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CertainRuin - a stock picker's record

"As to Bonaparte, he was well assured that nothing remained for him but to choose between that hazardous enterprise and his certain ruin." -Memoirs of Napoleon Bonaparte, by Bourrienne

Updated: 2014-10-28T05:36:20.535-07:00


Converting CPS to % U308 for Athabasca Basin uranium holes


Here is a plot of Hathor's (HAT.V) data. x-axis is the scintillator counts per second and the y-axis is the final assay result for % U308.

A good relation is U = 4.1% * (CPS/5000)^2.2

See plot of data here.


And now the banks bail out the FDIC


How crazy is THIS ?

Apparently the FDIC which is broke is going to borrow money from ...drum roll please ... The banks.


Isn't the FDIC supposed to insure the deposits of the banks. So if bad loans make the bank fail, the FDIC is there to pay back depositors. But what if the FDIC itself makes up those loans? What if the FDIC can't pay back those loans and makes the bank fail which then needs the FDIC to bail out depositors?

Won't this mess up the whole space time continuum?

Well not really. The FDIC is not like a regular borrower. It is a borrower with an almost infinite ability to raise revenue kind of like the government itself. They can raise insurance premiums on the banks (just like a tax really) and eventually pay back whatever they borrow. Really this is all about extending the period over which the losses are taken. If they raise insurance premiums now to collect the money, this will hurt bank profitability and put more downward pressure on banks. So they just borrow the money and will raise premiums on banks in the future. More reasons why banks in the future will be less profitable. The price of not failing now is less profits over the next decade.

This all works because of the way the Federal reserve can print money out of nowhere and force interest rates to zero making banks very profitable and able to absorb losses.

Strathmore Minerals


One of my stock holdings Strathmore Minerals (STM.V) just became somewhat more enticing. STM is a Uranium miner with properties in Wyoming and New Mexico. They have some good properties and excellent people and management.One of my beliefs is that if you can't explain why an investment is a good idea with a simple explanation, it probably isn't such a good idea.So here goes. STM owns land with about 150 million lbs of recoverable Uranium (hereafter U308) resources. The sales price (long term contract price, not spot price) of U308 is about $70/lb. STM's operating costs are likely to be about $20/lb since it can extract the uranium with either open pit mining or the in-situ leaching (ISL) process. No complicated underground mines required. STM purchased most of this land when U308 was only $7/lb to $15/lb and claimed that it would be profitable to extract the U308 at about $20/lb. They correctly predicted that the price would rebound.So the operating profit might be about $50/lb.There are about 72 million common shares. The stock price is about $0.52/share. My first purchase was at $0.20/share in March 2009. Market cap is therefore $37MM.So a VERY rough estimate of the value (assuming all the U308 is extracted at a $50/lb profit) is 50*150 = $7500MM. Note that this is 202 times the market cap. Now, this may be an over estimate. There is no guarantee that U308 price will not fall or that operating expenses will not be higher. But even if you take $40/lb for a selling price and $30/lb for an operating cost, you get a value of $1500MM. Now, maybe discount that by a factor of three to take into account the time required for the cash flows to arrive and the risk. You still get a present value of $500MM or 14 times the market cap.Basically the stock is priced as if the U308 will never be extracted. Actually it is priced as if it is ALMOST CERTAIN that the U308 will not be extracted. That is, even if the U308 price was so low that STM could not extract it profitably, the company should have option value just like an out of the money call option. That is, there is always a chance that the U308 price will sky rocket to say $100/lb (where it was just last year) or higher. Another risk is that they can't raise the capital required to extract the uranium. I have never worried much about this risk. If there is money to be made, capital seems always to be available. The company already sold a 40% stake in their New Mexico, Roca Honda properties to Sumitomo, the Japanese conglomerate for $50MM. There is about 33 million lbs of U308 in Roca Honda or about 20% of their total resources. That would value that entire asset at $125MM or $3.75/lb of U308.Remember the market cap of the whole company is only $37MM. Valuing it all at the price Sumitomo payed would be $562MM or 15 times higher.Very recently, they sold another asset, Pine Tree & Reno Creek that holds about 20 million lbs. They sold it for $30MM in cash or $1.5/lb. Valuing all their U308 resources at this price would be $225MM or 6 times the market cap. But this is likely a very low price. They sold this land because they needed the cash to start operations on some of their core assets. The deal has not been finalized. It depends on the buyer obtaining financing. But if it goes through, they will have $30MM in cash. Cash should always be valued at full value on the companies balance sheet. So subtract $30MM from the market cap of $37MM and you have an Enterprise Value of only $7MM. It is costing you only $7MM in net cash to buy the whole company which will still have 120 million lbs of U308. Even if you only value the U308 at $1/lb, it is worth $150MM.So there you have it. Now matter how you slice it, the company is worth many times it market cap. If you get lucky, the U308 price will remain high or go higher and the company will be worth a fortune. If the U308 price falls a lot, it still seems worth the current price even if the recent deal falls through.Very little risk and the chance for enormous gains makes STM currently one[...]

