And so it goes with the “creative destruction” reflected in foreclosures and the housing crisis. My argument is that if it’s going to happen anyway (there really is no avoiding it), let’s just suck it up and get it over with. Technically speaking, this would be the Fast Band-Aid Approach.

Government policy from the beginning of the crisis has been to try to avoid or delay the natural process that has to occur to put the crisis behind us: We have to move housing inventory from “weak hands” to “strong hands” as quickly as possible. After ten or fifteen years of government policies to encourage “weak hands” to invest in real estate, it’s going to take time to effect this evolution. It will take even longer than it otherwise would because our government designs and enacts policies every day to slow the process further.

In a bit of an “Atlas Shrugged” move, the politicos believe the process of creative destruction can be halted simply because they wish it so. But no matter how hard they wish, the process must run it’s course.

We could have done it the quick way or the slow way. Unfortunately, we’ve chosen the slow way.

ACTION ITEM: It can probably be a decent time to make some real estate investments if you can be comfortable holding it for a very long time. Although we’re seeing economic improvement which will probably help to hold up prices, it seems fairly balanced by continued slow dumping of homes on the market.

One of the people that I follow off and on from time to time is James Altucher who writes, ” The Altucher Confidential”. In past lives he used to manage a hedge fund and from time to time you’ll see him as a guest on CNBC or other financially-oriented news shows. Recently, he made some salient points about Greece, the country and their debt. Here are a few items that I found the most interesting:

We first even heard of Greece in May 2010. There were some rumblings. They couldn’t pay their debt and everyone wanted to retire by some early age – what? 24 years old they wanted to retire. And then hang out on the beach and get paid by the government.

It’s 0.15% of the world’s population.

If you go to Greece (or, in my case, if you go to a pool hall in Astoria, NY which is almost entirely populated by Greek people, and many of the waitresses at the Greek diners were too beautiful for me despite the fact that I wrote my phone number down on $2 bills that I gave out as tips) they have three types of backgammon that they play as opposed to our one. No wonder they want to retire so early!

The Greek debt divided by the Eurozone GDP is similar to Rhode Island’s debt divided by the US GDP. If Rhode Island defaulted I wouldn’t care either. Rhode Island, also btw, is a beach resort. Just like Greece.

Most important: Since the time of Augustus in 20 BC, Greece’s bills have been paid by other countries. All the way up to Ronald Reagan in 1989 who was terrified the Soviet Union would have access to the Mediterranean so kept paying Greece’s bills. So the EU knew this going into the situation that Greece can not live without the kindess of strangers. THIS HAS BEEN KNOWN FOR 2030 YEARS!

In 1981, the top 5 banks in the US were 263% exposed to South American countries that TOTALLY DEFAULTED! Zero! THANK GOD the word “contagion” had not been invented yet by some media Einstein. What happened next in the US? 20 year Stock market BOOM!

So ok, what’s our exposure to not only Greece but let’s throw in Portugal, Spain, Ireland, Italy. Other than Ireland, all prior leaders of the world. Total exposure in the top 5 US banks? 8% Glory Be! You know what this means? It means I should NEVER be able to turn on the TV and hear the word “Greece” unless I am watching some backgammon tournament on ESPN 3.

This isn’t to say that the stock market won’t produce a wild ride if investors (pushed by the media) head for the exits en masse based upon a contagion fear theory currently trumpeted about by the media. For this reason, it’s important to respect the potential for market volatility.

But, it’s also a pretty good reason not to get our shorts in a bunch about the whole Greece-Europe-Contagion thing and recognize that; while we should respect the market movements that others may cause because of it (this is the world that it appears we now invest in); we might also view it as a possible buying opportunity once calmer heads prevail.

It may have escaped the short memory of the investment world that the credit rating agencies were one of the key pillars that crumbled under the weight of the financial debacle that they helped create. You will recall that it was their admitted ignorance or understatement of the risks associated with securitized mortgages that led to a mass downgrade of billions of dollars of mortgage securities and triggered the collapse.

Expertise we can count On?

The subject of this recent mis-analysis were re-remics, a securitized mortgage instrument (here we go again) comprised of repackaged mortgaged back securities that managed to survive the latest rounds of defaults. This re-rating comes right on the heels of another one that occurred just 3 months ago with aother batch of 224 re-remics.

Most disturbing is the fresh light this casts on the questionable objectivity of the rating agencies which are highly compensated for their ratings, but only after winning the business by outbidding each other. Apparently, rating re-remics commands a much higher fee and the banks are willing to pay it to get the ratings they need to be able to market the securities.

Lessons for the Taking

Individual investors can, hopefully, take away some lessons from the lessons that weren’t learned by the ratings agencies and the banks.

