Wednesday Night Investment Update

As suggested here this past weekend, the long Treasury bond has surprised many with significant strength. The 30-year Treasury has dropped greatly- 20 basis points, down to 4.21%, corresponding to over a 3% upward move in price in the close ETF proxy, TLT. Some technicians are pointing to current interest levels as important; traders may want to lock in gains or place close stops. Given that Trimtabs Demand Index has just registered a sell signal on the stock market (was neutral) and given the fact that this move in Treasuries has occurred with no publicity and no obvious cause, I remain positive on direct ownership of zero-coupon intermediate to long Treasuries, though I'm no longer pounding the table for underinvested people to jump in here. Fundamentally, we all or almost all of us "know" that 4.2% a year for 30 years is a poor investment. Of course, if a Japanese purchased a 30-year Japan Government bond 20 years ago as the bubble was topping, he or she made a great investment.

I also remain positive on gold. Now that the Fed this weekend in Jackson Hole doubled down on its promise/threat to keep interest rates "too low, too long" in order to create inflation, I have changed my investment posture on gold from trading range-oriented with a bullish tilt, to buy and hold a significant core position, trading around it as desired. Physical gold and the two gold ETFs, GLD and GTU, all make sense.

Another reason for liking gold is the recent appointment of a labor leader with no legal, banking or economic credentials to head the New York Fed. Click here for the link, courtesy of Naked Capitalism. Click here for a link to his bio.

I also like cash. Yields vary greatly. If you trust the FDIC, it may be worthwhile to move money from bank to bank to grub extra yield.

Finally, at what should be roughly the nadir of the economic banana, there are probably solid long-term values in McDonald's. After the recent mini-sell-off, I also like FPL.

What is the theme to the above: high quality. Junk should have had its 5 months in the sun. Quality will out over the long run. Exactly when, those who lived through the late 1990s know that one never knows.

The Baltic Dry Index has come down sharply; link here for it on an ongoing basis. Chinese stocks look to be cracking, though it's not a market I know anything about. A growing number of pundits who both called the stock bear market and then the March low are very cautious to bearish, whereas other bears who stayed bearish have caved under the "don't fight the tape" theory. Yet all this is occurring during light end-of-summer trading, where the low-priced stuff such as Fannie Mae is dominating trading.

This game never ends, but when a mainstream outlet such as Bloomberg piles onto Dr. Roubini, a truly eminent academic, for no reason other than his first wrong (for now) call after what he says are five correct ones, I fear that that is a corroborating sign of too much complacency amongst the bulls.

Copyright (C) Long Lake LLC 2009

Housing in America

The New American Dream: Renting in today's WSJ is today's "must read" for anyone interested in a concise summary of the growth of the U. S. housing market, along with international comparisons.

A companion news item of the day regarding British housing woes is found at: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6030193/Bradford-and-Bingley-suffers-160m-loss.html.

And back in the U. S., Mish reveals that the FDIC is out of money as of now at: http://globaleconomicanalysis.blogspot.com/2009/08/as-of-friday-august-14-2009-fdic-is.html.

He titles his piece that FDIC is "bankrupt". This may or may not be technically correct, as the FDIC has a specific Congressional backstop in place and beyond that is a full faith and credit agency of the Federal Government. Overwhelmingly, residential and commercial real estate are driving the losses at the banks.

Yesterday I reported (via CR) on a 20 year part-time student who is buying a house using a Federal tax credit.
Contrasting this with the history of housing in America in the WSJ article and with common sense leads me to continue to believe that matters are at a serious disequilibrium point. The Feds are borrowing vast amounts of money, and the Federal Reserve is putting on its balance sheet similarly vast amounts of securities, to prop up the housing market. The indebtedness of the U. S. Government is surging as a result.

There really is an argument for the government to encourage more renting, especially if the owners of the rental units do so via cash ownership and not via a highly leveraged situation. In our mobile society, having a ready supply of well-kept-up rental houses and apartments in most communities will enhance the ability of people to change jobs, have temporary second residences, retire without a final commitment to a community, etc. The system would run more smoothly in that all the costs involved in buying and selling homes would be minimized and be replaced by the far simpler process of a lease.

The tax deduction for mortgage interest should probably continue to be phased out, now that it has been revealed that the Feds have to borrow to sustain the housing market. Canada has no such tax law and has similar housing ownership rates as the U. S., so the tax deduction is certainly unnecessary to reach any particular ratio of home ownership.

At the current new home size of about 2600 square feet, America is overinvesting in housing relative to other goods and services, such as health and exports. Returning housing to its proper balance in the economy is a change that is both timely and overdue.

Copyright (C) Long Lake LLC 2009

Freaky FDIC Thursday

The FDIC has closed seven banks today alone, six of them in the President's home state of Illinois. Usually Friday is bank closure today; these occurred today out of respect for the proximity of the pronouncement of the secession of the United States from the British Empire.

Click HERE for the list.

Many more are on the way.

Copyright (C) Long Lake LLC 2009

Sheila Bair's Errors in Yesterday's Speech to the Economic Club of New York

The Chairman (not Chairperson?) of the FDIC, who has unfortunately signed on to the veritable destruction of the FDIC by going along with PPIP, gave a speech yesterday to the Economic Club of New York designed to improve her image and, in the nature of bureaucrats, to further increase her power.

She decried the Too Big to Fail doctrine of bank holding companies.  She asked that the FDIC be given the power to take over all of a company that owned a bank that was a member of the FDIC system, even if that company primarily was not in the depository banking business, such as Citigroup.  Basically, she wants a potentially bigger FDIC so that can be on a par with the giants of Big Finance.

Econblog Review agrees with Ms. Bair that new thinking is needed.  EBR also agrees with FDR and probably with the philosopher/mathematician Nassim Taleb that bank holding companies themselves are the problem.  Bring back the Glass-Steagall law and let a company either be a plain vanilla regulated depository institution, with its depositors accepting low-ish interest rates for the security of a government guarantee, or let it be an investment banking company, or a trading/gambling company etc.

Ms. Bair said:

Everybody should have the freedom to fail in a market economy.  Without that freedom, capitalism doesn't work. 

EBR would ask Ms. Bair what PPIP is about if not preventing Citigroup and others from failing, using my money and yours.  If she really believed the above statement, she would resign from her position rather than risk far more than FDIC's capital for an unfair bailout of the gamblers in Big Finance.

She also offered a misdiagnosis of the status of the banking industry:

As I see it, we are now in the cleanup phase.  We need to get in, do the repair work, and get out.

This is like saying that it is time to clean up after a hurricane before it has left the area.  

Earth to Sheila Bair:  the economy is still shrinking.  Even after the downturn technically ends, the economy will not suddenly become the 1999 economy.  And we can be almost certain that the commercial real estate sector will be in recession or worse even after the economy returns to positive growth.  Worse, there can be no way except in the future looking backward to be sure that another liquidity crisis will not occur.

Count no chickens before they are hatched; don't consider a crisis over till it truly is over.

It's never over till it's over.

Copyright (C) Long Lake LLC 2009