retired aviator's Comments

Emerging Markets Aren't a Bubble

Sat, 05 Dec 2009 19:53:07 -0500

I agree with your cash flow rule generally but not always. One exception is an asset with compounded growth potential, though little cash income. Another exception would be the case of rare collectibles, as there is no cash generation potential. By your rule buying an original Picasso 30 years ago at a high price would have been "bubbly". However it actually would have proved to be a great long term investment.

On Dec 04 03:16 PM Keithcho wrote:

> A bubble is when the current price of an asset is far in excess of
> what the cash generation potential of said asset is. The apartment
> bought at a price that costs $6000 a month to operate but the rental
> value is $1000 would be evidence of a bubble, irrespective of the
> level of leverage in the transaction.

Is It Time to Recognize Reality?

Thu, 01 Oct 2009 14:13:24 -0400

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

Thu, 10 Sep 2009 10:43:36 -0400

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

Fri, 14 Aug 2009 18:45:37 -0400

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

<>

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!

<>

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

Fri, 14 Aug 2009 18:39:31 -0400

<>

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.

<>

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

Sun, 09 Aug 2009 15:59:22 -0400

There are a couple of unfair generalizations is this article:

<>

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.

<>

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

Sat, 08 Aug 2009 13:09:57 -0400

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

Fri, 07 Aug 2009 00:36:47 -0400

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

Tue, 04 Aug 2009 12:06:54 -0400

<>

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

Tue, 04 Aug 2009 00:57:46 -0400

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)

Sun, 02 Aug 2009 14:53:32 -0400

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

Fri, 19 Jun 2009 08:56:39 -0400

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

Sat, 06 Jun 2009 15:21:55 -0400

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

Thu, 28 May 2009 07:56:11 -0400

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

Tue, 26 May 2009 11:31:16 -0400

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 and is then free to be reallocated.

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

Mon, 25 May 2009 11:53:00 -0400

>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.

Housing's Big Picture Isn't Pretty

Mon, 25 May 2009 02:22:07 -0400

It's disturbing when economists get so used to crunching numbers and watching charts that they come to think the future must be in the charts. Historical trend lines and long term averages are meaningless and have no bearing on where home values will bottom in this recession.

No home buyer or seller will ever check the 100 year trend line in making an offer or setting a list price.

It should be obvious that home prices will continue to be, as always, simply a function of supply and demand, with these long term historical trends having no causative effect. It's a mistake to use past results to predict the future. From 1900 to 2000, the Dow Jones Industrial Average rose 175 fold from 66 to 11,000. If that trend line holds, the DJIA will be at almost 2 MILLION in the year 2100! Ain't gonna happen.

C&I Loans Are Starting to Unravel

Sat, 23 May 2009 17:33:59 -0400

But aren't these numbers about what you would expect given the economic/financial series of problems of the last year? You continually remark how terrible the data are. Considering the spike in unemployment I think the delinquency and writeoff rates are just about what would be expected. I agree it will get worse, but when and at what level bad loans will ultimately peak is still anybody's guess.

I don't agree with the negative superlatives though. You can dwell on the 5.7% of all loans delinquent or you can turn it around and say that 94.3% of borrowers are still paying on time.

Long Term Investors vs. Bear Market Rally?

Mon, 11 May 2009 09:47:31 -0400

I share the author's sentiments - except that Buffett is not ONE of the greatest investors, he is THE greatest investor. He's never drawn a salary over $100k or so and parlayed just a few thousand dollars in the 1950's into being the richest individual in the world (depending on BRK-A share value on the date you measure).

Today's stock price levels, despite the big rally, are still not factoring in any recovery, EVER. Of course debt levels are unprecedented and the negative spiral could go on for years, but there will be a recovery of GDP growth and profitability - I don't see a Japanese lost 2 decades.

New Mark-to-Market Rules: Playing Pretend

Sun, 05 Apr 2009 13:11:47 -0400

It's completely unfair to compare mortgage-backed's with GM's bonds. Everybody knows GM is insolvent and likely to default. More importantly, it is a single entity, so it's an all or nothing proposition (nothing, except whatever Chapter 11 might award).

MBS on the other hand are diversified with millions of borrowers and only some percentage of them will ultimately default. It's anybody's guess what that percentage will be, when the economy bottoms. As MBS are diversified baskets of mortgages, they will undoubtedly have substantial value in any scenario.

