Tuesday, March 30, 2010

A Bit Late To The Party Chuck

In December of 2008 I wrote the following post "Opinion: Seniors Victimized By Low Rates":

"With the Feds lowering short term rates to zero and attempting to lower long term rates by buying Treasury bonds homeowners with equity and good credit are doing handstands. Perhaps all of this maneuvering will help, perhaps not, only time will tell. What is left out of the story however are those who are effectively subsidizing this policy - Seniors who rely on reasonable interest rates for income.

While the meltdown in the stock market has been epic, at one point a tad over 50%. The meltdown of interest rates has been complete. Last year a senior could get a rate of 5 - 6% on their money with little, even no risk in most places. I even have a few clients who locked in a risk free rate of 7% for five years in a 457 plan they had access to. For seniors who were earning 5%, they would get about $5,000 per $100,000 invested. Today that rate is now nearly zero. You can shop around and get 2 or 3% in a CD, though you may even have to go out five years to do that. That would be around $2,000 per year of income for every $100,000 invested a drop of 60%.

What is worse is that the inflationary forces that have appeared to disappear and even reverse into deflation (which does actually make the $2,000 go farther......until you factor in that seniors are not experiencing deflation) are short term. The return of inflation is inevitable. This will further decimate the savings, though it will probably raise rates.

These low interest rates will push seniors to look for higher rates, not thinking about the higher risks. They will be marketed to by weasels who will attempt to lure them into their faux products promising higher returns with little or no risk - a combination that doesn't exist (can you say Madoff).

Be vigilant out there and stay on your guard."

14 months later Charles Schwab has basically written the same thing in a Wall Street Journal opinion piece. While I wholeheartedly agree with him I wonder where he was in December of 2008? I'm seeing people falling into the trap set by eager scamsters who lure seniors and retirees in with high guaranteed rates that are really just products that enrich the person selling or outright Ponzi schemes (okay, I'll admit, Bernanke and Co. are doing a pretty good job of running their own Ponzi - but they can legally print money).

I just have to wonder where Chuck was back then and quite honestly where the hell the rest of these so called leaders have been? Oh, that's right, getting bailed out (note: Schwab was not a recipient of bailout funds).

Bernanke is either wrong or lying. He says the economy is recovering, but it can withstand even a 1% interest rate hike - that is pure and utter B.S. OR, the economy is not recovering and he is lying to us. There are no other options.

For those seniors out there who are struggling, I feel for you, its time to get back what is rightfully yours - a reasonable and safe rate of return on your money.

Scott Dauenhauer CFP, MSFP, AIF

Thursday, March 25, 2010

Bloomberg: Half of Loan Modifications Re-Default

February 18th, 2009 I wrote a post titled "Will The New Mortgage Plan Work? Not A Chance...Strike Three" in which I argued that the programs the Obama Administration and previous Bush Administration announced would be failures. I wrote the following:

The plan announced today is based on a fairy tale - the same fairy tale that the Bush administration and congress hoped would have a "happily ever after" ending. That ending would be a world where foreclosures stop and home prices climb back up allowing the banks not to have to write down trillions in bad mortgage loans. This is what everybody in Washington is hoping for, but it just won't happen - it isn't possible.

This latest plan fails on five fronts:

1. It aims to help those who can least afford to stay in the home
2. It helps people who have reasonable interest rates already and have only lost a little on their home
3. It doesn't help out anyone for whom helping would make financial sense
4. There is not enough money being used
5. There is no provision for real write down of principal

If this Bloomberg article doesn't prove me right, I don't know what will, the key paragraphs:

More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report.

The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.

U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth. About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors.

This program is a failure and housing is getting worse, again. Bank of America's announcement yesterday was a joke, an absolute joke.

Without meaningful principal writedowns and the wiping out of worthless second mortgages we will continue to see mass foreclosures, defaults and short sales.

Scott Dauenhauer CPF, MSFP, AIF

Wednesday, March 24, 2010

Gizmodo: Tiny Generators Charge Up From Random Vibrations In the Air

Yet another minor breakthrough in the field of energy, imagine being able to power things (ok, small things) simply through the vibrations of everyday life - that is what the University of Michigan folks have dreamed up.

Technology - including bio and nano are changing the world and we are on the verge of a new "Industrial Revolution" for medical treatments and energy consumption. The world we live in fifty years from now will be difficult to recognize.

Globally we face great headwinds and severe financial issues that are not being worked out in a rational way, but none of this will stop (though it could greatly slow it down) march of technology and how it will change how we work, consume and live.

