rb

What you talk about here are kind of the deleveraging scenarios that you don't want and that the smart powers that be are trying to prevent. Number 3 wouldn't actually be that bad but it's a very unlikely scenario. The ideal scenarios would be something like this: 4. People stop borrowing and they "grow out of their leverage". Nominal stock of debt remains constant while incomes go up (inflation + some real gains) over time. Leverage rations then go down. 5. Economy reaching a critical mass where demand is not aggregate deficient anymore. People pay debt slowly but the weakness in consumption is offset by business investment which is now revived thus still having full employment. All of this take a long time to work through. You can't have a quick household delevering and still have an economy.

Corporate debt isn't that big of a concern. For a number of reasons. 1. Debt ratios are actually not that high. People can throw around big numbers like x trillion this and y trillion that and some may go wow!. But the reality is that it's a really big economy as well and these companies also make eye popping profits as well. 2. Even if corporates get too levered there are ways for them to delever that are not really damaging to the economy: cutting dividends, issuing equity, even chapter 11 reorgs.

I'm sorry that's just wrong. Without a double blind controlled study it's hard to determine the exact efficacy of a policy. In economics we're not allowed to do that because it would be incredibly inhumane and just flat wrong. About delaying the inevitable I would posit this. Most people that get cancer die of cancer. The treatment and drugs just delay the inevitable. Should we not administer treatment and drugs? Yea I know it's not a fair comparison. But the Fed administers monetary policy - QE is a monetary policy tool. The problems of income and wealth inequality preceded the GFC and were not caused by monetary policy. Monetary policy won't solve them. But like cancer medicine it may help the patient along. Furthermore you say that if we had deleveraging like the Great Depression we'd be in a better place. That is absurd. That last thing you want to have is deleveraging in a depressed economy. That is disastrous. If you had deleveraging like the Great Depression we wouldn't be where we are. We'd be in 1933. Where we are may not be perfect but nobody would trade this for 1933. The firm would not be burning because of asset prices, the firm would be burning because it has no business. Hoping for a replay of the Great Depression to decrease income inequality while it would work mathematically is insane.

I'm not saying there is no problem. There is indeed a problem. Others may disagree but I think it's a big problem. What I'm saying that your focus is wrong. The problem has nothing to do with the GFC or QE. The GFC (not its medicine) may have made it worse but it wasn't the cause of the problem. The problem started way before the GFC. If you're concerned about the problem you have to accurately diagnose it. If you have a gangrene on the foot you don't want to operate on the liver. Sadly I'm not optimistic.

I was gonna reply to cigarbutt on his post about participation, but I guess I can maybe kill 2 birds with one stone here. The thing that 80% of people have not participated is bullshit. You're referencing family net worth. But that's not an indication of participation. If before the recovery you had no job and were in danger of loosing your house/wife/kids/whatever and now you have a job - maybe not exactly the job you've hoped for - and now you can avoid all that then you've participated in the recovery big time. If you're an affluent person like me who was got fully invested in the early naughts (in spite of all the bullshit about too much risk in the market, etc that ppl were spewing at the time) then oh yeah you've increased your net worth a lot. But the first cohort never had a chance of doing that so it's not really a fair comparison. In addition, no the economy is not being held up by asset prices. It actually found a grip and getting some traction. You have that thing where that trucker has a job now and can finally take his baby girl to Disneyland on a holiday. That ensures jobs for the Disney ppl, who then buy other shit, etc, etc. If NFLX or FB stock takes a dive it won't change much of that. The auto debt I will admit is a bit concerning. I haven't spent too much time looking at that so if you have detailed numbers go ahead and post them. From what I know I would say that the numbers may not be as bad as one would think. Post GFC you had big changes in terms for auto loans. Much longer terms (72 mo?) and a lack of used cars for a large number of years which pushed people into the subprime car market. I'm not saying it's good, just that it's probably less bad that you think. Look, I'm not trying to say that things are great for the lower quintiles. They're not. But the problems they have did not arise from the GFC. They were screwed long before that. However, the measures that were taken did help them. Put yourself in the place of one of these men in the lower quintiles that doesn't have any financial assets because he doesn't and never really did have any money to buy any. Now he's got a job and can feed his family and the stock market is kinda bubbly. Before he didn't have a job, couldn't take care of his family, but assets were fairly (or under priced) priced at depressed levels. Which situation do you think he's rather be in?

