Monday, March 21, 2011

When the Fed starts to sell its treasury holding

Treasury yield is going to be higher after QE2 ends and the Fed starts to sell. The Fed's current plan is to start selling 7/1/2012 at a rate of 300 billion a year for a little bit more than 4 years.

El-Erian thinks current growth rate hasn't reached escape velocity. A higher interest may cause US economy to contract again and people calling for QE3. Will there be a permanent monetization of debt? The biggest losers will be countries holding large dollar reserve, such as China, Japan, UK, Brazil, and Taiwan, because the purchasing power of the US dollar will be diluted.
US Public Debt

The Fed will probably consider the growth rate and escape velocity before selling. If growth rate is still slow by 2012, the selling may be done at a slower pace. That will have the same effect - a permanent monetization of debt.

Saturday, March 19, 2011

Why do I think Goldman is responsible for the crisis of 2008

Goldman is a main buyer of Washington Mutual's Option Adjustable Rate Mortgage for repackaging into securities. Most Option ARM has a growing loan balance and borrowers usually default when home prices drop. Goldman must have known the risk of this product as evidenced from their buying protection from AIG. But they continue to buy these mortgages in bulk, repackaging and selling them to other long term investors such as pension funds and insurance companies. They probably also used their reputation and sophisticated model to influence the rating agencies on the securities they repackaged to get a good price. Their attitude toward these securitization is that as long as someone else is buying we don't care about the long term sustainability of the product. The same logic obviously doesn't apply if you are buying a car or an airplane. I see what Goldman did as a textbook case of moral hazard. Why would the expert of risk assessment not caring about the risk involved? Because that expert (read Goldman) intended to transfer it to others to make a handsome risk free fee income.

Option ARM:

FDIC sue WaMu executives:

Investment - the Buffett Method

1. Look for highly profitable companies that generate cash.
(What to buy? A company with positive cash flow.)

2. Decide if the company's profitability is lasting. Look at its product and long term edge.
(New technology brings efficiency but the edge is fleeting. Destructive creation is continuous.)

3. Wait for the tide: when the business cycle turns grab the ones you have wanted for a long time. (When to buy? In the early Spring of a cycle - when snow just started to melt)