Hello Mr. Wolf, won't you please sit down?

[PaulW]

If all the privately owned residential property in the United States was worth $20 billion, then each house would cost an average of $200 (divide by 100 million). You missed a factor of 1,000 somewhere.

[JWFITZ]

It's clear if one follows the source link, rather than the commentary.

[mgeary]

quote:

---

Originally posted by PaulW

If all the privately owned residential property in the United States was worth $20 billion, then each house would cost an average of $200 (divide by 100 million). You missed a factor of 1,000 somewhere.

---

You are precisely right, Paul. I misplaced a factor of 1,000 in my original post. I've since edited it to the correct amount, which makes the average residential property worth somewhere in the vicinity of $200,000.

The point still stands. All the residential property in the U.S. is worth less than $20 Trillion. I believe the default rate is in the neighborhood of 6%, or $1.2 Trillion. How do we get from $1.2 Trillion in default (there is still some underlying value, even in default) to "$500 Trillion in bad debt"?

P.S. Jay, the Wikipedia link to "derivative" takes you to 1st semester calculus, not a financial primer which explains the derivatives market. I'll check your other link to see if that helps me understand what a derivative is.

<edit> Nope, the "Marketwatch" link took me to "Story not found". Where are you getting the "$500 Trillion in bad debt", Jay?

<edit again> Googling "derivatives market" got me a much more successful response. If anybody is interested, this is at least a beginning, for me: http://en.wikipedia.org/wiki/Derivatives_market

Aloha! ;-)

[Bullwinkle]

"Here's a link to back all that up from two knowledgeable guys: "Buffet and Gross" "


I like these guys - have been watching pimco for many years ... problem is as with most of the pundits - they both have a dogs in this fight. Gross dba pimco - now some german outfit - has an especialy large exposure to bond losses and swaps.

my prediction, - things will settle to pre 1994 numbers, and slowly rebound 3500 -4000 may be about right for a bottom

[mgeary]

Okay, I've read the Wikipedia article on "Derivatives Market". Here is the link, again: http://en.wikipedia.org/wiki/Derivatives_market

In that article, the total value of the OTC derivatives market is $596 Trillion as of the end of 2007. Let me ask whether your assertion is true, i.e., that 5/6ths of the value of that market is gone, never to return. By way of comparison, my 457 fund has lost approximately 40% of it's value, compared to 2007 values. In reality, though, I haven't lost anything until I sell the underlying stock mutual funds while the prices are down. The price of the mutual funds is down, and the value of my portfolio is down, but I don't realize any loss at all until I sell the underlying stock mutual funds at a loss.

Likewise with my own real estate investments. Their value is down, perhaps quite a bit, but I don't realize any loss at all unless I sell while the market is down.

Is this apples and oranges, or is there any comparison between "$500 Trillion in bad debt" not being realized until somebody sells all that bad debt at a loss? What would it take for the value of the derivatives to rebound?

Please understand that I'm not being argumentative for the sake of an argument, nor am I being Pollyana-ish. I really want to understand this, and you seem to have a much better grasp than I do. The general economy, and the real estate market, in particular, may have a driving impact on the timing of our move to Puna. I'm headed that way as soon as I can get there, hopefully less than a year from now, but I may be delayed up to another year if the real estate market and my 457 doesn't rebound somewhat. I understand things may not get back to 2007 levels for maybe a very long time, but I don't necessarily need 2007 levels in my investments to retire securely.

Aloha! ;-)

[JWFITZ]

Sure, I understand no one is being argumentative. There's clear winners and losers in finance anyhow and the proof is in the pudding with the accuracy of one's calls.

Since I don't really have time to get into it at the moment, but to engender the conversation--to make a long and very complicated story short--the "derivatives" class is a peculiar class of instruments where, much of the time, "risk" is traded as a commodity, and the "risk" is dependent on the value of the underlying asset(class). All of this is contractual options trading--as there's no inherent value in a "derivative" save what's in the contract. Not only has nearly every asset class in the world been devalued-making the value of the derivatives based on them of very doubtful value--but many classes of derivatives themselves were based on derivatives.

[mgeary]

I got the "zero net value" part of the Wikipedia discussion. For every person taking a "long" position on a derivative, somebody must take a "short" position.

All the people who went "long", even $500 Trillion dollars worth, still hold an investment instrument. Is it not possible for those people to sit on their instruments until the economics change, lessening the magnitude of the loss (analogous to me sitting on my real estate and 457 investments until the markets rebound somewhat), or do derivatives "time out" at some point in a loss or a gain for the holder of the long or short positions, respectively? Olly olly in-come-free, times up, you're screwed?[][][xx(][V][8D]

Aloha! ;-)

[Bullwinkle]

It’s good to remember the in the begining derivatives were improperly rated at aaa by moodys and such.

The ratings of the mortgage pools in the derivatives were aaa .... Because the likes of a.i.g. pledged to insure the derivative pools in case of loss.

When the over inflated mortgage market hit the fan , insurers did not have the reserves when it came to the payout for the investors that bought the insurance. Meanwhile the insured pools or derivatives were listed as assets not obligations on the banks spreadsheets - they were insured right? - allowing banks to leverage the assets for even more!

The reserve requirement being pretty miniscule on aaa paper (as well as outright fraud by the insurers) The banks and others holding this (supposed) asset class took it in the shorts when the pyramid collapsed.

That in turn led to the bailout, masive printing of money etc.

All the fed really did was dilute the losses by printing more cash. Like adding a little (in this example a lot of) water to coffeee that got too much hot. (M1 money supply being the coffee)

That in turn will lead to horrendous future inflation.

[mgeary]

Yah, I get the inflation part, too. It's a pretty scary time for a guy (or gal) on the cusp of retirement. I guess it's a pretty scary time, too, for a new college graduate, anybody employed by a small business, anybody who's been retired for quite awhile, anybody employed by a large corporation...[]

P.S. I don't even know what kind of an emoticon to put anymore. By nature, I like to joke and kid around[], but times are so difficult right now[V], and I'm generally optimistic[8D], and this is the "Mr. Wolf" thread[xx(], you get the idea.

Aloha! ;-)

[Guest]

I think we are all in agreement that things are going to be tuff, but I think we will all pull together and be better for it. This false economy has been going on so long that even folks of modest means have been raise with silver spoons.

As a result our collective priorities are askew. The world crisis will make make us better in the end.

Respect will rightfully go to the Farmer and tradesman instead of the lawyer,accountant or celebrity.