A couple of weeks ago, John Hussman wrote an article called “The Menu” that has some very interesting analysis.

In the article, he highlights this chart as The Menu of anticipated returns based on his models for different asset classes.


Quoting Hussman,

Note that all of the figures in the chart below are prospective returns based on data that was available at the time (though it should be clear from the chart above that actual subsequent market returns have closely tracked the projections from our standard methodology, which is described in detail in numerous previous market comments). Again, for securities with maturities up to 10-years, prevailing yields-to-maturity are sufficient. For the S&P 500 and 30-year Treasury, the chart uses prospective returns based on existing valuations. So the figures for the S&P 500 below, for example, map to the expected returns from the model presented above.

Note that the blue line near the bottom of the expected returns is the current market environment.

The different rates of unemployment based on education level still grabs at my attention…


From the NY Times.

I saw this graphic and thought it was a nice depiction. It shows the relative size of the economies of the G20 nations…


This week’s must read missive is about the chain of title on mortgages, and how big the fraudclosure problems are for the big banks embroiled in the mess. The situation isn’t pretty, and the implications could be dramatic.

David Kotok put together an easily readable explanation of the problem. The short version — when a bank doesn’t maintain the chain of title on a mortgage, that legal document is no longer valid. The consequence is that the borrower is no longer required to make payments on the mortgage.

Barry Ritholtz (who is a lawyer) introduced the above linked article with some caution. A single legal point (the mortgage not is no longer valid) will not necessarily result in a windfall for the home buyer.

The Kotok message also made its way into John Mauldin’s weekly email, where he adds his take on it too.

I saw an updated version of the chart that Quicksilver posted a while back… here is the current version of the chart:


From Zero Hedge.

Here’s a well done graphic that reminds us where the government gets its revenue from, and where it all goes…


(click for bigger version)

More from WaPo.

Someone recently shared this quote from Murray Rothbard’s Ethics of Liberty (ch. 24):

Many libertarians assert that the government is morally bound to pay its debts, and that therefore default or repudiation must be avoided. The problem here is that these libertarians are analogizing from the perfectly proper thesis that private persons or institutions should keep their contracts and pay their debts. But government has no money of its own, and payment of its debt means that the taxpayers are further coerced into paying bondholders. Such coercion can never be licit from the libertarian point of view. For not only does increased taxation mean increased coercion and aggression against private property, but the seemingly innocent bondholder appears in a very different light when we consider that the purchase of a government bond is simply making an investment in the future loot from the robbery of taxation. As an eager investor in future robbery, then, the bondholder appears in a very different moral light from what is usually assumed.

While I don’t completely agree with this quote, it is certainly thought provoking. I think revenue bonds suffer less from this ethical dilemma than general obligation bonds…

Your thoughts?

John Hussman sees a double dip coming… While Hussman has been bearish or cautious frequently, it is not without rigor. Here is his analysis of why we have some rough times ahead of us:

Our policy makers have spent their ammunition in the attempt to bail out bondholders and to create an entirely deficit-financed appearance of economic strength. It would be better to allow insolvent, non-sovereign debt to default (including long-term Fannie and Freddie obligations, and obligations to bank bondholders), and to instead use public funds to take receivership of failing institutions and to defend customers and depositors from the effects. Restructuring is probably a more useful word, but in any case, the key element is that those who actually made the loans, not the public, should absorb the loss. Restructuring means simply that the payment terms are rewritten to reflect the lower amount that will delivered over time. I can’t emphasize this point often enough – “failure” of a financial institution means only that the bondholders don’t receive 100 cents on the dollar plus interest. Failure is only a problem when it requires piecemeal liquidation, as occurred in the case of Lehman. This is not necessary when appropriate regulators can take receivership of insolvent bank and non-bank institutions (as the new financial regulatory bill now provides).

My greatest concern is that these new receivership powers will not be implemented because the Fed and the Treasury are both in bed with major Wall Street and banking institutions. Yet there is no effective alternative. Having squandered trillions in an empty confidence-building exercise, it will be nearly impossible for those same policies to build confidence again in the increasingly likely event that the economy turns lower and defaults pick up again. The best approach will still be to allow bad debt to go bad, let the bondholders lose, and defend the customers by taking whole-bank receivership (as the FDIC does seamlessly nearly every week with failing institutions). Almost undoubtedly, however, our policy makers will choose to defend bondholders again, pushing our government debt to a level that is so untenably high that little recourse will remain but to suppress the real obligation through long-term inflation (though as noted below, the near-term effects of credit crises are almost invariably deflationary at first).

David Einhorn has an interesting perspective on the current state of the world as he recently penned in a NY Times op-ed piece

Are you worried that we are passing our debt on to future generations? Well, you need not worry.

We’ve made the problem so bad that our generation — not our grandchildren’s — will have to deal with the consequences.

The whole article is worth a read.

Yay, the stock market is up, the economy is getting better, and we solved the mortgage problem — all it cost us was a few trillion dollars (ok, more than a few). We’re out of the woods, right?

Here is the chart we looked at a while ago with when mortgages with variable rates reset those rates… notice the big wave of green-ish stuff in 2007 and 2008? That’s what we just finished dealing with.


You might also notice that in front of us there is a big wave of yellow-ish stuff in 2010 and 2011. Interesting, no?

John Hussman wrote about this in his weekly review:

Below is a slightly different schedule we’ve seen. It doesn’t show the first round of sub-prime resets that ended in early 2009, and is based on different classifications, but is largely consistent with the overall profile we can anticipate.


…To reiterate what the reset curve looks like here, the 2010 peak doesn’t really get going until July-Sep (with delinquencies likely to peak about 3 months later, and foreclosures about 3 months after that). A larger peak will occur the second half of 2011. I remain concerned that we could quickly accumulate hundreds of billions of dollars of loan resets in the coming months, and in that case, would expect to see about 40% of those go delinquent based on the sub-prime curve and the delinquency rate on earlier Alt-A loans.

If it cost us several trillion dollars, including nationalizing Fannie and Freddie to deal with the subprime wave of resets, what might happen with the second wave?

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