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alstry (35.19)

Bill Gross should study Alstrynomics

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January 29, 2009 – Comments (8)

NEW YORK (MarketWatch) -- The government needs to prop up other sectors of the credit markets such as commercial mortgage-backed securities and municipal debt, said Bill Gross, chief investment officer of bond giant Pacific Investment Management Co., on Thursday.

Doing so would help keep solvent borrowers such as shopping malls and office buildings, as well as municipalities, hospitals and universities, Gross said in a commentary on Pimco's Web site.  

Policymakers "should recognize that supporting critical asset prices such as municipal bonds, CMBS and even investment-grade corporate bonds is a necessary step towards eventual economic revival," he said.

No Mr. Gross, you have it bass ackwards.  The way the asset prices are supported is if the underlying borrowers are solvent.  If the cities can pay, the bonds are sound.  If the borrowers can pay, the debt good....plain and simple. 

It ain't that complicated and is taught in first year Alstrynomic classes.

The asset prices are crashing because the underlying borrowers can't pay.  The way to support the asset prices is to restructure the underlying borrowers (NOT BY PROPPING UP THE PAPER!!!!) so the borrowers can pay.  Once the borrowers can pay...debt will be good again and banks can start lending again. 

Until we address the disease, we are just f*#king around with the symptoms.

In real life, I have number of friends who are physicians.  As a physician, when you chase the symptoms and not the disease, the symptoms often spread.  If you let it go too far, the patient often dies.

Here is a timely real world example:

(CNN) -- One look at her photo, and you can't help but ask: How could someone so young and vibrant die so quickly from an infection?

Brazilian model Mariana Bridi da Costa was a healthy 20-year-old when doctors told her she had a urinary tract infection, her family says. The infection spread, and after amputating her feet, doctors thought they had the situation under control, according to a blog run by a family friend.

"She's alive, [she] will survive," Renato Lindgren wrote on the blog on January 20, before da Costa also had to have her hands amputated, and part of her stomach and both kidneys extracted. "She can eat well, visit the sea, swim, travel, talk with her friends and family, marry and have a baby. She has a full and beautiful life ahead."

Four days later, da Costa was dead.

From an economic perspective, the infection is insolvent BORROWERS.  The symptoms are defaulting debt.  Until you cure the infection, the symptoms get worse.  Pretty soon, our economy is dead.  You think I am kidding????  We are all infected kids.

Anyone think Mr. Gross might be a bit biased because he holds a whole bunch of paper????

8 Comments – Post Your Own

#1) On January 29, 2009 at 10:13 PM, SuperPicks (29.31) wrote:

He did call the bond bull market back in summer of 2007.

But him and his firm has been accussed of cornering the market and manipulating prices of options, and treasuries to steal money away from other companies and individual investors like me and you. 

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#2) On January 29, 2009 at 10:42 PM, whereaminow (51.33) wrote:

Alstry,

I disagree with both you and Mr. Gross. I am preparing myself now for your rebuttal =D 

Here is an analogy. I am a borrower with a $1200/month mortgage yet I can only afford $800. In the infinite wisdom of the federal government, I am given $400/month to cover the difference. I can now pay my mortgage, thus keeping housing prices high. Everyone is happy, right?

Well the borrower is temporarily satisfied, and lets assume that he/she is truly responsible and continues to make payments for the life of the loan thanks to the $400/month assistance. Alstry is satisfied since he thinks the problem is solved. Do-gooders around the world rejoice and point to this form of government intervention has worked! America is saved!

Enter Henry Hazlitt:  "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups"

The government's action to subsidize borrowers amounts to nothing more than a price control. Like all price controls, it causes the product (in this case, houses) to remain artificially priced higher than it shoud be. The more government intervenes, the longer housing prices will stay above their real market value. The negative consequences of such an action are multi-fold:

1. Fewer low-income households will be able to afford a new home. Renters that save for a down payment on a home will be unfairly punished by having to pay a higher price than would have been the case had the government left well enough alone.

2. Lenders, seeing that government will assist any debtor that can't make ends meet, will relax standards and misprice risk. On top of that, with a lender of last resort already available to them, The Federal Reserve, lenders have no fear of getting paid back. The concept of risk flies completely out the window (does this sound familiar?)

3. A price control that keeps prices artificially high results in oversupply by the producer. The American housing industry has already overbuilt based on easy credit via The Federal Reserve's artificially low interest rates. Your solution would continue, not alter that trend.

A price control is a price control is a price control.

The solution is to allow bad debt to be liquidated. End the Income Tax, freeing up more money for competent individuals to provide charity for those that have fallen on hard times. America is already a very charitable nation, and would be even more so if $1 trillion per year was not extracted by a wasteful, clueless bureaucracy. Balance the budget immediately. Repudiate the national debt. End the welfare and warfare state.

But most importantly, end the government created cartel of private central bankers known as the Federal Reserve. Allow the free market to determine the value of various privately issued currencies and to price the risk of each. It is not an original or far-fetched concept.

David in Qatar

 

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#3) On January 29, 2009 at 10:55 PM, alstry (35.19) wrote:

You get a F for thinking you understand the Alstrynomic position.  Actually, it is much closer to yours in that BOTH borrowers and lenders should be bankrupted and start over.

For analysis you get an A and thus here is my rebuttel:

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#4) On January 29, 2009 at 11:06 PM, alstry (35.19) wrote:

Unless we address this issue quickly, the infection will spread all over the world.  European countries are on the brink of chaos.

First, the implosion of Iceland.  Rioting in the Baltics that is now spreading to over a million rioting all over France. 

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=3906861&cl=11780657&ch=4226714&src=news

Dramatic changes to the bankruptcy laws need to be addressed.  QUICKLY!!!!!!!!!!!!!!!!!!!!!!!!

Currently we are rewarding the dealers, the banks that sold toxic debt, and punishing the borrowers, those that purchased the debt. 

BOTH need to be punished, get it behind us and move on......

If we don't restructure soon.....soon the structure will fall upon us all.

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#5) On January 29, 2009 at 11:13 PM, whereaminow (51.33) wrote:

LOL, well I guess I haven't quite yet caught on to your writing style. Please accept my apologies :)

David in Qatar

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#6) On January 29, 2009 at 11:25 PM, jegr5347 (< 20) wrote:

Bill Gross is a self serving crook like the rest of Wall Street.

Do to others what you would not like done to thyself.

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#7) On January 30, 2009 at 12:46 AM, alstry (35.19) wrote:

Here is a physician that understands the illness:

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#8) On January 30, 2009 at 10:57 AM, CycleFreak7 (23.73) wrote:

My, oh my ... If only Ron Paul was the person sworn in on Jan 20 as PotUS.

$825 billion more good money thrown into the fire.  Hey, what the he11, already $10 trillion in debt, what's another trillion, right?!

I think I'm going to vomit.

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