March 2015 Newsletter

Issue Three, Volume Sixteen

THE ENDING OF AN ERA

While the primary topics of my newsletters are almost always in the realm of finance or the economy, I do try to make bold predictions when I think they are there to be made. Some of them over the years have been pretty darn good and have made me extremely proud, especially when I was often very alone in making them.

One of those times was when the NASDAQ broke the 5,000 level for the first time back in March of 2000. Some of you remember how I was railing over the value of many of the Dot-com stocks at that time and the day the 5,000 level was broached it got my shorts in such a knot that I cranked out an edition of this newsletter and sent it out to my list on March 24, 2000. This is what I said:
--"Over the next ten years nearly any other asset category will outperform stocks."
--"The stock market still goes down. We just haven’t seen it in a while."
--"There are lots of people managing money who haven’t got a clue what a bloodbath looks like."
--"In as little as 10 years, college professors will be talking about this period of U.S. stock market history as one of the ‘classic’ speculative bubbles."
--"Of the Internet ‘pure plays’ trading right now, probably 90% of them will not exist in five years."
--“It might be a long, long time before you see 5,000 on the NASDAQ again. For example, if you are currently in first grade, it might be sometime not long after your high school graduation. Sorry for that.”
That newsletter resulted in a flood of “you suck” email, but also some heartfelt notes from concerned friends thinking I had made a fool of myself by adding the “10 years” before we recover the 5,000 level. These friends indeed used the word “foolish” to describe me predicting such a thing. To defend the prediction I drew a parallel to the Japanese stock market, which still sits almost exactly 50% lower than its record high set in December of 1987. Yes. You heard that correctly. The Japanese stock market is 50% lower than it was nearly 28 years ago. The most troubling thing to me was how dismissive my American friends would be when I offered up this comparison to defend myself about the 10 year prediction when they would say that it was “only Japan”. Wow! Only Japan; the second biggest, second most sophisticated industrial economy in the world and it happened to them, but it can’t happen to us? That level of ignorance and ego was a pretty frightening thing for me to witness honestly.

If you haven’t been watching closely, the NASDAQ finally re-reached the 5,000 level a few weeks ago. So my 10 year prediction was moot since it actually took 15 years to recover.

I titled my March 2005 newsletter “Real Estate is Over” and proceeded to make my case that the lending and real estate values that I thought were outrageous were unsustainable and would end soon. If you Google “Mike Gasior Real Estate is Over” you will still find the hundreds of places that re-ran my predictions back at that time.

When much to my surprise the real estate hadn’t collapsed by April of 2006, I told the story of a fictional couple “Mr. & Mrs. Ben Dover”. While the couple was fictional, their story was one I cobbled together from the circumstances from real life people who I had witnessed living WAY beyond their means thanks to massive mortgages and home equity lines of credit.

While my real estate prediction was two years early, the market managed to get several levels more outrageous than what I thought was ridiculous in 2005. I needn’t tell you what has happened to the market and economy since.

My bold prediction for this month isn’t particularly bold, nor am I alone in my sentiments this time:

The recent period of very low interest rates is near its end.

Many of you have heard me say in person during my courses or speeches over the past 18 months that interest rates are going to rise from these levels. And when they do, most of you will not see these lows again during your lifetime unless you are extremely young.

Obviously predicting rates will rise when they are damn near zero is nothing bold nor unique. I can’t, and won’t, even predict that the rise is imminent, or even soon and nobody else can either. What I do want to talk about this month is how and why rates are going to rise, what is going to be the cause and how this rise is likely to be violent, unexpected and not AT ALL the decision or policy of the Federal Reserve. In fact, when the rise does indeed occur, the Fed and U.S. government will likely find themselves in a hurt locker unprecedented in modern fiscal history.

But before telling you those thoughts, please indulge me in talking a little business.

ALSO, ANOTHER UPWARD TREND

Since 2008 I’ve written about my concern of organizations trying to accomplish more each year with less staff. To make matters worse, the organizations also reduced their commitment to training the people who remain. So I was pleased to read a release by The Association for Talent Development’s (ATD) “2014 State of the Industry” report, which was released in December. It was encouraging to hear that on average, employers spent $1,208 per employee on training and development initiatives during 2013, representing an increase of $13 from the average $1,195 spent per employee in 2012 and the first increase since 2008.

Also nice to read was that the most popular method of formal learning in 2013 was instructor-led classroom delivery since many of you know how much I enjoy presenting my sessions. In fact, the survey found that the role of instructors remains strong - with close to 70 percent of training being led by an instructor.

I realize your budgets are not what they used to be. Last year we began offering clients what I think is the most amazing “bang” for their training budgets with completely flat rate pricing for seminars for your staff. It is easily the most affordable and straightforward pricing in the professional development industry.

You can choose any of our “standard” training sessions viewable at the below link, or we will craft a custom agenda of topics that perfectly suit your audience’s needs. A two-day session at your location for 12 people or more, the entire cost of getting your personnel the finest institutional investment training available is only $400 per person.

That $400 per person price includes:
--Two days of professional instruction for your audience presented by me personally.
--A digital reference library of materials for each attendee for use after the program that we have updated for 2015.
--Continuing education credits for many professional designations like CPE and CLE.
--Any and all travel costs for me to get to and from your location.

We have never offered such an economical option in all of our 26 years. I also offer a completely flat daily rate for consulting engagements should you require as much talent as exists in the financial industry for help on any of your ongoing or upcoming projects at your organization.