Scott Dauenhauer CFP, MSFP, AIF

Potential __flation Scenarios

Perhaps the biggest debate in economics today is between the inflationists and deflationists. I have covered this over the past few years with relatively little additional insight as to which we will have and when (yes, I am partially dissing myself). What I'd like to do is present a few scenarios of what could happen.

If you've watched just about any financial or political television or talk radio you've no doubt heard of the massive amounts of money being printed by the Federal Reserve to buy certain assets. The commercials for Gold are about as prevalent as the mortgage commercials were a few years ago. You see chalk boards and charts showing the Fed's balance sheet ballooning in an almost parabolic manner. These charts are correct, the Feds balance sheet has grown in an unprecedented manner and the printing press continues. All of this money printing must lead to inflation, correct?

Not necessarily, at least not right away.

As I've spoke about in the past you need more than money printing to create inflation, you need that money to circulate and right now it is not. The money is actually going to prop up the massively deflated balance sheets of our nation's financial institutions (who claim that they are solvent). Let me give you an example of what I mean. Let's pretend that I own a printing press and have been given permission to print money. I decide to print up a bunch of money and give it to you in exchange for perhaps your house. I've printed money and increased the money supply, but if you don't spend that money it doesn't create inflation. Lets say you take that money and put it in a tin can in your back yard - no inflation. This is of course a highly simplistic explanation of the Velocity of Money, but in essence what is happening right now is that the Fed has created a lot of money, but the banks are not lending it out and thus it is not getting into circulation and being spent. No circulation, no inflation from the money printing. This doesn't mean there won't be inflation, just that the inflation could be caused by other events or that eventually the banks will begin lending this money and create an inflationary boom. With no bank lending, there is little that this Fed Balance increase will do to create inflation.

The reality is that we could (I said could, not would) see deflation occur. If you don't believe me just take a look around - its not easy to get a raise, its not easy to get a job and people have less money to spend. People are saving more, they are walking away from their houses and state and local governments are having to cut, cut, cut while raising taxes (taking money out of the consumers pocket). Tax revenues are not increasing, they are falling and it is this type of deflation that could eventually lead to a hyperinflation outcome. In fact, research that I've read shows that hyperinflation events almost always occur because of deflation that leads to massive fiscal deficits that can only be solved by a central bank printing money. This money printing gets into the economy because it is used to "monetize the debt", essentially becoming government spending which leads to inflation, higher interest rates and larger fiscal deficits which leads to more money printing and a downward spiral.

Yet another scenario is that we get inflation and deflation at the same time (I'm talking about personal inflation/deflation, not inflation/deflation as it applies to the money supply). If you think about it, nobody experiences CPI (Consumer Price Index) inflation. Everyone experiences their own inflation rate (which in some cases is simply supply/demand imbalances, other times bubbles, still other times both). If you grow your own food, travel very little and own your home outright - there is not much inflation can do to you (save perhaps higher water and heating bills.....pretend you live in a moderate climate!). Lets say that you live in a dense metropolitan area where home prices are high and so you have to commute a long way to work, if oil prices rise you are in trouble as it affects everything you do. The price to commute goes up, the price of food goes up...etc. Health care costs affect people differently depending on their relative health. We could have a major inflationary event and some people would not be hurt, while others would be dramatically affected. Major components of the CPI could be rising in price while other major components are falling - offsetting one another, but the effect is the same for those who need the components that are rising in price.

Another scenario, one that is becoming more likely do to the utter ignorance and stupidity of our nations banking system is where the banks decide that they are comfortable making loans again and begin making stupid loans - lending out all those reserve and creating another bubble that leads to inflation, higher interest rates and a bigger crash than in 2008. All of this could take many, many years to play out (look how long the real estate bubble went on for).

So what do I think will happen?

This is tough, there are too many variables to make an accurate prediction, but my gut tells me that we will first see deflation, followed by another dose of extreme measures which may lead to the inability of congress to continue their spending without much higher interest rates and/or Federal Reserve direct monetization of the deficit. This could take several years to play out.

If you don't believe that we could have deflation, look no further than our Federal Reserve's current Zero Interest Rate Policy. If we were actually growing and stabilizing wouldn't it be criminal for the Fed NOT to raise rates? Yet the Fed has no confidence in the recovery and fears deflation which is why they are keeping rates at zero and CAN keep rates at zero. What the Fed says and what the Fed is doing are incompatible, the question remains how this will resolve itself.

