Financial News

[southsider2k5]

I have 50 shares of IAU (about $600-700, I don't remember what I paid for it though) but no way would I buy more of it right now at this inflated price, that's money that could be spent on some dividend stocks at a cheap price or even buy like 100 shares of AMD and wait for it to regain value in a couple of years (I think the company is worth a lot more than what it's trading for right now, less than $8)

 

I'd do it. I wouldn't be surprised if we get one more stupid run up in gold, just to really give it the ridiculous run up before the collapse. I could see it going to $1500 before falling apart. That being said, if I owned gold, I'd sell it today and not even think twice about it, even if it did run a bit more. To me, this is a classic bubble, and when it breaks, it is going down for a while. Heck look at an oil chart for something pretty similar.

[Balta1701]

All though with us back at about 11000, I'd be a seller now. I think stocks are building in a Republican win in the House, and I don't think it really matters fundamentally all that much right now over the medium term.

You really think that actual investors buy that CNBC "republicans are great" crap to the point that it drives 20% swings in the DJIA?

[southsider2k5]

You really think that actual investors buy that CNBC "republicans are great" crap to the point that it drives 20% swings in the DJIA?

 

Short answer: enough people do that you do get a significant move out of stocks.

[Balta1701]

Short answer: enough people do that you do get a significant move out of stocks.

I don't buy that for a second.

[southsider2k5]

I don't buy that for a second.

 

You also don't buy into markets having instant reactions to politicians talking, so that doesn't surprise me.

[Balta1701]

You also don't buy into markets having instant reactions to politicians talking, so that doesn't surprise me.

Well, like when Bush talked about "Devaluation", which is something he actually could have pulled off, when he meant to say "Deflation", that's one thing. Or if Bernanke comes out and says he's going to do something, ditto.

 

But think about the very words you said earlier...that it doesn't make much difference in either the short or medium term who is in power, maybe slightly in the long term. If the market is then moving rapidly based on minute details of speeches, or based on who is winning in polls...that sets up an easy, easy opportunity to beat the market; you simply bet against everything CNBC says would be good for the market because it's good for the Republicans.

 

If the market moves rapidly based on rapid political developments that have zero ability to affect the market, then once that political development is off the front page, the market is going to return to the long term trend. That would mean if the Republicans win the House in November, I should wait until about November 5th and take out a huge leveraged short on the market, because if the Republicans have no short or medium term affect on profitability, then the boost you're saying exists would fade away within a short period and on average I'd win.

[NorthSideSox72]

Stocks are not overvalued - stocks are priced as they are only partially because of expectations of general recovery. The other big thing looming that the markets know, is that as the economy does grow a bit more, interest rates and inflation HAVE to rise. There is no way around it, with the amount of money having been shoved out there. And that means, even in a neutral economy, money will flow into the equity markets, and stocks will rise. They know that's coming, but no one knows for sure when.

 

[Balta1701]

Stocks are not overvalued - stocks are priced as they are only partially because of expectations of general recovery. The other big thing looming that the markets know, is that as the economy does grow a bit more, interest rates and inflation HAVE to rise. There is no way around it, with the amount of money having been shoved out there. And that means, even in a neutral economy, money will flow into the equity markets, and stocks will rise. They know that's coming, but no one knows for sure when.

Really, no, you're wrong. It doesn't matter how much total money is shoved out there, it matters the demand for it. Right now, there is huge demand for additional safe assets and the bond market is going in exactly the opposite direction of what you'd predict if anyone worried about inflation at all.

 

Take a look at the graph I posted a couple days ago. Until we're out of the gigantic hole in production, inflation isn't going to happen, and unless we can get >3% growth per year, there's no way to get out of that hole. We're at nearly 10% unemployment. There's so much excess capacity right now that there is absolutely nothing that will push inflation in the next decade unless we do another stimulus at the federal level to get that output gap filled.

 

The reason i think stocks are overvalued is that I don't see any real prospects for a sustained recovery. They've been boosted by a combination of the feds shoving out money and improving corporate profits...but those profits have come entirely from cutting back on employees and their spending. That's not a sustainable path towards improvement.

