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The Price of Everything, The Value of Nothing

Posted by Larry Doyle on August 23, 2010 12:23 PM |

What is something worth? Very simply whatever somebody is willing to pay for it, correct? While regulations or the lack thereof have a big impact on overall levels of returns and compensation, all other things being equal, I do not begrudge those who take risk, work hard, and reap rewards. I applaud them. I view that process as the essence of capitalism.

Does this line of thinking still work in our Uncle Sam economy circa 2010? One of the overriding themes highlighted in Observations on My Afternoon in New York City addressed the topic of market valuations. I wrote:

4. Investors do not want to sell what they currently own because they do not know what they might purchase to replace it. Investors do not want to allocate more capital because they are concerned about market valuations in general.

I should have been even more pointedly specific in writing this statement. While I do believe many people in the market today are concerned about the overall level of the market, the point I was trying to get across is that people do not trust or believe the individual values of investments at current prices. Why is this the case and how does this happen?

Very simply, as The Wall Street Journal addresses in writing Government Clouds Value of Investments:

What is anything worth?

That might sound like an utterance from the book of Ecclesiastes or the title of a freshman philosophy paper. But it is a valid question for any investor right now. Gauging the true worth of stocks, bonds and real estate is extremely difficult at a time when their prices are so heavily influenced by the actions, or perceived inaction, of governments and central banks.

On a far bigger scale, take the 10-year Treasury note, a cornerstone for pricing so many other securities. While the Fed’s monetary-policy stance has always had an impact on government bonds, its moves have much more sway when the economy’s future hinges on monetary stimulus. Just over a month ago, Fed Chairman Ben Bernanke said the economic outlook was “unusually uncertain.” Since then, the 10-year note has rallied. The drumbeat is growing louder for the Fed to balloon its balance sheet further by purchasing more assets. But that would only increase its presence in important asset markets, further distorting them.

Of course, there is supposed to be a happy ending. The fiscal and monetary stimulus is meant to bring the private economy to the point where it is self-sustaining. But it is just as likely that the government remains entrenched. Government entities will likely back some 90% of new mortgages for the foreseeable future. And if, miraculously, that backing returned to precrisis levels, it would still be huge. From 1990 to 2006, 54% of all new mortgages had effective taxpayer guarantees, according to data from Inside Mortgage Finance.

Some will take comfort from the fact that it would have been a good bet to buy shares in 2002, when there was huge doubt about the economy and loud calls for the Fed to do more. The S&P 500 rose 67% from the end of 2002 to the end of 2007.

The problem is, anyone unlucky enough to buy the S&P 500 at the end of 2003 would be down today. That underlines the fact that timing is everything. And even more so in markets beholden to aggressive government action. Today’s winners will arguably be those who correctly guess the Fed’s appetite for shock and awe.

To paraphrase Oscar Wilde: Right now, investors know the price of everything but the value of nothing.

Against this backdrop, should we really be surprised that to an ever increasing extent investors have exited the markets? When Uncle Sam is compelled to step in for investors who lack confidence and feel unprotected, we have a decidedly different marketplace.

Wall Street is now reaping what it sowed for far too long.

Larry Doyle

I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets, including our financial regulators, so that investor confidence and investor protection can be achieved.

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  • fred

    Unintended consequences,

    The gov’t should not be in the business of micromanaging the economy or estabishing socioeconomic policy. PERIOD!!

    It can be argued that it was gov’t involvement (every citizen’s right to homeownership) that caused the real estate crisis, and that the implementation of monetary policy distorts asset prices, but that would be too easy.

    Instead, let’s look at the newly implemented credit card regulation and some unintended consequences…

    Some card issuers, unable to collect higher late payment fees have instead put a freeze on your credit line making it impossible to use the card until the late payment has been recieved. What if it’s your only card and you don’t have enough cash to cover the transaction, talk about embarrassing!

    Still others, in an effort to reclaim lost profits, have resorted to selling your personal information as a normal consequence of your cardholder agreement and have begun to use agressive marketing and data mining tactics at every point of cardholder contact to improve the quality of cardholder data so they can get a higher price for your personal information.

    If you refuse to answer, they simply refuse to respond to your call by stating they couldn’t verify your identity. Talk about invasion of privacy!

    Sometimes the devil you know is better than the one you don’t.

    • Sam

      Atlas shrugged….

      • Sweet Ebony Diamond

        You guys are not even close to reality.

        And Ayn Rand should never be brought up again in civilised discussions.

        In what way does a group of humans (250 million of them in America) organize themselves so that they may live a better life?

        It is called government.

        For example, each citizen could have their urine & s%#t piling up in their back yard from now until eternity.

        OR a group of humans could come together and organize to collect the urine & s%#t in one place so that it may be further processed into something useful.

        If we assume that the 2nd option is better, then the question then becomes how to make this happen.

        • fred

          Sweet Ebony,

          There is a difference between the role of the federal government and the role of the state and local governments.

          As for your reference to waste removal, my home has a septic system which we service independant of any government involvement.

          “Ask not what your country can do for you, but what you can do for your country”. JFK

          I would like to remove some of the burdens from “government” that it’s citizenry have cast upon it; to remove the politics and polital adgenda’s of special interest from the business of government and promote self reliance among this countries citizenry.

