I am off work until next Tuesday and thus I am going to the Quabbin Reservoir tomorrow! Very exciting. Here are a few notes:
-The vaunted S&P 500 level of 1040 was blown past today, but fear not, some low volume melts up to week end should remedy that.
-I would hope you have been following the 4 part series by Econophile over at Zero Hedge. Today he had up the final part and it is a good time to get all caught up. I found this section of interest due to a later read:
There are two other asset purchase choices the Fed may consider in its Open Market Operations. Neither alternative is good: Alternative No. 1. Buy bad CRE loans (non-MBS) directly from regional and local banks.
A third area of uncertainty is commercial real estate. Banks across the country, especially small and regional banks, are heavily exposed to the commercial property sector and face a heavy docket of loan restructurings that may require sizable write-downs.
You have been told in no uncertain terms what the next step will be.
I would add that Lockhart is the second FED player to chime in with:
A second source of uncertainty is ongoing state and local fiscal tightening.
Now either the FED knows some reason why state budget shortfalls will not matter (QE money??) or they are very scared of this and downplay it. Which is it?
In closing, Kevin Depew hits another monster home run and if you read ONE thing today this should be it: The Modern Stealth Depression Revisited This is required reading.
Oh yeah, my 4th of July package came in today: 4 10oz filets and 4 bone in ribeyes at 20oz each from Allen Brothers. USDA PRIME Beef and aged as well. An unreal experience: Hello my pretties!:
I really have way too much regular stuff to get done before the holiday weekend so I will leave a few things I am mulling over to think about and comment on.
-Further, if this stock was a "non-protected" one, would the drop have held? I think it a bit naive that serious calls were not made about this stock as it is a pet of the government now.
-Some technical types see a big drop coming for stocks. Maybe so, and I have argued that another trip down (to 800 or so on the S&P) will keep regular investors out of the market for a LONG TIME.
-Something to keep in mind when US treasuries keep going lower in yield, where is that money going to go?
-Paul Krugman uses the basic argument that is best used AGAINST his policy ideas today and it is funny if you replace some words:
Of course, I know what will happen next: we’ll hear that the Irish just aren’t doing enough, and must do more. If we’ve been bleeding the patient, and he has nonetheless gotten sicker, well, we clearly need to bleed him some more.
Replace with the idea of pumping the patient full of blood even though he is internally hemorrhaging and it works against money dropping as well.
-The feeling that I keep having is that all the tricks and gimmicks used by the policy guys probably should have worked but have not. They are now standing there smiling saying "why don't you believe that all is well?" and it is because people know better now for whatever reason. It is still quiet out there, but something is going to blow up.
All We Have is a Long List of Excuses I think all that is wrong with things is best summed up by two examples. In the end to find out who is running the show and where the real interest lies these two answer the questions.
When we needed campaign finance reform we got the McCain-Feingold Bill which changed nothing.
When we needed financial reform we got the turd of a bill just passed which does nothing about anything.
That's really all you need to know. Everything else is window dressing and discussions over drinks. I do not think I even have to write anything more other than the same set of idiots running the FED (OMG, I did link Mark Thoma in a good light, the world is surely ending!) are the same as the isolated DC elected officials that think we cannot read and would accept that these bills are "better than nothing". They are nothing and please do not confuse zero turnout at votes and general apathy as acceptance.
I had some more stuff but I wanted to leave off with this remarkable video tribute to the site The Automatic Earth, which really should be a regular stop for you:
Long Weekend If you checked out the Friday post you will know that I had a great day of river fishing on the kayak. Saturday was occupied with settling on the new counter top material, which by total luck they had a slab that was ordered be cancelled, which is the last one in the state and of course my Wife just HAD TO HAVE IT! It's called Wild West and I like it quite a bit myself. Every slab is different, but here is an idea how it looks: Hopefully we will get final construction details this week for after 4th of July.
Today I hit the river again on the boat and did very well but I forgot the camera! You will have to trust me!
I was online a total of an hour this weekend and while it was nice, I feel out of sorts. I did cook MEAT this weekend and so you get some pictures of Saturdays cook.
Two NY strip steaks for the wife and mom in-law and I had a T-bone. I grilled up some corn right on the grill which I thought would not work, but it came out amazing!
Here are the items in a double layer on the Big Steel Keg: About ready to pull off the grill:
Ever since I got the new grill the Pug goes INSANE any time I cook beef. Not sure if the smell id different or what. Anyways, I let him chew on the T-Bone after I was done but it became an issue to get him to let it go! He was clamped on there something fierce!: Up close and personal with the Pug: What a maniac!
This week will be light on material. I am off Thursday and Friday from work and have a big day trip planned for the Quabbin Reservoir on Thursday. I have a ton off stuff to get ready including my brand new full color fish finder for the rental boat at the Gray Lady. I am very excited!
Make sure you scroll down and check out the fishing pictures from today that I posted. What a great time. No work and no things economic was so relaxing, except when the fish were biting!
Links There was plenty of stuff out there, much of it very important, but I cannot pretend I am even into it this evening. Here are some stops you should make: -Housing Doom picked up a Businessweek article that showed agency paper (FNM, FRE) trading at 106 cents on the dollar, that's right, 6 cents over full value! No idea what this means and too tired to bother.
-FED to go QE 2.0 to the tune of 5 Trillion? Why not, the first attempt has worked so well I can only imagine how great the second will go. Surely this means gold will collapse.
-It is always something from out of the blue that starts a big panic, so here is Romania for you.
-Did budget director Orszag quit because he works for idiots? Probably. Seems a recurring theme as of late.
-Well, we have been told all this would happen, but did you bother to read?
-Don't click if you do not want to get depressed, but here is Alabama waves rolling in with additives.
Friday Night Bonanza I came across a ton of cool stuff tonight so this is going to be fun!
Best of YouTube How about a spider crab molting its shell in time lapse? COOL!
Clips Tuesday and Wednesday night I read the book "The Last Great Fight" by Joe Layden which recounts the story around the Mike Tyson vs. Buster Douglas fight back in 1990. The book was amazing and I really can recommend it. It brought back memories; I watched that fight live and was in total shock. Here is the last 3 rounds with the 8th round knockout, I mean knockdown by Tyson and then the brutal end in the 10th:
Wow.