[NorthSideSox72]

Really, no, you're wrong. It doesn't matter how much total money is shoved out there, it matters the demand for it. Right now, there is huge demand for additional safe assets and the bond market is going in exactly the opposite direction of what you'd predict if anyone worried about inflation at all.

 

Take a look at the graph I posted a couple days ago. Until we're out of the gigantic hole in production, inflation isn't going to happen, and unless we can get >3% growth per year, there's no way to get out of that hole. We're at nearly 10% unemployment. There's so much excess capacity right now that there is absolutely nothing that will push inflation in the next decade unless we do another stimulus at the federal level to get that output gap filled.

 

The reason i think stocks are overvalued is that I don't see any real prospects for a sustained recovery. They've been boosted by a combination of the feds shoving out money and improving corporate profits...but those profits have come entirely from cutting back on employees and their spending. That's not a sustainable path towards improvement.

Balta, look. I'm not sure how to put this. There are things I can't even say here, for various reasons. But suffice to say that people who know the markets in a way neither you or I could dream of, feel that what I stated is true. And I don't understand how someone who knows at least basic economics can honestly say it doesn't matter how much money goes out the door, or what interest rates do, or inflation does. They are all key factors, they are all intertwined, and they all effect the markets in a big, big way.

 

[NorthSideSox72]

B of A now halting foreclosure proceedings in all 50 states, until they feel they have a better handle on procedures and documentation.

 

This is an interesting set of developments, starting with what Balta posted earlier. One of the positives of the foreclosure situation seemed to be that the banks were processing, but also sort bottlenecking them to an even pace, which was doing a decent job of putting them on the market at a fast enough pace to work down the pile but slow enough not to cause a massive downturn and following spike in prices. Now, we have this stalling - which if it goes on for any significant lenght of time, will cause a backlog, and further push out the healing process for the housing market.

 

Hopefully this turns out to be a blip. But I have a feeling you will see Congress grab onto this as a way to look good, going after the banks, but ultimately the stalling would end up making things worse.

 

[southsider2k5]

B of A now halting foreclosure proceedings in all 50 states, until they feel they have a better handle on procedures and documentation.

 

This is an interesting set of developments, starting with what Balta posted earlier. One of the positives of the foreclosure situation seemed to be that the banks were processing, but also sort bottlenecking them to an even pace, which was doing a decent job of putting them on the market at a fast enough pace to work down the pile but slow enough not to cause a massive downturn and following spike in prices. Now, we have this stalling - which if it goes on for any significant lenght of time, will cause a backlog, and further push out the healing process for the housing market.

 

Hopefully this turns out to be a blip. But I have a feeling you will see Congress grab onto this as a way to look good, going after the banks, but ultimately the stalling would end up making things worse.

 

That is the story of this recession. We are trying to forestall all of the bad things from happening that need to happen so that we can start to recover.

[NorthSideSox72]

That is the story of this recession. We are trying to forestall all of the bad things from happening that need to happen so that we can start to recover.

Well, let's divide that up. There is a difference between softening the extremes, and just postponing the inevitable.

 

Putting false stops on foreclosures is the latter - its not helping anyone, those people aren't going to suddenly find big money, so all you are doing is making things worse. The banks have f***ed a lot of things up, but the speed of foreclosures was actually being handled pretty well. Messing with it is stupid.

 

Stimulus type actions, on the other hand, aren't really forestalling anything. They are softening the dip, but also blunting the rate of recovery a bit. So its changing the curve, but can still have an overall positive effect, all the way out to the next run up. My problem has never been with the idea of the stimulus in general - and its plain to see that it has indeed helped avoid a depression. Problem is, they spent the money in the wrong places, so the long term (and I mean past the recession entirely) hasn't been helped.

 

[StrangeSox]

They're stopping foreclosures because they were rushing through them and evicting people who didn't have mortgages with them. No one was taking time to actually review the documents and verify that.

 

If that's how their going to operate, blindly signing tens of thousands of foreclosure documents as one GMAC manager/exec put it, then they need to be stopped.

[southsider2k5]

Well, let's divide that up. There is a difference between softening the extremes, and just postponing the inevitable.

 

Putting false stops on foreclosures is the latter - its not helping anyone, those people aren't going to suddenly find big money, so all you are doing is making things worse. The banks have f***ed a lot of things up, but the speed of foreclosures was actually being handled pretty well. Messing with it is stupid.

