PIMCO | Investment Outlook - Run Turkey, Run

PIMCO | Investment Outlook - Run Turkey, Run

Vote NONE OF THE ABOVE!

On Tuesday, get rid of incumbents who have done nothing but swindle the American public for the last decade plus.

Key Sentences: "Democrat or Republican, Elephant or Donkey, nothing much ever seems to change. Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn't a choice between chocolate and vanilla folks, it's all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath."

"We basically have two bankrupt parties, bankrupting the country."

"We are, as even some Fed Governors now publicly admit, in a 'liquidity trap,' where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there."

Unanticipated Consequences:

1. Ignorance: The Fed is acting without gathering all the facts; essentially ignoring history and unlearning lessons.
2. Error: The Fed has incorrectly assessed what the barrier is that is preventing the economy from moving forward -- it is not liquidity, it is loss of trust (which no amount of QE will fix - only time can repair it).
3. Immediate Interests: It is beyond me why the Fed of the last 15 years continuously insists on manipulating the stock market in the short term. Whether it is QE or interest rate moves, it more often than not has appeared that the purpose of such policies has been to prop up the stock market in the short term, often at the expense of the economy in the long-term. The Fed's stated purpose is "to provide a safer, more flexible banking and monetary system." Politics and the stock market should have no bearing, yet both seem to creep in and take hold of most decisions -- just one reason why the system is in need of an overhaul.

Hussman Funds - Weekly Market Comment: The Recklessness of Quantitative Easing - October 18, 2010

Hussman Funds - Weekly Market Comment: The Recklessness of Quantitative Easing - October 18, 2010

Hussman does a great job pointing out the fraud perpetrated by Congress & the Fed and carried out by FASB. If banks were held to mark-to-market standards like every other GAAP-reporting company, many (if not most) would be insolvent today (let alone two years ago). At some point, this lax accounting policy will be allowed to expire -- expect banks to dump assets, be forced to raise capital at a discount, and suspend making new loans. They know this day of reckoning is coming, which is why they held on to TARP funds instead of lending them as Congress intended, and then invested the funds in the market in order to make record profits in the last four quarters.

All our elected officials and their lackeys have done is to delay the inevitable (and possibly to dig a bigger hole depending on how the foreclosure mess plays out).

Key Paragraph: "In short, further attempts at QE are likely to have little effect in provoking increased economic activity or employment. This is not because QE would fail to affect interest rates and reserves. Rather, this policy will be ineffective because it will relax constraints that are not binding in the first place."

Unanticipated Consequences:

1. Ignorance: The Fed is acting without gathering all the facts; essentially ignoring history and unlearning lessons.
2. Error: The Fed has incorrectly assessed what the barrier is that is preventing the economy from moving forward -- it is not liquidity, it is loss of trust (which no amount of QE will fix - only time can repair it).
3. Immediate Interests: It is beyond me why the Fed of the last 15 years continuously insists on manipulating the stock market in the short term.  Whether it is QE or interest rate moves, it more often than not has appeared that the purpose of such policies has been to prop up the stock market in the short term, often at the expense of the economy in the long-term.  The Fed's stated purpose is "to provide a safer, more flexible banking and monetary system."  Politics and the stock market should have no bearing, yet both seem to creep in and take hold of most decisions -- just one reason why the system is in need of an overhaul.

PIMCO | Investment Outlook - Stan Druckenmiller is Leaving

PIMCO | Investment Outlook - Stan Druckenmiller is Leaving

As always, Gross hits the nail on the head. Low yields on bonds will require higher returns on stocks in order for pension funds and money managers to hit target returns. The result we are seeing in the short-term is an overallocation to emerging markets. Pension funds and money managers are being forced to chase higher returns, thereby chasing higher risks.

Unanticipated Consequences:

1. Error: Funds are using assumptions that worked in the past, but appear to be way too rosy based on current (and expected future) fundamentals.
2. Immediate Interests: Pensions were set up to take care of the then-current work force.  They ignored the burden on the future work force's wallet.  Additionally, realizing that they need higher returns to make up for the lost decade of 2001-2010, many funds have reach for yield recently by pouring money into higher risk investments like emerging market stocks.  This may create an even larger bubble that will hurt even more than the real estate bubble when it bursts.

