Morning Links 11-20

November 20, 2009

Bill Gross says chase risk! (PIMCO) In his December letter, Gross laments the ultra low yields available to investors. Holding cash is a terrible idea he argues. (Luckily he’s not saying to go far out on the risk curve.) Still, I disagree. While I believe there’s an outside chance of a dollar crisis (highly inflationary…hence the reason many investors have a 5-10% position in gold for insurance), the more likely scenario over the next few years is the one laid out by the SocGen guys: debt deflation. In that case the purchasing power of cash goes up. Looking at the .01% nominal yield on cash equivalents is therefore unfair. The deflation-adjusted yield would be much higher. This is not a reason to try to “inflate away” debt however as that’s not actually a solution. It just gets us closer to the dollar crisis scenario. 90% cash + 10% gold has done very well over the past two years (especially on a risk-adjusted basis!) I guess you can jump back into risky assets if you feel you “need” yield. Of course that’s the mistake so many people made in response to Alan Greenspan’s low rates. How well did that strategy work?

Fed makes capital foremost concern (Torres/McKee, Bloomberg) With the Fed/Treasury actively engaged in reflating the asset bubble (see next link), it’s good to know they’re paying attention to capital levels…

With FHA Help, easy loans in expensive areas (Streitfeld, NYT) Anecdotally this is quite scary. Remember a year ago when the size of “conforming” mortgage loans was raised over $700k? That means FHA is backing much larger home purchases (I’d forgotten this when I linked to that article on Toll calling FHA the new subprime). The scary quote (ht CR) comes from some technology guys who went in on a $900k property having been busted just a year ago: “We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”

Can the postal service be saved? (Montopoli, CBS)

Asia considers capital controls to stem bubble dangers (Adam, Bloomberg) Low rates in the developed world are putting emerging markets in a dangerous position. With no returns available at home, hot money is again flowing East (and South, to Brazil).

SocGen’s worst-case debt scenario (Murphy, Alphaville) Good sleuthing from Paul. He has a link to the report that Ambrose Evans Pritchard wrote up. Ambrose embellished a bit. Also the report is over a month old. Still, pessimism porn at its finest.

Texas accidentally bans straight marriage (Spak, Newser) HT Felix.

Satan, the great motivator (Fitzgerald, Boston Globe) “A pair of Harvard researchers recently examined 40 years of data from dozens of countries, trying to sort out the economic impact of religious beliefs or practices. They found that religion has a measurable effect on developing economies – and the most powerful influence relates to how strongly people believe in hell.”

College students arrested for not paying tip (Mucha, Philly Inquirer)

Commuter cat star of bus route (BBC)

Nunchuck (imgur)


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The article on the 3 guys buying a 2 unit apartment in Manhattan for over $900K with a 96.5% FHA loan just about made me throw up. Those guys aren’t buying the property, they’re buying a taxpayer funded option on the property. If the property value goes up, they make money. If the property value goes down, which is much more likely, they put the property back to the lender and FHA eats the loss on behalf of taxpayers.The San Francisco Fed report that was referenced on this blog earlier this week noted that the percentage of housing loans that are subprime is back over 20%, where it was at the peak of the housing bubble in 2006. But now, the subprime mortgages aren’t being funded via private label mortgage backed securities as they were in 2006, they’re being originated by banks and rolled into GNMA securities that are insured by FHA. Here’s a reference to the current state of FHA from today’s NY Times: business/20mortgage.html?ref=businessInc redibly, the end of the NYT story on the 3 guys buying the 2 unit apartment notes toward the end that Barney Frank’s answer to the FHA problems is to RAISE the limit of the loans they can insure by $100,000 beginning next year and make it permanent.I feel like I’m living in the Twilight Zone.

Posted by DP | Report as abusive

might it not be a bit contradictory to say “90% cash + 10% gold has done very well over the past two years (especially on a risk-adjusted basis!)” at the same time as calling concern over debt deflation “pessimism porn”?

Posted by sam | Report as abusive

Re “Satan the Great Motivator”It would have probably been helpful if unscrupulous lenders, fudging borrowers and two-faced politicians feared some consequences for their actions.Americans lied en masse on their mortgage applications, behavior that has never really happened before. Derivative garbage and short termism by investment banks is a monument weak morals.The popular religion these days is Joel Osteen’s “Your Best Life Now”…. Live for the moment… Pray for God to bless me me me! Holy cow, our ancestors would barely call this religion…

Posted by Dan | Report as abusive