Carl Felsenfeld: Do we know what the problem is?  What are we trying to solve?  Antitrust does not deal with Citigroup/Travelers, it should deal with Bank of America/Fleet, Wells Fargo/Norwest.  But it didn’t deal with those bank acquisitions.  The regulators were out to lunch.

Jesse Markham: Antitrust can only do so much. It also does not do so well where size is due to organic growth.  (DM: like Google or Microsoft.)

Zephyr Teachout: Antitrust should be based on size.  The DOJ is less subject to regulatory capture, and more inclined to prosecute.

Paul Kaplan: These ideas are against current trends in antitrust.  Perhaps a more rigorous application of the Sherman Act would be more effective.  Organic growth to a large size is still a problem, but how do you avoid punishing success?

(DM: just met Colin Barr of Fortune.  Nice to put a face to the name after all these years.)

Discussant: Canada disallowed securitization for the most part, and stopped more mergers with their banks.

False Assumptions

William Black — Control Fraud & Systematically Dangerous Institutions -Accounting values can be fudged.  RBC as well.  Difficult to detect Control Fraud.  Originating bad loans allows a bank to grow rapidly.  Need forensic accountants.

(DM: look for fast growth — quality, quantity, price. Look for new products.)

Lawrence Baxter — When Big Becomes a Problem.  – Worked ten years at a major bank that went through  a ton of mergers.  The self-regulations with each bank having its own risk model doesn’t work.  The regulators don’t understand them, and spend time learning what is going on.

(DM: fascinating that no one has talked about why the US bailed out holding companies, rather than letting them fail, and merely backing up the operating subsidiaries.  Also, few have fingered the Fed’s monetary policy.)

Shawn Bayern — False Assumptions in Law and Economics — Innovation in the banking is not always a positive.  Bonuses to executives skew incentives.  (DM: it is a form of asset/liability management.)

Russell Pearce — discussant — Business is self-interested, and short-term greedy.  Profit-making is maximized, not even long-term greedy (DM: maximizing the net present value of profits).  (DM: incent using long dated restricted common stock — trouble is, it doesn’t incent as well as cash.)

Mark Gimein — discussant — 3 questions a) What of a big rogue banker?  The market is good at absorbing single failures.  (DM: but not multiple failures.)  b) who should do the regulation?  Tough to get bright men who are tough who won’t go to work for the banks, or buy into the banks logic. c) Control Fraud is hard to prevent; human nature is that way.  No systematic approach to dealing with fraud.

Detecting Fraud — check for adverse selection, honest businessmen won’t do business that way.  Also, it never make sense for a secured lender to accept inflated appraisals.

(DM: Look for gain-on-sale accounting.  Analyze management culture for short-termism.  Remember you can never get pricing, volume and quality at the same time.  Financial companies are in a mature industry, so beware sompanies that grow fast.  Be aware of long dated accruals.)

Discussant — are we worse off today than in the robber baron era? Not necessarily.

Holmes bad man theory — the law exists to constrain bad men.

I gave a 3-minute rant on how insurers are better regulated than banks.  I’ll write more about that tonight in a piece that articulates my views on banking reform.

Simon Johnson’s lunch talk was pretty standard: there is no social benefit to banks being larger than $100 billion in assets.  Major banks are too politically powerful, but they should be fought the same way Teddy Roosevelt did with JP Morgan and trustbusting.  Simon thinks that political opinion is shifting on this issue.  He calls for a size cap based off of a 4% percent of GDP for commercial bank assets, and 2% for investment banks.  This would only affect 6 banks, and would put the banking system sizewise where it was in 1990.

A frequent comment is that Canadian banking is concentrated, and they haven’t been hurt.  But other nations have concentrated banking and have gotten into trouble, notably Switzerland and the UK.

One commenter noted that reliance on wholesale funding drove much more of the panic than deposit funding.