The American Century? Hardly.


There is a great website that I discovered called . It has all kinds of data including economic data for lots of different countries. I was able to make the following plot of GDP per capita from 1820 to the present for a few different countries: US, Germany, France, Japan, Canada, China, India and Brazil.


The 20th century has often been called The American Century. The US did indeed do well over this century. They became the foremost economic and military power. However, when you look at GDP per capita (a measure of the wealth of a nation), you find that they don't exactly stand out. For example, France and Germany didn't grow their GDP must slower than the US over this period. In fact, they started out a few percent behind the US and ended up about 30% lower. Ok, but they were both nearly destroyed by world war. Germany lost both wars and suffered a period of hyperinflation in between. They both suffered from stagnant population growth unlike the US which grew population rapidly. In addition, the US had more abundant natural resources. Canada basically tracked the US. No one calls it the Canadian Century.

However, If GDP growth is your metric for naming centuries, you would have to choose Japan. Japan is basically equal to the US in terms of present day GDP per capita. But in 1820, GDP per capita was half that of the US. In 1900, it was 28% of the US. In 1950 (after losing WWII to the US) it was only 20% of the US. Now they are tied. So the GDP growth crown for the last century and especially the past 50 years has to go to Japan.

The darlings of today's investment crowd, China, India and Brazil have lagged miserably. In fact India has hardly grown real GDP per capita at all in almost 200 years. Brazil has done OK, since 1900 but was quite far behind.

Swine Flu


Lets make some numerical estimates about how severe swine flu could be for the US.Start with the US population which is about 300 million people.Lets discuss two scenarios. One is the mild scenario and the other is the severe one. Obviously, it could be anywhere in between and even outside of these two bounds. But I would say, to my knowledge, that these two scenarios contain about 80% of the possibilities. Lets pick a time scale. Assume it lasts about two years with some tail before and beyond that. Now we need to estimate the attack rate. What percentage of the population will get it? From what I have read, I think this is between 20% and 50% of the population. These are my mild and severe scenarios.Then you can discuss things related to the severity of the illness. For example, what percent of people infected will have it severe enough to require hospitalization. What percentage of those hospitalized will require a ventilator? What percentage of those infected will die.Lets start with the death rate since it is pretty well studied wit this current strain. Most think it is between 0.2% and 0.5%. Obviously this is dependent on the quality of health care received which will be affected by the number of people that get dangerously sick compared to the heath care resources available.So right off, we can estimate the number of people that will die using the mild and severe scenarios. This is MIld case: 300 million x 0.2 x 0.001 =60 thousand Americans or 30 thousand per yearSevere case: 750 thousand Americans or 375 thousand per yearObviously that is a huge difference. Consider that this flu seems to be more severe for young people rather than the usual target for influenza which is infants and the elderly. See age distribution below from a study in Mexico.Lets look at the three age groups, 5-14, 15-24 and 25-34 who will probably suffer about half the case of H1N1. Lets look at their morbidity statistics, that is the chance of dying in any one year. This is usually done in deaths per 100,000 people. There are some numbers here for these age groups. It has all causes and individual causes including Influenza (which is linked with Pneumonia, see below).So lets translate our numbers above in morbidity statistics and add them to these numbers. Our death rate per 100,000 individual per year (for each of the two years) is 100,000 x 0.2 x 0.001 x 0.5 = 10 for the mild case and 100,000 x 0.5 x 0.005 x 0.5 = 125 for the severe case. Lets put these in the table with All causes and normal influenza..nobrtable br { display: none }Age GroupAll causesInfluenzaH1N1 mildH1N1 severe5-1421.7 0.4 10 125 15-2489.6 0.6 10 125 25-34126.7 1.4 10 125 Even for the mild case, the number of people in these age groups that will die of influenza will be 7 to 25 times higher than usual. It will be the major cause of death next year for this age group. The mild case will increase the change of a 5-14 dying (of any cause) by 31%. The severe case would double the chance of dying for 25-34 year olds. For 5-14 year olds, the chance of dying has increases by a factor of 6.7.People often say that the flu kills 36,000 people per year so this H1N1 is nothing to worry about. But this is wrong. First of all, as I mentioned Pneumonia is linked with Flu and "influenza-like illness". Flu by itself actually kills less than 1000 per year and less about 142 children under the age of 18. source .Using these number above and assuming the average high school has about 1000 students, the mild case would imply that one in every five high schools will have a swine flu death (in two years). The severe case would say that every school would average 2.5.Now on to another issue: health care and its ability to handle the situation. I will only focus on one issue, the availability of ventilators. Severe cases of swine flu require the patient to put on a ventilator in order for them to breath, sometimes for weeks. The US has about 100,000 ventilators and 80,000 are i[...]

