patrick.net

Insurance companies use Reinsurers, like Swissre. The scheme is almost exactly like the MBS scheme. I doubt most people who sign up with Progressive or the little lizard guy or whatever know that their specific risk (like being a terrible driver in excess of what the “risk adjusted rates” should reflect) is effectively funded by large institutional and foreign buyers of that risk.

Yes, I wonder how the $7bn bill for the WTC towers collapse echoed around the world -- they were mostly insured with European insurers who in turn would have been reinsured, possibly back in the US.

Skibum began the thread with a comment regarding MBS threat to mutual funds. At the risk of asking a dumb question, how does one investigate this with regard to one's portfolio?

For example, does Vanguard's Total stock market fund (VTSMX) have MBS risk? (https://flagship.vanguard.com/VGApp/hnw/FundsHoldings?FundId=0085&FundIntExt=INT)

Are index funds less likely to have MBS risk than managed funds?

I'm learning a lot from this thread...thanks to all.

For example, does Vanguard’s Total stock market fund (VTSMX) have MBS risk? (https://flagship.vanguard.com/VGApp/hnw/FundsHoldings?FundId=0085&FundIntExt=INT)

A stock fund --by definition-- would have zero MBS exposure. Bond funds OTH, may have considerable exposure. Vanguard Total bond market index fund has exposure to both GSE issued & private MBS paper, as I recall. Best to refer to your fund's prospectus.

Are index funds less likely to have MBS risk than managed funds?

Frankly, I don't think there's any correlation one way or the other. I'd thoroughly review the prospectus regardless.

HARM,

Thanks...you're right, the Vanguard Total Bond Fund has the following holdings:

Asset-Backed 1.5%
Commercial Mortgage-Backed 4.3%
Finance 8.5%
Foreign 3.0%
Government Mortgage-Backed 35.3%
Industrial 9.1%
Other 0.1%
Treasury/Agency 36.3%
Utilities 1.9%
Total 100.0%

What I find interesting is that under the "risks" section, this is the only comment I could find with respect to MBS:

"The Total Bond Market Index Fund is subject to call risk, which is
the chance that during periods of falling interest rates, issuers of
callable bonds may call (repay) securities with higher coupons or
interest rates before their maturity dates. The Fund would then lose
potential price appreciation and would be forced to reinvest the
unanticipated proceeds at lower interest rates, resulting in a
decline in the Fund’s income. For mortgage-backed securities,
this risk is known as prepayment risk."

It seems like this is the opposite of what we are discussing here, and I guess I find it surprising that there is no mention of default risk. Thoughts/comments?

Here's a very interesting report done on ABX by Nomura.

http://tinyurl.com/yjv8s9

It is quite shocking to me that MASTR (one of the 20 constituent deals) backed by UBS has the highest concentration in the West with over 73% and also the highest concentration of IO with, read this, 100%.

LTCM has become popularly misunderstood. I sometimes think it's ripe for Oliver Stone to redefine for us as most people believe things about it that aren't true.

Good point about Amaranth. The real proof is that monster crashed and yet hardly registered anywhere but in the NG futures markets. And, there were quite a few traders on the other side of Amaranth's superstar who made their yearly return off of his ego. It's also a liquidity thing. The irony is that Amaranth's trades were the right ones, and would have made a lot of money, except that they became the market, which isn't hard for big HFs to do in some of the futures markets.

And Marin Capital went down losing the better part of $2b a little over a year ago. Most people have never even heard of them, even though their failure was in GM stock & convertible bonds.

"Taking the specific case of foreign currency manipulators — China being the biggest offender"

@Randy,

LOL, sure we try to inflate away our debt to them and call THEM the offenders for trying to keep the game fair. But that's off topic. Here's an insightful piece on the derivatives market - http://www.lewrockwell.com/north/north456.html

The irony is that Amaranth’s trades were the right ones, and would have made a lot of money, except that they became the market, which isn’t hard for big HFs to do in some of the futures markets.

The only right trades are those who make money. There is no would-have, should-have, or could-have.

The real proof is that monster crashed and yet hardly registered anywhere but in the NG futures markets.

How much leverage can you have in the regulated futures markets? I guess not enough to cause cascading failure.

Randy H said:
“Taking the specific case of foreign currency manipulators — China being the biggest offender"

frank replied:
LOL, sure we try to inflate away our debt to them and call THEM the offenders

For the specific case of foreign currency manipulation, I don't see anything inaccurate about what Randy said. He took great pains to point out that forex manipulation was the specific issue. The fact that the US can (and does) inflate its way out of debt is another matter.

SP

Boston Transplant,

One of the basic premises at Vangard is that it's very difficult to outperform an index b/c an index frankly has no overheads. O.K, I guess I can go along with that but over 2/3 is in gov't paper. I'll be honest I don't like gov't paper, never have. Doesn't it strike anyone else as a little strange to why these types of funds are so prevelant in qualified plans?

Wouldn't participants be better off (long term) with more exposure to corp/pfd's? Convertibles? Anything but this pulp?

"The only right trades are those who make money"

God love you sir!

