patrick.net

Your input is valued highly as well.

I still lack experience. As I have said before, I am learning a lot from this blog. Also, I am not too sure about the inflationary scenario at this point. I need some advice too.

My final post for tonight:

PeterP; I really stopped paying attention to those loans after about 1980. My experience with real estate after 1978 was solely as an investor (and homeowner).

SactoQt: Too bad about your friends getting out too early. I have not gotten out yet. I will wait to the last day. The declines are always slower than the boom in residential real estate. I sold last time in 1989.

The downturn is inevitable. The timing and severity are the unknown. Predicting the timing or severity with accuracy has great value. Predicting the inevitable is of no real value.

PeterP: Your quote by Jefferson fits with much of what occurred during the Great Depression of the 1930s. Fortunately the federal government passed laws that restrict those abusive powers.

Inflation is all but dead for the immediate future. Long rates will rise a little perhaps, but the world demand is lower than supply for almost everything. Pricing power is still weak. Further, corporate profits as a share of GDP are recently at record highs. Companies will give up margin rather than lose business at these profit margins. Short rates will likely spike in the next 12 months and then decline to about or below where they are now. ARMs will be cheaper than Fixed loans in the long run, but not in the next 12 months.

Harm: It is a dangerous condition that so many have these loans. Not because the loans are bad, but because so many people will mismanage their finances because of them. In the end most borrowers will be fine even with these loans. However, many will find these loans to be the straw that breaks their back.

I have enjoyed this site, and will return. Goodnight.

Predicting the inevitable is of no real value.

I concur. Let's try to turn our attention to timing and severity.

Even if I am to be proven wrong in the future, I still feel that the current situation is a great learning experience (what in life is not a great learning experience?). I have never seen the market in action with such attention and obsession. :)

I guess I have become a bit obsessed.......

Reguarding Bubbleheads contradicting themselves…. I think you are painting with a broad brush again

Jack - thanks for the reality check.
Discussions about macroeconomics make it too easy to let your mind wander and entice you into useless speculation (of the cognitive sort). What the hell was I thinking??

NAAVLPs remain a bad deal, even assuming high inflation (unofficial or otherwise), because amateurs are gambling they can either sell at a profit due solely to continued high rate of appreciation, or refi/roll-it over into another NAAVLP. When prices plateau/drop and rates go up, it's K-Y time...

Strength and honor

I guess I have become a bit obsessed……

Who isn't on the board? Even Face Reality cannot resist... ;)

Your quote by Jefferson fits with much of what occurred during the Great Depression of the 1930s. Fortunately the federal government passed laws that restrict those abusive powers.

I certainly hope so. What if we change the quote to

"If Americans ever allow The Bank to control the issue of our currency, first by inflation and then by deflation, The Bank will deprive the people of all property until their children wake up homeless."

Peter: That portfolio (with yearly rebalancing)

Yeah. Kind of a pain, but with index funds and rebalancing achieved by inflow rather than selling, you end up not getting slammed too badly. The guy I work with charges seventy five basis points, which is worse than VFINX's eighteen, but is pretty good overall.

I'd rather just own one vanguard-like passive fund that does the diversification/rebalancing for me with computers and near-zero overhead. But I poked around and didn't really find a fund like that. Any recommendations?

Cheers,
prat

Just to chime in on IOL's: interest only loans, some with negative amortization, were (I have heard) quite common in the 1920's. It was one of the things that lead to the bank failures.

Ha Ha, hellboy, the Chinese have been talking about that for quite a while already. So it is not a complete surprise.

Bond price is down (yield up), but nothing dramatic. Perhaps the market does not think that the re-peg will cause too much bond sell-off?

Prat, do you have Forex exposure other than the 10% international index fund?

Cattle, the government backing of Fannie Mae is a perception because

1) It is federally chartered
2) It is too big to fail (!)

I think early payment (pre-payment) has more to do with interest rate movements (http://tinyurl.com/atqo3). I am not expert in this either.

If the credit risk of Fannie Mae is not questioned, foreclosures should not matter much to the spread. Homeowners are supposed (!) to have equity to protected themselves in case of a downturn, right? ;)

Prat, I do stocks myself. So my brokers really love me even more. ;)

BTW, the Fidelity Target funds will rebalance your portfolio based on your expected retirement date. A pretty good idea indeed.

Fake P, the Chinese has demostrated that they will only revalue in "measured pace".

I think your money is probably better served elsewhere.

(Not investment advice.)

g lammert, great site!

The terrorist trolls are striking London again. I heard that no one was killed. Thank God.

Still seems a bit premature to short financials and housing all-out.

Shorting needs to be driven technically. It is not the time yet.

Any thoughts as to where?

Anyone has figured out what basket of currencies to which RMB will be pegged?

Veritas, I am looking at CHF, NOK, AUD, and NZD. How would you get Forex exposure? Would you trade them or would you hold them?

If CHF and JPY are already too high then leveraged carry trades may be difficult to implement.

"Too high" relative to other currencies.

Forget what I just said, what I meant is that it may be difficult to borrow CHF/JPY (low interest) to buy higher-interest currencies if CHF and JPY are going to appreciate because of this revaluing move. On the other hand, borrowing USD (higher interest) to buy CHF/JPY will incur a lot of carrying costs (interest).

Peter, I must cede to your wisdom

Do not cede to the void. I have no wisdom. Just words.

BTW, I am interested in those currencies because Norway, Australia and NZ are rich in commodities. And the Swissland has fondue. :)

I do not know. My tiny brain is overloading.

One question: can China use the peg as an excuse to buy up currencies of its export competitors, thus driving up their prices and removing their competitiveness?

Zeta, I am not going to comment. The moment I make a prediction, the reverse will happen. (Not long after Bond bears waved their white flag, bond prices started to fall. This is the way of the Collective Unconscious to punish the talkative.) :)

Veritas, I agree with with except

This is NOT consistent with the governing policies of the PRC. They tend to handle dissent poorly. Remember Li Peng is the guy who “green lighted” the Tianamen massacre.

My impression is that the Chinese government is pro-wealth so long as it power is not challenged. I seriously doubt that they see the middle class wealth as dissent. I think they will actually see improving economics as a reinforcer of their power because happy and complacent people are much easier to control, so long as growth remains sustainable.

Veritas, you have a point. I do expect instability over the intermediate term.

Veritas
I just met a woman today who is raising a female child adopted from China. She told me that all the unmarried men in China are starting to form gangs because they don't have anything else to do. Off topic but interesting.

I shouldn't say ALL the unmarried men. But you get the point.

SactoQt, that would be very bad.

Peter
I really don't know much about it. But can you imagine so many young men with no one to marry? I do wonder what the long term consequences will be.

I do wonder what the long term consequences will be.

No doubt some will turn to various forms of fundamentalism.

You're probably right, but in this case I would have to hope you're wrong.

Since we are talking about the Chinese economy, how do you think this kind of instability will affect the world economy in the future?

You’re probably right, but in this case I would have to hope you’re wrong.

I certainly hope that I am wrong too.

Perhaps they can marry someone from neighoring west asian countries?

Perhaps they can marry someone from neighoring west asian countries?

Let's hope they are considered "acceptable marrying material."

Since we are talking about the Chinese economy, how do you think this kind of instability will affect the world economy in the future?

Instability is never a good think for the world economy. A country with more than 1 billion people is going to make a lot of impact.

One thing though, policy decisions are extremely efficient in China. I do have faith that they can solve the problem without resorting to war.

Veritas, have you consider the possibility that the "re-peg to basket" is a scheme to further depress the value of RMB?

Although the initial revaluation result in a gain of about 2%, they now have the flexibility to "choose" appreciation and depreciation against various currencies so long as the peg to the sum remains relatively constant. This re-peg to a basket of currencies is a very clever strategic move.

Veritas, now you are being dramatic.

Strategic nuclear weapons will never be used against another nuclear nation. It will forever remain a threat and only a threat.

I agree, but it does bring parties to the table, like Pakistan and India.

Absolutely. We only need to worry about nukes from terrorists.

Anyway, I think China's posession of nukes did played a major part in their emergence as a economic power.

Maybe they are sensing Europe and Asia would become more important export destination than US in future.

Or they now have a way to depress its value against the dollar without relying on US assets. The Chinese rarely makes a wrong long term strategic move.