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dollar decline and financial system/MBS woes
Old 04-16-2008, 07:16 PM   #1
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dollar decline and financial system/MBS woes

Just starting this up as a spin-off from http://www.early-retirement.org/foru...ble-34838.html. All quotes from that thread unless otherwise noted.

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Brewer said:
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Just curious: if you are so exposed to currency fluctuations, why did you not buy more Euro-denominated assets and/or a currency hedge?
Nords said:
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The dollar's been setting multi-decade lows but we put a big chunk of our AA in unhedged international stocks for exactly this reason!.. What are you doing about commodities or European stocks or holding euro-denominated assets?
Let's get this out of the way first. I have a paid off house here that is very nice, about 1/3 NW and if I sold it tomorrow for the price I paid for it, I'd be making a 25-30% profit just on currency shift.. so that's my biggest hedge if worse comes to worst. I also have a large international component in equities which mitigates some of the currency fluctuation, though not all. Hard to tell entirely with more individual stocks than indexes/ETFs.

I expect changes up and down, +10% here, -10% there. That doesn't bother me; recent developments give me new reason to worry about the dollar's future in the long term, i.e., the rest of my likely lifespan.

Small, tangential, part-that-can-be-skipped: I didn't get into specifically Euro-denominated assets here because (perhaps being penny-wise and euro-foolish) a.) I didn't want to pay exchange percentage fees for more than I had to take out to live on (takes a percent or so right off the top, which is one percent less that can be put to work) and b.) banks here are gruesome and investing is expensive: there's automatic CG and dividend witholding that gets sent straight to the Italian treasury .. tax rates are a bit less, but no std. deductions.. every penny is taxed. There's one 'discount online brokerage' but last I checked you needed a full-cost $$$ type of bank account to link it to, where just the privilege of having an account can cost several hundred euros in fees.. I like the cheaper post office bank, but they are not part of the banking cabal here.

Even with the post office account you can leave money in it and do no transactions and their account fees will cancel out any interest. You do not "keep" money in banks here. I've even heard stories of people with forgotten passbook accounts who wanted to close them and came to find out that THEY OWED THE BANK money, since the fees over the years had eaten up all the money in the account and kept going on and on into the red..! I try to avoid Italian institutions of all kinds wherever possible; it just helps my sanity.


Since I don't know what the future holds and we're not 100% sure we'll want to stay in Italy forever, I have one foot in each place. I know of retired fixed-income expats who have already pulled up stakes and moved back to the States, just because of currency pressure.


Nords said:
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This liquidity fuss is a drop in the bucket compared to Oct 1987 or 2000-2002 or my personal favorite, 1966-82. ... Brewer's point, as a guy in the financials industry who used to be a bond analyst, is that you either don't have access to the data on what's in those particular tranches... or you didn't bother to research it. But that didn't stop you from lecturing him on the basics of CDOs. Maybe you could pick a specific CDO or a particular credit rating for more analysis.
Brewer said:
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I can't be bothered to do some remedial education on securitization, the banking system, etc.
Oh "bother"!!

It's not a matter of me or PRGSDW having to "know what's in those particular tranches" to have a valid reaction to the larger picture.

Brewer said in Buy GE?:
Quote:
Never liked companies so big and so complex that nobody could figure out what is going on inside. ... The really huge conglomerates are almost impossible to really figure out.
And while he has not said that about GE bonds, or BSC's our BSC holdings, it spurs me to ask again: what do YOU really think is in these instruments?

If the people who are used to buying and selling them don't know (not brewer per se but the IB people and their ilk).. then it's offensive to put the onus on any individual investor, sneering at them if they are not able to do due diligence on "secur"ities that are opaque, unregulated and yet that every major financial institution along with municipalities, pension funds, private companies AND their counterparts worldwide, up to and now including the US Treasury, is exposed to and wishes they weren't.

