Doom
By Mitch Berg
Joe Doakes from Como Park emails:
Suppose you are an investor looking for a safe investment. You want some collateral for your investment, something the borrower has a strong interest in keeping and thus, a strong interest in paying the loan guaranteed by the collateral.
Mortgage-backed securities are great. People might fail to pay on their credit card bills but they don’t fail to pay their home mortgages. And if they do, the lender can simply foreclose and sell the home. This investment is literally “safe as houses.”
But buying a mortgage means paying off the bank to receive an assignment. You have to pay the entire balance due up front. That is expensive and you take all the risk of one homeowner defaulting. But if the lender were to pool all its mortgages together, you could buy a share of the pool for a smaller investment and reduced risk of default. In fact, if you only wanted the stream of interest payments generated by the mortgage and not the repayment of principal, you could buy in for an even smaller price. Your investment is technically not backed by the mortgage, it’s backed by the lender’s promise that the pool of mortgages is sound, but your payments are a derivative of the mortgages so it’s still a pretty safe investment.
Until it isn’t. If interest rates fall and everybody in your pool of adjustable-rate mortgages refinances to a lower fixed rate mortgage, they no longer make interest payments to you. And if the economy has a hiccup, marginal borrowers (who shouldn’t have qualified for loans in the first place) begin to default. That’s what happened in 2006 and it led to the real estate crash that lasted a decade and required billions in TARP bailouts, mostly for overseas lenders (and a few domestic corporations which hastily reorganized themselves as ‘banks’ to grab a slice of the pie – looking at you, Chrysler).
Lesson learned – don’t invest in derivatives. Except the housing market depends on investors to generate the funds to lend to borrowers to buy houses. If nobody invests, nobody can get loans, the housing market collapses. So the Federal Reserve stepped up and began to buy mortgage-backed securities guaranteed by a pool of mortgages. Safe as houses, right?
Maybe not. The Fed apparently didn’t foresee the Lesko Brandon Administration dumping billions of dollars into the economy in stimulus payments. Too many dollars chasing too few goods equals inflation and not just a little, the highest in decades. The Fed’s purchase of mortgage-backed securities inflated housing prices while racking up a mountain of debt instruments which cannot be repaid in this inflationary economy. It’s unsustainable but this time, we won’t be bailing out HSBC, Deutsche Bank or Royal Bank of Scotland, this time it’s the Fed itself which will go bankrupt. When that happens, the value of the American dollar disappears.
Don’t take my word for it. Read this article for yourself. Tell me where the author goes wrong. I’d genuinely like to know that his fears are groundless, that everything is rosy, that Uncle Joe will soon be riding in on a unicorn handing out ham sandwiches to save the day. Cuz I’m not seeing it, myself.
Joe Doakes
Me either.
June 6th, 2022 at 7:24 am
2 of my sons are buying, and have bought houses, respectively.
Normally, it’s the sort of thing that would make a father very happy.
So, why do I feel such dread?
June 6th, 2022 at 7:43 am
Blade;
Same thing here. One bought a condo in Chicago and the other a townhouse in Denver. That said, they are both fiscally responsible and their respective mortgages, cost them a few hundred less per month than they paid for rent.
June 6th, 2022 at 7:53 am
There is a lot of ruin in a country, said Adam Smith, and there has never been a richer country than the United States of America.
June 6th, 2022 at 8:07 am
Joe Doakes could use securitization and sell “Joe Doakes Bonds”, which would be asset-backed securities that would be backed by the current and future revenues of his blog posts.
Rather than getting a steady income from the revenues of Doakes’ back catalog — the bonds would allow Doakes to borrow more money up front. This of course assumes Mr Doakes owns the rights to all his previously released content. Investors would receive a predetermined interest
rate of return for a ten(?) year bond.
June 6th, 2022 at 8:14 am
rAT, are you *still* drunk, or just getting an early start?
tia
June 6th, 2022 at 8:18 am
Daughter closed on her mortgage this past December—2.9% interest rate. Luck, my friend is where opportunity meets preparation
She’s not looking back..
June 6th, 2022 at 8:21 am
My daughter closed on her mortgage last December — 2.8%. What can I say, some people are better at finance than others.
June 6th, 2022 at 8:43 am
I’m glad the next generation found housing at affordable prices. I hope they’ll be in it a long, long time. I hope the linked article is wrong.
June 6th, 2022 at 8:46 am
^ 🤡 First off you’re lying again. She’s your “step daughter” as you’ve claimed in previous comments. Are you lying now — or were you lying then???
