This is my response to an inciteful insightful comment posted by GJK313. It is in reference to an article which readers can find here, titled "FASB Surrenders - America Win". I suggest readers read the aforelinked document in its entirety before moving on. Notice how this is written by economists and analysts, not real world investors that are investing THEIR OWN CAPITAL! When I state "own capital" I mean their money, and not that of their clients. I cannot fathom how anyone who had their own money at stake would ever want more ambiguity in pricing assets, in lieu of less.. Let me pick this apart...
If you recall from my earlier rants on the Case Shiller index, one of its most glaring flaws is that it doesn't capture condo prices, which are a material component of housing stock in NYC and many major urban centers - see The Real Trend in US Housing Prices… It appears as if someone over there was listening, S&P now publishes a condo specific index, although that index too has many of the flaws of the CS single family index - see "Those Who Blindly Follow Housing Prices Without Taking Other Metrics Into Consideration Are Missing the Housing Depression of the New Millennium" and “Why the Case Shiller Index, Although Showing Another Downturn Coming, is Overly Optimistic and Quite Misleading!
Well, NYC, according to the S&P Case Shiller Condo index, is the only major US condo market that not only has firming prices but is actually increasing in price. Chatter and anecdotal evidence from the ground confirms this as developers and speculators are once again bidding up development land, lots and potential conversion properties.
The interactive version - drag the time line at the bottom of the graph to alter the perspective...
Summary: Except for a few metric blips borne from .gov bubble blowing, the housing market has been on a continuous nosedive since 2nd half of 2006. Anyone unfortunate enough to buy into the nonsense mis/dis/information styled propaganda of "This is the best time to buy" or the government's incentives to catch a falling knife with your bare hands (ex. tax incentives) have already been cut...
The residential real estate situation is still looking quite bleak. The downturn (actually, the continuation of the earlier downturn - they were not two separate events) that I forecast last year has come, and come with a vengeance. If we may reminisce, the mainstream media was overrun with optimistic housing forecasts, primarily as a result of some minor metric upticks born from incessant .gov bubble blowing. From my post of June 22nd last year - As I Made Very Clear In March, US Housing Has a Way to Fall
From Bloomberg, early in the morning you get the usual, inaccurate analyst chatter: Sales of Existing Homes in U.S. Probably Climbed on Tax Credit
Sales of U.S. previously owned homes rose in May to the highest level in six months as buyers rushed to beat a June tax-credit deadline, economists said before a report today.
Purchases of existing houses, which are tabulated when a contract closes, increased 6 percent to a 6.12 million annual rate, according to the median of 73 forecasts in a Bloomberg News survey. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.
Credit-induced gyrations will make the underlying health of the market difficult to determine over the next couple of months. A slump in builder shares since early May signals investors are concerned the damage caused by the end of government stimulus, mounting foreclosures and unemployment will exceed the benefits of lower mortgage rates.
Then the actual report comes out: Existing Home Sales in U.S. Unexpectedly Fell to 5.66 Million Rate in May
There has been much discussion on the topic of inflation, deflation and hyperinflation. I, personally, am in the stagflation camp - basically the worst of both worlds. The evidence is plain to see to my virgin eyes: real asset prices are dropping through the floor (for four years now) while input prices (fuel, energy, supplies, commodities), food and the general cost to live (I have to phrase it differently since our government doesn't believe that this is true of the cost of
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living) is going up.
It truly amazes me that the everyday guy and gal can be convinced that inflation is tamed as the things that they need to survive - food, warmth, clothing - cost them more month by month. I remember when I made the opposite argument in residential and commercial real estate three years ago. Ben Bernanke said "green shoots", yet real assets sat stagnant and empty. Reference Who are ya gonna believe, the pundits or your lying eyes?
Jim Roger, besides being a rather colorful figure, has been correct on his commodities call over the last couple of years and he has been sounding the currency crisis and inflation call as of late. If anything, I give credit where it is due. I can't disagree with him on the currency front. This is what he had to say on CNBC regarding Social Unrest and Currencies:
We now know why I had my team specifically model in the fuzzy, yet quite relevant social unrest factors into our Sovereign Contagion Models. Egypt appears to have erupted, and I will illustrate the path in real time using the roadmap that we created to predict such an event igniting a powder keg much earlier last year. First let’s check out the headlines:
I spent the majority of 2010 and a decent portion of 2009 warning that massive debt simply does not just "go away", particularly after significant asset devaluation. The result of these two actions (once combined) is the evaporation of equity, the waning of value, and the ultimate destruction of capital. Sovereign nations and global financial institutions alike have been dodging, ducking, weaving, fibbing, lying, closing their eyes, sticking their collective heads in the sand and kicking the can down the road for 3 years now. This is not the end of the world, but it is the end of the massive amount of economic capital that so many swear is still abound. The longer we take to acquiesce and accept this foregone conclusion, the harder the pill will be to swallow - "can kicking" be damned.
