Housing risks revisited

We have mentioned several times previously of the (still) somewhat below the radar problems with FHA, Fannie Mae and Freedie Mac- collectively representing government involvement in the residential mortgage market. New home sales and foreclosures have risen in the past few months. The general narrative proffered in the media is that the formerly risky lending by these lenders has all but ceased. NOT!! In 2006 the percentage of loans with low income to payment ratios and weak credit equalled 17% of the total. Today, these type risky loans account for 23% of the total! The upshot is no lessons have been learned and in many if not most areas housing may still have a ways to go before reaching bottom.

Taxes and Uncertainty

This is a very good article on the dangerous combination of uncertainty and higher tax rates. Many economists are concerned about the poor timing of these increases along with ramping up the level of uncertainty which may actually be more destructive. One thing is certain...capital will become much more expensive and simply put we need capital for capitalism to function.

Financial Reform???

Real financial system reform could be codified in a paragraph or two . The first paragraph would deal with fiduciary, something most of Wall Street firms just talk about but don't actually do. If you have any doubt just watch one of the ads running currently by a major stock brokerage firm. The ad uses the word "independent" twice; "unbiased" once and the phrase "putting your needs first". All good but untrue. If Wall Street firms, retail and institutional alike would actually practice as fiduciaries and protect clients, everything else would be fine.

The NYT has an excellent article today on the second of our 2 paragraph reform dealing with treating all banks alike (something the current bills in the Senate and House don't do). The two tiered system put in place by this legislation is plain awful and creates huge disincentives for all but the largest banks.

5% Chance of Success

When we do Sustainable Withdrawal Analysis (SWA) for clients we generally like to see 75% or better success rates based on reasonable assumptions. Just saw a report on state public employee pensions in the U.S. that are underfunded by an estimated $3 trillion. Since numbers that large can be hard to comprehend the author put the number in perspective. He estimates that there is a 5% chance of these pensions being paid as promised (or stated differently a 95% chance they won't be paid as promised). Next to Fannie and Freddie public pensions are likely the largest problems looming on the horizon.

Bond Funds

The Investment Company Institute (ICI) reports that bond funds accounted for almost 80% of the flows into mutual funds over the past 12 months. Since the stock market bottomed about 13 months ago , one might imagine that much of this came out of stock funds before going into bond funds.

This is both interesting and troubling. During this same timeframe the overall stock market has risen by about 70%. Moreover, interest rates have but one way to go . When rates go up, bond prices fall. A real disconnect it seems on the part of many investors.

More on VAT

A good "fair and balanced" article on VAT . The couple paragraphs in the middle of the article on the simple math of our budget mess are quite good.. so is the end of the article. The reason we have an interest are the many unintended consequences .

Economic Recovery...??

This a good quick article on the brewing recovery such that it is. Much of the data have turned slightly positive but there are significant headwinds as the article explains. 2 or 3% growth coming out of a big recession is far too low to stimulate employment. The financial markets are enjoying the moment and many firms have good earnings due to downsizing but that only goes so far.

VAT article

A good short piece on VAT history in Europe. With about 4 decades of experience there it might be worthwhile to examine the outcomes which are 1. less economic growth and 2. dramatically higher tax levels which lead to 3. larger and larger central governments.

Tax Tipping Point?

Today, I saw a couple different stats on the current state of federal taxation. A whopping 47% of 2009 tax returns show no net income tax . Stated differently, 53% of the population is paying all the taxes. We have seen these numbers before but after a little digging I found that only 3 years ago the 47% was 37%. The top 10% of the population pay 73% of the tax. Lots of talk lately about "fairness". With tax day one week away seems like we are close to a tax tipping point.