Poor Dude

The Fannie and Freddie Anomaly

P.S. - I don't think I'd pay too much attention to anyone who calls themself a professional Wall Street analyst and tells you that half the real estate in America is worthless. Most (if not all) of those guys and gals suffer from myopia, and can't see very far past the end of their nose. At best. They're so focused on this quarter's performance (and this year's bonus) ... and whatever their computer models might tell them (with their computer models being written by equally myopic programming nerds who might understand mathematical relationships very well ... but have no clue on how the real world - and real people - really work).

If you doubt me, then select any analyst and compare his or her predictions to what actually happened over a 10-year period. Almost without exception, they missed every turn and were wrong more often than they were right. They predicted stuff to go up, and it went down. When they predicted it to go down, it went up. They almost always follow the trend, until the trend reverses and makes them look like a fool for too terribly wrong. And then (and only THEN), they suddenly change their prediction and start getting it right for a while. Until the next reversal.


Analyst's predictions are a lagging indicator, with almost 100 percent certainty. If you're smart, you'll make your investment decisions on something other than what the so-called "experts" are recommending that you do. When they're wrong 90 percent of the time, it's probably best that you bet against them. And not "with" them.

Heck, that's only common sense!

;)

The Fannie and Freddie Anomaly

They own 1-3rd of the real estate in America, and they've already written off and foreclosed on all the trash (or most of it). In case you haven't heard, the values of our real estate have bottomed out and have started rising again. Uncle Sam bought them with the conservatorship to keep them alive in the midst of our financial crisis, and their very words telling you today that they don't expect to recover their contributions for the taxpayers can mean only one thing --- they're going to write the losses off and leave the value of all the "good" real estate in the hands of the companies' owners. Which is to say, those few proud and brave enough (or crazy enough?) to stick by and support the companies through their troubled times. Because those companies represent the very underpinning of our financial system, and of America itself. In other words, the common stockholders.

And never forget, that whole "pecking order" of the capital structure only applies in a liquidation. And if you think our government will "EVER" let FNM and FRE fail and go through liquidation, then ... well ... ummm ... the value of FNM and FRE common stock will be the "least" of our worries!

This is the investment opportunity of a lifetime, delivered only once every hundred years or more. And especially so for FNM, IMHO. I already bought, and I plan on holding for as long as America still exists. Or doesn't.

:)

Fannie and Freddie Shares Soar Though Value in Question

Between the two, they hold title to nearly 1-3rd of all the private (non-commercial) real estate in America. How can that be worthless?

I admit that I'm a little confused by their relative values, though. FNM owns twice as much property as FRE, and FRE held proportionately MUCH more of the toxic stuff than FNM did. So I'd expect FNM to eventually be trading somewheres around double what FRE does, in the long term.

Right now, I think our market is just trying to slowly readjust its thinking from an imminent collapse of the western banking system and a world-wide Greatest Depression, to a less serious (but still disastrous) future of hyper-stagflation. And in the new scenario, real estate will still have value.

Strange Inconsistencies in the $134.5 Billion Bearer Bond Mystery

Who cares if there is 100 quadrillion counterfeit dollars floating around out there on the world markets? Everybody already knows that our dollar is worthless anyways. Accepting a dollar today is a vote of confidence that someone as yet unborn will eventually pay the tab at some distant point in the future. Maybe in the next century or so. Anybody who is still taking dollars is simply doing so because everyone else does.

But as long as my local grocer continues to accept federal reserve notes in exchange for cans of beans and corn, or for a gallon of milk or a loaf of bread --- and the convenience store clerk will accept them in exchange for a tank full of gasoline ... who cares what they are really worth?

China Warns U.S. About Debt Monetization (WSJ)

So the solution to prove that our system is better than the communist system is to make our system more like theirs? To put in place more government control, to keep the capitalists in line?

Oh, OK. I think I get it now.

And that's why China's economy is growing at near 10 percent a year in a seriously damaged world economy, while ours is declining. Because their way is wrong and ours is right.

(lol!)

The only way to save capitalism at this point is to immediately reduce the size of our federal government by 50 percent or more and to start paying off our debt. But you're right if you say that's a fantasy and will never happen, because it won't. Our leaders (and citizens) are going to ride this pony until it drops. And we'll all still still be arguing over who's entitled to what share of what's left of the productive output of others, until the very next-to-last person dies. And the last person standing will then own all of nothing.

