Category: Unplugged

off the cuff and behind the curtain. war stories, industry observations, book club, rants, gripes, criticisms and other musings.

Feedback Loops – I Raise My Hand And Ask, "Is There Homework?"


Scientists must be folding their arms and shaking their heads at the financial industry. The financial media and economic discourse of the day has adopted the term “Negative Feedback Loop”, a term that originated in scientific labs, to describe the downward spiraling momentum of our economy (housing values go down, more people are encouraged to sell, foreclose, etc, and that causes values to go down further, and round and round we go…).

The market action systematically feeds its result back into the force that caused it to do what it just did. A feedback loop. Have you ever stood between two mirrors, and looked at your reflection, and then the infinite reflections of your reflection behind it? Its like that.

Problem is, we’ve got the name wrong. This may sound like I’m picking on a technicality here, but I think it points to a bigger problem.

A “Negative Feedback Loop” sounds like the right way to describe what we are seeing in the economy. But a true Negative Feedback Loop is one where the output of the system works against the system, causing it to lose momentum, and return to equilibrium. What we have here is a Positive Feedback Loop, or one where the output reinforces the input. The result is an increasingly negative impact on our economy, so its easy to understand the confusion. We had another Positive Feedback Loop that fed the mania side of the cycle as well.

A snowball rolling downhill, growing in weight, causing it to keep rolling, is a Positive Feedback Loop.

Why do I split hairs here? The widespread adoption of an erroneously illustrated concept just begs the question of who is doing the thinking out there, and who is doing all the talking. The mainstream media just takes it in on one side, spits it out the other, no regard for accuracy or perspective. All of the talking heads, the so-called experts, the pundits, the authorities, they’re all confused like the rest of us about the big picture.

And it’s a tough issue to figure out, so confusion is understandable. But our electable leaders and policy makers would serve us all well to admit what they don’t know. Seems to me they feel a need to convince us that they do know, and the next thing you know, they’re acting on their contrived and false sense of confidence. And let’s face it, since 8 out of 10 Congressmen have no formal education in economics, most of these folks are expert at one thing, and one thing only: getting votes.

The bomb has gone off in the markets, and there’s a lot of dust flying around. Those of us who slow down and focus while everyone else runs around screaming, are going to be the first to see what the new landscape looks like.

2008 Q3 Financial Dictionary

BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no “fun”.
BROKER — What my financial advisor has made me.
BULL MARKET — A random market movement causing an investor who mistakes himself for a financial genius.
CASH FLOW– The movement your money makes as it disappears down the toilet.
FINANCIAL PLANNER — A guy whose phone has been disconnected.
INSTITUTIONAL INVESTOR — Former investor who’s now locked up in a nuthouse.
MARKET CORRECTION — The day after you buy stocks.
P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.
PROFIT — An archaic word no longer in use.
STOCK ANALYST — Idiot who just downgraded your stock.
STOCK SPLIT — When your ex-wife and her lawyer split your assets equally between themselves.
VALUE INVESTING — The art of buying low and selling lower.

Does This Work?

Came across this quote from Michael Lewitt of Hegemony Capital Management recently:

At some point, society has to figure out that the way an investor earns his money is even more important than the amount of money he makes. This is why human beings were vested with moral sentiments, so they could distinguish the quality of human conduct from the quantity of its results.

hmm. An interesting idea, and one that garners some attention in a climate like this one. I don’t think it would hold water in a bull market, say what you will about moral sentiments, but a very interesting thought to say the least…

How To Get Your March Madness Fix In September

There is no better time in the sporting calendar than the first weekend of March Madness. It can be a long wait year over year, especially if your bracket gets blown out early. So what is one to do in the downtime, especially when the Giants and A’s can’t make the playoffs, the Olympics are over, the Raiders and 49ers are struggling at best, and you don’t give a rip about hockey?

Play September Madness, of course.

Interesting That This "Crisis" Is Happening During An Election Year

Just because of the way it shapes the discourse on the matter, the way it causes the public to value the players and the voices, the way it will shape the election, and how the election will shape the eventual path forward. I watched most of the McCain / Obama debate last week, and I have to say, when asked about their opinions on the bailout plans, I felt embarrassed that either tried to express any opinion whatsoever. Henry Paulson’s request for $700bn came with a “trust me, I know what I am doing” style plea, there wasn’t much to make an opinion of. Most of congress seemed perplexed by the details, so why should Obama or McCain represent to have a grasp of what it entailed, and then elaborate? Why can’t they just say “I dunno, my economists will advise me on that when the details become more clear…”?

