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  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    Curious, how is that you can appear so assertive and yet be so uniformed?

    Those "controls" you speak of were removed by the Clinton admin as one of their last acts.

    The whole housing policy was a direct reflection of Democratic party doctrine to make "housing affordable for everyone" and were put in place with the willing participation of both parties.

    Bush tried to re-regulate Fannie & Freddie unsuccessfully simply because both parties are so corrupted by money from vested interests there was no hope of doing so - Barney Frank was the poster child for this corruption.

    This article from Sept 2008 helps clear it up a bit:

    "In fact, here's a New York Times story from September 2003, clearly showing that the first substantive Fannie and Freddie reform from inside government came from the Bush administration. Spurred by worries that Fannie and Freddie were cooking their books and taking too many risks, Treasury Secretary John Snow proposed placing the companies under Treasury oversight with strict controls over risk and capital reserves. The NYT labeled the proposal "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago" and noted:

    Mr. Snow said that Congress should eliminate the power of the president to appoint directors to the companies, a sign that the administration is less concerned about the perks of patronage than it is about the potential political problems associated with any new difficulties arising at the companies.

    So five years ago, there was one of those rare moments in Washington when the branches and personalities of government—in this case, the Bush administration—are less interested in protecting or expanding their turf than in fixing a looming catastrophe. What was Frank's response to the proposal?

    "These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

    The fact that you live in Canada perhaps explains why you have this caricature of recent history - the truth is far more complicated than a simple story that blames Bush.
    Aug 19 10:11 AM | 2 Likes Like |Link to Comment
  • World's Cheapest ETF Portfolio: Institutional-Caliber Diversification For 8 Basis Points [View article]

    Good point.

    I completely agree with that sentiment. Active management in the bond area actually does provide value with the right managers. It is quite bit more skill-based than the equity side of the equation and easier to find a manager that provides alpha consistently over time.
    Aug 19 09:59 AM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Will Rising Interest Rates Kill The Stock Rally? [View article]

    As always a nicely balanced article. Whenever we get rapid (some would say disorderly) increases in interest rates it makes you think of what impact that has on the most interest rate sensitive sectors of the market. Clearly housing comes to mind.

    Two things have happened over the past year: prices have risen and now interest rates have risen. That means that the monthly payment on a house, all things being equal, has gone up as well as the required down payment. Amazingly it is really hard to find data that addresses both issues in a chart form.

    I came across this discussion from the NAHB last week and I still think it is useful:

    "The rapid rise in mortgage interest rates could affect housing affordability through higher monthly mortgage payments. However, monthly mortgage payments are not the only path by which rising interest rates can affect affordability. Homebuyers can instead decide to raise their downpayment amount in order to maintain an otherwise constant monthly payment in the face of rising rates.
    As interest rates rise, homebuyers increase their downpayment in order to keep monthly mortgage payments roughly the same. However, the required increase in the downpayment, both in levels and as a share of the house price, declines as mortgage rates rise.
    Alternately, homebuyers seeking to maintain affordable monthly mortgage payments may lower their bid price on a home. In aggregate, lower bids that are accepted by house sellers could depress house price growth, partly offsetting recent gains."

    It is said that people buy payments not prices when it comes to real estate so if you combine higher prices which require higher down-payments along with higher interest rates (which we are now getting) you will find that the initial and ongoing payments on a house have gone up a lot in the last few months. I suspect that that combination will cool the housing market a bit especially with disposable incomes being somewhat stagnant.

    Ultimately this could dramatically slow price appreciation or sales or both. What do you think?

    Have you found any better data?

    Aug 18 11:50 AM | 1 Like Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    Good link. The excerpt below was interesting. That's a pretty large subsidy for the banks. Cullen Roche of PragCap has done a phenomenal job of explaining this process and how our monetary system actually works. i highly recommend his site.

    The IOER is the defacto FED Funds rate.

    "In 2007, required reserves averaged $43 billion, while excess reserves averaged only $1.9 billion. This relationship was typical for the past 50 years when the Fed did not pay interest on reserves with only two exceptions. Those occurred when the Fed provided unusual levels of reserves to depository institutions in September 2001 following the terrorist attacks and in August 2007 at the onset of the global financial crisis. Other than those two months, excess reserves were less than 10% of total reserve holdings, because depository institutions had an incentive to minimize noninterest-bearing excess reserves held at the Fed.

