Monday, December 28, 2009

SAR #9362

Keep walking, avoid eye contact.

Over-Reaction Are US:  For a business that once focused on customer comfort, the airlines & Hopeless Security keep finding ways to make air travel something to be avoided if at all possible.

Shade Tree Economics:  The US budget is so unbalanced that the eventual debasement of the dollar through inflation is inevitable. Only the timing remains uncertain. Probably after a bout of deflation.

Modesty:  Because Fannie and Freddie “provide vital liquidity” to the mortgage industry by purchasing mortgages from lenders and selling them to investors, loans no bank would rationally make are written knowing that F/F will buy them. Investors then buy the F/F MBS because F/F guarantee them. (And the Fed holds $1.1 trillion of them.) The US Treasury stands behind F/F, ready to rescue them, and thus behind their MBS. The banks don't hold on the mortgages long enough to lose any money. The investors can't lose any money because the US Treasury stands behind F/F's guaranteed MBS. The only one who can, and will, lose money is the US taxpayer. A couple of trillion, probably.

About Face:  The Pentagon, now that Bush/Cheney have gone away, admits that privatization was a really bad idea and that it can save $44,000 for each “contractor” replaced by a soldier or DoD civilian.

Obvious, Belabored:  National Security Adviser James Jones says there are at most 100 al-Qaeda operatives in Afghanistan, and fewer than 400 in Pakistan. Other estimates claim there are far fewer than that.

Secret Formula:  The reason we have foreclosure problems is that too many people paid too much for their houses. And if the old 28% DTI formula is valid – and it seems to be - we are but 60% of the way through the foreclosure parade, with about 15 million more to come.

Countdown:  Obama is reported to have told China that the US could not keep Israel on a leash forever and that one day soon Israel would attack Iran's nuclear facilities. Of course this report comes from Israel, which is not wholly unbiased on the subject.

Future, Tense:  If you were an oil production analyst for the Energy Information Agency and you got a new box of crayons for Christmas, they'd come with the usual instructions: Stay inside the lines.

The Roof:  Mortgage rates are headed up, to 6% or more by the end of 2010. Freddie Mac claims that this is because private buyers of MBS will demand higher returns than the Fed has settled for. Thus the Treasury will have to offer higher rates in order to compete for funds.

The Real Deal:  You may not think the threat is real, but the Pentagon is getting ready to fight the Climate Change wars,

The Trend:  From 1890 to 2004 housing prices rose 0.4% a year. Houses are not a good investment. Owning does not beat renting. You need a 10 to 20% increase in price just to break even. I know you don't believe me, neither does my wife.


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ibilln said...

re, the Modesty section. Absolutely the only reason loans are being made is that Fannie/Freddie/FHA are buying. Holding loans is a lost art at banks, and, why would they commit to 4.9% or whatever for 30 years on a significant part of their capital base. It's a problem, for sure.

Not sure I agree totally with the "we're screwed" scenario. These MBS's will be around for a long time. The Giant Pool of Money out there in SWF's & etc, arguably a major contributor to the crisis, is still there (albeit, now reduced... :-) ). A non-worthless bet is that the GPM comes back into a market for MBS's. One fairly powerful argument pro is that a bunch of MBS's are what they are - they are -not- CDO's of CDS's or of other CDO's, and, so, are, eod, straightforward, decent investments, even given that the housing market, still going down, will be much more healthy (cross fingers) in, say, 10 years.

Unknown said...

I believe that based on the explosion of govt borrowing all fiat currencies are going to come into question in the next couple of years, and that's why I think one of the only safe assets to own is gold. and I just saw another m&a story in the gold mining sector at

Penmont trumped Goldcorp's offer for Canplats Resources for the 2nd time in less than a week. With all of the money printing the govt is doing, I think gold will continue to do well, which is gonna lead to more deals like this where the big gold miners acquire the smaller gold explorers

Namke von Federlein said...


It is amazing how fast your blog provides timely and useful information!

In case you are interested, there might be some hope in the current situation (which I could sort-of puzzle out using information provided by your blog!).

I just blogged about Fannie and Freddie lifting their caps and the Fed MBS reverse-repo problem.

If I'm right then the Fed and Treasury are planning a very neat move that will create some interesting growth management problems for the USA over the next year.

And no inflation.

However, IMHO Glass-Steagall is still the core to any reasonable solution. Even with the neat trick they seem to be planning, it will all turn out badly again unless Glass-Steagall makes it into policy.

all the best in the New Year from

Namke von Federlein

Keith Hazelton Anecdotal Economist said...

Re: The Roof...

Ah, the first hint of (even more)real estate doomsday propaganda from our friendly government-owned mortgage financing behemoths, who now have shiny new U.S. Treasury gold cards with no credit limits - despite their below 500 FICO scores).

I look for more "mortgage armageddon" economic "research" from the evil twins to warn Congress of the danger of the Federal Reserve stopping its single-handed purchase of all RMBSs in 2009 and the first few months of 2010 when it reaches its $1.25 trillion limit.

And to prevent, god forbid, a 30-year, fixed-rate mortgage of 6.00%, Fannie and Freddie will do anything to coerce the Fed to up its RMBS purchase appetite to, say, another $1.25 trillion, or risk taking the entire blame for cratering the nascent "technical" recovery and plunging us into the dredded double dip.

And, of course, Congress will fall for it, because, after all, it will be a very important election year.

I'm almost surpised Freddie didn't predict 8.0% mortgages, but maybe it's saving that report just in case they get some pushback from the Fed.

The fact is, if the Fed withdraws from the RMBS moving and storage business next spring, the higher returns private "investors" would demand to accept the risk on this toxic waste probably would soar to 10.0% or more.

Hey, maybe the Fed can get the Treasury to make AIG buy the next $1.25 trillion tranche of future mortgage defaults...

Anonymous said...

RE: The Trend

I've been saying this for years and used to have a spread sheet that proved it. It is particularly true in the NY tri-state area where taxes on a modest 3 bedroom can go as high as 8k-12k+ per year.

Houses are losers financially. There are other reasons to own a house, but financial reason isn't one of them.

P.S. I hope the first post doesn't make you need to turn on the anti-spam letters.


Charles Kingsley Michaelson, III said...

RBM - The first comment is essentially harmless. My readers are, I trust, smarter than that. The only possible reason to own a house other than as a place to live is to flip it in a bubble market - taking advantage of the leverage.

Keith - I suspect your suspicions are correct... Why should the mortgage manipulation stop now?

Namke - Right off the mark, I don't see any non-inflationary "interesting growth" to manage in the near future...

It's early, I'll go drink some coffee.