Now the third panel starts:

Rob Johnson spoke about creating a credible resolution authority.  He asked why we can’t send Large Complex Financial Institutions [LFCI] through Chapter 11?  Derivatives must be simplified and brought into clarity.  Contagion, complexity, etc.  No real solution offered.

Jane D’Arista — Financials cannot insure other financials.  Leverage must be scaled back.  Various types of short term funding must be scaled back.  Margin standards must be extended to all financial instruments.

Richard Neiman — Banks are risk-takers, that provide a social service, thus taxpayer guarantees via the FDIC.  Volcker rule may not have prevented the last crisis, but it might prevent the next.  Need a group to try to be proactive on future risks — war-gaming.  Attempt to predict black swans.

(DM: most of this can be done by following increases in leverage.)

Arthur Wilmart: no magic bullet.  Fed overstimulated housing market after dot-com crash.  Reduce implied subsidy to banks.  How to internalize the costs?  Three problems on deposit limits: failing banks, intra-state acquisitions and thrifts aren’t counted.  Narrow banking would contain the subsidy.  Systemic risk insurance fund — at least $300 billion, pre-funded.  FDIC would manage it — most competent of the regulators.

Frank Pasquale — Talks about information asymmetries, need more disclosure.  Financial privacy — banks that are big would have to reveal a lot more.  Records of everything would have to be kept for a long time 10-15 years.

A discussant: choosing the lax regulator (DM solution: government assigns the regulator)

DM: banks should not lend to or own other financial firms.  That would end contagion.  At least that should be limited to a percentage of assets, or through the RBC formula.

One panelist suggests that all financial instruments be traded on exchanges.  (Ridiculous, because only common instruments can can trade on exchanges.  Unique things don’t trade on exchanges.  That’s why IBM equity trades on an exchange, but most IBM bonds don’t.)

Discussant: banks cannot self regulate, not even as a group.

Cheapest source of funds are FDIC-backed deposits.  That’s the big subsidy.  (DM: Charge a much larger FDIC fee.)

Discussant: won’t narrow banking create more risk outside the banks?  Where things are less regulated?  Those losing money outside of the banks would end up taking a haircut.

Discussant: GS or MS failing would still shake the system.

Discussant: a new insurance fund would be difficult to make work.  Also,a new regulator might not be better than existing regulators

Discussant: Regulating money market funds as banks.  (DM:  money market funds lost so little, and banks lost so much… why is this an issue.)

Cornelius Hurley argues that banks are implicitly and explicitly subsidized, and that they need to return the subsidy.

Dean Baker argues for a transfer tax, and weakening the political power of financial institutions.  Really tangential to the point of the conference.  I’m not sure it would help or hurt too much.  It would drop trading volumes.

Dana Chasin argues for more centralized information analysis to deal with opacity and interconnectedness.

Ron Feldman argues that plans should be made in advance for how to wind up firms, based on what is special about the firms aka “living wills.”  Suggests that resolution regimes are too vague.

Tamar Frankel argues that banks should bail out each other, but pay differential guaranty fees based on the riskiness of each bank.  I think that would be difficult to pull off, such a strategy hasn’t worked that well for the PBGC (not equally funded), State Insurance Guaranty funds (post-funding), or the FDIC (pre-funded but equal contributions).  There are moral hazard and agency problems with this idea.

Personally, I would make the Risk based capital [RBC] percentage rise with the amount of risk-based capital.  Say, when RBC gets over $10 billion, the percentage of capital needed for RBC grades up to 50% higher than the level needed at $10 billion by the time RBC gets up to $50 billion.

One questioner suggested unlimited liability for bank shareholders.  That sounds like requiring the investment banks to be partnerships.

Another mentioned the trouble with state guaranty funds in the ’80s.

Also, more capital needs to be held against securitized assets versus non-securitized assets.

One commenter suggested making repo funding unsecured.  Oh my.

Another guy commented that having subordinated debt as a warning sign did not work in the past.

