tax, too. There are other physical assets with way much less carrying cost.

I have given you the example of leveraging a loan to buy palladium coins, for example. You make much bigger money, faster, with no real estate tax and very little storage fee to pay for palladium. I use palladium as an example because this is my most favorite precious metal. It will appreciate way much more than gold, in percentage term.

I am not a big fan of shorting anything nowadays. When you short, you hold a negative position of the equity you short, and a positive position of US dollar cash. Your cash holding should be NEGATIVE, not positive. Assume you short $1M worth of something and that something goes to zero, your initial $1M investment becomes $2M. But by then your $2M could only buy you a loaf of bread, on top of that you still need to pay the US government your "capital gain". So do you make money or lose money in such a case?

Why would any one short anything in a hyper-inflation environment?

On Oct 14 03:42 PM dieuwer wrote:

> I'm not so sure about house prices going up. Besides, people always
> "conveniently forget" that it is not just the mortgage payments that
> have to be made. You also have to pay SKY HIGH property taxes, upkeep
> and insurance.
> Here in Boston where I live, property taxes, upkeep and insurance
> is sometimes MORE than the rent! And don't forget: cash strapped
> local governments will INCREASE taxes on your home to pay for their
> lavish programs.
>
> With respect to a cheap loan: shorting SHY would do the job?

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

ebworthen:

I absolutely agree with you. But that is exactly the reason that you need to leverage up to profit from a collapsing dollar. The fact of the matter is no one can do anything about it, the dollar is collapsing. This is a fact that I can not change, but I can profit from it. The opportunity is available because not many people dare to leverage and there are too much money available to be borrowed.

We are talking about profiting using OTHER PEOPLE's money. It's rare to have such opportunity that you can borrow OTHER PEOPLE's money at such low interest rate it was like stealing money from others. Those foolish people are competend getting paid 1% interest or even less, in depreciated US dollar. They will not remain foolish forever.

On Oct 14 03:08 PM ebworthen wrote:

> Mark,
>
> This is the kind of thinking that got us to where we are.
>
> It's like a drug addict switching from crack to heroin.
>
> O.K., so, we let the dollar drop, then inflate our way to "recovery"
> in ten years. Then what, lower interest rates again and encourage
> the next generation to buy a home or cash in on equity?
>
> Oy vey...
>
> On Oct 14 02:03 PM Mark Anthony wrote:

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Jasper:

The deflationists forget that our dollar itself, called Federal Reserve Notes, is a debt coupon. Our money is a debt money. The biggest debt bubble is the US dollar itself. As the debt bubble bursts, so will the value of the dollar collapse. It is happening. I would rather hold physical assets than to hold a pile of worthless paper. By holding the US dollar paper, you are extending credit to the US government. Why would you do that? I don't want to lend money to any one. I would rather want to borrow money from any one at low interest rate.

Where do you want to park your fortune? In US treasury bonds? Come on. You are better off lend me the money let me buy more palladium coins, than lend the money to the US government.

On Oct 14 03:03 PM Jasper M wrote:

> Marc
> I note your steadfast reliance on depreciation of the dollar to justify
> some of your equations. This strikes me as a bad habit - as I have
> posted elsewhere, the collapse of credit inflations is always DEflationary,
> usually in spite of the wishes of the 'relevant' authorities. And
> this credit inflation has been of unprecedented severity.
> MOST of that credit is going away. And that means a precipitous drop
> in money supply. Further, it means an environment where the Fed's
> capacity to instantaneously create 'money' (actually credit) will
> be ineffective, leaving them only the physical printing press, which
> is far too slow to fill the gaping hole in time to save them.
>
> As for your notions re rents, I encourage you to find charts of real
> estate prices & rents going back to the 20's. Big chunks of that
> are NOT pretty for the owners.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Dieuwer:

Good question you asked. Both answers are affirmative. Banks did lend $500K to people with no money down and no income. They are not that foolish any more. But there are still the equivalent. Let say I do put 20% down, it does not change my argument.

Second question, who is going to lease $500K worth of gold to me? Gold is being leased at ridiculously low lease rate. That is a fact. I use my house as mortgage to lease the gold, so it is secured loan there is no reason why they are not willing to lease it to me. Particularly if I do put 20% down on the house.

Your final question: "> Why would anyone lend $500K if he/she knows the money will be repaid with depreciated dollars? You think people are that stupid??"

The answer is ABSOLUTELY YES. People ARE that stupid. 99% of people are that stupid and it is even worse than that. Look at all these people who buy US treasury bonds at ridiculous low yield. They know they will be paid back in depreciated dollar, but they put trillion dollars to lend the money to the US government any way. At least the people who lend money to allow me to buy a house at 6% interest rate and 20% down payment are smarter. They get paid more interest rate and their loans are secured by the physical house. But they, too, are paid back in depreciated dollar. So they too are foolish.