June 6th, 2022 at 9:04 am
MP, the bigger they are, the harder they fall… Fall of US will be SPECTACULAR!
June 6th, 2022 at 9:28 am
Maybe she identifies as his daughter?
Why are you such a filiaphobe? Why do you hate daughters and want them to die?
June 6th, 2022 at 9:36 am
I’m not saying that there’s nothing to worry about – in fact, I’m saying that there’s plenty to be concerned about. But with that said, sorry, but this whole financial Doomsday movement is heading into Y2K territory.
June 6th, 2022 at 9:43 am
jdm, the only difference, financial doomsday is based on fundamentals, not a whipped up hysteria brought to you by the same people who brought you russiagate. In fact, it is because MSM does not cover financial doomsday make it that much more real. But then, since 2000 mule are not covered by MSM means it never happened either, so who knows?
June 6th, 2022 at 10:13 am
jpa, I’ve lived through at least five financial doomsdays, as well as Y2K and I’m not letting the hysteria get to me. There are a lot of people who find themselves, whether they admit or not, addicted to the fear.
There are simply too many wheels in motion or balls in the air, financially speaking, to write a few paragraphs in American Greatness, a professionally produced blog that I like, explaining it all. For example, there was no mention in that article about petro-dollars and the effect this instrument has had and will continue. Or, there was nothing about the coincident fear of deflation as an alternative to hyperinflation or as the immediate successor to inflation.
As to the MSM not reporting about financial doomsday, you’re wrong. When the head of JP Morgan announces a financial hurricane, it’s reported in the MSM. When the senior chairman of Goldman Sachs announces a coming recession, it’s reported in the MSM. Maybe they don’t hype it (yet), but they do report it.
June 6th, 2022 at 10:21 am
My son closed his fabulous lakefront estate at 1.65%. Of course he’s a Senior VP at Wells Fargo, so there’s that.
Without even being asked, the sellers even threw in a 15′ Bayliner to sweeten the deal…yup; he’s *that* good.
June 6th, 2022 at 10:23 am
I hope you’re right, JDM. I’ve been worried for years about the deficit/debt and consistently amazed they’ve been able to extend-and-pretend as long as they have.
I was teaching continuing ed classes in the 90’s telling people Social Security was bankrupt, that it had no actual money merely IOUs from the General Fund. I asked, “If the General Fund can’t afford to pay its way now and so must borrow from Social Security to make ends meet, how’s the General Fund going to pay its own way in the future PLUS repay Social Security? Massive spending cuts? Massive tax increases?” I’m still waiting for a sensible answer (“massive cash dumps resulting in massive inflation” doesn’t seem like a sensible answer to me, but what do I know?)
The Federal Reserve was established in 1913 to provide the country with a stable currency. Inflation from 1913 through 2020 eroded the purchasing power of $1 to about 4 cents. Inflation since Lesko Brandon took over made it worse.
https://www.buybitcoinworldwide.com/img/dollar-devaluation-1913.png
I hope you’re right and I’m worried over nothing.
June 6th, 2022 at 10:30 am
@ Swift — We were fortunate enough purchase my wife’s family cabin 20 yrs ago. Her grandfather built it in the early 50’s. The only running water in the 3 season cabin was a hand pump @ the kitchen sink. Gas lights (think mantles) and an outhouse. Those were the days..
June 6th, 2022 at 10:34 am
I met Rich Karlgaard, Forbes publisher a few years ago. He told a small group of us that if financial reporters actually understood what it was they were reporting on, they’d be working as investment bankers or brokers, and not as reporters.
June 6th, 2022 at 10:39 am
Note JD, I took pains to state that there’s plenty to be concerned about. But I remember Y2K and what a big huge nothing it turned out to be. In spite of all the oh-so-concerned, chin-stroking articles about the End Times. If you think buying bitcoin or gold or land or whatever are reasonable reactions to the complete and utter financial fuckery of the last 50 years, then I encourage you to follow through. But do it cause it makes sense not because you’re panicking.
June 6th, 2022 at 11:01 am
What coincidence, rAT!
We were fortunate enough purchase my wife’s family mountain top cabin 10 yrs ago. Her great-grandfather carved it out of solid rock, with a bowie knife mind you, in the early 1900’s. The only running water was a creek running by, flame lights (think torches) and an outhouse. Those were the days…
Of course, we’ve extensively re-modeled and added a guest suite. It’s been appraised at $15.5 mil by my bank VP son. Luck, my friend is where opportunity meets perspiration, or something.
