Daily Archives: July 2, 2014

Yellen drives wedge between monetary policy, financial bubbles 1

Reuters has an article Yellen drives wedge between monetary policy, financial bubbles.

Monetary policy faces “significant limitations” as a tool to counter financial stability risks, Federal Reserve Chair Janet Yellen said on Wednesday, adding that heading off the U.S. housing bubble with higher interest rates would have caused major economic damage.Weighing in on a global debate, Yellen reiterated her view that regulation – not rate policy – needs to play the lead role in combating excessive financial risk-taking.

“The potential cost … is likely to be too great to give financial stability risks a central role in monetary policy discussions,” Yellen said at an event sponsored by the International Monetary Fund.

So what should the Fed Chair do when she knows what the regulators ought to do, but she also knows there is little likelihood that they will do it?  At least she is speaking out more forcefully on what they should be doing than any previous Fed Chair, including Bernanke, ever did.

It really irked me when the Fed Chair would testify before Congress and I could clearly see what he would like to have told his inquisitors, but was either to diplomatic or too afraid to tell them what they needed to hear.

It is another example of the Congress’s actions and  inactions forcing the Fed to have to work at cross purposes to what Congress is doing and what they aren’t doing.

Target Stores Took a Stand

I received an email today about Target.

Steven —

I have some breaking news: This morning, Target took a stand for the safety of our families by officially asking its customers nationwide to leave their guns at home before shopping in its stores.

“Bringing firearms to Target creates an environment that is at odds with the family-friendly shopping and work experience we strive to create.”1
– John Mulligan, Target CEO

The rest of the email is posted on Facebook for you to share.

I hope I helped when as a Target investor, I sent them a copy of my suggested poster from my previous post Target: Create Gun Sense Policies in Your Stores.

Warning We Shoot First Poster

Well Placed Sympathy, Misplaced Punishment

I tried like heck to withhold comment, but I am really troubled by what is going on.

The sharing of the Facebook post by Senator Dean Skelos, is what set me off.

Post from Senator Dean Skelos

Some of the text that went along with this image is:

Every time Israel makes an attempt at peace, it is met in return with missiles, kidnappings and murders from Hamas. As such, Israel should do what it feels is necessary to protect its citizens. I am hopeful that those responsible will be found and quickly brought to justice.

My comment on this post was:

Yes, I have sympathy for anybody who is kidnapped or anybody who is murdered. I just worry about the political uses this sympathy is being put to.

I refuse to be riled into approving inhumane treatment of Israeli Arabs in general, no matter what some of them may do. We didn’t like collective punishment when the Germans used it in WWII, and I don’t like it now.

By the way, how well did the Germans do with their policy of collective punishment? Did they win a war or something?

Just as I disapprove of the inhumanity of the right wing in the USA, I disapprove of the inhumanity of certain elements in Israel.  I also disapprove of the inhumanity of some Arabs.  I can understand why some Israelis feel the way they  do.  I can understand why some Arabs feel the way they do.  I do not approve of the actions of either side when it leads to inhumanity.

Senator Dean Skelos

Temporary President
Majority Coalition Leader
New York State Senate

Who could possibly have foreseen this result – Violent clashes as Palestinians demand justice after teenager’s body found?

Tensions between Israelis and Palestinians escalated further on Wednesday, with the discovery of a body believed to be that of a 17-year-old Palestinian boy who had been abducted hours earlier from an Arab neighbourhood of East Jerusalem.

The badly burned body, thought to be that of Mohamed Abu Khdeir, was found in an area of forest to the west of the city a day after the funeral of three Israeli teenagers who were kidnapped and killed three weeks ago. The discovery prompted widespread accusations from Palestinians that he had been murdered by Jewish extremists in a revenge attack.

Wolf Richter: How Private Equity Firms Manipulate the Buy-to-Rent Housing Racket

Naked Capitalism has the story Wolf Richter: How Private Equity Firms Manipulate the Buy-to-Rent Housing Racket.

Instead of trying to sell their tens of thousands of homes, Blackstone and American Homes are selling synthetic structured securities that are backed, not by mortgages like the toxic waste that contributed to the financial crisis, but by something even worse: rental payments, based on the flimsy hope that these homes will stay rented out. The already dumped $3 billion of this stuff. Wall Street is jubilating. The fees are going to be huge: the market for this type of synthetic concoction is estimated to be $1.5 trillion.

I have heard the term rent backed securities, but this is the first article that I have read that explains what they are.  If mortgage backed securities were the toxic asset that caused the last crash, I didn’t need an article to tell me that rent backed securities would be even more toxic.  Still, it is better to know the details in order to try to protect yourself from investing in this “asset”.

I am afraid that some investment grade bond funds do invest in these types of “assets”, so it is not that easy to protect yourself if you want “investment grade” bonds.  I know I have some exposure to this, but it is quite small.

As for protecting yourself from the indirect impact of this folly, good luck to you.  Don’t depend on government regulation to save you.  Even if you are not a believer, prayer may be your only hope.

For the doubters to my cautionary tale, I am going to do some research on what the investor actually gets when buying a rent backed security.  Untill I find that information, I found another interesting article about this.

Here We Go Again: Step Aside RMBS, Rent-Backed Securities Are Here, And With Them The Beginning Of The End

I still haven’t found the answer I am seeking, but I did find the Seeking Alpha article The Newest Trick In The Book: Rent-Backed Securities.

Then, there is the issue of managing the properties itself. In 2012, Blackstone formed a subsidiary, Invitation Homes, to fill this role. According to numerous tenant-filed grievances, it is anything but. Reports complain of cockroaches, unaddressed maintenance requests, and even larger structural issues. Meanwhile, an even larger problem looms. Poor management is the primary cause of vacancies, and empty units eat away at an investor’s promised return. If Blackstone, or any other property owner, is ever pushed to default, thousands of families may get evicted, even if they have never missed a month’s rent.

It is just amazing how hard it is to find out exactly what you get in a rent-backed security.

Motley Fool has the article Will Rental-Backed Securities Be a Hit with Investors? which does not answer the question either.

While the whole concept of lease-backed securities sounds a bit shaky, that might be just what investors crave in these times of low-investment returns. Not only can rental checks be counted on less than mortgage payments, but these securities would not have the backing of Fannie Mae and Freddie Mac, as most mortgage-backed securities do. This makes them more risky, but also increases the potential for higher returns. Particularly with the Fed scooping up MBSes, this new type of security will likely have investors lining up to buy them.

OK,I give up. I cannot find an explanation of a rental-backed security that explains what happens when the rents run out, you stop getting your income payments from the security, and the security becomes worthless. In particular, I want to know who owns the real-estate from which the rent was to be derived. My suspicion is that is is not the investor in the rental-backed security.

Does it strike you as odd that there is a huge market in these securities, but you cannot get a definition of what you are buying when you buy one of these securities?

I emailed info@blackstone.com.

Please point me to a prospectus for a rental-backed security.