patrick.net

DinOR / OO :

I have been trying to look for some good agricultural plays. MON seems very much overinflated and not sure about BG. I have some ADM but nothing else in that sector. The DBA is a strange beast. How to evaluate that ? It doesn't seem to go proportional to prices, maybe because it uses shorter term futures.

Any ideas ? With usual disclaimers of course.

My bad, the Fortress is impregnable.

Palo Alto Daily News:
Mortgage trouble? Act early

Counseling offered to troubled borrowers
By Shaun Bishop / Daily News Staff Writer

"Right now," Eichner said, "we're drowning in these calls."

It is one of Free Market’s ways to limit population growth.

Yes, starvation is right up there with war, pandemics and extinction-level disasters. Great "solution" to the problem of overpopulation. Anyone care to volunteer to starve first? (This is a good example of a macro-level social problem the free market is simply not well equipped to solve on its own.)

I want to buy stock in "Soylent Green"
That solves two problems.

Stuck,

my major ag. holdings are in BG (but got in early, not recommend for current level), DBA and RJA.

DBA and RJA only bets on the end price, and as all commodities, they are bound to end up in huge swings, but of course the macro trend right now is pointing up. Today is probably not a good day to load up.

I am particularly looking for a rice play, which RJA has little and DBA has zilch. Apart from the China factor, the fact that we are stupid enough to feed food to cars also dictates that food price will have to be on the rise in the next 2 years.

Can someone comment on Chindian public/private school housing arbitrage. Does this really happen? At what point does a house, in say, the east San Jose hills with private schools look better than a stucco box in Cupertino?

True, but I usually preface that with “why do we have to?”
DinOr, didn't mean to misrepresent you ... clearly you're someone who thinks applying the brakes when a wall is on the horizon is a good idea. Truly amazing that leadership at places like CITI said "pedal to the metal" and, well, close your eyes while you're at it as a turnaround it just around the corner. Had to clear out that dead wood before SIvs went in house and the tin cup went out looking for working capital...

Without the government subs., ethonol is a bust. From the seed corn to the full circle product + energy it's a negative and the amount of waste is obscene. If it was free market, it would be backburnered.

We've covered this before (though maybe it's time for a refresher thread), but it's possible to be moderately pro-REGULATION (as in no slavery, child labor, don't poison your customers, don't pollute, etc.) without being pro-SUBSIDIES or pro-price controls.

Housing, ethanol/corn, milk & oil subsidies = bad for consumers & taxpayers.

Outlawing stated-income, neg-am & I/O loans and requiring SarBox for mortgage lenders = good for consumers & taxpayers.

Seriously, there IS a difference.

EBGuy :

I have tackled that "arbitrage" question a few times. Especially to answer the myth about "economic fundamentals supporting the Fortress" argument.

If numbers matter then why wouldn't someone buy a better/newer/bigger house in Sunnyvale and send kids to private schools than buying a Cupertino for Monta Vista ? 150K per kid seem enough of for 10 years of private education.

Let's keep it simple, and ignore the benefits of lower property tax, lower mortgage servicing costs and wasted opportunity costs. Even without all these benefits, it seems that for a 2-kid family, it is better to buy a house in Sunnyvale that is 300K less than comparable Cupertino home.

My anecdotal and small sampling indicates that this is not the case. Cupertino sh1tboxes can go over 1.2M when comparable Sunnyvale homes can cost less than 900K.

There are few explanations.

1. People - the typical 2-income IT engineering family - cannot do math.
2. People are willing to pay for the non-tangible pleasure of having Cupertino on their address labels.
3. People believe that the appreciation of Cupertino houses can outweigh the additional cost to own them.

I believe that the housing in Fortress is going to bust. Softening has already started. But the real pain is still far away. The strong employment and low rate aberration cannot continue forever. One of them will break. When is uncertain.

But the arbitrage works in favor for the Sunnyvale / Santa Clara areas. In the real long run, they will do much better than Cupertino.

OO,

I usually change the channel before Cramer comes on but I bot @ IPO so my c/b is $40. At $57 clients are up over 42% (and remember this was just rolled out last Labor Day).

I mean, if Jimmy bought a car like mine, (I'm not going to trade it in the next day?) I will look at DBA though b/c what you say makes sense. Usually I have my strategy for the upcoming year well charted by this time but I've had a lot going on and if TODAY is any indication....?

Not Investment/Automotive Advice

EBGuy,

Oh I don't think it was off the mark at all. Perhaps we should be asking: "How many TIMES do you have to hit the wall...?"

