I am basically at breakeven, and above my tough rebalancing buy in August.?? I bought lower as well.? My view is that Deerfield returns to book value ($13) or above, because the market for prime and AAA whole-loan mortgage backed securities is improving.
It would not surprise me to hear that repo margins return to prior levels, which would benefit Deerfield Triarc.? The market for low risk mortgage collateral has returned.
There is disagreement over whether the merger with the asset manager is a good thing or not.? I favor the merger, because I think CDOs have a future.? That said, if it happens or not, I won’t be harmed much.
My view is this: at 73% of book, there is significant value to obtain here.? The company is not going broke.? I will only sell my full stake when the company trades over book.
1) Fed chatter has gotten a little quieter, so maybe it is time for an update.? Let me begin by saying in an era of detailed press releases from the Fed, many analysts spend more time parsing phrases than looking at the quantitative guts of monetary policy.? This article from Mish, which cites this article from Gary North is close to my views, in that they are looking at what is happening to the critical variables of the money supply.
2) For another example, Look at the discount window.? That has faded as a factor over the past two weeks.? You have to dig into Dow Jones Newswires just to hear about this.? The discount window is back to being a non-entity.
3) Review his book.? Cite his article.? Though I think the FOMC will loosen more, I agree that it should not be loosening.? The Fed will overstimulate healthy areas of the economy, while sick areas get little additional credit; that’s how fiat monetary policy works.? (Maybe I should review James Grant’s The Trouble With Prosperity?)
4)? I may not vote for him, but I like Ron Paul.? He is one of the few economically literate members of Congress. Thus I enjoyed his question to Ben Bernanke.? I favor a sound dollar, and risk in our system.? It keeps us honest.? Without that, risk taking gets out of control.
5) Now, onto the chattering Fed Governors.? Consider Donald Kohn, a genuinely bright guy trying to spin the idea that the Fed is not to blame for residential real estate speculation.? He argues that much of the speculation occurred while the FOMC was tightening.? Sorry, but the speculation only cut of when the FOMC got rates above a threshold that deterred speculation because positive carry from borrowing to buy real estate disappeared, which finally happened in September of 2005, when the FOMC was still tightening.
Or, consider Fed Governor Frederic Mishkin, who thinks that troubles in the economy from housing can be ameliorated by proactive FOMC policy.? If his view is dominating the Fed, then my prediction of 3% fed funds sometime in 2008 is reasonable.
But no review of Fed Governor chatter would be complete without the obligatory, “Don’t expect more rate cuts.”? They don’t want their policy moves to be impotent, so they verbally lean against what they are planning on doing.? This maximizes surprise, which adds punch to policy moves.
6)? Consider foreign central banks for a moment.? I’ll probably write more about this tomorrow, but a loosening Fed presents them with a problem.? Do they let their currencies appreciate, slowing economic growth, or do they import inflation from the US by cutting rates in tandem?? Tough decision, but I would take the growth slowdown.
8) Now the CP market is returning to health; almost all of the questionable CP has been refinanced by other means.? Now, money market funds are better off than they were one month ago, but all of the issues are not through yet.? Some money market funds contain commercial paper financing subprime CDOs.? Now, the odds are that the big fund sponsors would never let the ir funds break the buck.? They would eat the loss.? That’s not a certainty though so be aware.
9) This article is the one place where the Fed lists most of the Large Complex Banking Organizations [LCBOs — pages 32-33].? Some suggest that this is the “too big to fail list,” though by now, it is quite dated.? On the bright side, it correlates highly with asset size, so maybe a list of the 20 largest bank holding companies in the US would serve as well.
10) We end with Goodhart’s Law, which states that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”? My way of saying it is that trying to control a system changes the system.? The application here is that when the Fed tries to affect the shape of the yield curve by FOMC policy, it eventually stops working.
About a month ago, when the financial markets were more skittish, I saw a series of four articles on more interest in distressed debt investing (One, Two, Three, Four).? In this market, it didn’t surprise me much because we have too many smart people with too much money to invest.? It reminds me a bit of a RealMoney CC post that I made a year and a half ago:
Make the Money Sweat, Man! We Got Retirements to Fund, and Little Time to do it!