More importantly is the "MB" of "MBS". In default, creditors then own the homes, and homes are a type of collateral that can't walk away. GM's unsecured bonds bear no resemblance whatsoever to mortgages where the creditor in worst case scenario owns a valuable piece of real estate.

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

Tue, 17 Mar 2009 16:58:41 -0400

Mark to market is reasonable when you have functioning markets. Because we had unilateral massive unwinding of MBS last year, there was no functioning market. When big institutions are all simultaneously selling indiscriminately, market prices are depressed far below intrinsic value because selling volume far outstrips buying volume.

The other commentators on this article don't seem to understand that marking to market in a panic situation that is tantamount to a 100-year flood not only is unrealistic, but creates an apparent problem in writeoffs that is multiples of the true size of the problem.

Wealth Destruction on a Global Scale

Fri, 13 Mar 2009 09:30:51 -0400

"Lots of paper wealth has vaporized, to be sure, but the physical assets (roads, machinery, computers, factories, office buildings) that make the global economy function are still very much intact."

Indeed, we need to understand that "portfolio pain", and accompanying demand reduction, is not the real McCoy as far as economic capacity or need for economic growth. It is human nature to want material things, and to buy more things when they can be afforded. Population growth is also inexorable, and coupled with developing economies, drives global economic growth.

The long term trend will be growth, but the market is turning its back to that fact. It rankles me to hear so much about "wealth evaporation" in the markets. It's not quite accurate, as no wealth actually disappears. If you choose to have your wealth in equity 'shares', your brokerage statement will report that no 'shares' have evaporated. If you choose to hold your wealth in cash, that does not ever evaporate either (although if prices rise it will purchase less). Nonetheless, if I park $100 in my mattress or in my savings account it will remain $100 forever and suffer zero evaporation. The confusion with stocks come because we have a system that provides rapidly changing market values. But, remember a stock market quotation is a report on the price of the last sale, nothing more. If you are in for the long run and hold stocks of companies that will succeed, a downturn is nothing more than a buying opportunity.

The Fed Wasn't to Blame for the Housing Bubble?

Thu, 12 Mar 2009 10:27:03 -0400

In normal times lenders are keenly interested in getting repaid, so the lending markets monitor credit-worthiness and asset values being lent upon quite well. What we had with mortgage backed securities, though, was loose lending because primarily the loans were not held, but sold off. By far this loan origination "racket" was the biggest problem in the housing bubble. Sure, low interest rates contributed, but if interest rates were modestly higher, the same racket would have gone on except at modestly lower loan principal amounts. Extremely relaxed lending standards got us into this mess far more than low interest rates.
A lot of borrowers bought homes as speculators. With little to no down payment, and the expectation home values would continue to soar, it looked like easy money to be made (in the form of equity)with no risk.

The lesson to be learned is that where there is smoke there is fire. When prices rise wildly in a bubble, the government needs to investigate what is really going on and see if regulation (of lending)is necessary, or at least straighten out the government's own complicit organizations (Freddie and Fannie). Of course, bubbles are much easier to recognize after they have popped. Bubbles are often called 'booms' at the time and the feeling is euphoric.

U.S. Economy: Ruling Out an Apocalyptic Scenario

Wed, 11 Mar 2009 11:17:46 -0400

I generally think Lok's articles make very good points, and I do like his housing price support thesis. However, it's dangerous to predict the future using past data. Especially looking at just 2 or 3 variables. Economies are so complicated that many aspects of the 1930's economy may not apply now. Nobody knows.

A few of the huge wild cards that are different today are the trillions in entangled private debt and derivatives looming, much higher national debt funded with short term notes and fiat money, and too many insolvent consumers in a consumer-driven economy.

I think the debt has to sort itself out eventually, but it could really deepen and lengthen the recession. My worst fear is that there's always the chance of financial cardiac arrest – a widespread bank run. It happened to Washington Mutual! The FDIC can only cover small fires, not a nation-wide conflagration.

It's comforting to look at the Great Depression and infer things will be similar, but just not realistic. Better to keep an eye on current job loss data and home value declines, among other things.

Shadow Banking System: Death from Nowhere

Mon, 09 Mar 2009 02:11:15 -0400

Too bad the name "shadow banking" came into use. It implies a shady activity, when really by your explanation it was simply securitized lending going on in the markets outside the banks, and largely on the up and up. It was made to look bad when real estate came crashing down. The layperson will not understand this though if they hear of "shadow banking".

