drscott | Blood on the Street? : Part Deux

Still watching the XLF and not biting, as in my last post on the subject. Waiting for 25 or so (currently at 29.)

Freddie Mac looks like it will require new capital to survive, and Fannie Mae is in deep trouble, down another 25% today at 28, less than half its price last year. Fannie is a giant quasi-governmental institution, and its bureaucratic mismanagement has long been a weakness in our financial system. Fear of more time bombs of unpriceable assets lurk everywhere. Repricing a good chunk of the country's housing stock and then determining what value remains in these mortgage-backed securities is going to take a long time, and the players are still scrambling for the chairs long after the music has stopped. Meanwhile, here in the Bay Area, the most desirable places to live continue to rise in price, while in suburbs not so far away, markdowns, auctions, and foreclosures rule.

I'm not going to write too much about this because I need to pack for our Thanksgiving in Palm Springs, but I just finished reading (long after everybody else, as usual) the bestselling book The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb -- you can review the basic points it makes here. It's a bit of a rant, but a healthy corrective to the quantitative risk management strategies followed in recent years by financial firms following the lead of Nobel-prize-winning economists. As he says, trust a trader, not an economist, when you're talking about real money. All of our recent financial blowups have been due to short-term profitable strategies that depend on using statistics about the past and assuming future risks will follow Gaussian bell-curve statistics; the reality is that events are not stochastic, herd behavior exists, reality "leaks" and doesn't conform to models.