Please visit these links for all the information you should need:

http://www.afs-seminars.com/in-house-seminars/

http://www.afs-seminars.com/about-mike-gasior/

http://www.afs-seminars.com/expert-research-testimony/

Using Cisco’s WebEx technology, we can also deliver live training sessions to your staff as a Webinar with your colleagues at their desks, in a conference room or in any corner of the world. Please visit this link for more information on this amazingly efficient option:

http://www.afs-seminars.com/custom-webinars/

If you need to reach me please feel free to call my offices at (860)301-0732 or email me at mike@afs-seminars.com

Now on to this month's newsletter.

NO FAT LADIES ARE CURRENTLY WARMING UP

I have already turned over my cards and told you my bold prediction that the current environment of very low interest rates is nearing its end. With that said though, it is important to understand that any upward spikes are imminent.

Last month we discussed the Federal Reserve and the precarious position they find themselves in with their $4.5 trillion balance sheet filled with long term mortgage backed and Treasury securities. We have already arrived at a place where the monthly price changes of these holdings can wipe out the entire capitalization of the Fed many times over, but they are saved from failure because “mark to market” accounting does not exist for them as it does every other financial institution. Also, if rates were to increase, it would increase the effective maturity of much of that portfolio, making the price changes even more amplified and painful.

To summarize, the Federal Reserve has no intrinsic desire to have interest rates rise. In truth, it would be destructive to the economy, state and federal budgets, real estate values, their own QE portfolio and more.

The fact is the Federal Reserve and other central banks tried desperately to increase interest rates after the 2008 crisis in the exact same manner Japan did when that economy cratered after 1989. Yet Japan remains in a minimal growth environment and as bad as U.S. growth has been, Europe would literally pee themselves with joy to have it for themselves.

There is hardly any growth going on and as I write this 3-month Treasuries are yielding 1/100th of one percent while 30-year bonds yield 2.50%. The fixed 30-year mortgage rate is under 4% everywhere in the United States and yet home sales are going down literally month after month. You don’t have to be an economics dork like me to think that this doesn’t seem to make any common sense nor sound like a very good situation.

Yet the economists and the common man sat on pins and needles to wait for the earth shattering news that the Federal Reserve has removed the word “patient” with regard to their position on keeping interest rates low in the future. Everyone could only ponder that the Fed would soon be raising rates and even some Fed officials floated a time as early as June for this possible turn in policy. Truthfully, I wondered something myself:

For God’s sake, what in the hell is the matter with you people!!???

The U.S. economy sucks.

Europe’s is worse.

Nobody even thinks about Japan as an economic player anymore.

Real estate is dead in the U.S. at these epically low mortgage rates.

The federal government and every state is in massively more debt than they were 7 years ago.

The Federal Reserve has a $4.5 trillion dollar portfolio of long term bonds that will get crushed, value-wise, if rates rise.

But yet you people believe hook, line and sinker that the Fed is sincere in this nonsense about raising interest rates. Well you can be Thelma to Janet Yellen’s Louise and hit the gas pedal then, since even a non-dork would have to think that it would be just about the stupidest thing anyone has ever heard of. The facts are simple here.

The Fed is not raising rates anytime soon.

The Fed is not stopping Quantitative Easing anytime soon.

They can’t.

Which brings me back to my somewhat bold prediction about the ending of this low interest rate era. I said it would be unexpected and violent when it happens and I will honestly say that the cause will be something that literally no one saw coming. Do me and yourself a favor and admit that it WILL happen. Stop sounding like a fool by saying “if” rates were to rise or “if” the stock market were to go down. Rates, markets and prices all go up and down. Always have. Always will.

The likely cause will be some crisis of confidence brought on by the something that will be unexpected. Could be terrorism. Natural disaster. Pandemic. War. Coup. Who knows.

But one thing I will tell you from experience is that I have watched enough “one in a hundred year” events in my adult life that I should be 3,000 years old. One thing that worries me is that each financial crisis I have witnessed seems to be worse than the last one and they seem to be coming on more rapidly.

I vividly remember staring at my Quotron terminal in October of 1987 and watching the U.S. stock market drop 20.7% in one day. It was difficult to imagine anything being worse than that until Japan watched their stock market fall 80% over a 13 year timeframe.

The 1990’s brought on a slew of losses in OTC derivatives and the near collapse of the world economy thanks to one hedge fund in the summer of 1998. Had it not been for an intervention by the Federal Reserve back then we may have not enjoyed the Dot-com bubble bursting in 2000 and bringing on the recession that was multiplied many times by the events of 9/11.

The declining interest rate climate of that recession then led to the newest bubble in real estate and new mortgage products for investors. These culminated in 2008 when nearly every major financial institution would have failed if it were not for the intervention of governments and central banks. This intervention was deemed necessary and sold to the public because the institutions were “too big to fail”. Thus, minus my former employer Lehman, they were all spared failure.

All of the institutions not only didn’t fail, they are all literally bigger than they’ve ever been. Even better, the Federal Reserve allowed investment banks like Goldman Sachs and Morgan Stanley to act like real banks and join the Fed as members. Making it possible to borrow untold billions and billions dollars from the central bank at a nearly 0% interest rate. How lovely indeed.

So to summarize, rates are going to rise. I don’t know when. I don’t know why. What I know is that when they do, it won’t be the decision of any bankers, it will happen violently and it will probably create a crisis worse than the 2008 one since that certainly seems to be the pattern. The thing that has me the most scared is that I worry it is going to be much sooner rather than later.

I’M THROWING MY HAT IN THE RING

No, not the presidential ring. I think the 90 candidates we’re probably going to have running in 2016 is more than enough for anyone. I want to join the chorus of Elon Musk, Stephen Hawking, Bill Gates and Steve Wozniak in saying that I’m also afraid of the threat of artificial intelligence to mankind in the not very distant future.