It sounds like you are saying the lack of shadow banking lending (90 some percent reduction in securitization being originated), is much of the problem slowing down consumer demand. You are not clear on the mechanism though.

Are you saying consumers who have greater need to borrow (as opposed to those with good credit but little need to borrow)are in fact applying for loans but not signing when the rates are much higher now due to greater spreads, or are you saying the supply of funds is inadequate to meet loan demand that actually exists, or are you saying the consumers are simply not applying for the loans?

An Explanation for Monetary Inflation - And a New Low

Sat, 07 Mar 2009 10:30:29 -0500

If you want to speak generally about inflation, you are talking about purchasing power. You should measure that inflation, then, using a representative sampling of things people buy. Using the price of gold and relative currency strengths to measure inflation is irrelevant to someone who purchases no gold or foreign currencies. Their purchasing power should be measured by the prices of things they typically purchase.

On Mar 06 10:07 PM Brad Zigler wrote:

> Yes, the price of gold IS what people are willing to pay for it.
> So, too, for refrigerators, candy bars and Swiss francs.
>
> But which of these should we use to gauge the value of our currency?
> Which of these is universally recognized, readily valued and eminently
> tradeable?

S&P P/E Ratio Is Low, But Has Been Lower

Thu, 05 Mar 2009 11:04:13 -0500

Seems to me that what matters to anyone looking at P/E and considering a long position now is 'normalized' future earnings in years to come. Earnings during the current massive writedown and contraction stage will be meaningless after the writedowns are done and falling demand has ultimately leveled off.

The question is in picking the equities that will weather the storm and have intact businesses in the aftermath, and guessing what their earnings and earnings growth will be. I say 'guessing' because this great debt unwinding is uncharted waters and estimates a few years out are a complete grope in the dark.

The market is in deepest despair so stocks will likely fall more, but ultimately will undershoot intrinsic value at some point and the S&P will be a strong buy. Those who say 'buy and hold is dead' are dead wrong. The conditions for 'buy and hold' will be recreated. It could be several years off or just months. The plummeting market will create an excellent buying opportunity at some point. The question of course is how low does it go.

In the meantime S&P earnings are likely to keep falling and P/E not so useful a tool.

A Closer Look at Equities vs. the Dollar, Gold

Wed, 04 Mar 2009 23:59:39 -0500

You asked for possible reasons — I'm generally disinclined to entertain government conspiracy theories, but in this case I wouldn't rule out government market manipulation to try to stem financial panic!

There have been some surprising events that could be explained by a very heavy handed market manipulation — and the motive for the government does work.

1) The USD: No fundamentals supported a rising dollar this fall - all fundamentals from the crisis pointed to a weakening dollar if anything - yet it rose with a speed and strength heretofore unseen and has held the gain! (If dollar-shorts were just covering, you'd expect the dollar to fall back after they had covered. The dollar hasn't fallen back a bit.)

2) Oil: Does it not seem incredible the magnitude of the drop in oil prices that accompanied the very first inkling of recession and slight contraction last fall? I recall when oil had halved from its highs, the news was that Americans were driving 6% fewer miles and oil consumption was down a similar amount. I am still amazed (and skeptical) that that modest reduction of consumption could result in halving the price. It seems possible the oil price plunge was a collusive attempt at preemptive stimulus early on – oil companies and the government both attempting to avert severe recession in their own interest. Plus its hard to imagine a more ubiquitous, powerful, cheap and easy stimulus (no taxpayer cost and no Congress) than low oil.

3) Precious metals: Gold and silver markets have not done what you'd expect in the financial crisis of a century, with failing banks and widespread financial and economic panic. Comex traders have been crying 'foul' for months. They say whenever a gold rally gets going, an insatiably large short position opens up and pushes the market down mercilessly. They complain that comex never audits vaults and physical delivery backup stores.
Why is silver at only $13 an ounce when it reached $20 last spring, well before the crisis? Silver is actually selling at late 1970's nominal, not real, prices - it's crazy! Meanwhile, since last year people have been hoarding it. Dealers and coin shops have had trouble keeping silver and gold in inventory with demand far outstripping supply - yet the prices don't reflect that. Comex traders have been pointing out a big disparity between the comex values and the physical markets. It is hard to explain why there could be that disparity without very deep pocketed manipulation on comex. Again, would the government have a motive to keep gold and silver from taking off - you bet. The public could see roaring gold and silver as a sign of imminent financial collapse. Fast price runups tend to bring in a lot of new speculative money and the last place Uncle Sam wants to see money flow is into precious metals.

