And Another Thing -

I’m not done ranting about the Fannie/Freddie bailout yet. My wife and I were discussing it last night, and she said, “Isn’t increasing their credit lines like somebody getting a credit card with a $10,000 limit, and they charge it up to the limit, then the bank sends them a letter telling them that it’s increasing the limit to $15,000?”

Which, of course, happens all the time, so ingrained in our collective psyche is debt addiction, so it’s little wonder that it extends all the way to our institutions, which, after all, are run by people.

“Yes,” I said, “but in this case, the letter is sent after the cardholder has not only charge up the balance to the max, but has started missing payments.”

Perhaps a better analogy is a crack addict who’s admitted to the hospital after a near-fatal overdose. After saving his life, the doctor asks who his dealer is, and how he can contact him. So the doc calls the dealer and asks him to up the addict’s daily supply of crack. When the dealer asks who will pay, the doc says, “Don’t worry, the hospital will cover it – we’ll just raise the prices we charge everybody else for medical care.”

Apparently the markets don’t like the bailout either. In fact, I have yet to hear of anyone who does.

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Here’s an interesting item: a credit strategist at Deutsche Bank has come up with a pretty intuitive reason why total financial losses are likely to hit a trillion dollars or more (they’re currently at $400 billion, and I’ve seen estimates ranging from $1.2-1.6 trillion).

He notes that since the dot-com bubble, the US financial sector has seen annualized profit growth well in excess of nominal GDP growth. Based on that, he concludes that the sector has earned $1.2 trillion in “excess” profits, unless one can demonstrate that “the financial sector has seen a sustainable structural change in its business model over the last decade or that it is uniquely positioned to exploit strong global growth.”

Now, I could possibly buy into the latter, at least to a limited degree, but I know for a fact the former is not the case. He goes on to conclude that “mean reversion would suggest that $1.2 trillion of profits needs to be wiped out before the US financial sector can be cleansed of the excesses of the last decade.”

This may seem an over-simplification, and those who choose to look at the world through rose-colored glasses will, of course, reject the notion. But on what basis? The tired argument that “things are different this time?” “We’re in a new economy?”

I said it in 1998, and I said it again last year, and I’ll say it now, and until I’m blue in the face: We have not been in a “new economy” since we were all wearing animal skins and trading rocks.

I’m a big believer in mean reversion. I used the same logic to look at excess home building above long-term demand projections from the beginning of the decade to the peak of the housing bubble in 2005. I concluded that builders had built 1.4 million excess homes relative to demand. Based on that analysis, in mid-2007 I predicted that housing starts would fall to less than 700k annualized over the next two to three years. At the time of my prediction, starts were at 1.3 million annualized. As of May – about a year after my prediction – they were 975k, or about halfway there.

Like it or not, some things are indeed mean-reverting.

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One more sign of the times: I saw an ad on CNBC this morning for some ambulance-chaser law firm saying, "Did your broker sell you auction-rate municipal bonds? You may have a claim!" That was a new one on me.