Thursday, May 28, 2009

There are Limits to Knowledge, Understanding, and Control

Rainy, cold, and very dark for two days now with another on tap for tomorrow. The weekend looks good and "I have that going for me, which is nice" (obscure reference). Get your Friday night entertainment requests in so we can have a good time tomorrow.

Mortgage Market Dislocation Shows How Heavily Mortgages Rely on FED
One of the major arguments against any kind of major government intervention is that is causes dislocations which would not exists otherwise. This has the poor side effects of making intervention both a.) impossible to remove and b.) impossible to predict.

Consider mortgages. No bank in the country would write mortgage loans right now unless everything was so spectacular (property value, buyer qualifications, big down payment, etc) it made the loan too good to pass up. There are not many of those. The FED and the Treasury have in various ways stepped in to promote mortgage loans by lowering borrowing costs by rate cuts and intervention as well as banking bailouts and backstops to promote liquidity.

We all know that home prices must come down and that many home debtors must lose their home to restore some semblance of value to housing. There is no other way around this. Sadly the FED thought they could get rates in the 4% for everyone in the country, and actively promoted this idea. Of course blow back is a common American enterprise, and so we today we are presented with an amazing account of the mortgage market over the past two days that will have consequences for the foreseeable future.

The report is from The Field Check Group, a mortgage market research firm that specializes in real time information processing. This report has made the rounds quite a bit, but I think it very important and so I will provide a link to the full report here, and comment on what I saw in the report.
-Wild swings in the loan rates may scare off buyers who had their mind set on a sub 5% rate
-FED cannot control the treasury market; time to stop pretending
-There is NO MORTGAGE MARKET at real market rates; only a FED rate fixed market backed by FNM/FRE/FHA massive purchases exists

The report has so much more to offer that I really recommend reading it over when you have a good moment to read it all. Fascinating example of what market manipulation results in; chaos.

Massive Job Losses After a Jobless Recovery Part II
A few posts back I had argued that the real impact of the current job loss cycle was being wildly underestimated because unlike in most cycles, this loss epoch came after a very weak "jobless recovery". Today Clusterstock had a great chart that gave a mental picture to what I was thinking:

The time frame that interests me is the 2001-2005 snapshot.

Notice that in 2001-2005 job losses from peak moved down for 30 months before starting a weak uptrend that took another 16 months to get back to where employment had been at the prior peak. During this time the jobs being created were in the real estate sector, mortgage sector, leisure and entertainment sectors, health care, and government.

Now take a look at the line for this episode of job losses 2007-. I am going to go out on a limb and project that the relatively quick "U" shape of several periods in the past have almost a zero chance of happening. I expect this time will look just like the 2001-2--5 slow roll, only much bigger.

So on a day like today when CNBC is wetting their pants that initial jobless claims dropped some 1-2% from the previous month, they may want to do a little math;
-How long would it take initial claims dropping 1-2% for that number to get back to zero? How long until initial claims even break 400,000?

Hint: It will be a LONG LONG TIME.

There are Limits to Knowledge, Understanding, and Control
-"A good man always knows his limitations" ---Harry Callahan from the film "Magnum Force"


I have a day job. I work in the easy to understand and predict field of DNA manipulation. I write this blog to share my interest in things finance and to have fun doing it. If I can add a bit of humor, understanding, or insight to any and all that read here that is my reward. But I am not an economist. I am not a daily stock trader. There are limits on the time I can spend on this kind of thing and I understand that.

A couple of examples come to mind. Yesterday I wrote about the 10 year treasury action. I would have loved to really get into the nitty gritty of everything that one issue entails, but bonds are a blind spot for me. I really do not have a great understanding of yields and their application in many forms of finance. Another example is the Chrysler bankruptcy and the bond holder lawsuits. I would love to really know why the "Super Duper" tranches of bond holders get one deal while the "Sort of Senior Note Holders" get another while the "Not Really Senior, but Not Junk" tranches get yet another slice. I simply have NO IDEA. I still think the implications of it legally (another blind spot) are important, but it a bit beyond me to cover. My point (there is one) is that I know there are limits to my knowledge and understanding and thus I control my actions accordingly.