Another commenter said that liquidity always dries up when you need it most.

There are always a few loonies at conferences, who know nothing about the topic at hand.  It keeps things colorful.

At the end of this panel, Heather McGhee of Demos came to talk about Financial Reform in DC.  Snapshot:

• Non-compromise Dodd bill coming Monday — no systemic risk regulator, but a systemic risk council.
• Standardization of derivatives trading, clearing, etc.  There will likely be end-user exemptions.
• Prudential regulation ~20 big financial companies will be regulated by the Fed.
• New special bankruptcy court — a check to determine illiquidity or insolvency.
• Possible Prop trading amendment — the Volcker Rule, with regulatory exceptions.
• Possible amendment: Size cap on assets, unlikely to get made into law.
• Possible new resolution authority.

Difficult to see how proactive financial services regulation gets enacted… politicians and regulators tend not to be forward looking.

Okay, here is tonight’s rule: Governments that scam the asset markets (and their citizens) take all manner of half measures to defend failed policies before undertaking structural reform.  (This includes defending the currency, some asset sales, anything that avoids true shrinkage of the role of government.)  The five stages of grieving apply here.

I know I wrote it 8+ years ago, but it feels very live now.  At present it is most obvious to apply the logic to the PIIGS, and American municipalities that have overextended themselves.

But consider New Jersey that has cut back considerably, and the Kansas City School District that has cut almost half of their schools.  Their backs were to the wall, and they took brave actions to cut back.

But many municipalities remain in denial.  They have long distinguished histories, they cannot fail.  They just need to tax (or borrow) a little more to make ends meet.  Maybe they should raise the rate they expect to earn on pension assets, or offer sweeter pensions instead of greater wage hikes.  This is a big part of the crisis now, and is biting hard.

When the taxes do not come in as expected, or budgets were underestimated, and there is more spending than expected (Snow, Flood, Hurricane) there is anger, and anger drives the hopeless negotiations (bargaining) over spending cuts, over which no one wants to budge.  Not only are there priorities in what interest groups want, there are things that are guaranteed by statute, and some guaranteed by constitution.  Consider the constitutional guarantees on public sector employee benefits in Illinois.  Just try to change the Illinois Constitution; that won’t be easy.

The next stage of grieving is depression, and there are some places like California, L.A., Harrisburg, PA, Greece, etc. that are close to the point where one might say, “There’s no hope.”

After that comes the final stage of acceptance, where finally the tough adjustments are made, and solvency restored, or, bankruptcy is entered, with all of the attendant costs.  Deals are made to reduce budget items that were previously sacrosanct, such as entitlements, public sector employee benefits and salaries, etc.  That is not happening today, not even in New Jersey.

One final note: just as the last refuge of scoundrels that run companies is to blame the shorts, so it is for scoundrels that run governments — they blame the speculators.

I have been thinking about the the forces distorting the global economy.  In the long run, the distortions don’t matter, because economies are bigger than governments, and eventually economies prevail over governments.  Here are my dozen problems in the global economy.

1) China’s mercantilism — loans and currency.  The biggest distortionary force in the world now is China.  They encourage banks to loan to enterprises in order to force growth.  They keep their currency undervalued to favor exports over imports.  What was phrased to me as a grad student in development economics as a good thing is now malevolent.  The only bright side is that when it blows, it might take the Chinese Communist Party with it.

2) US Deficits, European Deficits — In one sense, this reminds me of the era of the Rothschilds; governments relied on borrowing because other methods of taxation raised little.  Well, this era is different.  Taxes are high, but not high enough for governments that are trying to create the unachievable “permanent prosperity.” In the process they substitute public for private leverage, and in the process add to the leverage of their societies as a whole.

3) The Eurozone is a mess — Greece, Portugal, Spain, etc.  I admit that I got it partially wrong, because I have always thought that political union is necessary in order to have a fiat currency.  I expected inflation to be the problem, and the real problem is deflation.  Will there be bailouts?  Will the troubled nations leave?  Will the untroubled nations leave that are the likely targets for bailout money?