This isn’t my usual, old fart crankiness about how I want technology to “get off my lawn!” I’ve always been a technology geek and often an early adopter besides. I bought my first computer, an AT&T XT clone in 1986 for three grand and still have that boat anchor stored someplace for the Mike Gasior Technology Museum. But I was always aware of “Moore’s Law”, which theorizes that computing horsepower effectively doubles every 18 months. For the record, Gordon Moore claims to have never said exactly that, but the technology industry indeed took it upon themselves to make it their business model and now my iPhone has far more computing horsepower than any spacecraft that went to the moon and back.

Now it’s definitely easy to cast myself into the aforementioned group of literally some of the smartest humans on earth. My reasons for doing so aren’t just because I’m a big fan of technology. I am also a big fan of Terminator.

James Cameron originally came up with the idea for Terminator in 1982 and would finally get the movie made in 1984. If there is any way you don’t know the plot of the movie (I’m sad for you), computers/machines basically take over the world in the future via a nuclear holocaust. In 2029 the machines send Arnold Schwarzenegger back in time to kill the mother of the man who leads the human resistance against the machine’s domination. If you want a horrifying factoid, the studio wanted O.J. Simpson to play the Terminator role.

Almost 33 years have passed since James Cameron thought of this fictional, apocalyptic future, but it increasingly doesn’t sound nearly as farfetched as it used to. Cars are now driving themselves for one quick example.

I’m not sure what we’re all supposed to do to prevent it, but that’s why my name isn’t Musk, Hawking, Gates or Wozniak. It is very much like my worry about interest rates in as much as it seems unavoidable.

Finally, if you think artificial intelligence isn’t impacting your everyday life very much currently, then you probably didn’t know robots are already writing a lot of the sports stories for the Associated Press. Read it for yourself in the Huffington Post:

“Robots Take Over The Sports Section” - http://huff.to/1AIMkIa

YOUR MARCH BRAINTEASER

I have to be honest and say that I really like this month’s brainteaser. This isn’t because I totally froze up and overthought it myself, but because it really requires you to think quickly and logically. It is actually an interview question that was given to candidates for a Wall Street trading firm. Give it a shot and remember to stay calm and think.

“A scientist puts a bacteria in a petri dish at exactly noon. Every minute, the bacteria divides into two. At exactly 1 pm, the petri dish is full. At what time was the dish half full?”

Give it a good chance before bailing out and checking out the answer at this link. Good luck!

http://www.afs-seminars.com/brainteaser-answer/

Copyright 2015, Michael Gasior. All Rights Reserved

February 2015 Newsletter

Issue Two, Volume Sixteen

THE FUTURE OF FANNIE MAE & FREDDIE MAC

Truthfully, I plan to talk about much more than just the future of the two mortgage giants this month, but I thought that title would be eye catching.

Even though we have barely begun 2015 it is readily apparent to me that there are massive forces at work in the world economies that may affect nearly every human on earth. The wild card question is whether the effects will be minor or earth shattering. Since the onset of the financial crisis of 2008 there have been many extremely bold experiments taking place in business and finance that have no precedent in modern history. This makes predicting or modeling the potential outcome of these experiments completely impossible and anyone who tells you otherwise is either a fool or a liar. In bullet form, consider some of the unprecedented things that have taken place since 2008 that I plan to expand on in this month's edition of my newsletter:

--The government of the world's largest economy not only intervenes in 4 of the world's largest corporations, but essentially takes them all over in one way or another; General Motors, AIG, Fannie and Freddie Mac. All four continue to exist in one form or another to this very day.

--The explosion of "Quantitative Easing" as a tool for central banks to manipulate economies into a false sense of security while exploding their balance sheets as well as the debt of their countries. The Japanese invented it in the 1990's. The United States took it into the stratosphere during the past six years. Europe is now heavily considering kicking off their own QE campaign at any moment.

--A recent war launched from many different agitators against the price of oil. During recent months, nearly every day oil gets cheaper. On the face of it American's would think this is a fabulous thing. I will explain later how these kinds of things have the capacity to slow the U.S. economy right into a stall.

So those are my serious topics for the month, but I will also make yet another case for why we should beat our politicians with ball peen hammers. But first a quick moment of business.

SPECIAL 2015 PRICING FOR TRAINING AND CONSULTING

While part of me is somewhat shocked that I enter my 26th year in business in 2015, the overwhelming emotion I have is pride in that accomplishment. I've made many friends in the financial industry during that time and was excited to visit several clients last year that I have had 20+ year relationships with.

Since 2008, there have been many changes in the industry where I have worked my entire adult life and those include reduced staffing, budget cutbacks and considerable reductions in the amount of resources allocated toward training and travel. This contributed to me being pulled more frequently into endeavors I had never really imagined for myself. Namely as a consultant and expert witness in cases regarding mortgages and investments.

Having spent 35 years in this life I realize your budgets are not what they used to be and last year we began offering clients what I think is the most amazing "bang" for their training dollars with completely flat rate pricing for seminars for your staff.

You can choose any of our "standard" sessions viewable at the below link, or we can craft a custom agenda of topics that perfectly suit your audience's needs. For a two-day session at your location for 12 people or more, the entire cost of getting your personnel the finest investment market training available is only $400 per person.

That price includes:
--Two days of professional instruction for your audience by me personally.
--A digital reference library of materials for each attendee for use after the program.
--Continuing education credits for many professional designations like CPE and CLE.
--Any and all travel costs for me to get to and from your location.