The republicans have voted down the bailout plan. The market is in a panic-style reaction. Stocks are way down, treasuries are way up, flight to safety. Even if some of them support the bailout effort, they all know that if they allow it to pass on a democrat-carried vote, McCain can soapbox all the way to the November election about how the democrats are bailing out Wall Street. You have to wonder what this would have looked like if it happend after the election…

Here are some more politically charged items floating around my desk today:

1- NY Times article dated 9 years ago tomorrow, talks about the Clinton Administration urging FannieMae to make more subprime loans. From the article:

“The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.”

2- Ron Paul preaching tough medicine in today’s bailout plan vote.

3- On the fall of Lehman Brothers, Bill Bonner writes:

“… how a company that survived the Civil War, the railroad bankruptcies, the panics, WWI, the Great Depression, WWII, and the Cold War couldn’t survive the biggest financial boom in Wall Street history?…”

In fairness, they survived the boom, just not the bust. But thought-provoking enough… well said.

What’s The Monthly Payment On A 2 Billion Dollar Home?

A lot.

But you probably have other types of problems when you are worth $42bn than making your mortgage payment. Such as, figuring out which of your 6 levels of garage you want to park on for any given day, or deciding which in-your-house gym you’d like to lift weights in. Or finding your kids.

Due up this January, the world’s most expensive home. There are video and photo tours in this article. Not really my style, but I could manage…

Hidden Camera Inside A Mortgage Company Office?

Is this the scene inside a local mortgage company office? Could be, although the lack of empty desks might be a clue that it is not. Nonetheless, it is a fair depiction of the office rage that I have heard too many times in the last year.

I have heard a few statistics ranging from 40-50% workforce attrition in recent weeks. To be perfectly honest, while I know some great people are being knocked out, the industry was due for a cleansing. All markets need to correct when they grow out of control for a prolonged period.

How Foreclosures Increase The Risk Of West Nile Virus


A couple of interesting news headlines today, especially when you put them together. First, a 48% surge in foreclosure filings nationwide for the month of May. The ‘pig in the python’ is just beginning. If you want to learn more about this, and more about the shape of things to come, email me.

And second, public health workers in Phoenix have devised a strategy to combat a spike in mosquito populations now that so many homeowners have abandoned their homes, and their pools, leaving the water to stagnate and become a habitat for the little pests. They are concerned that thriving mosquito populations raise the risk of outbreak of West Nile.

So this is another sign of how foreclosures can drag down community integrity. We have some choppy waters ahead still, but there is opportunity across the board. You must learn to position yourself, and ownership of a home requires much more careful planning today than in recent years. Work with a qualified professional to review your position and if you must abandon your home, for the sake of the neighborhood, drain the pool on your way out the door.

This American Life – Podcasting On The Giant Pool Of Money AKA Mortgage Meltdown


If you are looking for an overview of the mortgage meltdown, a recent This American Life podcast provides an excellent comprehensive overview. They touch on just about every dynamic in ‘the perfect storm’ that led us to where we are today. Specifically, they hit on:

  1. the “innocent consumer vs innocent banker” debate
  2. excess global liquidity leading to poor evaluation of investment risk
  3. abuse of low documentation financing*
  4. CDOs and rating agencies
  5. hot potato nature of the process between origination and securitization of mortgage loans
  6. the unexpected end of house price appreciation, and how it exposed systematic problems
  7. small banks vulnerability to leveraged wharehousing from larger banks
  8. challenges related to loan modifications in the wake of securitized and derivitivized mortgages
  9. why the “credit crisis” was not ever going to be confined to “Subprime”
  10. why the credit crisis extend beyond mortgages into student loans, credit cards, etc.

Some criticisms from my point of view while listening…

  1. Could use more of “The Nothing Song“
  2. * from item 3 above, they fail to acknowledge the intent of low documentation financing and why these programs were really created in the first place.
  3. did this “poor Marine” really think he could afford the home? Sounds like the broker was a creep, but would the Marine have been as willing to go along with all of this if he didn’t expect the home to be skyrocketing in value?

This is well worth a listen. Its nearly an hour long, but if you are interested in understanding why it is currently much more difficult to borrow money to buy a home, why foreclosures are happening at a record pace, and how the natural motivation of greed causes financial markets to bubble up and pop every once in a while, then this is an hour you need to set aside.

If you want to measure this against the historical record of financial crisis, see “Manias, Panics and Crashes” by Charles Kindleberger.

If you want to look at this within the context of of chaos and complexity theories, and learn how we might predict when and where and how big the next financial crisis will be, see “Ubiquity: Why Catastrophes Happen” by Mark Buchanan.