There are tremendous money making opportunities today. You can easily quadruple your money in a matter of a year, because there are soo many foolish people willing to lend money at 1% or 2% interest rate and be paid back in depreciated dollar, and they are happy about that.

And they think it is risky to buy precious metals like palladium, silver and gold? US dollar is safe haven. yeah right.


On Oct 14 01:29 PM dieuwer wrote:

> 1) Who would be willing to lend you $500K with no money down?
> 2) Who would be willing to lease you $500K worth of gold?
>
> Why would anyone lend $500K if he/she knows the money will be repaid
> with depreciated dollars? You think people are that stupid??
>
> On Oct 14 01:01 PM Mark Anthony wrote:

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Karl:

Karl:
You are completely wrong.
The equity of a house equals the value of the house, subtracting the value of the loan, principal and cumulative interest. Your monthly mortgage payment pays down the debt and increases your equity. But your monthly payment is not the only thing that causes your equity to increase. The depreciation of the dollar pushes down the value of the debt you owe, even if you pay not a single dime.

If the house itself "appreciate" faster than the growth of compounded interest and principal of the loan, then it costs you nothing to carry the house and the loan. Not only it cost you nothing, you actually gain something.

To understand this concept, let me tell you that I put down $100K down payment and took a $200K loan, for a total of $300K, to buy 1714 ounces of palladium in a broker's pool account, when palladium was at $175. The loan cost me 7% annual interest. That means I need to pay $14K in interest per year, or $1167 per months. Could I afford an extra $1167 per month on top of my other expenditures? NO. But I have not paid a dime. The loan just compounds.

Then palladium appreciate to $200, interest added to my loan was $2333, so I owe the broker $202333 while my palladium is now worth 1714x$200 = $342.8K. My equity is therefore $140,467. I borrow another $78.6K to buy 393 ounces of palladium. Now I have 2107 ounces and owe the broker $280933 in debt.

Another two months and I pay $3278 in interest, now I owe $284211 in debt. But now my 2107 ounces of palladium is worth $225 per ounces. So my equity is $189864. I want to maintain a debt/equity ratio of 2.0, so I borrow another $95625 from broker to buy another 425 ounces, bring my total to 2532 ounces and my debt to $379836.

Another two months and I pay $4432 in interest. Do you think I have that much money to pay from my monthly income? It just compounds into my loan, so now my debt is $384268. But now my 2532 ounces of palladium is worth $250 each. So my equity is now $248732. So why not borrow more? I borrow $113250 to buy 453 ounces more. Now I owe $497518 and own 2985 ounces of palladium.

Another two months. Interest paid $5804. Borrow $131725 more to buy 479 more ounces at $275 each. Now I owe $635047 in debts, but I own 3464 ounces of palladium.

Another two months. Interest compounded $7409. Borrow $150900 more to buy 503 more ounces at $300 each. Now I owe $793356 in debts, but I own 3967 ounces of palladium.

Another two months. Interest compounded $9256. Borrow $170625 more to buy 525 more ounces at $325 each. Now I owe $973237 in debts, but I own 4492 ounces of palladium, worth $1459900. So I have an equity of $486663.

How did it happen? I started with $100K down payment, and paid not a penny from my income to service my loan, and I end up with $486.663K in equity? The reason is my asset appreciate faster than my debt. And my debt, even if interest compounded, are actually SHRINKING in terms of real purchase power.


On Oct 14 08:25 AM Karl Denninger wrote:

> Housing, in the long term, cannot rise faster than after-tax household
> income.
>
> C'mon guys, this is basic math. Two exponential (compound) functions,
> where one has a larger exponent than the other, will ALWAYS run away
> from each other.
>
> Sixth grade math folks. You passed, right?
>
> This stuff is NOT hard to figure out.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Even that is not true. The housing affordability has nothing to do with treasury bond yield. The dollar could collapse and the treasury bond yield can go to the moon, but you can still pretty much afford a decent house, if you understand that a house retains its intrinsic value while your debt will become worth less and less.

Buy a house, rent it out. Chances are that the rent probably pays for the mortgage payment. From economic principle, the rent should ALWAYS be higher than the carrying cost of the house, otherwise there will be no house rental business.

Alternatively, buy a house at $500K on a $500K loan. Then lease $500K worth of gold, using the house as mortgage. Use the gold to pay off the loan. And then from that point on you only needs to pay the lease rate of the gold. At 0.5325% one year lease rate, it costs you only $2662 per year, or $222 per month. How about owning a half million dollar house for a cost of only $222 per month?