June 6th, 2022 at 11:04 am
jdm, speaking of petrodollars which are about to become petrorubles and petroyuans, that only adds gasoline to the doomsday fire.
June 6th, 2022 at 11:08 am
^ JPMorgan chief says ‘hurricane’ is bearing down on economy ~ Financial Times
“I think it’s OK to hope that it will end up OK. I hope it. That’s my goldilocks, I hope, who the hell knows?” ~ JPMorgan CEO Jamie Dimon
I wish more macro-outlook thesis would end with a similar summary. Honesty is refreshing.
June 6th, 2022 at 11:24 am
Say rAT?
We’re sure you’ve re-liquidated your recently re-financed market pOSITion that you sold for HUgE GaINz back in 2019. Just in the nick of time again, no doubt, since the Dow is down almost 5% and the NASDAQ is down >%20 (over 6 weeks now; longest downturn since 1933; thanks Pedo Joe!).
Did you take fAT GaINz, rAT?
tia
June 6th, 2022 at 11:35 am
Seems so very long ago — you were considered a serious troll.
June 6th, 2022 at 11:37 am
jpa, yes, the effort to move from away petrodollars is certainly going to complicate things and not for the better near term (long term tho’…).
June 6th, 2022 at 11:46 am
^^ “I think it’s OK to hope that it will end up OK. I hope it. That’s my goldilocks, I hope, who the hell knows?” ~ JPMorgan CEO Jamie Dimon
Jamie Dimon said no such thing, of course.
Dimon says maybe we will see $175 bbl oil. That’s all on Biden. First he shuts down oil exploration and pipelines in the US, then he abandons Afghanistan, encouraging the Russians to invade Ukraine.
June 6th, 2022 at 11:53 am
Woolly — you seem to have a tenuous relationship with the truth.
JPMorgan chief says ‘hurricane’ is bearing down on economy
https://www.ft.com/content/07108e32-aff1-4d8c-8950-7f7c4e5a5f28
June 6th, 2022 at 11:55 am
Dimon was talking about bank liquidity, MP, not the economy or the price of Biden Barrels. rAT re-mixed his cut and paste philosophy, common occurance.
June 6th, 2022 at 12:47 pm
First rule of Finance: nobody knows.
Second of rule of finance: Never mention the first rule in public
A deal will be struck in Ukraine in next 6 months.
Writing on the wall. Inflation will calm down and markets and economies recover and stabilize.
2023 will be a sold year of growth.
June 6th, 2022 at 12:55 pm
Consider that Emery predicted that the Brexit vote would fail, that Hillary would win over Trump in a landslide, That Trump’s presidency would result in an economic collapse, and that the Mueller report would contain proof that Trump colluded with Putin to steal the 2016 election.
The most significant economic event of the last three decades was the covid pandemic. He missed that one completely, never saw the pandemic coming.
June 6th, 2022 at 1:06 pm
A deal will be struck in Ukraine in next 6 months.
You misspelled “surrender”, rAT.
June 6th, 2022 at 1:24 pm
“Inflation will calm down”
From your mouth to God’s ears. More likely, the ‘rate’ of inflation will decrease which will be heralded as a tremendous success, to hide the truth.
If an item costs $1 today and rises to $2 tomorrow, it has inflated 100% If the cost goes to $3 the next day, it has only inflated 50% (1 -:- 2). If it goes to $4 the next day, it has only inflated 25% (1 -:- 4). Success! Inflation has calmed down!
Yes, the ‘rate’ has calmed down, but the item still costs 4x what it did and I didn’t get a 4x raise so I can’t afford to buy as many of those items as before. I can only afford to buy 1/4 as many of those items. But the media will report Success! and Victory! and Wonderful!
June 6th, 2022 at 1:33 pm
^ could calm down so much it becomes deflation. Which will be a Real Problem for anyone with any debt.
June 6th, 2022 at 1:50 pm
And the Pedo Joe string holders are doing all they can to complete their Great Reset. Anyone else notice all of the mysterious fires at food processing plants, the egg/chicken processing facility in Howard Lake and the mysterious train derailment of a train full of fertilizer? Sorry, but there are no coincidences and that is proven the DemoCommie Ministry of Propaganda, leads off their news casts with news about food and crop shortages. Hmmm.
June 6th, 2022 at 2:16 pm
Have a care, BH. That kind of talk can get you put on a White Supremacist Terrorist(tm) list.