I'm not sure I've provided any more clarity about the future (mainly because I have some difficulty predicting it!), but perhaps I've shed some light on possible scenarios.

Oh, one more scenario - the dollar remains strong with no inflation or deflation and we continue to spend unlimited amounts of money because all the other countries currencies are so much worse (this is perhaps the scariest of all, except that it could lead to a sustained boom that masks all underlying issues).

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, March 16, 2010

Nobel Laureates, American Leaders Call for the Fiduciary Standard in Financial Reform

Nobel Laureates, American Leaders Call for the Fiduciary Standard in Financial Reform, as Dodd Introduces Democratic Legislation Today

Wall Street Leaders Invited to Join Luminaries and Support the Fiduciary Standard Under the Investment Advisers Act of 1940

March 15, 2010—Washington D.C.: Twelve renowned economists, academics and leading thinkers -- including John Bogle, and Nobel Laureates George Akerlof and Daniel Kahneman -- today called for the fiduciary standard, as established under the Investment Advisers Act of 1940 and affirmed by the Supreme Court, to be included in financial reform legislation, and apply to all who provide investment or financial advice.

Senators Tim Johnson and Christopher Dodd are expected to drop the fiduciary standard in legislation scheduled to be introduced today and, instead, add a study. A study could delay implementation of the fiduciary standard indefinitely.

The fiduciary standard requires advisors to put the interests of their clients first.

John C. Bogle, the Founder of the Vanguard Group and a signatory of the Fiduciary Statement, noted, "Restoring the faith of investors must begin with a demand that investment and financial advisors stand up for the rights of their clients." Bogle concluded that congressional action was needed to affirm the basic principle that when rendering investment advice, "No man can serve two masters.”

These luminaries’ support is timely. Last week Bank of America Merrill Lynch (BofA) executive Sallie Krawcheck acknowledged BofA’s involvement with legislators on the fiduciary issue. While saying BofA supports fiduciary standard “enhancement,” Krawcheck did not say BofA supports applying the fiduciary standard under the Investment Advisers Act of 1940 to its Merrill Lynch brokers.

The Committee for the Fiduciary Standard is inviting the heads of several large brokerage firms to follow the lead of these prominent Americans and also sign the Fiduciary Statement. The Committee has sent letters to Brian Moynihan, CEO Bank of America; Sallie Krawcheck, President, Global Wealth and Investment Management, Bank of America; Jamie Dimon, CEO JPMorgan Chase; John Mack, CEO, Morgan Stanley; and Lloyd Blankfein, CEO, Goldman Sachs.

The Fiduciary Statement has been endorsed by:

George Akerlof, PhD
Nobel Laureate in Economics 2001

Dan Ariely, PhD
Professor, Psychology and Behavioral Economics, Duke University

Cliff Asness Managing & Founding Principal, AQR Capital

John C. Bogle
Founder, The Vanguard Group

Roger Ibbotson, PhD
Chairman and CIO, Zebra Capital Management, LLC

Daniel Kahneman, PhD Nobel Laureate in Economics 2002

John D. Markese, PhD President, American Association of Individual Investors

Don Phillips Managing Director, Morningstar

Jane Bryant Quinn Personal Finance Columnist and Author

V. Daniel Radford Former Federal Reserve Governor, Vice President, Ullico Investment Company

Terry Savage Personal Finance Columnist and Author

Richard Thaler, PhD Professor, Behavioral Science and Economics , University of Chicago

Knut A. Rostad, chairman of the Committee for the Fiduciary Standard, noted, “That these individuals have lent their collective support to the fiduciary standard make a very powerful statement. They are highly respected leaders in their fields. Their voice underscores the importance of this issue to the country.”

The Fiduciary Statement was prepared under the auspices of The Committee for the Fiduciary Standard, a volunteer group of investment industry leaders and practitioners. The Committee formed last year to inform and nurture discussion of the fiduciary standard as presently established under the Investment Advisers Act of 1940.

For more information, please contact: Knut A. Rostad, Chairman, The Committee for the Fiduciary Standard Regulatory and Compliance Officer Rembert Pendleton Jackson (703) 821-6616 x 429 or (301) 509-6468 cell kar@rpjadvisors.com

Monday, March 15, 2010

6/14/2004 - Bloomberg/Dauenhauer "I think there's a bubble"

It was nearly six years ago I was quoted in Bloomberg as saying home prices were "ridiculous" and ``I think there's a bubble. It's similar to the Nasdaq (stock market) several years ago. I tell any clients who come to me who want to buy a house that there's more downside than upside now to the home market.''

