ERICOPOLY

Yes I would expect this to hurt the demand for municipal debt somewhat. Investors already do not trust their mark-to-model valuations for a lot of these loans, knowing the real market price is lower. Confidence is restored by a significant degree as the real market price is suddenly substantially higher that before. They still might choose not to sell them, but the mark-to-model valuation has more credibility than it had the day before. The intrinsic value of the loans is higher -- tax free cash flows being worth more than taxable ones. They can cherry pick what they sell. Some of their loans are not underwater -- the loans underwritten in the past 12 months for example. They can sell these for large capital gains above where they are presently marked on the books.

Dynamic, I wouldn't anticipate a soaring in housing prices. The assets I anticipate soaring would be the loans themselves. I think banks would be able to sell their existing inventory at prices far higher than they can fetch at the present. A tax-exempt bond is worth more than a taxable one. Likewise, if we were to remove the tax exempt status from municipal bonds their market values would plunge. The point behind granting tax-exempt status to municipal bonds in the first place was to provide states&municipalities with low-cost funding. The Fed has tried dropping rates close to zero & tried buying back treasuries to bring the yield down. People think we are out of ammo when it comes to driving down the market rates that consumers face but not by a longshot. We know it's not the case because we know how effective tax-exempt status has been for municipalities. I would imagine securitization market might liven up more than just a little bit in response -- banks get liquid again.

I agree. To that problem specifically I think a tax policy can help. Brainstorm a little bit about what our financial institutions would look like tomorrow if Congress acted today to cut all tax on domestic consumer loan interest and domestic mortgage interest. In other words, put them on an even footing with tax-free muni bonds. The market values for their assets would soar. Tax-free status brings down market interest rates for consumer loans (reflating the prices for consumer goods, making businesses confident to resume hiring). This is not the same thing as the Bush tax rebate -- not at all.

He rather clearly is hanging his hat on the Bush tax rebate as evidence that no tax cuts work. I will quote from page 19 of the document attached at the beginning of this discussion: http://cornerofberkshireandfairfax.ca/forum/index.php?action=dlattach;topic=1923.0;attach=194 Why not tax cuts? Politicians love tax cuts. I like to have tax cuts myself. But from a macroeconomic perspective, when the private sector is minimizing debt because of a balance sheet problem, if you give them a tax cut, they’ll be more than happy to use that tax cut to pay down their debt or rebuild the savings that they have ignored for so long. But they’re unlikely to spend it. If you remember George Bush’s tax cut of last summer — That’s exactly what happened to it. Yes. Something like 88% of the rebate checks were used to pay down debt or rebuild savings. Only 12% went into new consumption. So I would argue that tax cuts under the current circumstances are the most inefficient way to expand the economy for the given amount of budget deficit.

Investors don't like bank assets inflated by mark-to-model. The government could boost bank asset valuations by reducing the tax rate on mortgage interest (would raise the market prices of such assets). That's another tax cut that isn't of the form of the Bush cash giveaways. It gets banks better capitalized and therefore reduces the pain of deleveraging. And it doesn't just favor banks. Little grandma and grandpa retirees benefit as their savings aand pension assets can be invested at the favorable tax rates too.

Are all tax cuts created equal? The Bush example was one where they just handed out cash. How about a tax cut that reduces the incentive to pay down debt? Interest on consumer debt, for example, is not tax-deductible anymore (it used to be). Simply putting that tax deduction back in action would reduce the attractiveness of debt retirement for consumers. That's not to say it would work, but I'm trying to question the simplistic example of the Bush tax rebate which is held as a rebuttal for all tax cuts of any kind. He pretty much makes that argument, and I think he hasn't been very convincing.