I wonder if China is deciding to hold grain at home in preparation for alcohol vehicle-fuel production in the near future. Much of their foreign exchange appears to be going for petroleum. Do you think the commies are that stupid as to try the ADM "solution" to petro imports?

If banksters are having a problem making loans, won't they need more cash in order to support the lower loan-to-asset ratios of the future? Won't they push for higher interest rates to get people to put more cash into savings accounts?

Project Sentinel .... I know them well, went to them about complaints in the ghetto-fabulous Sunnyvale apartment I was in, you know, the usual, gang activity, drug deals, death threats, attempted break-ins, being followed by packs of gangers, standard stuff for Sunnyvale.

The Crime Prevention unit of the Sunnyvale PD is better to go to for the above, although the above is good for filing HUD complaints and getting the slumlord in trouble.

Funny, the place I live in now is nowhere near as hyped at Sunnyvale and no problems. Which is funny because what bought these two+ acres and buildings here wouldn't buy a damn doghouse in Slummyvale.

HARM Says:

> Outlawing stated-income, neg-am & I/O loans and requiring
> SarBox for mortgage lenders = good for consumers & taxpayers.

Why would outlawing “stated-income, neg-am & I/O” loans be “good for consumers & taxpayers”?

If outlawing stated-income, neg-am & I/O” loans be “Good” for consumers & taxpayers, would requiring only all cash sales (or maybe 50% down payments) be even “Better”?

StuckInBA Says:

> EBGuy: I have tackled that “arbitrage” question a few times.
> Especially to answer the myth about “economic fundamentals
> supporting the Fortress” argument.
> If numbers matter then why wouldn’t someone buy a better/newer/
> bigger house in Sunnyvale and send kids to private schools than
> buying a Cupertino for Monta Vista ?

The reason is that most kids (even kids from rich WASP families) can’t get in to the “good” Bay Area private schools and the kids from recent Chindian immigrants have almost no chance of ever getting in to a good Bay Area private school. If you move to Burlingame or Cupertino the public schools have to let your kid in…

FAB :

Interesting angle. Can you please elaborate why this "discrimination" ? I have never heard it before, and from your comments it doesn't seem to do with racism either. What can be more divisive than money and/or race ?

If outlawing stated-income, neg-am & I/O” loans be “Good” for consumers & taxpayers, would requiring only all cash sales (or maybe 50% down payments) be even “Better”?

In a word: yes.

Imagine a California where 50% down is the norm. Imagine working class houses that average $100-150k. Impossible you say? Nonsense.

Most of the cost of a house today is in land prices, which are absurdly high (as we all know) due to rampant speculation on margin, absurdly cheap Fed credit and the government tax subsidies that fueled it. The rest is mostly due to extortionary local government fees (as high as $100K in some NCAL counties), which could easily be eliminated if the public demanded it. The cost of labor (usually illegal) and raw materials to build the structure is practically negligible in CA --probably well under 20% of the cost of the property.

In the aftermath of the Great Depression, I/Os (and neg-ams too AFAIK) were banned and stated-income was all but unheard of, thanks to Glass-Steagal and other similar legislation. End result: affordable housing that pretty much tracked inflation and 2-3X HH wages for the next 30-40 years.

Is there any regular here who still believes that Debt = Wealth, or that allowing consumers to dig themselves an ever-deeper financial hole actually increases (not decreases) true "affordability"?

Anyone read the FOMC minutes ? The key phrase there is feeling that rates need to be reduced substantially. If anyone is still naive enough to assume that Fed is done - this might be a good time to wake up.

Note: I am not proposing actually setting a government-mandated minimum down payment of 50% or all-cash or any other figure (though at the very least the GSEs should not be buying any $0-down, stated-income mortgages).

However, banning NINJAs, I/Os and neg-ams is not only good common sense, it is also in the public's (but not Wall Street's) best interests. It was done 70 years ago, it can be done again, and it should be done.

Oh, and since we're on the subject of "regulation" vs. "subsidies", banning secret, unpublished YSPs (A.K.A. toxic-loan kick-backs for unlicensed, non-fiduciary mortgage confidence men known as "brokers") and putting up a firewall between appraisers and lenders would also not be a bad idea.

HARM, the step in the right direction for the government to do is to remove all attempts to encourage people to buy with tax breaks and whatnot, right?

If didn't have the mortgage interest deduction and the capital gains exemption and so on and so forth and got rid of all the quasi-government institutions that supposedly help homeowners, wouldn't the prices come down?

Then, let the lenders operate in a real market with no Fed cushion to bail them out. Like any other loans, the lenders will decide how much risk is appropriate.