3/28/2006 10:23 AM EST
What prompts this post was a bit of research from the estimable Richard Bernstein of Merrill Lynch, where he showed how correlations of returns in risky asset classes have risen over the past six years. (Get your hands on this one if you can.) Commodities, International Stocks, Hedge Funds, and Small Cap Stocks have become more correlated with US Large Cap Stocks over the past five years. With the exception of commodities, the 5-year correlations are over 90%. I would add in other asset classes as well: credit default, emerging markets, junk bonds, low-quality stocks, the toxic waste of Asset- and Mortgage-backed securities, and private equity. Also, all sectors inside the S&P 500 have become more correlated to the S&P 500, with the exception of consumer staples. In my opinion, this is due to the flood of liquidity seeking high stable returns, which is in turn driven partially by the need to fund the retirements of the baby boomers, and by modern portfolio theory with its mistaken view of risk as variability, rather than probability of loss, and the likely severity thereof. Also, the asset allocators use “brain dead” models that for the most part view the past as prologue, and for the most part project future returns as “the present, but not so much.” Works fine in the middle of a liquidity wave, but lousy at the turning points.
Taking risk to get stable returns is a crowded trade. Asset-specific risk may be lower today in a Modern Portfolio Theory sense. Return variability is low; implied volatilities are for the most part low. But in my opinion, the lack of volatility is hiding an increase in systemic risk. When risky assets have a bad time, they may behave badly as a group.
The only uncorrelated classes at present are cash and bonds (the higher quality the better). If you want diversification in this market, remember fixed income and cash. Oh, and as an aside, think of Municipal bonds, because they are the only fixed income asset class that the flood of foreign liquidity hasn’t touched.
Don’t make aggressive moves rapidly, but my advice is to position your portfolios more conservatively within your risk tolerance.
Position: none
We are still on the side of the demographic wave where net saving/investing is taking place, and that forces pension plan sponsors to find high-return areas to place additional monies.? Away from that, the current account deficit has to be recycled, and they aren’t buying US goods and services in size yet.? That’s why there will be vultures aplenty, outside of lower quality mortgages.? Even the debt market for new LBO debt is slowly perking up.? The banks pinned with the loan commitments may be able to get away with mere 5% losses.? Away from that, investment grade and junk grade corporate bonds are looking better as well.
Now, don’t take this as an “all clear.”? There are still significant problems to be digested, particularly in the residential real estate and mortgage markets.? CDOs still offer a bevy of credit issues.? There will be continued difficulties, and I don’t expect big returns.? But with so many willing to take risk at this point, I can’t see a big drop-off until they get whacked by worsening credit conditions.
Well, look at the DJIA and Nasdaq Composite.? New 52-week highs.? I am still bearish on our credit markets, tepidly bullish on equities, particularly inflation-sensitive sectors (and insurance), and bearish on Real Estate and Real Estate finance.? This is a hard combo to hold together, but in some ways, I suspect that surplus capital that was making its way to the credit markets is now making its way to the equity markets.
I’m eclectic, what can I say?? I’m always trying to blend signals from the long-, intermediate-, and short-term, with greater emphasis to the longer cycle elements.? I’m not a trader.
Now, just a few notes to catch up on reader questions:
Why FSR and not VR or IPCR then?
I forgot about VR, and will have to consider it in the future.? I like IPCR, but it has run some recently, and their aggregate maximum loss discipline will limit their returns vs those companies that use probable maximum loss.
I think your post is very useful but that it raises some critical issues about successfully forecasting future inflation/real rates. Your study period includes a period where 3 major versions of CPI existing. There is the pre-Reagan CPI, the pre-Boskin CPI and the current. John Williams at shadow statistics calculates all three. The curren pre-Reagan CPI is running over 10% so ?real rates? based on that would be negative 6-7%! The pre-Boskin is I think 5-6% which would still produce negative real rates?.and the Fed is cutting rates!
I wish anyone luck trying to forecast 10 year hence real rates or inflation given this mix. My personal opinion is that due to fiat currencies they are likely to be much higher unless central banks allow a deflationary credit contraction to take force without trying to inflate. History suggests that they all try to inflate!
One thing that is different about my blog is that I will do different sorts of posts.? I’m hard to categorize. ? This comment makes some very good points, most of which I agree with.? I believe inflation is understated in the US, and I think that the idea is growing in the populace, while Ph.D. economists stay in lockstep with the guild, and deny it.? My main article on the topic, for those with access to RealMoney, can be found here.
Also, my main point was not to get people to try to forecast inflation and real interest rates.? It was to point out how changes in inflation and real interest rates disproportionately hurt equity investors compared to bond investors.? That said, it takes a large move in inflation rates to wipe out the ordinary advantage of equities.
