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Archive for January, 2012

On Corporate Cash

Tuesday, January 31st, 2012

In human terms, we are most often best off with the via media, that is, the middle way.  So it is with corporate cash.    The first article I wrote on the internet (in 2003) argued for the value of excess cash in the hands of intelligent management teams.

But there is a limit to that, and more so when many companies build up large slack cash balances.  Think of the converse: only one really intelligent company has a lot of slack cash.  That company starts buying up other companies like a clever private equity buyer, but taking account of synergies with existing companies in the process.

Such a buyer would understand the value of each company purchased, and how much fat could be cut out, synergies realized, etc.  But even as that one company acted, valuations would rise with each purchase, until the “intelligent company” stopped buying, because it was no longer reasonable to buy at the higher valuations.

If this is true with one clever buyer, it is true with many not-so-clever-buyers, but it takes longer, and there will be errors, failures even, and more.

It is hard to deploy cash effectively as a corporation, aside from the simple routes of dividends and buybacks.   But companies that are good at doing small acquisitions that improve organic prospects can do far better than companies that blindly acquire for reasons of scale.

The company with a lot of cash will look for a scale acquisition, and will overpay, or, will overpay for an acquisition in an unrelated industry, creating a conglomerate that is hard to manage.

It would be far better to pay it out as a dividend, or buy stock back.  The shareholders as a group have a better idea of what is valuable in the public markets than the management team does, particularly aas public valuations get high.

Thus, I agree with Michael Santoli of Barron’s in his recent article.  The additional cash in the hands of many growth companies is depressing valuation measures, and should be paid out as dividends, or with an eye to the price, buy back stock.

And, I disagree with the fellow who wrote this article, that large corporate cash hoards are a reason to buy equities.  That might make sense if one knew what companies would get bought  out, but no one knows that.  In general, it is hard to pick acquisition targets profitably.  If major corporations can’t do it, odds are you can’t do it either.

For one more point on corporate cash generally, don’t pay much attention to it, because corporate cash often serves as collateral for futures positions, and other derivatives.  Cash on the balance sheet is often encumbered.  Maybe accounting standards should be modified to reflect that, because knowing the true liquidity of a company is valuable.

