Tag: Economics

There’s no inflation in our economy – unless you wholesale money

What happened to inflation? 5$ gas, 6$ milk, 7$ Pabst Blue Ribbon!!! ???

Today’s PPI (Producer Price Index) came in at a negative for the 5th straight month. It measures commodity prices, and other materials that producers of goods and services need to buy in order to produce their good or service. Tomorrow’s CPI (Consumer Price Index – which measures the cost of goods that consumers buy) is expected to indicate the same signal – no inflation to speak of.

Meanwhile, much is being said about the efforts by the government to push down mortgage rates. But the underlying fundamentals that determine interest rates are not correlating with the rates being offered to consumers,. Or they are correlating less than is usual, presenting challenges to consumers and brokers trying to execute on their behalf.

Yes, rates are quite a bit lower. But the challenges of our “new landscape” are also new in nature, and no matter where you turn, it just gets more and more interesting. After 6 quarters of downsizing, banks were slammed in recent weeks with record applications for new loans. There was an immediate logjam. Demand is exceeding capacity. Banks do not need to lower costs to attract business. Margins are fat, ‘because they can’.

Icing on the cake: Banks offer lower rates to deals on shorter term locks. But it takes twice as long for them to underwrite files today, so what’s the point? You have to lock long-term, which means higher rates. Or, you float. And if you float, you get jumped in line at underwriting by all the locked-in deals. These same banks offer 7 day locks at their absolutely lowest rates… but you can never get within 7 days of closing UNLESS YOU LOCK!

If you do lock, and the period does not wind up being adequate, for ANY reason whatsoever, you can pay to extend it. But banks are doubling and tripling their extension fees as their queue grows longer and longer. Oh, and they are charging some brokers additional fees for not delivering on a loan once it is locked – even if they are too busy to underwrite it!

So lets review:
-banks have been taking it on the chin for ~6 quarters, so…

-rates are down, but not as much as they should be given the government intervention, and economic datapoints
-extension fees are skyrocketing
-processing times are skyrocketing
-lock periods are skyrocketing
-penalty for cancelling is skyrocketing

As far as I know, mortgage rate lock extension fees are not included in the PPI or CPI. Yet another area of the economy overlooked by the economic reporting data. Outrageous! Somebody call David Horowitz!

Great perspective to a timely question

Ric Edelman fields a question from one of his radio show listeners:

Q: Do you and your wife make extra principal payments to your
interest-only loan? Or do you not want to own your home someday?

Many in the investment business suggest investing it in the stock market
– you don’t keep up with inflation by putting the money into your home
or keeping the money in cash. Well, over the past decade or so, with all
of the ups and downs of the stock market, I bet the folks who kept their
money in cash or paid down their mortgages fared better than those in
the stock market. I know, I know, the market goes up and down, and over
the “long term” the stock market is supposed to outperform the other
things, but I question this advice sometimes and just wonder if you are
going to own your home someday? If not, why?

Ric: No, we don’t make extra payments. We personally handle our money
the same way we advise our clients and consumers.

Why would we want to add extra money to our payment? If you believe that
real estate values rise over long periods, the home’s equity will grow
all by itself, and it will do so at such a rate that any extra payments
we’d make would be pointless.

Here’s an example: Say you own a $500,000 house with a $400,000
mortgage. You thus have only $100,000 in equity. If you send in an extra
$100 per month for five years, you’ll have an extra $6,000 in equity.
But if the house grows just 1% per year, it will produce $25,505 in new
equity, or four times more than your effort from making extra payments!
And if the house grows 2% per year, your new equity will be more than
$50,000!

This is one reason – there are nine others in my DVD on the topic – why
making extra payments is a waste of time and effort.

Of course, I began by asking if you believe that real estate values will
rise over long periods. If you don’t believe that, then you shouldn’t be
a real estate owner in the first place. You should rent instead.

Also, I note that you referred to those who recommend placing into the
stock market all the money that you’d otherwise use to make extra
payments. I do not agree with that advice. Instead, you should invest
the money in a highly diversified manner. That’s because, as you’ve
noted, it’s possible to see stock prices falter for extended periods. By
owning a wide variety of assets, and not just stocks, you reduce the
risk of such underperformance.

But even if you invest solely in stocks, you’re highly likely to do
fine. Remember that we’re comparing the interest rate on your mortgage
to the performance of the stock market. Since your mortgage will last
for 30 years, we need to evaluate stock prices over that same period.
And in every 30-year period since 1926, according to Ibbotson
Associates, stocks have handily outperformed mortgage rates.

I realize that you’re questioning the strategy because of the stock
market’s recent performance, but it’s precisely at such times that we
need to remind ourselves of the long-term nature of the markets.
Otherwise, you’ll be tempted to do the wrong thing at the wrong time for
the wrong reason.

Find out more about Home Ownership here:
http://www.ricedelman.com/cs/education/home_ownership

Interesting Commentary From JP Morgan Chase

A colleague forwarded this to me, so I don’t have the direct link.

“In recent months, Wall Street has seen an extreme liquidity drought with steady redemptions from hedge funds and long-term mutual funds. However, this doesn’t mean that investors have no money to put to work. In fact, in November, M2 (the total value of money held in cash, checking accounts, savings accounts, CDs under $100,000 and retail money market accounts) exceeded $7.9 trillionfor the first time, up 7.4% over the past year. Interestingly, holdings in these short-term accounts now exceed the total capitalized value of the S&P 500. The problem is not the ability of investors to invest, but rather their willingness to do so.”

