Using Veritas to Construct the "Per…

29-04-2017 Hits:82127 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:77755 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:77323 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:82072 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:78663 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:80955 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:47836 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:79666 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:79186 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:79736 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:84714 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:81662 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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The spillover from the financial world to the real economic world happened as a result of tightened credit. The banks are not very generous with credit, despite a lower fed funds rate and access to the discount window. Credit availability is what drives business (and consumer) investment, as it has done in excess during the recent boom, and the lack of which will will cause a dearth of business and consumer activity that will prolong the recession.

In addition, the very real threat of higher rates, real or nominal, could very well damage banks even more. It was interest rate volatility that pushed lenders over the edge in the S&L crisis, and the extreme inflation that we are witnessing now could very well force the Feds hand in regards to rates. Volcker's predecessor was forced to push rates to 20% during a slow economy after dropping them too much in an attempt to stave off recession, but instead causing a worse one due to highly inflated prices which Volcker inherited. We shall see what Bernanke does. He surely knows that an increase in rates will quicken many insolvent bank's demise. In the following excerpts, all red font comments and graphics are mine.

From the lastest Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices: [We] queried banks about changes in terms on commercial real estate loans during 2007, expected changes in asset quality in 2008, and loss-mitigation strategies on residential mortgage loans. In addition, the survey included a new set of recurring questions regarding revolving home equity lines of credit. This article is based on responses from fifty-six domestic banks and twenty-three foreign banking institutions. In the January survey, domestic and foreign institutions reported having tightened their lending standards and terms for a broad range of loan types over the past three months. Demand for bank loans reportedly had weakened, on net, for both businesses and households over the same period. This tightening covers price and non-price characteristics for commercial and consumer loans over real estate, secured and unsecured lending and credit lines. A very broad spectrum tightening at a time when demand is weakening.

From Wolfgang Münchau at "So this crisis is about to end, right? There are two failsafe ways to justify a solid dose of optimism: define the crisis in a sufficiently narrow way; and, even better, look at the wrong crisis. In that spirit I am happy to state my optimism about the prospective end of the subprime crisis. But this would be disingenuous. It is no accident that our multiple crises – property, credit, banking, food and commodities – have been happening at the same time. The simple reason is that they are all part of same overriding narrative. The mother of all these crises is global macroeconomic adjustment – a rare case, incidentally, where the word “crisis” can be used in its Greek meaning of “turning point”.

It is a huge global macroeconomic shock. How long the financial part of the crisis will go on will depend to a large extent on how bad the economic part of the crisis gets. The economic part of the story started more than a decade ago with a liquidity-driven global boom. Property, credit and equity bubbles were all part of this.

If excess liquidity was the ultimate cause of this crisis, the real estate sector was its most important driver. Experience shows that housing cycles are long and symmetrical: downturns last as long as upturns. We also know from the past that house prices undershoot the long-term trend on the way down, just as they overshoot it on the way up. You can see this quite easily when you look at long-run time series of inflation-adjusted house prices for several countries.

The last property downturn in the US and the UK lasted some six years. This is not a prediction of what will happen this time, more like a best-case scenario – because this bubble has not only been more intense than previous ones; it has also bubbled on for longer.

But even if we take six years as an estimate of the peak-to-trough period, that means the housing downturn will last until 2012 in the US and a couple of years longer in the UK. It is difficult to see how either of these countries could grow close to trend as long as the housing market is in recession.

When you look at the global macro side, you are looking at similar timescales of adjustment. An important part of the adjustment will be a rise in the US and UK household savings rates. That, too, might take several years to accomplish, during which period economic growth could be below trend.

The really important question about the US economy is not whether the official recession starts in the first or second quarter, but how long this period of economic weakness will last overall. In Japan and Germany macroeconomic adjustment of similar scale took more than 10 years, starting in the 1990s. Even if you believe that the US is structurally stronger, the country will probably not replenish its savings in a couple years.

If global inflation rises, as I expect, this process will become even more difficult. The central banks will have less room for manoeuvre. Fiscal policy is constrained, which leaves the exchange rate as the main tool of adjustment. This would necessitate a weak real exchange rate during the entire period of adjustment.

