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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: energyplay who wrote (35110)	6/19/2003 5:47:55 AM
From: TobagoJack	Read Replies (1) \| Respond to of 74559

Hi EP, Some unsolicited observations about equity premium, real estate cycle, and rant on rant:0) A world where nominal risk-free return is zero can easily justify any manner of risky projects, and so we see folks in Japan spend their savings on negative real-return US treasuries, and people in the US expend their home equity on 40 PE stocks. The last refuge of positive nominal/real return are the agencies, corporates, high yields, and emerging market debts. We will, as sure as night follows day, see them blow up. The laws of economics and rules of finance are no less severe than that of math and physics. The danger is that Fannie and Freddie have enabled too many households to revalue and separate value from their homes, releasing liquidity that caused further rise in home prices, and augmented liberation of more false value, et cetera and once again. The cause for alarm is that 62% of bank assets are agency debt. When international investor electorates scale back on agency purchases, run with them. The mind warping fear is that the solidly embedded interest rate derivatives, mostly resident in the US financial system, is an experiment waiting for a conclusion. Greensputin talks about risk ameliorating properties of derivatives; folks far more astute than Greensputin fear that risk is now pervasive throughout every nook and cranny of the financial system, accumulating potential energy with each deficit day and every discount rate cut. Some observation on HK real estate cycle. The cycle went thus: rent increase led to price increase led to transaction increase led to liquidity increase led to more rent increase. Rent stopped increasing one fine day, leading to tightening bank lending practice, causing transaction decrease, setting up for price fall, resulting in decreasing real estate contribution to GDP, ... HK real estate market has several peculiarities: (a) We have no mortgage backed securities, and thus every bank lend against real estate very cautiously, requiring 30% down payment (on existing property); (b) The government controls land availability for new construction, and responds to popular demand on affordable but high price housing (have vs have nots interests); (c) The mortgage contract interest rate are adjustable monthly, with no floor/ceiling. It has been at 3% for more than 12 months; (d) The mortgage contract has a margin call feature that allows the bank to call for top-up cash should value fall below any point it alone determines (this feature has not been used against any borrower whose debt repayment is current) - this feature increases the flexibility of bank in securing its shareholder/depositor interest; (e) Personal bankruptcy is severe on the borrower, all assets are at risk, and fraudulent transfer means prison, and so folks (folks often have substantial assets from high savings beyond home equity) take debt repayment seriously. Many (20%?) of home owners are now at negative equity level on their home ownership, but, even at 8.1% official unemployment, default is low. I am deeply suspicious of the Fannie/Freddie/mortgage-backed-derivative-assisted security market of the US. The mortgage holder will not lose because of not affordable interest rate, but may not escape the carnage in banking (62% of bank assets are mortgage securities), pension portfolio (mortgage security holdings), and declining market value bites. Chugs, Jay