Transcript Business Valuation Center, Inc. Presentation to Steve

The Aftershock Perspective on
the Housing Debt Market and
Government’s Changing Role
April 5, 2011
Apartment Finance Today
Dallas, Texas
Robert A. Wiedemer, Author - America’s Bubble Economy and
Aftershock
Managing Director, Absolute Investment Management
703-787-0139
[email protected]
America’s Bubble Economy
John Wiley & Sons, October 2006
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Accurately predicted the fall of the real estate bubble and the stock
crash
Chosen by Kiplinger’s as one of the Best Business Books of 2006
Paul Farrell, Senior Columnist at Dow Jones MarketWatch, praised
the book: “In short, America's Bubble Economy's prediction, though
ignored, was accurate.”
Aftershock
John Wiley & Sons, November 2009
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Wall Street Journal Bestseller
In its 15th printing with over 225,000 copies sold
Seen on CNBC’s Squawk Box and Fox Business News
Quoted and reviewed by Barrons, Reuters, Financial Times, WSJ,
AP, Hedge Fund Journal, Seeking Alpha, Euromoney and others
Chosen by Smart Money magazine as one of the five Best
Investment Books of 2009
America’s Bubble Economy and
Aftershock Abridged
A virtuous upward spiral of rising bubbles have worked together to boost the
economy for the last two decades.
Sooner, rather than later, this will become a vicious downward spiral of falling
linked bubbles that push the economy down.
1. Housing, stock, private credit, consumer spending bubbles already starting
to pop resulting in current downturn
2. Long term, popping of these bubbles puts pressure on the two biggest
bubbles—Government debt and the dollar
How Do you Know You Have a
Problem in Your Financial System?
The bank returns your check marked
“Insufficient Funds” and you have to call
the bank to find out if they meant you or
them.
Overview
1.
2.
3.
Financial reform—Is more regulation the
answer?
How much will the role of government
change in the current housing debt market?
Can we privatize the market?
Longer term issues affecting the housing
debt market—the Aftershock perspective
Financial Reform
1.
2.
3.
4.
Two new agencies
Limitations on prop trading, etc.
Was the housing bubble/financial crisis
really caused by a lack of regulation?
Was the Internet bubble caused by a lack of
regulation?
Government’s Changing Role in
Housing Finance
Proposals:
1. Get rid of Fannie and Freddie
2. Hybrid
3. Fannie and Freddie as back-up
Impact on Down Payments
1.
2.
3.
4.
As of end of February FHA guaranteed
46% of all mortgages—3% down payment
What would higher down payments do to
housing industry?
In first half of 2010, household creation was
zero for first time in 30 years—basic driver
of housing demand
Do we want to keep down payments low?
Impact on Interest Rates
1.
2.
3.
4.
Government effectively guarantees almost
90% of all mortgages
What would interest rates be without the
guarantees—lots of risks in mortgages
In 2008 spread widened to 300 bps
Would guarantees sold by government to
banks be better?
Change of Administration
1.
2.
3.
What if Senate and presidency changed?
Still have down payment and interest rate
issues
Some sort of replacement of Freddie/Fannie
more likely, but see bullet #2
Longer Term: What People
Want to Hear
Could This Cause Inflation?
It’s not just what the Fed has printed, but also what it will print in the future.
U.S. Monetary Base Growth 1984 to 2010
2,400
Billions of Dollars
2,000
1,600
1,200
800
400
Source: St. Louis Federal Reserve Bank
10
20
08
20
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
19
84
0
Key Question
How much can the government increase the money supply,
as defined by the monetary base, before it causes
inflation--long term (2-5 years)?
A.
B.
C.
D.
E.
F.
100%
200%
300%
400%
500%
Never
If No Down Side, Let’s Do More!
1.
2.
3.
Nothing but benefits to the stock
market, debt market and the economy
Ben deserves two Nobel Prizes for his
work in finding the perfect system for
funding deficits
But, if it causes inflation and pushes up
interest rates, could be a big game
changer for housing finance
Continuing Pressure on the Fed to
Keep Printing
1.
2.
3.
Massive deficits put strong continuing
pressure on Fed to keep printing
Will we have meaningful deficit
reduction that would take off that
pressure? Will Congress get religion?
Keep your eye out for inflation in
another 1 – 2 years
US Government Is Largest Holder of
Adjustable Rate Debt in the World
Interest Expense Could Consume All
of Our Tax Income
Forecasted 2013 Treasury Interest Expense
$2,000,000
$1,600,000
(000,000's)
$1,200,000
$800,000
$400,000
$0
3.7% (Current)
5.0%
7.5%
10.0%
Current and Assumed Interest Rates
20.0%
Good Time to Do Some Financing
1.
2.
3.
4.
Things could change with inflation and
interest rates
Government unsettled
Change of party in Senate and Presidency
could help, but there are limitations
Fixed rates are low