American states' pension funds: A gold-plated burden | The Economist

American states' pension funds: A gold-plated burden | The Economist

Excellent article. Between the national debt, state and municipal pension liabilities, and corporate pension liabilities, the country's future has been mortgaged. Unrealistic expectations for returns and unreasonable benefits for retirees have forced these pension plans to implement "Delay and Pray" tactics on their funds. Just like at the national level, someone needs to step in and make the unpopular, but necessary, decisions if they are to survive.

Unanticipated Consequences:

1. Error: Funds are using assumptions that worked in the past, but appear to be way too rosy based on current (and expected future) fundamentals.
2. Immediate Interests: Pensions were set up to take care of the then-current work force.  They ignored the burden on the future work force's wallet.  Additionally, realizing that they need higher returns to make up for the lost decade of 2001-2010, many funds have reach for yield recently by pouring money into higher risk investments like emerging market stocks.  This may create an even larger bubble that will hurt even more than the real estate bubble when it bursts.

House Advantage - Series - The New York Times

House Advantage - Series - The New York Times

A great article series that shows just how much the game is rigged.

Qualified? Home lenders saying not so fast - Business - Real estate - msnbc.com

Qualified? Home lenders saying not so fast - Business - Real estate - msnbc.com

Unfortunately, this is an all too-common story (experienced by yours truly among others). The fact of the matter is that there are several things working against good, honest citizens trying to secure a new mortgage:

1) Recent transgressions have swung the pendulum to the opposite extreme (moving from "Liar Loans" in 2004-2007, banks now want minutia details that rational thinking human beings would realize should have no bearing on the credit risk an individual poses to the bank)

2) Banks have had to reallocate resources to deal with foreclosures - meaning that you may get the B-team on originations

3) Banks have no incentive to make loans right now -- with interest rates (and specifically mortgage rates) at all-time lows, why would a bank want to make a 30-year loan, when there is nowhere to go but up from an interest rate perspective -- they may as well wait a couple of years and get more yield. Furthermore, with all of the bad debts still on the books (and possibly coming back on the books in the form of foreclosures that were improperly made), they need to be extra careful when it comes to making new loans (of any type) so as to not violate the Tier 1 Capital Ratio guidelines set by the FDIC.

4) Depending on your local market, we may not have hit bottom yet -- Shiller came out today with his expectation that residential real estate will drop another 20% before we hit bottom... that puts traditional 80/20 loans made today at 100% LTV when the bottom is finally found -- not a comforting thought for bankers.

What is truly frustrating though are the deadbeats who are not paying their mortgage and essentially living rent-free for 18+ months while the foreclosure machine grinds along. Now there's talk about bailing these people out (again)? Why not pay honest hard-working citizens to take over these properties and loans (at a discount -- there's your use of bailout funds) and punish the transgressors by kicking them out on the street?

Unintended Consequences:

1. Immediate Interests: There is a current school of thought that the government should fix everything and save people from being kicked out on the street.  This ignores the long-term effect of individuals ceasing to care about the consequences of their actions because no one ever gets punished for mistakes/bad behavior.  Look at Greece today -- that is where the U.S. is headed in the next 50 years unless we do something to correct course now.
2. Basic Values: The American Dream has been sold for multiple generations as home ownership.  People may not buy into that anymore after this debacle.

For foreclosure processors hired by mortgage lenders, speed equaled money

For foreclosure processors hired by mortgage lenders, speed equaled money

So basically nothing changed -- a mirror image of 2004-2007, with the same people getting rich. Mortgage originators were paid for speed -- get as many loans done as possible in order to fuel the MBO/CMBS securitization machine. Now foreclosure processors (many ex-originators) are getting paid again for speed - process as many as possible, ignoring procedure if it results in greater volumes because most of the homeowners in foreclosure are the same fools that didn't know any better when they took the loan, so why would they bother questioning anything now (especially when they know they have behaved badly by not paying the mortgage)?

Unanticipated Consequences:

1. Ignorance: By focusing on speed and throughput, decisions were made on incomplete analyses.
2. Immediate Interests: Loan originators (and now foreclosure processors) were incentivized to process as many new loans or new foreclosures as possible (by being paid on a per transaction basis).  This ignored the long-term effect of inflating the housing bubble on the front end and having bad debt return to bank balance sheets on the back end.

