Author Archives: Ramsey Su

     

 

 

Medical vs. Financial Engineering

I broke my elbow a month ago, pretty badly as I was told.  The surgeon screwed the pieces back together, using a steel alloy bracket and six screws.  Two hours later, I left the hospital with no cast, a bandage (just to cover a very ugly scar), a prescription for painkillers and therapy started a week later.

 

 

Elbow collectionThis isn’t Ramsey’s elbow specifically, but a random post surgery elbow collection from the inter-webs, to illustrate how it’s done. The contraption in the lower right-hand corner is generally used to hold an elbow together after a complicated fracture. As you can see from the x-rays, this is then complemented with additional thingamabobs as required.

Image source: eortopedi.com

 

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Restless Peasants

First, a few quick words on Brexit.  Being the always positive and optimistic person that I am (big grin), I see one very positive outcome of Brexit – it is a revolution without bloodshed.

 

mo' peasantsThe peasants are getting restless…

Illustration via squadron.com

 

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Is it Time to Buy Income-Producing Real Estate? 

No, No, No. Much to the dismay of my real estate buddies, who are complaining about how high prices while watching the cash flow of their portfolios bursting at the seams from a few good years of rent increases, the answer is no.

 

1-Chart-Cap-rates2REIT cap rates (as of mid 2015, they have declined further since then)

 

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A Sudden Turn for the Worse

Freddie Mac posted a loss of $354 million this quarter, versus a $2.16 billion gain the previous quarter.  Fannie Mae did slightly better with net earnings of $1.1 billion, which were still substantially down from $2.5 billion the previous quarter though.

 

10621303-freddie-mac-hqFreddie Mac HQ – a strange time for posting losses

Photo via nytstyle.com

 

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A Mountain of Debt – But at Least We Have an iPhone

Whenever I encounter someone from the younger generation (40 years or younger), I make it a point to apologize for leaving them a country in far worse shape than the one I enjoyed.  Surprisingly, none of them believe that apologies are necessary, as most have no clue what I am talking about.

 

good-bad-times-joker-tattoo-design

 

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An Ominous Jump in Delinquent Mortgages

Black Knight Financial Services used to be LPS.  The name was changed after the sale to Fidelity.

 

arbeitssklaveImage via housingwire.com

 

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Something Needs to be Done – A Glimpse of the Future

In the summer of 2016, US and global economic growth rates are nowhere close to estimates.  In fact, a global recession, or worse, is imminent.  At home, student loan defaults are now close to 100%.  The unemployment rate is climbing, as minimum wage workers finally realize that the financial pain of working or not working is identical.  In Euro-land, as the weather warms up, the never-ending flotillas from Northern Africa resume swamping the Southern shores.

 

NIRPA black hole opens up in the world of centrally planned money

Illustration by Denis Cristo

 

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Rate Hikes and the Fed’s Goals

Finally, a 1/4% increase in Federal Funds rate. The immediate response from the banks was 1/4% hike in the prime rate to 3.5%.  This may have some effect on HELOCs.  Adjustable mortgages facing reset may also see some changes.  These minor adjustments should however have no direct impact on the real estate market.

As for the 30 year mortgage rate, so far the reaction has been nothing more than normal daily fluctuations.  Even if mortgage rates eventually settle at a 1/4% higher level, that is only $30 a month for a $200,000 mortgage, or $60 to $70 a month extra in household income to qualify for the same mortgage. A quarter point should not make much of a difference but what about half a percent or more?

 

ph mansionThis mansion in Pacific Heights, San Francisco was sold for a record price of $31 m. in 2015 – it netted its owners a $4 m. profit in less than two years. Reportedly no improvements were made to the property. SF is one of the regions in which bubble conditions are not merely noticeable, but are better described as “raging”.

Photo credit: Zilov / MLS

 

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Government Handouts Galore

Time flies.  It has been over seven years since the agencies, Freddie and Fannie, were placed under the conservatorship of the Treasury.  Think of it as a bankruptcy filing.   The difference being that there has been no reorganization plan, nor a liquidation plan.  In fact, there has been no plan at all, aside from letting the hole be dug deeper and deeper.

 

FNM HQFannie Mae’s headquarters in Washington – not bad for a technically insolvent company

Photo credit: Picture Alliance / DPA / EPA

 

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What is Judgment Day?

It is like ancient times that the Feds, under Greenspan, somehow decided that US needed to follow a zero interest rate policy, a policy now known as the ZIRP.  It was 2008 when Bernanke gave birth to the term Quantitative Easing, QE. QE was followed by Operation Twist, and its sequels – QE2 and QE3.

The new buzzword is “normalization”.  Normalization is the reversal of the QE operations and the raising of interest rates to above zero.  Whether we agree or disagree is irrelevant.  The fact is that the BLS just declared the unemployment rate is at 5%, a level that should justify initiating the normalization process starting with the next FOMC meeting in December. In other words, judgment day is at hand.

 

judayBatten down the hatches, judgment day approacheth

Image credit: World Wrestling Entertainment (WWE)

 

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Something has Changed

Last month, I posed the question “Is it time to short the home builders?”  My conclusion at the time was pretty much a “wait and see”.  Circumstances have changed.  I believe the builders are now short candidates.

 

glencartoon

Beware of politicians trying to fix the housing market (the Johnson-Crapo GSE reform bill actually failed last year)

Cartoon by Glenn Foden

 

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Useless Methodologies

Traditional real estate indicators have not served much purpose as predictors of the real estate market. As an example, here is a recent report by the Mortgage Bankers Association titled Housing Demand: Demographics and the numbers behind the coming multi-million increase in households. Superficially, the report makes a lot of sense, supported by many beautiful charts and figures.  Yet, my gut feel is these methodologies are of little use in the future.

