HJ

It's not just a Eastern vs. Western cultural thing, although that's a part of it (buying an apartment in Shanghai is a multi-generational affair). So those housing value / average income ratio wouldn't settle at the same level as in the West. There's the issue of extreme inequality, the issue of domination over the economy by the State, and that keeping the real estate price high is a way for the State to tax the economy further without calling it so, the issue of lack of investment alternative to preserve any "new found wealth", the issue of "stock" vs. "flow" in Chinese housing (although this last issue is changing every year new housing gets built), the issue of a closed capital account, all of these are a lot more accentuated to the Chinese housing experience compared with those in US, or Japan, Taiwan, and Korea, none of which is specific to only the housing environment in China, but to the Chinese economy in general. So to call a crash in Chinese housing is really akin to calling a crash in the Chinese economy generally. But in today's environment, the question is what does it crash against? the Western banking system? Afterall, after 20 years of deflation, Japanese housing is still quite untennable for most young people trying to be independent of their parents, and Tokyo remains one of the most expensive cities to live. How badly has it really crashed? None of this is to say the elevated housing price in China is a sustainable phenomena, just that what causes its downfall is not simply going to be that the price is too high in relation to per capita income by some historical experience in a different market. In the Chinese context, you kind of need a fundamental reworking of the Chinese economy concurrent with it.

The problem with Chancellor's view on Chinese real estate is that the analysis is based on historical relationships among data coming from predominantly Western experiences. Whereas the high real estate price in China may very well be a reflection of several unique factors in the current Chinese system that acts together to twist those relationships into something that is entirely unrecognizable from a Westerner's view. Not saying it's not a bubble, just that this trail of reasoning will not lead to a satisfactory conclusion as to how long the distortion will exist and what the transmission mechanisms are to cause it to collapse.

To the extent that the argument for sustained high margin rests on the ability to outsource low margin activities, doesn't it implies that it's heavily underwritten by the current global geopolitical structure, i.e. a world dominated by the "Washington consensus" as to how the world's economic affairs should be arranged? An argument for such sustained high margin would therefore assume that such structure would be mostly maintained, at least for the forseeable future. Is it even possible to handicap that？

While for the time being, teens yield may appear attractive, be very aware that you are buying a levered portfolio of agency mortgages. Funding risk aside, FNMA 3% today trading north of 102. If rates just rise by 1%, assuming these mortgage passthroughs extend to something like a 6 yr duration, you are down 6% NAV on an unlevered basis. Applying 5x leverage ala Annaly, you are down 30% on equity, more than 2 years of dividends. If you are levered like AGNC at 10x, it could get very ugly very quick. Check out the price actions on NLY in rising rate environments, 2005-2006, 1999 - 2000. You need to be able to navigate that environment. These REITs have a place in a tax deferred portfolio at certain times, but arguably the best time to clip the pure agency mortgage carry has already passed us in this cycle. I would feel much more comfortable with a non agency version like CIM, where the leverage is only 2x and getting the same yield.

Imagine you have $100m that you want to save. What are your alternatives? You don't have FDIC protection (and there is no reasons why bank accounts can't have negative rates), and you can't put that in a safe under your bed. Sure, regular Joe's with $5,000 don't have to accept negative rates, but they aren't the majority of deposits. Not arguing that we will see those rates, but I'm just saying that there is some reason for why T-Bill yields sometimes go negative. It could happen for longer dated issues too. Ben Forget about a guy with $100MM. Imagine you were the treasurer of Apple or Microsoft, care taker of tens of billions, sprinkled among 15 banks across the world. You modus operandi in the past was just stash them in a money market fund that the bank offered. And that, through the "shadow banking operation" goes into the real economy. Some of your brethens in smaller institutions put the money into auction rate preferreds. Then the crisis happens, you find out that the oldest money market fund out there, Reserve Fund, broke the buck, and the auction rate preferreds were written down 20 points. Think the furry of equity investors out there. Over the year, the headline subsided, your life went back to semi normal, but would you do that again? So you find a too big to fail bank just to stash as deposit, and now you find this headline: http://www.cnbc.com/id/44019510/Bank_of_New_York_Puts_Charge_on_Cash_Deposits Is that different from a negative rate?

Time to put some serious regulations on the credit derivative market or put it to bed! That market is nowhere near as deep as its participants claim to be, and nowhere near good enough for hedging any meaningful risks. It's always somewhat of an insider's game, with a handful of desks dominating the marks, and can basically twist the market whichever way suits them. When Goldman needed to do their subprime synthetic CDO, the "market" was shown to be at one level, but literally within weeks the market is dramatically lower. Secret? They cross $5MM notional of a similar instrument, and use that as the level to reference a $1 billion notional deal. At the time, they couldn't have moved 1/3 of that collateral in the cash market. When they needed AIG to pony up, the desk just mark things down to whatever level suits them. Except they did it to such an extreme that it literally freaked out the whole shadow banking system, causing a run. If JP Morgan had to move hundreds of billions of investment grade bonds in actual cash market, the world would have caught on long ago. What is a price in the so called CDS market, or the tranches is very fake. It becomes the tail that wags the dog, yet the regulator and senior management some how think that it's a good market! That world needs some serious adult supervision, or should just be shut down as suggested by Charlie Munger.

