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giofranchi
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The latest from Mr. Robert Rodriguez, for anyone who might be interested.

 

giofranchi

 

You did scare me for one moment while reading this thread headline.

I thought you followed in Ericopoly footsteps and put everything in one security.  ;D. 

But that was just one flash crash of my mind while reading your headline words,...

... see you can create panics.  :P

 

 

 

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But great read, this article... specially the time frames of the long-lasting debt overhangs

 

In a preliminary draft paper, “Debt Overhangs: Past and Present,” the authors concluded that since the early 1800’s, the average duration before recovery took place from a debt overhang has been about 23 years.

 

 

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Now, I might add here also to this post some further interesting research paper

from Carmen Reinhart & Kenneth Rogoff at Harvard University.

 

Debt Overhangs: Past and Present

Carmen M. Reinhart, Vincent R. Reinhart, Kenneth S. Rogoff

Preliminary Draft April 15, 2012 - Harvard University

 

http://www.economics.harvard.edu/files/faculty/51_Debt_Overhangs.pdf

 

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Well,... Reinhard & Rogoff also wrote the best book about such debt overhangs.

http://press.princeton.edu/titles/8973.html

 

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But great read, this article... specially the time frames of the long-lasting debt overhangs

 

In a preliminary draft paper, “Debt Overhangs: Past and Present,” the authors concluded that since the early 1800’s, the average duration before recovery took place from a debt overhang has been about 23 years.

 

berkshiremystery,

my firm’s portfolio is very concentrated, as concentrated as yours!, but I would never put all eggs in just one basket… anyway, if I did, that basket right now would be FFH! ;)

 

What I really like about Mr. Rodriguez is the great emphasis he puts on history. An investment thesis should be tested and proved by history, otherwise it is just speculation. Mr. Rodriguez has said many times that, at the beginning of his career, he had the chance to ask Mr. Munger three things that would help him to develop his skills as a money manager, and Mr. Munger replied: “Study history, study history, study history.” That’s why my favourite lines from his latest commentary are the following:

 

The Fed Chairman recently expressed the opinion that he does not view unemployment as structural. However, he is using this “All In” approach to shock the economic system. This reflects something other than normal times. He believes if the Fed gets interest rates low enough for a sufficiently long period, the recovery will finally gain traction. This is pure speculation. I view this approach as highly dangerous, misdirected and untested.

 

giofranchi

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Yes all this MUST be structural. That goes a long way to repudiate the myth that you need to understand macro to be a good investor.

 

Here is the recent oped of Edward Lazear, former chairman of the Council of Economic Advisors under George W Bush. Another lefty Keynesian most probably.

 

http://online.wsj.com/article/SB10000872396390444914904577623110908143058.html

 

Here is the widely distributed paper. Great charts at the end on why the unemployment is NOT structural.

 

http://www.kansascityfed.org/publicat/sympos/2012/el-js.pdf

 

And by the way, the economy did respond to the fiscal stimulus. Just watch how the UK is doing, compared to the US, with their "Austrian" budget: one of the worst recoveries in British history, comparable or worst than the Great Depression.

 

I should not not mind these investors talking macro, everyone is in his right to believe in myths and macro is not essential or even necessary to be a successful investor.  Besides, people with Austrian beliefs do not change their minds ... I've tried, my best friend is an Austrian and I am in awe of his moralistic views and disregard to data ... while designing robots for Mars.

 

However, much more important is that these barrages of nonsense (gold standard, hyperinflation, US government going bankrupt) have huge implications for the millions unemployed that do not have a voice in this money driven political system.

 

Austrians are loud and are given widely disproportionate airtime compared to their relevance. But hey, they still believe the reason that very few economists take them seriously is that they have not been able to show their case ...

 

Can we come back to study ideas?

 

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Who gets hurt most by financial repression?  The small saver who does not have the means or insight to buy other assets.  Who gains the most?  The wealthy who can move to higher yielding assets or hire someone who can for them.  The major question I have is what is the alternative?

 

I think the key is to do something similar to Ryan's plan and go after future benefits in conjunction with eliminating deductions.  I don't see any other viable path.  Unfortunately,  the only good plan out there is getting alot of bad press.

