Vad's Best Ideas

"The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it. "
P.J. O'Rourke

I think as the times goes by I just become more and more sarcastic when it comes to politics. I used to believe that there was a significant difference in the impact on the economy between a "pro-business" party and an "anti-business" one, but as the results show it is not necessarily the case. Even the most astute business leaders seem to lose their way rapidly when put in a public role. There are certainly exceptions but they are few and far in between... Now even Hank Paulson has lost his way? Mortgage freeze as a solution to the sub prime fiasco problem? Heh? I think we need another diaper here...

This proposed bailout makes very little economic or logical sense and is almost certain not to achieve its desired purpose. What's more I think it will create more mess when lenders who are already subject to substantial guess work over how much their assets are worth, now trying to estimate how much impact is the reduced cash flow is going to have on their holdings?

I won't be surprised if some of the same brokers that sold these worthless loans will now be able to get a job as government credit counselors due to their "industry" expertise and experience. I mean, if the government is willing to spend tens of billions of dollars on this bailout plan that is virtually guaranteed to be as efficient as the government is in general, we might be better off distributing public money to banks and lenders as an additional capital infusion... This way the public could at least get most of the money back eventually.

I am not alone in my disbelief in the complete worthlessness and wastefulness of the proposed solution. At least sixty one economists from all major schools agree:

"Sixty-One Economists Sign Letter Opposing Subprime Mortgage Bail Out"

http://www.freedomworks.org/newsroom/press_template.php?press_id=2394

Quote- "Legislation to create new underwriting standards will reduce competition and restrict consumer access to credit. Additionally, efforts to bail out or shore up lending institutions create a moral hazard that would slow the adjustments required in the marketplace.... These (bail out) proposals would fundamentally alter the workings of the mortgage market, leaving consumers with fewer choices when seeking to buy a home and potentially increasing taxpayer exposure for bad loans."

To everyone who still believes that we can get out of this mess by cutting rates I would answer with a simple analogy- "the best way to get of this hole one needs to stop digging". Let the economy bite it's bullet quickly and work out the excesses- business cycles are ok and "creative destruction" is a fundamental principle of Capitalism. In 2001 Fed responded to the economic slowdown with a series of significant rate cuts all the way to 1% which one might argue in turn produced the current sub prime fiasco? I wholeheartedly agree with Keith Barton's view that the housing mess is not over yet but we differ dramatically on the proposed solution. Cutting rates dramatically is almost certain to produce another asset bubble in something. The next time it might happen faster and cause even more damage...

Risk premium spreads between US stocks and many emerging economies have declined to a dangerously low level. I don't buy into the "decoupling" stories that suggest that US Economy does not matter any more and that the World can keep growing even when US is in trouble. We need to remember - just three years ago we've heard very convincing stories on why sub prime assets and junk bonds were not that risky and thus deserved their low spread over treasuries.

That is why my portfolio is positioned more conservatively than most others. I know that not having "hot" stocks in the portfolio like solars, miners and Chinese stocks might have cost me the leadership position, but my ultimate goal is not only to achieve the highest absolute return in the short term, but also to do so while taking on only a "reasonable" amount of risk. I can certainly go for "double or nothing bet" with 4-5 concentrated positions during the last week but that would be against my principles and strategy. I will remain compliant till the end of the competition because I am trying to manage this fund as I would if it was my investors' money

Trade safe and cheers, Vad
Please feel free to read my next post with a short review of my portfolio as it stands today :)

Comments: View Comments |  Saturday December 8, 2007