I read the Koo paper yesterday and here is where I'm getting stuck in terms of digesting it: 0) Assertion: without stimulus spending GDP would shrink as private sector prioritizes debt retirement 1) Assertion: increased cash flow from tax cuts are spent in paying down private debt (uses Bush tax rebate as example) 2) Assertion: the economy's main issue is that there is too much private debt To me, it would seem that the problem gets fixed when the excess debt is retired. As Koo points out, tax cuts will get us there the fastest, but advises against doing that because of an expected collapse in GDP while we wait. Now, my question is why wouldn't you want to get back to health as quickly as possible? That would seem to be debt retirement. If in a "do nothing" scenario GDP shrinks as people pay down debt, then in a "tax cut only scenario" perhaps GDP shrinks less given that people have new funds with which to pay the debt down. So if GDP is shrinking less, then why can't the remainder be made up in form of stimulus spending? Instead of this approach, he seems to be advocating only stimulus spending.

Here is a video of Berkowitz discussing his purchase of Citigroup. http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=17974680&src=finance&ch=4535474 (I own Citigroup shares now so I'm sort of interested)

Berkowitz owns Citigroup... probably because he thinks the recovery is happening: “I’m optimistic about the economy—we are in the spring of a recovery,” . Watch the video: http://www.cnbc.com/id/34749475/site/14081545?__source=yahoo%7Cheadline%7Cquote%7Ctext%7C&par=yahoo He also said: "We own a large position in Sears which means we'd be buying, because if we're holding it it's like buying it". I like his thinking there -- perfectly in line with mine which is that... holding is buying. We've had that discussion before on this board.

Does anyone understand why he chose Canada over Australia as his first choice investment? His ring of fire nearly encompasses Canada, but not quite. Australia is as far as one can get. Or is Australia not considered a "Developed" country? Of all of the developed countries, three broad fixed-income observations stand out: 1) given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country,

The full price paid for BNI will be carried on the books, even though it represents a multiple-to-book of BNI's underlying assets. In theory, if Berkshire only held KO and nothing else, Berkshire should trade at book value even though KO trades at a huge multiple of book. Excellent point, Eric. The publicly traded Cos that BRK owns are already trading at multiples to book before they are marked to market. On the other hand most of BRK's wholly owned Cos are carried way below any rational private market value which would be way over tangible book. Also the cyclical Cos BRK owns will surely have a greatly increased value as the economy turns up. ( think BNI's sensible senario to double earnings over the next four years) Let's assume that the public Cos that BRK owns are fairly valued compared to the rest of the S&P ( although they are on average superior). Can we assume that the rest of BRK should command a substantial multiple to BRK' carrying value for them if those businesses were part of the S&P? If so what would the increased multiple be? I bought 2 class A shares last week and I must say I like the instant gratification of the recent share pop. I have trouble when the S&P500 tanks 50% because a lot because people invariably say... "hey look, Berkshire's book value only declined by half as much as the S&P500". Partly this is skill, but partly it's just plainly obvious that while the S&P500 index is marked to market, the value on Berkshire's books of the wholly owned subsidiaries is not. So Berkshire in theory ought to have a lot less volatility in book value vs the S&P500. Anyways, during periods when the S&P500 goes up steeply Berkshire's book value will likewise have a difficult time keeping up.

That's true but the majority of dividend paying companies also have debt -- they too could have less debt instead of paying the dividend. It just looks a good deal bit more silly to raise the money so close to the dividend paying date.

Yes, there is some facetiousness even in my advocation of it. However it was an attempt to answers Sanjeev's question as to whether government support is sustainable... this is a method I found that actually puts a price on it. Not acting has a price too by the way, as those jobless persons are given humanitarian aid by the government. Part of that cost (the one we are paying anyhow) is capitalized in the price of blowing up some inventory -- labor is the largest cost component of building a house and we are paying for that labor one way or the other.

The full price paid for BNI will be carried on the books, even though it represents a multiple-to-book of BNI's underlying assets. In theory, if Berkshire only held KO and nothing else, Berkshire should trade at book value even though KO trades at a huge multiple of book.

Warren weighs in: http://www.huffingtonpost.com/2010/01/20/warren-buffetts-housing-s_n_429850.html "We could have a cash for clunkers program on housing. If we would blow up 3 or 4 million houses today, the housing shortage would be over... if you have an inventory overhang. You have to have demand be greater than supply for a significant period of time. And we're well on our way to that."