 

I think the best way to view the QEs is transfer of wealth from savers to borrowers and in most cases borrowers are folks of wealth not the middle and lower class.  Just my 2 cents.

 

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The financial "repression" argument is very messed up:

 

(1) They do not include all the winners like: the unemployed, the entrepreneurs, the mortgaged, the business owner.

 

(2) Nor do they make the point that CURRENT SAVERS are also BIG WINNERS. Current savers have had their bond portfolio wealth vastly increased with the even further lowering of interest rates.

 

And regarding FUTURE SAVERS, that are supposed to be the QE losers  ... without QE there is bad news anyway. Without growth, low interest rates will be here for at least a decade. The money is in the mattress of banks and financial institutions without profitable opportunities because of lack of loan growth.

 

The solution for low interest rates is GROWTH and these policies have a better than good chance of achieving it. I would prefer fiscal policy and mortgage restructuring but this is good anyway.

 

Paraphrasing, "the solution for high oil prices is high oil prices"  ... in this case the solution for low interest rates is low interest rates.

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I think many of your winners (business owners, entrepreneurs, the unemployed) are only winners if they can borrow at the low rates and they cannot.  The indebted can only do better if they can refinance and the smaller borrowers with underwater mortgages cannot.  So a majority of the winners are wealthy folks who can refinance.  You conclusion is correct if all could take advantage of low rates but they cannot.

 

Who loses.  The small savers.  So in effect you are fleecing the old and poor and giving it those who can borrow.  Which to date has only included the wealthy.  That is why the lower rates have had little effect.

 

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I think many of your winners (business owners, entrepreneurs, the unemployed) are only winners if they can borrow at the low rates and they cannot. 

 

Well many of them can borrow... but GROWTH/EMPLOYMENT is what they want. And these policies are about growth. So they are big winners.

 

And that mysterious poor saver that is not getting his payments from social security, annuities, 401Ks, equities, bonds and other standard investment vehicles and instead just invests in short term treasuries and CDs ... well that mysterious saver is screwed anyway. The only solution for low interest rates is growth.

 

First time that I hear the argument that monetary policy fleeces the poor. Even in the great depression the rentier was not poor and inflation was their boogieman, the poor had/have a mortgage.

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Based upon the information I have heard and observed, the small business guy and entreprenuer cannot get a loan or the rates are very high (VC rates).  So QE has done little for these folks.  The folks who can get loans are the large corporations who in fact have so much credit that many are practicing credit arbitrage to take advantage of the spread.

 

I think another unanticipated consequence has been the increased capital requirements on the banks.  This is what has cause this cheap rates to large customers and huge rates to smaller ones.  Now if this changes then QE will have an effect on growth in small business. 

 

The other constipating factor is the emerging markets.  In theory, the money from developed markets should flow to emerging markets to facilitate thier growth.  However, the property laws and practices in those countries do not provide assurances like in the developed markets.  As a matter of fact you get a negative flow to the developed world from the emerging markets.  This leads to a huge amount of money available to developed and a shortage in the emerging markets.   

 

I think one secondary affect, the R&R paper illustrates and you see it in Japan is the market knows the debt is going to be paid back (that is why the rates are so low) and correctly assumes the interest payments will come from future economic growth and thus the net available return to investment will be lower (because the future income has a claim against it).  This leads to a downward spiral situation like what we see in Japan.  The only way to get out is via financial repression (as long as the real negative interest rate is in excess of the increase in debt), lowering the growth rate of debt below GDP growth (which is what Romeny/Ryan does), default of debt or inflation. 

 

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So a majority of the winners are wealthy folks who can refinance.  You conclusion is correct if all could take advantage of low rates but they cannot.

 

So the majority of people are wealthy, or the tiny minority of wealthy people are actually refinancing more than the vast majority who are poor?

 

And what of the people who are buying homes?  Yes, they may not be refinancing, but aren't they getting a low mortgage all the same?

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I think another unanticipated consequence has been the increased capital requirements on the banks.  This is what has cause this cheap rates to large customers and huge rates to smaller ones.  Now if this changes then QE will have an effect on growth in small business. 

 

With 70% loan to deposits all banks are taking loan growth anywhere they can find it. The problem is lack of good prospects, particularly mortgaged consumers ... and those refinancings are going to help a lot.