The rates and downpayment requirements will vary based on the borrower's risk (credit rating, job etc.)

This is pretty how it was in India growing up. Most people bought houses the following way:

1. Save money while renting for years.
2. Use the saved money to buy land.
3. Using some more of the saved money (maybe after a while) and money borrowed from friends/relatives (if necessary), build the house.
4. If absolutely necessary, borrow a little bit from a bank.
5. Move in and start paying off any loans.

My father did this and many others too. And the house would be completely paid off usually a few years after moving in.

Nowadays, the US model is being adopted more and more and I feel sad about that.

I feel there is no need for banning all those dubious instruments using the strong arm of the law. If the incentives are removed and the risk stays with the lender and the Fed does not expand credit ridiculously, that will automatically happen.

sriramgopalan,

Here's the thing: there's a big difference between being pro-SUBSIDY (direct or indirect, taxpayer financial support) and pro-REGULATION.

We have NOT had any meaningful regulation in the mortgage and RE industry, especially when compared to the securities industry. What we've had are $Trillions in government subsidies, taxpayer risk underwriting and various taxpayer bailout proposals.

I would like to see this situation reversed. Real, substantive, common sense Regulation, and a whole lot less (prefereably zero) subsidies and taxpayer bailouts. I don't think we can get back to a sane lending market by eliminating the subsidies & bailouts alone.

There is a reason why there are no I/O or neg-am credit cards: it's called "Usury" --a legal concept that I would like to see come back with a vengeance and applied to the REIC.

Harm, each mortgage regulation is basically another boiler plate form that gets added to the to sign stack. People focus so much on reading that blacks can get a loan the same as whites that they neglect the note. You are right on the mark about meaninful regulation. In CA the state does a very good job regulating insurance companies so that consumers easily shop for something based on standardization of terms and coverages.

Yes redefine usury for mortgage lenders. Let rates float with the market but stop with the shell game terms.

I feel there is no need for banning all those dubious instruments using the strong arm of the law. If the incentives are removed and the risk stays with the lender and the Fed does not expand credit ridiculously, that will automatically happen.

I disagree. Banksters and companies will always try to get away with whatever they're allowed to get away with. They have a mandate to make money and serve their shareholders --period. If it's profitable and legal for them to operate factories using slave labor, they will use slaves. If it's profitable and legal for them to dump toxic waste directly into the air and public waterways, then they'll dump. If it's more profitable for them to sell "innovative" neg-am NINJA loan products (and securitize them & dump the risk onto the taxpayer) vs. "old fashioned" full-doc FRMs, then that's what they'll sell. If it's profitable and legal to hide information and coerce/intimidate competitors, then they will hide and coerce.

There's nothing wrong with capitalism, as long as some basic level of regulation is established to address its fundamental shortcomings. Namely, the tragedy of the commons, and unfettered capitalism's inherent tendency to reward unethical, coercive, fraudulent, monopolistic and other socially, environmentally & ethically unacceptable behaviors.

my dog got out the back gate, wandered around the neighborhood and came back with a mortgage in his mouth...

Maybe they will reposess his doghouse next year...

Oh, and since we’re on the subject of “regulation” vs. “subsidies”, banning secret, unpublished YSPs (A.K.A. toxic-loan kick-backs for unlicensed, non-fiduciary mortgage confidence men known as “brokers”) and putting up a firewall between appraisers and lenders would also not be a bad idea.

I suppose this is along the lines of SG's post, but I have always held the REIC will have to be destroyed if the securitization engine is to be reved up again (and there are too many reasons for it not to be). Those who "poisoned the securitization stream will be shown the door".
BTW, exotic ARMs have always been tools of the rich, so I have a hard time believing they will get banned. In fact, for our highly mobile society with shortened holding times for RE, I can see some of these types of ARMs getting more popular. Of course, this time around, someone's gonna come a knockin' to make sure the residence is truly "owner occupied" (you can bet the investors are going to want to know).

No, actually China is NOT falling for the feed-food-to-vehicle crap like we do. There was a small-scale ethanol experiment earlier last year but the central mandate right now is to shut down all ethanol projects using biograins. There is a real issue of food shortage, and keeping the 1.3B population fed is definitely one of the top priorities for the Chinese government if it wants to stay in power.

For all you no-regulation, laissez-faire "the henhouse runs better when the foxes are in charge" capitalists out there:

"If men were angels, no government would be necessary."
--James Madison, The Federalist #51 (1788)

There are two things that I disagree with Mish.