Obviously inflation would make everything worse, and our future scenarios will depend critically on the inflation outlook. A rise in inflation might alleviate the pressure on some mortgage holders, but is not a good environment for a country to build up savings. If higher inflation were tolerated by the central bank, it would clearly prolong the macroeconomic adjustment process. If it were not tolerated, interest rates would go up and we might experience a re-run of the 1980s. It would get a lot worse before it got better.

Either way, adjustment would take time. Would you really want to predict that under any of those scenarios, the worst was already over for a fragile financial sector? There may be no global financial meltdown. But our multiple crises could easily return with a vengeance, like one of those bloodstained image001.gifvillains in a horror movie who rises to fight his last battle.

It will end at some point, but several pockets of the financial market remain vulnerable in the meantime: US government bonds (under an inflation scenario); US municipal bonds (if the downturn is severe and long); several categories of credit default swap; credit card debt securities among others.

Our macroeconomic adjustment is not going to be as terrible as the Great Depression. But it might last longer. There will be time for optimism, but not just yet.

I had an email discussion with an analyst and blog regular who brought up the topic of inflation and real estate. Academically, inflation is supposed to be good for real estate prices and can actually drive up the price of real estate without driving up the cost of debt, thus allowing the Fed to "infate" certain insolvents out of insolvency. The problem is, too often reality hits. When inflation is rapid and extreme, it actually hurts holders of real estate. For those who hold income producing properties, it drives up the cost of owning and/or maintaining the property faster than rents can be increased, thus puts significant stress on the property holder (think of leases with provisions for 2 and 3 percent annual rent increases while inflation is runnin at that much per month - ala oil and gas prices). This can also work against homeowners who can't keep pace with the inflated costs of homeowner ship, ex. property taxes, heating fuel and other energy (electricity), etc.

From a J P Morgan Research Note: US banks face threat of capital Punishment - The current problem for US banks starts, naturally enough, with a deterioration in loan performance. Noncurrent loans—those delinquent for 90 days or longer—rose to 1.39% of all loans in the fourth quarter of 2007, an increase of 31 basis points from the previous quarter. (All figures cited in this note refer to the universe of all federally guaranteed depository institutions: including banks, thrifts, and credit unions). In historical perspective, the amount of noncurrent loans does not look particularly onerous. However, this conclusion is likely too sanguine for two reasons:

 • The increase in delinquencies on real estate loans is probably just getting started. Noncurrent real estate loans were 1.71% of real estate loans last quarter, more than double the figure one year earlier. Given that the decline in real estate prices accelerated into year end, delinquency rates are set to move higher.

• The banking system entered the current episode with a relatively slim cushion of loan loss allowances. In 4Q06, loan loss allowances—a balance sheet item set aside for bad loans—reached a low of 1.07% of loans outstanding, down from over 2% in the mid-1990s. The interaction of these two factors means that banks have been, at best, running to stand still. Even though credit loss provisions—the addition to loan loss allowances—were set aside at the highest pace (relative to assets) since the 1980s, that provisioning did not keep pace with the deterioration in loan quality. The aggregate coverage ratio—the stock of loan loss allowances relative to noncurrent loans—slipped below 100% last quarter for the first time since early in the1990s, meaning that banks have less than $1 in loan loss allowances for every dollar of noncurrent loans.

Capital ratios under stress - As banks realize losses on their assets, capitalization continues to come under pressure. In our GDW Research note of Nov 30, 2007 (“New data intensify spotlight on US banking sector”), we observed that banks can respond to deteriorating capital in three ways: allow capital ratios to drift lower, raise or retain more equity capital, and shed or slow the growth of assets. To varying degrees, the data show all three responses in play.
 • Bank capital ratios generally drifted lower last quarter. Of the four capital ratios that regulators use to determine capital adequacy, three declined last quarter. The fourth, total risk-based capital, increased a touch because some banks issued more subordinated debt. The lower capital ratios fall, the more banks will feel compelled to arrest the decline by raising capital or slowing asset growth. Although most banks are a long way from triggering
regulatory action, they would like to keep it that way.
• Banks have been increasing equity capital. The most visible equity infusions in recent months have been through investments by sovereign wealth funds in US banks. However, banks have also been replenishing capital through more mundane means. Dividend payments (to both individuals and bank holding companies) have fallen sharply. Share buybacks—to be reported in next week’s Flow of Funds report—likely also slowed in 4Q.
• Banks will likely slow asset growth. Data through 4Q show bank balance sheets expanding rapidly. However, much of the acceleration in lending likely reflected prior commitments, such as asset-backed commercial paper, coming back onto balance sheets. Indeed, for commercial and industrial loans (to take one well documented category of lending), around 80% of lending is done under prearranged credit lines. Moreover, an average of about
nine months elapse between the time when contract terms for these loans are set and their actual disbursement. This lag suggests that C&I lending should begin to slow as the tightening of lending standards over the past six months begins to be realized in the data. This will put a significant drag on the real economy as working capital is dried up.