Of course that didn't stop the rise in the market and it didn't prevent me from buying into it (after selling out). My thinking was sound - we are in a bubble, housing is going to drop significantly (even though every one says it can't happen) and even though I could get a loan to buy in Orange County, I'd be crazy to do so. I decided to look around and found Murrieta, a community not to far away from anything in SoCal, but with clean air, good schools and reasonable housing prices. We wanted to have another child, but wanted to be in a home that we weren't going to move out of for a long time. I thought that prices would fall about 20%, but didn't know when and couldn't be sure I was right. I figured I could handle a 20% drop, it would eventually be made up. So, instead of a payment of $10,000 per month if we bought in the OC, we settled for about $3k in Murrieta.

Prices continued to climb. I remember after selling my townhome and renting being in a meeting of financial planners (colleagues) and one of them quoting me from the bloomberg artice - he began laughing at me (and invited everyone else) and inferred I was stupid - housing never goes down. Was I really that far out on a limb?

A few years after I moved into my Murrieta home I saw people refinancing to pull cash out at even higher home prices, yet homes were not selling for what the appraisers certified as the value of the home. I figured prices were 20% below what the appraisers were telling the lenders. Then I began to learn what many of the borrowers used to qualify for their loans, essentially nothing and I began to become very concerned about my decision to buy a home anywhere in California.

I continued to tell clients that housing had more downside than upside and they should be very careful. My only wish is that I had thought through more clearly the consequences of a housing bubble and understood how it bursting would affect all other asset classes. While most of my clients were well positioned, we could have been MUCH better positioned had I pushed my thinking on housing further. Of course I still wasn't sure I was right, it had been three years since the Bloomberg article and housing was still going up, albeit much slower and it was driven purely by fraud (which I was just beginning to catch on to).

2007 is when things began to fall apart for housing. While Orange County eventually fell around 20% (more or less depending on the area) the outlying communities like Murrieta fell by considerably more, nearly 70% from peak to trough (ironically, about the same dollar amount I would have lost by purchasing an OC home, with the exception that my payment was still $7,000 cheaper per month). This fall would have end with a complete devastation of the world economy, which was then propped up by massive amounts of liquidity and balance sheet doctoring (mark to market).

So what is my point?

I have a few:

First, sometimes you can be right and still not get the next actions correct
Second, the experts aren't always right and sometimes simple, common sense is what should rule.

I could list for you many, many experts - including both heads of the Federal Reserve who publicly stated there is no bubble in housing. Yet, a financial planner with a degree in finance and a Masters in Financial Planning (not economics) was able to deduce that housing was in a massive bubble. Not only that, I wrote to the Wall Street Journal in early 2008 warning that the banks were hiding gigantic losses....right again, but that didn't stop me from taking it to the next correct action - being right doesn't translate to making money - you have to be right AND know the correct next step.

Here is that article from so many moons ago, for your reading pleasure. This article both encourages me and haunts me:

Is U.S. Housing Boom Nearing the End of the Line?: John Wasik
June 14 (Bloomberg) -- Is the long, ascending march in U.S. home prices reaching a summit?

Scott Dauenhauer, a fee-only financial planner in Laguna Hills, California, for one, isn't sanguine about home prices in Southern California, where double-digit increases are common.

Having sold his 1,000-square-foot, two-bedroom home six months ago for $350,000 -- he paid $170,000 in 2000 -- Dauenhauer says he's not really timing the market, yet found home prices in his area ``ridiculous.'' He's looking for a three-bedroom home with a yard for his wife and three-year-old son home in Orange County. For now, he's renting while prices continue to soar.

As rising mortgage rates chasten the housing boom, it's time to consider whether you should buy new property or borrow against your home based on the presumption that home prices will ascend endlessly.

``A friend who lives about mile away who has a four-bedroom, 2,500-square-foot home said a home similar to his just sold for over $900,000,'' Dauenhauer said. ``I think there's a bubble. It's similar to the Nasdaq (stock market) several years ago. I tell any clients who come to me who want to buy a house that there's more downside than upside now to the home market.''

Home Prices Slowing

Home price increases are easing throughout the U.S., according to the Office of Housing Enterprise Oversight (OFHEO), a U.S. government agency that monitors government-sponsored housing enterprises.

While prices averaged a 7.71 percent increase from the first quarter of 2003 through the first quarter of 2004, the 0.96 percent first-quarter rise is ``nearly 3 percentage points lower than the 3.71 percent jump in the fourth quarter of 2003,'' OFHEO said.

