Eight Thought on Our Fragile Debt Markets
It’s early morning now, after two days on the road. It is good to be home, and it will be good to get back to “regular work” once the workday begins. A few thoughts:
1) Here are two Fortune articles where Colin Barr quotes me regarding Buffett’s offer to reinsure the muni liabilities of the financial guarantors. He correctly quotes my ambivalent view. I am not willing to take Ackman’s side here, nor that of the guarantors and rating agencies. This is one of those situations where I don’t think anyone truly knows the whole picture. My thoughts are limited to Buffett’s offer. He’ a bright guy, and he is hoping that one of the guarantors is desperate enough to take him up on his offer.
2) Personally, I found this note from the WSJ economics blog worrisome. Ben Bernanke is probably a lot smarter than me, but I can’t see amelioration in the residential real estate markets in 2008. We still have increases in delinquency and defaults at present. Vacancy is increasing. Inventory is increasing. The market is not close to clearing yet.
3) I like the “quants.” Are they a big force in the stock market? Yes. But they are an aspect of Ben Graham’s dictum that in the short run the stock market is a voting machine, but in the long run it is a weighing machine. “Dark pools” sound worrisome, but to long-term investors they are a modest worry at best. Traders should be concerned, but that is part of the perpetual war between traders and market makers/specialists.
4) There are two aspects to the concept of the rise in housing prices. One is the scarcity of desirable land near where people want to live. The second is that financing terms got too loose. Marginal Revolution says there is/was no housing bubble. They are focusing on the first issue, and downplaying the second issue. My view is that there are legitimate reasons for housing prices to rise, but we built more homes than were needed, and offered financing terms to buyers that were way too generous. To me, that is a bubble, and we are still working through it.
5) Auction-rate securities have always seemed to me to be micro-stable, but subject to macro-instability. What do I mean? Small fluctuations get absorbed by the investment banks, but large ones don’t. As an old boss of mine used to say, “liquidity is a ‘fraidy cat.” It’s around for minor jolts, but disappears in a crisis.
6) Muni bond insurance is thought insurance. Most municipal bonds are small. What credit analyst wants waste time analyzing a small municipality? With a AAA guaranty, the bonds get bought in a flash, and they are liquid (so long as the guarantor continues to be viewed positively). So, I still view municipal guarantees as having value. Not everyone else does.
7) Intuitively, I can feel the dispute regarding the recycling of the current account deficit. The two sides boil down to:
- When are they going to stop buying depreciating assets?
- What choice do they have? They have to do something with all the dollars that they hold.
It’s a struggle. In the short run, supporting the US Dollar makes a lot of sense, but the build-up of continual imbalances is tough. Why should we buy into a depreciating currency in order to support our exporters?
8 ) Privatize your gains, socialize your losses. It’s a dishonest way to live, but many press their advantage in such an area. Personally, I think that losses need to be realized by aggressive institutions. They took the risk, let them realize the (negative) reward.
That’s all for the morning. Trade well, and be wary of things that work in the short run, but are long run unstable.
February 14th, 200810:10 am at
“the scarcity of desirable land near where people want to live”..it’s important to consider that “places where people want to live” is not fixed. Few people wanted to live around Orlando, for instance, before Disney made major investments in the area. Fewer people wanted to live in the deep South and the Southwest before the introduction of air conditioning.
February 14th, 200812:28 pm at
I guess that part of the motivation for Buffett’s announcement, beyond the slim hope of getting a good deal, was to support the municipal bond market – because he has positions there and/or civic sympathies. There’s nothing wrong with that…he was simply pointing out something true to the market.
Anti REIT’s (e.g. SRS) seems like the best hedge on the economic issues here. They have both bad valuation and bad outlook.
For housing’s effect on the economy, IMO it is best to think about three main factors – one is related to number of home sales and all the economy that hinges off that (realty, furniture, mortgage banking, etc.), the second is the wealth effect on consumers and bank balance sheets, and the third is the demand for new homes and the effect on homebuilders. Those are listed in what I believe to be their order of importance to the overall economy and also the order in which they will probably recover. Perhaps Bernanke really means that (he hopes) the first will get untracked by next Fall and the second will stop getting worse by then?
One stock I am long here and regard as a very good deal in terms of both valuation and macro themes is XFML, a Chinese advertising and media company. Valuation wise, the price is very low relative to both book value and growth. Macro wise, we can think of the housing and credit crisis as big picture caused by a class of buyers/sellers overestimating the sustainable consumption levels; they borrowed too much against too little real income. In contrast, XFML is in the business of reaching a class of consumers that are growing in wealth, have underspent their collective income, and hold/earn in an appreciating currency. Another short term positive is the upcoming Beijing Olympics. I’ve seen negative comments on XFML due to worries about fraud in China small caps and concerns about some of the founding principals; I’ve also seen inchoate concern about the large shareholder interest by the PRC; in my mind, the PRC interest goes some way to cancel vague concerns about fraud and sovereign risk.
February 14th, 20081:35 pm at
Fundamentally there was no housing bubble?
So claims Alex Tabarrok. Alex and his blogmate Tyler are two of my favorite bloggers, but on this matter I think Alex is wrong. Unlike for some, his argument doesn’t invite scorn, because humility should teach us that sometimes things are differe…