That said I know I pick on folks like Hank Paulosn, Ben Bernanke, Tim Geithner, Bill Gross, and Paul Krugman a bunch. Those guys are smart. Those guys are the real deal. If I pick on them it is because sarcasm is like my medium for art, my canvas if you. Plus it is so much fun.

But I think those mentioned, and many many others, are missing a key point. It is the point Harry Callahan made in the quote above and the point I tried to make with personal examples:

There are Limits to Knowledge, Understanding, and Control

A few of examples.

The FED's efforts at Quantitative Easing seem to have hit a wall and they are now being taunted by the bond market to really make a big move. I am sure the FED thought they could get it done with words and some spending, but their bluff has been called. They miscalculated. Here, there was both limited understanding (the FED thought they knew how things would go) and a demonstrated limit to their control (yields went up anyway). This had terrible consequences in the mortgage market as the first section of the post highlighted.

Another example is the spectacular failure of the PPIP program. Today we learned that most of the program is now to be scrapped, and the rest is scaled back. Remember that Tim Geithner said that the PPIP was "Plan A, there is no Plan B"? What happened?

It seems that the Treasury and the FDIC had a lack of knowledge about the true nature of the banks they had tried so hard to help. The major banks had the temerity (love that word) to ask publicly and in written form if they could openly game the PPIP instead of just gaming it the way it was set up. The banks felt that buying and selling each others bad assets backed by taxpayer dollars did not offer enough, so they wanted to buy and sell their OWN assets to themselves to manipulate books and make money. I mean, why play with others when you can play with yourself? Its cleaner and safer anyway! Ok, get your minds out of the gutter now!! Again we see there are limits.

The US economy is too big and has too many moving parts for any government agency to effectively manage, much less control. At times there can be the illusion of control or the appearance of somebody at the steering wheel, but those times are more chance than direct effect of action.

If the FED, the Treasury, and the FDIC just did was in their direct control (and their explicit charters) things would have been terrible for the economy. There would have been serious issues and serious pain. But things would have worked themselves out, as they always do, and some kind of gradual recovery would have been put in place based on FUNDAMENTALS. Instead we have had a terrible economy, serious pain and no end in sight to the endless spending and losses to taxpayers trying to maintain the illusion that things have been "set right".

At this point the citizens of the US have no knowledge of the amount of patience the government has to try and pretend there are no limits to theirs.
Have a good night.

23 comments:

Lisa said...

Just a couple quick comments here:

My mind is always in the gutter :)

The smart guys you listed may be intelligent, but they are also immoral and evade reality. That makes you smarter than all of them. Stop selling yourself short, you have an active mind, positive sense of life, and you are honest. Great combination!

Stagflationary Mark said...

GYSC,

"The US economy is too big and has too many moving parts for any government agency to effectively manage, much less control. At times there can be the illusion of control or the appearance of somebody at the steering wheel, but those times are more chance than direct effect of action."

LOL! Illusion of Control!

What a great blog naming idea. I might be a bit biased though.

It reminds me of something a comedian said once.

Why do people slam on the brakes when their car goes over the cliff?

getyourselfconnected said...

Lisa,
you are WAY too nice!
All I meant was that I believe those guys are smart and really think they have a grasp on things. Well, Bill Gross is a glorified bank robber, but whatever.

I would be interested in what a chartist type like yourself thinks of my "random walk" theorem? You can use gutter thoughts if need be.

Hope you are feeling better, sure you are not a swine flu victim? Interferon may help, but better to be pallitive!

getyourselfconnected said...

Mark,
if you know cars the answer is easy:
"If I am going to die, I better have good wheel bearings than burned out ones from spinning the wheels! I mean imagine the highways in heaven?" LMAO

Lisa said...

No swine flu, dear man :) I did have to hit the antibiotics, though. When you get old, it takes longer to get over things, so I'm still in a recovery mode.
Did you hear that the CDC is saying the govt could approve emergency use of adjuvants for the swine flu vaccine? I think they are making a mistake, but they will harm many (and then deny it) before they stop. You may have a different opinion (would like to hear it), but all this damn "emergency-gotta do something fast" business is getting out of hand and the consequences have not been good.

getyourselfconnected said...