 

Stimulus type actions, on the other hand, aren't really forestalling anything. They are softening the dip, but also blunting the rate of recovery a bit. So its changing the curve, but can still have an overall positive effect, all the way out to the next run up. My problem has never been with the idea of the stimulus in general - and its plain to see that it has indeed helped avoid a depression. Problem is, they spent the money in the wrong places, so the long term (and I mean past the recession entirely) hasn't been helped.

 

Forcing banks to keep bad debt on their books only means there is less money to lend, especially when all of the focus is on tightening rules, increasing capital requirements, and the like. All it is doing is forcing banks to look at a Japan type scenario.

[Balta1701]

Forcing banks to keep bad debt on their books only means there is less money to lend, especially when all of the focus is on tightening rules, increasing capital requirements, and the like. All it is doing is forcing banks to look at a Japan type scenario.

They're not being forced to keep bad debt on their books right now...they've figured out how to make so much money off of that bad debt that they couldn't care less about getting it off the books.

 

They get a family that misses a couple payments, they start the foreclosure process but don't tell the family so that the family keeps paying on the mortgage, they foreclose on the family anyway, and show up 1 day and evict them with no warning. They sell the house at near full value because it never sat empty, and they get the additional funds the first family paid on the mortgage. That's the new game. They do things as rapidly as possible between eviction and sale because they make the most money that way from both sides.

 

The problem is they keep going overboard with the eviction process, to the point that they've literally broken into some people's homes. That got the government's attention, so now they "halt" all foreclosures and just let the people they're foreclosing on pay longer.

[southsider2k5]

They're not being forced to keep bad debt on their books right now...they've figured out how to make so much money off of that bad debt that they couldn't care less about getting it off the books.

They get a family that misses a couple payments, they start the foreclosure process but don't tell the family so that the family keeps paying on the mortgage, they foreclose on the family anyway, and show up 1 day and evict them with no warning. They sell the house at near full value because it never sat empty, and they get the additional funds the first family paid on the mortgage. That's the new game. They do things as rapidly as possible between eviction and sale because they make the most money that way from both sides.

 

The problem is they keep going overboard with the eviction process, to the point that they've literally broken into some people's homes. That got the government's attention, so now they "halt" all foreclosures and just let the people they're foreclosing on pay longer.

 

If people aren't paying, they aren't making anything. They also aren't able to lend on those fund again, because they are tied up.

[Balta1701]

Balta, look. I'm not sure how to put this. There are things I can't even say here, for various reasons. But suffice to say that people who know the markets in a way neither you or I could dream of, feel that what I stated is true. And I don't understand how someone who knows at least basic economics can honestly say it doesn't matter how much money goes out the door, or what interest rates do, or inflation does. They are all key factors, they are all intertwined, and they all effect the markets in a big, big way.

And NSS...these same people are the same ones who told us that housing prices could never go down, and ARM mortgages were a wonderful investment. These experts are the same people who bet after the stimulus package that they were shoveling out so much money that they could make a fortune betting on inflation. JPMorgan, for example, lost billions on that bet.

[Balta1701]

I have a bit more time this morning, so let me spell out why inflation can't be a concern at all until we're nearly out of the output gap.

 

Inflation is at the most basic level caused by demand for products outpacing supply. You can't make enough to keep up with demand, prices have to rise to slow down demand.

 

Normally, when we start seeing general inflation in the economy, that is a sign that the economy is overheating; that is, people want to buy more things than can be produced. Expanding capacity is not cheap in a working economy; the supplies it takes to expand by building new factories or opening new shops are more expensive because everyone wants them, workers are hard to get because low unemployment means that most people who want jobs actually have jobs. Thus, if you want to expand capacity, you have to pay more for workers, for labor, for facilities, everything.

 

In that case, typically what we see is the federal reserve bank raising interest rates...so that it becomes more expensive for people to buy things on credit, and demand is suppressed.

 

Now, let's look at the case we have now. We have a gigantic output gap; we have huge amounts of idled capacity. Factories, raw materials, and workers are all sitting there idle, with the workers especially wanting to work.