    The failure of high profile U.S. financial institutions in September 2008 caused a great degree of instability in the financial system. Consistent with its role as a lender of last resort,8 the Fed provided unprecedented amounts of liquidity to the financial system. Once the Fed was authorized to pay interest on reserves, the relationship between the levels of required reserves and excess reserves changed dramatically. For example, required reserves averaged almost $100 billion during the first six months of 2012, while excess reserves averaged $1.5 trillion! As shown in Figure 1, since September 2008, the vast majority of total reserves (blue line) held at the Fed belong to the excess reserves category (black line), while required reserves for all depository institutions (red line) have remained relatively stable.9"
    Aug 16 05:27 PM | Likes Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    Your bio says:

    "Trying to learn and build wealth..... "

    Keep trying!

    Aug 16 01:48 PM | Likes Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    "When rates are chokingly high, you're fine with them, but when they're low, it's some form of evil "repression.""

    That wasn't the question you asked. However you are making my point in another way which is the FED has a history of distorting the market. I think this makes them the most powerful financial force on earth and they are unelected and unaccountable.

    It's distortion pure and simple whatever form it takes. The FED's actions impact the behavior of the private markets as much or more than the direct effects of their policy - half of the US bond market ($16 trillion or so) is private issue.

    The FED works for the banks and no one else which explains why they are doing what they are doing and I know you know this.

    By the way, I have been following your financial ideas for a long time and it is clear that you have an excellent grasp of how to invest and make money in today's world. I commend you on your success and I highly recommend that people pay attention to your recommendations.
    Aug 16 01:42 PM | 4 Likes Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    I meant exactly what I said :)

    re·press (r-prs)
    v. re·pressed, re·press·ing, re·press·es
    1. To hold back by an act of volition: couldn't repress a smirk.
    2. To put down by force, usually before total control has been lost; quell: repress a rebellion.
    3. Psychology To exclude (painful or disturbing memories, for example) automatically or unconsciously from the conscious mind.
    4. Biology To block (transcription of a gene) by combination of a protein to an operator gene.

    "And, when CD rates were 15% in 1981, what was that? "

    A great time to have them! Although owning treasuries would have been a lot better.

    It looks to me like the market is starting to assert itself on the price of money anyway so it will be interesting to see where this all ends in any event.

    Given that the bond market is about twice the size of the stock market, those potential losses won't go unfelt. That's the flip-side of targeting the wealth effect of the stock market.

    Definitely a very exciting time to be an investor. Good luck!
    Aug 16 01:17 PM | 3 Likes Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    Your opinion speaks for itself. You offer a series of assertions and opinion as if they are "facts" - they are not. So many wrong statements that I don't have the heart or desire to discuss it.

    Thanks for piping in.
    Aug 16 01:13 PM | Likes Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    It is "repression" - that's not a political statement that's a fact. They are "repressing" interest rates to maintain the 0% target.

    The FED is intentionally maintaining rates at this level which means it is stated policy to do so. They are purposely distorting the market price and signal. It could very well be that all rates would remain the same or fall further but we will never know will we?

    It is the fact, that the FED is so involved in the economy that led to the 2008 panic in the first place. Risk-taking behaviors that should never have been rewarded in the first-place were rewarded even more greatly after the fact.

    That really sends the message that no crazy risk will ever go unrewarded if it is systemic enough :)

    The idea that we no longer have liquidity at this point in time is a bizarre notion in my mind and completely undermines the rationale for maintaining this policy for so long.

    James has written many times about the way our monetary system works - when someone buys stock someone sells stock there is no money creation.

    Risk is meant to be on a graded scale with the reward contingent upon that degree of the risk. Lending money for two years is far more risky than daily savings, yet that price signal no longer exists. The risk/reward scale is being intentionally distorted by the FED. Why should they have such power?

    I believe that distorting the risk scale will only end in the mis-allocation of capital and even greater problems in the future. You may disagree and that's why it is called an opinion :)
    Aug 16 01:00 PM | 4 Likes Like |Link to Comment
  • Nike suffers design flaw [View news story]
    "an expensive recall for yoga pants which revealed too much"

    Not all of us would agree with this being described as a flaw :)
    Aug 16 12:52 PM | Likes Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    Your statement is confusing. Are you saying that 5 years of ZIRP is the right policy? That 0% is the correct interest rate?

