patrick.net

Brand,

Could we just forget I ever posted that cyberhaven link? I read Starchild a long time ago and remembered being interested. Now it looks like cr#p.

"Rich emu, Poor emu" LOL!

Where do I get MY copy!?

I thought this article was emblematic of America.

http://biz.yahoo.com/cbsm/070620/8d95be7caf994c909605fad32361c515.html?.v=1&.pf=retirement

Investment companies trying to profit off of the sheeple’s apathy. They want to profit by default from people who don’t care and are unwilling to take any active role in their retirement portfolio.

Why would Bear Stearn be the straw that broke the camel’s back particularly? Perhaps like some other recent implosions it’s a symptom or a victim not a trigger event.

Vincente,
The prevalent theory behind this is that the BS funds collapse unearthed a dirty little secret - these very, very illiquid financial instruments such as CDOs and MBSs have a financial value that is not very clear because they are so illiquid and infrequently traded. As a result, when hedge fund investors and the banks that loan money to the hedgies so they can "double down" their bets get the least bit antsy and ask for a valuation or ask for a margin call, there can be sudden downward valuations on these funds. All of a sudden, the investor realizes their stake in the fund is worth 30% less than they thought previously (this is more or less the case w/ the BS funds).

People are concerned that the BS problem could be the start of a chain reaction because now, all of a sudden, everyone else who has a stake in all these other funds with heavy investments and leverage in MBSs is exposed to the risk of significant devaluation. Add to this picture the recent push by Moody's to revalue many of the funds in this category, and in the worst case scenario, you could potentially be looking at a massive panic and fleeing for the exits by investors to these funds.

Whether or not the panic occurs is obviously not certain. Clearly BS "decided" to bail out at least one of their funds to stave off this scenario. I believe a similar thing happened during the LTCM meltdown.

I'm by no means even close to having the most expertise on this matter among the posters here, but that's my lay-person's understanding.

KT,

I agree, it IS a mess. The Act, as originally written was not necessarily a bad piece of legislation. I've advocated "negative enrollment" for years. It's sad to see this become a political football. Enter greed.

Getting a new job and/or transferring can be stressful. Perhaps what's needed is proper follow up from HR within a reasonable time to get participants into investments they have actively selected, making the "default funds" a temp. parking vehicle?

Nice find.

skibum,

No, that's about the size of it. This "re-pricing of risk" is what it's all about (and what BS and the street is fearing). You may have missed your calling.

On the Bear Stearns and other funds woes, here's a shot across the bow from Bill Gross:

http://www.bloomberg.com/apps/news?pid=20601087&sid=abbFUHu6bkY4&refer=home

Gotta love the guy! A frank assessment, and he manages to squeeze in at least 3 separate colorful metaphors:

RE: CDOs:

``AAA? You were wooed Mr. Moody's and Mr. Poor's by the makeup, those six-inch hooker heels and a `tramp stamp,''' Gross said in his monthly commentary posted on Pimco's Web site today. ``Many of these good looking girls are not high-class assets worth 100 cents on the dollar.''

OR,

Defaults on subprime loans will ``grow and grow like a weed in your backyard tomato patch'' and if total losses reach 10 percent, CDO slices rated A may also ``face the grim reaper,'' Gross said.

OR,

``The willingness to extend credit in other areas -- high yield, bank loans and even certain segments of the AAA asset- backed commercial paper market -- should feel the cooling Arctic winds of a liquidity constriction,'' Gross said.

skibum said:
I’m by no means even close to having the most expertise on this matter among the posters here, but that’s my lay-person’s understanding.

Good summary. Another 'plain english' explanation is:
1. Investors gave money to B-S.
2. B-S went out and bought Collateralized Debt Obligations.
3. CDO's were backed by the value of the collateral assets.
4. The valuation of the collateral is now questionable.
5. Investors want to know whether they are adequately covered.
6. If B-S is forced to verify the valuation, it is likely to come up short.
7. If valuations are lower than thought, the value of the CDO falls.
8. Investors rush to the exits, causing the CDO to plummets further.
9. This can trigger a worldwide re-valuation of all collateralized debt.
10. Pretty much all models are screwed because you don't know if your counterparty is solvent anymore.
11. When you don't 'know' and your models can't 'tell' you anything for sure, your risk shoots up.
12. High risk needs to get priced into everything you invest in, assuming you actually choose to invest instead of curling up into a ball and sobbing.