That would be more benign than outright confiscation ala YPF / Repsol.

FT alphaville has one of the best article talking about the current monetary system (what the the author call "collateral based") that I have read. I highly recommend reading the linked article written by Credit Suisse. One can glimpse from it, explanations for the persistently low long term interest rates (a residual monetary phenomena, rather than an investment bubble), and give one a theoretical basis to try to make guesses as to what type of collateral will bubble up in the future. http://ftalphaville.ft.com/blog/2012/04/05/941741/when-safe-assets-return/

New York, New York.

But it's the TBTF banks that are willing to make certain bets (or according to them, obligated to make certain markets), specifically, in the world of derivatives (a world invented, and encouraged to flourish by them within the last 30 years). There was recently article about Morgan Stanley getting $3.4 billion from Italy to unwind a swap transaction and booked $600 MM gain in 4th quarter. Now what if Italy actually did default? Morgan Stanley would be on the hook for $3.4 billion, just from the one transaction that became known. The top 10 institutions in the world account for something like 90% of the derivative notionals outstanding. Italy being the 3rd largest sovereign issuer, derivative notional outstanding with them as the counterparty runs into the hundreds of billions at a minimum, and that's just on the more plain vanilla interest rate kind, let alone the more exotic credit derivative side bets. And once you question the credit worthiness of counterparty, it's gross, not net notional that matters. If you measure the gross notional on JP Morgan or Deutche, I bet the number goes into the trillions. The fact that the TBTF's can still keep derivatives off exchange, and make that their exclusive casino with little disclosure is quite bizarre. Cause that really continues to be the weak link. Think how many horror stories you've heard over the years, from Jefferson County to Greece to Italy. And if we have a dramatic rising rate environment ala 1970's, you'll have a different set of players blowing up, think Orange County, all with the TBTF's as their counterparty. It makes you really question the wisdom to have this market exist at all, as all these transaction does is redistribute the risk within the system, and give certain players a perceived hedge against rate movements, while they all took the credit risk of TBTF's. There is no net reduction of rate risk to the system. The only way for the entire system to reduce the rate risk is for the system to pay down debt, which certainly ain't a good thing for the financials. All this rant is just to say that if TBTF's all just behave like a bigger version of US Bank, then it's one thing, but they don't, and therefore it's another thing all together.

I'll take a stab at it. From a business perspective, which is the only one I believe to be rational, gold is worth its marginal cost to market plus a pre-tax margin. Currently, from my gold mining sources, the world average cost to market for gold is around USD 500 per ounce (which is higher than I was told). Tack on a pre-tax margin of 10-15% and, voila, gold is worth about USD 550 - 575 per ounce. Anyone paying over that is either not rational or has proof that the cost to market is higher. The problem today is that money has no value (short-term cash rates are negative on a real basis). That puts pressure on the demand for gold, which supposedly holds its real value over time. The supply being reasonably fixed, the price shoots up. Once the Fed shows a tightening bias, as long as it is not too far behind the inflation curve, gold will revert toward its business value. The time to buy gold for rational investors (big lines or not) is when its price is below its business value, not above. But I would just skip all that and buy the large caps that will be around for a good long time. All mentioned in prior posts and almost all offering good value. And compared to gold, excellent relative value. How much does it take to reproduce a dollar bill? Or maybe a more relevant question is "What would it take to make the Fed do QE?" (QE1 was quite difficult, but QE2 felt way too easy). For thousands of years, gold periodically comes into human society as money, and then goes out and gets replaced with something else, but that something else always goes away while gold always came back. US Dollar being the most recent "something else". What gives gold its perceived value is mass psychology, much as the faith in US Dollar. Its psychological value is magnitudes greater than the production cost. The current US social / economic / military dominance in the world is what gives faith in the US Dollar. When that's in doubt, gold or whatever the "counter dollar" at the moment is, goes up in relation. We maybe at one of those historical inflection points as it relates to the dominance of one particular social/economic organization and its related moral / economic values, but I for one am a believer in US exceptionalism, at least for the duration of my trip on this earth. Nobody alive has ever needed to question that belief in their investment decision until this crisis. The fact that it's something that's being questioned now just shows the magnitude of this earth quake.