US Private Consumption


Here are the numbers for private consumption, in $ Trillion, for the US and some other areas

US 10.1
Eurozone 7.6
Japan 2.8
UK 1.6
China 1.6
India 0.6
Korea 0.5

Source: CEIC

Many economists expect the US, Europe and Japan to slow their consumption after this great loss in wealth and also due to demographics. They also expect emerging markets like China, India etc to pick up some of the slack.

Those three combined are $20.5T. Lets says, they reduce consumption by 10%. That is a loss in demand of $2T. If China, India and Korea were to pick up all of this slack, they would have to increase their private consumption by 76%. They would have to do this while their export markets (their largest employer) are undergoing this historic bust. Does that make sense to anyone? Of course not. There is no other consumer capable of replacing the US and European consumers. The conclusion is unavoidable excess capacity.

Real Estate Declines in Chicago


My wife and I visited some friends of ours in nearby Portage Park, a neighborhood in Chicago. Portage Park has long been an immigrant community, mostly Polish in the past but now hispanics are prevalent there as well. The Park itself is rather nice and the neighborhood may be considered up-and-coming if not exactly there yet.

Our friends have had a foreclosed home right next door that had been on and off the market a few timed over the past couple of years. It has recently sold. Our friends couldn't remember exactly the sale price but they thought it was around $130K. They also told us that it once sold for $450K near the peak of the housing bubble. I thought that sounded a little far-fetched so I went to to try to find the sales records. Yup. he was right. Here it is.

4933 W. Byron
Sale History
05/04/2009: $134,000
03/21/2007: $450,000
05/15/2006: $390,000

That is a 70% decline between actual sales in two years.

Here are some more examples in that neighborhood.

For example, here is 4136 N. Monitor Ave. .
Sale History:
05/06/2009: $134,000
01/17/2007: $480,000
12/17/1998: $189,000

That is a 72% decline in actual selling price in a little over two years!

5146 W. Dakin St.
Sale History
06/23/2009: $90,000
11/03/2004: $289,000

A 69% decline between sales and that is only 2004, two years before the bubble peaked.

5706 W. Wilson Ave.
Sale History
01/22/2009: $174,000
06/29/2006: $410,000
12/08/2005: $337,000

A 57% decline in 2.5 years.

5919 W. Warwick
Sale History
09/17/2008: $5,000
06/25/2004: $340,000
08/29/2002: $240,000

This one takes the cake, a 98.5% decline! Ok, that might have had a tax lien or something but still.