In other words, the tide is going out. Nobody knows who is swimming naked - it could be you.

SP

O.K Bill, we get the idea without the "tramp stamp" thing! For once BG and I are in agreement (mostly). Bank loans are an entirely different asset class and probably shouldn't be lumped in with this mess.

I think there may have been (1) add'l step? Merrill provided BS w/ "warehouse lines of credit" to run out and buy this cr@p and THEN back filled it w/ investor $'s. I guess that's how Merrill got involved. As in "we have warehouses full of money".

DinOR Says:
I think there may have been (1) add’l step? Merrill provided BS w/ “warehouse lines of credit”

True - in my summary this was simplified into 'investors' who gave money to B-S. I glossed over the fact that the money was actually OPM - that is pretty much a given on Wall Street. :-)

SP

DinOR says:
“Rich emu, Poor emu” LOL!

Where do I get MY copy!?

Maybe at "www.I_Am_Facing_Extradition.com"

:-)

SP,

True, true. It's a given. I will say that I like the brand of candor Bill Gross is bringing across. You have to wonder why he didn't have more pointed comments earlier?

As for living abroad, there's a number of good websites that offer that information. My favorite is internationalliving.com - though it's approach to real estate is awfully bubbly.

That's one thing I've always wondered about so many of those "escape-artist.com" type web-sites? I'll take obviously the pricing model in much of Central/South America is built on someone that has leave the U.S post haste?

"Buy this lovely villa in Colombia for ONLY 2/3rds of what a similar property in Miami would cost you!"

Yeah uh.. if I'm going to live in a country where more people are held for ransom than hit by champagne corks I'd be looking for a little bit more of a discount? Hint? At least where the Philippines is concerned virtually everything that's for sale (is also for rent!) In fact with but a few exceptions the lists are almost identical. Difference is, just as it is here, rents are ridiculously cheap! Think ocean view w/pool for about $600 a month. That's their ADVERTISED price!

The Bill Gross outburst was very entertaining. The real question is why is he talking like THAT and talking like that NOW ?

I point you all to this 2-year old article posted by another Bill on MSN Investor. I highly recommend reading this, even though most of us will not find anything "new" in there.

http://www.fleckensteincapital.com/hotpotato_pt1.htm

It's a 3 part series, replace the pt1 by pt2 and pt3 to access other parts.

This was written more than 2 years ago and introduced me to the craziness of lending, financial dark matter and essentially the root causes of the housing bubble. All this has become common knowledge NOW. Then, it was like a shocking truth that made understanding the bubble so much easier.

DinOr, SP, Skibum

So, with the BS meltdown, naked swimmers, vulnerable CDOs, and questionable MBS backing, are we finally going to see the liquidity crisis (opportunity) sooner than later?

I want the lack of easy credit to swell the unsold listings faster than a diuretic Clydesdale can fill a coffee cup. I want to see lowballs of cents on the dollar become routine, boring news. When??

Headset,

I don't know about "cents on the dollar" for houses just yet but no question, subprime is effectively shutdown! The only reason this lending distribution channel hasn't been completely choked off is b/c new loans CAN have the risk efficiently priced.

Where the downward pressure comes from is the fact that Mr. Howmuchamonth? is in essence priced out of even discounted home prices (let alone armed for a bidding war!) There will be no help for Stanley Johnson.

"Evacuate, in our moment of triumph?"

In the hodgepodge of data from the press release for the latest Case/Shiller Index numbers, it should be noted that Stumptown, Seattle and Fortress BA are showing increasing rates of appreciation for the past couple of months. Subprime fiasco, what fiasco? Is this a case of you can't chart what you can't sell? A few more months of data will reveal if this is a seasonal issue or the beginnings of a recovery in these markets.

HeadSet Says:
So, with the BS meltdown, naked swimmers, vulnerable CDOs, and questionable MBS backing, are we finally going to see the liquidity crisis (opportunity) sooner than later?