The intro to John Carpenter's "Christine". Gives me the chills:
Rock Blogging We need a little music to really get this weekend going and so here it is.....
Watchtower asked about the April Wine song "I Like to Rock", which I had never heard. The song was so great I can allow the crap at the end to slide:
That was a great one, thanks Watchtower!
Lurker would like a little "Blinded by the Light" from Manfred Mann and I had not heard this one in a bit so here it is:
Nice.
Gawains was looking for some KISS and Firehouse, but that got me in mind of my favorite KISS clip, a live version of "I Was Made for Loving You":
What a great live version! Plus plenty of hot ladies in the audience, not that I was looking, I am married and all.
Ok, maybe a little old school heavy rock overload so far. How can we change it up?
Maybe slow it down with Bon Jovi and "Always"?:
Your welcome ladies!
This song can be complex to play, and my Dad played a nasty good one on 12 string guitar that was amazing. I wish he had played electric! Anyways, here is Dolly Parton with "Jolene":
Great stuff.
Two more then I have to go, I was paddling up a river all day, but I did have a paddle, obviously!
How about a little "Rocky Top" for Tennessee:
Also very good on a 12 string!
Last call! Have a great weekend! Now what to close the show with????...
Ok, I had this one over a year ago (9/26/08) but it really is a great tune and so I send you off for the night with Adrenalin and "Road of the Gypsy":
"You know it don't come easy.." You said it brother!
I will have the usual Friday night stuff up later on, but I had such a great time fishing this morning I thought I would post about that.
Gone Fishing As soon as I could walk my Dad took me fishing and I think I have spent the better part of 25 years fishing the Merrimack River myself from shore. Over time I have been able to find about 30 or so spots that are sure things but I always dreamed of being able to get out on the river and see what I could find away from the shore. Besides, poison ivy is never fun!
I was a bit apprehensive about taking the kayak out on the mighty Merrimack because it really is a good sized river and the current moves medium fast. I also have very limited experience fishing from the kayak. Seeing that I am totally dumb, I just went right ahead and did it today! I am glad I did.
There is a nice boat launch right near where I live and it is located in a region that I wanted to try with a boat, so that made it easy. I was supposed to get up at the regular time (5am) and be out on the water by 7am. Of course I went out with the wife last night for a while and then came home and stayed up too late! I was slow to get going, but I was on the water about 9am. What can you do? Here is a shot looking back at the river:
There were tons of fallen trees in the river from shore erosion, and I targeted these fall downs as I passed them. Smallmouth bass will not relate to wood structure unless they have nothing else, but largemouth bass love trees. I tried about 6 places and nothing happened. A couple of taps, but no fish. Here is one spot I tried:
I was not worried, I knew I needed rocks! Smallmouth love rocks, the bigger the better! I kept paddling along for a while and I was getting nervous as I had not seen the type of rock strewn bottom I was looking for. After travelling for about 20 minutes I finally found what I wanted. Only One problem, these pesky ducks came in from the shore and would not leave me alone!: You can see the boulders in the water at the right hand side of the picture.
Things picked up, but sunfish kept grabbing my senko lures as soon as they hit the water! Here is a good sized sunfish: Here is a really awesome colored pumpkinseed fish: I was fishing 3 inch fat senkos but I switched to 4 inch regulars to get rid of the tiny fish. Of course, then I caught a bunch of tiny smallmouths: and This one had great color and the darkness of the fish clued me in that the bass were in much deeper water. If this guy had not been caught, several big fish would not have been caught either, HAHAHA!
I backed out a ways, about 50 feet and there the water was about 12-18 feet deep. I switched to 5 inch senkos and stayed right on the bottom. I could feel big rocks as the lure bumped bottom, so I knew this spot was going to be very good. I was slowly bumping the senko back when a small tap made me give some slack line. The line started to move against the current so I slowly reeled in and applied pressure to turn the octopus hook up and WHAM!!!!!!!!! It was on! This fish stayed deep, right at the bottom and was so strong. River fish are way more powerful than lake fish due to having to swim in current all the time. This was a big one. It took about 6 minutes to get the fish ready to come in the boat. It was a bruiser river smallmouth, about 4 pounds: See how big this fish's eye is? That's how you can tell a big smallmouth!
I put the fish back in the water and it took a minute for it to get going. I did not take anymore pictures of fish because they were all pretty good sized (2-4 pounds) and after the fight they were really done so I wanted to get them back in the water as soon as possible. I caught 12 total in about 2 hours.
At some point my anchor (a 7 pound hand weight on a rope) got wedged in some rocks so I had to cut the line. I used the wind to drift fish the area and it seems I have found a great 15-25 foot deep rock strewn flat teeming with big fish. Unreal. I will be going back, count on it!
Why do we call skipping work or school "playing hooky"?
Perhaps it is based on the word hook? I'm just trolling for fresh ideas. Just angling for a new spin. Spawning some thoughts. Weighing-in with my opinions.
Have I hit bottom? Is the jig up? I feel a backlash. I'm bobbing and sinking here. I should probably stop now before I cast off some real barbs. That would be a real drag. Some just don't appreciate puns and would likely throw a few carping remarks at me! I'm almost baiting them!! I need to learn to shut my large mouth!
Oh buoy. I've crossed the line. The lure of streaming puns was just two great lakes. I've hit my limit. The pun reservoir is dry and I can't restock it.
True talent is rare in this world, enjoy it when you see it!
I am going to go fishing tomorrow and I got home a bit late after some intense "dialogue" over drinks so get your requests in for Friday Night and I will get on them.
I am a bit short on time tonight, and luckily this post writes itself.
The Autostereogram Large version here. Discussion can be found here.
I am not a trader. I am not selling anything and I do not make anything if you buy something I talk about. I am just one individual doing what he can to make the most of what he has, or at least not lose it! I leave the trading of Citi (C) stock back and forth to the Algos or the day guys and I do not buy crap I do not believe in to turn a buck, though I understand the desire to do so by some or even the need to do so by real money managers.
What I do is try and identify things that either: -WILL happen -HAVE TO happen And then I try and get in front of it. I am a boring macro type player.
I bring this up because all the pieces are falling into place for the next round of efforts on various fronts. Usually I am already set on how I will be positioned before I discuss too much of what I am thinking, but at this point I am at a loss to put anything into motion. First up, what I am seeing.