It seems a little arrogant and annoying to me that a bond analyst might brush this whole fiasco off without explanation. Brewer's statement,
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Originally Posted by brewer12345 View Post
Have you actually looked at these structures, or are you just talking out your ass?
is throwing down a gauntlet.

The "argument" here might seem to be equally one of "ignorance", since it is equally unaccompanied by any supporting details or analysis: "YOU can't prove these things AREN't good.." hence.. they are good?

Brewer contributes a lot here, I've always considered him a good guy, and I don't expect him to spend hours giving us a seminar on securitization.. but when People In High Places whose business has to do with securitization are saying Quite Dire Things, and scrambling Hither and Thither..then a slight nod toward those who hold concerns would be appreciated. BTW, I have been basing my comments on what I have read well outside of the mainstream media and in places like The Economist or the Financial Times -- I don't watch US cable or read USAToday or a local Gannett rag, and I look at the NYT about once a week, maybe.

The only thing I can think is that perhaps brewer has professional interests that prevent him from commenting, which would be understandable.

What I haven't heard (but maybe I missed it) is that he is loading up on big bank/IB stocks.. as he should do if he sincerely thinks the Golems ARE worth more than pennies on the dollar and this is all a big media scare. If it's a big media scare and these assets have value, then someone in the market should buy them; that doesn't seem that hard to me. No one in the finance world wants to touch them anymore.. but we peon/amateurs on the forum should sleep easy because they Really Are Worth Lots and Lots. And in case of nuclear attack just duck and cover. Have some extra duct tape, too, though.. just to be on the safe side.


Nords said:
Quote:
His other point is that creditworthy debt instruments are being valued at pennies on the dollar due to the lack of liquidity caused by hysteria and ignorance.
Well, Nords, here you are falling into a bit of the same trap as far as I can see. You're crediting brewer with having implicity vouched for some higher level of value of these debt instruments, and by extrapolation you yourself are assuming they are worth dollars as opposed to pennies. How is that analysis/non-analysis any more valid or invalid than what PRGSDW or I or anyone else might intuit?

Quote:
The KMart blue-light special is flashing
K-Mart is probably not a fortuitous choice for composing an analogy, for reasons that should be obvious!!
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and the shoppers are running away screaming.
If a bank held out to you a black box, and said "we've been trading these black boxes for years now, swapping them back and forth amongst ourselves, the value's really gone up, and they are a large part of our assets", would you buy it? Maybe the box has gold and rubies, maybe it has a wad of dollars, a sketch by Christo, or a duck, or maybe it's full of toilet paper. Don't they have game shows based on this?

Reacting with skepticism to the black box is not "hysterical", it is healthy.

I have a hard time comparing the S&L debacle to the current crisis since it was a bunch of S&Ls on the hook (another large aspect was their simultaneously getting caught up in escalating CD interest-rate battles), and they failed or got bought out. They were not marketing toxic debt to people in Norway AFAIK. Today, it's the pillars of the global financial system that are on the hook INCLUDING the US Treasury and the main players are ALL the major banks and investment banks.

Are they not also downgrading Fannie/Freddie? I don't know whether that happened in the late '80s and I'm not sure where to find that out quickly and easily (should ratings matter) for the purposes of this discussion.

from 2004: What Does Fannie Mae Do?
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Even though the company's debt offerings clearly state otherwise, the financial markets believe that Fannie Mae's status as a government-sponsored enterprise implies that the government will provide full faith and credit for Fannie's debt. It is for this reason that Fannie Mae maintains a AAA credit rating, even though at a 78:1 debt-to-equity ratio it is levered many times what is allowed international banks. (Debt is defined as mortgages on its books plus the value of its guarantees.)