6028 W. School St.
Sale History
03/23/2009: $118,000
09/11/2006: $425,000

A 72% decline in 2.5 years.

Amazing stuff. This area must have been big into the subprime lending fiasco. Most of these houses must have been foreclosures that were auctioned off or sold by the bank.

Long Beach Ports Traffic in June


Here is a plot of the container traffic in June at Long Beach Ports which is America's second busiest seaport. Units are Twenty Foot Equivalent Units (TEU)s.


The number of TEU loaded in, a measure of imports, has declined 28% from last June and 39% from June 2007. This is a major contraction of imports and shows how dramatically the US consumers has put an end to their 20 year shopping spree.

Earnings and PE ratios in the Great Depression


Stock prices have risen about 40% from the low a few months ago. The main reason appears to be that people think the recession will end soon and that stocks are simply pretty cheap. Though I disagree about the recession ending, I would have to agree that stock look pretty cheap with the emphasis on the look.For example the 30 stocks in the Dow Jones Industrial average have an average PE ratio of about 13. It is about the same whether you use trailing earning or forward analyst estimates for next year. Well 13 is indeed pretty cheap compared to the long term average of about 15. But looks can be deceiving. The question is what the earnings will be in the future. Corporate profits as percent of GDP were recently at an extreme value. The long term trend for real earnings (as compiled by Robert Shiller) puts the S&P 500 earnings at about 50. That would be the trend value not the value one might expect in a very deep recession. Typically earnings fall to about half the trend during deep recessions. So earnings for the S&P 500 might be more like 30 over the next few years. With the S&P 500 at 900 that would put the PE ratio at about 30. Not so cheap looking anymore.Let's look at the data for the Depression years 1928-1936 as an example. This plot shows the aggregate earnings (black), stocks prices (blue) and the (trailing) PE ratio in red. The data is from Robert Shiller's data-sets. The stock prices have been divided by 17.In late 1929, the bubble popped and stock prices fell as market participants realized that corporate earnings would fall and that stocks were overvalued. The PE ratio fell quickly from about 20 in 1929 to about 13 by the beginning of 1930. People naturally expected a quick economic recovery and decided that stocks were cheap. After-all, a PE of 13 (just like today) is pretty enticing. So began the rally of 1930. The PE ratio jumped up to about 18 before the rally fell apart. The market then fell steadily with occasional rallies until the bottom in late 1932. The amazing thing is that the PE ratios never strayed far from 17 during the rest of the bear market except for right at the end when it fell quickly to bottom at 10. The blue line is price over 17 so the fact that the blue line traces the black line demonstrates this. It is just that earnings fell steadily until they fell to about 7 from the peak at 26, a 73% decline. The story of the great bear market was really one of corporate earnings not valuation.The moral of the story of course is that a PE ratio is pretty meaningless by itself. What matters is where earnings will be in the future. The best guide to that is simply mean reversion. Corporate profits tend to revert to about 6% of GDP. They recently peaked at almost twice that. If they bottom at half this average that would be a 75% fall just like in the Depression. If that happens we might expect the S&P to fall to at least a PE of 15. The S&P 500 earnings peaked about about 85 so a 75% decline would be 21 and a 15 PE would bring the index to a horrifying 315 a 65% decline from here.Of course this might be overly pessimistic or it might not. But the point is that stocks will follow future earnings and that those will likely go down from here. Stocks are not nearly as cheap as they look.[...]

