BookValue

When Will the Market Turn Negative Again?

I'll give you the two reasons why the US economy will grow again:

1. Population grows a little over 1% per year.
2. Productivity grows around 2% per year.

Population is not going to stop growing and people keep getting more productive.

This has been the case as the US economy transitioned from an agriculture-based economy to an industrial-based economy to a services-based economy. There have been worse financial panics and real estate bubbles, worse recessions, and worse economic policies, yet we still grew a little over 3% through it all.

Unemployment: The Number to Watch

Ron, you are the classic example of Mark Twain's quote about statistics. Are you aware that the US population is 44% higher now than it was in 1974 and 33% higher than it was in 1982? On a population adjusted basis, the employment statistics you tout for the 73-74 and 81-82 recessions are much, much worse.

If you would stop for a moment and look at the trend in the initial jobless claims number, you will note that it is now declining from its high and is below it's 4-week moving average. This is one of the best leading economic indicators for the turn in economic activity.

A Stress Test Shocker: BofA Needs $35 Billion

This is more of bullcrap from Secretary Tax Cheat. TCE is a load of manure foisted on the market by the hedge funds who have shorted the banks.

Chart of the Week: Existing Jobless Claims Continue to Spike

It's idiot day on Seeking Alpha.

Making absolute comparisons to what was happening 25 to 35 years ago is meaningless. The US population is 33% higher than it was in 1982 and 44% higher than it was in 1974. Unless you correct for that population increase, your conclusions are vacuous.

FHFA Housing Price Increases Are Suspect: Better Stick with Case-Shiller

FHFA tracks the whole country. Case Shiller tracks 20 cities. Not exactly a broad measure.

Obama Just Pulled a 'Reagan' on the Automakers

The Obama/Reagan comparison is a load of crap.

If it were Reagan, he would have fired all the UAW employees for the mess they had caused.

In Mark-to-Market War Pragmatism Will Trump Principles

Here's the kind of logic contained in FAS 157. The neighbor puts a gun to his head and pulls the trigger one morning because he feels his life has no more value. Under FAS 157, we all have to put guns to our heads because if his life doesn't have value, that means ours doesn't either.

During the 70 years that mark-to-market accounting was abolished, financial crises were minimal, bank runs were unseen, and global downturns unsynchronized. Within a year of it returning, financial markets seized up, we had runs on banks, and the entire global economy is in meltdown. MTM has re-introduced too much instability into the system.

Recognizing a loss as soon as the market deems it probable increases the probability not only of realizing that loss, but also of realizing other losses. The increase in probability of the other losses under MTM accounting will only increase the probability of further losses. Economists call this pro-cyclicality. Physicists and mathematicians call this chaos because the synchronized feedback drives the system further and further from stability.

It is insane to have the Fed attempting to stabilize the financial system with TLF, TARP, TALF and every other acronym they can think of while one of the major sources of instability, MTM, is still in place. For 70 years, the accounting rules kept the loss realization closer to when the actual loss occured. This kept losses from being synchronous and self-fulfilling.

It isn't accounting transparency that people who make money in markets want, it is a self-reinforcing trend that they want. There is no better way to make money than to spot a trend that will continue. Unfortunately, negative self-reinforcing trends can damage the economy. If you poll a bunch of fund managers whether they would rather have a self-reinforcing trend or a stable economy, I can make a lot of money betting which way they will go.

FASB made a huge mistake in giving us MTM accounting again because they missed one of the big ideas economists hit on during the MTM hiatus: maximizing the outcome for the whole country, not just for those who can make money from it. Over the 70 years MTM was on hiatus, our country and our country's financial system survived wave after wave of real estate bubbles in California, Texas, the northeast, and everywhere else. But as soon as it returned, we were instantly thrown back to the volatility and financial collapses of the great depression.

If the choice is between pointing the gun at ourselves or pointing the gun at FAS 157, I say we point it at 157 and the FASB. Fund managers will keep telling us to point the gun at ourselves, but only because they have taken out life insurance policies on everyone. They're too self-centered to realize there won't be anyone around to collect.

Mark-to-Market Triggered This Recession; It Will Also Trigger the Recovery

Willie, maybe you should look at when FAS 157 took effect. We weren't complaining about it before, because it wasn't in effect before. It took effect right as this economic crisis was unfolding, which is why things got so bad.

As I commented before, if it turns out that the US taxpayer had to bail out so many institutions simply because of FASB's rule, every American should march on the FASB glass tower in Norwalk, CT and frog march the board members out of there.

It is highly ironic that those who set the accounting standards of the country are completely unaccountable to anyone!

Mark-to-Market Triggered This Recession; It Will Also Trigger the Recovery

Here's how intelligent mark-to-market accounting is. One morning, you awaken to a gunshot. It turns out your neighbor felt his life was worthless and put a gun to his head. Now, because of FAS 157, we are all required to put guns to our heads because if he felt his life was worthless, it means our lives are worthless also.