Fannie is exempt from regulation by the Securities and Exchange Commission (though Fannie Mae has in the last few years begun filing 10-Ks and 10-Qs), it is also exempt from state and local taxes.
WSJ talks about possible downgrade of US debt (T R E A S U R I E S) based on what might happen with FNM/FRE:
Free Preview - WSJ.com
(sorry pay link, I only read intro, too).
More here:
UPDATE 2-S&P says GSEs may pose risk to US government rating | Markets | Bonds News | Reuters

Quote:
Fannie Mae's and Freddie Mac's capital surplus ratio was recently reduced to 20 percent from 30 percent. [ooo that will make them better prepared to weather the storm!] The "conforming jumbo mortgage" lending limit was also increased to a maximum of $729,750 until the end of the year. [yes.. we should be guaranteeing $3/4 million - $1million homes!]

These moves follow a period that saw GSEs' market share of newly originated mortgages skyrocket to 76 percent in the fourth quarter of 2007 from 46 percent in last year's second quarter, S&P said. That market share ticked up to 80 percent for January 2008, it said. [they've got ALL the most bubblicious properties?]

"The mortgage GSEs face heightened demand to provide mortgage financing, which comes at a time when their need to raise capital and improve earnings has placed them under extreme pressure against the backdrop of historically weak housing markets and seized securitization markets," Victoria Wagner, a Standard & Poor's credit analyst, said in the statement. [And the answer to 'demand' is? risking solvency to write bigger and worse mortgages? What am I missing here?]
Just rumblings like these make me think "it's different this time".



Quote:
People can kvetch about it or they can think about adding it to their asset allocation.
I have made no changes to any of my positions, either in 2008 or 2007.

I don't see being concerned about the situation as "hysteria".. just prudence.
Even the most diligent investors can't know what's really going on in every company. We rely on regulators, ratings agencies, analysts, the market, earnings reports, etc... to tell us the general story. When this construct breaks down (the regulators aren't regulating, the ratings agencies are fiction, the analysts have conflicts of interest, earnings are manipulated, companies talk casually about things being "off-balance-sheet" and we accept that...) then confidence in the system breaks down and SHOULD break down. That it hasn't broken down entirely yet in some ways points to the true magisterial artifice of it all, and that any growth and earnings anywhere might just well be merely the tail that wags the systemic dog.. or better, a kind of regrettable organic by-product of the larger organism. It certainly would be more efficient for ALL individuals' money and savings to go into the system and have none come out!

Really, look at the system turned on its head or inside out and see it for what it is. Think of it as an exercise in Gestalt.


Nords:
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PRGSDW, I see Bear Stearns as capitalism in action, not a taxpayer bailout.
I can't find words right now to respond to this.
I'm stunned.
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Old 04-16-2008, 08:12 PM   #2
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I can't find words right now to respond to this.
I'm stunned.
No problem, no need to respond.

You have a nice life now...
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Old 04-17-2008, 07:37 AM   #3
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So did that make you feel better, lad? Was it good for you?

BTW, I just renewed my membership with the Gnomes of Zurich. Expensive, but we manipulators of the capital markets can easily afford it.
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Old 04-17-2008, 09:40 AM   #4
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Old 04-17-2008, 12:18 PM   #5
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Its hard to find a bigger fan of Brewer or Nords than I am yet I think ladelfina could receive a better reply than 'don tin foil hats'. As far as I can tell the market goes up & down and it is always something that looks different but is seen as a regular element of the market in retrospect like the junk bond crisis and now junk bonds are just part of the market. Same thing seems to be happening with commodities. There is a serious problem with the banking structure, IMHO Fannie & Freddie should never have been allowed to grow as they did, so I am not happy at their recent 'enhancement.'. The US is going to get relatively poorer because of our borrowing and lack of financial discipline, not to mention war costs. But is it different this time or just theme and variation?
At the end of the day I have to decide what to do with my resources.I am still mostly in a target retirement fund, hold some dividend stocks (recently bought DVY) and my wife is mostly in Wellesley. Too late for me to get into commodities,maybe add some REITs. and something foreign, although the dollar has dropped a lot already (it was over due, but what is the right level per the Big Mac index?) I'm sort of brave and know DVY includes a lot of financials. So far I've lost 3% on that bet but will hold on long term for dividends. Don't know what else to diversify with and I'm not bailing out wholesale on anything I have now.
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Old 04-17-2008, 12:29 PM   #6
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I'm open to other thoughts on diversifiers. Other than what yakers mentioned, only other thing I can come up with is something like MERFX. Nothing to set the world on fire, but hedged and less than exorbitant fees (hardly cheap, though).