Recent Tweets

Tuesday, January 31st, 2012
  • Probable RT @moorehn: Because I’m pretty sure John Reed was super-excited to bust Glass-Steagall until Sandy Weill outsmarted him. Jan 31, 2012
  • RE: @finadd I think the US has two possible ways out with $AIG. Take control, break it up, and auction off the piece… http://t.co/RjjxqMpG Jan 31, 2012
  • Modern version of the Roman Empire: the Greeks resume their role as slaves; sadly, they don’t regain their position as intellectuals $$ ;) Jan 30, 2012
  • Germany Wants Veto Power Over Greek Budgets http://t.co/7PmugGmy “odds would favor Greek politicians rebuffing Merkel’s power move” $$ Jan 30, 2012
  • Corporate cash hoard screams ‘buy’ for investors http://t.co/mVtjHeey Not so. Large amounts of excess cash rarely get used well $$ #paydivs Jan 30, 2012
  • Why Tech Stocks Look Better—Even 4 the Risk Averse http://t.co/HOA9QqIX Valuation, Volatility, Financial strength & Low expectations $$ Jan 30, 2012
  • Spanair Collapse Puts Europe’s State Airlines on Alert http://t.co/XGrgHnbt Too much capacity & govts strapped, can’t bail them out $$ Jan 30, 2012
  • Greek Debt Talks Risk Derailing EU Summit Plan http://t.co/7B83ydbn Any relief will b temp; how much sovereignty r they willing to lose $$ Jan 30, 2012
  • Are Pension Forecasts Way Too Sunny? http://t.co/J9NLBgl9 They assume the weather of Hawaii while their clients live in Alaska. $$ Jan 30, 2012
  • Weaning Off ‘Alternative’ Investments http://t.co/kbViW06T Alternative became faddish & overused, now SC pensions reduces exposure $$ Jan 30, 2012
  • The Coming Tech-led Boom http://t.co/upoH7PoK Overly optimistic in my opinion, but does give a decent feel for where growth may come $$ Jan 30, 2012
  • Just Too Much Money http://t.co/QBltc7em Tough for companies to use a lot excess cash wisely, so valuation suffers. $$ #paydividends Jan 30, 2012
  • Money From MF Global Feared Gone http://t.co/iflSoXDJ Saying the money is gone isn’t news; acctg is double entry, this can be tracked $$ Jan 30, 2012
  • The fundamentals behind strong HY fund flows http://t.co/MUMwnX7J There seems to be a lot of retail money chasing yield at present $$ Jan 30, 2012
  • Thanks, James, I’ll give it serious thought, as I have been approached to write a book on Value Investing. http://t.co/D0J7puh3 Jan 30, 2012
  • Time to ride the commodity bull http://t.co/Awnruk2F I’m less certain here, this looks like a rally by specs, not from end-user demand $$ Jan 30, 2012
  • Hedge Funds Lift Bets to Two-Month High as Rally Accelerates: Commodities http://t.co/HuPyLVV7 Interest coming from specs, not hedgers $$ Jan 30, 2012
  • Living In A QE World http://t.co/HIqfrZp5 The degree to which central banks around the world are printing money is unprecedented. $$ Jan 29, 2012
  • I get a special enjoyment out of cutting up an AARP card after they mail one to me or my wife. I do not agree with the intergenerational war Jan 29, 2012
  • Yes! RT @Convertbond: There’s only one @rcwhalen must follow Jan 29, 2012
  • Francis Fukuyama on the Financial Crisis http://t.co/3WaRPv66 Five good books on the crisis; I’ve read 3 of them. Well-done Q&A. $$ Jan 29, 2012
  • Amazon’s Hit Man http://t.co/mBzIFjGb Larry Kirshbaum was the ultimate book industry insider—until $AMZN called. Industry disruption here. Jan 29, 2012
  • Taking Your Pension Private http://t.co/1lwRZSHG Consistent cash flow & want to shelter a lot of $$ from taxes? Set up your own DB plan. Jan 29, 2012
  • Inflation and the central banks’ new paradigm http://t.co/C6kM8rTG Base money eventually turns into price inflation after 5-10 years $$ Jan 29, 2012
  • Two articles from the Economist on Private Equity http://t.co/sOCGpsB2 & http://t.co/4ldGEIbT Returns r not high 4 current vintages $$ Jan 29, 2012
  • What You Can Learn From Mitt’s Tax Return http://t.co/0ODXKrLX Clever tax planning, plus playing it conservative to avoid audits $$ Jan 29, 2012
  • Sumup Yr Inv Philosophy 10 Words? http://t.co/EOntUSQT Margin of Safety. Understand Industries. Analyze Cashflow. Buy Quality. Rebalance Jan 27, 2012
  • A Wave of Sovereign Debt Defaults and High Inflation Would be Normal, suggest research from Rogoff and Reinhart http://t.co/2Ot0ExaA Wow $$ Jan 27, 2012
  • A less opaque Fed will become boring http://t.co/Ul8sA3Jn Reads like the author wants to do Bernanke’s authorized biography $$ Jan 27, 2012
  • The End of Japanese Mercantilism http://t.co/KKpGsCHR Ends not with a bang but a whimper. But will it be the same for China? $$ Jan 27, 2012
  • Investors Abandoning Copper, Cotton, Crude http://t.co/gFXJ6LeG Often after price peaks, volumes reduce, specs don’t have one-way bet $$ Jan 27, 2012
  • Greek Debt Wrangle May Pull Default Trigger http://t.co/XwNISUaH Collective Action Clause may allow CDS 2 trigger, avoids outright default Jan 27, 2012
  • New York Times Co. Faces Leadership Vacuum http://t.co/WT2c6m5y $NYT core business has continued margin pressure from loss of ad revenues Jan 27, 2012
  • Maybe the trading robots hit a feedback loop. http://t.co/tFCcFi6l Jan 27, 2012
  • Words Not Spoken in Obama State of Union Address Speak Volumes, Too http://t.co/Tghox7qE Education, Public Pensions, Entitlements, Fgn pol Jan 27, 2012
  • Smurfs Get Caught Short as $JAKK Toy Takeover Seen 4 20% Less http://t.co/3aladAYA @reformedbroker: Smurf Alert & profitability stinks $$ Jan 27, 2012
  • Innovate Without Mercy Is Lesson of RIM http://t.co/tcF4AL0a Engage in creative destruction of your own company, or someone else will $$ Jan 27, 2012

Post 1700

Saturday, January 28th, 2012

Every 100 posts, I breathe a deep breath and try to catch up on where we have been.  It’s not always easy for me; I write about so many different issues, and I shift in response to changes in the markets.