 

That is why interest rates are low: lack of lending prospects. This is no financial repression, it is growth repression.

 

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Guest rimm_never_sleeps

unfortunately a lot of people invested in bonds now are eventually going to get crushed. The little guy saver doesn't know how bonds work. they don't know how bond mutual funds work. all they know is they get a check that's bigger than the bank gives them and that their fund has gone up. they won't know when to sell. many are going to get absolutely crushed. bb has forced them to invest in things they don't understand. they also are going to invest in stocks after they have more than doubled. thanks to bb and his willingness to create ever more echo bubbles.

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I am not saying that middle income folks will not benefit from lower rates just that the benefit has to be balanced versus the loss of income from middle/low income savers.  With the forced low interest rates, money is being transferred from savers to borrowers.  In addition, due to credit standards, a portion of the low/middle income folks will be locked out of re-financing versus the wealthy.  This trade off also has to be taken into account.  I just think at some point the marginal decline in interest rates will be more beneficial to the wealthy than middle/low income folks.

 

As to bond declines, if interest rates just return to the begining of 2011 rates 30-yr treasuries will decline 35%.  I totally agree.

 

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I agree that the "financial repression" concept is messed up. 

 

Who is more likely to have negative net worths due to debt or really feel the effects of having to service their debt?  Low income and middle income folks, of course.  As the JPM presentation that Ericopoly posted a while back indicates, about half of the reduction in consumers' debt service ratios have come from lower interest rates and refinancing, which has actually lead to quicker deleveraging.  So these folks -- many, if not most, of whom are savers -- have been helped out by low interest rates, including low mortgage rates thanks to QE. 

 

More importantly, it appears to be Bernanke's belief that QE will increase lending and, therefore, will help with growth and reduce unemployment.  He also seems to be thinking that a wealth effect from reflation will potentially make people less afraid to invest and hire labor.  So whatever you may say about the efficacy of QE, it should be clear that Bernanke is focusing on the employment side of the Fed's dual mandate, which negatively affects investors depending on income, but not necessarily savers, many of whom are deleveraging while working for their income.

 

Now, I happen to be a Keynesian that is very skeptical of the benefits of QE.  I tend to gravitate towards the Richard Koo view that monetary policy (and particularly extraordinary monetary policy) is almost ineffective in spurring growth in a balance sheet recession, and it is really fiscal policy that we must turn to because of the lack of loan demand from the private sector.  Bob Rodriguez probably cannot comprehend (or at least refuses to recognize) that such a view could exist. 

 

So I'm not sure that QE3 is a good idea.  However, I believe Bernanke has been forced to take this action because Congress refuses to take action on the economy -- fixing the fiscal cliff scenario and coming to some real solutions that will help out the economy -- before the election is over.

 

Finally, I would note that a lot of money managers love to use terms like "financial repression" because it allows them to demonstrate to their clients how they are sooooo responsible and looking out for their client's interests.  Just another trick that folks like Bob Rodriguez have up their sleeves to draw attention away from their investment selection. 

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Guest rimm_never_sleeps

the only borrowing the poor and lower income do is credit card borrowing, tax refund borrowing, and paycheck borrowing. none of these rates have come down. who benefits? I don't think it's a coincidence that Manhattan trophy property are going through the roof. Silicon Valley trophy properties are going through the roof. why? because the ipo market has been on fire, especially for hyped web 2.0 type companies. money is easy. the rich profit. meanwhile the middle class homeowner remains under water.

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unfortunately a lot of people invested in bonds now are eventually going to get crushed. The little guy saver doesn't know how bonds work. they don't know how bond mutual funds work. all they know is they get a check that's bigger than the bank gives them and that their fund has gone up. they won't know when to sell. many are going to get absolutely crushed. bb has forced them to invest in things they don't understand. they also are going to invest in stocks after they have more than doubled. thanks to bb and his willingness to create ever more echo bubbles.

 

rimm_never_sleeps, I could not agree with you more!

 

giofranchi

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the only borrowing the poor and lower income do is credit card borrowing, tax refund borrowing, and paycheck borrowing. none of these rates have come down.

 

The household debt service ratio is at nearly the lowest point in 30 years.

 

It's not low because the debt is low, it's low because the interest rates are low.

 

Mostly due to refinancing.

 

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