I named this post as I did and posted that picture because right now all you need to see is right in front of you. Of course it may be a little hard to pick out, but it is there. Here are the relevant headlines and minimal snippets or commentary to set the scene.
Why Are Lawmakers More Upset With BP Than Fannie, Freddie? While we are very far away from knowing how much damage the Gulf Oil spill will eventually do, we are reasonably close to understanding the enormous damage to the country FNM and FRE have done. Where's the outrage? It's part of the puzzle.
Barney Frank has introduced the Frank Bank Levy Proposal, which would tax banks with more than $50 billion in assets, and hedge funds with more than $10 billion, and use the money to fund $4 billion for neighborhood assistance and foreclosure help for the jobless with good credit.
Now I do not think this will pass, and 4 Billion is chump change, but again another cog in the machine.
WASHINGTON, DC — Fannie Mae (FNM/NYSE) announced today policy changes designed to encourage borrowers to work with their servicers and pursue alternatives to foreclosure. Defaulting borrowers who walk-away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure.
This has teeth and I will tell you why.
I think FNM and FRE will be taken private and merged. They will be rolled out as the new agency for mortgages or whatever they call it and this entity will be the bulk of the housing market (and also 100% explicit backing of course). If you want a home loan, you WILL have to deal with these guys. Now the above release has a bit more sting indeed. Again, just my conjecture.
Members from both branches of Congress are reconciling financial regulatory reform bills that could ultimately include comprehensive covered bond legislation offered by the House of Representatives.
House members offered covered bond legislation modeled after the proposed bill by Rep Scott Garrett (R-NJ).
Garrett's United States Covered Bond Act, introduced in March, aims to establish a regulatory framework for covered bonds in the US. It lists eligible assets for covered bonds as residential property, home equity assets, as well as auto, commercial and student loans.
Covered bonds are so named for the dual recourse provided, where the issuer is on the hook to pay out regardless of whether or not the collateral performs as expected.
Now what happened the last time loans went bad, who paid? Offered as a tool to get private funds into the mix, this is an iron clad bailout bill in all sense of the term. This one is scary.
Here is a humble giude by none other than Ben Bernanke himself in a wonderful post by Bruce Krasting, a contributor at Zero Hedge: What's Ben Gonna Do? Bernanke's key address about fighting deflation holds plenty of nuggets. Zero FED rates have done nothing. We all know about the Quantitative Easing program. It has worked to lower rates, but has had zero effect. The FED bought 1.25 Trillion in agency debt and this weeks home numbers show that was a stop gap measure with limited effectiveness. So what is left? Unfortunately, only really bad things that the type of bookworm economists in charge of policy think exist in a vacuum and will work in the real world. From the article:
-The Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Why stop at 6 years Ben? To make a dent he would have to have the 10-year at 1%. Is that what he has in mind? I think it is a real possibility.
-The Fed might next consider attempting to influence directly the yields on privately issued securities. Oh boy, this is the beginning of the end. Ben would buy corporate debt. GE would be high on the list; the rest of corporate America would follow. Ben could buy BP bonds. That would solve our problems, wouldn’t it? -The Fed might make 90-day or 180-day zero-interest loans to banks. Lights out when this happens. Ben will stop at nothing. This option is not far from reality. That said, if this happens the public backlash is going to be vicious.
-The Fed has the authority to buy foreign government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt. The “nuclear option” is to buy up the sovereign debts of other countries. This would extend QE globally. In a way we just did this with the opening of $100b in swaps lines to the European central banks. This gives them the wherewithal to buy their debt. The ultimate is when the Fed starts doing it for their own account. I doubt this option is realistic. It would require the approval of the other CB’s. That said, should you see this headline buy lots of canned food and rice. If this step is implemented bread lines will follow. -It's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. In this case the Fed would attempt to devalue the dollar in order achieve its goals. This of course would just destabilize everything else in the world and would insure a downward spiral in economic activity.
John Hilsenrath at the WSJ also put the idea of negative interest rates on the table in a recent piece. I think the article was from Ben’s lips, into John’s ear and then onto the front page of the Journal. If Ben has something to say on this matter he should address us all. He should not use a beard to influence public/market thinking.
How could something as crazy as negative interest rates work? Consider this from none other that Harvard economist Greg Mankiw. He had this to say on the subject back in March of 2009:-I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.
This bit of lunacy comes from one of our best and brightest economists. Should this (or any other negative % plan) be implemented it would mean that a depression is just a few months away. The last desperate acts would insure that we would fall into a very big hole. We will hear more on these “emergency” measures in the coming months. Should any of them come to pass, be guided accordingly. These steps will only agonize what must come.
Now I do not agree with everything the author says, but I agree that these steps are now probably being actively discussed. Maybe 80% of the people out there have no idea what targeting the 10 year bond would do so I think most would not care at all. Take a way 10% of their money and things are going to get ugly so fast your head will spin in circles.
Sorry for the long excerpt, the entire piece is just required reading right now so I thought another print can only help.
Right now you have to be looking at big newspaper Op-Ed sections as well as favorite economist of the entrenched establishments writings (ie Krugman). Here is where the "trial balloons" of the next steps will be put out into circulation.
What I do know is that something is going to be done, they will not sit still. Just what the actions will mean to various assets, that's a tough one! I need some more information and some more time to digest things. What are the readers thinking?
Another Monday about done. Summer Mondays are rough!
As an aside, it seems like Animal Planet here as of late. In the last two weeks I have seen in my back woods near the yard: -Rabbits -Fisher Cat -White Tail Deer -Wild Turkeys (about 6 of them in a group!) -Marten -Red Fox -Red Tail Hawk Maybe they can smell the Big Steel Keg when it's cooking?
Housing Issues are Still Not Going Away One of the most deeply held beliefs of policy makers is that real estate was suffering from a liquidity shortage and that stop gap measures could support prices for a time until things got back to "normal". This has gone on a lot longer than they must have expected and looks at this point to be a multi year (decade?) phenomena. Nice effort though guys!
All kinds of stories today about hosing, and I will do a linkfest so I can focus on the main section.
More form CR, a guest post forecasts some problems for home sales next month: Lawler: Home Sales in May; a Look at the Data If the author is correct, this is going to miss expectations by a ton.