 

If I produce a product that suddenly becomes in high demand...how hard is it for me to expand? Compared with the supply-constrained case, it's easy. I can increase capacity easily; workers are easy to find, even highly skilled workers, and they're cheap because they have no other job offers. I can get raw materials somewhat easily as long as I don't need gold, and I can get facilities easily by taking over someone else's idled factory.

 

We are in a demand-side crisis right now. None of the forces that could drive inflation exist, because we have the capacity to produce over a trillion dollars more stuff than we actually are producing. Businesses that have funds they would invest in expansion have zero reason to do so; even if they have good products, they already have more capacity to produce stuff than they need. Bringing extra production capacity online would be easy.

 

This problem is why doing things like business tax breaks right now will have zero impact; businesses are already sitting on the cash and the capacity they need to hire people, but they have no customers to buy stuff.

 

Until we're close enough to out of the output gap that labor starts to become constrained and the idled capacity is working again...there just is no reason for inflation to happen. We're still, in reality, stuck in the area where limited deflation is possible, despite all the money we've shoveled out, and the thing preventing that right now is price-stickiness; the fact that people don't like to lower the prices of their product even if they can't sell the stuff they're currently producing.

 

The only thing that really could push inflation right now is a spike in raw materials prices, such as oil or precious metals. I'll grant...that's at least slightly possible, since we're in a world where energy and raw materials supplies are genuinely constrained...but right now, even energy prices aren't acting as a constriction.

[southsider2k5]

I have a bit more time this morning, so let me spell out why inflation can't be a concern at all until we're nearly out of the output gap.

 

Inflation is at the most basic level caused by demand for products outpacing supply. You can't make enough to keep up with demand, prices have to rise to slow down demand.

 

Normally, when we start seeing general inflation in the economy, that is a sign that the economy is overheating; that is, people want to buy more things than can be produced. Expanding capacity is not cheap in a working economy; the supplies it takes to expand by building new factories or opening new shops are more expensive because everyone wants them, workers are hard to get because low unemployment means that most people who want jobs actually have jobs. Thus, if you want to expand capacity, you have to pay more for workers, for labor, for facilities, everything.

 

In that case, typically what we see is the federal reserve bank raising interest rates...so that it becomes more expensive for people to buy things on credit, and demand is suppressed.

 

Now, let's look at the case we have now. We have a gigantic output gap; we have huge amounts of idled capacity. Factories, raw materials, and workers are all sitting there idle, with the workers especially wanting to work.

 

If I produce a product that suddenly becomes in high demand...how hard is it for me to expand? Compared with the supply-constrained case, it's easy. I can increase capacity easily; workers are easy to find, even highly skilled workers, and they're cheap because they have no other job offers. I can get raw materials somewhat easily as long as I don't need gold, and I can get facilities easily by taking over someone else's idled factory.

 

We are in a demand-side crisis right now. None of the forces that could drive inflation exist, because we have the capacity to produce over a trillion dollars more stuff than we actually are producing. Businesses that have funds they would invest in expansion have zero reason to do so; even if they have good products, they already have more capacity to produce stuff than they need. Bringing extra production capacity online would be easy.

 

This problem is why doing things like business tax breaks right now will have zero impact; businesses are already sitting on the cash and the capacity they need to hire people, but they have no customers to buy stuff.

 

Until we're close enough to out of the output gap that labor starts to become constrained and the idled capacity is working again...there just is no reason for inflation to happen. We're still, in reality, stuck in the area where limited deflation is possible, despite all the money we've shoveled out, and the thing preventing that right now is price-stickiness; the fact that people don't like to lower the prices of their product even if they can't sell the stuff they're currently producing.

 

The only thing that really could push inflation right now is a spike in raw materials prices, such as oil or precious metals. I'll grant...that's at least slightly possible, since we're in a world where energy and raw materials supplies are genuinely constrained...but right now, even energy prices aren't acting as a constriction.

 

All of that sounds great, if this were actually true in anything but a theoretical sense then why is the President on TV complaining about a lack of lending? I know you have latched on to the idled output as some soft of mecca of problems, but at the end of the day, you need to have banks lending. That is the start of economic activity in this country, because there is no such thing as savings.

 

[NorthSideSox72]

They're not being forced to keep bad debt on their books right now...they've figured out how to make so much money off of that bad debt that they couldn't care less about getting it off the books.