Read Ayn Rand. She explained it all, and we're following her prophesy to a tee!

:(

Was TARP Really an Elaborate Ruse to Bail Out Citigroup?

I'm amazed that people still don't get it. Citi represents western civilization. If and when they fail (which many people seem to want, for a short-term gain or long term market share with reduced competition), they will take our world as we know it with them. Lehman times 100 seriously understates the problems such a failure will create. Maybe times 10,000, or times a million. Or perhaps a billion.

Sure, maybe there's a quick buck to be made today by destroying Citi. And maybe certain large companies would be even more profitable in the future if Citi were gone. But that would only hold true assuming that we had some sort of organized civilization in place after its failure. And THAT'S the part that I think Wall Street is forgetting to make allowances for. They seem to assume that foreign countries will continue to buy our debt, no matter how high that debt grows. And they assume that unemployed , homeless, and hungry people who've lost their life's savings will just sit around and feel sorry for themselves, collect their weekly unemployment or welfare allowance, be happy, and continue to vote in our existing leaders for another 4 years. Election after election after election.

After spending nearly a decade watching our markets and figuring out how they work, that's why I invested in Lehman Brothers and Washington Mutual and Citi. I figured that if our system is intentionally designed to take away my life savings and there's not a darned thing I can do about it, then fine. They can have my money. But I'm taking everyone else down with me. And most especially, those who manipulate the markets and can't see past the end of their own nose.

Lehman Brothers .... check.

Washington Mutual .... check.

Citi ... coming soon!

(And then it will be "mission accomplished", as my gold and silver hoard will soar in value and my guns and ammo will guarantee that I can always get food - from "somebody".)

Yes, sometimes the tail wags the dog!

;)

Jungle Ethics Financialism vs. Free Market Capitalism

I'll pile on and also say kudos for well-written and compelling article. Good job!

In principle, my core tendency is to recoil against any argument for a larger or more intrusive government. And yet, I view our financial markets today as a den of thieves.

Perhaps a simpler and more effective solution would be to simply outlaw all financial transactions which are speculative in nature and serve no underlying economic function? I disagree with the poster who said that such speculation serves a legitimate purpose, because I don't feel that it does.

Another thought is the possibility of holding people personally responsible for the results of their actions. Make the penalties for white collar crime equal to or worse than the penalties for blue collar crime. Which does more harm to our system: the unemployed vagrant who takes a handgun into a quick mart and steals $100, or the banker who creates an investment that subsequently loses $1 billion and wipes out the lifetime savings of thousands of innocent people? Instead of looking back after the fact and arguing over whether or not we should put caps on the bonuses these people should receive in the future, I think we should be gathering up the ring leaders, confiscating all their assets to repay as much of the losses as possible, and throwing their sorry behinds in jail for the rest of their lives.

Leave the markets free, but make the free market participants aware that if their actions cause harm to innocent people, then they will be held responsible and they WILL pay for their crime. And then do it. That should solve the problem.

Citi's TARP Convert and Chrysler's Indiana Bond Holders

The way I view it, Sheila Bair wouldn't now be sucking up to the Citi board and declaring a truce, if she didn't fear for her own job (and freedom?) as a result of the Congressional inquiry into what the Treasury and the Fed told to Ken Lewis in relation to the Merrill acquisition.

Seems to me, some lawyers took it upon themselves to advise several of our high-ranking government officials that there are legal limits to their power (whether they like it or not, and much to the chagrin of some executives at JP Morgan and/or Goldman Sachs).


Your prior play is over. Move on. And hope the net of government scrutiny which will inevitably close upon this rather sordid chapter in our history doesn't catch you as a contributor or a co-conspirator. Our people will want (and get) blood. Just hope that you're not one of those who is bleeding, when all is said and done!

;)

Citi's TARP Convert and Chrysler's Indiana Bond Holders

Forget it. Your cause lost 2 or 3 months ago, and yet no one seems willing to admit it.

Fannie and Freddie represent the value of nearly 2/3rds of the real estate in America. As of 1 April, they get to value their holdings at their true long-term value (rather than at some arbitrary value created by a panicked and frozen market (whether that was conceived and planned by certain people or not)).

