Safe Haven | Will Someone Tell Our Government that You Cant Legislate High Asset Prices?

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December 05, 2008

Will Someone Tell Our Government that You Cant Legislate High Asset Prices?
by Reggie Middleton

As it stands now, the US Federal government is the only significant buy of risky assets in this country. Not only is it the only buyer of these hyper-inflated and hasteningly depreciated assets (read as wealth reducing), it is now trying to force bubbled assets up in price. This is absolutely absurd. Who's in charge up there. The housing market was on an unsustainable and destructive bubbliciously unrealistic tear. The bubble popped, and prices are correcting. Let me say it again - prices are CORRECTING. They are returning to where they should be, the are not dropping from where they should have been.

With the very strong possibility of a US auto industry bankruptcy (pre-packaged or not, somebody is going to get stiffed), combined with what will most likely be a $70 billion plus bailout - don't believe that $25 billion number any more than you can believe Treasury Secretary Paulson in public - this country is going to be a little strapped for cash. We still have the commercial real estate crash to deal with, the insurance industry will have their hands out, and the municipalities are bleeding badly. For those not familiar with my stance on Paulson, see "Is Paulson to be trusted, or is this Bush Administration Shock and Awe, 2.0?", Reggie Middleton asks, "Do you guys know who you're messin' with?", and "Reggie Middleton says don't believe Paulson: S&L crisis 2.0, bank failure redux" - Yeah, I think the man "stretches the truth" to congress and the public every now and then, but to give him a little credit, no more so than Bush, Rumsfeld and those WMDs.

Take a cursory scan of Bloomberg.com's home page and you will see nothing but good news to lighten your weekend:

• European Stocks, U.S. Futures Drop as Metals Fall, Economy Concern Widens

• Payrolls in U.S. Probably Fell by Most in 26 Years as Recession Deepened

• General Motors Chief Says He'd Accept Strict Conditions on Federal Bailout

• Trichet Under Pressure to Give Deflation Plan as Rates Get Closer to Zero

• Merrill May Be Toughest Test for Bank of America's Serial Dealmaker Lewis

• Pimco Sees Pound Bottom as BOE Cuts Rate to Lowest Level Since Churchill

• Kerviel Loses Bid to Question SocGen Chairman Bouton in Trading Loss Probe

• India Broadens Security Alert to Include Government Buildings, Refineries

• Cisco, Dell Risk Losing Sales as Bankruptcies Flood Technology Gray Market

• Galaxy, Olam Buy Back Debt as Collapse in Asia Bonds Drives Yields to 28%

• Murders Rise in Obama's Backyard as Recession Crimps Chicago Police Hiring

• Canada Economy Sheds 70,600 Jobs, Most Since 1982, on Manufacturing Slump

So, what happens when you try to artificially manipulate this correction, through administrative or legislative means? You make a big, fat, hot mess that is much worse than what you started with, that's what happens. See Paulson Considering Plan to Revive Housing by Driving Down Mortgage Rates:

Treasury Secretary Henry Paulson is considering a new plan to reduce mortgage rates in another bid to revive the U.S. housing market, a government official said.

The Treasury, which already has a program to buy mortgage- backed securities issued by Fannie Mae and Freddie Mac, could step up those purchases to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The plan is preliminary and could change. Now, I'm not an expert or anything, but wasn't this the impetus of the calamity in the first place? There used to be this urban myth circulating when I was in college. If you had a real bad hangover from partying the night before, just throw down a couple of shots of over proof rum and you will totally forget about the hangover the night before. It appears as if Paulson is a believer. Don't get me wrong. I make my money from unwise central banker decisions, worldwide (see "My Investment Style"). If Paulson keeps it up, I might as well start test driving that new convertible Maserati Gran Turismo S. Since I am a humble man from working class roots, I'd be quite satisfied with my Chrysler mini-van, in exchange for some fiscal prudence and practical foresight from my government. Unfortunately, I don't think it will happen, at least not in the short term and in the vein that I think is most practical. Then again, what the hell do I know? I just called this malaise with 100% accuracy from the very beginning (see performance).

If the followers of my blog think my performance has been impressive over the last year and a half, just wait until this Global Macro Experiment really starts to kick in. You ain't seen nuthin' yet! In an attempt to avoid taking the proper medicine for the last two bubbles blown, the central bankers around the globe are huffing and puffing, inhaling and exhaling (quite hard, may I add) in a concerted attempt to blow the MOTHER OF ALL BUBBLES). My team and I road the last bubble up, we're riding it down (and documenting it meticulously in real time through this blog via 20 page research reports) and trust me, we will take full advantage of the mess the central banker made (is making, won't stop making). The revolution will not be televised. No need to fret or worry. I will continue to manipulate this new media and medium to blast the truth to all who want to, or wish to hear it.

Asset prices must be allowed to correct, and the insolvent must be allowed to fail so the solvent can continue and investors can have confidence in the market pricing mechanism. Thus far we have no investor confidence, and as for the insolvents -well the walking dead are all over the place, and I'm talking some pretty big bodies.

It is not as if asset prices are not going to fall anyway. You cannot legislate, or administrate high risky prices in a market based economy (that is, if we still have a market based economy - the socialism is creeping). Yes, the government buys everything risky from everybody else, but what about the 2nd transaction? In order for prices to maintain that level or rise higher, someone must make a purchase at an equal or higher price. It ain't gonna happen for at least a decade, and that may be optimistic.

The deliberations come as President-elect Barack Obama pledges fresh action to help American homeowners, and follow a $600 billion initiative announced by the Federal Reserve last week to buy mortgage debt. Mortgage applications surged by a record last week and the average rate on a 30-year fixed-rate loan dropped to 5.47 percent, the lowest level since June 2005, the Mortgage Bankers Association said yesterday.

"Lower mortgage rates will allow households to fortify their balance sheets, and we will likely see consumer spending come back a little quicker than it would otherwise," said Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina. At the same time, "it's not going to be an instant panacea for what ails the economy," he said. Maybe, and maybe not. Lower money rates also spur imprudent speculation when taken to the extreme, and this can be considered extreme. Mortgage rates are ALREADY flirting with historical lows, so I really don't think rates are the problem. Imprudent financial behavior and low savings and real investment rates coupled with sparse real income is the problem. Hey, instead of dropping rates to a 100 year low, let's keep them at a 98 year low and try to spur employment and productivity. That way people can actually pay their debt service and buy assets the old fashioned way, work for it.

While lowering mortgage rates to 4.5 percent would allow most homeowners to refinance into a cheaper loan, far fewer will actually qualify, said Rajiv Setia and Nicholas Strand at Barclays Capital in New York.

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.