We have never offered such an economical option in all of our 26 years. I also have a completely flat rate per day for consulting engagements should you require as much talent as exists in the financial industry for help on any of your ongoing or upcoming projects at your organization.

Please visit these links for all the information you should need:

http://www.afs-seminars.com/in-house-seminars/

http://www.afs-seminars.com/about-mike-gasior/

http://www.afs-seminars.com/expert-research-testimony/

Using Cisco's WebEx technology, we can also deliver live training sessions to your staff as a Webinar with your colleagues at their desks, in a conference room or in any corner of the world. Please visit this link for more information on this amazingly efficient option:

http://www.afs-seminars.com/custom-webinars/

If you need to reach me please feel free to call my offices at (860)301-0732 or email me at:

mike@afs-seminars.com

Now on to this month's newsletter.

THE FUTURE OF THE U.S. MORTGAGE MARKETPLACE

For the purpose of full disclosure, I have had relationships with both Fannie Mae and Freddie Mac over the past 26 years, but I have no intention to share a single morsel of information regarding them. I will simply say that over the years I have taken money from them both and one has been among my favorite clients for over 20 years and I visited them as recently as a couple of months ago. That said, my commentary won't be tainted whatsoever by those relationships and I will tell you right this moment that neither of the two organizations was even close to bankruptcy when the government rushed in to put them under "conservatorship". I was actually at one of them on the morning the government took over and ended up presenting the four days of training that I was scheduled to present, albeit with some interruptions for hastily called, company-wide "town hall" video conferences.

Most of you who have read me for years know I am a big believer in giving hard core facts and information early on for you to digest before I begin down my path of where my story is going to lead. So here goes:

--Ginnie Mae was the ONLY of the three agencies that was always part of the U.S. government since their creation in 1968 and their obligations have always been directly guaranteed by the government. Also, the ONLY kind of mortgages that Ginnie Mae packages into the pools are government sponsored ones like FHA and VA loans.

--Fannie Mae and Freddie Mac both operated as GSE's (Government Sponsored Enterprise), which gave the two publicly traded companies (and both continue to trade at about $2 per share as I write this) a special status of an "implied" guarantee of their respective obligations were they to ever fail. Even most Americans are unaware of these "special" public and private companies that continue to operate as defacto "government" entities like the 12 Federal Home Loan Banks and others. Until the conservatorship of Fannie Mae and Freddie Mac in 2008, the government had never intervened before or since.

--As I write this, about 95% of ALL mortgages being issued in the United States are being packaged into mortgage-backed securities issued by one of the three agencies. All three carry guarantees to investors from the U.S. government regarding the safety of every penny of interest and principle owed by the homeowners. To sum up my point, there has NEVER been a penny of interest or principle owed to an investor that wasn't paid and paid on time. That means the payments of these pennies was never a day late either.

This system had worked wonderfully for nearly 40 years until 2008 happened. By and large, the three agencies had nearly nothing to do with the "housing boom" (please inflect much sarcasm into those words if you know the sound of my voice). They also had literally NOTHING to do with the subprime and other mortgage risk monsters created by lenders and packaged by Wall Street that created the disaster that still hangs over the economy much like the cloud over Pigpen from the Charlie Brown cartoon. In fact, the government kept both Fannie Mae and Freddie Mac from raising their lending limits per mortgage during the run up (making it so in many markets you could basically buy no house with a "conforming" loan that Fannie and Freddie could package). Both agencies actually have pretty strict lending standards for borrowers that Congress squeezed them to loosen to make it possible for more people to qualify for loans during the rising housing crisis.

Now after that avalanche of facts and figures, let me approach the point of this topic to exploring what the future of Fannie Mae and Freddie Mac may hold. I say "may hold" because no one honestly knows. The government has said nothing about their plans at any level. The companies themselves don't know either. At the beginning of the training session I delivered at one of them a few weeks ago, within the first 30 minutes of the seminar, one of their employees asked me:

"What do you think will ultimately happen to us?"

The truth is, I have actually thought often and long about that very question ever since that Monday in 2008 when I was an eye witness to the government's intervention. In response to the question I went on a 25 minutes tirade about my latest feelings about what the trajectory of their future looks like to me. Then right after that tirade I told that audience what they just heard was going to be the subject of my next newsletter. This is that newsletter.

When the "conservatorship" first happened I thought (and told the people at the company) that the government would likely get their arms around the risks that existed within the business and then eventually sell the companies back off to investors after they were healthy again and the storm had passed.

I then went through a phase where I felt the government was running the two agencies more like social programs than a business and my definite feeling was that the government may indeed be running them down and ultimately closing them. But then something happened that changed my mind about that.

An important fact to know is that through the takeover the government received warrants (options effectively) to purchase 79.99% of all Fannie Mae's and Freddie Mac's outstanding common shares for an exercise price of one-thousandth of a U.S. cent ($.00001 price per share). This would obviously make the U.S. government the largest shareholder by far of both firms and in complete control.

Another worthwhile fact to throw in here is that the government agency that regulated the two GSE's both prior to and after the takeover is the Federal Housing Finance Agency or FHFA. They are relevant to this story because in 2012 they instructed Fannie Mae and Freddie Mac to create a brand new, third agency that will do ALL of the actual securitizations of the mortgages into mortgage-backed securities. This new entity is called:

Common Securitization Solutions, LLC (CSS) and was established by the companies to build and operate the Common Securitization Platform (CSP).

The singular purpose of CSS and CSP is to take mortgages from either Fannie Mae or Freddie Mac and turn them into securities to be available for purchase by investors all over the world as they have been for many decades. So basically instead of packaging the mortgages themselves as they always have, they will instead run them through this new CSP format.