One forward indicator of home sales -- the Bloomberg U.S. Homebuilders Index of leading home construction stocks -- is off 2 percent year to date through June 8. The index hit its 52-week high on March 8. Mortgage applications also fell for the fifth straight week in the week ending June 4, down 8.9 percent, according to the Mortgage Bankers Association, a trade group.

Slackening of home prices is actually good news for property owners, since it may lessen the possibility of a drastic bubble bursting in the Northeast and Southern California.

What Happened to the Bubble?

While there have been pronounced regional declines in Boston, Southern California and Houston over the past two decades, is it possible that for most homeowners, real estate is the ultimate no-brainer, long-term purchase?

Going back to 1980, in the frothiest markets, prices appreciated most in Massachusetts (up 516 percent), New York (399 percent), Rhode Island (361 percent), New Jersey (316 percent), and California (315 percent) through March 31, OFHEO reported.

You could have done better. Let's say you took a buy-and- hold approach with stocks represented by the Standard & Poor's 500 index of the largest U.S. companies over the same period. With dividends reinvested, your nominal return would have been 1,317 percent, or about 11 percent a year.

Although it's unfair to compare large-company stocks to homes -- stocks annually average 20 percent variance in prices (standard deviation since 1926 or risk) -- there's typically no 6 percent commission to buy a no-load stock index, no taxes to pay (if held in a tax-deferred account) and certainly no maintenance costs. If owned through a mutual fund, you could pay about 0.20 percent a year to own the stock index.

Evaluating Risks

Real estate is hardly risk free. It's an economic shibboleth that home prices can't outpace local job and income growth forever. This idea runs contrary to the housing industry's contention that demand and demographic factors are driving the boom and not speculation.

Like tech stocks, homes can also be wildly overvalued. A recent study by the Economist magazine of the $50 trillion worldwide property market found that ``home prices look seriously overvalued in Australia, Ireland, Netherlands, Spain, the U.K. and U.S.''

Pam Woodall, economics editor of the British magazine, said at a London conference sponsored by the U.K. research firm Investment Property Databank that ``house prices will fall by at least 20 percent in many economies over the next four years.''

While it's hotly debated whether a dramatic decline is coming for the most inflated markets, the least-discussed risk is that being overleveraged in real estate can negatively crimp your cash flow and financial goals.

Biggest Risk Factor

The commonly accepted wisdom that you should buy as much house as you can afford is perhaps the most dangerous residential risk factor. Higher housing debt can backfire.

Mike Dubis, a fee-only financial planner with Touchstone Financial LLC in Madison, Wisconsin, said Americans are spending about a third of their disposable income on housing, twice what they were spending 30 years ago. That means a reduction in cash flow and a sixth less money available to finance retirement and other financial goals.

Spurred by low consumer interest rates, the crushing burden of household debt also contributed to 1.6 million personal bankruptcy filings for the year ended March 31. So no real-estate investment is worthwhile if it cripples your cash flow.

``One-sixth less disposable income for a family earning $120,000 a year would leave them with $20,000 less in real dollars per year,'' Dubis said. ``So many are putting money into their home with the misperception that it's an investment,'' Dubis said.

Should You Worry?

It's a good time to be vigilant only if you're an active investor, considering tapping the equity in your home or planning a move. Selling investment properties may be a good idea if you need to take a gain.

Also, examine renting if moving into a pricey new area. Just don't expect any bargains when buying in torrid markets. In Manhattan, where demand is strong, apartment prices climbed to a record average $998,905 in the first quarter of this year from $903,259 the previous three months, according to residential appraiser Miller Samuel Inc. and Douglas Elliman, a real estate brokerage.

``If you think there's a bubble (in your local market), sell your property,'' said John Henry McDonald, a fee-only financial planner with Austin Asset Management in Austin, Texas. ``That's putting your money where your mouth is.''

``When home prices start to soften, we'll see a greater downdraft in prices on both coasts,'' said Sidney Blum, a fee- only planner with Leonetti Associates in Buffalo Grove, Illinois. ``In other places, they (prices) will either go sideways or down slightly. It may not be the best time to buy based on huge potential appreciation in your home. A home is a place to live.''

To contact the writer of this column:
John F. Wasik in Chicago at jwasik@bloomberg.net.

To contact the editor responsible for this column:
Bill Ahearn at bahearn@bloomberg.net.
Last Updated: June 14, 2004 00:09 EDT

Friday, March 12, 2010

Bernanke's Dilemma: Hyperinflation and the U.S. Dollar

A well thought out and excellent piece on Hyperinflation.