Tidal wave of bad loans threaten banks - San Francisco Business Times

Tidal wave of bad loans threaten banks - San Francisco Business Times

Prepare for the double dip. The securitization machine was running so hot and heavy that many originators and banks cut corners when it came to paper work. Now, with hundreds of thousands of homes in foreclosure, they are trying to figure out where the titles to these homes are (possibly sitting in a box in someone's garage because the originator or branch office of the bank or predecessor bank [i.e. WaMu] got shut down). This will prolong the downturn in housing and could be the catalyst for sending the economy into a double-dip recession.

Unanticipated Consequences:

1. Ignorance: By focusing on speed and throughput, decisions were made on incomplete analyses.
2. Immediate Interests: Loan originators (and now foreclosure processors) were incentivized to process as many new loans or new foreclosures as possible (by being paid on a per transaction basis).  This ignored the long-term effect of inflating the housing bubble on the front end and having bad debt return to bank balance sheets on the back end.

Allan Meltzer: The Fed Compounds Its Mistakes - WSJ.com

Allan Meltzer: The Fed Compounds Its Mistakes - WSJ.com

This is one of the most well-written articles I have read in a long time. Mr. Meltzer truly gets the issues at hand and articulates them very well. The multiple mis-steps by the Fed and the Obama administration are leading to repeats of mistakes made in the past - another example of history being destined to repeat itself.

Key Sentences: "Adding another trillion dollars to the bank reserves by buying bonds will not relax a constraint that is holding back spending.  There is no shortage of liquidity in the economy - banks already hold more than $1 trillion of reserves in excess of their legal requirements, and business balance sheets show an unprecedented amount of cash and near-cash assets."


Unanticipated Consequences:

1. Error: The Fed is misguided if it thinks that buying more bonds will prop up the economy.  It worked on a temporary basis in 2009, but that ship has sailed.
2. Immediate Interests: Focusing on the current state of unemployment, the Fed is ignoring the likely negative long-term effects of ramping up inflation.  A return of gas rations and 20% Fed Funds rates is not out of the realm of possibility.
3. Self-defeating Prophecy: The Fed is fearful of a double-dip recession and deflation.  It is trying to find solutions before those problems occur.  I think it would actually do the long-term economy good to retreat into another recession in the short-term and reset asset values (which was not allowed to happen in 2008-2010).  On the subject of deflation, there is no evidence that it is anywhere on the horizon; furthermore, mild deflation would not be such a bad thing.

FDIC to sue bank officials in effort to recoup $1 billion in losses

FDIC to sue bank officials in effort to recoup $1 billion in losses

Accountability?!? Imagine that! This is certainly a step in the right direction... now to see what (if anything) these lawsuits yield......

Unanticipated Consequences:

1. Ignorance: These execs assumed that once their banks failed, no one could come back after them.
2. Immediate Interests: These execs kept feeding the machine, focusing on the near-term growth needed to continue the banks' upward trajectory, while ignoring the fact that it was unsustainable and would contributed to a crash of the entire financial system.

Congressional Staffers Gain From Trading in Stocks - WSJ.com

Congressional Staffers Gain From Trading in Stocks - WSJ.com

I don't know which is more despicable, the unethical actions of these public employees, or the fact that they get paid $170,000/yr.

This is CLEARLY a case of insider trading. They had non-public information and they traded on it for personal gain. See: Martha Stewart. At the very least, there should be some sort of code of ethics violation here -- in the accounting profession, CPAs are not permitted to own or trade the stocks of their clients because of the (potential) conflict of interest - real or perceived - that could arise from having access to information that is not publicly available. What is the difference here? Nothing.

How these individuals are not being prosecuted is unfathomable. Encourage your elected representatives to pass the Stop Trading on Congressional Knowledge (STOCK) Act. The only reason there isn't more support for the legislation in Washington is because the people that are supposed to be serving our best interests are taking advantage of the system.

Unanticipated Consequences:

1. Basic Values: These individuals valued making a quick buck over ethical action.  The conflict of interest will hopefully be resolved if the American people act to force the passing of a law that makes these actions illegal, thereby forcing a change in Basic Values.

Economic Nonsense From Ezra Klein at The Washington Post -- Seeking Alpha

Economic Nonsense From Ezra Klein at The Washington Post -- Seeking Alpha

Not particularly well written, but he makes some great points. The unfunded pension liability in this country is scary.

Key Sentence: "Kicking the can down the road solves nothing."

Unanticipated Consequences:

1. Immediate Interests: Focusing on current unemployment levels, many of the proposed solutions to unemployment ignore the long-term effects of such solutions (hyper-inflation, lower productivity levels, etc.).