Let's see, I have been accused of being blind to the suffering of my fellow man (putting it mildly), attacked as being part of an industry that conspires against ordinary investors, been pilloried for not trying to convince people who KNOW the world is ending that things really aren't that bad, etc. As far as I am concerned, lad and the other members of the tinfoil brigade can either figure it out their damned selves or stew in their own ignorance. I have bet heavily on the latter.
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Old 04-17-2008, 01:37 PM   #7
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Just starting this up as a spin-off from http://www.early-retirement.org/foru...ble-34838.html. All quotes from that thread unless oth


Nords:


I can't find words right now to respond to this.
I'm stunned.
Is that a promise?

Just a suggestion. (I'm serious here). Find something postitive that will occupy your time or you're going to end up shouting "I'm right, I'm right as the guys in the white coats haul you away to the "Funny Farm".
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Old 04-17-2008, 03:13 PM   #8
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I think that I'll have to vote with ladelfina and yakers; there is more to this financial conundrum than the sub-prime problem. ladelfina's concerns are the same as mine especially if assuming that many of the financial institutions are sharing the Bear Stearns propensity to leverage their bets investments at high levels - BS was leveraged at 33x!!

It seems to me that the market and this administration are happy to just kick this problem a little further down the street rather than working the issues. With this confluence of non- actors my diversification strategy is to avoid all bonds and be careful of REITs.

Regards

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Old 04-17-2008, 07:04 PM   #9
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It seems to me that the market and this administration are happy to just kick this problem a little further down the street rather than working the issues. With this confluence of non- actors my diversification strategy is to avoid all bonds and be careful of REITs.



JohnP
I am no fan of the current administration. There will always be the question about how much fixed income to hold.No bonds is too extreme for me. There are TIPS, ibonds, munis, junk, short & long term corporate and Govt, foreign too. My wife has done pretty well by Wellsley. There are different ways to hold real estate too. I like to keep it simple, the bond part of my retirement account is a total bond fund.Wellsley just seems to work and I hold VG Asset Allocation (VAAPX) in my Roth which holds some long term treasuries in different times. It has worked for me for many years now at least it does what I want it to. You get to make your own decision, and inflation really scares me, but over time some bonds just seems make sense in a portfolio even if abstract logic seems to say 100% equities has the best payout. And I have a COLAd pension.
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Old 04-17-2008, 09:33 PM   #10
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Yakers

Ordinarily I would think of Bonds as one of the more safe investments - but I understand that many bond funds have used some of these Mortgage Based Securities to increase yields. As pervasive as leveraged MBS's and CDOs are I think that there will be more 'shoes dropping' that will impact bond funds therefore I just want to avoid that risk.

Regards

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Old 04-18-2008, 10:39 AM   #11
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A panel on CNBC is talking right now about switching from the Dollar to the Euro as the world reserve currency.
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Old 04-18-2008, 10:44 AM   #12
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A panel on CNBC is talking right now about switching from the Dollar to the Euro as the world reserve currency.
Surely a sign of the end times.

Incidentally, I just bought a nice antique tinfoil helmet on Ebay. It was originally made to see its wearer through the end time that happened when the British Pound ended its run as the world reeserve currency.
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Old 04-18-2008, 01:46 PM   #13
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Surely a sign of the end times.

Incidentally, I just bought a nice antique tinfoil helmet on Ebay. It was originally made to see its wearer through the end time that happened when the British Pound ended its run as the world reeserve currency.
Yup. That was about 1955, right?
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