GNP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 10

[Roland]

One big issue with the housing bubble is how the GSEs are hedged. If they seriously miscalculated risk (like LTCM, like Enron...), we're in for one big bust once

- interest rates rise again
- house prices deflate
- mortgage borrowers' income and balance sheet situation deteriorates further

This could turn out to be a mild bust, depressing consumption, or a bomb that makes the S&L debacle look like a fart in the pacific....

[TCO]

Originally posted by Roland
I'd guess Sten might be a bit busy. Last week was total madness in the bond market.

Could get very interesting now. I think that the US bubble has finally entered the terminal stage.

What do you mean, when you say bubble? If it refers to stock prices than I don't quite follow you. First of all because stock prices are not always inflated/deflated by fiscal policy. There is a strong element of market sentiment and just plain volatility. But if there is a bubble and it is collapsing, why would investors so quickly be "taken in" again?

[Roland]

"What do you mean, when you say bubble?"

The econo-financial US bubble. Consisting mostly of:

- stock price inflation
- real estate inflation
- debt/fiat money excess
- savings/financing imbalance
- malinvestment
- dollar bubble

Most of the bubble is still intact.

"First of all because stock prices are not always inflated/deflated by fiscal policy."

Well, monetary policy and bullish propaganda are the US government tools here.

"But if there is a bubble and it is collapsing, why would investors so quickly be "taken in" again?"

In stocks ? It's called "bear market rally".

[Colonâ„¢]

Don't forget about Enron and that rush into hedge funds lately.

[TCO]

Originally posted by Colon
Don't forget about Enron and that rush into hedge funds lately.

Huh?? What point are you making?

[DanS]

Does anybody have comparitive figures for the % of GDP that exports comprise: US, EU, Japan, China, and India? By my quick calculation, the number is about 10% for the US ($80B x 12 / $1T x 100%).

Thanks.

[Roland]

EU ~10-12 % (excluding intra-EU)

Japan, China and India are tricky, depending on the conversion you use.

[Colonâ„¢]

GP, never mind.

So, what’s going on the bonds market anyway? It seems I indeed missed some stuff, US treasury notes yielded 2.3% last time I checked but that apparently changed. And how have corporate bonds been performing?

And where's pchang?

[Sten Sture]

YO!

I am actually out of town - at the farm in Allahbama.

Curious that you mention Enron colon... I got to spend a bit of time on that mess over the past few weeks. We had sold it a couple of times over the past year, but left a little on the table because cash was running so high in the portfolio; we ended up selling pretty quickly and getting out well above where it is now. Rule #7: if it is really confusing, don't buy it.

GSE hedges are a really complex thing because of their extreme size, but fairly generic individually. Effectively this is what happens: The GSEs act like a bank wholesaler when they make a mortgage loan. The bank makes an 80% loan to value loan then sells the loan to the GSE, the GSE then sells it in the open market. They buy it from the bank cheaper than they sell it in the market. Some loans they keep. To get the funds to loan out (or buy) they sell debt that theoretically matches the cash flows of the loan. Mortgage loans can pre-pay, so a lot of the GSE borrowing is done with call provisions in the bonds, so if interest rates go down and refi's come in to pay off the home loans, the GSEs can call their bonds in so they aren't left with an asset vs liability mismatch. The real risk that Roland refers to is if the 80% loan to value is insufficient to collateralize the loans and the payees become unable to pay. This happens all of the time, but if it happened simultaneously on a massive scale there would be problems. That would be a depression type scenario for the US economy with 20+% unemployment and massive corporate failures. Theoretically we would be having even bigger problems than a liquidity squeeze at the GSEs.

2yr Treasuries have backed up from their lows, but are still pretty expensive - if the next Fed move is a tightening in response to rapid growth in the domestic economy...

Corporate bonds have outperformed recently (last two weeks) - their spreads to Treasuries have a tendency to decline when things are more hopeful. Treasuries yields are up + corp yields are up less = corps outperform.

I have got to get back to the DSL line at home and the T1 at the office. This 28.8 is killin' me.

[Saras]

Yo Sten,

Saw ya in Nelsons directory of investment managers .

Btw all - Saras is becoming a dad end of July, 2002. Oh happy joy.

[Ted Striker]

Congratulations Saras.

Make sure you send all those hot Barbie doll emigrant Lithuanians towards Southern Cali.

[Roland]

Sten:

The collateral is one problem, but at least for a first stage of GSE problems, I'd be wondering about the maturity and currency issues, how they are hedged/insured, and the capitalisation of those on the other end of the trade.

Saras:

"Btw all - Saras is becoming a dad end of July, 2002. Oh happy joy"

You're becoming a dead end ? Is that somehow painful ?

Blah! CONGRATS!!!

[Saras]

Or "Saras' end is becoming dead"

Maybe I should start a thread - else I'll get the congrats from Sten, Colon, GP and DanS and that's about it

[Roland]

Good point. Suggested title:

"Saras turns bullish on Lithuanian microeconomy"

[Colonâ„¢]

"Maybe I should start a thread - else I'll get the congrats from Sten, Colon, GP and DanS and that's about it"

Who says I want to give you congratulations in the first place?

Ok ok, congratulations on the organic growth performance of your household.