The rease rate of gold reflect the REAL interest rate, inflation adjusted.

On Oct 14 08:34 AM Andrew Butter wrote:

> Yes it can.
>
> The value of a housing is a function of after tax household income
> divided by a function of the 30-Year Treasury yield.
>
> That's basic math
>
> Don't believe me?
>> That algorithm gives a 98.9% R-Squared going back to 1915

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Houses have extraordinary LONG cycle of price adjustment due to supply and demand, compare with other physical assets. At the end of day it still obey the basic physics laws that a physical asset should not be priced below marginal replacement cost, and WILL NOT stay below cost for long. I do not know how low housing price dropped during the 30's Great Depression. If I can travel back time I would love to buy real estate at the low of Great Depression. Profit is virtually guaranteed if you buy below cost and you know it MUST return back to above cost.

Regarding the current housing prices. Is it still a bubble? Or is it already depressed below fair value? I believe it is now below fair value. Don't agree? Let's do a thought experiment to find out:

Assuming the US government issue an order there shall not be any trading of houses in the next 20 years. The order shall take effective at the end of the year. There will be help of free advertisement and free agency service to help people to sell or buy, at no cost. So for every one, you will have a choice:

1. Sell your house at the market price for cash. And then for the next 20 years say "bye bye" to home ownership. You will only be allowed to rent, not allowed to buy, for the next 20 years. You will pay whatever high level the rent goes up, or sleep on the street if you can not afford the rent.

2.Buy a house at the market price for cash. And then for the next 20 years stick with that house as owner. You can rent the house out for extra income, but can NOT sell it for the next 20 years.

Given the choice, and given no opportunity to buy or sell for the next 20 years, will you want to buy a house now, or will you want to sell now and be a renter for the next 20 years? At current price?

Mr. Karl Denninger, would you keep your house or sell it at today's foreclosure prices, if for the next 20 years you will have no opportunity to buy or sell?

On Oct 13 02:58 PM Jasper M wrote:

> If Marc Antony's model is correct, how come housing prices dropped
> so precipitously in the last depression?
>
> Housing is a durable good. If such are produced in a manner only
> revealed to be non-profitable due to the end of a credit mania, they
> will not vaporize - they will hang around, as inventory.
>
> (THIS is why the governmetn should not mess with interest rates!)
>
>
> Let me model this with yachts - suppose that, for Decades, the feds
> gave special tax credits to yacht buyers, and special treatment ('goodwill')
> for those making loans on yacht purchases. This would tend to artificially
> inflate demand for yachts, diverting excess capital into their production.
> Perhaps yacht makers, anxious to maintain this golden goose, would
> cultivate political influence, the better to keep things as they
> are.
>
> But ultimately and inevitably, we would reach a saturation point,
> where everyone who wanted a yacht, and could remotely buy one, had
> one. And then demand would plummet, and the yacht economy would burst
> whatEver political efforts were expended to try and revive it.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Dandun:

My advice is do NOT touch your 401K until your retirement age. And keep your house at all cost. Your physical assets are tremendous fortune of yours in a environment of a looming US dollar collapse and hyper-inflation. Just make sure your mortgage interest is locked and can not be jacked up.

Your best bet is screw the credit card companies and stop paying them. Basically there is only two choices available when it comes to credit cards: They screw you by charging you 30%+ or even ever growing interest rate, until you break; or you screw them by stop paying and tell them to pound sand.

There would be a third choice which is immediately pay off all your credit cards and call it through. But since this choice is not possible, what you have is either you screw them, or they screw you. Your choice. Eitherway the US credit card industry is screwed.

On Oct 13 01:24 PM dandun wrote:

> Games lenders play.
> Great article. I have a house worth 1,000,000 and 1st loan $410K
> (6%) and a 2nd equity line $150K(3.5%). $130K on credit cards loans.
> Luckly we have $1.400,000 in IRA accounts.
>
> I lost my job a year ago as software engineer, still unemployed.
> My wife -luckly- still employed makes $72K/year.
>
> We called Wachovia 4-5 months ago to modify our loan, we were told
> that they hiring and training modification officers. It will take
> 60-90 days put together a loan modification form. After 2 months
> we had a loan modification form which is not any different than regular
> loan application. At the application, we have not stated our IRA
> accounts (bad advise from friends). We were immediately denied for
> modification due income/loan ratio.
>
> A month ago, we applied again, this time we have declared our money
> in 401K. We were told that we have too much money, loan modification
> program is only for people they are really suffering.
>
> We have applied a few other places to refinance, and declared 60K
> income for me as if I am going to retire and start taking money from
> my IRA account. They would not able to refinance our loan again because
> income from IRA accounts not counted unless there is a 2 year history
> of withdrawing money according to Fannie Mae loan guidelines.
>
> Just a footnote, we are 52,53 years old and have 2 teenagers. If
> all possible, we like to stay in our house until kids out of high
> school.
>
> If I don't find a job soon a have very limited choices,
> 1- Start taking money from our IRA accounts, pay penalties and 35%
> tax.
>
> 2- Don't pay the credit cards, blow our credits which will make impossible
> for me to get a job.
>
> Here is bottom line, banks do not want to modify any loans, unless
> you proof that you don't need the loan. They rather make 15% on credit
> cards while I am making 2% on my money.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