The savings rate


The US personal savings rate might be the key indicator to tell us when the economy is at the bottom. Basically the savings rate needs to increase from its bottom of about zero in 2006 to its historical average of around 8%. In fact it may need to stay above 10% for a few years to rebuild much of the wealth that was squandered over the past decade.So here is the data from the government's Bureau of Economic Analysis (BEA).The good news is that we almost half way there. The bad news is that this is probably incorrect. Trim Tabs, an independent economic research firm says that the BEA data is flawed for a few different reasons. The main reason is that the BEA uses income data that is six months old. The real time data that Trim Tabs uses shows that incomes have been falling rapidly over the past few months. So the savings rate is actually more like 0.9% and not 6.9%. In other words, we haven't made any progress on saving. This is Irving Fisher's "paradox of thrift" in action. If everyone tries to save at once, incomes fall even faster and no one makes any progress on reducing their debt burden. That is probably an over-simplification but the point is that it does not appear that American's have made much progress on repairing their balance sheets. It does not appear that spending is reaching the bottom. Keep in mind that consumer spending accounts for roughly 70% of the US economy. Another 10% decline in consumer spending would take another 7% out of GDP. This doesn't bode well for an economic recovery any time soon. In fact we may only be half way through this recession.trimtabs BLS [...]

The best articles of the year.


Here is what I think are the most important articles on the Crash of 2008 and the aftermath.First former IMF chief Simon Johnson's critique of the Wall Street Oligarchs control over Washinton, published in the Atlantic magazine.The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.Michael Lewis wrote a story in about the subprime fiasco and the hedge fund manager Steve Eisman who bet against it. An excerpt: For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said. “Yes?” the C.E.O. said, obviously irritated. “Is that another question?” “No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out. Finally, there is a new story in Rolling Stone by Matt Taibii which portrays Goldman Sachs as the parasite on the American people that they are. It is a story about how Goldman Sachs is the cause of every major bubble in the US Economy from housing to internet stocks to oil prices to global warming.Here is a good quoteIn other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages. "That is how audacious these assholes are", says one hedge fund manager. "At least with the other banks, you could say they were just dumb - they believed what they were selling, and it blew them up. Goldman knew what it was doing." I asked the manager how it could be that selling something to customers that you're actually betting against - particularly when you know more about the weaknesses of those products than your customers - doesn't amount to securities fraud. "It is exactly securities fraud," he says. "It is the heart of securities fraud."and anotherIf America is circling the drain, Goldman Sachs has found a way to be that drain.and anotherThe basic scam of the internet age is pretty easy for even the financially illiterate to grasp. Companies that weren't much more than pot-fueled ideas scrawled on napkins by up-too-late bong-smokers were taken public via IPOs, hyped in the media and sold to the public for megamillions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out of 50-story windows and opening the phones for bids. In this game you were the winner only if you took your money out before the melon hit the pavement.Great stuff!Update. Here is another very good one. [...]

What is really going on in China


Chinastakes is one of the best places to read about economic trends in China. The latest article is a doozy.

Basically the Chinese are following America's example and flooding their economy with stimulus spending. In fact the majority of the stimulus is just the government directing their state run banks to lend money to anyone for any reason. Where is the money going to go when demand for manufacturing is plummeting? Speculative assets obviously. Here is the money quote.

“I began to invest my money in villas when orders began to decline in the second half of last year and my factory's production was cut by 1/3. The reason is simple. Under current economic conditions, investing in houses is safer than investing in factories,” said the owner of a private firm.

“Do you really think all those stimulus bank loans have entered the real economy?” queried a real estate dealer in Shanghai. “Of course not. They are still in enterprises’ hand, or have been invested in real estate and the stock markets. Some companies took money they scored on the stock market and invested in real estate soon after.”

Anyone with thorough knowledge of financial history knows how this is going to end.


Good story with links at
Zerohedge .

Whiney banks


The banks are whining again. This time about buying back their TARP warrants. Remember, the tiny amount of warrants were issued to make it look like the taxpayer was going to get a little bit of the upside from their investment" in the banks. Now that they want out of TARP, they also want to renege on their contract and get those warrants back.

Listen to the whining

“We shouldn’t have had to pay a dime,” said Sun Bancorp Chief Executive Thomas Geisel...Taxpayers deserve a return for the risk they took on, but it wasn’t a risk to invest in us.”

"You shouldn't have to pay a dime, Tom?". Did you not sign a term sheet giving you tax payer financed capital in exchange for warrants? Now you want those warrants cancelled for nothing in return? Please show me in the term sheet where it says that the warrants will be cancelled.

Jamie Dimon, CEO of New York-based JPMorgan Chase, said June 1 that that the U.S. should cancel half the warrants it holds “out of fairness.”

