Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
AMD Ryzen 4900x / 5900x and 4950x / 5950x Zen3 4th Gen IPC and Clock Speed and Core Specs - 14th Aug 20
Stock Market Gap Fills Suggests Market Momentum May Stall - 14th Aug 20
Silver May Be Overextended – But It’s STILL Cheap - 14th Aug 20
A Short Guide To Making Your First Stock Market Investment - 14th Aug 20
Is Tech Reality Affects our Dating Possibilities? - 14th Aug 20
Will You Make Money in the New Silver Bull Market ? - 13th Aug 20
Hyper-Deflation Capital Destruction And Gold & Silver - 13th Aug 20
Stock Market Correction Approaching - 13th Aug 20
Silver Took the Stairs to $21 in 2008, Took Escalator to $29 2010. Is Silver on Elevator to 120th floor today? - 13th Aug 20
President Trump Signs Additional COVID Relief – What To Expect from the Markets - 13th Aug 20
Has Gold's Upward Drive Come to an End? - 13th Aug 20
YouTuber Ads Revenue & How to Start a Career on YouTube - 13th Aug 20
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Secret Behind My Hedge Fund Trade on U.S. Housing Market

Housing-Market / US Housing Mar 03, 2015 - 11:31 AM GMT

By: Money_Morning

Housing-Market

Shah Gilani writes: Suppose I’m the manager of a giant hedge fund. Suppose I’m soliciting you to come into my fund with a few billion of your $100 billion net worth.

Suppose we’re good friends.

You want to come in because you trust me and you know I know how to make money.


However, you’ll only come in if I tell you how the secret trade I’m working really works.

Okay, I’ll tell you. But you can’t tell a soul. Not because what I’m doing is illegal, but because only a few other guys are doing this, and we all know each other, and we’re kind of all in this together – wink, wink – and we don’t want anyone else in our game.

Come a little closer… you’re not going to believe this…

Return of the Vultures

First of all, we can’t lose money. Not only are we making money on the way up, but when the bottom drops out – and it will, we will make it drop out -we’ll make money on the other side too.

We came up with this trade after analyzing what went wrong leading up to 2008.

Here’s what we figured out.

Back in the buildup of the mortgage bubble, we knew it was a bubble, we knew it was going to break. We were all playing the game, but we didn’t realize we didn’t control the ultimate default rate, and we couldn’t time it, which was the worst thing.

We also know a couple of guys who bet against the bubble and made mega-billions. They didn’t just guess that stuff was going to crash – they had banks make crappy mortgage pools designed to crash and they bet against those. We learned from them, too.

I’ll get to that, and you’re going to love it.

So we’re doing it differently this time. Yep, you heard that right – this time is different

You see, after the crash settled, when all the people who still had tons of money needed something to believe in, we went to them and said, “Housing.”

And they said, “What! Are you kidding?”

“Distressed housing,” we said.

And they smiled. “We love you vulture guys,” they said.

So, on account of the Federal Reserve System making the cost of borrowing essentially zero, we go out and borrow a ton of money from big banks that aren’t lending to little schmucks to buy houses, or to idiots who want a loan to start a small business that isn’t going to make it in a crappy economy, which the banks know is crappy.

They lend us a ton of money. And we also go out into the bond market and borrow really cheaply. Because, you know, those institutional investors will buy anything with a dollop of yield above what they’re getting anywhere else.

All that money we raised, that’s called leverage.

So, we take all this money and we buy up distressed housing stock around the country. We concentrate our buying in the hard-hit areas.

Now, the beauty of the upside of this trade is that we’re paying cash. And the banks aren’t lending to private borrowers on account of raising their loan standards and not wanting to have to bother with them defaulting again.

So, we buy low and keep buying. You get it. We’re raising the value of the prices of the homes we’ve already bought by buying all the other distressed homes around them.

Now, get this. The people who can’t afford a house, even the ones who can afford a house but can’t get a mortgage, they have to rent. And who do they have to rent from?

Us.

The House Always Wins

We own the homes and rent them out. And we can keep raising rents because we’re taking so much of the housing stock off the market.

So, as housing prices are rising, because we’re making them rise, and the value of our stock is going up, guess what? We can raise rents.

People think those areas are recovering and are good places to move to, so they come back in droves. And we rent to them, because they still can’t get mortgages.

I know what you’re thinking. You’re thinking, “How come they can’t get mortgages in areas where housing prices are rising rapidly? Don’t the banks want to lend to them in those areas?”

No. The prices have gone up so quickly that new buyers won’t get much appreciation out of their new purchase, because we’re ringing it all out ourselves, lifting the equity value of our stock. So the banks aren’t bending over backward to give them money.

I’m laughing because I know what you’re thinking by the way you’re looking at me.

You’re wondering how we’re going to get out of this giant trade if there are no buyers for the houses we bought because people can’t get mortgages?

Good question.

Here’s the beauty of it. We’re packaging these rental homes and selling the securities to those institutional-investor guys looking for yield.

And the ultimate beauty – that would be the government. We own it.

Those lapdogs are doing what we want. They’re loosening up standards on Fannie Mae and Freddie Mac government-guaranteed loans, and they’ve lowered the insurance that premium buyers who go through the Federal Housing Administration have to pay.

You see, all the tough talk about the government getting out of the mortgage business after it had to bail out big Fannie and Freddie and the FHA became essentially insolvent – well, that was all talk.

You know, free-market stuff.

The truth is, the government is our partner in this game. They’re making it easier for people to get mortgages again. Really soon, they’re going to make it even easier. Just wait and see.

When people can get mortgages, we’ll start selling our inflated housing stock to them.

But there won’t be any equity left to build into the value of their homes.

It’s the American Dream.

Why is it the dream? Because we’re going to short against the rental securities we sold. We’re going to buy credit default swaps (CDS), tons of them -and, man, I mean tons of them. Of course our counterparties will be all the big banks that can still trade derivatives.

You remember that, right? That was part of our plan too. We got Congress to pass a provision in the last budget funding kerfuffle that screws Dodd-Frank and lets deposit-taking banks still trade derivatives.

It’s great!

So they will be the counterparties on all our CDS, because, you know, they’re too big to fail and they’ll pay up.

Do you get it?

When everything is in place, we’ll just dump all our housing stock, whatever we have left.

Prices will crash, but we’ll make a fortune, because we’ll be short 10 times what we own.

Oh, and as far as the United States goes, don’t worry. Don’t feel bad. It will be rough for a while, but the government will just make more money available and we’ll start the trade all over again.

Are you in?

Got any questions?

P.S. I encourage you all to “like” and “follow me on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then we’ll bank some sky-high profits.

Source :http://www.wallstreetinsightsandindictments.com/2015/03/secret-behind-hedge-fund-trade-housing/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules