patrick.net

SP, I concur with your logic and analysis for a good method to estimate asset value. But remember that market value is what the market will bear. We can only guess at the values for the various intangible elements. And each person will have differing values for these items as well as differing costs of capital. So there really is no single valid calculation of value, as it will be different for each person.

As a real estate investor I have my own standards and costs for evaluating properties. Nothing has fit my standards since early 2003.

But remember that market value is what the market will bear.

Cannot be more true. That is the definition of market value.

The Democrats are better. At least they want goevernment it to work, but they also run up against human frailty.

Justme, if not because of that human frailty, everybody should be a democrat. ;)

But at least I understand humanity. Going against human nature is an exercise that is doomed to fail.

In a perfectly efficient free market world many would be oppressed and discarded by the brutality of the system. In a perfectly equal compassionate world everyone would share equally in the abject poverty.

So under Free Market some will be oppressed but in a "compassionate" world all will be oppressed.

Now we know which side we should err on. :)

TOB, our actions are by definition artificial. ;)

So human nature has nothing to do with Nature. It should be renamed human artifact.

TOB,

Indeed, and we should all be thankful for that.

Duke,

if we raw print, which is something I expect to happen, there won't be the high interest rate problem, the Fed can keep the interest rate artificially low for Treasury forever, although USD is toast.

See, Treasury auctions off Ts, Fed writes a check, there is no limit on how much Fed buys, where is the urgency of seeing a spike in interest rate? We are already doing this in stealth, what do you think Fed's taking on crappy asset and paying full price for them equivalent of? Raw print vs. 1.0. How did the Fed expand its balance sheet from $950B to $2.3T in 3 months? Raw print. It is just that our speed of printing is too slow compared to the rate at which debt is getting destroyed. But I have confidence in the Fed to catch up. Better still, we have Bernanke in his driver seat till 2010, what is the odds of him refraining from raw printing at a high speed from now till then?

As for housing value, the only thing that can really destroy it real bad is not interest rate, but unemployment rate, or the expectation of staying employed. Still too many people are being employed in the Bay Area to support the price. Once the current homeowners get laid off, and there are not enough employed to pay for the wishful price, regardless of what interest rate it is, even if it is 0.2% like the Japanese had for years, nobody is going to buy a house.

Housing value is all about expectation: the expectation of appreciation (now in the toilet), and the expectation to stay employed (still struggling).

This is what Obama said in the recent 60 minutes interview

"Question: Where is all the money going to come from to do all of these things; and is there a point where just going to the Treasury Department and printing more of it ceases to be an option?

Obama: Look. I think what's interesting about the time that we are in right now is that you actually have a consensus among conservative, Republican leaning economists and liberal, left leaning economists. And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to, we're going to have to spend money now to stimulate the economy and that we shouldn't worry about the deficit next year or even the year after. That short-term, the most important thing is that we avoid a deepening recession."

Treasury rates will stay down. With unlimited printing, if China and Japanese sell, our Fed just buy them all.

Raw printing of money will lead to inflation if the pace of printing exceeds the real growth rate of the economy. The peak of the inflation should come about two years after the peak of the printing.

We are seeing very inflationary policies going into place now.

While we are discussing interest rates....

How can a financial institution make any money charging 0% on auto loans for 13 months? The Idahy Credit Union is advertising 0% auto loans for the next 13 months, after which a market rate kicks in. www.idahy.org

It makes sense for the auto manufacturers to advertise cheap loans - they need to move product. But what's the upside for a credit union?

And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to

Too bad Andrew Mellon is not around. :(

To keep interest rates low in such a scenario the Fed will have to continue printing at an ever increasing rate. The rate of inflation will keep rising. At some point this process collapses.

The future direction of policies will dependent on one variable, the powers at the top, what kind of financial situation are they in?

If the TPTB are not extremely leveraged, then deflationary depression is what they will choose to get out of this, because they can hoard more in such a situation.

If the TPTB are very leveraged, they will choose inflationary depression, or even hyperinflation so that they will be made whole. Hyperinflation is generally what everyone will avoid and it is unlikely to happen. However, it seems to me that it is beyond obvious our government wants to reflate and has failed so far, so there is only one option left - blatant raw print. It will be interesting to see how long BB will wait before he gets to that final step that he prescribed in 2002. I think we are about to start doing this when our deficit of $500B or $700B next year can no longer be funded by legitimate buying, and our President says, spend, spend, spend.

I frankly don't care either way, just want to stay on the same side of the TPTB :-)

Dennis,

it is called teaser rate, the bank is banking on the fact that you do NOT pay it off in 13 months, and then they shock and awe you with the "market rate" which will compensate them for the period that they do not charge you anything.

But more importantly, there are bezillion windows open at the Fed where banks can get free dough, who said banks have to make money from retail customers? Their business model is to make money from the taxpayers.

I frankly don’t care either way, just want to stay on the same side of the TPTB

Absolutely. Any idea?

Whether the government funds its spending with taxes or with inflation, any increase in government spending takes real goods and services away from the rest of us.

Tax increases target those who pay the increases. Inflation steals from everyone.

My bet is we will see mild deflation for about one year, followed by significant inflation lasting much longer.

Well, the government is very obvious, reflate at all cost.

The Fed with SEC and commodity exchanges actually change rules to set off the commodity crash, so there is conflicting evidence, while at the same time, Fed is trying everything to reflate.

So my initial theory is, we do not want a high oil price (which will benefit Russia), but we are ok with high food price (oil is tanked deliberately by our powers, but agriculture is collateral damage). What perplexes me is, why is gold still at $700+ and not naked shorted to a much lower point? Is it because the Fed doesn't want Japan and China to take advantage of this and load up their gold reserve? $700 is kind of a painful price, because it is somewhere in between, if it is $500, then lots of people will back up the truck including our biggest bag holders, and if it is $1000+, USD may go poof any time.

Then the signal from the other fiats are clear as well, they all want to reflate. There won't be a strong currency out there, we are more likely to devalue at the same time. But what are we going to devalue against is the question.

Inflation is a steady and automatic devaluation.

The oil price tanked because it was an unsustainable bubble. The "powers" would have stopped it from rising in the first place if they had such powers.

I know what the government wants, but I need to be careful if it will be successful. There is only one way that it can be successful - raw print.

Those who are betting on inflation are practically banking on BB going through with his last step of raw print, will he go through on this? When? How desperate does he need to be before he starts blatantly raw print?

So if I bet on inflation, I prefer to have a deep deflation next year, because he is not going to blatantly raw print if we are just getting by with mild deflation. It has to be desperate, then he will just turn on the spigot completely disregarding the consequences. A mild deflation actually decreases the chance of raw print. The data so far is good, according to bloomberg we are having the deepest deflation of 60 years, which gives him more motivation.

The deepest deflation in 60 years is 1% for one month.

OO, How much deflation do you consider to be deep?

If we get what we have now, for another 3-6 months, very deep, that is good enough for starting to raw print.

Another angle to consider is, our Chinese and Japanese bag holders are getting very nervous:

Japan calls for Yen-denominated Treasury
http://www.atimes.com/atimes/Japan/JK19Dh01.html

China recently announced multi-billion stimulus and there are still more to come. They only have $2T to begin with.

Putting these pieces together, sometimes next year T auction failure is almost guaranteed, if we don't print.

Here the month that we got net capital inflow in US T
http://www.treas.gov/tic/mfh.txt

Some observations again:

UK's total international reserve is $48B
http://www.imf.org/external/np/sta/ir/gbr/eng/curgbr.pdf

In one year, their holding of US Treasury increased $218B!! Why? Because there is a little thing called Channel Island (BVI equivalent) that got into the statistics reporting of UK. So we can safely assume that most of the buying comes from the Channel Island. I checked with some authority that they said that could be Saudi, oh really?

Let's go down the rabbit hole a bit further. The Channel Island purchase was only up a few $B in the previous months when the oil price was at all time high. Somehow in Sept when oil price crashed and Saudis could only $1.6B, somehow the Saudis in Channel Island was able to buy an extra of $30B, interesting.

Apart from China, the biggest increase is from Carribeans, an increase of $37B, which I can understand because of the deleveraging.

However, this piece of trivia raised my eyebrow. In the last 12 months, our T increased $625B, nice job. The extra buying from Channel Islands and Carribeans ALONE account for $218B, a whopping 35%. I know there are many anonymous tycoons from all over the world that are JUST patriotic to the US, I just didn't realize there are so many of them.

why am I being moderated?