    There is a difference between being "rewarded" and repressed and this is clearly a case of repression.

    The math is simple: $1 million at 4% and 0.25% is the difference between $40,000/yr and $2500.

    That's repression.

    Why shouldn't someone be entitled to be rewarded for living a prudent life and setting aside enough money to support themselves in the future without having to deal with the fear of running out of it?

    The price of money is the interest rate. Presumably savers make their money available at some price so that others can use it productively. That is how capital is created for investment. All it means now is that the risk/reward ratio is skewed 100% in the other direction - the thumb is on the scale of the risk takers. I don't think that is "fair" either.

    When money has no value I don't believe it finds it most productive uses either and leads us back to same stupid bubble policies and crashes of the past. Let the market set the price and if that price is zero that's fine with me.

    Money invested in the stock market is not productive capital. There is no capital creation in the buying and selling of stocks. Only IPO's and new stock issues create additional capital.

    Sadly saving money and being prudent was the normal order of things in the past and I am not sure why you oppose that.
    Aug 16 12:43 PM | 5 Likes Like |Link to Comment
  • QE3: The Fed's Faustian Bargain For The U.S. Economy [View article]

    This one really resonated with me:

    "The presumed achievement of a boost to consumption and investment by debtors by raising their disposable incomes via lower interest rates is largely (though not entirely) offset via the diminished corresponding disposable income that would otherwise accrue to savers. While it is argued that there is a benefit to short-term economic activity via the higher marginal propensity to consume on the part of debtors, it is clear that the net short-term benefit to the economy of raising the disposable income of one group at the expense of another is modest, even under the most optimistic assumptions about the marginal propensity to consume and empirically credible Keynesian spending multipliers."

    I believe that is actually far worse then you describe ( dare I say mephistophelean?) because there is a point at which you can't cut basic consumption and if you are the saver you will be forced to spend from principal which further diminishes your future economic strength. The lost earning potential from spending the principal will never be available in the future and will be keenly felt at some point.
    Aug 16 12:06 PM | 1 Like Like |Link to Comment
  • Investors Are Buying A Pig In A Poke With Tesla Motors [View article]
    Aug. 14, 2013, 6:30 a.m. EDT
    "Tesla’s supply hurdle could slow success
    SAN FRANCISCO (MarketWatch) — During Tesla Motors Inc.’s quarterly conference call with stock analysts last week, Chief Executive Elon Musk was frank about one of the primary challenges to the company’s long-term success.

    “We’re supply-constrained, not demand-constrained,” Musk said, referring to the fact that the capacity of the electric car-battery industry is behind the needs of Tesla TSLA -4.24% , which has forecast it will deliver 20,000 cars in North America this year.

    To achieve its long-term goal of producing 500,000 vehicles per year, Tesla would need more battery production capacity than is used today by the entire PC industry, said Musk.

    “Clearly, new cell factories need to be built,” he said. "
    Aug 14 01:56 PM | Likes Like |Link to Comment
  • Weighing The Week Ahead: Time To Ring The Cash Register? [View article]
    The one downside to rising house prices is really the corollary of the positive which is that housing becomes more unaffordable.

    I personally have always thought of housing as a substitute for rent rather than as an investment. The mentality of the 2000's in which housing became an investment class was not a positive and productive development from a capital investment point of view. A house is a non-productive asset.

    You combine higher prices with higher interest rates which we are now getting and you will find that the payment on a house has gone up a lot in the last few months. I suspect that that combination will cool the market a bit especially with disposable incomes being somewhat stagnant.

    This article from the NAHB was interesting and attempts to quantify the impact of rising prices and rising mortgage rates in combination:

    Once again ZIRP is distorting the price signal in a lot of markets and its eventual unwinding could prove very treacherous.
    Aug 13 03:08 PM | Likes Like |Link to Comment
  • FalconStor Continues To Offer Poor Performance With A Side Of Lofty Promises [View article]
    This once had a price to sales ratio of over 5 and now at around 0.56 so theoretically it is trading at a huge discount to its former level.

    So can they fix the "glitch"?

    If they can raise money by diluting current shareholders that would seem to suggest that an entry after that point would be a lot less risky for a new shareholder.

    I am very tempted to make an entry at this level.
    Aug 13 10:42 AM | Likes Like |Link to Comment