It seems like the level of understanding here regarding MBS is as good as anyone that trades them for a living. The bond desks at most firms are no longer pushing this paper. It's tough to retail and w/all the neg. MSM coverage surrounding RE who needs the headache? It's not my job to create a script to move that inventory, it's done.

Who solved the Poincare Conjecture?

Who cares. Who invented Chicken a la King?

Who invented Chicken a la King?

Yes, that person should be shot.

Yes, that person should be shot.

Why?

I do make Chicken a la King from time to time. It is not that bad.

I've always associated it with bad 1950's-style heavy-creamy vat-like foods. BTW, I prefer epicurious.com for recipe and food facts info. It's more commercial, but the recipes are generally good. Maybe I should head over to the food blog sometime...

I’ve always associated it with bad 1950’s-style heavy-creamy vat-like foods.

I do not usually use a lot of cream. You can even use low-fat milk. I like it more watery than usual. And I use ONLY dark meat.

Somehow breast meat is usually dry no matter how you cook it.

Maybe I should head over to the food blog sometime…

Do come over! greencrabs.blogspot.com

Chicken skin is the best part! :)

I think the popularity of MBS will only go down from here.

How about Labor-Backed Security? The loan can be backed by a guarantee of service or labor over a period of time. :)

How about Labor-Backed Security? The loan can be backed by a guarantee of service or labor over a period of time.

Why not just reinstitute debtors' prison?

They invest for the risk-adjusted returns.

Really? :)

I think it is because most people believe they are above-average stock pickers.

How many people even know what risk-adjusted returns are? They look at all the success stories and they want to be one of them. When they fail, they cry in front of their mothers, or worse yet, government.

Why not just reinstitute debtors’ prison?

You mean debtor's labor camps? :)

OK. Then they “should” invest for risk-adjusted returns. Now if someone could figure out how to quantify risk. Don’t tell me volatility is risk.

Risk is the conceptual possibility of an adverse outcome.

You can perfectly quantify risk only if you can perfectly predict the future. But if you can perfectly predict the future, there is no risk.

Therefore risk does not exist.

Not investment advice

Apparently according to one interpretation of Quantum Mechanics, we don’t really exist either.

Cogito, ergo sum.

BTW, what is the cheapest legal way to shop for canned ox-tail soup and Bovril beef tea?

UK internet stores usually charge $40+ for shipping.

Cogito, ergo sum.

BTW, the phrase means "I think, therefore I eat". :)

Doesn't it say it all:

"history has not dealt kindly with the aftermath of protracted periods of low risk premiums"

Remarks by Chairman Alan Greenspan
Reflections on central banking
At a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
August 26, 2005

http://www.federalreserve.gov/boarddocs/speeches/2005/20050826/default.htm

You'd be real surprised at how many funds that are apparently set up for the sole purpose of betting ON the US demise are investing in MBS and GSEs.

I just found out from my prospectus that Pimco's UNhedged foreign bond fund invests about 10% of its portfolio in GSE and MBS, denominated in USD.

Excuse me, the whole point of me investing in the fund is because I am betting on the USD going DOWN, so what good does it do to me for them to shuffle my money right back into USD, not into treasury, but into the stinky GSE bonds?

So read your propsectus carefully, I guess the fund managers are just running out of ideas.

I'll have to agree w/H.Z when it comes to distancing yourself from MBS. It's nearly impossible. Just a few years ago "green investors" had extreme difficulty washing their hands of things like Phillip Morris etc. I don't suppose any of us can participate in our company 401K or take positions in our brokerage accounts and have the expectation that we're "in the clear"!

Perhaps there's a marketing angle for a new Patrick.net offering above and beyond T-shirts and coffee mugs? Invest in our certified MBS FREE Mutual Fund!

Oh, I should add that in spite of our best efforts we still wind up with (as OO notes above) w/some weighting in MBS doesn't mean we give up! This is the good fight.

As Peter Schiff notes in Allah's audio link, the time to get rid of a bomb is when it's still ticking!

Institutions don't have a lot of choice. Each pay period means a fresh infusion of cash. It has to go somewhere! As individuals we have other options.

Allah,

I like Peter, he and I share a lot in common. My wife works for a Fortune 500 company though and I don't think in spite of her tenure that she would have much say in how their plan is administered. (Most of us don't). But you're right and it's about exercising the freedoms and options when we have them before us!

Person,

In ways, we miss Vangard. When my wife's company got bought out they terminated the long and profitable relationship w/Vangard and went w/Fidelity. Sheesh, take your pick, the 2010, 2020 or the ever popular 2030 Fund! It sucks.

I believe the reason the 401K industry has elected to take the low road is all about liability. That's why we're seeing so much emphasis on "education" at the participant level. After the market meltdown plan sponsors are doing everything in their power to distance themselves from the process! Hence the generic "buffet" of offerings. Allowing real choice like ETF's and country specific funds is more fiduciary liability than most employers are willing to take on. I agree, yuck.

