No taper

[spdrun]

ER – I am doing the best I can despite what Mr. BS at the Fed is doing. I’ll probably do fine IF current trends continue.

[SK in CV]

[quote=FlyerInHi]This is pretty good analysis of the latest Fed action
http://charlierose.com/watch/60269186

The commentator from the financial times is a little disingenuous when saying that the Federal Reserve lost credibility. The truth is that policy makers will always project more optimism so as not to talk down the markets.

I believe Bernanke is just responding the disfunction in Congress. What we should be surprised about is the business community has not lobbied congress more strongly to resolve the fiscal gridlock. Without the sequester we could have had 3% growth instead of 2%. And with good fiscal policies, we could have had 4% growth.[/quote]

I watched the first few minutes, will watch more, but i’m frankly flabbergasted that these panelists are saying they’re surprised that the Fed delayed tapering. It is exactly what they’ve been saying they would do since April. Then clarified in June, July and August, that if the economic growth didn’t meet projected targets (threshholds they called them), then tapering would not begin. Nobody suggested that those targets were for unreasonable growth levels, even though none of thresholds haven’t been met. It should have been surprising….even shocking, if they had started tapering.

[earlyretirement]

[quote=spdrun]ER – I am doing the best I can despite what Mr. BS at the Fed is doing. I’ll probably do fine IF current trends continue.[/quote]

That’s great spdrun. It does sounds like you are making the most of it and made some great purchases picking up properties at distressed prices. I’m not sure how your cap rates are but I’d have to guess the cash flow is good. Did you flip any of them or will you hang on to them for the long haul for cash flow?

Anyway, congrats on the purchases. I have an affinity for real estate vs. other investments. But at this point of my life, I don’t really want to add any more real estate to my portfolio. But if things were to go back to the lows of a few years ago I’ll add some more.

I kick myself for not picking up at least another property here in San Diego.

My strategy the past few years (although I haven’t been crazy about continuing to plow cash into the stock market at these levels) has been to continue adding stock of companies that have a strong balance sheet and making money at a good clip.

Then I’ll sell the forward month covered call option. The % gains have been incredible. I’ll only buy stocks that I would feel comfortable holding for the long haul anyway. Several times stock has been called away and that is ok. I’ll sell the forward month or two option and sell far enough up where I’ll have a good gain plus I make the cash when I sell the call option.

I’ve been doing that with AAPL and been doing well. Bought some the other day at $450 with a GTC limit order that kicked in. Then sold the October $460 Call option the next day and got like a $20 premium.

But you have to be willing to limit your upside reward. Case in point, I sold the NOK $5 call options and it’s exploded the past few weeks with the Microsoft announcement. All I’ll get is $5 for my shares. 🙁

Obviously you limit your upside potential in the event that it skyrockets but I find this conservative type play to be very rewarding. I’ve been selling covered call options for years and it’s paid off extremely well.

But just as FlyerinHI mentioned…there are always ways to make money in good times and bad.

[CA renter]

[quote=SK in CV][quote=CA renter]

Like spdrun said, it stokes the demand for **riskier** products that offer higher yields.[/quote]

With underwriting standards that existed before the bubble, those products wouldn’t have been “riskier”. S&P and other ratings agencies called them low risk. Not the Fed.[/quote]

Again, the reason for the lower underwriting standards was the desire/need to take on more risk (because of the low rates/Fed). Changes in mortgage securitization and derivatives enabled the lending standards to fall through the floor…and allowed the credit rating agencies to give the products high ratings. Everybody was making speculative bets because everybody was looking for higher yield/higher-risk “financial innovations.”

———-

“Widening the Margins
Thanks to an exploding real estate market, an updated form of the ABS was also being created, only these ABSs were being stuffed with subprime mortgage loans, or loans to buyers with less-than-stellar credit. (To learn more about subprime, read Subprime Is Often Subpar and Subprime Lending: Helping Hand Or Underhanded?)

Subprime loans, along with their much higher default risks, were placed into different risk classes, or tranches, each of which came with its own repayment schedule. Upper tranches were able to receive ‘AAA’ ratings – even if they contained subprime loans – because these tranches were promised the first dollars that came into the security. Lower tranches carried higher coupon rates to compensate for the increased default risk. All the way at the bottom, the “equity” tranche was a highly speculative investment, as it could have its cash flows essentially wiped out if the default rate on the entire ABS crept above a low level – in the range of 5 to 7%. (To learn more, read Behind The Scenes Of Your Mortgage.)

All of a sudden, even the subprime mortgage lenders had an avenue to sell their risky debt, which in turn enabled them to market this debt even more aggressively. Wall Street was there to pick up their subprime loans, package them up with other loans (some quality, some not), and sell them off to investors. In addition, nearly 80% of these bundled securities magically became investment grade (‘A’ rated or higher), thanks to the rating agencies, which earned lucrative fees for their work in rating the ABSs. (For more insight, see What does investment grade mean?)