 

banknote-1000-greek-drachma-apollo-19871,000 Greek drachma from 1987, depicting the Olympian god Apollo.

 

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Most read in the last 20 days:

  • The Capital Structure as a Mirror of the Bubble Era
      Effects of Monetary Pumping on the Real World As long time readers know, we are looking at the economy through the lens of Austrian capital and monetary theory (see here for a backgrounder on capital theory and the production structure). In a nutshell: Monetary pumping falsifies interest rate signals by pushing gross market rates below the rate that reflects society-wide time preferences; this distorts relative prices in the economy and sets a boom into motion – which is characterized by...
  • How to Get Ahead in Today’s Economy
      “Literally On Fire” This week brought forward more evidence that we are living in a fabricated world. The popular story-line presents a world of pure awesomeness. The common experience, however,  falls grossly short.   There are many degrees of awesomeness, up to total awesomeness – which is where we are these days, in the age of total awesomeness, just a short skip away from the Nirvana era. What is Nirvana, you may wonder? We only know for sure that Nirvana is what...
  • Full Faith and Credit in Counterfeit Money
      A Useful Public Service There are nooks and corners in every city where talk is cheap and scandal is honorable.  The Alley, in Downtown Los Angeles, is a magical place where shrewd entrepreneurs, shameless salesmen, and downright hucksters coexist in symbiotic disharmony.  Fakes, fugazis, and knock-offs galore, pack the roll-up storefronts with sparkle and shimmer.   The Alley in LA – in places such as this, consumers are as a rule well served by applying a little bit of...
  • Gold and Gold Stocks – Conundrum Alert
      Moribund Meandering Earlier this week, the USD gold price was pushed rather unceremoniously off its perch above the $1300 level, where it had been comfortably ensconced all year after its usual seasonal rally around the turn of the year. For a while it seemed as though the $1,300 level may actually hold, but persistent US dollar strength nixed that idea. Previously many observers (too many?) expected gold to finally break out from its lengthy consolidation pattern, but evidently the...
  • US Money Supply Growth Jumps in March , Bank Credit Growth Stalls
      A Movie We Have Seen Before – Repatriation Effect? There was a sizable increase in the year-on-year growth rate of the true US money supply TMS-2 between February and March. Note that you would not notice this when looking at the official broad monetary aggregate M2, because the component of TMS-2 responsible for the jump is not included in M2. Let us begin by looking at a chart of the TMS-2 growth rate and its 12-month moving average.   The y/y growth rate of TMS-2...
  • Fear and Longing - Precious Metals Supply and Demand
      Waiting for Permanent Backwardation  The price of gold dropped 9 bucks, while that of silver rose 3 cents. Readers often ask us if permanent backwardation (when gold withdraws its bid on the dollar) is still coming. We say it is certain (unless we can avert it by offering interest on gold at large scale). They ask is it imminent, and we think this is with a mixture of fear and longing for a higher gold price.   Lettuce hope this treasure is not cursed... but it probably is....
  • Scorn and Reverence - Precious Metals Supply and Demand
      Shill Alarm One well-known commentator this week opined about the US health care industry:   “...the system is designed the churn and burn... to push people through the clinics as quickly as possible. The standard of care now is to prescribe some medication (usually antibiotics) and send people on their way without taking the time to conduct a comprehensive examination.”   From the annals of modern health care... [PT]   Nope. That is not the standard...
  • Global Turn-of-the-Month Effect – An Update
      In Other Global Markets the “Turn-of-the-Month” Effect Generates Even Bigger Returns than in the US The “turn-of-the-month” effect is one of the most fascinating stock market phenomena. It describes the fact that price gains primarily tend to occur around the turn of the month. By contrast, the rest of the time around the middle of the month is typically far less profitable for investors.   Good vs. bad seasonal timing...   [PT]   The effect has been studied...
  • Tales from “The Master of Disaster”
      Tightening Credit Markets Daylight extends a little further into the evening with each passing day.  Moods ease.  Contentment rises.  These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening.  Credit markets are tightening.  The yield on the 10-Year Treasury note has exceeded 3.12 percent.   A change in pace: yields are actually going somewhere. There is...
  • Is Political Decentralization the Only Hope for Western Civilization?
      Voting with their Feet A couple of recent articles have once more made the case, at least implicitly, for political decentralization as the only viable path which will begin to solve the seemingly insurmountable political, economic, and social crises which the Western world now faces.   Fracture lines – tax and regulatory competition allows people to “vote with their feet” - and they certainly do. [PT]   In the last few months, over 3,000 millionaires have...
  • Why the Fundamental Gold Price Rose - Precious Metals Supply and Demand
      Gold Lending and Arbitrage There was no rise in the purchasing power of gold this week. The price of gold fell $22, and that of silver $0.19. One question that comes up is why is the fundamental price so far above the market price? Starting in January, the fundamental price began to move up sharply, and the move sustained through the end of April.   1-month LIBOR (London Interbank Offered Rate – the rate at which banks lend euro-dollars to each other). LIBOR and GOFO...
  • “Sell In May And Go Away” - A Reminder: In 9 Out Of 11 Countries It Makes Sense To Do So
      A Truism that is Demonstrably True Most people are probably aware of the adage “sell in May and go away”. This popular seasonal Wall Street truism implies that the market's performance is far worse in the six summer months than in the six winter months. Numerous studies have been undertaken in this context particularly with respect to US stock markets, and they  confirm that the stock market on average exhibits relative weakness in the summer.   Look at the part we...

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