Scott Dauenhauer CFP, MSFP, AIF

Meridian Original: Stamps, The Dollar, Inflation and The Federal Reserve

I apologize for the formatting issue.

A postage Stamp Cost $.01 (1 cent) in 1913, the year the Federal Reserve came into existence.

A postage stamp today (2010) costs $.44 (44 cents), about 97 years after the Federal Reserve came into existence.

This is a chart from the Federal Reserve showing that a 1913 $1 now is worth $.05 according to the CPI

Let me spell this out. In 1913 a person could buy 100 stamps with $1. Today they can buy 2.27 stamps. This is annualized decline in purchasing power of close to 4% (3.83%) or about 98% total loss (which parallels the Fed chart above of a 95% loss) of purchasing power.

Given this history and extending it out to say 2050, you will be able to buy 1/2 of a stamp. Anything wrong with this picture?

Scott Dauenhauer CFP, MSFP, AIF

Thursday, March 11, 2010

Surprise audit trips up star financial adviser in Seattle - Investment News

Surprise audit trips up star financial adviser in Seattle - Investment News

"Some of the clients told investigators they had invested with Ms. Breard for more than two decades. They said that a few years ago, she began asking them to liquidate those accounts and write her checks which she would then invest in new accounts."

This is a BIG RED FLAG - never write checks (other than for fees) to your advisor and always make sure your statements are coming from an independent, reputable custodian. If you do these two things your money can almost never be lost to a Ponzi. I mail account consolidated statements to my clients, however these ARE IN ADDITION to the actual statements that are prepared by the custodians that I work with.

Finally, just because an Advisor is on Television or appears to be a media star, it doesn't mean they are honest or competent....as we are finding out with this Seattle thief.

Scott Dauenhauer CFP, MSFP, AIF

Principal Writedowns and the Fake Stress Test

A great article that deals the sham that is the Stress Tests and points out once again that the major impediment to solving the mortgage/foreclosure crisis is 2nd mortgages. They aren't being negotiated and the banks have no incentive to do so, this leaves it impossible to modify the principal on the first (which would turn into a massive bank giveaway). There is only one path to solving this particular crisis and it starts with the 2nd Trust Deeds.

Scott Dauenhauer CFP, MSFP, AIF

America's hidden debt bombs

America's hidden debt bombs

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Why the U.S. can't inflate its way out of debt

Why the U.S. can't inflate its way out of debt

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Wednesday, March 10, 2010

Inside Man | The New Republic

Inside Man | The New Republic

An excellent review by Simon Johnson of Hank Paulson's book, "On The Brink". Basically Johnson doesn't buy the hero persona that Paulson creates of himself, he's more of a patsy.

Scott Dauenhauer CFP, MSFP, AIF

What's Gross About Our Gross Domestic Product?

What's Gross About Our Gross Domestic Product?

Rob Arnott, manager of the PIMCO All Asset fund makes a very strong case that Government spending hurts, not helps the Private economy.

Scott Dauenhauer CFP, MSFP, AIF

Gold Demand: Not What You Think - Features and Interviews - Hard Assets Investor

Gold Demand: Not What You Think - Features and Interviews - Hard Assets Investor

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Tuesday, March 09, 2010

Robert Shiller Chart on Stock Valuations

As you can see from this chart, Stocks are not cheap on a historical basis (unless you talk to Jeremy Siegel). Perhaps stocks aren't a terrible buy, but perhaps there isn't much room for error, or as Ben Graham would say "Margin of Safety".

Scott Dauenhauer CFP, MSFP, AIF

The Fannie/Freddie Targeted Tax Cut

Economists are baffled to explain why consumer spending hasn't dropped more given the severity of the depression. Of course government unemployment and stimulus are part of the answer, however there is another. Many people are now living rent free. I want to be clear that I am not passing any judgement on those that are - just pointing out the fact that they have stopped paying on their mortgage and now have that money to spend on other things. Ordinarily this wouldn't have a net-positive affect because a mortgage payment is simply a transfer to the individual (or entity) that loaned you the money in the first place. In this world of securitization your mortgage payment could literally be made to your next door neighbor who owns a Freddie or Fannie Mortgage Backed Security....Let me explain.