In the published Remarks by John C. Dugan, Comptroller of the Currency, before the Florida Bankers Association in Miami, Florida on
January 31, 2008, I excerpt
: "I’m referring to the challenges we face – both community banks and the OCC – from the intersection of two inescapable facts: significant community bank concentrations in commercial real estate loans, and the declining quality of a number of these loans, especially those related to residential construction and development. Today, I’d like to talk briefly about both of these facts, and then turn to our supervisory perspective and expectations.

Let me start with CRE loan concentrations. The banking agencies issued guidance in late 2006 to remind everyone of the increased risk that arises from these concentrations, and to reiterate our expectations when evaluating this increased risk. Those of you with long experience in banking probably don’t need to be reminded of real estate concentration risk. It’s a first principle of sound banking and  bank examination that, the higher a bank’s concentration in a particular category of loans, the greater the risk that losses from that asset class will affect the financial soundness of the bank. That principle proved to be a harsh reality in the late 1980s for banks with concentrations in commercial real estate loans, especially those in the Southwest and Northeast.
But I can tell you from our discussions around the country that, as the result of a prolonged period of exceptionally benign credit conditions, many community bankers had become a little too complacent regarding the potential for significant stresses in these markets. Lending growth was historically high in commercial real estate, especially in the regions of the country that enjoyed an extraordinary boom in the housing markets. The result was that CRE concentrations rose significantly in many banks around the country, even as the quality of risk management practices lagged – which is why we felt the need to issue the guidance.

For example, looking at community banks as a whole, the ratio of commercial real estate loans to capital has nearly doubled in the past six years, to 285 percent. Even more significant than this overall industry statistic is the number of individual banks that have especially large concentrations. Over a third of the nation’s community banks have commercial real estate concentrations exceeding 300 percent of their capital, and almost 30 percent have construction and development loans exceeding 100 percent of capital. Here in
Florida, as in other states where housing is so important to local economic growth, the concentration levels are more pronounced. Over 60 percent of Florida banks have CRE loans exceeding 300 percent of capital, and more than half have C&D loans exceeding 100 percent of capital.
I guess it wasn’t surprising, then, that the notice and comment process for the concentration guidance prompted a full-throated chorus of criticism from community banks – many of you were very concerned that examiners would interpret the numerical thresholds in the guidance as hard limits that would jam the brakes on CRE lending, which has been such an important source of profit for so many community banks around the country...

. ..against the backdrop of elevated credit risk caused by CRE concentrations, we’re now entering a stage of the CRE credit cycle where problems have started to surface and losses have started to increase – which is the second inescapable fact I mentioned at the outset...


...While overall commercial real estate performance has been sound, weaknesses have plainly begun to emerge in C&D loans, primarily related to the slowdown in residential home sales. Indeed, during the past year national community banks have experienced a significant increase in nonperforming C&D loans. As of Sept 30, these loans amounted to 1.96 percent of total C&D loans, a rate that was more than twice that of a year earlier. Although starting from an admittedly very low baseline, an increase like this – over 100 percent in a single year – is clearly a trend that we need to monitor closely. And in Florida, that trend is even more pronounced. While nonperforming loans a year ago were 40 basis points less than the national average, the figure has increased to 3.34 percent of total C&D loans. That’s 70 percent greater than the national average and an almost eight-fold increase in one year....