For comic relief, enjoy the NY FED's comic strip on how they handle inflation: The Story of Inflation No word yet on the release of the long awaited follow up work called "The Story of Failure".
Explain This Mr. Krugman It has been a while since I have pointed out a Paul Krugman piece, and I think I even agreed with him a few times over the past few months! Miracles do happen! Tonight it seems I am back where I always end up with Krugman, in total opposition to anything he says.
One of the issues I often have with policy makers or mainstream economists is that they never have to really answer for real world data. All their exercises are theoretical and abstract. It can be frustrating.
Tonight I have a perfect example of this very thing.
Paul Krugman writes in a NY Times Op-Ed the following:
Now and Later Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand? Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems.
But maybe a clear explanation of the issues can change some minds. So let’s talk about the long and the short of budget deficits. I’ll focus on the U.S. position, but a similar story can be told for other nations.
At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014. Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.
So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.
If you just woke up from a coma this maybe all sounds reasonable and a good idea.
So let's dismiss the idea that budget shortfalls could be fixed by higher taxes, social security changes, or health care savings for a minute. While all may well be possibilities, it is not needed for this discussion.
What Mr. Krugman, as well as all the other Keynesian sort, leave out is historical fact. I get the idea, spend to cushion a bad economy and then pull back when the economy is good. Fair enough. What should have been included in the OP-Ed were these charts: CBO's Estimate of Budget Deficit 1980-2020 Now I do not want to give too much weight to way off future projections, but at a minimum we have a solid 30 years of data here that shows a grand total of 4 YEARS where the US did not run a deficit. 4 out of 30. Call me crazy but I am pretty sure (correct me if I am wrong) that we have not had a "severe economic crisis" for 30 years. Well, I mean we have, but not the way it is defined technically!
A longer term view: Federal Budget Deficit 1930-2010 Again I find it hard to take Mr. Krugman seriously when the enormous weight of history shows he is as wrong as can be. Can you see the surpluses? You may have to squint. My point is that no one serious could write that Op-Ed and then present those two graphs and expect anyone to not think them a nut job. However, this is what passes today for mainstream economic thought, facts need not apply.
So how is it possible that the US can run these deficits for all time and nothing seems to come of it? It is a great question and there are numerous facets (reserve currency, idea of higher taxes in the future, leprechauns) to the final answer. I like to dumb things down because that is how I best understand them (insert joke here!) and so here goes:
In order for some entity (bond market, other countries, aliens) to call the US out on this fantasy land game of cheating someone has to have something to gain from the other side of that bet. So the US cannot really pay back their debt? Who cares? Refinance it and keep rolling it over and everyone gains. What would be the point of blowing the US bond market up? None at all.
It is a strange phenomena at work here. Unless a major world event occurs where there is a scramble for hard assets and hard money the US will continue to get away with this stuff. I actually have a fleshed out theory on this big picture wise, but I do not want to be called a conspiracy nut. If interested, email me and I will serve it up!
Of course, maybe at some point more than 100 people here in the US will figure this out and desire some real reform. I would not hold my breathe.
Plenty going on this weekend in the world of finance. I think I will wait until tomorrow to go over new items, just a guest post and today's cook.
Real Estate as an Investment, Not a Lotto Ticket Reader Gawains is a Real Estate insider and has years of experience working in the field. Gawains submitted another housing essay and I am including it here as it covers some things which are important:
I remember back in 1987 when the stock market crashed the owner and principal shareholder of Wal-Mart was on tv, and this stupid reporter asked him, "How does it feel to lose a billion dollars in a day?" Mr. Wal-Mart said, "I haven't lost anything, I still own the stock."
Exactly. This really is what the gloom-and-doomers misunderstand in their dire prognostications of evaporated wealth, the difference between perceived loss and actual loss. Mr. Wal-Mart surely would have lost a billion dollars if he had sold his stock in 1987, but he didn't. He simply held onto it and waited for the market to recover. Now, in 2010, that stock is worth considerably more than $1 billion.
The lesson to be learned here is not to panic because of fluctuations in the market. You only lose money if you are forced to sell, especially in a severe downturn. Panic will only lead you down the road to ruin. It's the same with housing, or any other investment for that matter. A home is the single largest investment most people make in their lifetimes, so it is important to understand the dynamics particular to the real estate market in order not to behave foolishly in response to misinformation or perceived loss and thus realize an actual loss.
First, some definitions of terms.
Fair Market Value (FMV) is an estimate, usually within +/- 10%, of what a house will sell for. Also known as a Broker's Price Opinion (BPO), it is prepared by a licensed broker or realtor and is based on nearest, most recent comparable sales. Factors considered include age, size, location, condition, amenities, etc. The FMV is used to determine the list price.
Market Value (MV) is the actual sales price, what a willing buyer and a willing seller agree to.
Appraisal Value (ApV) is similar to FMV. The difference between a price opinion and an appraisal is, well, not much, other than cost ($300!). An appraisal can only be prepared by a licensed appraiser. It is more detailed than a BPO, with several more pages that have pictures, maps and whatnot. It also includes factors such as quality of construction and price per square foot, and uses different methods to estimate value. However, ultimately an appraisal is based on nearest, most recent comparable sales, just like a BPO. The primary difference though is that an appraisal is ordered by the lender, to justify the loan, and charged to the buyer at closing. Because the appraiser must be given a copy of the sales contract prior to performing the appraisal, he or she often looks for comparable prices rather than comparable homes, because his or her job is to justify the loan, not offer an estimate of fair market value. This is why ApV should not be used to determine list price. The appraiser does not have to sell the house! The broker does. Thus, a BPO is a far more reliable estimation of value. (A realtor only gets paid when the house sells, and incurs numerous expenses in the process, such as marketing, advertising, signage, gas for showings. Therefore, a realtor is not going to list a house at a price it will not sell for--that would be a money losing proposition.)
Assessed Value (AsV) is what the property is taxed on. This is prepared by the county appraiser (who never even enters the house!). It is in no way indicative of value, only of expenses involved with ownership of the property. A good thing to know, by the way.
It is crucial to understand and not confuse these terms in the purchase or sale of a house.
Now, let's cut to the chase. Here is what the prevaricators in the press fail to comprehend, and it's a simple formula.
