As the World Turns

Dec 21st, 2007 | By Christopher Hancock | Category: Housing

“I do not doubt that a low U.S. federal funds rate in response to the dot-com crash, and especially the 1% rate set in mid-2003 to counter potential deflation, lowered interest rates on adjustable-rate mortgages (ARMs) and may have contributed to the rise in U.S. home prices.”

— Alan Greenspan

Morgan Stanley (NYSE:MS) and Bear Stearns (NYSE:BSC) took one to the chin. They posted their first quarterly losses ever.

Morgan boasts 72 years of banking experience. But somehow, a single trading team in the company’s fixed-income division conveniently fell on the sword.

Its miscalculations were exacerbated by deterioration in the credit markets and a lack of liquidity for subprime and other mortgage-related securities, our friends at CNN report.

Translated: A couple of greedy traders placed a bad bet. More importantly, they placed a bad bet in a bad system. So it goes.

Unfortunately, the epidemic of rogue trading desks spread. So has the propensity to assign blame:

Bankers point to Greenspan. Greenspan dodges. He points to bureaucrats.

“Of course,” the once indubitable chairman writes, “the elephant in the living room is the glaring omission that, while the bubble was inflating, there was a complete lack of regulation for both mortgage origination and Wall Street product ‘innovation.’”

Regardless, bankers need cash. And they need it now.

Initially, they cast their lines in foreign waters. The sheiks and Chinese nibble…but they don’t take the full bait.

So the bankers turn to Atlas (the Fed)…and Atlas desperately wants to shrug. But alas, he grins as his ailing knees bend ever so slightly more:

He knows banks make the world go round. Without them, the disco ball stops spinning. And the seemingly interminable champagne toast comes to an end.

So reluctantly, Atlas offers $20 billion in short-term loans. Investors sigh. The world, at least for now, keeps turning.

But you, dear reader, shouldn’t care. Spending time and energy condemning the arson doesn’t help rebuild the house.

We must look forward. Ignore the headlines. Headlines are simply evidence for something missed, not something found.

It didn’t take an Ivy-clad Ph.D. to magically foresee a bull market in real estate five years ag

And forecasting the “next” great bull market shouldn’t require one, either.

So when we read an estimate by Booz Allen Hamilton that suggests that modernizing and expanding urban water, electricity and transportation systems over the next 23 years would require $40 trillion — “a figure roughly equal to the 2006 market capitalization of all shares held in all stock markets in the world,” we sit up and listen.

We believe you should, too.

Until next time,
Christopher Hancock
December 21, 2007

P.S.: As you may already know, I head a newsletter service called the Free Market Investor. I recently told my readers about a very special opportunity, which I call “The World’s Greatest Growth Stock.”

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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