Friday, August 24, 2007

If you're so smart, why aren't you rich?

A couple of years ago I thought the economy was out of balance for a number of reasons. The main one was that there was a housing bubble. Other reasons included the current account deficit, anticipated inflation (by me), and consumer-driven economy fueled by debt. But mainly the housing bubble. So, during that time I took financial positions that would do well if the stock market declined.

Am I ready for profits? Maybe not, if Bill Gross's advice is to be believed, and followed. From his op-ed in the Post: (excerpts, emp add)
Why We Need a Housing Rescue

... policymakers must ... decide what to do about the housing market.

Granted, a dose of market discipline in the form of lower prices might be healthy, but forecasters are projecting more than 2 million defaults before this cycle is complete. The resulting impact on housing prices is likely to be close to a 10 percent decline. Such an asset deflation has not been seen in the United States since the Great Depression.

Fiscal ... policy should be the preferred remedy. In the early 1990s the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers yet 2 million homeowners must be thrown to the wolves today? If we can bail out Chrysler, why can't we support American homeowners?

This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hardworking Americans. Those who [are doing well economically and don't care about the homeowners] should look at it this way: your stocks and risk-oriented leveraged investments will spring to life anew. Republican officeholders would win a new constituency of voters for generations.
I'm for easing some of the pain for some homeowners (it's a complex formulation - there are greedy idiots who deserve there fate, others much less so) but since when was it government policy to make it safe for massive asset bubbles? Gross cites the bailout of Chrysler, but Chrysler's problems were of an entirely different nature (post 70's oil shocks, slow response to Japanese imports) and was not related to speculation, which is what the current liquidity and insolvency crisis is.

What Bill Gross is saying is that, at least in the equities market, if you were correct about the unsustainable nature of the boom, then you will suffer financially.

Obviously, the way to get rich is not to pay attention to fundamentals or even the technicals, when it comes to stocks. Just do what everybody else is doing. If things go well, you profit. If things don't go well, then tap the federal government. The result will be "stocks and risk-oriented leveraged investments" going up. What happened to the risk in "risk-oriented leveraged investments"? It went away, courtesy of the - wait for it - the U.S. taxpayer.

And the best part is this:
Republican officeholders would win a new constituency of voters for generations.
No kidding. I just don't want to hear any more shit about the wonders of the marketplace from now on. Gross' advice would explicitly help homeowners (all of them) at the expense of (mostly lower income) renters. That's not only market manipulation, it's morally wrong as well.


"The past few weeks have exposed a giant crack in modern financial architecture, created by the youthful wizards and endorsed as a diversifying positive by central bankers present and past."


"I was talking to CDO managers in mid-'05 that were saying how rich sub-prime MBS was and how wrong everyone was for buying that stuff at the spreads they were. To a man, they all agreed they were paying too much for the risk, they all believed that HPA [ED: home price appreciation] was going negative soon. But, sadly, they had to buy the stuff because they needed to accumulate collateral for their CDO issuance. Fuck, we all knew we were overpaying, even back in 2005. We knew it was essentially a bet that home price appreciation was going to continue at levels that couldn't be sustained. No way that could keep going on.

Everyone was saying the same thing: Home pricing cannot continue appreciating at the same rate, and the second this thing turns, we are FUCKED."


By Anonymous Anonymous, at 8/24/2007 10:16 AM  

Republican officeholders would win a new constituency of voters for generations

Well, for as many generations as it takes for the Chinese and the rest of the world to stop buying our debt, at which point those government payouts will be taking the form of wheelbarrows full of useless paper that people will be using to try to buy loaves of bread.

But, until then....

By Anonymous Mike, at 8/25/2007 2:41 AM  

My memory is that Chrysler repaid the loan used to bail them out. It does not look like this bailout would generate any direct repayment.

By Anonymous Anonymous, at 8/25/2007 2:44 PM  

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