Hi, how do you think i-bank incentive fees will effect EPS over the next year?
I worked for a technical trend following CTA in the 90?s that had a severe drawdown of -55% over the course of a year. It started with one bad day and the company was never even remotly profitable again and the owners closed it down 3 years later.
I think that people don?t understand that in order to make incentive fees the hedge funds have to make new highs, just being flat doesn?t cut it. Unless they are constantly making new highs, the hedge fund business is the same model as the mutual fund biz but with much higher overhead.
Alternatively they shut their existing funds down and open new ones to reset the mark but its hard to replace the truely large capital pools.
Interested in your thoughts.
That’s an interesting question.? With respect to compensation from internal hedge funds, there will be some loss of EPS.? That said, investment banks have more true technical information than most hedge funds, and will benefit from trading against funds that are in bad situations.
In general, most hedge funds that lose 25% of capital go out of business.? At 50%, almost all of them do.
That’s all for the evening.? Let’s see if the S&P 500 hits a new high on Tuesday.
Implied volatilities have fallen below long-run averages for equity indexes.
The equity market is within spitting distance of a new high.
The Fed is loosening (will they do more?)
The discount window is largely vacant.
Away from real estate, and real estate finance, things seem pretty chipper.
The yield curve is normalizing.
Inflation as measured by the government is low.
Long term interest rates are low, for investment grade borrowers.
Commercial paper problems are gone.
LBO debt difficulties will be solved soon, through a combination of losses to the banks, and canceled deals.
Or maybe not:
Inflation is rising globally.
The dollar is weak.
US inflation should start to rise as a result.
Housing prices are weak and getting weaker.? Default and delinquency statistics are rising.
The CDO [Collateralized Debt Obligation] problems are still not solved.
Defaults should begin to increase significantly on single-B and CCC-rated corporate debts in 2008.
The TED [Treasury-Eurodollar] spread is still in a panic-type range.
I’m seeing more of my stocks get closer to the upper end of my rebalancing range.? I will begin reducing exposure if the market run persists.? I’m not crazy about the market here, but I am not making any aggressive moves.
It brings a lump to my throat, but the Canadian dollar briefly traded over parity to the U.S. dollar today. My guess is that it decisively moves above the U.S. dollar, and stays there for a while. Why not? Their economy is in better shape.Oh, and to echo one of Doug’s points, watch the 10-year swap yield. Nothing correlates better with the prime 30-year mortgage rate. It’s up 13 basis points since the FOMC move.
Looking at slope of the yield curves 10-years to 2-years, the Treasury curve has widened 20 bp and the swap curve 23 bp. If all Bernanke is trying to do is calm the short-term lending markets, that’s fine, but the long-term markets are getting hit.
Even in the short-term markets, things aren’t that great. We’re past the CP rollover problem, but the TED [Treasury-Eurodollar] spread is 135 bp now, and that ain’t calm.
I’m not a bear here, but there are significant risks that we haven’t eliminated yet… most of them stemming from the need for residential real estate to reprice down 10%-20% in real terms. Hey, wait. Hmm… what if the FOMC doesn’t really care about inflation anymore? They could concoct a rise in the price level of 20% or so, which would presumably flow through to housing, bailing out fixed-rate borrowers with too little margin (ignore for a moment that floating and new financing rates will rise also).
Okay, don’t ignore it. It will be difficult to inflate our way out of the problem. Even as the dollar declines, it will cause our trading partners to decide whether they want to slow their export machines by letting their currencies rise or buying more eventually depreciating dollar assets.
I would still encourage readers to be cautious with real-estate-related assets and those who finance them. Beyond that, just be wary of firms that need financing over the next two years. It may not be available on desirable terms.
Position: none, but who is not affected by this?
Interesting Times
We are within a half percent of taking out the all time low (1992) on the Dollar Index [DXY].? Since the move by the FOMC the ten-year Treasury has moved up 21 basis points.? That’s not stimulative.? Then again, maybe the FOMC wants to address the short term lending crisis, but could care less about stimulating the economy as a whole.? If this is their goal, let’s stand up and applaud their technique, but perhaps not their goals.