As a result of this activity, it became very profitable to originate mortgages – even risky ones. It wasn’t long before even basic requirements like proof of income and a down payment were being overlooked by mortgage lenders; 125% loan-to-value mortgages were being underwritten and given to prospective homeowners. The logic being that with real estate prices rising so fast (median home prices were rising as much as 14% annually by 2005), a 125% LTV mortgage would be above water in less than two years.”

http://www.investopedia.com/articles/07/subprime-overview.asp

———————–

Cheap money encourages risky, speculative financial activity; it causes risk to be mispriced — which is why the ratings agencies were not accurately rating the various securities. It does not necessarily encourage productive investment (I would argue it does exactly the opposite).

[CA renter]

And this, from Greenspan in 2005:

“Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.“

http://www.federalreserve.gov/boarddocs/speeches/2005/20050826/

———————

Interest rates are at the very core of risk pricing. We are doing it all over again — but it’s even worse this time because interest rates have been held even lower and for a longer period of time…not to mention the ever-present quantitative easing and bond buying. IMHO, we are really and truly screwed. This will not end well.

We’ve learned absolutely nothing from the financial crisis.

[SK in CV]

[quote=CA renter]
Again, the reason for the lower underwriting standards was the desire/need to take on more risk (because of the low rates/Fed). Changes in mortgage securitization and derivatives enabled the lending standards to fall through the floor…and allowed the credit rating agencies to give the products high ratings. Everybody was making speculative bets because everybody was looking for higher yield/higher-risk “financial innovations.”

[/quote]

This makes no sense whatsoever. Three sentences and three claims of “a caused b”, “a enabled b” and “a because of b”. Yet there is no nexus between any of the “a” and “b”.

[FlyerInHi]

[quote=CA renter] IMHO, we are really and truly screwed. This will not end well.

We’ve learned absolutely nothing from the financial crisis.[/quote]

How are we screwed? Please explain some possible outcomes.

I assume that by screwed, you mean that the “comeuppance” will be worse than had the Fed done nothing.

[FlyerInHi]

[quote=SK in CV]
I watched the first few minutes, will watch more, but i’m frankly flabbergasted that these panelists are saying they’re surprised that the Fed delayed tapering. [/quote]

Alan Blinder wasn’t so surprised.

It looks like, despite all the talk to the contrary, the debt ceiling will again be last minute brinksmanship that will damage the economy. Bernanke is plainly reacting to that.

Alan Blinder said that he believes Bernanke will start a taper before leaving office.

[FlyerInHi]

spd, you’re too tied to what you like. Instead you should look at real estate as a product that is being sold and not everyone likes the same thing.

I also dislike the lifestyle of Las Vegas and Phoenix. Phoenix is a little different in that there are no casinos… But the 2 cities are very similar and offer “resort lifestyles” in the desert.

Like you, I prefer city life such as what Manhattan or European cities have to offer. But that is too Euro-Americano for most people who don’t like the messiness and traffic of a real city. They like clean, fake town-centers like the Irvine Spectrum (but Irvine is too expensive).

I’ve gained a new appreciation for what people want. This is a big country and it takes all kinds.

Like SK said, I see retirees and snowbirds back to strong buying. I don’t know as much about Phoenix, but consider that Las Vegas offers resort lifestyle and new houses for cheap. If you’re a retiree from dreary places like Harrisburg, Cleveland, Minneapolis, the desert lifestyle is wonderful. Even NJ, outside NY is pretty pathetic if it weren’t for the proximity to NYC.

In Vegas, you have bling and the “good life” for cheap. Good shows for seniors and cheap early-bird meals. I had a 2 for 1 coupon at the Palms Hotel so I went with a friend. Snow crab w/ fresh oyster and champagne brunch, all for $11 per person. Where else in the world can you get the same quality meal for that price?

I met a retired state police from Harrisburg looking to buy a house in Vegas. Problem it that he can’t sell his house in Harrisburg and he can’t get financing to buy another new house on his pension. Meanwhile, the prices are increasing so his “dream” might not come about.

If your house is paid for, you can live very well on $30,000/year in Vegas enjoying a roomy clean new house, rounds of golf, eating at luxury hotels, shopping in the nicest malls, occasional live shows of famous performers, celebrity chef restaurants, even cheap flights to Honolulu on Allegiant. All that and a stream of friends and family who want visit Vegas. So you’re not lonely in your old age.

Beats living a dreary Trenton, NJ.

Vegas was ground zero of the real estate crash, but construction is pickup up. They started some new master planned communities, new massive time-share developments. A Chinese-Malaysian company will start a huge new casino that will bring in thousands of wealthy foreign investors w/ visas.

All that construction will bring new jobs.

Sure, it’s not the same as 2006 but we are slowly but surely on the road back. The Fed had a strong hand in engineering a comeback.

[CA renter]

[quote=SK in CV][quote=CA renter]
Again, the reason for the lower underwriting standards was the desire/need to take on more risk (because of the low rates/Fed). Changes in mortgage securitization and derivatives enabled the lending standards to fall through the floor…and allowed the credit rating agencies to give the products high ratings. Everybody was making speculative bets because everybody was looking for higher yield/higher-risk “financial innovations.”