Ok, Jamie and why don't we reduce everyone's mortgage balance by half out of fairness. Can I pay back half my credit card balance? That sounds fair to me. 50-50. Even steven. Meeting you half way. Apparently contracts are sacred to bankers except for the ones signed between the banks and the taxpayer where the banks have made concessions.

Long Term House Prices


This is Bob Shiller's famous plot of the US housing bubble.

This is using Shiller's more accurate repeat sales method instead of median prices. You can see how house prices go up because everything goes up. This is called inflation.


Shiller made another study of repeat sales of identical properties along the canals in Amsterdam. This is also pretty fascination. There is no upward trend once corrected for inflation though there is lots of variation tracing the history of Holland. Here is a version in Dutch.

This is Bob Shiller's famous plot of the US housing bubble.

How banks plan to survive


The banks have a survival plan and the Fed and Treasury seem to be on board. It looks like this. They are going to earn their way out of trouble. Sure, the capital they have now is probably not truly there if they really took all the marks that they should. But they will write it down slowly over the next few years and replace it with earnings.They think they will be able to do this because of a few things High interest rate spread. Their deposit cost is very low due to the Fed's zero interest rate policy. They can raise interest rates on loans. They can borrow cheaper in the capital markets because the government is guaranteeing their debtNow lets look at these in detail to show how all of them are direct wealth transfers from individuals and businesses to the banks. First, the Fed's zero interest rate policy (ZIRP), forces deposit costs down. People with money in the bank are now getting 0.25% or something instead of 3% or so that they were getting a few years ago. This punishes seniors and other savers including businesses with large cash balances. This results in about $200 Billion dollars per year of interest income getting shuffled from the savers back to the banks. They can raise rates on loans. They are already doing this. Here are a couple links from the New York Times and ABC News talking about how they are increasing credit card rates on people with good credit. Why are they doing this? Simply because they can. The right question is why didn't they do this in the past. Well, the credit card business is very competitive and people frequently do balance transfers to get better rates. But in this deleveraging environment, no one wants new credit card customers. They would love it if their customers paid off their balance and dropped off the face of the earth. They are not growing these portfolios. They are trying to reduce them. So it is an easy problem for them. Raise rates and fees through the roof. Either you pay them and make them lots of money or you pay off your balance and they reduce their leverage and so reduce the amount of capital they need to raise. How much does this get them? Well, there is $2.5 Trillion in US consumer debt. If they can raise interest rates (or fees) by 5%, that is $125B/year in extra income. And that is just consumer debt. Total household debt (minus consumer debt) is about $11.5 Trillion and there is another $7 Trillion of non-financial corporate debt. Banks owns about $5 Trillion of this. If they can squeeze another 2% interest rate out of that $5 Trillion, that is $100B/year. Again, if the borrowers don't like it, they can try to find a loan elsewhere. If they leave, the bank has successfully delevered. So raising interest rates on borrowers might get another $225B/year.Finally, there is all the government guarantees on their debt and direct government lending. I won't estimate the impact on earnings other than to say that without it, they would probably cease to exists. Certainly the Wall Street "banks" would have failed just as Bear Sterns did without the access the discount window and other such programs.So the impact of lower deposit cost and high interest rates creates a much larger spread which might be roughly $425B/year in extra income for the banks. This is money that is transfered from US individuals and businesses directly to the banks. Most estimates of US banks losses is around $1 Trillion. So the banks can replace this capital through higher interest income is roughly two years.In summary, the Fed and the government have orchestrated a massive wealth transfer in favor of the banks. This, of course, is in addition to Federal bailout of the banks through the[...]

More real estate madness


Jess and I used to live in a funny neighborhood of LA called Montecito Heights. It was basically Mexico hidden away in the hills above downtown LA. This is East LA where Cheech and Chong come from.

We used to go for a walk from our place and pass this boarded up place that looked like a former crack-house. It was basically a wooden box on metal stilts hanging on the side of a steep hill. I would doubt that even cock roaches would sleep inside. Very gross. These pics are not so great but, believe me, it doesn't look better from close up.