No disclosure, but my company is #1 in vaccines, and yes swine flu!
Lisa,
what antibiotics are you on? I have extensive experience with those agents, so purely as a side note?

CoachingByPeter said...

By knowing your local real estate investing market, you're able to keep your finger on the pulse of your local community and to stay abreast of changes in trends, sales prices and rental rates. Knowing immediately about these changes is critical to your investing future.

getyourselfconnected said...

Hey Peter,
before I delete your crap spam, I know, to the dollar, what very house on my road has sold for, or was listed as. Luckily I bought "in family" and got a nice 65% markdown. Thanks anyway, clown!

His post stays until 2morrow so i can laugh.

getyourselfconnected said...

night all, 5am is my wake up time!


On weekdays!!!

Lisa said...

5am? Lightweight :) Some of us never sleep lol
Antibiotic is plain old amoxicillin. Not sure it's gonna do the trick this time, though. If not incredibly better by Monday, I'll have to see another doctor, not crazy about the one I saw last time.

Stagflationary Mark said...

GYSC,

Cut Peter some slack! Just because his comment is off topic, it doesn't mean he's not here to help us all make some serious money!!!

http://ripoffreport.com/reports/0/436/RipOff0436038.htm

Um, nevermind. Forget I said anything. I haven't been this ashamed since I sent money to rescue a Nigerian Prince. I found out later that the cash I sent never actually got to him though, nor did the money sent in the second and third attempts! But what could I do? He wanted cash. He must think I'm a liar now because once I told the police that someone was stealing my cash, the Nigerian Prince no longer wanted to talk to me! Hahaha! ;)

Anonymous said...

Japan's top insurers said on Friday that U.S. Treasuries look increasingly attractive after the benchmark 10-year yield hit a six-month peak this week, but that they remain wary of falls in the dollar against the yen and the potential for downgrades of U.S. and UK credit ratings.
http://tinyurl.com/nsc6gv

South Korea's National Pension Service will reduce U.S. government bonds and more risky assets such as stocks in its portfolio, while raising overall debt holdings by buying bonds of other foreign governments.
http://tinyurl.com/nz8fjy

Looks like Benny is going to get his inflation he was craving so it doesn't happen here by moon lauching commodity prices, of course this is going to put a dagger in any recovery so watch out.

Kevin

watchtower said...

Just wanted to say thanks for playing the "Sabatoge" video last Friday, can't think of anything for this week though.

Anonymous said...

Bond Vigilantes Confront Obama as Housing Falters
http://tinyurl.com/lc9xy9

Hey GYSC here's my request.
Willie Nelson - Turn out the lights

Kevin

GawainsGhost said...

Well, just to chime in here, this is what I do for a living, sell real estate. And I have to tell you, it's not easy.

Back when I taught junior high I thought junior high students were the most stupid people on the planet. Then when I taught high school I came to believe that high school students were the most stupid people on the planet. After that I taught college and came to the realization that college students were the most stupid people on the planet. Now that I am a Realtor I can state with absolute certainty that the most stupid people on the planet are home buyers.

You wouldn't believe some of the calls I get. "We want to look at this house." Have you bee pre-approved for a loan? "No, we're not at that step yet." Hello! That's the first step, you idiot.

I mean, really. How long do you intend to waste time, money and gas driving around looking at houses that you can't even make an offer on, only to find one you like and by the time you get your financing learn that someone else, who had the cash or loan approval, bought it?

This to me is the height of stupidity. Hell, it borders on insanity.

"We have very good credit, so financing shouldn't be a problem," they say. If it's not a problem, then why don't you have it?

You want to wast time, money and gas driving around looking at houses you can't even make an offer on, that's fine with me. But don't expect me to waste my time, money and gas driving around showing them to you.

This is the reality of the real estate business. I don't get into my car for some clown without loan approval. Period. I just hang up on them.

Oh, yeah, I get a lot of complaints. "Why are you being so rude?" Why don't you have financing? Rude is expecting me to waste my time, money and gas opening doors for you to houses you can't even make an offer on.

That said, it is true that it is becoming increasingly harder for people to get pre-approval for a loan. At least 3% down payment is required for the most lenient mortgage. It's 3.5% for an FHA loan. So more and more people, not known for their savings habits, are finding it more difficult to qualify for a mortgage to purchase a house.