[/quote]

This makes no sense whatsoever. Three sentences and three claims of “a caused b”, “a enabled b” and “a because of b”. Yet there is no nexus between any of the “a” and “b”.[/quote]

I know you understand how the (mis)pricing of risk — specifically, the underpricing of risk due to the Federal Reserve’s interest rate manipulations — causes investors move further out on the risk curve and into more speculative investments…and that this spurs the creation of ever-more speculative and risky products because of the increasing demand for these products.

If some of these speculative investments (derivatives, in this case) are also presented as lowering risks even further, it’s easy to see how underwriting standards on certain types of related securities would be lowered as a result. It is all related.

[dumbrenter]

[quote=6packscaredy]I’ll say this. I honestly feel better stronger more optimistic less scared less tired and more kickass at 50 than at any point ever in my sad little life.[/quote]

At least there is something to look forward to 15 years from now.

[scaredyclassic]

I have a theory that I’m going to get stronger and stronger and be one of those old mean who are scary strong and maybe also mean.

[SK in CV]

[quote=CA renter]

I know you understand how the (mis)pricing of risk — specifically, the underpricing of risk due to the Federal Reserve’s interest rate manipulations — causes investors move further out on the risk curve and into more speculative investments…and that this spurs the creation of ever-more speculative and risky products because of the increasing demand for these products.

If some of these speculative investments (derivatives, in this case) are also presented as lowering risks even further, it’s easy to see how underwriting standards on certain types of related securities would be lowered as a result. It is all related.[/quote]

The bolded part is the logical fallacy of begging the question.

Let’s work through exactly what the Fed did and did not do prior to the financial crisis in 2008.

It does set the federal funds rate, which is the rate that member banks pay and receive for over-night borrowing/lending. The quantity of member bank borrowing is limited by capital requirements set by the Fed. Member banks do NOT have unlimited access to funds.

It does buy and sell US government securities to keep the prices of those securities stable, but it does not, per se, set the rates on US govt securities at auction. This is an open market function.

It doesn’t set market interest rates which member banks pay on deposits or charge on collateralized or un-collateralized loans.

It doesn’t set the prime rate.

It doesn’t set nor regulate lending standards.

At least since Paul Volker, the Fed has used the federal funds rate to either heat up or cool off inflation, typically setting the interest rate at a level somewhere around 1% above the nominal GPD growth rate. Variations from this target (which as far as I know, they have never set as an official target), have, for at least the last 15 years have served to either stimulate the economy (less than 1% over nominal GDP growth), or slow the economy (more than 1% over nominal GDP growth).

Now what I’d like to know, is which of these functions specifically encouraged lower lending standards, and exactly what the mechanism was to make it happen.

It was a very simple supply/demand equation. Investors wanted more high quality securitized debt at interest rates higher than banks were paying on CD’s, and that was higher than open market US government backed securities yielded. What the market provided instead, was lower quality securitized debt. The market (in this case, Wall Street investment banks) did this by buying everything that direct lenders could supply. The suppliers (the direct lenders which includes banks, and private lenders like Countrywide), gave the market what they wanted by lowering their standards. The Fed had absolutely nothing to do with this piece of the puzzle. It didn’t set the interest rates. It didn’t set the lending standards. It didn’t set the standards used by rating agencies to rate the securities which included these higher risk loans.

Ultimately the investors were not looking for higher risk investments. They were looking for higher yield. They bought higher yield which was marketed as low risk securities, but in fact, were much higher risk securities. The Fed was not involved in that slight of hand.

The Fed’s historical record has never been perfect in hind sight. It can’t be. They don’t base their decisions on what has already happened. They base them on what they expect to happen, and that will always be an unknown. But their direct involvement in the RE bubble is a canard.

They were never parties to the transactions which caused the crisis. They weren’t primary lenders nor did they regulate any piece of that process. They weren’t packagers, nor did they regulate any piece of that process. They weren’t investors, nor did they regulate any piece of that process.

There was simply never a direct (or even much of an indirect) nexus between their function and the credit crisis. They were never a party to the mis-pricing of risk. And that really is the key to assigning culpability in the crisis. I could certainly be convinced otherwise. But you’ll have to show me exactly where in the process the Fed was involved in mis-pricing risk.

[barnaby33]

Housing correction, vs appreciation hardly means you want the economy to be in chaos. This whole site however does have a selection bias and that bias is for lower prices on housing.
Josh

[barnaby33]

First of all, from the Fed does all money flow. The Fed sets interest rates and bank reserve requirements. It could have easily said, no you can’t make these risky loans, by raising reserve requirements. SK you obviously don’t remember the Fed issuing exemptions to the big banks allowing them to loan more than 10% of assets to their pet investment funds in 2008. Previously that was verboten but the Fed allowed it, to buy more time. Essentially to deepen the crisis that already had to happen.

True it didn’t loosen credit quality, but it certainly didn’t object to Congress doing so either. It had a choice, to uphold the legal/credit nexus that you say they had no part in creating, or along with the Treasury they could print to inflate to allow all the bad actors in the system off the hook, also known as changing the rule book when the game moves against your customers, the large banks. Where do you think the money came from to buy all that Phony/Fraudie debt? Taxes collected? The Fed printed it.
Josh

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