Today's post is number 3000. This site will be four years old next month.The picture is to commemorate a great baseball player and person but does not to signify the end of my blogging.
From yesterday's FT Alphaville comes this little nugget from Marc Faber;
From a personal perspective, says Faber, of his total assets, about 5 per cent is in equities, 8 per cent in gold, 8 per cent in real estate and related investments and the rest is split between US and euro fixed-interest securities.
He also mentioned that sooner or later he thinks the entire financial system will blow up. This makes the case for him for holding some equities because he thinks large cash deposits will disappear over night in a "blow up" but equities although down a lot would still have some value.
He cites an opinion from an unnamed economist who thinks that the surpluses built in Asia will shrink in 2009 by 50% (why is spelled out in the link) which if did happen would be devastating for everyone.
Here is a fun fact from Whitney Tilson in a post on Seeking Alpha; prior to this decade, the average American household was able to borrow approximately 3x its pre-tax income to buy a house...As the decade progressed, they (lenders) were willing to lend 9x a household’s income!
I can't vouch for the numbers but we all know that the direction is correct. Regardless of whether 9 is spot on or not the lending standards became absurdly lax.
Is there anyway that Fannie and Freddie's equity survives? Forgetting the day to day news flow for a moment isn't their failing (equity-wise) a foregone conclusion? Am I missing something? Even if I have that wrong their going to zero is well within the realm. This brings up a point I have made (but did not originate) many times before which is that part of the fallout from a major crisis is enormous failures (Enron and Worldcom as recent examples). This has happened before, appears to be happening now and more importantly will happen in the future.
On a more pleasant note there was a snippet in the WSJ about a banker venturing out to start a wine fund, apparently there are ten of these that already exist.The chart is a wine index that seems to be impervious to cycles (I wish the chart went back to 2000). I don't know anything about wine but some sort of exchange traded something or other would not shock me.
Evolution in this regard would be great; let the end user decide it owning it makes sense.
In going anywhere near something like this I think I would rather own a meat fund, sugar or chocolate. These types of things face new demand from ascending (and bigger) markets as opposed to what might be demand from the same rich people that have always bought expensive wine.
16 comments:
Holy cow, 3000 posts. I've learned a lot from your approach to investing but, by that count, I guess I'm still a relatively new reader. Congrats and thanks for blogging.
Let me see if I have this straight. Mr. Faber believes the financial system will blow up and he has 77% in securities-16% in hard assets and 5% in equities? That doesn't make a lot of sense quite frankly..
hey, he didn't "spend all those years at evil medical school to be called Mr."
Here in the UK as long-term interest rates came down and easy credit proliferated the lending standards were eased too. Instead of 3x earnings it became a question of 'affordability', with the lenders looking at monthly net income and weighing up what would be a reasonable set of outgoings (eg for a 3 bed house with two earners and one child) and whether the mortgage payment would be affordable.
It was reasoned this way of checking affordability was just as/more than accurate as 3x gross earnings.
Most mainstream lenders started looking at affordability which equates to around 4.5 to 5x earnings as interest rates dropped, with some sub-prime and alternative lenders going as far as 8 or 9x - usually when a professional (eg a lawyer) had just qualified and his parents put up the equity in their house as collateral.
Where the mainstream lenders became even more relaxed was additional loans on existing mortgages, often making it very easy to authorise up to an additional 25k sterling without need for any proof of income.
There were also many, many cases where IFAs were doing no doc. mortgages because they knew which lenders were the most easy to fool (see Northern Rock and Bradford & Bingley) and bought into the 'house prices only go up' and 'they're not making any more land' theories.
Unless interest rates rise considerably, compounding rises in the costs of living, the UK housing market will probably just be stagnant for many years to come.
The problem with wine as an investment is the transaction costs kill you.
Roger,
I was curious if you ever used GMO for their research and economic outlook. Attached is a link to their 2nd quarter report. Please advise.
https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIDw4xLiaGjSyulWDs59nNCg6SAy6Id6vhnovl1Yl%2b2oubOjF1vvXKaz5xFMErLppx1dr4biwfgkYmYpOcFjg5Es
sorry your link took me ot a login page
Congrats Roger !!. Thanks a great accomplishment.
In this country,banks should not have given mortgage loans to folks whose income were too low compared to their monthly payments.Nor they should have given any of those "ninja" (No Income No Job, Assets)loans. Now I am seeing many houses abandoned in the city I live in.
Like the other poster mentions I heard that the same issue is affecting the UK housing market since they followed some of the logic of the banks here.A while ago Business Week had an article where they praised the German bankers since they follow very traditional approaches to approving home loans.The scenario we are facing might affect the emerging market of India too since the banks there have been reckless in approving loans as well.We will see.
thank you, you say UK, I would add spain.
Congrats, Roger.
You are four years into blogging because you are VERY, VERY GOOD at expressing yourself. And, those expressions cause us to think both critically and logically.
Time for a radio or cable show big guy?
T
lmao, at a bare minimum you have to like people and be willing to leave the mountain for that sort of thing.
sorry, thank you for the very kind word
Congrats Roger - 3,000 is an incredible number for just 4 years.
Best for the future and the next 3,000 posts!
DJF
I would add Ireland into the mix too, and add unemployment rising as another drag on the UK market.
thank you Declan
Roger
Yes I agree.Spain needs to be added to that housing bubble list.Too much vacation home/condo developments were done by the builders thinking foreigners and locals alike would buy them at any price.
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