I'm glad to see that Warren Buffett also thinks it's stupid. http://www.huffingtonpost.com/2010/01/20/warren-buffetts-housing-s_n_429850.html Separately, Buffett told Bloomberg that he "didn't see any reasons why the banks should have to pay a special tax," and questioned why Fannie Mae and Freddie Mac had not been asked to pay similar fees. Here's Buffett: "If it's some kind of guilt tax or something of that sort because banks were among the [firms] that were saved back in 2008, everybody was taken care of then. And the banks, basically, somebody like Wells [Fargo], it's cost them a lot of money to be in the TARP and it was basically forced upon them. They didn't want to take the money, but really had no choice...The government's made a lot of money off Wells. They've made a lot of money off Goldman. They've made a lot of money off JPMorgan. And where they're at going to lose money, at least where it's possible they'll lose money, is in the auto companies."

That works when an industry is destroyed permanently. Those workers need to learn a new skill. For example, people once were employed for manual labor that is automated today. The homebuilding sector (and related industries like carpets/appliances) is not permanently destroyed. It is just idled while we wait for demographic growth to eat up the oversupply. What are they going to do? Retrain as computer programmers for the next three years only to go back to work in construction when their labor is needed again? Aren't you then wasting a lot of money on retraining them? We need carpenters... we just don't need them right this second. Where is this other industry that is undersupplied for labor over the next few years? Free market? Sometimes the free market is not in need of huge amounts of additional labor, such as when demand is slack.

There are some notable things that make it unique. We'll keep using OIL as the example: Pushing up the price of oil makes the Saudi's happy but increases costs for the so called "Main Street" individual. Oil exploration to replace supply destruction does not put "Main Street USA" back to work US residents who own houses do not feel wealthier and more confident as the price of oil rises Lenders who want 40% down for houses do not feel encouraged by rising oil prices My point about destroying excess inventory is merely to get it out of the "OVERBUILT" status. Then it goes back to the normal place where we would be had it not been for the housing bubble. So then the free market can allocate capital whereever it feels appropriate again, and the government can step back. People who normally are employed by the home construction sector go back to work, they buy bread which puts another cashier behind the checkout line... and they have income which allows them to make their payment on their mortgage again (they are one of the millions who are currently delinquent in paying). I could go on, but anyway... I see your point that it can't possibly make the country wealthier in the aggregate to destroy an asset (which is housing). It does however improve some of the other problems that are leading to much of our current social unrest.

You are right, there is the shadow inventory. But there is also FHA loans, there's Fannie and Freddie which is going to absorb a good deal of those expenses anyhow... I think that if you buy a house for $170k and tear it down... you are then supporting a housing price level. But let's say you don't do that... you let prices fall and in that case prices go lower and Fannie/Freddie takes a larger loss. I think we're talking about some level of government losses one way or the other. Everyone that owns US debt ought to understand that. So buying up the entire 4m of housing inventory would be an overstated cost. Once you get well into the 1-2m buying level, prices stop falling or rise, confidence wouldn't get any worse (likely improve), perhaps some of that shadow inventory dissipates on it's own. But suppose it doesn't and you need to buy and destroy 4m homes. I think once that happens you have normal supply/demand that drives construction and magically people go back to work building houses, selling appliances, selling carpets, etc... Then you have incomes to tax again (vs unemployed people) and that further chips away at the cost. All of the assets tied to house prices benefit... that may mean they are not sold at such steep losses, so there are fewer tax loss deductions and that ultimately means higher taxes collected on other gains. So again, some of the money goes back to Treasury. I don't think that $100b of stimulus spending necessarily equates to $100b of deficit... if the money is spent on destroying supply then it brings recovery a step closer, and that means growth in tax receipts.

Why then is the price of gold continually rising? Why are central banks (like India's) paying more and accumulating more of this worthless relic? That kind of sounds like central bankers are infallible. After all, they are... so their actions must mean something about the value of gold.

