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?
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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?
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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.
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Brewer said:
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I can't be bothered to do some remedial education on securitization, the banking system, etc.
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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
http://www.early-retirement.org/foru...-ge-34753.html:
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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.
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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
Have you actually looked at these structures, or are you just talking out your ass?
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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:
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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.
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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?
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The KMart blue-light special is flashing
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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.
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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.
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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
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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?]
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Just rumblings like these make me think "it's different this time".
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People can kvetch about it or they can think about adding it to their asset allocation.
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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.
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I can't find words right now to respond to this.
I'm stunned.
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