Over the past two years I would have many people attending my sessions that were in one form or another working to make this whole CSP idea something that would be actually functional. Needless to say, I would get tons of questions or requests for suggestions about what I thought of this new situation, but I was in no position to know anything since CSP didn't exist yet, nor had anything like it ever existed.

Then last May I received a document from the FHFA. It was literally labeled as a "Scorecard" of the firms they regulate. Though only 6 pages long and mostly bullet points, it immediately made a light bulb go off in my head. More like a lightning bolt. If you read two of the major goals listed at the tops of pages 4 and 5 you will read these words:

"Reduce taxpayer risk through increasing the role of private capital in the mortgage market. [30%]"

"Build a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future. [30%]"

Here is the link to the document if you'd like to read it yourself:

http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2014Scorecard051314FINAL.pdf

BINGO!!

Two things leapt off pages into my head; "…increasing the role of private capital in the mortgage market" and "…adaptable for use by other participants in the secondary market in the future."

I had always wondered why the government never took the companies over in a true earnest way and instead left their stocks trading in the markets while the U.S. held on to basically 80% of all the shares. Now I think I know why.

Once this CSP is working with all the bugs worked out and Fannie Mae and Freddie Mac are even healthier (the two agencies have been paying the government billions of dollars in earnings every quarter for the last couple of years) I think the two will be spun off from the government and ALL guarantees by the U.S. will disappear. Basically Fannie Mae and Freddie Mac would become just normal, publicly traded corporations with no affiliation with the government at all. Basically the U.S. will stand behind all obligations from the two issued up to a certain day, and then starting the next day the only assurance investors will get on new obligations will be on the shoulders of the issuer. Not taxpayers.

By the time this day comes, ANY participant in the mortgage business will be able to run their mortgages through this new CSP (providing the mortgages meet all criteria to conform for underwriting standards) just like Fannie Mae and Freddie Mac do.

The two GSE's have operated for decades as near monopolies that could dictate the terms of the mortgage marketplace. If JPMorgan Chase wanted to sell mortgages in the secondary market and have them government guaranteed, they would have to sell them to one of the two GSE's.

Now JPMorgan Chase can send them directly through the CSP and out the other side will come a wonderfully secure mortgage-backed product. No Fannie Mae or Freddie Mac is necessary.

So basically, instead of JPMorgan Chase being the customer of the two now former GSE's, they are a direct competitor. As is Bank of America, Citibank, Wells Fargo….and the list goes on and on.

Given that I have a firm view that the government is largely filled with clown and chumps, this would be a remarkable Houdini type of move for the U.S. to extricate themselves from this potential bottomless pit they could have found themselves in back in 2008.

I mentioned earlier that 95% or more of all mortgages being taken out by U.S. homeowners this very moment are going into a Ginnie Mae, Fannie Mae or Freddie Mac mortgage-backed security. Closing down any of them, much less two of them, would have burned the economy to the ground. The idea that the government may take two of the three off the shoulders of taxpayers and turn them into for-profit concerns and potentially make a fortune on the whole deal besides is more brilliant than I generally expect from inside the Beltway. All without even causing a ripple, much less a tsunami in the mortgage lending business.

If they pull this off I will take my hat off to the government and someone will deserve a medal, because this was an epic undertaking that began at an extremely fragile time in economic history. What will make me quasi sad is that the vast majority of Americans won't even know it happened or the cliff that we could all still end up plunging over.

FED FOLLIES

Speaking of plunging off a cliff to a gruesome death…let's talk quickly about the Federal Reserve.

To get the boring facts and figures situation out of the way before telling you a story, let me begin by saying that the Federal Reserve's relationship with the government is even more complex and convoluted than the two agencies in the previous story.

Fed is a weird entity when it comes to "ownership". It exists due to an act of Congress, but it is also considered an independent entity because it is not part of the Executive or Legislative branches of government. The Fed exists because Congress created it, but it (the Fed) doesn't enact policy measures with any Congressional or Presidential approval. Politically, this makes it a very independent entity. Every year if the Fed makes money via its operations, it pays a 6% fixed dividend on the shares owned by member banks and then remits any left over money to the U.S. Treasury. Most years this is tens of billions of dollars.

With regard to the plunge, cliff and gruesome death, I will need to bring up "quantitative easing" or QE. While nearly every American has heard of this program, damn near no one really knows what it is. So I will explain it to you.

Lots of people seem to have knowledge that the Fed somehow controls interest rates and this is largely true. But the interest rates they actually have any control of are the extremely short term rates used for overnight borrowing by banks. The "Discount Rate" is the rate that banks can borrow from the Federal Reserve directly and the "Fed Funds" rate is the rate at which member banks lend to each other. The problem, when situations like 2008 arise, is that the Fed has basically no control over longer terms rates like those on bonds and mortgage-backed securities. This is a problem because the heart of the housing and credit crisis was a severe spike upward in those longer term interest rates, which could have easily caused an economic collapse that might have been worse than the Great Depression.

Remember that bond prices and interest move inversely to each other and also that the bond market is a supply and demand place like any other market. In 2008 when investors (lenders) got scared, they stopped buying bonds as they normally might and waited on the sidelines hoping for things to improve. With less demand, bond prices fell, interest rates rose and more and more gasoline got poured on a housing market that was already on fire.

In an unprecedented move for the Federal Reserve, they elected to print more dollars and use those dollars to purchase longer term Treasury Notes and Bonds, as well as the mortgage-backed securities from Fannie Mae and Freddie Mac. This caused an artificial rise in bond prices and a corresponding drop in long term rates. The plan was to temporarily fill the vacuum left by the investors who would normally be buying all these products and that the Fed would step aside when the more "normal" purchasers/lenders returned. But they really haven't in the past 6 years.