September existing home sales volume AND prices down YoY:

http://biz.yahoo.com/ap/061025/economy.html?.v=4

Allah,

I can't disagree with what you say but at some point we all have to decide wether we're going to fish, or cut bait.

When my wife and I decided to sell our home prior to the peak of the market and NOT re-deploy those assets toward an even bigger more ridiculous home we made the choice to rent. I know it sounds simplistic but that's what we did. Since we no longer have a HUGE Schedule "A" to lean on we take the Standardized Deduction of around 10K. (Married filing joint). When you're used to having around 30K + in itemized deductions, this is a huge hole. Since neither of us is 50+ we don't get the catch up clause for IRA contributions. Even though I max out my SEP/IRA we still have income that needs to sheltered so for her to take full advantage of her company sponsored plan just makes sense.

(Of course for Peter P this is all moot b/c he believes in "pay as you go" anyway).

Oh Oh Oh,

and when your daughter (whom you support almost entirely) asks you if she can claim herself so she can "get back" $346 in taxes...... that doesn't help either!

Of course you can dear.

Speaking of international diversification, does anyone agree with me that younger investors should probably have something like 90-100% of their investable assets in foreign securities? I know this seems drastic--especially compared with the conventional wisdom that you should not have more than 25% exposure to foreign markets--but is it really?

For instance, in my case I know that 100% of my future earnings will be dollar-denominated. So if the dollar crashes, my paycheck will not buy nearly as much gasoline, heating oil, or foreign-made goods. It is likely that my future earnings will be at least 10 or 20x the amount of my investment portfolio. So then isn't it true to say that 90-95% of my future net worth is *already* tied to the dollar? Why not hedge this massive exposure by investing my small investment portfolio entirely in foreign markets?

Glen,

Not radical for you at your age or me at my age! Like FRIFY said, for him to buy a home in the BA would mean something like 98% of his net worth would be in ONE undiversified investment, all dollar denominated btw.

I got no problems with where you're coming from.

skibum,

The article you linked noted a decline in the median price of a home but failed to define what "median" implies! Now we have to log on to Realty Times to get that informations......

George,

I'd read an article about a home in an exclusive FL area that had been on the market for months on end at like 900K without a single written offer. Then out of the blue someone offers 1.15 mil! Yeah, that's what I thought. What, was the buyer in some sort of imaginary bidding war with himself? No, not really. Just a "helpful" neighbor. Seems even those in "upscale" communities could use a little MEW love once in awhile. Because they can't legitimately sell their homes on the market, they sell them to each other AND at above asking price! Wish I lived in a neighborhood with that much "love".

Scumbags.

Allah,

During the 90's when people were throwing money at the US market with both fists who the hell needed to pay a dividend? Dividend at that point meant cash cow and cash cow meant no growth! People actually shunned these "old economy" stocks. Twisted..... I know.

Back in the day old timers bought the stock not so much for appreciation but simply for the div. If it went up at all great but it really was about the dividend. Things have come full circle and they're now back in vogue (along w/ "old economy" stocks!)

One definite advantage that I see for the ADR's and pure Euro plays is that their accounting is handled on a rotational basis so you don't have the "Arthur Anderson Effect" where auditors get too chummy!

DinOR and Glen: You’ll have to help me out, since monetary economic theory always throws me for a loop. How does the dollar denomination of a house or domestic equity investments expose you to a risk of the dollar declining? If dollars are worth less, then the house or domestic equities will be worth more … in dollars. Even if the dollar becomes completely obsolete, you could redeem those (non-money) investments in whatever the new currency is, right?

This is a tricky issue for me too and I don't claim to have mastered it. However, it seems to me that your dollar exposure of any asset is related (though not perfectly) with the source of income earned by the asset. A few examples:
1. House: Compare a US house to a house in Japan. In both cases, the income is derived from real or imputed rental income. For simplicity, assume both houses are rented out. If I buy a house in Japan and the dollar declines 20% vs. the Yen, then my rental stream increases by 20% and the cost of Toyotas in the US increases 20%. Thus, my ability to buy a Toyota is unaffected. If I buy a house in the US and the dollar declines 20% vs. the Yen, then my rental income stream stays constant in US dollars, but I have 20% less Toyota purchasing power.
2. Stock: The analysis is complicated by the fact that many global companies earn money all over the world. A foreign company that exports most of its product to US consumers may actually have more exposure to the dollar than a US company that earns most of its money overseas (not to mention the complicating factor of hedging by US and foreign companies). But overall, it is safe to say that a foreign index fund has much less exposure to the dollar than a US stock index fund. For simplicity, assume I can choose between two stocks--USA Co. or Canada Co. USA Co. makes products exclusively for the US market. They earn $10M US dollars per year selling products to the US market. Canada Co. earns $10M Canadian dollars per year selling products to the Canada market. Assume we start the analysis when the US and Canadian dollars are trading 1 for 1. Now the dollar crash hits. One US dollar only buys 80 cents Canadian. Now the $10M in US earnings only buys 80% as much Canadian goods. But the $10M Canadian dollars still buys $10M worth of Canadian goods (or $12.5 Million in American goods).