All that said life has returned to the investment grade bond market, and may be returning to the junk market, and maybe even the LBO debt market, if the banks will take enough of a loss to get things moving.? What I am finding attractive currently in fixed income right now is prime residential mortgage paper (this is rare — I usually hate RMBS).? Implied volatilities in are high, just look at the MOVE index, but they will eventually come down, at which point, the prices of mortgage bonds should improve (on a hedged basis).
Beyond that, I like foreign bonds, but am uncertain as to what currencies to go for; I still like the Canadian dollar, yen and the Swiss franc, but beyond that, I don’t know.? Aside from that, keep it short and high quality, because the long end isn’t acting well, and the junk credit stress is starting to arrive.
Away from that, I also still like inflation protected bonds, but they have run pretty hard since April.? TIPS overshot on the FOMC announcement, and have undershot since.? What a whipsaw.
So where would that leave me if I were a bond manager?? Foreign, mortgages, inflation-protected, and short duration high quality.? Sometimes the game is about capital preservation, and nothing more.
My broad market portfolio trailed the market a little today. I’ve been a little out of favor over the past three months; I’m not worried, because this happens every now and then. That said, we are coming up on another portfolio rebalancing, where I will swap out 2-3 stocks, and swap in 2-3 others. Watch for that in the next few weeks.
Every group in the S&P 1500 was up today. I can’t remember when I have seen breadth like that before. Financials and Energy led the pace. Names like Deerfield Triarc flew on the Fed cut. They will benefit from cheaper repo rates, and the excess liquidity injected the system should eventually ease repo collateral terms.
If the US dollar LIBOR fix at 6AM (Eastern) tomorrow follows the move in the US futures markets today, then we should see LIBOR drop by 27 basis points or so. Given the smaller move down in T-bill yields, 14 basis points, that would leave the TED spread at 132 basis points, which is still quite high, and higher than the 10-year swap spread. (LIBOR would still be higher than the 10 year swap yield.) This indicates that there is still a lack of confidence among banks to lend to each other on an unsecured basis. Things are better than they were two weeks ago, but still not good.
The short term crunch from the rollover of CP, especially ABCP is largely over. The good programs have refinanced, the bad programs have found new ways to finance their assets, or have sold them, or used backup guarantors, etc.
Watch the slope of the yield curve. It is my contention that the slope of the yield curve changes relatively consistently through loosening and tightening cycles. In the last tightening cycle, the curve flattened dramatically through the cycle, making the word “conundrum” popular. This is only one day, but the yield curve slope, measured by the difference in yields between 10-year and 2-year Treasuries, widened 10 basis points today. (The curve pivoted around the 7-year today.) If I were managing bonds at present, I would be giving up yield at present by selling my speculative long bond positions that served me well over the past few months in my model portfolio. I would be upping my yen and Swiss Franc positions.
We learned some new things about the FOMC today: a) They don’t talk their book publicly, so don’t take their public comments too seriously. b) They are willing to risk more inflation for the sake of the non-bank financial system (which is under threat), or economic growth (which may not be under threat). c) They are flagging the Fed funds rate changes any more by letting rates drift nearer the new target in the days before the meeting. d) Beyond that, we really can’t say yet whether this is a “one and done” or not yet. We just don’t have enough data. e) The FOMC really isn’t interested in transparency.
It would be historically unusual for this to be a “one and done.” Fed loosenings are like potato chips. It’s hard to stop at one. Just as there is a delay in the body saying, “that’s enough,” with the potato chips, the in the economy in reacting to monetary policy is slow as well, often leading policy to overshoot, as the FOMC reacts to political complaints to do more because things aren’t immediately getting better. It’s hard to sit in front of the short-term oriented Congress, or listen to the manic media, and say, “But the FOMC has done enough for the economy. It doesn’t look good now, but in 18 months, our policy will take effect and things will be better. Just trust us and wait.” That will not fly rhetorically; it will take a strong-headed man to not overshoot policy. On that Bernanke is an unknown.
To me, it’s a fair assumption then that this cut will not be the last. Investment implications: in fixed income stay in the short to intermediate range, and remain high quality. Buy some TIPS, and have some foreign bonds as well. I like the Yen, Canadian Dollar, and the Swiss Franc. In equities, think of high quality sectors that can use cheap short-term credit, and sectors that benefit from inflation and a weaker dollar. So, what do I like? High quality insurers, mortgage REITs that have survived, (maybe trust banks?), basic materials, energy, goods transportation, staples, some areas in healthcare and (yes) information technology (if I can find any more cheap names there that I like).