In that time we've gone through QE-1, QE-2, "Operation Twist" and are now in QE-3.

All told the Federal Reserve who held between $600 billion and $900 billion of securities in their own portfolio, are now holding almost $4.5 TRILLION!

You may be surprised to know that the Federal Reserve is not only the single largest investor in U.S. Treasury securities but also owns 40% of ALL the Fannie Mae and Freddie Mac securities that exist on planet earth.

Remember that position; $4.5 trillion. That's an awfully large investment in longer term bonds, which are the most sensitive to changes in interest rates.

Now one more figure for you; The Federal Reserve has a net worth of about $55 billion. This sounds like an awful lot of money (and I wouldn't mind it accidentally being wired into my checking account) but please step away for a moment and let me tell you what all this means and why you might care.

The Federal Reserve is operating under more leverage than any investment banking firm and very likely any hedge fund on earth. Certainly any large hedge fund.

While I don't keep track or try to calculate it every single month, I will tell you when we experienced a minor interest rate rise back in May 2013, the Fed lost $155 billion in market value that one month. Actually the Fed loses about $3-4 billion in value for every 1/100th of percent that rates increase. And I know what you're thinking:

"Wait a gawd dang minute Mike. That amount is almost three times their net worth. Why aren't they bankrupt?!"

You're right. They did lose three times more than they were worth that month. And they were bankrupt. The only difference is that they didn't have to file bankruptcy because the Federal Reserve doesn't have to mark their holdings to market like basically every other institution in the United States and bully for them.

I don't expect you to be the historian of interest rates that I am, so I will tell you that the rise back in May of 2013 was fairly mild.

I do however expect you to be able to answer these two questions in relative comfort though:

--Can interest rates go much lower?

--Then basically the only direction interest rates can go is which direction?

BINGO AGAIN!

The Federal Reserve has their ass in an economic meat grinder of epic, historical and unprecedented proportion and they know it.

One expression that rose out of 2008 was "Too Big to Fail". I guess we may actually find out.

We can ask the Japanese who pioneered the use of QE coming out of their real estate and stock market crashes of the late 1980's. They will tell us of massive stimulus packages, interest rates of zero for decades, zombie banks and a national debt that is three times the size of their economy. Perhaps they will also mention the "Junk" rating their government debt carries after all this and how China has kicked their ass economically ever since their stumble began.

The European Monetary Union is about give this genius idea of QE a twirl of their own shortly and I wish them Godspeed since I think they will most certainly need it.

And since I mentioned Europe, let me bring up again a prediction I have made here, on radio and in speeches for three years now.

There's no possible way Greece ends up staying in the Euro and there is talk that they may run out of money in literally a matter of weeks. They're done and it's time to put a fork in them. Greece is over. Period. Paragraph.

OIL WARS

Outwardly Americans would think that cheap oil and a strong dollar both sound like fantastic things. While I am personally enjoying filling my tank with sub $2.00 gas, there is a cost associated with it that you might or might not care about.

I understand there is LOTS of contentious debate going on about fracking here in the U.S. as well as the construction of pipelines to bring more Canadian oil into this country. But let's put aside any environmental or political angle to this conversation to agree about one thing. It's working.

U.S. oil exploration and production are both at 25 year highs. Oil production for the first week of December 2014 was almost double what it typically was for that week during the decade of 2001-2011. Add to that fact that global oil supply has exceeded demand for the past six consecutive quarters. All of this has led to what was first a slow decline and then a rapid descent in oil prices.

This has Saudi Arabia's shorts in a bit of a twist since this is basically the only business they have. If you might think I'm making this up, please feel free to Google it for yourself, but recently the Saudi's cut their price of oil for the U.S. while raising it for everyone else. This may strike you as a bit of an odd move for a country with some of the biggest oil reserves in the world. Unless you consider it a declaration of war (price war) with the American and Canadian companies that were recently able to start competing with OPEC on a heads up basis.

There have been announcements already from some U.S. oil companies about cutbacks in people and capital spending so the Saudi's are already having some success at driving these newcomers out of the market.

Of course Saudi Arabia and OPEC don't want cheap oil and want to go back to a time where they picked the music that everyone else danced to. To get5 their wish they will have to successfully throw a wet blanket on U.S. production. Then prices will rise once again.

There are wild cards in this war like Russia and South America who suddenly found themselves getting screwed in the middle of all this since their economies were already bleeding out of every orifice of their bodies and a price war was the last thing they needed.

It won't happen fast up or down, but I encourage you to enjoy these low energy prices since they may not last.

WHY I WOULD ENJOY BEATING POLITICIANS WITH A BALL PEEN HAMMER

I'll make this quick since anyone who has read this newsletter for a while or knows me personally is aware of my personal disgust with politicians of all parties, ilk's and affiliations.

These are the important issues CURRENTLY being proposed by my birth state of Connecticut and my adopted home of sunny Florida. While at completely opposites of the political spectrum, it is "laws" like these that continue to convince me that all politicians are morons.

In Connecticut there is a proposed law to require egg farmers to increase the amount of square inches the laying hens are given for nesting area. Even though I was born in Connecticut and lived there for about 50 years as part of a farming family, I was unaware there was much of a chicken business left here. Federal data actually says that the Constitution State produced 667 million eggs in 2013. Apparently there is, because the cost of changing basically every chicken nest in the state will cost in excess of $10 million to these farmers, who are trying to farm in basically the most heavily taxed state in the country. Genius.

