Terry Thprsen

Freddie and Fannie: Living in the Past

Thank god there aren't margin calls on houses or the "unwind" would degenerate into an out and out spiral. I'd like to add a couple of points.

The decrease in percentage of equity can be compared with the one-time bumps to P/E ratios in the stock market over the years. The debate is still out as to whether those bumps will realign but it has been many years with not much of a fall. These lower ratios might likewise be the new reality.

The rise in equity assets has to be adjusted for the rise in money supply. Unfortunately we don't have M3 numbers anymore which are critical given that all of this agency debt is foreign and institutional. MZ indicates a 26% increase in money supply just over the past 18 months alone. So that 5.5 trillion number might actually act like much less money. The fact that surplus nations have nowhere else to invest their export dollars is the thumb in the dike.

One way out of this is to keep inflating. Eventually currencies will align but it will be a bumpy ride. This is clearly the approach that was taken in 2002 to create a soft landing with the unintended consequence of just shifting the bubble over to real estate. With the rates low again where is the bubble heading next?

The other situation that is pretty scary is the looming demand gap. Retiring baby boomers will be downsizing and eventually bequeathing their homes to their children creating an oversupply that dwarfs what we see today (vacation home anyone?). Meanwhile our immigration policies are bottlenecked preventing demand from entering the system. Unfortunately you can't export homes. (Interestingly I think immigration reform is the only policy that McCain, Obama *and* Bush all agree on but can't get through congress. So much for executive power...).

My personal prediction is that Bernanke & Co. will continue to let the air out of the tires with as many smalt jolts as they can conjure. $29b for Bear bailout. $30b for Fannie bailout. and so on and so on. Where did all the money go? You'll find out when DVD players cost $700 again...

Demand - baby boomer, immigration