When we started these horizontal reviews, we found that many banks lacked robust risk management practices and sufficient management information systems to adequately identify risk exposures. Over time, we began to see improvements, especially in risk management policies and in boards of directors articulating the level of risk they believe is appropriate to take, by product, loan structure, and overall borrower creditworthiness. We have also seen more use of stress testing, at least through the analysis of the effect of different interest rate scenarios. That has all been to the good.
But we’ve also continued to observe a number of risk management deficiencies that are a cause for concern. For example, despite our previous guidance, a number of banks with CRE concentrations have not extended their stress testing of income-producing properties beyond interest rates to other business variables that affect risk, such as vacancy rates, lease rates, and expense scenarios – not only at the time the loan is made, but also periodically throughout the life of the credit relationship. The potential for rapid deterioration in this business is simply too great not to conduct such testing on an ongoing basis.
Another issue that has surfaced in the horizontals involves real estate appraisals. We have seen an increasing number of instances in which appraisals on file have become outdated with respect to current market conditions. That in turn can make it very hard to assess the true credit quality of loans on the books. n terms of asset quality, our horizontal reviews have indeed confirmed a significant increase in the number of problem residential construction and development loans in community banks across the country. Not surprisingly, but perhaps not as visibly as has been the case with larger builders, declining residential sales and housing starts have taken a toll on smaller builders. As sales slow, holding periods have extended both for raw land and for homes under construction. This has had a direct effect on collateral values and is forcing many lenders to seek guarantor support and additional collateral, at a time when neither may be willingly offered. Likewise, more prospective buyers are abandoning planned purchases of homes and condos from developers where the general decline in housing prices has made it more difficult to obtain mortgages. The combination of these circumstances has begun to translate into more problem assets and increased provisions for loan losses.
In saying this, I recognize, and I think we all need to recognize, that the recent increase in nonperforming CRE loans must be viewed in context. The baseline from which the increase began was an exceptionally low level of problem assets that resulted from the long period of benign credit conditions. An increase in nonperforming loans from such a low baseline is hardly unexpected, and thus far overall nonperforming CRE loans, even in the area of residential construction and development lending, are a long way from approaching historical peaks. Nevertheless, the trend is unmistakable, and the potential consequences are magnified in this credit cycle by the fact that so many community banks have CRE concentrations that are so much higher than has ever been the case in the past.
Given these circumstances, what do we see as the consequences in the coming months? Not surprisingly, there will be more frequent interaction between supervisors and banks with concentrations in CRE loans that are declining in quality. There will be more criticized assets; increases to loan loss reserves; and more problem banks. And yes, there will be an increase in bank failures. Last week we saw the first failure of a national bank in nearly four years – the longest such period in the 145-year history of the OCC. I am quite sure that the period before the next one will not be nearly so long. As the credit cycle turns, the failure rate is very likely to return to the more typical levels that we have experienced in most other years...

... That’s why I want to emphasize today, as we see the clear signs of CRE credit quality declining, that we will expect banks with CRE concentrations to make realistic assessments of their portfolio based on current, changed market conditions. That may require you to obtain new appraisals. For those of you in stressed markets, it will almost certainly require you to downgrade more of your assets, increase loan loss provisions, and reassess the adequacy of bank capital. These are normal, expected steps to take in these circumstances, and I can’t stress enough how important it is for you to make these realistic judgments yourselves, based on sound credit administration practices, instead of forcing our examiners to try and make these same judgments in the first instance. This includes monitoring, and curtailing if necessary, interest reserves that might have been established at a loan's inception...

...This leads me to one final, and related, point. I hope I’ve made clear that banks with increases in problem CRE assets will likely have to increase provisions to their loan loss reserves to ensure adequate coverage. But I also know that, in recent years, some bankers have been fearful of criticism from their external auditors that the bank’s loan loss reserves were too large. As we and other banking agencies have stressed, your methodologies for arriving at your loan loss reserves, and the reserves themselves, need to be sound and well documented. But I firmly believe that in this environment, increases in loan loss reserves for many banks are both warranted and prudent. I would be extremely surprised if your auditors disagreed with this position – but if they do with respect to a national bank, I urge you to contact your examiner-in-charge or Assistant Deputy Comptroller. If we have to intervene in this situation, we will not hesitate to do so...