You also ask a good question... how sustainable is the tax credit? The housing market is oversupplied by 860,000 units: http://newobservations.net/2009/12/27/housing-inventory-still-dramatically-oversupplied It would cost $146 billion dollars to buy 860,000 units and scrap them. Kind of like cash for clunkers in a way (scrapping houses instead of cars). $146b is well within the remaining unspent stimulous budget. My assumption is that the average price paid is $170,000 -- that may be fallacious because median is not the same thing as average price.

On Australian television a couple of nights ago there was a psychologist explaining why some individuals get sucked into believing in apocalyptic scenarios from "the book of revelation". Apparently, as aweful as it is to contemplate armageddon, some people actually find relief in believing it because it provides them some certainty... finally, they know how it ends. So it gives them relief... relieved that they know how the world is going to end, and when... I know, silly as that sounds the psychologists were saying it anyway. But what immediately struck me is that people probably find the same relief when they reach the conclusion that the financial world is going to end... and that probably encourages people to step onto the hell in a handbasket bandwagon... notable investors included.... permabears.

I think that buy low and sell high is the best method to apply. Value investing works because it includes the appraisal process... without which you have not a clue where "low" and "high" fall. I heard of buy low and sell high long before anyone told me about "value investing". Later I realized they were the same.

I wish the government did not pursue this any further. They forced companies like Wells Fargo to take the TARP money for cosmetic reasons, and it's clear that they did not want to take it. Every single quarter they have made progress towards rebuilding their capital levels through profits. Now, they are punishing Wells Fargo and behaving like it was a "bailout". Why do they have low capital levels? Because their took the writedowns on Wachovia before buying it... a lot of the other firms only look better capitalized because they are dribbling out the writedowns instead of doing it in one big bang. I also take exception to the idea that the remaining banks need to recapitalize the FDIC with special assessments. The mistake was made several years ago by not requiring all banks to pay a higher insurance premium to the FDIC to ensure that it was capitalized enough to withstand the storm we are going through right now. Instead, the politicians wait until the crisis hits, they wait until the bad banks go under, and then raise the premium and impose special assessments. In other words, if you are a good bank Wells Fargo, you need to pay for the sins of the bad banks. That's just insane in my opinion. All the banks, good and the bad, should be paying equally, but instead we have it rigged so that we wait for the bad to fail, and then concentrate the costs on the good banks. Why punish the good banks who did nothing wrong? The FDIC exists to save the depositors, I think the tax payers should ultimately bear the cost of the special assessments, it was their duty to put the right people in office in the first place and they failed at that... their elected representatives did not get the FDIC adequately capitalized in the first place. The tax payers (in my opinion) need to feel some pain when they elect the wrong people... When the politicians failed to regulate the CDS that AIG wrote, did they re-elect those same people? Did they push out the people who deregulated or failed to regulate, or did they elect them for an additional term? How many letters did they write to their congressmen demanding that AIG's CDS get regulated, and that the FDIC was undercapitalized? I think it's disingenuous to just blame Wall Street for "greed" when really the problem here (IMO) is taxpayers voting in the wrong representatives. We talk about how hard it is to remove a director when it comes to CEO compensation, but how about getting your elected officials in government to do the right thing? If the elected officials would only manage risk appropriately in terms of things like CDS regulation, discourage (through regulation) the kind of lending practices that got us into this mess in the first plac, and ensuring the FDIC is big enough to handle failures at large banks... Nah... couldn't the taxpayers that voting these people in that allowed the crisis to happen... the tax payers and their elected representatives have framed the debate such that they are not responsible.... Wall Street is. I don't buy it frankly... the taxpayers (through their elected officials) had the power to stop this crisis dead in it's tracks long ago. They failed to act and now they just blame somebody else... Wall Street greed "fat cats".

17F in Gainesville. Low 30s in Miami. 42F in Key West. Brrrr! FYI Publix is hands down the best run supermarket chain in US. It's privately owned and likely the most profitable too. There are @ 300-500K Canadian snowbirds in Fla this time of year. You can run, but you can' t hide from Ol' Man Winter. :) Your snowbirds are just going to the wrong place. It is stinking hot here in Sydney today.