June 6th, 2022 at 2:36 pm
WST is a myth since JP Sears is still on the loose
June 7th, 2022 at 8:46 am
@ Swift — This was never about NATO for Putin, even though he is doing all he can to make it sound like it is. His real motive was to prevent a fellow Slavic nation from transforming into a functioning democratic law-based western economy. Because this will set “wrong” example for people in Russia that freedoms and economic well being can and do coexist.
On the other hand — why not give the aggressor what it wanted? This has always worked well in the past.
June 7th, 2022 at 10:18 am
That’s an interesting take. How did you deduce his personal motivations? Was there a manifesto that I missed? A speech?
June 7th, 2022 at 10:41 am
I have read some SiTD comments from individuals suggesting Ukraine negotiate with Russia to get peace, with the implication of giving concessions/territory to Russia. Exactly what is there to negotiate when your counterpart is a lunatic?
Otherwise can such people expressing those opinions please specify what part of their country’s territory, and what people from the population, are they willing to give up (sacrifice if you will) to a murderous oppressive invader just to secure a peace that is unlikely to last?
Not to mention the excellent historical record on appeasing dictators….including how the world effectively having conceded South Ossetia (2008), Crimea and parts of Donbas (2014) to Putin did nothing to stop him going further.
Putin can end this war at the drop of a hat by withdrawing all Russian troops from Ukranian territory, it is really that simple. There is no underlying conflict here, there is just one man’s delusions.
June 7th, 2022 at 11:39 am
Regarding housing, my daughter and her husband bought their first home last year, and as her father-in-law and I were trying to coach them through what we look for, we eventually realized that in today’s housing market, a lot of those things we’d previously insisted on could no longer apply. You would learn to accept foundation and framing issues, and you’d have to be ready to move within days of the home coming on the market, and your offer would have to be above list.
To me, that’s a sign of a bubble, and the one thing I can say in response to Joe’s linked article at the top is that economic conspiratorialists have predicted 300 out of the past ten recessions.
And of course, Putin delenda est!
June 7th, 2022 at 11:51 am
^ Great timing on the home purchase—and mortgage interest rate. 👍
June 7th, 2022 at 12:15 pm
@ Swift — This was never about NATO for Putin, even though he is doing all he can to make it sound like it is. His real motive was to prevent a fellow Slavic nation from transforming into a functioning democratic law-based western economy.
From reading the minds of your debaters to reading the minds of world leaders? With such a display of skill, we are humbled by your gracing our quaint corner of cyberspace with your presence.
You must clean up at the poker tournaments, with such an advantage.
June 7th, 2022 at 1:28 pm
^ It’s clear, and has always been clear, that military power couldn’t win either Cold War 1.0 or Cold War 2.0. Nuclear powers don’t have to fight wars of survival, and even if they did, all of the Chinese, Russian, and American leadership understand that decisive conventional victories (i.e. marching into your enemy’s capital) are geographically impossible for all three big players.
So soft power it is. Russia has none. China has financial soft power, but lacks cultural soft power, and is unlikely to acquire it without an internal environment where culture and ideas can be freely expressed. Only the West has both money and ideas and societies that outsiders want to be a part of.
June 7th, 2022 at 1:47 pm
Every time I see rAT’s icon, I think of a portrait of a tiny, misshapen little dick hanging out of the clown suit of a guy driving a Free Candy van. Can’t help it.
June 7th, 2022 at 1:51 pm
“So soft power it is. Russia has none.”
Except world energy prices (and the economies that depend on them). 3rd world food. The petro-dollar.
rAT, you’re a strategic genius. Why are you not in Kyiv?
June 7th, 2022 at 1:55 pm
Tell us how you aced this historic market crash, rAT. Tell about how preparedness, not luck, has once again enabled you to take massive gAINs.
What brand of cigar are you lighting with Benjamins on the patio of your fabulous LAkE FRont EState, rAT?
tia rAT.
June 7th, 2022 at 3:00 pm
That’s an interesting take. How did you deduce his personal motivations? Was there a manifesto that I missed? A speech?
Putin has written and spoken a lot about his political motivations, including repeatedly calling the fall of the USSR a catastrophe/calamity. For Swiftee, it’s even been covered in Pravda. So Putin’s motivation of recovering some of the USSR’s mojo is not something that’s up for debate among serious people. The attempt has gone so far as to work to re-create the Soviet sports machine–to the point where the IOC has banned Russia because so many of their athletes are doping.
It’s a motivation also reflected in Russian tactics, which are disproportionately directed at civilians, and has involved setting up statues of Lenin while flying the Soviet flag. Shades of the Prague spring and the Hungarian uprising, really. Putin is revealing that his real enemy is indeed the people of free nations, just like he wrote.