You are right that the Fed cares more about consumption inflation rather than asset price inflation. Because that is their job. They have a price stability mandate and no asset price stability mandate. They keep an eye on asset markets for sure as a part of the whole system for sure but it's not nowhere near the top of their concerns. They also don't have the tools, nor the authority to regulate asset prices. Fed's monetary focus had more to do with demand side of the economy. At some point you may get a wealth effect but that's more of a feedback/bonus rather than the goal. 2008 was both a liquidity crisis and a solvency crisis. Of course at that point no one wanted to say the S word because you don't want to add fuel to the fire. In 2008 I was working for a large and well capitalized bank. We were way better than most institutions because we had shitloads of deposits financing us. But we also had repo and interbank financing. When the crisis hit repo just disappeared and overnight lending went to 7%. That's a big liquidity problem. We may have been ok because of our deposits but not many banks can survive when they have to borrow overnight at 700 bps. Now on the other hand AIG, Citi, and a number of other institutions were insolvent. AIG or Citi alone were big enough to brick the entire system if they went tits up. Both and a number of others doing it at the same time would have been unbelievably destructive. So that was the solvency crisis. But the QE was not implemented to deal with the liquidity or the solvency crisis. The QE was applied to deal with the collapse in demand that followed the initial shock. The 1932 QE was actually quite successful. It brought yields down a lot which is what it was intended to do. You also can't really superimpose impose the Great Depression over the Great Recession very cleanly because it was a vastly different world back then. For example if I take away Fannie and Freddie I think the recent experience with home prices would have been very different indeed. I'm not exactly sure what you're trying to say here. Nominal debt doesn't really matter that much. It will increase ever forward. It's part of the story GDP grows nominal debt will grow. Yes households have delevered back to 80% to GDP. I can't really tell if that's good or more should be done. It seemed to have stopped here for now so maybe households are fairly comfortable at this level. The economy seems to get some traction here which is good. But investment and inflation remain subdued which still indicate a fairly weak demand situation. You don't really want to force deleveraging in such a place. Once the economy improves further you can go for it. The home ownership rate is something people like to play bullshit games with. For example, the home ownership rate currently is 63.7%. So come and say: "that's the lowest home ownership rate since the 60s". Well actually it isn't really. It's pretty much the lowest home ownership rate since 1994 when home ownership was at 63.8%. After 94 home ownership took off like a rocket and peaked at 69 right before GFC. We know now that at that point people it was excessive and a lot of people that had no business owning homes did. For most of US history home ownership has been below 65%. I don't know what the "right" home ownership rate should be but we're probably not far from it. I also don't expect a big pop in the ownership rate. The current generation that should be buying homes already carries a lot of debt from student loans. It also went through a majour traumatic event - the GFC. Also rents in the US are mostly decent. This environment won't endear them to buy homes. Also why focus on home ownership rate. We just went through an event that showed us that a high home ownership rate is not exactly a good thing. In regards to corporate debt and buybacks. Corporate debt reached 3T in 2004. It was higher in 2008. Now you're right it's about 6T. But corporate profits also doubled from 2004 to present. So really it's not that surprising. Corps target debt to earnings ratios. The fact that a lot of money went to buybacks isn't surprising either. The fact that they faced weak demand means they faced a lack of economic investment opportunities. So they couldn't spend the money to create new cash flows as you put it. So they returned it to shareholders instead. Money went more towards buybacks than divvies because buybacks help with that stock options business too. Yes commodity prices have collapsed. That's what commodities do. They go through super cycles and they had a super cycle. Did you really think that oil (or insert your commodity here) will continue to trade at 160 when it cost 40 or 50 per barrel to make? The reason why they have super cycles is because projects have long lead times. Supply gets tight and price runs up. The juicy price triggers investment. A lot of supply comes to market and prices collapse. It's an old story. The fact that asset prices rose is not so relevant. GOOGL investors don't really care what the price for iron ore is. I would also posit that most Americans have participated in the recovery just to various degrees. But it's not like most Americans were wildly prosperous before the GFC and now that's gone. It was varying degrees then it's varying degrees now. Maybe more on that in a later post. Lastly, from your subsequent posts you seem to want to draw a lot of lines. What about the Fed and asset prices, how about stock prices? What about the Fed and OTC derivatives. That view is wrong. The Fed's job has to do with the real economy, not the asset markets. And definitely not with OTC derivatives. The Fed has a few jobs to do though. To act as a lender of last resort. To stabilize prices - currently that means low and stable inflation. More specifically and inflation target of 2% not above, not below - I think 2% is too low but that's another story for another day. It's other mandate is to maximize employment - that actually doesn't mean it's driving toward maximum employment but actually towards NAIRU. As you see nowhere in there is anything about asset markets. You and me are market participants and no one is forcing us to do a stupid deal and buy a security at an elevated price. OTC derivatives are largely unregulated. You want to do a dumb deal with Goldman Sacks - go right ahead. There's also no written rule that you or I have a divine right to earn X% on some security whatever that may be.