So, where have we been?

In the long run, I think willingness to cover a wide number of investing issues is an advantage my blog has, though if I were in the shoes of my readers, perhaps I would want more predictability.  Not all of my articles interest all of my readers.

And, sometimes I write stuff that angers others.  That’s not my intent.  That happens every now and then because I write about controversial topics that are currently disputed.  I don’t aim for this sort of thing.  I could write a blog that always focuses on the crisis — many blogs do that, good for them, but I want have a broader range of expression.  There is danger, but there is also opportunity.  Both need to be written about.

After all, what if things go right, even if it is not due to government policy, but in spite of it?  We need to be open-minded enough to accept and understand when something good is happening.

So, I try to write about a wide number of things that interest people who care about economics, finance, and investing.  I would rather be a teacher than a tout.  I do not enjoy articles that tout stocks.  I assume by now that my readership is that way as well.

In the next few months, a website for my business, Aleph Investments, LLC, should be operational.  I will let you know when it is up, but people wanting information about what I do in investing can simply e-mail me here.

Thanks to all who read me.  I appreciate that you take your time to read what I write.  I personally know that my writings are not all stellar, and so I thank for bearing with stuff that is drivel.  Drivel is not my goal, but if you want to write 5-7 times a week, you will write some drivel.

Constructive criticism is invited here, as well as advice on what areas you would like me to cover.  Let me know, and I will factor it in.  May the LORD bless us all in 2012.