As I have said before, my view on the FOMC has gone cloudy.? That said, I’ll put forth my best guess for you what the FOMC will do and say today.? I think the FOMC will ease the Fed funds target 25 basis points, or maybe a little more, but not 50 basis points.? (Stuck my neck out there, hope I don’t get chopped.)? Here’s why:
Not all lending crises are over, but the crisis in the CP market largely is over.? There was some paper that had to be taken back by the banks, and some that had to be rolled over at relatively high rates, but the refinancing of the bulk of short term credit is done for now.
Total bank liabilities are growing smartly since the change in the discount window, leverage changes, and temporary liquidity adjustments took effect.? Little effect on the Fed’s monetary base, M1, MZM, or M2 yet.? This is just a bank leverage thing.
The NY Fed Open Markets desk continues to be sloppy on the upside.? Over the last four days, three times Fed funds finished over 5.25%, with the close yesterday at 5.4325%.? This is not what you would expect to see from a Fed that expects to loosen aggressively.
The discount window finally got good demand last week.? With that strategy seeming to work, the FOMC has less pressure to cut the funds rate.? Might they cut the discount rate more than the funds rate?? Yes. because seeming success often breeds more of the same.
Business conditions aren’t that bad nationally yet.? Real estate is a drag, and will get worse, but it is not an immediately obvious reason to loosen.
A 25 basis point move validates the temporary policy move of the Fed, and does not change policy, beyond making the more semi-permanent.
There are more hawks with votes on the FOMC now, and Bernanke is not pushing to get his way, the way that Greenspan did.
Beyond that, we have the language of the statement, where the FOMC will attempt to sound a balanced view between the risks of inflation and economic weakness.? After the announcement, I expect the stock market to fall back and then rally modestly.? Bonds won’t do much.
That’s my view, though I must state that this is not one of my more strongly held views.? I am still gathering data on the current Fed, because they are so new to their roles in loosening environment.
In my continuing series where I try to look beyond the current furor of the markets, here are a number of interesting items I have run into on the web:
1) Asset Allocation
Many people who want to stress the importance of their asset allocation services will tell you that asset allocation is responsible for 90% of all returns, so ignore other issues.? An article on the web reminded me of this debate.? The correct answer to the question, as pointed out by this paper, is that asset allocation explains 90% of the variability of the returns of a given fund across time, but only explains only 40% of the variability of a fund versus other funds.? Security selection matters.
Two interesting papers on asset class correlation.? Main upshots: historical correlations are not fully reliable, because risky assets tend to trade similarly in a crisis.? Value tends to march to its own drummer more than other equity styles in a crisis.? The effects on correlation in crises vary by crisis; no two are alike.? Natural resources and globa bonds tend to be good diversifiers.
In bull markets, risky asset classes all tend to do well.? Vice-versa in the bear markets.? My reason for this correlation is that you have institutional asset buyers all focusing on asset classes that were previously under-recognized, and are now investing in them, which raises the correlation level, not because the economics have changed, but becuase the buyers have very similar objectives.
There are a few good states, but by and large, public pensions are a morass.? Most are underfunded, and rely on future taxation increases to support them.? When a public system realizes that it is behind, the temptation is to take more investment risk by purchasing alternative asset classes that might give higher returns.? This will end badly, as I have commented before… I suspect that some state pension plans are the dumping grounds for a lot of overpriced risk that Wall Street could not offload elsewhere.
2) Insurance
When the premiums get too high, people tend to stop buying insurance, or reduce coverage severely. That’s happening for Southeast windstorm coverage now, particularly in Florida.? That might be a good bet this year, but I wouldn’t press my bet in 2008 even if 2007 ends loss free.
Now fixed immediate annuities are another thing, and I recommend them highly as a bond substitute for those in retirement, particularly for seniors who are healthy.
The only real cure for these deceptive practices is to watch out for the seniors that you care for, and tell them to be skeptics, and to run all major investment decisions by you, or another trusted soul for a second opinion.
4) Accounting
I am against the elimination of the IFRS to GAAP reconciliation for foreign firms.? What is FASB’s main goal in life — to destroy comparability of financial statements?? We may lose more foreign firms listed in the US, which I won’t like, but a consistent accounting basis is critical for smaller investors.
Congress moves from one ditch to the other.? This time it’s sale of subprime loans.? Too many modifications, and sale treatment is at risk, so Congress tries to soften the blow for the housing market.? Let auditors be auditors, and if you want the accounting rules changed, then let Congress do the job of the FASB, so that they can be blamed for their incompetence at a complex task.
