Wednesday, November 25, 2009

A Study in Contrasts

Here I was up early on my vacation day and reading across the web at my usual stops when I came across a post (via Naked Capitalism) that seemed familiar in title, but very different in content to a post of mine from last week. This offers a chance to see a real contrast is opinion and so I will post them both.

Bronte Capital weighs in this morning on the March expiration of FED MBS purchases:
The Ides of March and the FED Exit Strategy
You should read the whole article. It is well written and many angles are thought out. I would summarize (my words) that the writer's idea is that the Banking system will be ready, willing, and able to buy back all the MBS paper the FED took off their hands next year as risk appetite increases, thus making the FED exit from this space relatively smooth. The crisis of last year was one of liquidity, and not solvency.

Now contrast with my post from last Thursday:
Beware the Ides of March (Maybe)
Here I argue that not only will the banks not want the impaired paper, but the FED will have to extend the MBS plan early next year due to severe aversion to these instruments as well as a monster move up in mortgage rates should actual banks offer to by this stuff.

I left a comment at the authors post that we will only have to wait until about February to see which view is more in line with the reality on the ground. Let me know what you, the readers, think about this great study in contrasts.

13 comments:

watchtower said...

Hey GYSC, I'm off of work today too (yea!!!) and I read that guy's article, wish I was smart enough to write some intellectual reason of why I'm not in that guy's camp but alas I'm not.
But what I can say is that it reminds me of the time I stumbled upon an article by this guy from CNBC and he was explaining how the advance in gold was BS.
That article was from 2006, wonder how that worked out for him?

getyourselfconnected said...

Watchtower,
I can remember back in 2002 when I was building a big position in gold and silver and all the pundits said it was a waste of time and money.

I think the Bront article just assume a whole lot with little real input to back it up, but surely he may well be correct and I am wrong. Difference of opinion is good for debate.

getyourselfconnected said...

Nice:
"Vietnam devalues currency by more than 5%"
http://tinyurl.com/yh2real

"For weeks, the government had insisted that it would not give in to the pressure: “Vietnam will not devalue our currency,” Nguyen Minh Triet, president, told a seminar in Singapore last week. “We will take cautious steps on our monetary policy.”

The question asked by analysts on Wednesday was whether the market will believe the latest move has put a floor under the dong, or if it signals continuing weakness.

“The decision poses further challenges to the central bank’s credibility,” Tai Hui, a regional economist for Standard Chartered Bank, said in a research note. “The risk is that local investors will pay little attention to official comments going forward, which may exacerbate devaluation pressure on the currency.”

Now how did that happen?

Stagflationary Mark said...

GYSC,

"Difference of opinion is good for debate."

Here's my opinion, but it's just an opinion. This is about complacency.

The mindset in the first article is and has been too complacent. Not an insolvency issue? Everything is okay? Nothing to fear here?

The risk you run is similar though. Your bet against complacency has worked SO well and for SO long that it would be easy to assume that it always will.

I find myself in a third contrast camp (is it possible to have THREE sharp contrasts?).

I don't think everything is okay.
I don't think hyperinflation is imminent.
I don't think investing in parabolas is a good idea.
I'm not bullish on China.
I'm not bullish on Europe (euro in particular).

I lean towards more unexpected deflation at some point in the not too distant future, if only to inflict maximum pain on the most market participants possible.

getyourselfconnected said...

Mark,
Thanks for the ideas. I would say I am not betting against complacency as much as seeing things as they are in reality. No spin, just data.

I have covered a million times that inflation/deflation can be almost so similiar (in real seen effects) as to be no different.

Stagflationary Mark said...

GYSC,

If true, then you are doing FAR better than me. I could only hope to see a small fraction of economic things as they are in reality.

At best, I'm seeing things through a dirty soda bottle on a dark, foggy, moonless night. Still beats rose-colored glasses though. Better to be vaguely right than precisely wrong. ;)

getyourselfconnected said...

I specialize in being vaguely correct, but still wrong! HA

Nobody knows anything for absolute, the best anyone can do is look at data, history, and current environment and make a guess. Or throw darts. About the same!

My only point on this whole thing was the clear difference between the two articles on FED MBS buys.

Dave in Denver said...

The Bronte Capital piece is so full of erroneous assumptions that it wasn't really worth reading.

How can he possibly say the banking system wasn't insolvent? It's still insolvent. Most real analysts do not even debate that. Hell, even the Fed, implicitly, acknowledges as much or they would stop buying crap assets.

Second, he's assuming all the mortgage paper is GSE agency paper. It is not. A large portion of the assets sitting on the Fed's balance sheet is of the toxic variety and we have no idea how much, what they paid, or even what it is. We can assume it's mostly Maiden Lane-type dog diarrhea. This is one of the reasons the Fed is fighting the transparency thing. Oh, but here's the good news for Mr. Bronte Capital: most of that dog shit has a Treasury back-stop. Too bad that stuff will never have a bid.

Here is why the deflationist argument fails miserably: There has not been any constraction or deflation in debt. All that has occurred thru the various Fed and Treasury programs is that all that debt has been transferred from the financial sector (the private sector) ultimately to the Government (the public sector). It hasn't disappeared at all.

There are many other incorrect assumptions and I don't have time to detail them.

As for his gold argument, let's assume the Government CPI inflation tracker is accurate (it's not). Gold has already gone up in value over 450% this decade WITHOUT the benefit of any perceived inflation. Imagine what will happen when we start seeing serious inflation.

One more point, most people I know who are well-schooled in economics are still trying to figure out why Krugman was given a Nobel Prize. It's about as deserved as Obama's...

Dave in Denver said...

Possible commercial signal failure coming in gold

http://truthingold.blogspot.com/2009/11/is-commercial-signal-failure-upside.html

getyourselfconnected said...

Dave,
wow, great points about the MBS Bronte piece, thanks for the take.

watchtower said...

Happy Thanksgiving!

-----------------------------------


I have to second GYSC on Dave's take of the Bronte Capital piece:
"wow".
I've said it before and I'll say it again, it's amazing the quality of the posters who stop by here.

getyourselfconnected said...

Watchtower,
I contend that the comments here are as good as they get. What a great pool of ideas to draw from! You should count yourself among them as many questions or thoughts you have shared over time have contributed greatly to my posts and the general discussion.

Anonymous said...

I use to read Bronte all the time. However after awhile I realized this guy makes no sense and was a waste of time. I have not read him for a long time and I feel my IQ has been returning to normal.