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Peter Schiff

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Peter Schiff Recession prediction!

In this video from Aug. 2006 Peter Schiff in relatively high detail explain exactly the chain of events that cause the horrible recession we are just beginning to pull out of. He now looks like he had a crystal ball in his back pocket. The other guy is comedically wrong about just about everything he says and I'm sure he probably has a hard time living this down (although I would have been hard pressed to tel you who was more right at the time. if only more people were as smart as Peter Schiff, myself included.

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Shame he didn't time it. I don't blame him, though - imagine trying to short tech stocks in 1999! You'd have been smoked several times over only to see your thesis becoming right from the sidelines.

Laffer is a bit of an idiot. It was much easier to justify the bubble than he makes it. (considering how he dresses, I have a lot of trouble seeing him as a serious financial player, anyway - it's really not that hard to iron a white shirt and keep a sober tie for an appearance on TV!) The core idea was that of strong home equity replacing conservative savings, which was backed by house prices never falling since the second world war; the problem with that idea is that the reason for ever rising house prices was ever more present government subsidies, direct ($$ to GIs returning from Europe) and indirect (Fannie and Freddie destroying lending standards on Barney "Wesley Mouch" Frank's orders).

As ever, I strongly, strongly recommend Zuckerman's exceptional book, "The Greatest Trade Ever", which will tell you what Schiff should have done (but, I guess, couldn't, as CDS were not available to retail, and even Paulson had to fight pretty hard to put on long CDS positions). The core idea in that book was that CDS allowed you to go short (sell) mortgages without taking a dangerous position in the underlying; they are a kind of insurance contract. They make governments very uncomfortable because they provide a new and powerful way of getting prices closer to reality. A trader who is short a country's government debt is always "an evil speculator", anyway :D

Also recommend Drobny's "Invisible Hands" chronicling how ten exceptional managers made it through the crash; he also goes over the epic failure of the endowment model which, you guessed it, was based on asset prices ever increasing (it was quite astonishing that Harvard etc. were eating into their principal, anyway).

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Yea Fannie and freddie actually played another key role besides adding a bunch of government money to the mortgage market. They wrote the underwiting programs based on all sorts of regressions on housing data. But the data came from a period where the mortgage market wasn't flooded with money(i.e anytime before 2000 or so). Since this was the case all housing prices busts were regional and offset by housing booms elswhere so the models basically operated with the assumption that a nation wide housing bust was impossible. because of this their underwriting programs seriously mispriced the risks involved. Since Fannie and Freddie were such significant players in the market their pricing was able to move the entire industry to their underwiritng programs. I think that was the biggest factor, other than maybe the fed keeping interest rates so low, in the housing price boom and bust.

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