• First, we have no business investing in financial instruments that we don’t completely understand, especially ones that require some sort of engineering by backroom financial geeks. Seriously? When the rating agencies don’t understand them enough to develop the right methods for analyzing them, it’s time to run; run far away.

• Second, even though the loss that the banks that are holding these re-remics won’t amount to more than a blip on their balance sheets, it’s a reminder to the rest of us “sophisticated” investors that proper diversification is key in the face of these human-caused flare-ups that could possibly trigger the next calamity.

• Third, unless you have some sort of twisted financial death wish, stick to the fundamental tools. The “next big thing” in investments is usually a re-hashed, raked over financial product loaded with fees and back-door profits intended to enrich the promoters with little regard for your financial future.

None other than the notorious stock trader, Jesse Livermore, stated it the best, “Another lesson I learned early is that there is nothing new in Wall Street…Whatever happens in the stock market today has happened before and will happen again.”

The big takeaway here  is that in successful investing, there are no crutches, no models, no experts, and there are no short cuts.  With experts like S & P, it’s more important than ever to be able to think for yourself and move deliberately along your own course.

The unfortunate fact remains that credit for most of America is still tight, banks are still trying to repair their balance sheets, and the overlying problem is real estate, the detritus of the Fed’s reckless monetary policy. Credit expansion fueled by the Fed’s easy money policy of the early 2000′s drove private debt to fuel housing over-production, and drove commercial debt to fuel commercial real estate (CRE) over-production. It was the greatest such expansion of money and credit the world has ever seen and it went primarily into real estate. We are now facing the consequences of that expansion and boom: the bust.

You can read the article in its entirety here.

In his best-selling 2007 book, Black Swan: The Impact of the Highly Improbable,” Taleb argues that these models are essentially useless because they ignore the stark reality of cataclysmic-sized risks that have rocked the financial markets time after time. He contends that probability models are based on a dilution of major, market shifting events (black swans) that, while rare, have the effect of rendering the models nearly ineffective.

Models that only assume the existence of white swans rely upon scenarios that exclude the real possibility of events such as the Lehman Brothers collapse, the near failure of AIG, or the collapse of the housing market, and the potential financial collapse of several European countries. With such events occurring more frequently, it seems that we’re surrounded by more and more cliffs.

This leaves investors who ascribe to MPT or other probability models in a perilous position where probable risk has been severely underestimated, and without a way to react except after the damage has been done. While MPT may be an appropriate tool to analyze historical returns, its danger as an investment tool is that it can provide a gilded view of future performance. Those investors utilizing MPT may, in fact, be walking backwards towards the cliff with their eyes on past investment results and little concern for impending disasters.

In our previous writings we have been fairly clear on our stance that MPT doesn’t work because it is largely based on risk calculations that implies knowledge of future uncertainties, which is impossible.  It also assumes that people, as a whole, do act rationally, which has been disproven time after time.

We have also politely suggested that, absent a crystal ball, investors who formulate their own thoughts and opinions, or who are thoughtful enough to seek the advice of those who follow their own thinking, are better positioned to survive, and even thrive in uncertain times.

Taleb reinforces this principle in a list of his own ten principles for protecting your portfolio against “black swans” that were quoted a couple of years ago in the Financial Times.  His ninth principle states, “Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbor the certainties that normal citizens require.

We believe that, if you “definancialise” your investment approach and, instead, focus on what it is that is most important for you to achieve, you’ll not only avoid the cliffs, you will gain a firmer grasp of your financial future.

The approach is simple, easy to understand, and it centers on you.  Please feel free to contact me for a brief overview.

It seems that Rep. Brady rankled Mr. Geithner a bit by insisting that he resign, blaming him for rising unemployment, growing federal deficits and accounting flaws in the number of stimulus jobs created, among other economic problems.

All of the articles that I’ve read about the exchange focused on how unusually forceful Mr. Geithner was and how hot the debate ended up getting. Included in most articles is this statement by Mr. Geithner:

“The economy fell into the worst crisis in generations after almost a decade — certainly, eight years — of basic neglect of basic public goods, in health care, in education, in public infrastructure, in how we use energy.”

Whaaaaaat?  I thought it was a credit crunch, lax regulation, an irresponsible banking system colluding with an irresponsible public piling on debt they couldn’t afford to buy things they didn’t need. Since when was the current economic crisis caused by not addressing health care? Or education? Or how we use energy?  That’s pretty far out there… even for you Tim.

Seriously, Timmy… If this is what you believe caused the economic crisis, then maybe you should step down. That kind of a statement is either simple felony stupid or reckless historical revisionism to get political points.

Maybe what it means is what he says? Is it even reasonable to postulate that our current economic conundrum is the simple result of one man’s mistaken economic theory? Could it all be that simple? 