Oddly there will be no change in the law that will keep me from hatching chickens and then killing them to eat. This is allowed to be done as much as I want.

Meanwhile my new friends in Florida have two wonderful new laws in front of state legislators geared toward our school children.

Concealed firearms on campus (HB 19 and SB 180) - These two nearly-identical bills would allow the school district superintendent to designate one person on a school campus to carry a concealed weapon as the school's "safety designee." It would also require school districts to work with local law enforcement to craft procedures for shootings and hostage situations.

Patriotic film screening (HB 77 and 96) - This bill would require students in 8th and 11th grade to watch "America: Imagine the World Without Her," a patriotic film based on a book by conservative pundit Dinesh D'Souza.

I will admit that it does make me very happy to know that all the problems of American society have been taken care of and things are rolling along smoothly. Connecticut politicians are worried about the living conditions of chickens (and not people) while Florida wants MORE guns on school grounds and mandatory reading much like those old classics like "Maos - Little Red Book" and "Mein Kampf."

Wonderful. Just wonderful.

YOUR FEBRUARY BRAINTEASER

This month's brainteaser is one that I like for several reasons. I think it's trickier than you expect and more layered, but it also has the occasional chance of being applicable in everyday life. Not many of these mind twisters can offer that practical feature.

So take a deep breath and consider this question:

"Three envelopes are presented in front of you by an interviewer. One contains a job offer, the other two contain rejection letters. You pick one of the envelopes. The interviewer then shows you the contents of one of the other envelopes, which is a rejection letter. The interviewer now gives you the opportunity to switch envelope choices. Should you switch?"

Now give it a good chance before bailing out and checking out the answer at this link. Good luck!

http://www.afs-seminars.com/brainteaser-answer/

AFS Seminars LLC
232 Ambury Street
Fort Myers, FL 33913
http://www.afs-seminars.com

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Issue 1, Volume 13 February 2012

FISH ROT FROM THE HEAD

Issue 4, Volume 12 July 2011

THE "BIG BROTHER" ISSUE

Issue 2, Volume 12 February 2011

SOCIALLY USELESS

Issue 1, Volume 12 January 2011

IT DOESN'T ADD UP

Issue 3, Volume 11 August 2010

SHADOWS AND DUST

Issue 2, Volume 11 February 2010

LAW & ORDER - SPECIAL ACCOUNTING UNIT

Issue 1, Volume 11 January 2010

THE DOOMSDAY SCENARIO

Issue 2, Volume 10 October 2009

A WONDERFUL FICTION

Issue 2, Volume 10 October 2009

A WONDERFUL FICTION

Issue 1, Volume 10 August 2009

ECONOMIC FACT AND ECONOMIC FICTION

Issue 7, Volume 9 December 2008

THE WINTER OF OUR DISCONTENT

Issue 6, Volume 9 November 2008

THE FINAL BUBBLE AND THE END OF CAPITALISM

Issue 5, Volume 9 September 2008

THE APOCALYPSE

Issue 4, Volume 9 August 2008

RUBBER BAND & CHEWING GUM ECONOMICS

Issue 3, Volume 9 March 2008

WHERE IS MY FREAKING BAILOUT?

Issue 2, Volume 9 February 2008

TRUTH AND CONSEQUENCES

Issue 1, Volume 9 January 2008

AND THE BAND PLAYED ON

Issue 6, Volume 8 December 2007

THE GREATEST GENERATION

Issue 5, Volume 8 November 2007

I'M BACK IN THE U.S.S.A

Issue 4, Volume 8 April 2007

THE ATTACK OF PANIC

Issue 3, Volume 8 March 2007

SUBSIDIZING STUPIDITY

Issue 2, Volume 8 February 2007

WE'RE DOOMED

Issue 1, Volume 8 January 2007

GOING GREEN OR BLEEDING RED

Issue 10, Volume 7 December 2006

THE END OF ANOTHER LONG YEAR

Issue 9, Volume 7 September 2006

ALCOHOL-ISM

Issue 8, Volume 7 August 2006

IN MEMORIAM

Issue 6 / 7, Volume 7 June / July 2006

SOX SUX

Issue 4 /5, Volume 7 April / May 2006

AN AMERICAN TALE - MR. & MRS. BEN DOVER

Issue 3, Volume 7 March 2006

HEDGE FUNDS, FREE MARKETS AND CRYBABIES

Issue 2, Volume 7 February 2006

IMMIGRANTS AND HARD WORKING AMERICANS

Issue 1, Volume 7 January 2006

REFLECTION AND RESOLUTION

Issue 12, Volume 6 December 2005

REFLECTION AND RESOLUTION

Issue 11, Volume 6 November 2005

PENSION TENSION

Issue 10, Volume 6 October 2005

MORE STUPID POLITICIAN TRICKS

Issue 9, Volume 6 September 2005

POP GO YOU WEASELS

Issue 8, Volume 6 August 2005

GREETINGS FROM SEPTEMBER 2010

Issue 7, Volume 6 July 2005

IN DEFENSE OF AMERICA

Issue 6, Volume 6 June 2005

HEDGE FUND FOLLIES

Issue 5, Volume 6 May 2005

THE TRUTH ABOUT OIL

Issue 4, Volume 6 April 2005

ALAN GREENSPAN IS P***ED OFF

Issue 3, Volume 6 March 2005

REAL ESTATE IS OVER

Issue 2, Volume 6 February 2005

MOTHER'S LITTLE HELPER

Issue 1, Volume 6 January 2005

IT'S ABOUT THE GDP STUPID!

