Relevant and even prescient commentary on news, politics and the economy.

Game for the Weekend

Find a set of Mortgage-Backed Securities that are (1) still rated AAA by S&P, (2) have a WAL the same as (close to) an on-the-rin US Treasury, and (3) still have a Factor within 5% of the expectation of a generic MBS of that maturity  (that is, are not clearly impaired).

Post the CUSIP(s) in comments, along with that of the reference UST, and let’s track relative values on a regular basis for the next several months.

Anyone betting on where the relative value will be?

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The "Standard" of The Price of Gold is This Century’s DeBoers

I’m writing a few long posts—you’ve been warned—but that machine doesn’t have Internet access right now.* So I’m just going to point to Kash, who writes about something else:

In looking at the data I was struck by how small (relatively) the worldwide market for gold really is. That means that relatively small inflows of funds into the market for gold could potentially have very large effects on the price of gold. And that in turn means that the price of gold could be very sensitive to a number of factors that have nothing to do with economic conditions or inflation….

[M]oving just 0.1% of the financial wealth of US households into gold could be enough to have a dramatic impact on the price of gold. Note that the same can not be said of other asset prices that we care about; it would be difficult to discern any price effects whatsoever of a move of an additional $50 billion more or less per year into the stock market (valued at over $50 trillion around the world), the bond market (also with a total value in the tens of trillions of dollars), or real estate.

[A] good advertising campaign by gold producers could be enough to move the price of gold. Imagine that an effective, sustained advertising campaign, targeted at wealthy, conservative individuals in the US, is able to persuade 25,000 of them per month to switch a portion of their financial assets into gold….Such an advertising campaign would have the effect of pushing $15 billion per year into the market for investment gold — very possibly enough to have a significant impact on the price of gold, given how small the overall market for gold is.

[A] very similar thing happened to the market for diamonds in the middle of the 20th century. The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds.

Whether or not you like that analogy, the central point here is a very simple one. Since the market for gold is so small, its price may be strongly affected by things that have nothing to do with the state of the economy.

Kash’s analysis—read the whole thing—should drive the final stake through the heart of the idea that, in the current economy, gold is anything more than what I quoted Warren Buffett as saying it is more than a year and one-half ago.

*In this context, does anyone know how to add the Windows Live Writer app to a Droid X?

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Random Notes 3 June 2011

  1. Buce has been on fire recently, so I’ll probably have to do a post about why this post is so off-target, though his conclusion is correct (short version: he’s been misled).
  2. If I’m reading this morning’s SIFMA Brief correctly, Moody’s—whose rating skills Robert has discussed at length—(1) may downgrade US debt if we spend too much and (2) will downgrade US banks unless we spend too much on them. Oh, and the banks object to regulation because it would “artificially” reduce asset values (presumably, many of the same ones Moody’s wants protected).
  3. Relatedly, James Salt (probably h/t Felix) notes that “generous” UK banks are playing reporting games. (The US version is to deny the rework and leave the asset marked at unsustainable levels.)
  4. That this is spot-on would make me sadder if I thought we still lived in anything resembling a meritocracy, or even a developing economy.
  5. If we needed further evidence of that, the state with the best secondary eduction system in the country is pushing forward with privatize-the-gains.
  6. I’m more and more convinced that China “is different,” but very much not certain the differences will make an ultimate difference. Daniel Gross is inclined to think not. More on this as I finally finish my review of BoomBustOlogy, which you should expect to see some time before the apocalypse.
  7. I assume everyone has already seen this. Just in case, check out the facts, stylised or not.
  8. Oh, and Felix is wrong here. But that’s a post that will probably never be written by me. Someone else want to send it in?

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