E = MV - PO
Equity equals market value minus principal owed. That is the fundamental rule governing investment in real estate. A house is only worth what someone is willing to pay for it. Period.
During the mania of the credit bubble, a lot of people took out toxic loans--0% down, interest only, adjustable rate mortgages--and rolled over closing costs (in other words, borrowed more money than they actually paid for the house). Those people are now in a world of hurt.
It matters just as much the type of financing you take out--20% down on a 15-year fixed rate note is the best--as it does the type of house you buy. An older, well-maintained home in an established neighborhood with good schools is gold in real estate, because properties like that tend not to depreciate and can be sold at any time. A new condo in a 20-story building on the Gulf Coast, bought for 0% down on a 30-year ARM, is not. You're now the sole occupant in a disaster zone.
Prudence is the best course in all things. Do not buy into a mania and do not sell into a panic. Rather, make an informed and intelligent investment. Yeah, prices are declining, cratering in some areas, but that's what markets do, they fluctuate and some implode. So what? If you buy on a whim at the high and sell on a whine at the low, naturally you're going to lose money. Duh.
But if you made a prudent decision, not only in housing but in financing, these market swings do not affect you. Simply live in your house and ride out the waves. Pay off your mortgage, then when it comes time for you to sell you will realize a return if not an actual gain. The market will recover eventually, so now is not the time to panic.
Like Mr. Wal-Mart, you still own the house. It's a capital savings account with expenses. When equity (savings) equals market value (sales price) minus principal owed (nothing), then you will have protected if not generated wealth.
Think of taxes, utilities, maintenance, renovations as the cost of preserving or making money. Not as the debt burden most make them out to be.
An excellent essay and one that adds value for myself and the readers overall. If you found this helpful, let Gawains know in the comments.
I responded via email:
Great points. I have always contended that real estate is one of the very best investments IF you buy under the right kinds of terms and withing your means, as you say. While I am a "gloom and doomer" the problem this time around was so many were not buying to hold or generate rental income, but to flip in 6 months to a year. That's the core of it.
I think one of the worst things to come out of the housing boom/bust is that a solid, long term investment like a home was abused like an internet stock by flippers and dreamers. It is going to be a LONG time before old values are even approached.
Sunday Cooks It was Big Steel Keg time again. I was at the grocery store and saw some beef ribs that looked ok. Usually I get mine at a local butcher shop, but I figured why not. I wanted to make some pulled pork sandwiches so I bought a mini pork picnic (known as a Butt, I am not kidding) for that purpose.
Here are the items before I applied the rub:
Here they are near the end of the cook:
The beef ribs were good, but not as good as the butcher shop sets I usually get. These were a bit too fatty and stringy. The pork was a total disaster and I think that piece was more like a ham than a real picnic shoulder. Oh well, what can you do?
The Celtics did not get blown out last night! If you told me the final score before the game and told me the referees would let both teams play as physical as they wanted I would have thought the Boston boys would have won going away. The Lakers played better down the stretch and won fair and square, no complaints. A pretty good game and series. Congratulations to the Lakers on back to back titles, and a nice run for the Celtics.
Quotable I was checking in at The Reformed Broker this morning and I saw this post where The author had up some of his favorite quotes of the week. Check the fifth one down, it was me! It made my day indeed!
Fun With Headlines for Friday Night I always like to have fun with headlines or article titles that jump out at me, so here we go!
The whole article is a must read and how you react will in large part depend on how you view things. I have had some issues with CR, and I found the same cliche line used by CR as useless as Mish does:
"I believe the focus right now needs to be on jobs, jobs and jobs."
While jobs are the most important issue, I fail to see how government spending can accomplish real job creation. I do not want to go over all the numbers, it is Friday after all, but government job creation always operates as a net loss of money. The jobs made are not sustainable. Mish throws down the gauntlet:
Challenge to Krugman and Calculated Risk If you want jobs, name a jobs program that makes fiscal sense...
..Those clamoring for "jobs, jobs, jobs" never bother to explain what happens when the stimulus runs out. It ran out in the 1930's as well. Krugman mistakenly blames that small amount of tightening for sinking the US back into deflation.
Mish also covers some very huge differences between then and now. This is well worth your time and I hope there is a response from those challenged.
Friday Night Entertainment As if you have not had enough fun all week, a Friday Night joy ride as well!
World Cup Fun Ok, I have really tried to watch some of the World Cup but it is not easy, I just don't like soccer. To make up for it, here are two related items.
I do not think the North Korea picture is quite right for this poster: Instant CLASSIC!
Signature Roles for Versatile Actors I admire actors that can do all kinds of roles and can be believable in all of them.
The Actor Clancy Brown has a long resume including the HBO series "Carnivale", Viking form the film "Bad Boys" (the old one with Sean Penn and Esai Morales, classic film!), and the head guard in "The Shawshank Redemption". To me of course he will always be "The Kurgan" form the original film "Highlander":
Yup.
Now this is going to shock you all, as you all know I am a severe Star Wars maniac! Perhaps no other actor has played so many exciting roles as well as Harrison Ford. To me he is not Han Solo, but always Indiana Jones!:
My favorite Ford film.
Rock Blogging A few selections of music to get you ready for the weekend.
Reader Lurker asks that I include a song by Jimmy Dean, who passed away last Sunday. And yes, it is the sausage guy as well! A famous folks singer, Dean is probably most known for the song "Big Bad John":
Lurker also wanted some Rod Stewart which I was not going to play, but Gawains requested The Faces and "Stay with Me" which both has Rod Stewart and does not suck:
Not too bad.
I love Amazon.com (no affiliation, unless they would like to pay me!). I found this all piano tribute to the band Iron Maiden by artist Scott Lavender. It is amazing and it came in two days! All the songs are gems and wonderful, but try out the piano version of "Wasted Years":
The piano really captures the mood of the song and the mellow sadness of the tune. Unreal. Love it! (compare to rock version here)
Have not had AC/DC on in a while, and we could do with a little "TNT":
That song is classic.
Two more songs. What to play, what to play....
Going old school and 80's hair band rock which was the golden age for music! Try out Europe and "Carrie":
That one is really good.
Last call! It has to end sometime, yes?