REP. HENRY WAXMAN (D-Calif.): And my question for you is simple: Were you wrong?

ALAN GREENSPAN: And what I’m saying to you is, yes, I found a flaw….a flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.

REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?

ALAN GREENSPAN: That is–precisely. No, that’s precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

My most recent session was prompted by a friend who wrote me an email asking about an article she’d read. The article discusses the French Revolution and how the government ran their printing presses churning out money to the point that it destroyed their economy and precipitated a revolution.

Actually, rampant inflation is just about the one thing that the common folk just can’t take. Not only did revolution in France present the opportunity for Napoleon to jump onto the world stage, a similar situation in Germany after World War I put the German economy in such a rotten place that Hitler’s promises of prosperity at any price resonated with a desperate populace.

So, yes I think by trying to print ourselves out of the current crisis we might be putting ourselves in a precarious position… but I differ a bit from the article because I think we will probably recognize this as our next problem before anyone goes to the guillotine. The next solution becomes to raise interest rates and keep them elevated for an extended period.

I imagine that this will be necessary, but in the process it will dampen our future economic prosperity for a very long time to fight some very stuborn inflation. I feel certain that our leaders will choose this option over revolution.

Anyway, here’s the meat of my reply to her email:

Interesting… Obviously, I’ve been a huge fan of cash the past 16 months or so! It’s funny also because adding TIPS (inflation protected treasuries) is a part of my “Going Forward” plans that I’m presenting to clients next week.

As for gold… Well, I just can’t quite stomach it at $1000 per ounce… I’m feeling it’s a bit like oil at $145 per barrel last summer. Everyone said it was easily going to $200.

I look to implement a lot of the ideas from the article.  But I’m hoping to do it in a manner that doesn’t just kill my client’s prospects forever if we are wrong. Everyone’s uncomfortable right now and maybe even a little bit scared, so I don’t want to do anything too radical, no matter how rational it sounds at this moment. Sometimes these decisions and rationalizations that are made during very turbulent times end up being huge mistakes and we look back and can’t imagine how we thought such thoughts.

So, I’ll march forward incrementally. At present, I’m thinking that we’re probably looking at some serious deflation for a while and then a very muted, long term half recovery that could stretch out to a decade or so.

This leads me to a place where cash is king at the moment for most of our money. But, somewhere in the future there is going to be the opportunity, as interest rates rise, to buy these TIPS and hunker down for the possibility of some real ball-busting inflation.

Fortunately, these things usually unveil in slow motion. So slow in fact that people begin to dismiss their earlier premises and question their previous conclusions even though they are probably still correct.

As an example, I thought the housing market and the stock market were overpriced going back into late 2005. But, after another year-plus of both markets continuing to escalate, it was only reasonable that I doubted my own previous conclusions. I was right, but early. Being too early is the same as being wrong as far as our pocketbooks are concerned and I was on the edge on this one. Honestly, it coulda’ gone either way.

So this is kind of my big-picture picture. What I don’t say in the above letter is that while the economy may stagnate for the better part of a decade or more, I firmly believe that the stock and bond markets will experience continued strong rallies and significant selloffs. It’s not a longshot bet that the stock market will end up right where we are today in another decade or two.

If that’s the case, I wouldn’t want to be a “buy and hold” investor, but if you’re willing to be nimble and cynical, there’s a lot of money to be made during this whole period of economic malaise. If you need an historical precedent, go back and look at a chart of the market during the Great Depression after the initial, monster selloff. What a great time to be an investor with actual cash!

All we have to do is have some cash left at the end of the monster selloff that we find ourselves in today.

This past weekend I was sitting with my Grandson, eating Cocoa Puffs together on the sofa and watching on the boob tube the kinds of stuff that appeals to your average five year old…. and that’s when I heard it… that fimiliar refrain… “Yes We Can”

That’s where BHO got it! That’s where he got it all, the chant and the building stuff about putting the American people back to work in construction jobs! This has to be the genesis, the root, the seed of the Great Economic Recovery and Ego Act: “Yes We Can!”

On a serious note: I was, in fact, a little less distraught at last night’s speech. It seemed more hopeful and “Rooseveltian” now that he’s gotten the package passed. I think the hopeful message that he put out there is a bit of the salve that Americans need at the moment.

As usual, I just wasn’t finding much substance to the whole thing. The FDR flashback is a very popular faddish image at the moment for “pseudo-economists” to grab a hold of, but the problem is that most serious students of economic history concede that FDR’s plan didn’t really work.

The market’s action since early January when the plan started to come to light seems to be saying that BHO’s plan may not work any better. Back in Roosevelt’s day, the whole world at war finally snapped us out of it. Although it worked, nobody wants that kind of a stimulus plan.