I have a better idea: point the gun at FASB. I think that if a single RMBS that had to be marked down at a bank that had to be bailed out by the US taxpayer matures closer to par than where it is currently marked, that every FASB member be frog marched out of their glass tower in Norwalk, CT straight into a maximum security prison. After that, I waffle between life in prison and the death penalty.

Don't Blame Mark-to-Market for This Crisis

Adrienne, the whole concept of mark-to-market accounting is based on psychology, including greed and fear, because markets operate on greed and fear. Rationality was thrown out the window with mark-to-market accounting. Now, if your neighbor panics and shoots himself because he thinks his life doesn't have value any more, everyone else on the planet has to commit suicide as well, because FASB made up a rule called mark-to-market accounting. If his life is worthless, your life is worthless as well.

If you are holding the top tranche of a 2005 prime MBS that is overcollateralized and has a credit enhancement where the default rate is nowhere close to touching either the overcollateralization or the credit enhancement, why should you have to worry about the value of your security? Because FASB says that if some idiot hedge fund got itself into trouble and has to unload the identical tranche to meet redemptions, even if the only way it can do so before they have to pay off investors tomorrow is by selling it for 75 cents on the dollar, your security is now worth only 75 cents on the dollar. That should be ok, except if you're a bank. Now, you're going to have to raise capital because your assets are suddenly worth less. That will tank your stock price, and cause a run on your bank, which will force you to liquidate your assets at even lower prices, which will cause the next bank which held the same security to stop lending because they're not sure if they have adequate capital, which will force the widget company down the street to layoff people because it can't get a short-term loan to make payroll, which will cause John to miss his next mortgage payment, which will lower the value of the 2005 prime MBS, and here we go again.

So, yes, let's all put guns to our heads because FASB and the mindless CPAs who follow their accounting rules tell us to. Wouldn't it be more intelligent to point the gun at FASB and the braindead CPAs who only know how to do what FASB says?

Don't Blame Mark-to-Market for This Crisis

Sorry, phaf, but you just gave away your lack of knowledge on the subject. Mark-to-market means you have to mark the value of your securities to whatever they're trading at. Banks have been applying this accounting rule for some time now, and that is the problem. Why do you think their regulatory capital is suffering? These securities are still paying interest and principal, and defaults are nowhere near affecting either the over-collateralization or the credit enhancements. Do you even know what a tranche is?

You purists who now want us to mark-to-panic are the cause of a worldwide economic collapse. Try explaining your desire for accounting purity to a potato farmer in the highlands of Peru who can no longer clothe his family why marking securities that are still money good to panic and liquidity firesale prices is a good thing. Yes, the whole point of what I am saying is that firesale/panic prices have no bearing on the ultimate value of the security. Duh!

Don't Blame Mark-to-Market for This Crisis

Phaf, will you take the bet or not?

Your mark-to-market purist attitude affects all assets, not just those at the top of the market. There are 2005 vintages of prime RMBS with no exposure to FL, CA, AZ, or NV, over-collateralization... and credit enhancements that are now trading at 15% yields to maturity. Is that honesty inherent to MTM? I'll tell you what, I'll keep MTM accounting if those RMBSs don't pay par at maturity if you restore my 401K to its pre-Obama value if it does.

Don't Blame Mark-to-Market for This Crisis

Adrienne, all I am asking is if you think the market price of these securities is what the ultimate economic value will be. It doesn't matter who is holding the security. It doesn't matter who bought it. It doesn't matter who sold it. If the ultimate value of a fixed income instrument is significantly higher than what the market is saying now, then it is a dreamt up accounting rule that is causing economic distress throughout the world, not who holds it, sold it, or bought it. If so, then get rid of the accounting rule and the idiots who dreamt it up.

Don't Blame Mark-to-Market for This Crisis

Adrienne, if you really believe that the market prices of these securities are an accurate measure of the ultimate value of the securities, then make the bet! Otherwise, stop defending the absurdity of mark-to-market accounting.

Greed or fear have no place in determining what the value of a fixed income instrument is, otherwise accounting should be placed under the psychology department at universities.

Don't Blame Mark-to-Market for This Crisis

Hey, phaf, you also sound like an MTM purist. Will you make the bet? If you really think the ultimate value of the top tranches of these securities is closer to the current market price than par, then make the bet. If you're wrong, then you and your FASB purists are the ones causing the largest destruction of wealth even seen. I'm sure the 8.1% of the population who are unemployed greatly appreciate your adherence to accounting purity.

Just in case you're unaware, these securities are trading at 20-25% yields-to-maturity, even with over-collateralization and credit enhancements. Still want to make the bet?