Issue 12, Volume 5 December 2004

TUNING OUT ALL THE NOISE

Issue 11, Volume 5 November 2004

HOLIDAY GREETINGS

Issue 10, Volume 5 October 2004

AN ADULT DOSE OF POLITICAL TRUTH

Issue 9, Volume 5 September 2004

MY CASE AGAINST GLOBALIZATION

Issue 8, Volume 5 August 2004

HOPE IS ON THE WAY

Issue 7, Volume 5 July 2004

SUMMER READING

Issue 6, Volume 5 June 2004

THE HEDGE FUND ISSUE

Issue 5, Volume 5 May 2004

THE MOTHER OF ALL FINANCIAL SCANDALS

Issue 4, Volume 5 April 2004

THE SAME OLD STORY

Issue 3, Volume 5 March 2004

A WORLD OF TROUBLE

Issue 2, Volume 5 February 2004

THE ALAN GREENSPAN SHOW

Issue 1, Volume 5 January 2004

POLITICS AND MONEY

Issue 12, Volume 4 December 2003

A TROUBLING TREND

Issue 11, Volume 4 November 2003

HOW REAL IS THE RECOVERY

Issue 10, Volume 4 October 2003

THE BEST OF WALL STREET

Issue 9, Volume 4 September 2003

SCANDAL MONGERING

Issue 8, Volume 4 August 2003

THE MIKE GASIOR MANIFESTO

Issue 7, Volume 4 July 2003

THE FINAL STRAW

Issue 6, Volume 4 June 2003

MIXED SIGNALS

Issue 5, Volume 4 May 2003

DEFLATE THIS

Issue 4, Volume 4 April 2003

THE WORLD WE LIVE IN

Issue 3, Volume 4 March 2003

WHEN THE ONLY CONSTANT IS CHANGE

Issue 2, Volume 4 February 2003

AWASH IN OIL?

Issue 1, Volume 4 January 2003

DON'T BE A LOSER

Issue 12, Volume 3 December 2002

BLASPHEMY

Issue 11, Volume 3 November 2002

A HAPPY ANNIVERSARY

Issue 10, Volume 3 October 2002

TRICK OR TREAT ?

Issue 9, Volume 3 September 2002

QUESTIONS AND ANSWERS

Issue 8, Volume 3 August 2002

DROWNING IN A SEA OF FOOLS

Issue 7, Volume 3 July 2002

NEVER A DULL MOMENT

Issue 6, Volume 3 June 2002

THE MID-YEAR REPORT

Issue 5, Volume 3 May 2002

THE FAST AND THE FURIOUS

Issue 4, Volume 3 April 2002

Back To The Fundamentals

Issue 3, Volume 3 March 2002

THE REAL PAIN

Issue 2, Volume 3 February 2002

THE PENSION PLAYGROUND

Issue 1, Volume 3 January 2002

THE TRUTH ABOUT ENRON

Issue 12, Volume 2 December 2001

A HISTORIC YEAR INDEED

Issue 11, Volume 2 November 2001

A "ZERO" SUM GAME

Issue 10, Volume 2 October 2001

THE GOOD, THE BAD, AND THE UGLY

Issue 9, Volume 2 September 2001

A NEW ERA

Issue 8, Volume 2 August 2001

THE ECONOMY
HEDGE FUND-ITIS

Issue 7, Volume 2 July 2001

INDIAN STOCK BROKERS GO ON STRIKE
WATCH WHAT YOU WRITE IN E-MAILS

Issue 6, Volume 2 June 2001

THERE'S SOMETHING ABOUT ALAN
THIS WEEK'S HEADLINES

Issue 5, Volume 2 May 2001

T+1 IS 36 MONTHS AWAY
THIS SENATOR JEFFORDS THING
THE ECONOMY

Issue 4, Volume 2 April 2001

THE BLOTTER

Issue 3, Volume 2 March 2001

THE STOCK MARKET
UGLY AMERICA

Issue 2, Volume 2 February 2001

CALIFORNIA AND ELECTRICITY
TIME FOR HEDGE FUNDS AGAIN ?

Issue 1, Volume 2 January 2001

TIME FOR MICROSOFT ?
T+1 AND THE BUY SIDE

Issue 12, Volume 1 December 2000

THE NASDAQ
PRICELINE.COM

Issue 11, Volume 1 November 2000

LEVITT GOES OUT IN A BLAZE OF GLORY
T+1 NOW PUSHED TO 2004

Issue 10, Volume 1 October 2000

PRICELINE.COM
NASDAQ
INTERNET ACCOUNTING

Issue 9, Volume 1 September 2000

WELCOME TO THE BOND MARKET

Issue 8, Volume 1 August 2000

SOMETHING ABOUT EMULEX

Issue 7, Volume 1 July 2000

THE BIG LAWSUIT (Microsoft)
THE OTHER BIG LAWSUIT (Bidders Edge)

Issue 6, Volume 1 June 2000

DECIMALIZATION - MY FINAL WORDS ON THE SUBJECT
T+1 POSTPONED ?
THE INTEREST RATE CLIMATE
BERMUDA CONFERENCE IN NOVEMBER

Issue 5, Volume 1 May 2000

POSTPONING DECIMALIZATION
WATCH THOSE MORTGAGE BACKED SECURITIES

Issue 4, Volume 1 April 2000

ACCOUNTING IN THE NEW WORLD
REVENUE RECOGNITION

Issue 3, Volume 1 March 2000

THE MOVE TO DECIMAL PRICED PRICING
MY 2 CENTS OF THE MARKET

Issue 2, Volume 1 February 2000

RISK MANAGEMENT
DERIVATIVE USAGE

Issue 1, Volume 1 January 2000

THE MOVE TO T+1