Closing the show with Journey and "Worlds Apart" which is a total kick ass tune:
The Boston Celtics look to lose by less than 20 points, I mean win another title tonight. I am rooting for the boys to win but the game on Tuesday was so disastrous I am not sure how they are going to turn this one around. You never know though!
More Fannie and Freddie Comments Yesterday I asked why FNM and FRE were going to be delisted now after they had met the criteria for that very thing many times. A reader pointed out a suspension of the rule when almost all stocks were under $1 for a while (kidding, not all!) and yes I knew that. What I wanted to point out was that there are a million ways to avoid delisting, and certainly if FNM and FRE were deemed "too important to delist" whatever rules about that would not be applied. Sorry if I was not clear about all this but I figured readers would figure that one out.
Anyways, I am of the opinion that some kind of new mega agency is in the works and this will involve FNM/FRE/FHA and some kind of all encompassing mortgage credit market backed by the US government. There are no other interested parties. For a litle humor on this, here is LOLFed and their take.
As an aside, I am close to making the decision to stop writing myself about gold or silver. The arguments at this point are so stupid that I wearing thin on them all. You love gold? Buy all you can. You hate it? Short the crap out of it and use leverage. Either way, the level of discussion is getting bad. I will link stories like the one above that I find relevant, but I will not offer commentary, I think, going forward. My disclosure is that I own physical gold and silver and that's all you need know I should think.
Headline Fun Just like late night comedy, I can always rely on Yahoo Finance to provide me with material.
Here is one from today after the deflationary CPI reading: Consumer prices dip again -- break for shoppers Consumer prices dip for second straight month, extending break for American pocketbooks It is pure beauty! While Boom Boom Bernanke does all he can to defeat deflation, little did he know it will HELP SHOPPERS!! Is deflation not GDP positive? What gives?
Of course deflation is a great thing if the right things are deflating. Here are the good things: -Food -Gas -Electronics -Waistline
Where's the Beef? A vintage Wendy's commercial will set the tone for the next segment:
Indeed, where's the beef? (I have no position in Wendy's, but i do love their fries!)
For over a year I have been deluged with the standard "things are improving" lines or "the rate of change is highly positive year over year" or my favorite "the second derivative is turning up as things get worse more slowly!". To any and all that like to play these games, it is now put up or shut up time.
Today brought plenty of information to digest including: -Initial jobless claims moved up and have never been low enough to suggest much job growth and certainly nowhere near the kind of job creation needed to make any dent on unemployment -David Rosenberg shows two very different charts of US industrial production; year over year change and two year change. Please take a look at these charts, it shoots the rate of change crowd down and also shows lower highs and lower lows for all your chart geeks out there -The Philadelphia FED Business outlook showed a huge downward move, and Mish has a chart showing how expectations are outpacing reality by quite a margin (sound familiar? Hope IS our plan!) -Banking is doing well except for the smaller banks not repaying TARP funds -Interest rates are still at zero and there is active discussion on how to make them negative. Not exactly a growth story -Along the same lines, Illusion of Prosperity has these great charts up tonight showing Real yields going out to pasture at zero. Long term growth is suggested by such things -Housing is perhaps the biggest facade of a recovery in the history of wishful thinking. Without government agencies making 97% of home loans there would be no mortgage market. I could put out a bunch of numbers but those that live in unicorn land will not hear them (like S&P expecting 50-70% of modified mortgages to re-default!) and I do not need to. My best evidence? Toll Brothers, who have seen and cheer leaded the housing "bottom" since 2006 are even trying to backpedal! This stands on it's own
The main point (there is one?) is that the recovery has been all show and no go. The same remedies that have worked in the past for a time period are now getting shorter and shorter half lives (what's the rate of change??).
Never fear, more of the same is one the way. I mean, we would not want to come up short at this time in history would we? Enter Mark Thoma and Brad Delong who accurately reflect mainstream economic thinking, you know, the kind the FED uses:
I'd make the usual plea that labor markets need more help, but what good would it do? Congress is not going to do anything substantial to try to help with the employment problem. Brad DeLong is equally frustrated:
"I tell you. Writing the history of this episode is going to be next to impossible. "But why didn't they see?!?" is what the students are all going to ask. And I have no answer..."
The austerians are winning, but at what cost? How does a stubbornly high unemployment rate increase business and market confidence?
One wonders how blind can anyone be. The same "pleas" they make now have been answered in spades for 2 decades and we are still where we are! Maybe another line of thought could be in order? Unreal.
The Fall of 2010 (no pun intended!) will see, by my high powered economic theory, the following: -Renewed Quantitative Easing (QE 2.0) to the tune of 1 Trillion dollars -Renewed homebuyer tax credit -Renewed MBS purchases to the tune of 1 Trillion dollars -New tax credits for car, toaster, microwave, intimate device purchases -A ban on taxes for alcohol sales; it will ease the pain felt by so many as a major argument of money printers is to ease the people's suffering -Other tricks yet unseen And that is just the United States! Expect more funny business in Europe.
"Where's the Beef"? If there is a real recovery story not 90% dependant on some government handout please elucidate me in the comments section.
Well the Celtics really laid an egg last night! I went to bed at halftime knowing full well that game was over. I figured the Celtics were a 2:1 favorite going into last night's game but after the debacle of their performance would not put them about 3:1 underdogs to win game seven. Makes me think of that game 6 of the New York Knicks vs the Houston Rockets in the title series a long time ago. It was all there and they let is slip away.
Now I am the One Asking Questions I was inspired by this post over at The Illusion of Prosperity last night which just asked simply:
Q: What Do These Five Commodities have in Common? 1. Gold (the ancient metal?) 2. Silver (imaging?) 3. Copper (wiring?) 4. Lead (bullets?) 5. Iron (swords?) There are many valid correct answers, but I have one particular answer in mind.
You can check the post for the answer and the give and take in the comments section.
I know this may be very hard to believe, but this author does not know everything. In fact I am well aware of the many things I either do not know or cannot predict. This may surprise you as in your daily reading it seems many KNOW almost everything and can predict what will happen in the future. It's a dirty little secret. All writers are pretty much just like you; doing the best they can with what they have. Some are more talented than others, but in the end all one has is their mind, their gut, and some kind of way to express their opinions.