Yes, that is a chain link fence two feet from the front door. They are not much for zoning in the Montecito hills. To get in the front door, you open up the chain link fence and walk across a piece of plywood into the front door. If the plywood was not there, you would tumble down the hill rolling underneath the house. Lovely!

I looked on Zillow today to see how much it is worth. They say $300K. But funnier still is that it sold near the top of the bubble at over $700K. What utter madness, this housing bubble!

Swine Flu


I had previously read a lot about the Flu of 1918 and so when I heard about the possibility of pandemic swine flu coming out of Mexico, I immediately got very worried. I expected people to start dying in the US. After a few days, no one died. The media started saying that the symptoms were mild, about the same as normal flu. So naturally, I calmed down a bit.

But maybe that was not the right reaction. There is the curious case of Dr. Gitterles. The doctor in Texas is saying that the situation is far worse than the authorities are saying. Read the email, especially this part

Since it is such a novel (new) virus, there is no "herd immunity," so the "attack rate" is very high. This is the percentage of people who come down with a virus if exposed. Almost everyone who is exposed to this virus will become infected, though not all will be symptomatc. That is much higher than seasonal flu, which averages 10-15%. The "clinical attack rate" may be around 40-50%. This is the number of people who show symptoms. This is a huge number. It is hard to convey the seriousness of this.

Taking this as face value, it means that the flu will likely spread around the world and infect maybe 20% of the world population or 1.2 billion people (60 million Americans) If the "clinical attack rate" is 40%, that means that 480 million people (24 million Americans) will get sick. Note that the US has only a million hospital beds. It has enough antiviral medicine (Tamiflu and Relenza) to treat about 50 million people. So we likely have enough medicine. But we don't have the capacity to treat so many people. In poor countries, they lack the medical capacity and the medicine. This scenario would likely lead to total chaos if not huge numbers of deaths.

The death rate is so far unknown but probably nothing like the 1918 virus. It seems to lack the key gene that made the 1918 flu do so much damage to the lungs. But viruses can mutate and it seems new viruses like this tend to mutate more easily. Who knows where that would lead. The 1918 flu started in a milder wave and came back as a much more deadly virus the following winter. How deadly can a flu get? The H5N1 bird flu killed 60% of infected people but thankfully did not spread easily between people. The death rate for the 1918 flu was probably about 3%.

For the time being, I am not going to freak out. But keep an eye on this and think about how you will respond if the facts begin to indicate that it is worse than we now think. Even if the death rate stays low, this could cause real problems. on Geithner

2009-04-22T15:22:45.787-07:00 has a cover story on Tim Geithner which is decidedly negative.

Another ray of hope


Neil Barofsky seems to be taking his job seriously as TARP watchdog.

He seems to be warning about the same kind of abuses that I am worried about. That is good news for Americans.

But it is bad news for bank stocks and probably bad news for the markets. It means that the banks are going to have a harder time swindling their way out of trouble and so the question of how to save the banks is back on the table. Sorry, it won't be by defrauding hard working Americans. On to plan B or it is M by now.

Strange NYTimes article


This New York Times article is certainly strange. Apparently the Obama administration is floating the idea that they have more ammo for recapitalizing the banks than everyone thinks.

Oh,really? What is the latest shennanegans? Well, remember that $350B in TARP money that Paulson put into the 8 largest banks. Well, that was preferred equity shares. That is sort of like a loan that never needs to be paid back (except on liquidation) where the company must pay a fixed dividend to these shareholders before paying the dividend to common shareholders. The yield (annual dividend over the price) was a measly 5%. What a great deal for the banks! But if times gets tight, it can stop paying both dividends without there being an event of default. The shares are non-cumulative so missed dividends never need to be paid back.

Because not paying the preferred dividend is not an act of default, this is considered equity not debt. Preferred equity is not counted any differently than common equity in the three capital ratios that are used by bank regulators although there are guidelines on how high the preferred portion can be - more than half is frowned upon.