The only thing you can be certain about is that risk will get priced in, which basically shuts down the subprime party. Liquidity will certainly be lower - but whether it will reach a crisis is open to question. Liquidity crises are big, scary events that affect far more than housing.

For what you want (cheaper houses), you don't need a full blown liquidity crisis - you need a 12-24 month credit squeeze all the way up to the A-grade. This will make mortgages more difficult to qualify for, and also reduce business investment (~jobs). The raised lending standards (20% down, 28% of verified long-term income) will stay in place for a long time after that.

SP

Diversify! A little gold, a little foreign stock, a little domestic stock.

For what you want (cheaper houses), you don’t need a full blown liquidity crisis - you need a 12-24 month credit squeeze all the way up to the A-grade.

All I want is for the bond market to wake up from its hangover induced by drinking too much cheap "liquidity". Especially the non-treasury - and add sufficient risk premiums for MBS that reflect the reality of the housing market. In other words, I want the 30yr FRM to go up to 8% at least. That's all. Nothing earth shattering. ;-) That's how it was 10 years ago. Everything else will automatically get adjusted.

StuckInBA said:
I want the 30yr FRM to go up to 8% at least. That’s all. Nothing earth shattering.

My expectations are also quite close to that. 8% and above, accompanied by some realistic lending standards will bring things down to earth.

When I was talking about a year long credit squeeze, that was in the context of Headset's "pennies on the dollar" scenario - the point being that he would get that without even a total liquidity crisis. Sorry I didn't make it very clear in that post.

SP

If there is a high inflation scenario in the US, do you think the proverbial rich foreign investors would jump in before a bottom that we're comfortable with? Or would they get scared and stay home?

I'm very upset about the weak dollar. Iceland high season prices (in USD) have practically doubled in the last five years and Norwegian prices have gone up even more.

Randy says:
"There are good things about a weak dollar period that have to be recognized: 1. it helps to adjust the current account deficit; 2. it exports inflation to China which helps because it makes them pay for labor arbitrage."

One classic way to approach a current accounts deficit is cut interest rates and create a loose monetary policy. The US obviously did this. Normally, such a policy would weaken the dollar and make the Chinese goods more expensive to us, and the US goods cheaper to foreigners. Thus I understand "helps to adjust the current accounts deficit." For your statement "exports inflation to China....." are you saying this based on the fact that China does not let their currency float? I am assuming that "exports inflation" does not mean Chinese goods more expensive for US market, but that you were talking about overall inflation in the Chinese economy itself. If the Chinese did allow their currency to float, it would seem that a weak dollar export unemployment rather than inflation.

Astrid,

I was in Bodo, Norway back in 1993. Even then, a beer at a bar was the equivilent of $14.

I wasn't aware BMW was "farming out" a lot of their production. Funny... their sales literature doesn't mention that..?

Randy H,

Barring an appetite for foreign travel, I don't see much impact in my daily life which could be attributed to a falling dollar. Haven't had a big mac since probably 1970, but my 2007 iMacG5 cost 30% less than the 2000 G4 cube it replaced, so the falling dollar hasn't fallen enough to interfere.

I'm on the low end of the learning curve where this blog's subjects are concerned. While most here are interested primarily in real estate, I read for information to help me protect assets - I'm trying to work out what's prudent and where the risks lie. I also tend to be swayed more than I should be by what I've read most recently, certainly more than I would be had I the level of certainty some here seem to possess.

What I get here is discussion which seems to disqualify every possible investment medium, i.e., paralysis.

Can't say as I'll ever set foot in NORWAY then!

At one time I'd thought about putting together a "Slummin' with DinOR" travel guide. All the best places to go when you're "a little short"? Great post on the Portland Housing blog where gas prices were being discussed. One poster said he WISHES you could a gallon of beer for 3 bucks!

One of the education costs links failed to post correctly above:

One of the education costs links failed to post correctly above:

HARM,

Excellent links. IIRC I paid under a dollar a gallon for gas in 1997. CNBC had some good coverage today on their survey about summer vacations. The number of people electing to stay home (due to fuel costs) should be alarming to anyone in tourism/hospitality!