1) Gold is a better hedge for deflation. Maybe his definition is different from mine, deflation to me means USD becomes the most treasured "benchmark of wealth" in the world, everything expressed in USD terms will decrease, which should include gold. I have a big gold position but am not a gold bug, and I am particularly bothered by people who claim gold is a good hedge for both inflation and deflation, sounds too good to be true.

In what circumstances will the world collectively say, ah, these responsible Yankee bastards really care about the value of their currency, let's hoard USD, although the Fed keeps dropping rate to the floor. Does any US government official, any US government action indicate that they care about defending the USD, except for lip service?

Currency value is based on one thing, confidence. Just because USD is destroyed in massive amounts doesn't mean that worldwide investors are now suddenly confident in the US. Especially when the US consumers stop buying stuff, explain to an ex-foreigner like me why I should hoard a currency of those bankrupt consumers? What can they do for me?

2) Asset deflation across the board. That happens only once, in 1929, when USD was gold-backed, and government couldn't print out of the mess. What incentive does the US government have to make USD and all the debt denominated in USD more expensive for itself, its SS, Medicare obligations and its debt-ridden citizens?

The government's manipulation of one's currency is one-sided. You can weaken your currencies very easily, but you cannot strengthen it with the same ease. Look at Japan, they can always manipulate Yen downwards (print Yen to sell), we can just do the same, the printing ability is infinite.

Asset deflation will only happen in previously over-priced categories like housing, because government doesn't have a mechanism to sprinkle money evenly to every sector of the society. If heliBen does drop USD on a perfectly even basis to every single American, then we will have no deflation in ALL sectors. Since we don't have such a mechanism, those who can't get as much sprinkle won't be able to keep supporting the asset price that are linked to their wealth.

Mish used Japan's deflation as an example. Unfortunately he is not very familiar with the Japanese situation. One, Yen is not a world currency hoarded beyond the need for practical use, and enjoyed no premium for being the world's reserve currency, which we do, that's why we have further to fall than the Yen. Second, the extra Yen printed was largely borrowed for Yen carry-trade so they disappeared in circulation within Japan! Third, Japan's recession coincided with the emergence of China as a production base, so offshoring was a big reason accounting for the price deflation. Today, China is the already world's production base, and we've already offshored everything we can (is there still nuts and bolts left?). Therefore, it is completely naive to draw a parallel comparison between Japan and US in terms of their response to recession.

OO,

Post a comment on Mish's blog - he usually answers any comment worth answering - so most likely you will get an answer.

He has claimed that gold is NOT a good hedge against inflation and one proof is performance of gold in 15 years before 2000. According to him, it's a hedge against hyper-inflation, which is really unlikely as Randy H pointed out.

Mish argues that gold is money and hence a deflation hedge - "cash is king". It's not an asset - it's money - a form of exchange.

His definition of inflation and deflation has nothing to do with commodity prices. It's about supply of credit. He has been saying that consistently for many years - and has so far been proven right in terms of interest rates, treasury notes and gold. And we are in a housing deflation.

It took me a while to understand, but his arguments about commodity prices increasing has nothing to do with inflation - which is increase in money supply to him. Oil can increase due to peak oil and corn prices can increase due to Govt policies. That's not inflation to him and he was not ruling out increase in these commodities.

Ok, this is not all I agree with. His blog also had a great debate with Peter Schiff just last week. I would vote for Peter Schiff's stand. No matter what the technical definition for all these "flation"s are, I see prices for things we NEED going up, USD falling, houses dropping in value and eventually long term rates going up.

Sriram - I like your model on how to acquire a house. That's how it used to be most places. That's how it is for most in mexico.

It's traditionally been kind of like that here, buy the land and put a trailer on it while you build the house. Big bank loans in many cases but I also know/know of people who've done much of the work themselves, and "bit by piece" as they say.

sriramgopalan's DIY/pay-as-you-go model also used to be the standard here in the US, if anyone can believe it. Before WWII and the universal adoption of the 30-year mortgage (we can thank the government for that, naturally) and the G.I. Bill, DIY/PAYG or short-term "balloon" mortgages were the norm.

Outside of the Amish, a few earthy-crunchies and some unusually stalwart, rugged individualist types, there aren't many Americans today with a lot of enthusiasm for this model of home ownership anymore. Which is too bad, because the owner-builder really does end up "owning" the house & land within a reasonable period of time, and gains a tremendous amount of practical experience and skills in the process.

We had a discussion about this (in the context of straw-bale & alternative DIY construction), but the big drawback was, in the end you need relatively cheap land within a reasonable commute range to employment centers for it to work. As long as Wall Street (& Fed) is willing and able to lend out $Trillions in cheap credit and consumers are willing to enslave themselves to their overpriced houses for life, land prices will continue to be set by speculators and sub-prime & NINJA borrowers.