I still always keep my eye out for the double loop de loop as a strong signal to stop looking at stocks, turn off my computer, and go to bed. Lol when you encounter the double loop de loop it's time to put down the scotch. ;D

You're not worried of a regulatory block of the purchase by chinese of a company that's rebuilding nuclear power plants?

That's smart. Those charges annoy the hell outta me. Not so much because I have to pay extra. I know they exist. It's more that I'll look at some places, jot down some of the prices and then if I go to look them up later it's hard to find them cause the prices on the big map won't match. Annoying!

IRRs can be deceiving that way and lead you to stupid decisions. If you're a fund manager and want to juice performance figures that's the way to go. But I get the sense that it's not the case here. So I would recommend to make decisions based on fundamental factors and the available market opportunities. So you bought XYZ at 10 and a month later it's 13. You feel really good about your monthly return. However you've figured that the stock is worth 20. There's a 35% discount to IV. Why would you leave that behind? Just because you've made 30% in one month? That makes no sense. Now it at the same time ABC is trading at 30 and you figure that it's worth 60 - a 50% discount - then it's better to sell XYZ and buy ABC (we'll ignore taxes for this). I remember seeing a lecture or presentation by a finance professor at a big school in India. He was walking through one of his trades. He had a position in Hindustan Unilever. He bought a dip or it was some sort of arbitrage, I can't remember exactly. But the trade was on for a couple of months and it resulted in some crazy IRR like 40% or something. Job well done. Then he zoomed out on the chart and it showed the stock going on a crazy run. Something like 200% in a couple of years. Moral of the story, let valuation guide your investment decisions.

Tripleoptician, Based on the numbers you've listed I assume you have something like a $1M mortgage @2.6%. Assuming you've but 20% down that would make the house 1.25M your price of 1.5M market. There's not much to criticize about your decision. It looks like you've looked at the situation carefully, understand all the details and risks and you're ok with it. Based on the numbers it looks like it could have gone either way. That $4,000 rent is pretty high. You don't get rents that high in Toronto. Enjoy the place. :)

Actually construction costs for new regular homes are about $100-$150 per foot. Also if trades people were in short supply in BC you would expect them to earn high wages. So are the hoards of carpenters and drywallers making $50 an hour? Actually no. The wages in Vancouver for a carpenter is about $26 per hour and for a drywaller about $25. That pretty much in line with the national average. The highest wages for tradespeople are actually in Ottawa where homes are a fraction of the price in Vancouver. Vancouver seems to be this magical place where how much money people make ($80k median per family) is irrelevant. It doesn't matter how much you make, you too can have a $1.5 million home. All you have to do is believe.

Most of what you say is true Jurgis. There is no real difference on paper between ETFs and mutual funds. Also the same story tends to play in crashes - so yeah not mu difference there either. The difference is that ETFs are largely automated whereas mutual funds were not. When a crash happens IAs tend to be busy not take your call, have a marital crisis, whatever. It slows the selling. With ETFs it will be faster. Basically, like all cycles, the way down is the opposite of the way up. Up was slower and smoother - lower vol - down it will be faster and choppier - higher vol. It's also worth noting that in the history of the market basically every crash had a higher vol than the previous one. It's what happens when technology meets fear.