4) Many entities that are affiliated with lending in the US Government, e.g., FDIC, GSEs, FHA are broke.  The government just doesn’t say that, because they can still make payments.

5) The US Government feels it has to “do something” — so it creates more lending programs that further socialize lending, leading to more dumb loans.

6) Residential real estate is still in the tank.  Residential delinquencies are at all-time highs.  Strategic default is rising.  The shadow inventory of homes that will come onto the market is large.  I’m not saying that prices will fall for housing; I am saying that it will be tough to get them to rise.

7) Commercial real estate — there is too much debt supporting commercial real estate, and too little equity.  There will be losses here; the only question is how deep the losses will go.

8 ) I have often thought that analyzing the strength of the states is a better measure for US economic strength, than relying on the statistics of the Federal Government.  The state economies are weak at present.  Part of that comes from the general macroeconomy, and part from the need to fund underfunded benefit plans.  Life is tough when you can’t print your own money.

9) The US, UK, and Japan are force feeding liquidity into their economies.  Thus the low short-term interest rates.  Also note the Federal Reserve owning MBS in bulk, bloating their balance sheet.

10) Yield greed.  The low short term interest rates touched off a competition to bid for risky debt.  The only question is when it will reverse.  Current yield levels do not fairly price likely default losses.

11) Most Western democracies are going into extreme deficits, because they can’t choose between economic stimulus and deficit reduction.  Political deadlock is common, because no one is willing to deliver any real pain to the populace, lest they not be re-elected.

12) Demographics is one of the biggest  pressures, but it is hidden.  Many of the European nations and Japan face shrinking populations.  China will be there also, in a decade.  Nations that shrink are less capable of carrying their debt loads.  In that sense, the US is in good shape, because we don’t discourage immigration.

Ordinarily, I don’t think much of video on the web.  Writing is usually a more concise way to get a view across.  But video can be more effective if it gets past the genre of “talking heads,” in which case, one is usually better off reading a transcript.  Consider the State of the Union message as an example: regardless of who is president, would you rather spend an hour on it, of five minutes?  And, it would be five minutes where you are not distracted by the crowd, and can dissect things rationally.  I pick reading.

There are places where video can be useful, but it has to be well thought out.  I first saw the above video over at “The Big Picture,” which has enough readership to kick up a video’s viewings.  I thought it was clever, representing the economist’s views in a short catchy way, and capturing their philosophies  as well.  The next day, I showed it to three of my boys — they thought it was interesting, and mentioned it the next night at dinner.  My wife, incredulous at the idea of an economics rap video, then watched it the next night with all of the kids, while I cleaned up the dinner dishes.

Then the surprise happened.  “Dad, what are animal spirits?”  “Are animal spirits the bull and the bear?”

Interesting.  The video prompted questions from the children for me to answer.  I’ve written on Animal Spirits before, at least twice.  Animal spirits attributes irrational risk taking and avoidance to businessmen, as if they are irrational animals.

I told my children that businessmen are generally rational, and they make their decisions off of their own balance sheets, and the general willingness of the market to spend, which is related to balance sheets in aggregate.

The contrasts of the video are considerable:

• Keynes is known, Hayek is unknown.  Desk clerk immediately knows Keynes.
• The two men are hybrid in what they portray.  To some degree they represent the schools of thought that each was a leader of, and to degree the men themselves.
• Hayek reaches into the hotel room drawer, and rather than finding the Bible, finds the General Theory. Similarly, Keynes says, “I am the agenda.”  This is a statement of the dominance of Keynesian thought in modern macroeconomics.  Keynes was important, but not as dominant while he lived.
• Hayek assumes they will go via the subway.  Keynes hires a limo.  Keynes is worldly wise, having a great time, and Hayek is uncomfortable.  Keynes has alcohol; if Hayek is having alcohol, he is sipping it through a thin straw.
• Alcohol is an allusion through the whole piece.  Stimulus is just more of “the hair of the dog that bit you.”  The boom is a good time where we drink freely, and the bust is where we deal with our hangover.  It was no surprise to see that the Bartenders were named “Ben” and “Tim” and that they were serving up alcohol for as long as the patrons would survive.  Even the pyramiding of the glasses had meaning — building up to a stuporous, unsustainable level.
• Keynes holds money as he begins his rap, and throws it midway through.  It is an aspect of how incentives from the government or central bank can lead behavior for a time.
• Keynes ends his rap with “We’re all Keynesians now.”  Keynes himself did not live to hear that comment uttered by Friedman in the ’70s.
• Keynes and Hayek had different views on spending and savings.  On spending, Keynes didn’t think what money was spent on mattered, only that it was spent.  Hayek felt that intelligent spending would grow the economy more.  On savings, Keynes was negative, whereas Hayek said that moderate savings were valuable, and would facilitate future investment.
• As for animal spirits, businessmen only get bold when they have sufficient free capital to act.  When interest rates are artificially low some businessmen invest, trusting that good times will continue.  Alas, those good times never last; avoid long commitments when times are good.
• There are liquidity traps, but they occur when banking systems are broken due to misregulation.
• “In the long run we are all dead.”  Well, Keynes, way to care for our progeny.  You had no kids, for a variety of reasons, but some of us care for how our children, and the nation that we love will do after we have died.

The video portrays a Goliath and David situation.  Keynes is dominant, and totally assured of his position in the world.  Hayek is less certain of himself, but certain in his message.

My wife and my kids have a better understanding of the current economic situation now than they did before the video came out.  I am grateful that the video was made.

I read Reminiscences of a Stock Operator around ten years ago.  I was trying to understand trading dynamics in the market, and the book was mentioned frequently.

It is a classic.  But can a classic be made better?  In this case yes.  Jon Markman, an able financial writer, has written notes around the narrative, with pictures and graphs that illustrate many things that would be obscure to the reader of the book.  Markman brings forgotten people to life, and motivates the events that transpired.

It was an exciting era, one where the common law of contracts played a greater role, and statutory law played a lesser role.  It wasn’t no-holds-barred, but it was close.

We are experiencing our own era of leverage that is too high, and what happens when it breaks.  The protagonist of the book, Jesse Livermore, aims for best advantage, and learns as he goes along, going broke several times in the process, and dying broke as well.  Leverage cuts two ways.  Live by leverage; die by leverage.

Paul Tudor Jones II writes an appendix to the volume, as well as a foreword.  Being a trading billionaire who started from scratch and went broke a few times, he is an excellent man to get into the mind of Livermore on a modern basis.

Who would benefit from this book: Historians would benefit, as would those interested in trading.  Economists wanting to get a look at market microstructure would also benefit.  Livermore, more than most, gives a full view of technical analysis, because he lays bare the motivations of players, and how other players attempt to devine those motivations.

If you want to buy this book you can buy it here: Reminiscences of a Stock Operator Annotated Edition.

Full disclosure: Publishers send me books.  I review some of them.  I try to review the best of them, but I promise the publishers nothing.  If you click on a link that leads you to Amazon through my website, and you buy something, I get a small commission.  My view is that you should buy what you want.  Don’t reward me for something that you don’t like.  Rather, enter Amazon through my website and buy what you want; it will cost you nothing more.

My first real post at the blog was Yield = Poison.  In late February 2007, prior to the blowup in the Shanghai market, I felt frustrated and wanted to simply say that every fixed income class seemed overvalued.  Short and safe seemed best.

It reminded me of a discussion that I had with a colleague two jobs ago, where in mid-2002, the theme was “yield is poison.”  I did the largest credit upgrade trade that I could in the second quarter of 2002, prior to the blowup of Worldcom.  Moved the whole portfolio up three notches in four months.  Give away yield; preserve capital for another day.

