A periodic blog dedicated to providing commentary and encouraging debate on topics in Economics and Finance.

About Me

Age: 26 Occupation: Private Equity

Friday, April 20, 2007

PIMCO's Bill Gross: Houses 15%-20% Overvalued


Sorry from the absence of posts! Jury duty ("ugh") has thrown a monkey wrench in my whole routine.

As promised, I'll be delivering a "real" buy vs. rent (or anything vs. anything calculation) shortly. Please understand that putting together a good piece of original work (not simply pasting someone else's work) takes a good bit of time... especially when data-gathering is required. In the meantime, I'd like you to check out a great site:

Bubble News Network

If you have some free time at work or at home, this is a great way to get news on the housing bubble without sitting through those annoying pieces on Angeline Jolie's ninth adoption from the planet Skylon.

The link above will take you to an entertaining interview of PIMCO's Bill Gross. PIMCO's (bond fund company) estimates are right in line with mine below. They actually looked at the NUMBERS! What a novel concept.

Always remember: while all analysts / economists see the same things that I do, whether or not they decide to show you those things usually depends on how rich or poor it might make them. If you ever have heard the Latin term "cui bono? (who benefits?)", this is its essence. When examining anyone's "advice," always remember to examine that person's motives... more often than not, you'll find a trail leading to that person's wallet.

PIMCO's angle: While Gross talks about a gracious rescue for housing by the Fed, what he fails to mention is that the Fed has much less control over long-term rates than you might think. Did you notice that the Fed increased its target by more than 4% and long-term rates barely budged? Instead, Mr. Gross is salivating at the hefty returns rate cuts would generate for his short-term bond funds (when rates fall, your existing bonds have interest rates that are now "above market" - people will pay more for them).

For those of you who think that a Fed rate cut might actually work... check out the Bank of Japan's response to their real estate implosion in the early 90's. They dropped rates to virtually 0% - that's right - from 1990 to 2003. What effect did that have? Nada. Leverage, even at 0% interest, has little appeal when prices are declining.

- eternitus


ghu206 said...

Interesting point about Japan. I hope we don't get what they did. Of course, instead of doing something, the Fed will say the problem is "contained" to increasingly larger portions of the economy until it is "contained" in the U.S.

Anonymous said...

That PIMCO guy give me the creepy crawlies!

Anonymous said...

The video that you said is there isn't coming up!

eternitus said...

It looks like a random video comes up when you enter the site. Scroll down to see the PIMCO link and click it. The video should come up.

Enjoy the other ones too!