GSE Report

 “Our Congress–past and present–has behaved disgracefully in discharging its fiscal duty. There are limits to what a monetary authority can do. Only the Congress of the United States can now save us from fiscal perdition. The Federal Reserve cannot.”

“Between the ECB’s action last week and the Fed’s today, the world’s two most important central banks are bringing unprecedented resolve to bear on economic growth. The world may one day look back and conclude the first half of September was either a turning point for the global economy, or the final nail in the coffin of the doctrine of central bank omnipotence. The Economist September 13, 2012

“It is a strange world we inhabit. One where economies remain extremely depressed yet almost no companies go bankrupt, while low interest rates encourage holders of capital to speculate. One where global turmoil mounts, while the world passively watches. One where nearly every member of Congress will insist that we need to rein in deficit spending, while collectively Congress accomplished virtually nothing. It would be absurdly funny if it weren’t so incredibly tragic.” Seth Klarman Baupost Q2 Letter

“Inflation is set to decline significantly and could even become negative. Headline inflation is expected to fall well below 2 percent in 2013 and remain there through 2014. …Moreover, given the subdued growth outlook, there is a sizable risk that inflation could even turn negative in the medium run. Specifically, the IMF’s GPM projections indicate about a 25 percent probability of below-zero inflation by early 2014. This risk of deflation is relatively low in the faster-growing economies but significant in the periphery, where administrative price and tax increases are masking more severe downward price pressures from still substantial output gaps. …This disinflationary environment in much of the periphery will make it difficult for many countries to reduce the burden of debt. International Monetary Fund EURO AREA POLICIES July 3, 2012

“Over the past 15 years, the global financial system—encouraged by misguided policy and short-sighted monetary interventions—has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.” John P. Hussman, Ph.D. June 11, 2012

In short, it’s a world without leadership. That’s unfortunate, because at a time when so many problems transcend borders—from regional conflicts to climate change and threats to global market stability to cyber-attacks, terrorism, and the security of food and water—the need for international cooperation has never been greater. Cooperation demands leadership. Leaders have the leverage to coordinate multinational responses to transnational problems. They have the wealth and power to persuade other governments to take actions they wouldn’t otherwise take. They pick up the checks that others can’t afford and provide services no one else will pay for. Leaders set the agenda.”

“The curse of the insurance business, as well as one of the benefits, is that people hand you a lot of money for writing out a little piece of paper, and what you put on that piece of paper is enormously important. But, the money that’s coming in that seems so easy can tempt you into doing very, very foolish things….If you are willing to do dumb things in insurance, the world will find you. You can be in a rowboat in the middle of the Atlantic and just whisper out, ‘I’m willing to write this,’ and then name a dumb price, and you will have brokers swimming to you – you know, with their fins showing, incidentally …you’ll see a lot of cash. And you won’t see any losses. And you’ll keep doing it because you won’t see any losses for a little while. So you’ll keep taking on more and more of it. And then the roof will fall in.” Warren Buffett 2003 Berkshire Hathaway Annual Meeting

We would like to draw your attention to a segment of the Report (pages 16-21) below. The discussion focuses attention on an often unrecognized fact that many distressed borrowers actually cashed-in on the equity in their homes prior to defaulting on their mortgages. Now, under the various mortgage modification programs, some of those borrowers seem to be “cashing in” again. The discussion below begins with an excerpt from Warren Buffett’s annual shareholder letter just recently released, and then provides two real-life examples that might be of interest to you.

“Fiscal sustainability has become the issue of the day, not just in Europe but throughout the developed world. …The year 2024 struck a chord with us, as that is the year the Congressional Budget Office projected that the cost of entitlements plus interest payments would absorb 100% of tax revenues in the United States, in a scenario more likely than simply extending current policies indefinitely"

U.S. economy ends on a positive note, but… Housing market is showing a “little more strength,” but home values continue to fall. The 2012 outlook in the U.S. The EU headwind… Financial repression is underway in Europe. The triumph of optimism.