But valuing all the real estate in America at between 3 and 10 cents on the dollar? You've got to be kidding me! That would be roughly like valuing it at FAR less than 1/4th the value it reached during the Great Depression! And you'd bet "your" money, or advise others to bet "theirs", on such an outcome? (lol)

There are a lot of things happening in today's world that I don't agree with. With government intrusion into private markets being near the top of that list. But to argue that FNM or FRE or C or BAC are over-valued today is just plain foolhardy at this point. No matter HOW bad our economy gets from here (and yea, even if our government collapses and America splits into 5 or 6 different sovereign nations), then those companies will most assuredly go up in value from here.

The "short Citi" and "short BAC" game ended quite a while ago. If you truly cared about the people who read your posts, you'd now be advising them to buy hand over fist. And the same applies to FNM and FRE. And you'd be betting your own money accordingly.

Do otherwise at your own peril.

:)

More CRE Mortgages Going Bad

The value of our commercial real estate will ultimately be determined by the long term viability of our government (and by extension our economy). The default numbers you've shown, although increasingly worrisome, don't even begin to approach the level where I would start really worrying about them. Call me when they exceed 10 percent, and I'll start worrying.

Besides, if our economy regains its footing then those numbers will start reversing back towards zero and everyone will be rich and happy again. At least, for a little while longer. (And that's our plan, as I understand it.)

The problem, as I see it, is this: How long will the world markets continue to view America as good place to invest, when our government is borrowing nearly half of what it needs to operate from year to year? And when our total debt continues to grow exponentially, while our economic growth is declining or stalled (or at best, growing at only a fraction of what is required to feed the federal monster)?

I think it's important to separate the dog from the tail, and to recognize which is moving the other. The value of CRE is a symptom. Government spending is the affliction. If you want to know what's going to happen to the value of investments in CRE (or anything else for that matter), then simply observe the federal budget from year to year. As long as it continues to grow, then everything else must surrender some value in order to fund it. And the faster it grows, the more that must be surrendered. The money to operate a huge federal beauracracy must come from SOMEWHERE. And from somewhere productive, where wealth is actually created.

Contrary to the popular belief of some, it cannot be simply printed out of thin air. And given that basic economic truth, we're all in deep doo-doo at this point!

:(

Poisoning the Green Shoots

We live in a world where corporations hire lobbyists to convince Congressmen/Congresswomen to pass laws that benefit them over (and at the expense of) their competitors. And where our leaders do so, in exchange for campaign contributions.

Where our tax laws are so convoluted that not even the people who wrote them nor the people who enforce them have even a clue what the law requires (but where our government will come down on you hard in a heartbeat, should you piss off the wrong federal official or serve as a good example of what "not to do" for the rest of our public).

Where nearly every single elected representative feels it is their solemn duty as an elected official to "bring home the bacon" to their district. (Forget what may be in the "nation"'s best interest.)

Where the vast majority of our population feels they are entitled to a good-paying job, or at least a nice roof over their heads, one (or two?" cars), three radios, two cell phones, a surround-sound home theatre system in HD, free food, and the best of medical care at no cost --- even if they choose not to work. And they get it, in the name of "compassion" or "humanity" or "equality" or "progress". Or whatever.

Where corporate executives and high-flying New York bankers get multi-million-dollar salaries each year, year after year after year, regardless of whether the value of their company's stock has gone up by 10 percent or down by 95 percent. And if they do REALLY badly, they'll get fired and drive off in the company car with a mega-millions settlement and a healthy pension for the rest of their life, while the little old ladies and widows and orphans and average working people who lost their life's savings after investing in them don't get even an apology.

Yep, that's the America we live in today.

And just trust me when I tell you that it's not sustainable, because it isn't. At some point, the producers are going to stop producing. And the hurt and the angry and the homeless and the penniless are going to want blood. And they'll get it.

Poisoning the Green Shoots

>>> Debt is an important tool in building our future. If we wait for people to be able to "pay cash" for their houses, cars, college educations, or for gov'ts too pay "up front" for roads and schools, it will be a looooong time before we see any economic expansion. <<<

OK, I do not disagree with this. If you can borrow at 5 percent and produce a return of 10 percent, then it is smart to borrow. (To yours and Mr. Lounsberry's credit.)

But I think it's important to keep investments and returns in perspective. While the underlying principle may be sound in a growing economy (or for a young nation), it is critical to know when you've passed the point of productive borrowing and entered the realm of borrowing for the sake of survival or maintaining the status quo. Once you cross that threshold, there is only a limited opportunity to reverse course and place oneself on a sustainable footing for the future.