I feel much the same, but not as intensely in the present environment.  Spreads could come in further if the government keeps providing low cost liquidity to those who make money on the spread they earn on financial assets.  But most fixed income assets do not reflect likely default costs.  Perhaps the long end of the Treasury curve is worth a little allocation of assets here, if only as a deflation hedge, but if the Fed is going to start lightening up on their QE, and the Treasury will be having high issuance, I might want to stand back for a while  while supply will be high, and try to buy near the end of the quarterly refunding.

There is another sense in which I say “yield = poison,” though.  When rates for safe assets are low, retail and professional investors are both tempted to stretch for yield.   Wall Street is more than happy to deliver on your desire for yield.  It is their top illusion, in my opinion.

Two examples from my bond trading days: the first was some local brokers asking to buy a small amount relatively highly-rated junk bonds from us.  They were offering a full dollar over the usual market price.  They called me, since I ran the office, but I handed them over to the high yield manager, who said, “Jamming retail, are we?”  [DM: placing overpriced bonds in customer accounts.]  After a lame reply which amounted to,”Look, don’t ask us about what we are doing, we’re offering you a good deal, do you want to sell your bonds or not?”  the high yield manager sold them a small amount of the bonds, and we didn’t hear from them again.

The second example was when a bulge bracket firm called me and asked me if I owned a certain very long duration bond.  I said yes, and he made me an offer several dollars above what I thought they were worth.  With a bid that desperate, I said I could offer a few there, and more a little back, but for the block he would have to pay more still.  He offered something close to the “more still” price, and I sold the block to him there.

As we were settling the trade, I asked him, “Why the great bid?”  He said, “We need the bonds for retail trusts.  They get an above average yield, but if rates fall, after five years, we buy them out at par, and keep the bonds.  If rates rise, they take the loss.”

Even on Wall Street, if you have a good relationship, you get an honest answer.  That said, it made me sorry that I sold the bonds, even though it was the best thing for my client.

There are many ways to frame the yield question at present, here are two:

• You are on a fixed income, and you are having a hard time making ends meet.  Should you lend longer to earn more, go for lower rated credits, or do nothing?
• You are earning almost nothing on your money market fund.  You need liquidity, but where else could you invest it?

I would be inclined to buy a mix of foreign-denominated bonds, but most people can’t deal with that.  So, I would advise them to build a “bond ladder” where they have high quality issues maturing every year for the next 10 years.  As each bond matures, I would use the proceeds to buy bonds ten years out, re-establishing the 10-year ladder.

But don’t reach for yield.  Odds are, you will get capital losses great than the excess yield you hoped to receive.  And remember this, don’t buy products someone else wants to sell you.  Specifically, don’t buy high yielding investment products that Wall Street sells to enhance your income.  They prey upon those who want more money, and are weak in their knowledge of how the markets work.

To professionals: don’t reach for yield now; long-run, you are not getting paid for the risks.  You have seen how illiquid structured products can be in the face of credit uncertainty, and impaired balance sheets of holders and likely purchasers.  You have seen how spreads can blow out (bond prices fall), and roar back in (prices rise again) in the absence of safe places to invest money.

I’ll give the Treasury and the Fed this: they have created an environment where savers are punished, and have to take significant risks to get yield.  They have created a situation where the markets are dependent on subsidized credit, and speculation dominates over lending to the real economy.  They are pushing us deeper into a liquidity trap, as low-to-negative return investments in autos, homes, and banks get supported by cheap public credit, rather than getting reconciled in bankruptcy, so that capital can be redeployed to higher returning projects.

Anyway, enough for now — more later.

As I roll through the day, i often make comments on the blogs and websites of others.  I suppose I could gang them up, and post them here only.  I don’t do that.  Other sites deserve good comments.  Today, though, I reprint them here, with a little more commentary.