Recent Tweets

Friday, January 27th, 2012
  • Stinks RT @s_m_i: RT @hedgefundinvest: RT @financialpost: Twitter to censor content in some countries http://t.co/zhnzV1Qo Jan 27, 2012
  • When the Reps win, wants 2b FedChair RT @pdacosta: Fed activism harms US growth, former Fed board governor Warsh says http://t.co/Tht5YyHi Jan 27, 2012
  • I’m different. I gained my net worth little by little through investing, and have kept it. My wife is glad she married me, and not my friend Jan 27, 2012
  • that I made to him in March 2009, with stock conversion rights. Many entrepreneurs r this way; they are not geared to preserving wealth. $$ Jan 27, 2012
  • An example: I have a friend who is presently very wealthy. He has nearly gone broke four times in the last decade. Pays me 13% on a loan + Jan 27, 2012
  • Angry about inequality? Don’t blame the rich. http://t.co/CV0GE1Gg Being rich is more fluid than most think. Rise fast, fall fast 4 many $$ Jan 27, 2012
  • Apple’s Dirt-Cheap Stock and the Fiduciary Theory of the Firm http://t.co/DtV2kK7P Me: Risk of tech obsolesence & mkt saturation -> low PE Jan 27, 2012
  • @Nonrelatedsense That’s funny. I didn’t see that because my browser blocks pop-ups. Jan 27, 2012
  • The chase for yield is on http://t.co/ISJ6MmLx High yield market looks a little frothy now. 73% of all HY CEFs trade at a premium to NAV. $$ Jan 27, 2012
  • Risk Bites Back: Lessons Learned From The Harvard Endowment http://t.co/Ch4s7jbP Similar to my article: http://t.co/Ycu95PCU Guard liquidity Jan 27, 2012
  • At minimum, desirable asset classes must be chosen and given weights. Then adjustment strategy; rebalance vs momentum. These invlv forecasts Jan 27, 2012
  • Tactical Management and Flawed Forecasting http://t.co/2VWePjbf All asset allocation implicitly involves a forecast. Jan 27, 2012
  • US Sovereign Debt Tipping Point Scenarios, Symposium by George Mason University http://t.co/QDFe1BJP 5 scenarios, but I can think of more $$ Jan 27, 2012
  • Tin Gains as Prospect of Low Fed Rates Boosts Speculation of Higher Demand http://t.co/zYYQXHVM I think the correlation is rather tenuous Jan 27, 2012
  • The GOP Goes MAD http://t.co/F7CoZQBl The candidates go thermonuclear, but the party itself may get hit. Lotta mudslinging going on $$ Jan 26, 2012
  • @groditi Yes, and Vale tried to strike some deal w/the Chinese to lessen the pain, and the Chinese stiffed them Jan 26, 2012
  • New Jersey Pensions Earn 1.7% in 2011 http://t.co/8vHP7Ok7 Add in the effects of low interest rates & funding levels fall considerably $$ Jan 26, 2012
  • One Third of New Yorkers Can’t Retire http://t.co/o8VFsw2v This is not news; a lot of people did not plan well, compounded w/no interest Jan 26, 2012
  • Merkel Masters Markets With Euro Austerity Mollifying Investors http://t.co/DSrJaAFZ She seems to be getting her way, bit by bit $$ Jan 26, 2012
  • Gingrich Attacks Romney Over Swiss Account http://t.co/AXzEC9ij Populism is a dangerous thing to swallow; read the warning label first $$ Jan 26, 2012
  • The squeeze on dollar funding in the Eurozone continues http://t.co/BZxSdJOc Will probably continue the demand for USD swap lines by ECB $$ Jan 26, 2012
  • US Banks Face Pressure on Margins From Fed Policy http://t.co/yzXGroUm Flat front end of yield curve steadily crushes interest margins $$ Jan 26, 2012
  • No Slower Steaming as Container Lines Run Like Clippers http://t.co/N9G7Ltgu This one made me pause. The shipping glut has funny effects Jan 26, 2012
  • Deteriorating employment situation in France http://t.co/EuTX0Go0 A clear sign of deteriorating economic conditions in the E-Zone as a whole Jan 26, 2012
  • Uralkali Ready to Cut Potash Output to Shield Price http://t.co/yqPjHQEZ Potash producers cutting production globally; can’t b good 4 Agri Jan 26, 2012
  • ‘Stop-Newt’ Republicans Confront New Base http://t.co/UZEdELQr This ain’t your Father’s Republican Party. Less of a party more of a fracas Jan 26, 2012
  • The Real Margaret Thatcher Story http://t.co/Ul6dyr3N “Lesson: governments cannot permanently live beyond their means had been learned.” Jan 26, 2012
  • More Drones, Fewer Troops http://t.co/D94fBRsm This doesn’t look smart to me, & makes America look like more of a empire than it is. $$ Jan 26, 2012
  • @The_Analyst After Great Depression the Flubs were established by the Flub Act of 1932 – provide funds 2 “building and loan” institutions $$ Jan 26, 2012
  • Egypt Bans LaHood, Other Americans From Leaving http://t.co/SVz5DBAn Military alleges foreign nationals are sowing dissent among masses Jan 26, 2012
  • Banks Hoarding ECB Cash to Double Company Defaults http://t.co/TPPvb33z European companies needing liquidity are not getting it from banks Jan 26, 2012
  • Ron Paul, the Fed and the Need for a Stable Dollar http://t.co/fwTrW2B3 Fed policy hurts savers aids government. Policy stability needed Jan 26, 2012
  • 2 bright ladies who know bonds RT @cabaum1: I’ll be opining on Fed folderol w/ my pal @Kathleen_Hays on WBBR’s Hays Advantage @12:45pm today Jan 26, 2012
  • @munilass It’s been fun 4 us. I hope u have an even better time of it. Jan 26, 2012
  • @munilass My wife says that u forget the pain w/the joy of the child. We also have 5 adopted kids; youngest turns 10 soon. Life changes fast Jan 26, 2012
  • @munilass My sympathies. Having a baby is wonderous, though I always pitied my wife during her 3 deliveries. Hope it goes well for u & baby. Jan 26, 2012
  • @SoberLook Thanks. Appreciate your blog. Jan 26, 2012
  • @interfluidity Thanks. Many thanks. Jan 26, 2012
  • @interfluidity Thanks, I appreciate it. I always wonder at myself when I get too hard. Jan 26, 2012
  • @interfluidity Thanks. I am not trying to beat up on Bernanke, as much as trying to point out the inconsistencies involved in his policies. Jan 26, 2012
  • @PlanMaestro Not sure, I am imitating @HistorySquared, who I appreciate. Aside from that, a number of readers asked for it. $$ Jan 26, 2012

On Junk Bonds

Friday, January 27th, 2012

If someone were to ask me my opinion on Junk Bonds at present, fool that he would be to ask me because I know real experts elsewhere, I would say this: They are good for a speculative trade, but dumb money has arrived.  Be ready to sell when the momentum fails.