What's up? Gas has been expensive for the last several travel seasons. Evidently the difference this year is that the ATM has been shut down?

Oh, and for the record, the really *significant* changes to the way the BLS hedocially adjust the CPI came during the Clinton administration in the mid-1990s, not during the 1970s.

FYI: http://www.shadowstats.com/cgi-bin/sgs?

DinOR, that's kinda cherry picking, isn't it? How long was gas $1 in 1997? I seem to recall maybe for a couple months before it picked back up. That's kinda like citing the tech stocks' P/E circa 1999.

Anyway, most of the items cited above--oil, college education, food--are increasing in price because global demand is rising. I'm not sure if youc an call that "inflation" in the purest sense. It's just rising prices. Just look at the number of college applications now vs. 1990 or 1980. Corn and meat are getting more expensive because of this silly ethanol thing and other factors. More foreign countries like China and India are consuming oil, coal, steel, lumber and basic materials at tremendous rates.

Housing prices have been beaten to death here. It's just rampant speculation, and I feel the same way about gold. Healthcare... yeah, it has gotten insanely expensive.

Brand,

Well... I didn't say it -wasn't-? It's true, (as per HARM's chart) crude only dipped below $10 very briefly but we paid a buck and change for much of the late 90's.

Randy DID promise that ethanol would be a boondoggle, so justifying higher food prices ALREADY is evidence enough where I'm concerned. If it were that impactful this soon wouldn't you think there would be some relief at the pump?

Brand,

I have to disagree about housing and education, those things are overpriced not merely because demand is greater than supply, but due to an unfortunately misperception that education and housing are "sure bets" that are worth any price. This causes people to overestimate the value and pay any price for the good. Properly priced, there are plenty of housing in this country and space for a lot more. There are also lots and lots of Ph.Ds (esp. in the humanities) who are only too happy to teach and do research for $40-60K a year.

These trends are harmful to everyone long term except administrators/tenured professors/student loan officers in education and realtors/builders/mortgagers/current owners intending to sell.

Much of the current high oil price is also tied to Middleeastern instability, though China/India/SUVs&McMansions certainly do their part.

DinOR,

When partying in Scandanavia, bring your own alcohol or load up on dutyfree booze.

The question to ask yourself is exactly, precisely, in concrete-terms, why do you care about a weak USD? Tell me exactly what it is costing you in your real life.

I deeply care about the state of US$. In a way that hasn't been mentioned in this thread.

In my real day to day life, the increased spending on gas doesn't bother me much. It's a small portion of my expenses. Rent, day care etc eat significant chunk of my money. It's hard to quantitatively attribute how much increase in these costs is due to falling US$.

My main worry is job outsourcing. The value of US$ in other currencies, mainly INR has a significant impact on this. So the falling US$ actually provides some help in securing my job. I know this is just ONE factor, but it IS a factor, and quite important one at that.

Falling US$ is a mixed bag, but to me, it has more positive than negative.

DinOR,

I guess ethanol changes the old saw that "they can't consume fuel, and we can't put food in our gas tanks."

Actually, a mix of 80% ethanol and 20% water makes a fine piston engine fuel (very high octane qualities). To mix with gasoline, ethanol needs to be quite pure (water and gasoline do not mix). Refining pure ethanol is much more expensive than distilling a 80/20 mix. If we could overcome the fear of losing the gasoline option (a piston car engine optimized for ethanol can no longer effectively run 100 octane or less gasoline*), 80/20 may be the way to go. That is, for energy independence. Without subsidies and tax breaks, gasoline has a big cost advantage over ethanol.

Ethanol does have less thermo potential than gasoline, but that can be made up for by much higher compression ratios, like 14 to 1.

*The Model T could burn either gasoline or ethanol, but it had a very low compression ratio, inefficient for either fuel. And yes, some technology like a computer controlled dynamic retarded spark (only fire after the piston is coming down off the compression stroke, when the pressure is lower) could allow gasoline to not knock in an ethanol optimized engine (14 to 1)

Ethanol from corn is an all around terrible idea.