Mish's Global Economic Trend Analysis: Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

Mish's Global Economic Trend Analysis: Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

Brings a new meaning to red states and blue states.

Unanticipated Consequences:

1. Error: Using recent historical assumptions for anticipated future growth has resulted in massive underfunding of public pension plans.
2. Immediate Interests: Focusing on paying current retirees is ignoring the fact that there will be nothing in left in the bank to pay current workers.

Bailout Ends, Not Anger

‎"An unwillingness by policy makers to let people pay for their own mistakes." We have all just witnessed the death of capitalism.

Conflicts of Interest

Two headlines I saw today: 1) "White House report shows stimulus package is on time, under budget," 2) "Treasury estimates TARP will cost far less than expected."

This is the definition of conflict of interest - the entities that created these monstrosities are telling us that they are working out according to plan. Pretty much the same thing Bernie Madoff told his clients.

Fixing the Deficit: Do It Now... Or Later?

This does a good job of explaining (in lay terms) the National Debt Crisis.

Key sentence: "Incumbents want to avoid or delay action on the deficit because they need to show results on the economy."

...which is why you should not vote for incumbents in November.

The Market War Between Traders and Investors Heats Up

HFT should absolutely be banned. It is not a trading strategy; it is an exploitation of the market - an unfair advantage that a few large traders have. It is effectively cheating, largely at the expense of individual investors.

G.O.P. Cites Tax Cuts and Health Care as Main Focus

Duh-um. If this is the definition of a "concrete plan," it's no wonder that this country's infrastructure is in such a state of disrepair. Do your country a favor in November - do not vote for any incumbents or any professional politicians.

Amid mountain of paperwork, shortcuts and forgeries mar foreclosure process

When the tide goes out, you see all the crap left on the beach. The volume of foreclosures will take an extraordinary amount of time to work through - these errors will prolong that period. We are living in a lost decade.

Privates Eye

Excellent thesis: Capitalism is dependent on population growth. The last paragraph hits the nail on the head.

The wasted 4.44% mortgage rate

Bottom line: banks don't want to lend at this rate because they know rates will go up dramatically from here in the next few years... they will find any way possible to keep you from qualifying - even if you are the lowest possible credit risk in the world.

Stiglitz Says U.S. Faces `Anemic Recovery,' Needs More Stimulus

I've been saying this for over a year... the stimulus should have been spent on INFRASTRUCTURE. Most job losses were in the construction industry - fix our decaying infrastructure and you solve the bulk of the unemployment issue. The money never should have been spent on bank bailouts and neverending handouts to the unemployed and overlevered.

I do not agree that we need another "better designed" stimulus package... we had one shot (or five if you count all of the iterations of TARP, ARRA, etc.) to get it right and both administrations screwed the pooch. More stimulus will just lead to greater problems down the road at this point - inflation and the need to learn how to speak Chinese.

Basel Capital Rules May Prompt Banks to Shrink Trading, OCC's Dugan Says

I'm pretty sure making loans is why banks were formed in the first place... what a bizarre concept - forcing them to go back to what they were supposed to be doing all along. Weird.

Update: Is the Stock Market Cheap?

Great analysis and use of the 10-yr. average earnings principle. The P/E10 graph is a great illustration of how we never came out of the 2000-2002 recession because Greenspan et. al. did not let it run its course -- stocks were overvalued throughout the last decade (and may be for the next decade if the current administration's track record is any indication of future monetary policy).

Banks Sell More Homes than Builders Do

Scarry headline... and graph. But yeah, the economy is totally fine and the housing market is definitely coming back soon.

Let Goldman Be Goldman

Cliff's Notes to Goldman's Playbook: 1) Wait for Fed to raise rates (money is FREE right now after all!), 2) Give back bank holding company, 3) Go private, 4) Give middle finger to Washington.

World economic recovery driven by global imbalances

Key paragraph: Total household debt has fallen 2.7 percent, or $374 billion, since peaking in the second quarter of 2008. But, as the Wall Street Journal recently noted, U.S. banks and lenders have written off almost exactly the same amount of loans as unrecoverable. That means, on balance, that Americans are not paying down what they owe in any meaningful way.

5 Questionable Arguments Against the Double-Dip

I think the odds are actually better than 50/50... one more shock puts us over the edge.

What Coming Wave of Corporate Debt Means to Investors

Not sure how this gets stripped out of the system... or refinanced. Warning: Double-dip ahead.

U.S. National Debt Clock: Real Time