If housing by its very nature has an future expected cash flow, then why is housing in Detroit, or portions of it, basically free?
I believe that at an given time any investment(s) value is the sum of all information available to the buyer about that investment, coupled to the alternatives that buyer has either at the moment or in the expected future. That doesn’t mean that there aren’t huge asymmetries in information.
Now to an example of MBS “data.” As you can see this is a 2007 vintage MBS and as of Mish’s last post on it was already 12% delinquent. Why would anyone take a risk on an investment so toxic? Sure there may be real underlying value that can be realized by buying and holding till the market recovers, but the trick is, you have to be understand whats in the pool.
You argue bring data, but thats been impossible. Trust has been destroyed exactly because of the opacity of many of these instruments and the fraud they enabled.
When we can bring data, then the market can clear![/quote]
Regarding the hugs that you keep saying I need, I’m not Marvin the Mindreader so won’t venture at what you’re trying to get at, although I happen to be heterosexual (not that there’s anything wrong with being otherwise, of course).
Detroit is obviously one example, and one at the extreme end of the spectrum. Extrapolating from Detroit’s example that housing generically has no cash flow value would be the same as my extrapolating something equally bullishly silly based on San Diego’s market alone.
Yes, there are huge assymmetries in information. That was part of my point. That you appear not to believe that inefficiencies are also created by liquidity considerations puts you at odds with almost 100% of the finance profession, but so be it.
Why would anyone take a risk on anything so toxic, you ask? Which risk? Which security? At what price? With what terms? Under what set of assumptions? Your question is so generic as to be meaningless. I happen to love 98% of Mish’s posts (and this one’s fine, but I haven’t looked at the security in question closely, so I have no opinion on it), but I wouldn’t base my opinion on an individual tranche of a MBS on anything in his post. I will say that it appears that most of the tranches will be worthless. But this has nothing at all whatsoever to do with the tranche of the MBS I discussed or of the securities that individual banks have because we have to compare the results with current prices, which aren’t supplied.
I’m not saying that handicapping the value of MBS is easy, but for any of these securities a knowledgeable professional can sit down and make a set of assumptions – as apocalyptic as you like – and decide whether there’s likely to be value or not. It ain’t rocket surgery. In many cases there isn’t any value. And banks have marked down a lot of these securities to zero and thereabouts. But you have to be specific, otherwise you’re just engaging in a fool’s errand.
What you apparently want is not just data, but “perfect” data, which doesn’t exist and never has. There’s plenty of data out there for handicapping. Boatloads of it. Certainly better and more voluminous data than there is for stocks, which are really just call options on highly uncertain future dividend receipts. And yet stocks still trade… at least the liquid stocks do.
I already stated that I thought the banks’ mark-to-model behavior has been bad. But mark-to-market in many instances is flawed as well. (If you can’t acknowledge that, then you’re again at odds with almost 100% of the finance profession. Even its proponents acknowledge that it’s flawed at times.) I acknowledge that there’s a problem and further acknowledge that I don’t have an answer. If your answer is back to 100% mark-to-market, then that’s ok. But we may as well close up shop, get some guns and canned goods and start all over as an agrarian society and rebuild from there. If that’s where you want this crisis to lead, then your position is perfectly defensible. Personally, I’d rather not go down that road. But then again I’ve actually got something to lose in the deal, so I’ll acknowledge my bias.