Yes there would be a difference if these people would hold shares. When you hold shares you know what you hold. So you may sell some KO or TSLA because in your heart you know they're overvalued but you keep your BRK cause you feel good about it. ETF holders have no idea what they're holding. In their mind they're "in the market" or whatever. Without fail everyone I've met can list a litany of ETF tickers but have zero idea what they actually hold. When these people decide to "leave the market" because now it's too risky, or it's a bad time to "play the market" or whatever clever sounding phrase they use to sound smart it will lead to indiscriminate selling. People that hold actual shares while also prone to herd behavior tend to be more discriminate in their actions. As to what they do with the capital they have sitting around? They will keep it in cash. You will hear recycled phrases of past crashes about how cash is kind and the best place to be in right now is in cash. That cash will be provided by my and my clients' accounts (most likely BRK's as well) while we feast on the great opportunities they provided us with to enlarge our wealth.

It won't be the cause. But it will make it bigger, faster, high correlation, higher vol. It will also be the opposite of what we've been seeing the past few years and it will create a wealth of buying opportunities for real investors.

You hear this type of argument frequently around cycle tops. What if this happens, what if that happens, what if this time is different. When it comes to real estate a lot of them have to do with with financial engineering. Yours does as well. Basically it means extend the term of the loan - 100 year mortgage - or interest only mortgage. On paper it looks like it's technically possible. But in reality it always ends in tears. One of the reasons is that everything has to go smoothly and perfectly for it to work. But reality is neither smooth nor perfect. There are life events, credit cycles, and economic cycles. These ruin everything and you get tears. The bailout thing is actually not such a distinct possibility. There have been many house bubbles, but I am not aware of a single one where the gov't went in and bailed out the over indebted home owners. One counter argument to the whole thing I can make is that if houses are so valuable why can't a landlord collect reasonable rent to make a reasonable rate of return? On a $1M house that should be at least $5,000 per month. But where I live you can rent $1 M for $2,200 and $1.7M for about $3,200 per month. Let's take your example and assume I can get a 100 year interest only mortgage @2.9% - the current best 5 year rate available from a shitty lender. Since I'm doing interest only, i'm effectively a renter but the bank is my landlord. As a renter my monthly outlay is $3,200. As an owner my interest is $4,100 + $800 property tax + $200 insurance + $500 maintenance& repairs for a total monthly outlay of $5,600 dollars. As a rational economic actor why would one choose to buy instead of rent? This whole thing happened because you have irrational economic actors making irrational economic decisions.

I hate the fact that they own Pampered Chef. I don't think that an MLM has any place in a company like Berkshire. I can't understand why he bought it. it brings a host of issues and it's not like it was an elephant. I think this one should have been a pass.

Supposedly Vancouver Real Estate is the only good who's demand is not affected by its price.

Huh?

Yes, we're talking here about a car company that doesn't make money, or for that matter that many cars. Ask yourself this. Would there be these many fan boys if Tesla's market cap would be 1B instead of 60B? I think not.

Yes I need to pay $8 to listen to someone tell me that it's ok and I should feel good paying a lot of money for a company that doesn't make any money. You see... these are not the droids you're looking for.

FRED

Can you please post a link to the work? It would be interesting to read. Btw, we also gave the world other people, like Myron Scholes - good boy from Timmins - also of Black-Scholes fame, also of Salomon Brothers and LTCM fame. Discuss? :) 8)

Let me add a bit to what Cameron has been saying and maybe clarify a bit. The reason why there was CDS on MBS was not because Goldman did Burry a favour or anything like that. As a derivative the CDS has 2 counterparties the long and the short. Guys like Burry took the long but the shorts were bundled to create synthetic CDOs. It was the demand for synthetic CDOs that created the CDS and allowed Burry to go long. Until we see demand for synthetic ABS there won't be CDS on ABS. Any way this is kind of a moot point. Even if there was CDS on ABS we wouldn't be able to short the markets because nobody here would be able to buy them. But in case anyone can buy CDS pretty please can you share how?

Yea but you have to give it to those geniuses over at Boeing. You have a good product in the hands of a small competitor that is struggling financially and operationally. Pick a fight with the small competitor. Move the good product and technology to a large competitor that is sound and has a giant sales force. Make sure to piss off a couple of G7 countries in the middle somewhere. Done. Totally brill. Basically this couldn't have gone worse for Boeing.