retired aviator

Is It Time to Recognize Reality?

<The Fed is literally the entire mortgage market. Yes, really.>

Your analysis behind this statement is so bad a child could see through it. After I read your blurb and the linked Chris Martenson article I realized your analytical abilities are so questionable that I stopped wasting my time reading any more of your article.

You compare the amount of new mortgages originated in 2009 through August to the amount of mortgages purchased by the Fed in 2009 through August. But the Fed is not purchasing these new mortgages! These mortgages haven't even had time to become 'troubled' yet. Obviously the Fed is buying mortgages older than these.

The relevant statistic would be the sum of the Fed's mortgage holdings compared to the whole of the mortgage market, i.e. the unpaid principal value of ALL mortgages regardless of the year of origination. Comparing the Fed's purchases in '09 to mortgages originated in '09 is meaningless.

As if this scare tactic wasn't enough, you are implying that if the Fed owns it, it must be toxic and potentially worthless. Where's the statistic on how many of the Fed's mortgages are delinquent or in default? Where's the stat on the market value of the homes collateralizing their mortgages? Those are the relevant statistics.

Misunderstanding Inflation: There's No Free Lunch

Thomas J. G. (above) has a great point.

The term 'inflation' is commonly understood to mean rising prices in general -- not in specific asset classes such as the dotcom stock binge or the real estate bubble. If only dotcom stocks are inflated, my dollar's purchasing power is not hampered unless I choose to buy dotcom stocks.

We understand these asset price bubbles to be speculative manias -- not a general inflation or a loss of purchasing power in terms of general goods, which is what inflation measures. Though I can see how loose monetary policy can provide the fuel for bubbles to grow, to say that loose monetary policy creates inflation channeled only to specific asset classes is a twisted logic. If inflation really debases the value of the money, it must be debased across a variety of goods and services, or it is not truly devalued.

Another reason why 'bubbles' are not inflation (general currency debasement) is that bubbles eventually pop. When the bubble prices come back to earth, where is the so-called inflation? It is gone.

If you blew $500k on an overpriced Florida townhouse that is only worth $250k today, then today's buyer at $250k has not suffered the loss of purchasing power from the inflated $500k price tag of a few years ago. This "asset specific" inflation has disappeared by the correction.

Retail Sales Stage a Modest Recovery

Oops -- ignore the above post. I cannot delete it. One paragraph is out of order. Here is the correct version of the same post:


<<This chart also provides yet more evidence that the "stimulus" spending generated by tax rebates earlier this year was the equivalent of pouring money down the drain.>>

Not so. The chart shows a "net result" of sales up 1.7% ytd. That "net" could be a 10% natural drop, offset by an 8.3% gain from gov't stimulus -- nobody knows. And no evidence will ever be conclusive as to what effect stimulus has had. People will certainly argue about it forever though!


<<You can't "jump-start" an economy by taking money from one person and giving it to another. That doesn't create any growth, it just redistributes income [through taxes].>>

Not always true. If Ebeneezer Scrooge has all his cash in the mattress being unproductive, coaxing him with lucrative interest to loan it out for worthy productive purposes can turn idle money into productivity.

Remember that deficit spending doesn't "take money" from taxpayers now -- deficits are financed through Treasury sales, not immediate taxes. The burden to taxpayers doesn't show up until later in the form of interest payments and a balloon at maturity.

Retail Sales Stage a Modest Recovery

<<This chart also provides yet more evidence that the "stimulus" spending generated by tax rebates earlier this year was the equivalent of pouring money down the drain.>>

Not so. The chart shows a "net result" of sales up 1.7% ytd. That "net" could be a 10% drop offset by an 8.3% gain from gov't stimulus -- nobody knows. And no evidence will ever be conclusive as to what effect stimulus has had. People will certainly argue about it forever though!

Remember that deficit spending doesn't "take money" from taxpayers now -- deficits are financed through Treasury sales, not immediate taxes. The burden to taxpayers doesn't show up until later in the form of interest payments and a balloon at maturity.


<<You can't "jump-start" an economy by taking money from one person and giving it to another. That doesn't create any growth, it just redistributes income.>>

Not always true. If Ebeneezer Scrooge has all his cash in the mattress being unproductive, coaxing him with lucrative interest to loan it out for worthy productive purposes can turn idle money into productivity.

Reality Is at Odds with Policymakers' Optimism

There are a couple of unfair generalizations is this article:

<<Obviously, markets were completely blind-sided by the biggest recession since the Great Depression.>>

The markets are no single 'read' on where the economy is going. You have to consider the makeup of the market participants being different at different times. One simple dichotomy is that the stock market is made up of both "dumb money" and "smart money". Smart money began to have an inkling of the debt meltdown long before the peak in 2007, but foolish money being piled into stock funds drove the markets higher anyway. The question is, who thinks the S&P500 is a buy now at 1000 -- the smart or dumb? -- I say lots of buyers today are of the smart variety. They know of the recession that "This too shall pass." There still are hurdles, such as many option ARM resets to come, but I think it is smart money that is betting now that the US economy will not wither and die.