For any physical asset, the principle of intrinsic value being higher than marginal cost is an over-riding principle proceeding the supply/demand equation. Because if something can not be sold for a profit, the supply may last a little while but eventually it will drop to zero, as all the unprofitable producers are killed.

If no one in the world can afford to buy yachts, you can bet no more yacht will be built and it will become collection item of a museum. Surely there ARE some billionaires left in the world who can still buy yachts. And you can bet they have to pay a price higher than the manufacturing cost. Some yacht makers will go bankrupt to reduce the supply, the remaining one will have to ask for a price which allows them to be profitable, otherwise they too will go bankrupt and there will be no yacht maker left.

Intrinsic value of any physical asset is equal to or larger than the marginal production cost. Keep that in mind. It's the ultimate truth.

On Oct 13 12:16 PM Forever Bear wrote:

> Mark,
>
> Then how would you explain the difference on the price of the same
> bungalow in San Marino, CA, vs Youngstown, OH? The land may be cheaper
> in Ohio, not the cost of building the house. But reason of the difference
> is, just like anything else in the market, supply and demand.
> In the past 10 years or so, many people bought older houses in Arcadia,
> CA for 500K, tore them down and build McMansions, expecting to sell
> them for millions. Many of those same folks are hurting now because
> those houses just sit on the market, while their interest only mortgage
> began to reset. Some sit tight and hope that things will get better
> soon, while others took a loss.
> The moral of the story is: if you build a yacht and nobody can afford
> to buy it, you'll have the slash the price and hope that you won't
> lose everything you spent to build it.

Banks and Delinquent Borrowers: The Chickens Are Coming Home to Roost

Karl:

How do you suppose house prices come down very significantly from current level? Just because some one can not afford them? I wish yacht prices come down very significantly because I want to buy one but I can not afford to buy one. I wish private jet prices come down very significantly. I would love to buy one but I don't have that much money. Affordability is the reason price of everything must come down, right?

Karl you are totally wrong. Housing prices in many area are creeping back up again, in terms of dollar, because the dollar is coming down. A physical asset's value has nothing to do with affordability. Just because a private jet is too expensive for me to buy, doesn't mean it is priced too high. It costs something to build the house, build the yacht and build the private jet. This has nothing to do with general affordability.

Is housing prices too expensive today? They are not much higher than 2000 level. You are hard pressed to find anything that appreciate less than houses since 2000. Home builders are losing arse load of money building a home and then sell you below cost, and you still think houses are too expensive today?

Preview from Europe: Stocks Continue to Defy Gravity...and Logic

Maxe:

Read this:

China steel body urges crackdown, but Beijing silent
uk.news.yahoo.com/22/2...

No there is NO Chinese government policy to impose a three year moratorium on the steel industry expansion. Not at all. This Mr. Li YiZhong is merely head of a Think Tank. He can not make the government policies. The Chinese Steel Industry Association is of course not happy with the price they pay for iron ores. But for the Chinese Centural Goverment, they are perfectly happy to see the industry to spend out the US dollars as fast as possible. The national policy is a higher priority than the profitability of an individual industry.

China is divesting its US dollar holdings, BIG TIME:
seekingalpha.com/artic...
seekingalpha.com/artic...

On Aug 14 06:39 AM Maxe Paul wrote:

> "With China’s steel industry in turmoil over the Rio Tinto (seekingalpha.com/symbo...)
> scandal, the government has instituted a three-year moratorium on
> applications to expand production or start new projects. China needs
> to have more say in the global iron ore trade, Industry and Information
> Technology Minister Li Yizhong said. Specifically, the country is
> reacting to the steel industry’s production overcapacity, the minister
> said. The government will continue backing the China Iron & Steel
> Association in iron ore price negotiations, but will stop the “chaotic
> situation” and disorderly competition among Chinese importers to
> address the continuous rising spot iron ore price. Li said he hoped
> the world’s major iron ore suppliers would consider both their own
> long-term interests and their long-term cooperation with China’s
> steel industry. "