As I’ve said before, I don’t like SFAS 159.? It will lead to more distortions in financial statements, because managements will tend to err in favor of higher asset and lower liability values, where they have the freedom to set assumptions.
5) Volatility
Earn 40%/year from naked put selling?? Possible, but with a lot of tail risk.? I remember how a lot of naked put sellers got smashed back in October 1987.? That said, it looks like you can make up the loss with persistence, that is, until too many people do it.
Here’s an interesting graph of the various VIX phases over the past 20 years.? Interesting how the phases are multiyear in nature.? Makes me think higher implied volatility is coming.
I don’t think a VIX replicating ETF would be a good idea; I’m not sure it would work.? If we want to have a volatility ETF, maybe it would be better to use variance swaps or a fund that buys long delta-neutral straddles, and rebalances when the absolute value of delta gets too high.
That’s all for now.? More coming in the next part of this series.
For those wanting a road map of where I am likely to post over the next few days, tonight is mortgages and real estate, tomorrow is speculation, and Friday should involve longer dated topics. For those that commented on the blog redesign, I want to say that I appreciated your comments, particularly the critical ones. In the next two months, I’ll be doing a minor redesign to fix some of the flaws that I introduced in the process. I’m not perfectly happy with the result, and it can be improved. Trivia: I co-edited the best high school yearbook in the nation back in 1979, so I do have some eye for design. It’s more of a question of the computer implementation.
Onto real estate:
1) After a bubble bursts, it’s amazing the details that come out on the ethical lapses that transpired. With Countrywide, people were steered into loans that were worse than what they might have qualified for there or elsewhere. Now, they should have shopped around; I always do that on mortgage loans. That Countrywide is still facing problems after the Bank of America infusion might not be too surprising; companies that cut corners with their customers are more likely to be aggressive in their accounting practices. After the post-bailout bounce, the convertible preferred that Countrywide got is now under the $18 strike price.
2) Can the mortgage crisis swallow a town?? Yes.? I know this personally, as some friends of mine on the Eastern Shore of Maryland are finding out right now.? They are not in one of the best areas, and demand has dropped off a cliff.? Entire neighborhoods near them are in bad shape, making everything else less salable.? They need to sell their home for medical reasons, and they can’t do it without taking a loss, which would impoverish them.
3) The internals of the housing market are now such that no one is arguing over the troubles faced.? Consider:
When I became a corporate bond manager, one of the rules of the firm was “no homebuilder bonds.”? The wounds of the early 90s were still memorable.? If you want to see why that was possibly a good rule, look here, because these bonds have gotten whacked recently.
4) But won’t the President and Congress bail out strapped homeowners?? Tough task.? Current proposals are just dust on the scales, and doing anything big would be a budget-buster.? I agree with Accrued Interest; a bailout is bad policy.? I suspect one will happen anyway.? Washington, DC specializes in bad policy, if it wins votes.
5)? After a bubble bursts the second order effects can be quite significant.? Consider:
“Rising defaults on subprime home loans are boosting the inventory of unsold homes and driving sale prices lower. That’s cutting into housing-related revenues from building-permit fees, taxes on contracting and recording property transfers, and even sales taxes.”?? Housing is a big source of revenue for the states; no surprise that they are suffering as prices and transaction volumes decline.
Title insurers get whacked by fraud claims.? (Note investable idea: wait for a little while, because the fraud claims will eventually pass.? An entry point on the title insurers will come slightly after housing inventories begin to decline.)
In the case of American Home Mortgage, many borrowers face foreclosure because tax and insurance payments are not getting to to the local governments and insurance companies.
Shutting the barn door after the cow has escaped to the pasture; so much for tighter lending requirements now.? It would have been better to have had moderately tighter standards over the past five years, than to have the whipsaw.
And, anytime a bubble bursts, it is a business opportunity for the lawyers.? I never thought of it this way before, but the legal profession benefits from societal volatility.
6) Now, I wonder if Merrill Lynch will have any significant hits from subprime.? I would expect it, but who can tell for sure?
8) Finally, we keep them in a bubble to make sure that their theories on how the economy works do not get contaminated by data.? I’m partly kidding here, but the Fed is very optimistic that any spillover from residential real estate to the general economy will be light.? I think the effect will be moderate; it will definitely hurt, but not destroy the US economy.