<<if the U.S. economy really were improving, the dollar would be strengthening – not weakening.>>

It's definitely not that simple. A currency can 'decouple' from its underlying economy without correlation. Case in point: Japan. The yen has been strong for years, yet at same time the Japanese economy has been in the doldrums.

Fractional Reserve Banking in Pictures

Fractional reserve banking is much older than the US dollar. It originated when goldsmiths, who were keepers of a communities valuables, noticed that typically very few owners would redeem their receipts for their gold at any given time. These receipts sometimes were in the form of transferable bearer bonds (simply paper money).

Over time the idea developed that the depositors could earn interest on their idle gold by loaning it out for worthy undertakings, and the goldsmith earn fees too. Over many years of watching most of the gold sitting idle in the vault all the time earning nothing, gradually the idea appealed to both goldsmiths (bankers) and depositors to earn more interest by issuing paper notes beyond the amount in the vaults. Thus was born fractional reserve banking. By putting your money in a bank rather than under your mattress, you are inherently agreeing to be a part of the fractional reserve system. You do have a choice. In the old days when bank runs sometimes wiped out depositors, people did eschew banks and stash their cash quite often. (If inflation is your worry in stashing cash, you can exchange your mattress money for some type of durable assets. As general inflation 'lifts most boats' over the very long term, your purchasing power can be maintained in the assets.)

The notion that banks first receive deposits and then loan out those funds is not really how it works (though it can be). That is the Econ 101 version. It is not well known outside the banking industry that private banks actually can create money out of thin air for borrowers. They do not need to 'transfer' funds from somewhere to a borrower (though they can if they choose). Since banks cannot create money for themselves, obviously, but only for a borrower, the system works pretty well. In creating new money, the bank books a loan receivable (asset) which is offset by the cash paid out to the borrower - a net wash on the books of the bank, except for future interest.

So your initial $100 deposit can instantly be sufficient reserve for that bank to create up to around $900 on behalf of a borrower (only). However, the $100 came from an account held at another bank in all probability, so that bank may have to pare back new lending to the degree its reserves had just shrunk.

The real limiting factor to this type of money growth is the number of willing borrowers. That is why the Fed is so focused on setting interest rates -- to influence the amount of new borrowing and the money supply, among other things.

Don't Expect Hyperinflation for U.S. Economy

Even the large money supply increases very likely to come need not cause price inflation at an unusually high rate. See my website.

Why a Weaker Dollar Is Good for Stocks

<<Normally, I would say that a weaker dollar is a bad thing (since from a supply-side standpoint a stronger currency is always preferable to a weaker currency, ...>>


I think many Japanese businesses would strongly disagree with you. It is generally thought there that the strong yen has kept the Japanese economy depressed for years since they rely greatly on exports.
----------------------...

Comment on Michael Clark's question a few posts above: A "weaker dollar" usually refers to its relationship with other currencies. That is a distinctly separate thing from its domestic purchasing power (inflationary debasement). So prices in the U.S. can stay pretty stable during a period when the dollar's value on FOREX swings wildly. In fact we saw this in the past year when the dollar rose quickly a whopping 25% or so against other currencies during panic deleveraging, and has since retreated by over 10%. These FOREX moves don't translate into swings in what you pay to go to the movies, or rental apartment rates, though eventually they influence prices of some things. Inflation (consumer prices) and the dollar's value on FOREX are very weakly correlated, especially in the short term.

Four Reasons Peter Schiff Is Wrong

I was initially a Peter Schiff fan when I first saw the famous youtube video "Peter Schiff was Right". In fact, after that I began in earnest to study the man's views, as I feared his prediction that the worst is yet to come. I wanted to be informed and position my assets.

After doing a lot of study, though, I did a complete 180 degree turnaround from being a Schiff believer - see my website and book on debunking his arguments!

Peter Schiff: Wrog on the Economy, Wrong on Healthcare (Part 1 of 4)

I agree with some of your points, but not all. The hyperinflation argument of Schiff and others is purely the "Quantity Theory of Money" -- a theory every bit as useless in prediction as "Efficient Markets Theory". No room for all the details here. See my website on debunking hyperinflation.

Clarification of Gold Comments in Seeking Alpha Live Discussion

I agree that gold seems high at $900+ an ounce! 'Gold bugs' are insisting that $900 will seem low soon, but you hit on the key point that it 'pays no interest'. An ounce of gold is forever an ounce of gold with zero growth, making it more of a hedge than an investment. Growth happens to good businesses (stocks), but not held commodities. I'd like to buy a piece of good businesses now (at recession-level prices) that will have inevitable sales growth as their markets grow. At some point in the future, those who have bid gold up to $1000 (or perhaps significantly higher) will realize gold has no growth and I expect it will fall from the $1000 level back to earth.

Gold has done great in the last decade and also did great in the 1970's. This has encouraged a lot of investors to seek its perceived safety. Many don't realize though that from 1980 to 2000 gold languished during the stock boom and had a negative return of 65% nominally and 90% inflation-adjusted. That's a pretty miserable 20 years, as you say, with "no interest". I wouldn't put a lot of chips into gold now as sooner or later I think that part of the cycle is likely to repeat.

