Wednesday, August 5, 2009

Wednesday's Abbreviated Links

Sorry for the late posting. We are still working out the kinks at Inoculated Investor headquarters. As of tomorrow we should be up and running at full speed.

Richard Thaler’s lastest piece in the FT: I found this link on Simoleon Sense. In this article, the most famous behavioral scientist Richard Thaler discusses Justin Fox’s new book called The Myth of the Rational Market and undertakes his usual assault on portions of the efficient market theory (EMH). Thaler argues that the “Price is Right” component of the EMH has failed to hold true in the three most recent bubbles: Japanese real estate, US technology, and US real estate. Can we finally lay the idea that the market always comes up with the correct price to rest? Markets may be efficient and rational most of the time but the recent lasting distortions should be the final nail in the coffin for this theory. However, Thaler does say that the “No Free Lunch” principle of the EMH has actually been strengthened by this crisis. Just because you can’t see the risk every day does not mean there is none and investors should not expect to be rewarded for taking on what appears to be minimal risk.

Deutsche Bank continues to be bearish on US real estate: This time is it not Richard Parkus who has been sounding the alarm regarding to the impending commercial real estate bust. The dour projection that by 2011 48% of US homeowners will be under water on their mortgages comes from Karen Weaver and Ying Shen. The DB duo is especially concerned about prime conforming loans, the type that get bought up by Fannie and Freddie. They expect 41% of these loans, which make up 2/3rds of total mortgages, to be underwater by 2011, up from about 14% now. The total forecasted decline for US real estate would be 41.7% if the analysts predication of another 14% drop occurs. Now, this all may sound a bit draconian, especially given the ongoing green shoot PR campaign. However, for those of you who believe that we are not going to see a sustainable recovery until housing turns around it is important to understand the inputs the DB analysts are using to make these projections.

Is this a false or real dawn? American Express reported some news today that could be seen as very good when it comes to consumers. Write downs due to uncollectable debts fell to 9.2% in July from 9.9% in June. The reason it is tough to know whether this reversal is a temporary blip or a lasting trend is because of the government stimulus. I want to see what the charge offs look like when the government is done handing out checks. You all know I am very bearish but if we actually start to see less stress on the consumer even I will admit the presence of a legitimate green shoot. Accordingly, the monthly trust data releases from the credit card companies are incredibly important to monitor and scrutinize.

(Picture of Richard Thaler courtesy of