I had quite a few questions on my mind about several stories today and of course I have a few ideas about all of them. Then I figured, why not just ask the audience? Brilliant! The readers here are the best anywhere and so I will open up what I am puzzled about to the board and see what comes out.
Fannie Mae and Freddie Mac Delisted Two wards of the state, both FNM and FRE have been sub dollar stocks for a long time. FNM was a HFT favorite, making the top 25 most heavily traded stocks for the high frequency crews. Why now? Even the Wall Street Journal had a hard time finding a reason:
Many analysts for months have maintained that the companies’ shares aren’t worth anything because Fannie and Freddie have run up such spectacular losses as a result of the housing bust. To become profitable again, the companies would have to stop losing money and pay back the $145 billion that they’ve taken in government aid just to get back to a break-even point. From there they’d have to recapitalize themselves before shareholders could see any gains. Given that the companies’ circumstances haven’t changed much, “it somewhat raises the question why it wasn’t done earlier,” says Jim Vogel, an analyst at FTN Financial.
You think so, Mr. Vogel? Thanks for the insight. Someone may have wanted to talk to Investment Technology Group Inc who in a Businessweek item mused:
Two companies removed from the Russell 1000 last year because their share prices were less than $1 -- Freddie Mac and Sirius XM Radio Inc. -- are likely to rejoin the benchmark, according to ITG.
Guess not.
I have an idea as to what this is leading to and the WSJ piece even hints at it:
The big issue now is what happens to the companies moving forward, and Wednesday’s delisting helps clear the pathway a bit towards doing something completely new as opposed to taking steps to restore the value of the current companies. And it’s also a sign that the common shareholders “don’t play a role in that future structure,” says Bose George, an analyst at Keefe, Bruyette & Woods Inc.
I have a really bad feeling about this. What is the deal here?
Euro Bank Stress Tests: What is with the Delay? Spain wanted banking stress tests to be made public, Germany was opposed but as they have been likely to do as of late, caved right in under any pressure and have agreed. But we will have to wait two weeks to see any results: ECB Says We Have To Wait 2 WEEKS For Any Stress Test Data Why the wait? Presumably these tests are done and should be ready to go. What is the hold up? Can you think of anything off the top of your head? It's more than the first thing that pops into your mind I think.
Convoluted Court Ruling I am not a lawyer. I have zero understanding of cross-border banking regulations. I have no idea if one country can compel a business based in another country to do anything. That said, I am clearly puzzled by this news which Calculated Risk covered today: Iceland: Court Rules Foreign Currency Indexed Loans Illegal CR links this Iceland Weather Report site which offers:
The Icelandic supreme court ruled this afternoon that Icelandic loans indexed to a foreign currency are illegal. This is hugely significant for thousands of people in this country. As many of you will know, the foreign currency loans were one of the most serious consequences of the economic collapse for normal people in Iceland. Thousands of Icelanders had taken out these so-called “currency basket” loans to buy homes and cars, and when the Icelandic currency plummeted, their loans doubled, tripled and even quadrupled in value, with disastrous effects. And now, they’ve been deemed illegal. Exactly what the implications of this are I’m not entirely sure [the World Cup dominates everything these days, so we don't even get Kastljós in the evenings, which might help shed some light on the matter] — but it’s sure to be big.
Well that sounds big!
I really cannot offer much on this one. In the CR comments section some voices (smart folks) thought maybe this would mean Icelandic borrowers would be given back money after being overcharged in this, now illegal, type of loan arrangement. I have no idea how this would work. If that is the case there will be more loan losses for banks that made these loans, though how large that number is is open to question. Any thoughts?
England's Version of the SEC is Dissolved The very agency tasked with financial regulation was a failure, which in that it is hardly alone. From the Clusterstock piece:
Last year David Cameron said that Gordon Brown's financial regulation system, the FSA, was to blame for the entire country's financial problems. He made plans do something about it: either get rid of the FSA or give someone the job of better supervising them. Now George Osborne is disbanding the FSA altogether and giving the job of supervising and regulating to the Bank of England, says the Guardian. The new king of regulation is Mervyn King, who will exercise ultimate control over the supervision.
This is rich! Imagine the government getting rid of the inept SEC (great news!) and giving enforcement over to the FED (WHAT????). A puzzling move indeed. Again, any ideas?
BP Going Down but PIMCO Likes The Odds Things are not looking good for oil spill culprit BP. To start they will have to set aside $20 Billion dollars in an escrow account for various payments. The CDS markets do not like their chances, but Bill Gross of PIMCO sure does:
Bill Gross, the co-chief investment officer of PIMCO, said on Wednesday that he recently bought $100 million of short-maturing BP Plc (BP.L) (BP.N) notes and some Anadarko Petroleum (APC.N) paper. Gross told Reuters via email that he purchased BP paper and "some Anadarko, which is a 20 percent owner," in recent days. He earlier told CNBC television: "BP 5-year bonds yield 6 to 7 percent, BP 12-month paper yields 10 to 11 percent. This is either a double-A company or a triple-C company depending upon the caps and the ultimate cost." Gross said on CNBC: "At this point, if you can get 10 percent on one-year paper on BP, we think it's closer to double-A than triple-C. That's a significant (thing). We started to buy some."
I will defer to Mr. Gross about the particulars but I think there is something else going on here. Remember, PIMCO likes to "shake hands with the government" and it is this line of questioning that I think leads to a better reason for the purchase. What do you think?
Best Move of the Recovery? A nagging question after today is what has been the best move of the recovery? Your choices, amongst so many, are: A - General Motors (GM) ramping up production, especially of SUV's, due to the Toyota scam, I mean boom in sales signaling a new long term uptrend and gas long term under $2.50 a gallon. or B - Toll Brothers (TOL) getting back into land purchases and looking to expand as they "focus on growth" just last month and already they are thinking things over.
Tough call!
Last night in the LABEL line I left: Get up and get down financial reform is a joke in your town Which was a borrowed from the old Public Enemy song "911 is a Joke in Your Town". There, one question answered!
I am having wireless network issues that are annoying me to the point of quitting for the night, so just a small note and I hope it posts.
Financial Regulation: What's the Point? The ridiculous parade that has been financial regulation is best characterized as soundbite and headline heavy face, and a hollowed out body. After nearly crushing the US banking system major banks have been able to side step and serious regulatory changes and the FED has dodged any chance of ever seeing what they are doing. This is very disappointing.