One of the biggest advantages of building houses the step by step, almost no mortgage way was the emotional investment that is made while doing so. You don't become just part of the community, you build the community doing so.

Today people ask - will this neighborhood "appreciate" as much as others ? This does not build a community. But when you are borrowing north of 80% of the cost, it is only human to think of your house as your "investment".

To be sure, this mentality was there even before the bubble. I don't think this method will ever return. Nor does it have to. The world has changed, for better or for worse. I would settle for conservative and prudent financial behavior - and I am not sure even that would ever return. I don't think this bubble bust would change much of the speculative spirit. For a few years it may seem so - but only till the next bubble.

A question about Trulia. Is there any way to obtain more information about a listing without having to go the subscription route ?

Would any of the regulars here think of buying a foreclosure ? One of the listing is quite attractively priced, but I have no idea about how buying from bank is different than buying from a person. Yes negotiations will be different, but is the process more complicated or with legal pitfalls.

Maybe I need to attend one of the Foreclosure seminars ;-)

StuckInBA Says:

> FAB: Interesting angle. Can you please elaborate why this
> “discrimination” ? I have never heard it before, and from your
> comments it doesn’t seem to do with racism either. What can
> be more divisive than money and/or race ?

All the “good” private schools in the Bay Area have way more applicants than spaces so the schools almost always take kids from families that have been generous to the schools for generations. Today the schools want to say they are “diverse”, so they do have some minorities, but the minorities are usually the kids of 49ers or black guys that became friends with some of some of the school board members while in Law School at Harvard or Business School at Stanford…

StuckInBA Says:

> Would any of the regulars here think of buying a foreclosure?

I would think about it, but I would want to get the home at a big discount. If the previous owners were still living in the house I would want a massive discount since you will have to evict them and you run the risk of them thrashing the place and will have little chance of getting any money from them…

I asked:

> If outlawing stated-income, neg-am & I/O” loans be “Good” for
> consumers & taxpayers, would requiring only all cash sales (or
> maybe 50% down payments) be even “Better”?

Then HARM Says:

> In a word: yes. Imagine a California where 50% down is the norm.
> Imagine working class houses that average $100-150k. Impossible
> you say? Nonsense.

I don’t understand why HARM (or anyone else) cares if a bank makes a bad loan and loses money… Should we pass a loan that made it illegal for parents to give loans to irresponsible kids (or me to loan a friend with a drug problem $100)?

If the government passed a law that made the minimum down payment 50% the price of homes would not drop to $100K, they would just drop a little and we would have a lot more rentals with higher rents (since a 50% down payment would make it so hard to buy landlords would be able to charge higher rents)…

> Most of the cost of a house today is in land prices, which are absurdly
> high (as we all know) due to rampant speculation on margin, absurdly
> cheap Fed credit and the government tax subsidies that fueled it.

The reason for high land prices is due to lack of desirable space and restrictions on development not speculation (if half the lots in SF were vacant and available and there were no restrictions on developing those lots the price of the lots would not be high)…

> In the aftermath of the Great Depression, I/Os (and neg-ams too
> AFAIK) were banned and stated-income was all but unheard of…

I was not around at the end of the Great Depression, but I’m pretty sure that IO loans were not banned by the government (I know that they have been legal, but unpopular for most of my life), but stopped because banks figured out that an amortizing loan would make it easier for the Borrower to actually pay off the loan (and cut bank loan losses).

> Is there any regular here who still believes that Debt = Wealth, or
> that allowing consumers to dig themselves an ever-deeper financial
> hole actually increases (not decreases) true “affordability”?

You can only dig so deep before the hole caves in and buries you. Once enough borrowers are killed by cave ins and can’t pay back the banks it will become harder to get a loan without any government action (this has already happened and I’m betting that it is now impossible to get the once popular stated income NINJA loan in California)…

From MSN Investor :

"As long as demand is greater than supply, the dollar is weak and the Fed accommodative, prices will move higher," said analyst Peter Beutel of Cameron Hanover, an oil consulting firm in Connecticut.

This is perhaps the first time I have seen MSM saying that the Fed is at least partially responsible for oil prices.

Except for professional like FAB, I don't think we should touch foreclosure. I will only buy foreclosure land.

Aside from the legal complications, the thing I am most concerned about is sabotage, which is very common. Lots of disgruntled previous owners pour concrete down the pipes, trashed the cabinets, or even intentionally pull out wires behind certain appliances to cause short circuit.

You should go on youtube to search for sabotaged foreclosed homes, classic.