Let's say your neighbor loaned you the money to buy your home, each month you walk across the street and drop off a check. You have just spent $1,500 or more on your mortgage, your neighbor received it and we'll pretend she lives on it and proceeds to spend the money. Now, let's pretend that you stopped paying your mortgage, but you still lived in the house. You've stopped making the monthly trek over to your neighbor and rarely go outside in order to avoid the confrontation. You now have that $1,500 to spend (maybe you don't, perhaps you've lost your job, but you've probably got something to spend that would have normally gone to the mortgage). Your neighbor on the other hand is out $1,500 per month of income - this is money that WILL NOT BE SPENT as it isn't ever paid. Why is this important? Because for the those holding Fannie/Freddie debt, it isn't happening. In our scenario when you signed your loan docs with your neighbor to buy your home, your neighbor was smart, she bought insurance from Fannie/Freddie (technically she sold the loan in return for the payments coming from Fan/Fred). So now when you fail to make your payment to your neighbor, she doesn't care - Fannie/Freddie, AKA the government and taxpayers will pay her (so you can now have your neighborhood BBQ). This is what happened when the government put Fan/Fred into conservatorship and then gave them an unlimited line of credit - they made up for the lost mortgage payment so that your neighbor continues to get and spend her money.

I'm not complaining about this, other than the fact that it is my taxpayer money going out (okay, complaining a bit). My point is that spending is also being propped up by these transfer payments. Fannie and Freddie are AIG on steroids. Everyone knew that Fan/Fred was government backed - EVERYONE - which is why Fan/Fred was able to borrow at such low rates. Allowing Fan/Fred to fail would have been a complete disaster - mainly because of the collapse in spending and transfer payments this laundering system provides. Fan/Fred was not a mortgage entity - they were an insurance company that no real reserves. Actually they had massive reserves - the taxpayer.

Let's look at the situation again, people have stopped paying their mortgage and have that money to spend now (or at least some portion), many of the people that were receiving the mortgage payments that would normally stop receiving the mortgage payments have continued to collect via the government insurance policy, thus they continue to spend - there you have it, a major targeted tax cut that continues the spending. Next time you wonder why nothing is being done about Fannie and Freddie - remember, its all about spending.

So what is my solution? I've discussed it several times, but housing has to be looked at in a comprehensive fashion and everyone has to participate in certain losses in order to move on. First, second mortgages have to be addressed - they are the main obstacle in fixing the housing problem. Second, principal reductions must occur, even if it is some form of tradable debt/equity swaps. Third, we need to begin removing the government from housing.

There is much more and I'm not suggesting that we allow Fed/Fan to default - the government created those messed up companies and they must take responsibility for them. They should be accounted for ON-Budget and we should have a plan to fix, break-up and then make it illegal for the government to bail them out ever again. None of this will happen, so housing will continue to falter.

Scott Dauenhauer CFP, MSFP, AIF

(Please forgive the poor grammar, spelling mistakes and disconnected thoughts.....I've got a busy day today and just needed to get this posted!)

Monday, March 08, 2010

Barney Frank: Big Banks - Write Down Second Mortgages

Barney Frank, a Congressman who I've nearly nominated to my Hall of Idiots several times may have just won himself a reprieve with the following letter to the four biggest banks who hold second mortgages (and who are the primary cause of the the housing market not correcting itself):

Full Barney Frank letter:

Mr. Brian Moynihan

Bank of America

Mr. Vikram Pandit

Mr. James Dimon
JP Morgan Chase

Mr. John Stumpf
Wells Fargo

Dear Messrs. Moynihan, Pandit, Dimon and Stumpf:

The mortgage foreclosure crisis that began over two years ago, and which continues to be a prime contributor to our nation's current economic downturn, burdens millions of hard-working American families. Congress and the Obama Administration have worked hard to address foreclosures by enabling and encouraging loan modification s, but the private sector's response has fallen far short of the need. Many homeowners are eager to save their homes despite being "underwater," but find that lenders and servicers are unable or unwilling to make necessary modi fications. These homeowners are increasingly deciding to walk away and thus foreclosures continue to mount, deepening the crisis.

To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages. There is no more important priority for me in our efforts to restore stability to our mortgage market.

Many investors in first-lien mortgages have indicated that they are willing to accept the fact of significant losses on those investments in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high and growing likelihood of foreclosure. With the interests of homeowners and investors aligned in this way, it should follow that large numbers of principal-reduction modifications could be made relatively quickly. That is not happening. According to investors, Administration officials, and other experts I have consulted, holders of second-lien mortgages are now a principal obstacle to many modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate
attention from your institutions.

Large numbers of these second liens have no real economic value - the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep
borrowers in their homes.