Things in China in general is very opaque. Often even Beijing doesn't have a good handle on what's actually happening far from the center. They keep a reasonably tight leash on places like Beijing, Shanghai, ShenZhen, but I bet things like Ordos or South China Mall probably only crept up to them through foreign media. If they can enforce something like "we won't register a transfer of housing title if price / square meter is greater than 15,000 RMB", it won't be hard to imagine them saying down the road that "we won't register a transfer of housing title if price / square meter is less than 10,000 RMB". Often times only people very close to the situation has a good handle on what the real market is. For that matter, I don't even trust the currently reported prices. Developers were hiring actors to stage scenes when they open a development for sale. Half the apartments were pre committed, whether it's bribery or as compensation for moving the old residents out of that locale. They put a price tag of 60,000 RMB out there on the rest, and just wait for fish to bite. Much like "painting the tape" here on some thinly traded stocks, they can paint the tape there on apartments. In fact, one thing to note is that because of the lack of a truly free capital market, real estate over there serves some of the monetary function (store of value and medium of exchange). When you call real estate over there, you are calling something that's much closer to monetary and currency policy than their counterpart in the West. Because of the highly controlled nature of the economy, free market phenomena as described ala Rogoff and Reinhart can be distorted for a very long time, not that things are 100% free elsewhere over their study period either. On the other hand, China started from such a low base, a lot of what has been gained over the past 30 years will be retained. I'm not a raging bull or a gloom and doomer on China, I just think that trying to quantify things there, especially on a nationwide scale in market terms is an extraordinarily difficult, and somewhat futile exercise.

Isn't it somewhat of a meaningless statistic? Even just for yuks, is it in USD or in RMB? The last real estate cycle in Shanghai peaked in 1992, bottomed in 1999-2000 in the aftermath of the Asian crisis. Back then market was different for foreign and domestic buyers, the foreigner market fell from 30,000 RMB per square meter to 7,000-10,000 RMB per square meter, but RMB also devalued against USD by 50%. The domestic buyer's market didn't really quite exist, but basically fluctuated between 1,500 RMB - 3,500 RMB per square meter throughout. But in the end, the government support to the real estate market was such that the cost of purchase can be used to offset your taxes. This cycle will clearly be very different. Can't extrapolate from past experience. I'd expect that before it all ends, government will interfere heavily to exercise price control in an RMB denominated market. A big chunk of the price action will also be reflected among the interplay between domestic inflation rate (however interfered that may be by government as well) and USD exchange rate. But that subject has become so political that it's really hard to say how much pressure can be let off from that channel.

Surrender is a good thing for the Lifeco's. The negative thing would be these variable universal life product they sell that sometimes carry a minimum guaranteed return. Some companies has a pretty exposure to the market there. You have to dig into the K's and Q's to find that info, sometimes not even disclosed. Back in '09, I was offerred a product by Metlife with a minimum guaranteed return of 7%. That's when all their portfolio was marked down, and probably have some regulatory capital concerns. A way to avoid that risk would be to look at the reinsurers who only look to arbitrage longevity risk and bond yields.

There's a lot to be said for the transaction tax. To start, it certainly would force every transaction to be more long term oriented if it's no longer frictionless. It'd kill something like high frequency trading, but I'm not sure if it's such a bad thing. It would also force some longer term thinking into entering into any financial transaction, be it taking out a loan or entering into a derivative. But seems like 1% up front shouldn't kill any transaction that provide true economic value for the society. It would kill some part of the financial industry as it is currently constructed, but after the initial shock, the world will moves on. The problem would be if it forces too many financial transactions underground into something that's non transparent for all to see. But somewhere between fraction of a cent per share, or half a tick per bond, and 1% of notional is a number that makes sense for the society?

Seem to me TA is much more useful as a shorting tool than a buying tool. When going long something, you hope you've made the right judgement, and value will be realized one way or another, reading technicals is secondary to the decision. But going short, in its nature, is about front running a big sell order. In that situation, TA is almost the only tool available, however inaccurate, since you don't have anything else.

In related news, Kennedy Wilson buys Bank of Ireland assets. http://www.kennedywilson.com/435-kennedy-wilson-acquires-bank-of-ireland-real-estate-investment-management-business

There's a pretty negative article from Barrons over the weekend, which went into the dynamics of the operations of the fund, and in particular, as it related to the recently resigned brother in law. http://online.barrons.com/article/SB50001424052748703927304576637270740785508.html#articleTabs_panel_article%3D1

Not so much "China gets it", as much as demand for gold in RMB term is as strong as that in USD term. From the perspective of someone living and working in China, it's not clear at all that "China gets it". More along the line of "The West really doesn't understand the political economy of China". It's also not clear at all that if all capital control were to lift tomorrow, RMB would appreciate vs. USD. The "moneyed class" in China (yes they exit now as opposed to 20 years ago when they dont'), are as nervous about what the future portends as those in the West.

A play on the restructuring of these Greek bonds? In a restructuring scenario, how much would Greece still be on the hook for? 50% of the old debt outstanding? Do you get exchanged for some sort of Brady bond, with principal guaranteed by some German zero coupoon? A 1 year 97% yield would imply in a restructuring you only get 3%, i.e. EU let's Greece wipe away all of their debt, and absorb all the pain in the banking system, which seems quite unlikely...