High yield ETFs sell at decent premiums which leads to the creation of more units.  High yield closed-end funds — 73% trade at a premium.  You could issue a new high yield CEF, and come out at a lower premium than the current average.  I think I smell smoke.

Hmm….  If I owned junk bonds I would hold, and wait for momentum failure.  Buying now seems risky to me.  Most of the risk stems from global conditions.  We don’t know what will happen in the Eurozone. The rest of the risk stems from speculation.

I am a fan of junk bonds when nobody likes them, but there are too many fans now, and for bad reasons, most of which boil down to “I am old and I need income.  The fed has eliminated good choices for income, but I need income anyway, so get me yield.”

I had a conversation with a friend of mine in her upper 70s today where she asked “why are you suggesting I sell my funds that provide the most income?”  I said that I did not trust junk bonds at present and would look to lighten up, besides, the fund she owned has underperformed over the last 10 years.  If she really wanted income from junk bonds, I would look for a new fund for her.  So I am looking for a new HY fund, with an arm twisted behind my back.  It’s not the right idea, but she won’t listen.  (She’s not paying me.  I help my friends as best I can.)

The illusion of yield drives many older investors; they need income, and the delusional Fed thinks that low yields will yield prosperity.  It may make some people take more risk, but it will not yield prosperity.  There will be a lot of impoverished old people at the end of this, and they will be angry — at themselves, their advisors,  and the powers that be.

-==-=-=–=-==–=-=-=-=-=-=-=-==–=-=-=-=-=-=-=-=

This is not to say say that junk spreads are low; they are moderate to high at present.  But the spread relationship is manipulated by the Fed at present, making spreads seem high.  No market is truly free, but the Treasury market is affected by the Fed to a high degree.  The high quality bond market follows Treasuries closely.  Junk bonds don’t.  Junk bonds follow a hybrid of what Treasuries and common stocks are doing.  With stocks doing well, junk bonds run as well.

But we are still in an environment where more things can go wrong than right.  Until the US government figures out how to finance itself, we are in dangerous territory.  Given present political conditions, I don’t see how that works out; everything looks like a stalemate at present.

So be wary, and don’t overcommit to risk assets.  I would be neutral on risk assets at presemt, but ready to be bearish if there are problems in Europe or China.

 

 

On Opaque Transparency

Thursday, January 26th, 2012

There are two things that I want to comment on Fed policy this evening: Transparency is overrated, and Bernanke does not understand savings.

Transparency is Overrated

Ever heard of the phrase “data overload?”  Greenspan would do that verbally in his testimony to Congress, providing them with more data than they needed, and occasionally contradictory so that each side could quote what they wanted.

Well, the present transparency policy of the Fed is another version of data overload.  Give lots of data — some similar, some different.  Opinions, forecasts, policies — average people have a hard time with the nuances; even some professionals do.

After a certain point, the more data you reveal, the harder it gets to evaluate what is going on.  Far better to reveal to the public the core data that explains policy than to make them slog through big data releases.

Transparency is overrated.  Not sure which foolish economist thought of this one, but more data does not mean better decisions, or better public understanding.  Humans are not Vulcans (only logical), nor Ferengi (only greedy); we are complex, and that makes prediction of actions difficult.

Bernanke does not Understand Savings

Twice in his press conference yesterday, Bernanke showed that he was out of touch with average Americans.  He argued that average people could keep up with a 2% increase in the price level by investing in stocks and (presumably short-term) bonds.

(Speaking to The Bernank)

I’m sorry, Ben, but ya gotsta come down from the uneducated ivory tower and wallow in the mud wit da restov us.  There are three problems with what you said:

  • It’s hard to earn 2% (after-tax) consistently when the Fed funds rate is zero.
  • Only the top 20% of the wealthy have enough assets to keep themselves afloat using the asset markets.  Most people would like to do something to protect themselves from inflation, but lack the means to do so.
  • Average people do not invest, they save at financial intermediaries like banks, S&Ls, and life insurers.  Fed policy kills rates for savers.  They will not become investors, because they lack the knowledge to do so.

I am again sorry, Ben, because your policies discriminate against the poor, and the lower middle class.  Yes, the rich and the upper middle-class clever can escape the penalties stemming from your policies, but the lower-middle class and the poor can’t.