And on that note, Bloomberg reports: Japan's Credit Rating Cut to AA- by S&P on Mounting Debt Burden
Japan’s credit rating was cut for the first time in nine years by Standard & Poor’s as persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen ($11 trillion) debt burden. The world’s most indebted nation is now ranked at AA-, the fourth-highest level, putting the country on a par with China, which likely passed Japan last year to become the second-largest economy. The government lacks a “coherent strategy” to address the nation’s debt, the rating company said in a statement. The outlook for the rating is stable, S&P said.
The yen and bond futures fell on concern the downgrade will push up the cost of borrowing for Japan, where public debt is about twice the size of gross domestic product. Vice Finance Minister Fumihiko Igarashi this week said the government must fix its finances to avoid a debt crisis that could trigger a “global depression.”
Another stint on Max Keiser discussing topics such as Goldman's Facebook offering that never was, what happens when its the banks that walk away from a home, phantom banking profits that never were, and more shenanigans that are the tour de force that is today's banking system and economy. To skip directly to the Reggie Middleton interview, move to 11:55 in the video.
I must admit, I was shocked when I first read this headline and saw the accompanying cover. After all, Bloomberg was the organization that published a story lavishing adulation upon a young Goldman analyst that had a 38% win rate throughout the credit crisis and (faux) recovery. I see those results as mediocre at best, and downright horrible from a realistic perspective. To make matters even worse, I believe I ran circles not only around that analyst, but the entire firm, see Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? The next thing you know, this heavy nugget of truth is dropped, and all I can say is.... Damn. Let's excerpt some juicy tidbits from Blankfein Flunks Asset Management as Jim Clark Vows No More Goldman Sachs:
On Jan. 2, Jim Clark, a founder of such technology icons as Netscape Communications Corp. and Silicon Graphics Inc., was at home in Palm Beach, Florida, when he got an e-mail from an executive at Goldman Sachs Group Inc.’s private wealth management division. Goldman was offering Clark a chance to invest in the closely held social-networking company FacebookInc. The deal -- through a fund overseen by Goldman Sachs Asset Management -- was being offered to other Goldman investors at the same time, Bloomberg Markets magazine reports in its March issue.
The firm would levy a 4 percent placement fee on clients, plus a half percent “expense reserve” fee. It would also require investors to surrender 5 percent of any profits, known as “carried interest,” according to a Goldman Sachs document.
Clark turned Goldman down. In June, 2009, he had yanked most of the roughly $400 million he had invested with the firm due to what he considered bad advice and poor performance, including a big hit from GSAM’s Global Alpha hedge fund. This offer, he says, just irked him further. A few months earlier, he had purchased a stake in Facebook through another firm for a lower price, he says, and without the onerous carried interest.
“I don’t think it’s reasonable,” Clark says. “It’s just another way for them to make money from their clients.”
Jim Clark is a smart man, and I don't think he needs me to assure him of that. For those who may not be as hip to fees and valuations, I published The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models which clearly demonstrated that this offering was primarily for Goldman's bonus pool integrity and basically a ripoff for clients. In the following post, I declared "Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure". As excerpted:
As far back as 2009 (yes, over a year ago) I have been warning readers and subscribers of the (not so) hidden risks of putbacks, warranty and rep reserves, and the overly optimistic under reserving of the big commercial banks. I used JP Morgan as an example (see link list below), but made it clear this warning stood for several big banks (several of the big banks - As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves, As a matter of fact I said that the banks 'May Become The “New” Tobacco Companies' due to legal risk. This risk was significantly exacerbated the day after making that post, Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! wherein the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifying and vindicating my post from the day before and clearly demonstrates that The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!
I know many find this to be sensationalist, but they also found the bombastic posts of 2007 to be sensationalist as well, that is at least until 2008! We have mortgage situations where the actual BANKS are walking away from home, see I Warned That Banks Will Soon Be Forced To Walk Away From Homes… Guess What! Now, tell me how much the mortgages are worth behind abandoned houses - houses that were abandoned by both the homeowner and the bank? Although these are minority occurrences, I see them spreading away from the fringes and closer to the core as the economics of foreclosing on certain properties makes less and less sense in an increasing number of situations. All of this ranting and raving is simply to provide a background for the not so surprising development in the latest Bank of America quarterly earnings announcement. From Bloomberg: BofA Reports Loss on Costs Tied to Bad Loans, Mortgage Unit:
Three years ago, I ran a series of posts that declared the housing crisis will lead to municipal defaults (Municipal bond market and the securitization crisis – part I and Municipal bond market and the securitization crisis – part 2) and even worse, miserable recoveries. I caught a lot of flack on this proclamation from the "expert"Muni investors and analysts. The Muni default record blah, blah, blah... Historically, Munis have rarely defaulted... Yakety yak! Well, somebody better explain that to the unsecured investors of bankrupt Vallejo, CA. From the Bond Buyer:
SAN FRANCISCO — Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court.
The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.
“The city regrets that it cannot pay a higher percentage,” Vallejo officials said in the court filings. “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets.”
The city has also settled with NPFG over fees that backed insured certificates of participation, according to court documents.