Don’t want to miss the bounce, do you? Good time to be checking in with your financial planner. Please email me if you need a referral.

How to get a Cheap Vacation to Antigua


Elite Island Vacations has thrown out an interesting twist on the stock market uncertainty – a bet that your financial stock shares are likely well below their fair value. They are willing to take your shares at July 1 2008 value in exchange for travel services – with some restrictions I am sure.

Example: GOOG shares closed at $302 today. On July 1, they were worth $534. If you have shares of Google, and want to go to Antigua, you can pay with your shares, and get $534 of travel for every single share – that you would only be able to get $302 on the open market for.

Why do this? Elite Island Vacations clearly believes that the shares are worth more than their current trading value. That and the fact that they are very clever marketers. It’s no different than offering a sale on their service, but this is bound to get a lot of attention. I’d certainly never heard of them before.

Is The Loan Modification Trend Working?

New reports on CNBC today that the re-default rate on modified mortgage loans is greater than 50% after 6 months.

That’s a pretty disappointing and discouraging statistic. A lot of money is being spent on the modification efforts, and with that kind of performance, lenders are going to be less likely to continue the effort.

This gives good fuel to the debate over whether market intervention can soften the blows of a natural market correction….

Is the ‘Bailout’ Working?

Some evidence of the US Government’s activity affecting our markets in positive ways:

Yesterday, a statement from FHFA Director James B. Lockhart:

“The Federal Reserve Board’s announcement that it will purchase debt of the Federal Home Loan Banks, Fannie Mae and Freddie Mac as well as the mortgage-backed securities (MBS) issued by Fannie Mae, Freddie Mac and Ginnie Mae is a very positive step. This $600 billion program should be a major boost to the mortgage and housing markets. By providing more liquidity to the market FHFA expects these actions to help reduce the large interest rate spreads between mortgages and Treasuries, resulting in lower mortgage rates over time, assisting homeowners and home purchasers.”

And then, a press release:

FHFA URGES SERVICERS TO TAKE PROMPT ACTION ON LOAN MODIFICATIONS

And then, the announcement of a new report: “Monthly Foreclosure Prevention Report” which promises to detail the efforts to slow down the flood of foreclosure activity.

STRONG moves are being made to stop foreclosures from happening in such large quantities, as the downward spiraling momentum they bring is causing rot within our nation’s housing stock. Property inventory declined this month for the first time in months, quarters, over a year? Let’s hope it is the beginning of a trend… There was a 39% decrease in foreclosures in California, month over month, largely due to the cancellations and the moratorium imposed by the government, which is being followed by most major lenders and loan servicers.

Decreasing inventory causes a shift in supply/demand equilibrium. Are we nearing a bottom? Is it time to be thinking about investing in real estate?

Some Painful Medicine from Peter Schiff

Some interesting retrospective views in this collection of Peter Schiff interviews on various financial circuits. Why post this? There’s nothing valuable or encouraging listening to somebody who can look back and say “I told you so”, but we really need to be careful when we listen to people who are in agreement on things that obviously want to believe. Listen to that voice that stands against the pack, and just give it a thought or two. Its very interesting to hear people laughing at Schiff as he made his forecasts.

I am optimistic, but cautious. And also realistic. We will hit a bottom, and we will recover. We are still adjusting to this environment, and there are some violent corrections going on that are going to damage a lot of people. A long bumpy road is ahead, but we’ll get there.

Why do Mortgage Rates Seem So High in This Market?

A few factors are contributing:

· In order to fund the rescue and the new government guarantees, our Treasury must sell more new Treasury securities to raise money. And the Treasury has to offer higher interest rates to sell them.

· Mortgage related bonds always trade at a slightly higher yield due to the prepayment and delinquency risk.

· The cost of financing mortgages has increased for Freddie and Fannie due to the plan for the FDIC to back the newly issued, unsecured debt of some banks. By guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields – and to pay for that they’ll have to charge borrowers higher interest.

· And in case anybody forgot, we had ‘the panic of 08’ the week before last. A massive liquidation of assets occurred, as people and institutions converted stocks, bonds, and everything else into cash. Mortgage bonds plummeted in value like everything else, causing the rates to spike. We saw the average 30 year fixed go from 5.9% to 7.05% in one week. Nobody is rushing back into this market… mortgages are tied to housing, and housing is at the epicenter of this entire financial crisis.

We are in seldom-explored territory, if not uncharted waters altogether. The risk of waiting for the market to come your way exceeds the risk of inking a deal at a rate that ‘just has to come back down. If you have a deal on the table, close it. If you want to see what I mean in numbers, email me.

Why There Are Critics Of The Bailout/Rescue Plan

It’s because of complicated concepts like this one, brought to light by David Kotok of Cumberland Advisors, in his September 24 piece titled “Helicopter Hank”. He writes:

“… With the government holding a large portfolio of mortgages, the Fed’s ability to fight inflation will be conflicted, because each increase in interest rates will impose capital losses on those holdings, making it mroe difficult to sell them back to the marketplace and delaying getting them off the Fed’s and government’s balance sheets…”

A little hair on this dog, so it goes. Raise rates to fight inflation, see the value of the bond holdings and mortgage securities go down. Makes sense. This does not mean the plan by and large won’t work, but this is one of potentially several conflicts within the plan that are open to debate.

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.