There have been many instances of rules that could have made a difference making waves and then not two weeks later have the whole thing scrapped or changed to a bare bones kind of deal.
Best example: Senator Blanche Lincoln (D-Ak) Senator Lincoln's hard stance on making the mega banks spin off derivatives desks makes sense. She barely won her primary mainly on her sticking to her guns on this issue to confront the banks on this. Of course, now she has won and the cave in begins: Wall Street Set To Get Huge Win, As Blanche Lincoln Caving Towards A Derivatives Compromise I want to say I am surprised but I do not like to lie to the readers. From the piece:
Senator Blanche Lincoln is on a hunt to take down derivatives, or more specifically radically alter the ability of bank holding companies to deal in them. But now, in an effort to broker some kind of compromise between the U.S. government and the banks, Lincoln may amend her derivatives measure to allows banks two full years to spin off their swaps departments into subsidiaries or special purpose entities.
And of course it does not stop there:
Here's the kicker though... Banks would be able to produce their own studies of how the proposed legislation would “impact of the measure on mortgage lending, small business lending, jobs and capital formation. In otherwords, if the studies suggested that everything would suck after this, they'd probably wiggle out of the new rules.
I am going to make a bold prediction, write this one down: The banks will all say any changes will kill their small business and mortgage lending abilities! I know, I must be able to see the future or something.
Whether it is Hurricane Katrina, the banking crisis, the mortgage crisis, the Gulf Oil Spill, or your local DMV the people in charge really have no clue what to do and even less interest in helping anyone but themselves. I could waste my time and your and ask you to write or call your representatives and make some noise but we know how that works out by now.
The Boston Celtics are one win away from a second title in three years. I did go on the record as picking the Celtics to win in Six games. Anything can happen, and certainly the Lakers can play better ball than they have, but this scrappy Boston team is close to another championship. Good luck guys!
Signs of a Recovery? As anyone who read me knows, I tend to be net negative on the economy and things market wise. I have been for some time. It could be a huge bias on my part (possible!) or it could just be how I look at the information in front of me and go from there. For about a year we have seen rebounds in auto sales, home sales, consumer spending (did it ever really dip?), the stock markets, shipping volumes, and oil prices. Various metrics like GDP and the ISM look pretty good. So what's the problem?
In no particular order here are some signs of severe stress and problem areas I am looking at right now:
All Time Low Interest Rates Perhaps for as Long as Five Years This item continues to be ignored but is in no way suggestive of a stable situation. San Francisco FED member Glenn Rudebusch suggest interest rates will stay at zero (he would prefer -5%; try that out at any bank and see how fast people pull their money!) until at least 2012. I think that is the very earliest a rate hike will occur, unless a bond event occurs (unlikely). Calculated Riskpokes fun at the large number of fools, I mean seasoned market players who were predicting rate hikes as far back as 2009! Too funny. CR thinks unemployment and inflation "expectations" will be the only things the FED is concerned with. Thus, as I said, 5 years from 2008 is a safe bet! This is in no way indicative of anything good and I have argued many times that zero rates are no a structural part of the markets and will be unable to change. When is this going to be discussed?
European Banks Set Records Using the ECB Overnight Lending Facility As detailed by Zero Hedge, Euro banks are keeping gobs of cash at the ECB instead of other channels. My favorite line of "banks are afraid to lend to each other for fear of what's on a counter party balance sheet" has already been out in force. This is of course garbage. The remaining big banks have almost identical holdings thus it is not fear, but full knowledge that keeps them from trusting each other. This is another metric that needs to be addressed by the folks doing the stashing. What's the story boys?
Record Sales of Short Term Bonds with No Yield The Housing Time Bomb covers the 3 and 6 month Treasury sales today and notes record bids for short term US paper. Now I will always argue about the perceived "safety" of US bonds, but the point is the markets see them that way and this is a clear signal that lending by banks is not going anywhere anytime soon. In a V shaped recovery situation the last thing you want to do is get zero return on your money, yet banks are lining up out the door to do just that. I feel like Bernanke does about gold, I am puzzled!
Gulf Oil Spill While I am sure this will all be fixed by the President's address tomorrow night, the final impact of this event will not be known for some time. The repercussions from this disaster are going to be large and many in number. A huge unknown.
US States on Life Support; Pension Plans Gambling to Get Ahead If all is well and getting better one would wonder why another 50 Billion is needed for the states (it will not end there!) and pension plans are getting aggressive in wild instruments to try and get some kind of return in a zero rate world. Is this a sign of an improving situation?
Assorted Items -Housing WILL double dip -GM ramping up production is going to look really stupid very soon. No worries, we can pay for it all again -FNM/FRE/FHA losses to be around 500 Billion; assumes no double dip! -Related to the Oil spill, how will this affect the economies of states impacted?
Plenty of warning signs, but I could be biased.
Something to Think About Another great write up over at The Automatic Earth tonight and you would do well to read the whole thing.
An item I think is lost to many:
Apart from the arguments about trickles and floods, such strategic default is very socially divisive, which means it will be easy to generate a mandate to prevent it in the future, whether or not doing so would violate existing contract terms. Those who expect contract terms to remain inviolate are likely to be very disappointed in many instances. Governments don't 'fight fair'. When push comes to shove, they are perfectly capable of changing the rules abruptly, and retro-actively if they perceive it to be necessary. After all, we are already witnessing the demise of the rule of law in many obvious ways. The rule of law exists only when the centre agrees to be bound by the same rules as others, and that is less and less the case all the time.
The above is pointed towards debt "strategic defaults" but I think it applies to the market mechanisms many rely on. Many times I have read that in the even of hyperinflation, all one has to do do is buy long dated LEAP options or other such stuff and let the money roll in. What makes you think those contracts would be honored? Even if they were to be (I doubt it highly) a "windfall" tax of 99% would almost certainly punish a speculator who did this. The same applies to something like TIPS. Why would the government honor such a contract? Citing "National Security" or other such baloney they will not honor a monster debt payment if they do not have to, and they do not. They could also re-tool how inflation is calculated to screw you as well, they have done it before.
Just something to keep in mind. If things go bad you may find that the tools an mechanisms which exist today will not tomorrow.