@Denis. Its real just an implied rate. If the CU expects a 5% rate in 13 months but takes off the first year, then their real expectation is 4%. If CUs are getting chunks of money today at 0% and the maring of 3% is the mendoza line, then hey, they aredoing oky.
I also suspect the get a finder's fee rom dealerships, since they can't float money at the mothership any more.
@OO
Interesting.
Are yo saying that since China will spend their $2T that they will have to sell their Treasuries which will make it super hard to auctin new debt against the old debt China will be sending to market.
I guess I would have to fall back on an old analysis, if Asia stopped buying today, the cost of borrowing was thoght to only go up about 1%. So if China dumped $2t with an agregate rate of 5%, in theory we would have to auction new debt at abut 6%. At what rate do we get worried?
It seems pretty clear we are willing to go up to 10%.
So, I think an auction failure next year unlikely. However, I see lots of debt auctions failing elswhere.

Yeesh. This is all ugly.

Duke,

the whole issue is sustainable debt, and everyone in the world knows our debt is unsustainable.

When we had the largest consumer market in the world, people put up with us, because they want to find markets for their excess capacity. Guns are useful in defending a country, but useless in trade, are we going to sail the Kitty Hawk to China so that they will buy more Ts, or buy more Boeing?

Japan shed $18B in the last 12 months, China added $118, when we were sending so much USD their way and they didn't have any internal stimulus needs. In my previous post, the biggest add-on of T in the last year was from Carribeans and Channel Island, accounting for 35% of total new Treasury in the last 12 months. We will see at some point all the new Ts will be accounted for by these two anonymous banking centers where buyer ID is concealed.

Even in the latest Sept Treasury purchase during which there should be a "flight to quality", many countries SHED the T, and the biggest addition apart from China is again, from the Carribeans and Channel Island :-)

Duke,

China didn't have 2T in Treasury, they have a total of $2T foreign reserve, ~$300B in F&F.

I am never worried about the Treasury rates, because we can always find buyers in Caribbeans and Channel Islands, there is an unlimited supply of them.

Convetional theory on repudiating unsustainable debt when you are country the size of the US is:

1. Currency manipulation
2. War.
3. Innovation.

I think 1 will not go very well. 2 is an terrible option. So, we need to come up with something that everyone wants to buy that only we can make.

Possible ideas: Fusion, organs (cloned from donor), cure(s) for cancer, longevity, state of the art weapons, ??

soshal netwurking

If first lives are terrible, the only option is ...

Bernanke's playbook
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

"A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well."

I think our Caribbean and Channel Islands coffer is already stuffed to execute the last step.

Cures for cancer is a horrible innovation

We are already becoming an aging society, and retirees are not dying fast enough so our SS and Medicare burden will be huge on the working population, and you want to prolong their life further?

I am for cure for cancer only if retirees actually have to pay for it out of pocket, or insurance will pay when the cancer patient is still at a working age. Or else, our population pyramid will be so inverted that nobody wants to have kids, and we will be still struggling with depression 3 decades later.

Fed is certainly ahead of me, trader rumors that Fed is already backstopping the 10-yr Treasury note to keep yield down.

http://www.cnbc.com/id/15840232?video=933464201&play=1

Nice, time for everyone to refi again. Looks like the Fed is determined to print enough to keep the yield low for 09-11 ARM reset crowd to refinance at a low rate.

Nice, time for everyone to refi again. Looks like the Fed is determined to print enough to keep the yield low for 09-11 ARM reset crowd to refinance at a low rate

That would have been interesting if economy was going up. People are throwing unemployment numbers in double digits and low rates are not going to fix it.

sa,

that is where the rebate checks and fiscal stimulus program come in to provide employment and cash flow.

You will be surprised at how far the government is willing to go to keep this game going. It is absolutely amazing to watch.

In about 6 weeks we will see how Barrack Hoover Obama is going to start wooing the crowd. More money for sure.

Large volumes of money in the Caribbean are from US citizens who have put their money offshore to avoid US income tax. For example the Caymans is the favorite domicile for hedge funds. I have heard that 70% of all hedge funds are domiciled in Cayman.

Cayman is also a favorite for offshore banks. Secrecy laws are a big advantage. Cayman has more banks than it has residents. It is money fleeing taxation.

The US insurance industry has also been migrating offshore (or into foreign ownership) to reduce or eliminate US income tax as well.

The favorite domicile for US insurance investors seeking to escape US income tax is Bermuda.

Offshore banking is a symptom of excessive taxation and regulation.

Some companies domicile their holding companies in Bermuda (or eslwhere) to escape the more restrictive US regulation of industry. The offshore domiciles have very minimal or streamlined regulation. What do care? the regulated companies are not allowed to sell product in their countries - they are only there for the tax and regulatory advantages.

This enables them to compete in the US market with less tax and fewer rules.