The four organizations you lead are major participants in the second-lien market. Failure to modify these debts has become a major and unnecessary obstacle to thousands of Americans being able to stay in their homes. I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principal reduction modifications of the underlying first liens to take place. If there are legal obstacles to your doing so, we will work with you to remove them.

I will be calling you within the week to discuss what your institutions plan to do to remove the second liens you own or control as impediments to principal reduction modifications.

While I applaud this move, I don't expect anything to actually happen. If the banks actually did this they would be exposed as cheats (as if they aren't already) that have used accounting rules to make it look like they are solvent.

Principal reductions are what is needed, I've said it now for almost two years - or at least some form of debt-equity swap. The longer we wait, the worse it will get.

Scott Dauenhauer CFP, MSFP, AIF

Tuesday, March 02, 2010

Farrell: You Cannot Win Wall Street's "Loser's" Game - I Disagree

In this linked to Column by Paul Farrell he tells you to sell all risk assets because Wall Street is out to get you and you can't beat them. The irony is that much of what he writes about Wall Street is correct, but his conclusions are wrong. Investors very well may lose 20% by 2020 adjusted for inflation and Wall Street will have something to do with it - however it will have more to do with valuations. Depending on who you talk to the market was trading between 30 and 43 times trailing earnings by January of 2000 - a number with no historical precedent (not even a close one). We could have had ten boom years and still ended with a negative return do to valuations being to high. If there is one thing this past financial crisis has taught us, it is that Valuation matters and what is required is a Margin of Safety - these are not new concepts, just forgotten concepts (and often ignored concepts). Stocks are nearly as overvalued as they were in 2000, yet on a historical basis still appear over-valued given the risks that are out there. Stocks are likely to have a positive return this decade, but not by much (and of course it will vary by asset class), yet many investors are likely to lose - likely because of many of the thing Farrell mentions. The main point is that while what Farrell says may be true, its not the primary reason for a negative decade - Valuation is.

Scott Dauenhauer CFP, MSFP, AIF

Monday, March 01, 2010

Deflation: Is It Here?

While I don't necessarily agree with the author's conclusion (that we need to continue monetizing the debt and printing more and more money) I do think the author is prescient in his view. Lately my thoughts have turned to why Bernanke (the Fed Chairman) would continue to keep interest rates at zero percent (no the discount rate was not a real raising of interest rates) and continue to say that he will keep rates here for an extended time period....all why essentially telling us that America is recovering. We all know that Bernanke has access to the same data we have and much, much more. Either Ben believes the data and is lying to us about the recovery or he doesn't believe the data and is simply making a huge mistake. I say he is lying to us because if the economy is truly recovering then a small increase in interest rates won't kill it off. But he insists on keeping rates essentially at zero - this tells me he doesn't believe what he is telling us, there is no recovery and in fact there is deterioration or the expectation of deterioration. Is Bernanke gearing up for round 2 of QE (i.e. money printing) because he sees the specter of deflation? Something tells me Big Ben is see something he isn't telling us and that something is deflation, not inflation.

I'm not so sure deflation is bad long term, but in the short term is will be painful for many. The solution of course is to continue dropping buckets of money from helicopters. This solution is short-term and will only delay the inevitable (which ironically is likely inflation).

All I know is that it is strange to proclaim recovery (be it a "nascent one" - code for we are not recovering) and then not tighten even slightly. Bernanke is not showing all his cards and I'm willing to bet he isn't sleeping well.

It is precisely for these reasons that I've positioned my clients as much for deflation as inflation - I don't know which we are going to have or when......or if the two forces will battle it out to a draw (which is the subject of Bernanke's bedtime prayers).

Scott Dauenhauer

TARP Didn't Save Banks - FASB Did, a Mark-to-Market Saga

I've written a lot about Mark-to-Market, in fact I stated the events in the above chart about a year ago, you can see my writings here. I am no expert in Mark-to-Market accounting but what is clear to me is that TARP had almost no real affect on the markets, it was this accounting rule change. Had it not been made the market would not be where it is today and TARP would have needed a bailout - though perhaps we would actually be dealing with our problems. Since FASB changed the rules we are now on a pretend and extend saga that looks like it has no ending. Banks can pay record bonuses while not paying back other government provided liquidity facilities and while they continue to hold assets on their balance sheets that are not worth near what they say.

Welcome to the accounting bailout - now if Greece could just figure out a way to do something similar!

Scott Dauenhauer CFP, MSFP, AIF