Real Personal Income Is Actually Rising

Tue, 03 Mar 2009 12:10:42 -0500

To cautiousinvestor:

I think the point is not the wage increase for the government worker, but the fact that the worker now has more money to spend in the economy. That aspect is certainly good news since demand (GDP) has fallen so sharply. Higher wages translate to demand unless the money is stashed rather than spent.

Also, to the extent that government workers may be the ones with debt problems, this raise is certainly good news for their keeping up their payments.

On Mar 03 10:27 AM CautiousInvestor wrote:

> Is it just me or do others find it odd that under our system of national
> accounts we........the governement.........bo... money and then pay
> a dutiful civil servant and then it is accounted for as if it were
> income?

All Banks Are Insolvent if You Believe They Are

Mon, 02 Mar 2009 16:20:27 -0500

Milton said: "If one uses the market prices of the mortgage securities instead of their book value then one would conclude that banks that hold them have assets that are less than liabilities and are insolvent. If one would use likely cashflow projections without government intervention then these banks are solvent."

Milton makes a great case here - one of the best explanations I've read of the actual MBS market valuations. However, it is based on 'efficient markets' theory and the financial markets are anything but efficient. If they were, we would not have had a dot com bubble.

Especially in the volatility of the past months, when large institutional holders were deleveraging en masse, buying support couldn't possibly match the volume and create an 'efficient market'.

MBS are inherently different from the more complex default swaps and other derivatives as there is hard real estate collateral in a worst case scenario. Home values can only fall so far, so worst case cash flow scenario is some depressed home market value, minus costs to foreclose. Seems the mortgage market has already priced in about a 100% worst case scenario. Extreme fears priced into some equities and debt instruments now may prove ultimately justified, but the mortgage market in my opinion is an area of opportunity because the downside is more than priced in.

On Mar 02 06:43 AM Milton Recht wrote:

> One of the logical reasons for the apparently excessive market price
> discounting of mortgage securities is the market anticipated the
> Federal government's intervention into the mortgage contract which
> diminished the value of the securities. The Federal banking agencies
> and Congress are forcing the banks to extend mortgage life, decrease
> the interest rate, decrease monthly payments to a lower percentage
> of income, and delay foreclosure proceedings. Also, there are strong
> indications that banks will see the principal amounts of the mortgages
> lowered, either through bankruptcy judges or voluntarily. All of
> the above factors and others cause mortgage securities to be worth
> significantly less than originally anticipated based on default rates
> and cashflow.
>
> As the data on the current mortgage crisis reveals itself, it is
> becoming increasing clear that four states were the cause of the
> current banking problem. California, Nevada, Arizona and Florida
> account for most of the subprime, no income verification, underwater,
> defaulting mortgages, and foreclosures. Much of it was caused by
> the above average and rapid house price appreciation in these states
> combined with lax state regulation of mortgage bankers and originators
> within these states.
>
> While in all recessions there are always calls by some of our Congressional
> representatives to help homeowners in foreclosure, this time around
> we had the US Senate and the House of Representatives controlled
> by individuals whose states were at the forefront of the problem.
> Pelosi is from California and reid is from Nevada. It was also clear
> during the 2008 presidential campaign that a Democrat was most likely
> to win the White House due to Bush's and the Republican's very high
> unfavorably ratings and that the Democratic winner would likely accede
> to a Democratic Congress on helping mortgage borrowers in trouble.
>
>
> The depressed market prices for mortgage securities in early 2008,
> which led to the Bear Stearns collapse, were lower than many anticipated
> by the then actual and foreseeable cashflows on the mortgage securities.
> Even today, the payments are better on these mortgage securities
> than market prices would suggest. The disconnect between expected
> cashflows and market prices has caused the most problems in motivating
> banks to take write downs and in attempting to come up with a federal
> government solution.
>
> If one uses the market prices of the mortgage securities instead
> of their book value then one would conclude that banks that hold
> them have assets that are less than liabilities and are insolvent.
> If one would use likely cashflow projections without government intervention
> then these banks are solvent.
>
> Insolvency is the trigger for government intervention of the bank.
> So, the insistence by the banking regulators and the Treasury to
> use market prices instead of cashflow projection prices has caused
> the deterioration in banks' equity stock market prices and insolvency.
> However, Krugman and others should recognize that mortgage securities
> prices are excessively depressed due to the involvement of the Democratically
> controlled Congress and White House in coercing banks' to modify
> mortgage loans.