          As to your reference to Atlas Shrugged, I have read the book and support some of the ideas presented by the author, but only to the extent that those ideas, make sense to me.

          It both saddens and offends me that you use “labels” to negate and demean peoples ideas simply because they are different from your own.

  • coe

    The challenge in getting our arms around these matters is that the economic factors that converge are much more complex and global – way moreso than they were a mere 30 years ago. If we even attempt to isolate the discussion to mortgage finance policy in America, it’s pretty clear that the system seemed to work better after Freddie and Fannie arrived on the scene, though when conforming loan limits were more modest and the big GSEs were not driven by public ownership, greed, portfolio growth and mismanaged leverage and derivative hedging. And, let’s not forget that the u/w standards were crisper, cleaner, and more conservative…And, surprise, surprise…there were far fewer “designer” mortgage types that turned out to turn sour in the faces of the banks, the investors, the homeowners and the politicians. But the story wouldn’t be remotely complete if we didn’t acknowledge that the structural “advances” in mortgage finance technology served as the foundation for the explosive growth in the credit derivative market, and that the progress in America migrated to Europe and Asia…and that the accounting police and the Federal regulators couldn’t be expected to keep pace. And, quite simply, that human nature is what it is…So this, in my opinion, is less a referendum on the role of government (though I am of the opinion that bad leadership in government is destined to make things worse and, in fact, is happening day after day right here in the US)…rather, I would expect these economic conditions to be in vast disarray for the next 5-10years, as risk is “traded” back and forth, as more (and probably bad) regs are created after the horse has left the barn, as the world’s fiscal leadership and governments kick the can down the road, and as the human condition continues to prey on the stupidity of the naive, as unemployment remains chronic, as uncertainties abound, and as those that are actually in a position to do something about it sit in cash, take their chips off the table, and are taxed into submission.

    Whether or not the analogy to 1957 and dystopian world of John Galt is valid – well, that is in the eye of the beholder. There is no doubt that our government, this administration is right in our grilles. The dialogue has turned ugly, the philosophical positions stand in sharp contrast along partisan lines, and, sadly, there is no real base of accomplishment nor experience guiding the way. Time, as I have asserted before, for real leadership to step up – we need it and so does the economic world stage.
    The role of the GSEs, though critically important, is merely one symptom of the bigger challenge we face.

    Frankly, LD, I’m not sure why my early morning literary sensibilities are more drawn to the land of comic books and superheroes than of Ayn Rand – for me – as for the Thing in the Fantastic Four, “It’s clobberin’ time”! – or, as they say in Boston, “Keep punchin'”

    • fred


      Did the system work better after the GSE’s came on the scene? I don’t know. Could/would private industry have provided a better solution? We’ll never know, but that is the direction we are moving in now, given the lessons learned from the past.

      Certainly, the mortgage industry needed a central clearinghouse for mortgages so that the mtg industry could move product and continue to function in a rising rate environment when porfolio mortgages aren’t as attractive to a lender.

      What caused the system to go so wrong? I would argue it was the mixing of business and politics, an ill advised extended “easy money” Fed policy and the government’s lack of oversight and enforcement.

      • coe

        Fred – I think you hit the key note in using the phrase “the mortgage industry needed a central clearinghouse for mortgages so that the mtg industry could move product”…prior to the development of the secondary market, for the most part the creation of a mortgage was a function of the thrift industry and its related brokers and correspondents in mortgage banking land…and it was a portfolio product…the current big four mortgage producers – Bank of America, Wells Fargo, Citibank, and JPMorgan Chase were behaving as more traditional commercial banks and their loan books had not turned to the residential mortgage sector in any meaningful way…but along comes the Freddie and Fannie purchase/guarantor programs and voila, we create velocity in transferring risk – all aided by the government imprimatur – and materially sounder as to real risk, mind you, because of the conservative nature of the underwriting standards and program characteristics…clearly, any artifcially induced period of low rates helps the “affordability index” and poor oversight plus mercurial and “love tap” enforcement helped all participants lose the quality controls that kept the system in check and safer back in the 70s and early 80s. I also remember that the institutional investor community, after some discovery, found comfort in the conforming RMBS paper as an exciting new and safe sector to place their funds. I’m pretty sure that private industry could not have stepped into the role of the government guaranteed mortgage agencies – having neither the scale, balance sheet strength, nor the ability to absorb the credit risk that the GSEs could…

        The question for the economists, historians and the pundits is whether we needed to take the developments further than provided for by the early simple model. It was only then that the system started to get the wheels off the track.

        In many ways, we have blasted ourselves back to the 70s via the upshot of the crisis and the policy maneuvers…what is wrong with reverting to the foundation principals that governed the early days of the secondary market…do the good bank/bad bank split to isolate the legacy exposures and transfer those risks into the private sector in any number of structural ways, and go back to the early rules for the marginal new product.

        When I think of the 70s, I put the work of the GSEs in the win column…but please, under no circumstances should we bring back disco music!

  • fred


    Well said…You asked the question in your response of whether we needed to take the developments further than provided for in the early simple model.

    My response, yes, we do and although it will be difficult now because noone wants to step up until the government steps out, I would like to see that good old, made in the USA entrepreneur provide the answer. Credit risk should be born by the originator thru putback provisions, interest rate risk by the market.

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