Thus, sales are slowing and prices are falling. Down here in South Texas, we didn't see the rapid rise in prices that other areas, like California, Nevada, Arizona, and Florida, saw. So we aren't seeing the rapid decline in prices those areas are seeing. But overall prices here are down 6% over last year.

The first rule of real estate is that a house is only worth what someone is willing to pay for it.

The second rule of real estate is that you buy a house to live in it.

The third rule of real estate is that you only lose money when you're forced to sell.

Most people think of their house as an asset. This is incorrect. An asset generates income. A liability generates expenses. Properly understood, a house is a capital savings (equity) account with expenses (maintenance, utilities, taxes, insurance). But you're going to pay those expenses anyway if you rent. You'll just be paying them so that the true owner can build equity.

I don't have any idea of what is going on in this economy. I do know that the government, especially this administration, doesn't have a clue.

But people were still buying houses when the interest rate was 18%. Anybody else remember the early 80s? Those were some hard times.

I suspect we're about to see a return to that forgotten era. And don't think it's not going to be expensive.

watchtower said...

GawainsGhost said:

"But people were still buying houses when the interest rate was 18%. Anybody else remember the early 80s? Those were some hard times."

They were selling cars back then too compared to today, that's what is giving me the willys about the times that we are living in currently.

watchtower said...

I guess I should say that them not selling cars like they used to is but one of the things that bother me.

GawainsGhost said...

By the way, for those of you who are interested in why real estate values rose so quickly, you don't need to look any farther than at appraisal fraud.

http://ml-implode.com/article/buhl-banks_appraisals

I write price opinions for a mortgage insurance company all the time. Some of these are for current values. Others are for as of/historical values at the time of sale. For the latter, I am often sent a copy of the appraisal. I have yet to come across one that didn't overvalue the house by at least $25,000.

For the record, appraisals are a joke. I've seen some that were so ridiculous it would boggle your mind.

If you want to know the value of your house, ask a licensed real estate broker who has at least ten years of experience. She or he will tell you what you can sell it for. That's the real value.

An appraiser does not have to sell the house, so he has no incentive to estimate it's real value. He works for the lender, so he's not interested in comparable homes. He's interested in comparable prices, because his job is to justify the loan.

The whole scheme is a fraud.

Anonymous said...

GawinsGhost

I think the American people are the most stupidest people on the planet but that's just me, it's probably gonna take a couple generations to clean up the gene pool me thinks.
When It comes to homes and financing I pay cash. I look at a home like I do a car, a deprecating asset, this whole scam that's been fed to a bunch of fools that they are anything else then that is a travesty fostered along with our governments support and the GSE's
Kevin

Anonymous said...

GawinsGhost,

The reasons interest rates were so high in to 80's is because the banks were insolvent then also due to Latin American debt crisis, Volker pulled that off and raise interest rates so they could earn their way out of insolvency due to wide spreads and the public for the most part didn't have a clue.

http://tinyurl.com/lvdvwk

Go to about 46 min, into the video presentation by Richard Koo.

Kevin

GawainsGhost said...

You don't have to tell me about the Latin America debt crisis. I lived through it.

When the Mexican peso depreciated in 1983, it destroyed the economy down here. There were 44,000 foreclosures in the first month alone. 1/3 of the real estate companies went bankrupt and disappeared in 90 days. It took over twenty years for growth and development to return.

I suspect we're about to see a repeat of that fiasco. Only now we're not talking about the Mexican peso but the US dollar.

And when America sneezes, the rest of the world catches cold. So if I were you, I'd get my finances in order.

Cash is king, and debt is for losers. It's only what that cash is denominated in that matters.

GawainsGhost said...

http://www.ft.com/cms/s/0/71520770-4a2c-11de-8e7e-00144feabdc0.html?nclick_check=1

Anonymous said...

GawinsGhost,

I guess my main point was that for most Americans the latin debt crises had no real meaning because it wasn't happening HERE, the US banks were insolvent then just as they are now and the American people who's borrowing cost were high paid to bail them out of their bad bets then but most were none the wiser.
The FED is evil.
Kevin