 

They get a family that misses a couple payments, they start the foreclosure process but don't tell the family so that the family keeps paying on the mortgage, they foreclose on the family anyway, and show up 1 day and evict them with no warning. They sell the house at near full value because it never sat empty, and they get the additional funds the first family paid on the mortgage. That's the new game. They do things as rapidly as possible between eviction and sale because they make the most money that way from both sides.

 

The problem is they keep going overboard with the eviction process, to the point that they've literally broken into some people's homes. That got the government's attention, so now they "halt" all foreclosures and just let the people they're foreclosing on pay longer.

 

The bolded is patently untrue - what they are doing is losing money, lots of it. Further, your scenario of a shadow foreclosure is falacy. That is not what happens, it can't because its all kind of illegal, so they'd never be able to complete the proceedings in the courts even if they tried it. I really don't get where you think your scenario is some sort of new "method".

 

And NSS...these same people are the same ones who told us that housing prices could never go down, and ARM mortgages were a wonderful investment. These experts are the same people who bet after the stimulus package that they were shoveling out so much money that they could make a fortune betting on inflation. JPMorgan, for example, lost billions on that bet.

 

No, they're not. That is not who I am talking about. I'm talking about the people who've been right, not the ones who've been wrong.

 

 

[mr_genius]

They sell the house at near full value

 

someone is selling foreclosed houses at 'full value' bubble prices'? I need to find this salesperson and hire them. they can obviously sell anything.

Edited October 9, 2010 by mr_genius

[Balta1701]

someone is selling foreclosed houses at 'full value' bubble prices'? I need to find this salesperson and hire them. they can obviously sell anything.

Simple math here. You're a bank, holding the mortgage on a house that is going into foreclosure. That loan has paid 10-15% on it. Bare minimum, basically anything other than an interest-only mortgage. The house has lost 20% of it's value. You have 2 options...you can either have the inhabitants stop paying entirely, or you keep them on the hook with a "modification" where they keep paying for another 12-16 months. You have no intention of actually redoing the loan, but you extract another 12-16 months of payments from that family, foreclose on them anyway, and now you own the house and you have every dollar that they've paid into that mortgage. It's not always a win, but compared to the write-offs they were taking on those, a 2-3% loss thanks to the government telling the family to keep paying is a pretty big win.

[Balta1701]

All of that sounds great, if this were actually true in anything but a theoretical sense then why is the President on TV complaining about a lack of lending? I know you have latched on to the idled output as some soft of mecca of problems, but at the end of the day, you need to have banks lending. That is the start of economic activity in this country, because there is no such thing as savings.

What on earth would having the President complain about a lack of lending do?

[Balta1701]

No, they're not. That is not who I am talking about. I'm talking about the people who've been right, not the ones who've been wrong.

And they're the ones who have been saying that worrying about inflation when you're in a huge hole is the recipe for a Japan-style lost decade.

[NorthSideSox72]

Simple math here. You're a bank, holding the mortgage on a house that is going into foreclosure. That loan has paid 10-15% on it. Bare minimum, basically anything other than an interest-only mortgage. The house has lost 20% of it's value. You have 2 options...you can either have the inhabitants stop paying entirely, or you keep them on the hook with a "modification" where they keep paying for another 12-16 months. You have no intention of actually redoing the loan, but you extract another 12-16 months of payments from that family, foreclose on them anyway, and now you own the house and you have every dollar that they've paid into that mortgage. It's not always a win, but compared to the write-offs they were taking on those, a 2-3% loss thanks to the government telling the family to keep paying is a pretty big win.

 

Your scenario is absurd. First, most of the people being foreclosed upon are not a little underwater, they are WAY underwater. Second, they are selling these homes for way, way down from what they were valued when the mortgages were done. Third, very few people are even getting these modifications - most of them are just not paying at all. Fourth, you are completely ignoring the fact that it costs a whole bunch of money and time just to even perform a foreclosure: legal costs, personnel time costs, fees and costs to the auction, realtor, etc., commission to realtor, and so on.

 

You are creating a fictional boogeyman. Banks are not making money off foreclosures, at all.

 

 

And they're the ones who have been saying that worrying about inflation when you're in a huge hole is the recipe for a Japan-style lost decade.

No, they're really not.