These rules are well established in banking. Until now that is. Now the Fed wants to redefine what equity means. Now they want to pretend that all that matters is tangible common equity, bank regulation tradition be damned. So now you can increase the tangible common equity by converting the preferred equity to common equity. Presto, the banks have more capital!

Huh? This does not increase the total equity by one bit. It does nothing to change ASSETS-LIABILITIES which is the definition of equity. They have just shuffled the form of the equity. Really, they have just lowered the standard of acceptable capital levels and made it so that the banks fit the lowered standard.

While they are at it, maybe they can change the definition of liabilities as well. They can redefine it as all debts except those to the federal government. There you go again, instant improvements in capitalization! Just ignore those liabilities when calculating capital ratios.

Honestly, what a joke! Do they really think the market is going to buy this nonsense. The market knows what capital means and they know these banks ain't got it.

Latest T2 Partners presentation on housing


T2 Partners Presentation on the Mortgage Crisis-4!3!09 3 (object) (embed) T2 Partners Presentation on the Mortgage Crisis-4!3!09 3 optionarmageddon

China's bubble economy


While many people trumpet the strength of the growing Chinese economy, there are other signs that it is on the verge of collapse. Note the following Financial Times article .Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data.The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade and the slumps in both have taken a heavy toll.Cao Jianhai, professor at the Chinese Academy of Social Sciences, a leading government think tank, said an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.He told the Financial Times he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008."being driven by a flood of liquidity and fraudulent activity". Hmm, why does that sound familiar? Ah, that's right. It sounds like our housing market in 2006.Real estate agents in the residential property bellwether of Shanghai said the market seemed to have bottomed out as a result of government stimulus measures, falling prices and pent-up demand from owner-occupiers.But Mr Cao said preliminary government investigations had turned up numerous examples of real estate developers using fake mortgages to offload apartments on to the books of state-run banks facing enormous pressure from Beijing to rapidly increase lending to boost the economy.Does that sound like the basis of a sound economy? A sound housing market is one in which houses are affordable for the majority of the population. So how is that working out in China?At a national level, average housing prices tripled between 2003 and the peak in mid-2008 and are now 10 to 12 times average income, which means 60 per cent of homebuyers’ monthly income must go to mortgage repayments, Mr Cao said.Ok, I am pretty sure we all know how that story ends. Good luck China in your quest to prop up the world economy.Here is more from the Times Online.China faces a surge of bad loans and speculative bubbles as the country’s banks open lending and flood the market with record levels of money supply, economists are warning... The peril appears to lie in the speed and geographical spread of lending: the mostly state-owned banks, scattered throughout both economically weak and strong parts of the country, are duty-bound to follow Beijing’s orders to lend. Few analysts believe that the banks have the mechanisms or expertise to assess the quality of the borrowers.In short, China has a command economy. It doesn't have a real banking system. The "banks" in China are just state owned entities who don't know how to say no to loans. Even if China keeps growing due to this forced lending, it will eventually end badly. It is classic boom bust ponzi lending. Since capital is being allocated by fiat rather than based on economic soundness, it will result in inefficiency and waste and ultimately economic stagnation. Another result will be excess supply which will export deflation to the rest of the world which the boom finally goes bust.[...]

William Black Interview


Great interview on PBS with former banking regulator William Black.

Get the word out and forward this around.

Interesting fact about imports/exports.


China sends us manufactured goods and we send them pieces of paper. No, I am not talking about US dollars or Treasury bills. We literally send them pieces of paper. Recycled paper is the biggest US export by ocean going container.

The list of biggest exporters and importers is here . Basically China and other high-export countries send us ocean going containers full of high value goods like TVs, cars, furniture etc, the stuff that gets sold at Walmart (the biggest importer). We send these shipping containers back filled with recycled paper which basically has little value. The Chinese turn the paper into cardboard so they can send us more cardboard boxes full of high-value goods. Pretty depressing huh?

We export lots of other high-value goods such as software, financial services etc. But not much in the way of tangible goods sent by ocean going container. Paper is pretty heavy though so many containers go back empty when ships hit their weight limit. Next time you want to take a trip to China, bribe some seaman to let you bum a ride in one of their empties.