Mark-to-Market Has Only Deepened Financial Crisis and Slowed Down Recovery

What you are saying boils down to 'efficient markets theory', the notion that free markets price risk and reward correctly. While generally markets are good are pricing the risk vs. reward tradeoff, sometimes markets get carried away to extremes and market prices are way off. There is no doubt whatsoever that markets are inefficient at times. Case in point is the dot com bubble of 1999. Should Anypieceofcrap.com, Inc. have had its stock at 50 or 80 times earnings with high debt, no assets and meager sales?

Sometimes the market gets it way wrong temporarily and then MTM is a flawed and dangerous method that can have dire consequences. Bubbles happen, whether it is Treasuries, real estate, or dot com stocks. The opposite happens too, and, for example, MBS became under priced in 2008.


On Mar 18 12:35 PM bobbobwhite wrote:

> You are completely wrong. MTM works all the time as it follows a
> real problem with real solutions that may be harsh short term, yes,
> but still not some artificial manufactured "solution" that is not
> a solution at all but is a put-it-off-til-later band-aid. When MTM
> is good it is very good, when it is bad it is bad for a caused reason
> and that reason needs to correct itself in true and accountable ways....and
> that may end in systemic breakdowns and failures if those will correct
> it sooner than taxpayer bailouts, markdowns, etc. will E.g, steel,
> forestry...those two previously huge industries had to solve gov't
> and global changes in their businesses in the 80's that took out
> millions of jobs. The very harsh solution took a lot of jobs with
> it overseas, but those were made up in other growing areas. Just
> like it would be now with any MTM economic consequences if left to
> work out naturally. Hard lessons yes, but those are the ones best
> taught and best remembered. Anything short of that is just wimpy
> self delusion.
>
> On Mar 17 04:58 PM retired aviator wrote:

New Mark-to-Market Rules: Playing Pretend

MBS holders did take a huge bath in 2008. Too big. The point is that the floor for MBS in a rational world should be considerably higher than the floor for GM's unsecured bonds, since GM is insolvent and bleeding big red ink every quarter. Diversification and solid collateral make a big difference why MBS are more desirable than GM bonds. Also, even today after all the writedowns, an MBS shareholder enjoys significant positive income. Over 90% of mortgages are still being paid, and not delinquent.

The point of mark-to-market being leading to an unreasonable result during 'the great unwinding' is that buying volume could not possibly hope to match the colossal selling volume of unilateral institutional unloading en masse. "Market value" is meaningless in such a scenario. When 'mark to market' was instituted to stop accounting shenanigans, it was not foreseen by the FASB that the market could actually 'cease to function' with such volume imbalances. It was unprecedented on this scale.

My own feeling is that either Congress or the President should have the authority to temporarily suspend 'mark to market' accounting during times of national financial panic when markets are deemed to not be functioning normally.


On Apr 05 07:33 PM Trillion with a T wrote:

> The point of these securities is to NOT collect the collateral.
> In the past the collection of this collateral allowed the holder
> to get some sort of return for their investment. What happens though
> when suddenly you own 100 'valuable pieces of property' that no one
> wants to buy them at the price that is valuable to you (keeps you
> from taking a bath on the transaction).
>
> This is the actual worst case scenario, that we are currently in,
> and much worse then the scenario you have lined out.
>
> So you see in reality MBS and GM bonds are much more comparable then
> they should be...

15 Notes on Our Current Economic Situation

Hussman's arguments are contradictory and with a fatal flaw. He correctly says: "Money doesn't go into or out of the stock market – it goes through it." This is because every share sold must be also a share bought. Cash moves from one owner to another <i>and is then free to be reallocated.</i>

However, then he fails to recognize that the exact same mechanics apply to the bond market when he says: "the money that has been provided to make bank bondholders whole will have to come at the expense of crowding out more than $1 trillion of private investment that would otherwise have occurred."

The 'bank bondholders who have been made whole' now hold the cash and are free to allocate it to whatever investment (or spending). No investable cash is ever lost to the system as a whole.

Putting the 'Dollar Collapse' in Perspective

>However, the dollar's true weakness is being masked these days >because all major currencies are falling against objective >benchmarks, the principal one being gold.


Gold is hardly an 'objective benchmark' in the greatest panic period in decades. There has been a tremendous flight into gold in the past 18 months, lifting and supporting its price. Physical gold has even been in short supply for the first time -- ask some coin dealers.


Gold is now a poor investment choice in the very long term. I'm not predicting that $1000 is the top for gold, but I fully expect at some point in the future gold will lose all its steam and begin a long agonizing fall just as happened from 1980 to 2003. In the ravaged economy of the 1970's, gold rose to a peak of $800 briefly. Then the economy healed and gold began a slow fall to around $250 in the early 2000's. Someone buying at $800 would have had a 23 year after-inflation return of around -85%!

The reason it is a poor investment is that gold just sits there. It doesn't have earnings or grow like a business. One ounce of gold is forever one ounce.

So gold can be a strange ride that should not be used as a benchmark of currencies anymore (since none are pegged). Gold's long term path simply doesn't reflect any kind of representative basket of things people buy to gauge currency swings or general inflation.