1) First, I want to thank a commenter at my own blog, Ryan, who brought this article to my attention.  I’ve written about all of the issues he has, but he has integrated them better.  It is a long read at 74 pages, but in my opinion, if you have 90 minutes to burn, worth it.  I will be commenting on the ideas of this article in the future.

2) My commentary on Dr. Shiller’s idea on Trills drew positive attention, but the best part was being quoted at The Economist’s blog.

3) Tom Petruno at the LA Times Money & Company blog is underappreciated.  He writes well.  But when he wrote Fannie and Freddie shares soar, but for no good reason.  I wrote the following:

7) Then we have Evan Newmark, who is a real piece of work, and I mean that mostly positively.  His article:  My comment:

With markets, it doesn’t matter what people say.  What matters is what they rely upon.

Face it, people have opinions, and when asked only the most cautious or prudent won’t give an answer.  Talk is cheap.

But money talks.  What will people or institutions risk some of their financial well-being in order to make money?

Turning points are exceptionally difficult to call with time precision.  Anyone can say that a trend is going to break for a long while before it breaks; the trick is to be able to make the change within a short distance of the inflection point.  I’ve done it a few times, but I have little confidence in whether I can do it regularly.

Examples:

• Five months before the crest of the housing bubble, I wrote a piece on why it would pop soon.
• A few months before the subprime mortgage crisis hit, I wrote a piece on why it would end badly.
• In March of 2000, I told the investment department that I worked in that financing for tech companies was unwinding, and that the tech bubble would deflate.
• In October 2002, I sensed that the bear market was over and began taking risk in my own portfolio, as well as my main client’s portfolio.
• In May 2003, I told my boss that we were in a liquidity rally and that shorting lower grade companies was suicidal, because financing was becoming available for marginal ideas.  In early 2004, I confirmed that by writing a piece showing that the bull market had a way to go.
• And recently, I made predictions on munis, mortgage bonds, agency bonds, and investment grade and junk corporates.

Now part of this is that if you predict enough things, you will have some right ones to point to.  I am obviously picking and choosing here, but when I made these predictions, there was a method to my madness.  I am not like Cramer, who makes predictions every day.  I wait for points where markets are out of kilter, and then I act, and sometimes predict.

Calling turning points is very difficult.  I want to offer two bits of advice to those to try to do so.

1) Look for situations where the yield is unsustainable on the high side or on the low side.

Examples:

• Earnings yield too low during the tech bubble.  Also workers were relying on stock to rise, because they were getting much of their pay through options.
• Net yield on much residential investment real estate negative in 2005-7, without even factoring in maintenance costs.  When someone is relying on price appreciation in order to break even something is wrong.
• Toward the end of the commercial real estate bubble, the same was true.  Equity investors began to rely on price appreciation in order to break even.
• When spreads on high yield blew out, at its worst the market was assuming that half of all high yield issues would die, with low recoveries.  Even the Great Depression wasn’t that bad.  The same was true in a faint echo for BBB Corporates.
• During the recent bottom in March 2009, high quality companies could be bought for less than their net worth and at earnings yields unseen since 1973-74.

2) Look for a qualitative change when you think we might be near a turning point.

• Chatter changes at/near turning points.  Certainty gives way to uncertainty.  Uncertainty gives way to worry.  Worry gives way to panic.  In October 2005, Googlebots that I created tipped me off to the change in the residential real estate markets way ahead of most parties.
• Inflection points tend to be times of stasis as far as economic variables go, but confusion in terms of chatter.  During the tech bubble in early 2000, the chatter became decidedly less certain.

Inflection points are times of change, and chatter should reflect that.

Coming back to contrarianism, ask yourself, “What are people relying on to be true, that may not be true?”  That is what it means to be a contrarian.  Mere disagreement means little.  Where have men placed their bets?  Betting against the consensus is what a contrarian does.