And looking at the literally exponential growth of our nation's total debt over the past 20 or 30 years or so, and then factoring in our nation's demographics and life stage (baby boomers just now entering retirement, the development of a truly global economy where our workers must effectively compete with children from third-world countries, etc.), I can't help but reach the conclusion that we have now passed the point of no return. The point where we are no longer growing or earning our way to prosperity, but are instead simply borrowing today's prosperity (or maintenance of our current status quo) from our future. With a net NEGATIVE return to our children, instead of a positive one. And I'm sorry, but that's not productive borrowing.

Now being unable to sustain ourselves in a world where everyone else has the same advantages we once owned (because we chose to export our expertise in exchange for lower costs of labor and a short-term competitive advantage in the free markets), we are now doomed to failure. We have now borrowed more than we can ever POSSIBLY pay back while realizing a positive return on that investment. We are now borrowing simply to maintain our current lifestyle --- not to improve our future. And we are doing so at the expense of our children.

That's what I fear. That we have now entered the long slide to oblivion, and our leaders have neither the understanding nor the will to stop our demise and save us. At this point, it would require hard choices and sacrifices by many. But none are willing to pay the price. And because of that, we will all die together. All holding each other's hands and singing "kumbaya" as we're flushed down the toilet of human history, along with all those who preceeded us with great ideas but lacking the fortitude to make the sacrifices necessary to realize their fruition over the many centuries it requires ....

:(

Banks: Rebuilding the House of Cards

And mind you, that's not to say that cash flow can't also be manipulated to a large extent if the company's management so desires. Because it can. It's just that it is less frequently manipulated because fewer people are paying attention. And that's why it's always important to read the footnotes in all those annual reports. Buried in the small print, on page 87.

Once you've read enough annual reports, you can start to pick up on patterns. To see manipulation of the numbers. The company spent the last 3 years writing off every cent of its intangibles and reporting huge losses, while generating positive cash flow in each and every year? (All the while exponentially increasing the stock option grants to their executives because their price had declined so dramatically and they had to pay out the same equivalent value in order to retain the best talent - LOL!.)

But they've now run out of things to "write off"?

The company which is hiding unreported profits in their overseas subsidiaries?

The company which has made a judgemental adjustment to reduce the value of their deferred tax assets by 90 to 95 percent, although they state that they expect to eventually realize the full value of those assets?

That's a company which is about to soar. The "always-sought-after" ten-bagger!

Banks: Rebuilding the House of Cards

Funny that you should say that, Tack. One of the executives at General Dynamics told me years ago that their company doesn't really put too much emphasis on "profit", since that's a number they can make to be anything they want it to be. When it came to measuring the success of their managers, they were focused almost exclusively on cash flow. And the more positive that number, the better they viewed the performance of their managers.


At the time, I was a little perplexed by what he was telling me. But now, I understand!

Poisoning the Green Shoots

>>> Steven,

Your moralizing about debt is neither grounded in economic history or any credible theory of economic growth. Follow the consequences of your own logic. Less government debt means less government spending and less aggregate spending. So it implies a far more severe recession. Now a more severe recession means less tax revenues...

It is naive for you to think that the federal deficit would be smaller under a do nothing scenario.

Keynes wrote that practical men, who think themselves immune from theory, are usually the slaves of some defunct philosopher. Could that apply to you? <<<


That's an argument that the only way to ensure prosperity is to create it by hocking everyone's future productivity in order to enjoy the benefits of that future productivity today. If that's what Keynes espoused, then he is a fool.

Prosperity is created by productive output and economic expansion. Nothing more, and nothing less.

While borrowing may lend the appearance of prosperity at the current moment, it carries with it an iron-clad and unquestionable consequence. It requires you to drain from your future prosperity the means to repay the amount of your debt, plus the interest on those borrowings (since time is money, and no one is willing to lend to you today without an acceptable return on their investment).

To enjoy the benefits of a borrowed dollar today, you must pay back more than a dollar in the future. I don't know if "economic history" or any "credible theory of economic growth" recognizes that fact, but it's still a fact. Hell, it's just plain old common sense. Finance 101, or even simpler.

Any system built upon the premise that it must borrow from the future in order to survive today is a system built upon sand. One built upon the "bubble theory" of economics. And its future is unquestionable. The bubble will eventually burst, and that system will fail.

This much, I agree with:

"practical men, who think themselves immune from theory (or I would say economic reality), are usually the slaves of some defunct philosopher. Could that apply to you? "