Think of it this way: your policies are making it more palatable for average people to buy gold, because the alternatives in savings are lousy.  If there is no income, why not grab safety from inflation?

Are you really trying to wrest the thorny crown of “worst Fed Chairman” from Arthur Burns?  If so, well done, you are achieving your goals.  Even Alan Greenspan did not do that, though he tried.

My advice to you is simple.  Raise the Fed funds rate to 1%, and stop the QE, and pseudo-QE.  At the zero bound, monetary policy has no punch, and the same for QE.  It affects asset markets; it does not affect goods markets.

Time to abandon useless theories about the Depression, and embrace the practical difficulties that we now face.  Ben, grow up and abandon your failed theories on the Great Depression.  And resign, if you can’t grow up.

Recent Tweets

Thursday, January 26th, 2012
  • @The_Analyst does Hempton do Twitter? Bright guy. Jan 26, 2012
  • RE: @SoberLook It’s not a pledge, indeed, but it is an estimate.  The bond market has reacted quite strongly to the e… http://t.co/crpU3QpH Jan 26, 2012
  • RE: @SoberLook Does this post from Alea change your opinion at all? http://t.co/2hs1LTyN… http://t.co/p3Plmjnb Jan 26, 2012
  • MF Customers Face Long, and Possibly Fruitless, Slog http://t.co/MoMIalrc Law s/b modified: customer accts s/b top priority in broker BK Jan 26, 2012
  • Solar Cheaper Than Diesel Making India’s Mittal Believer http://t.co/ZW2ta2aB This is the right way 2 employ solar; with no subsidies $$ Jan 26, 2012
  • Obama Pushes Salad in Schools at $3B Cost to States http://t.co/M9nWkW4T Healthier food is no good if the kids don’t eat it, ask L.A. $$ Jan 26, 2012
  • Con Artist Starred in Sting That Cost $GOOG Millions http://t.co/ErAgeziD New motto: Don’t be evil, but if you are evil, make $$ by it Jan 26, 2012
  • This is y well-capitalized P&C insurers r hard 2 kill, & usually make $$ over the int-term: past losses r more than paid 4 by higher prems Jan 26, 2012
  • US Commercial P&C Rates to Climb, Marsh Says http://t.co/OxCUuSsU The insurance brokers know; after a year of losses comes a hard market Jan 26, 2012
  • @researchpuzzler @The_Analyst “There’s an institutional hedge fund analyst born every minute.” Alleged 2 PT Barnum but, http://t.co/ku1NlqZG Jan 26, 2012
  • @BarbarianCap What I am saying is that structural legal protections around economically necessary authorities & municipalities r significant Jan 26, 2012
  • @BarbarianCap PV of losses are typically small, except on odd munis that don’t have any necessary economic value 2 a municipality + Jan 26, 2012
  • @BarbarianCap Part of the difficulty is that states can’t default, and Ch 9 4 what municipalities can use it, merely gives breathing room + Jan 26, 2012
  • @BarbarianCap There will be significant issues, but even during the Depression, losses were remarkably small on munis. Taxes will rise. $$ Jan 26, 2012
  • @The_Analyst Then again, it’s probably more “a fool and his money are soon parted.” Due diligence ain’t always that great 4 institutions $$ Jan 26, 2012
  • @The_Analyst Typically they were pretty good salesmen to get fund #1 off the ground, even better 4 #2. W/fund #3 they sell “It’s fixed.” $$ Jan 26, 2012
  • Iran’s Ahmadinejad ups rates to stem money crisis http://t.co/6IhpevuO Sanctions r having an internal effect on the Iranian economy. $$ Jan 26, 2012
  • Niederhoffer Discusses Being Wrong http://t.co/mWrnI7mg Frank talk from one who blew up twice. Perhaps he has a risk control discipline now. Jan 26, 2012
  • What’s In Your 401(k) Fund Line-Up? http://t.co/1ufb7xk2 Plan sponsors have an obligation 2 remove poorly performing funds but many don’t Jan 26, 2012
  • Wither the Wirehouse RT @ReformedBroker: Whither the Wirehouse? http://t.co/E4Xtz5Ul Jan 25, 2012
  • Wither the wirehouse ;) http://t.co/TnuMFvDE Jan 25, 2012
  • RE: @wallstCS None of the competitor companies you list compete w/ $RGA. $PRE does a little bit of life reinsurance &… http://t.co/v9r3kg5z Jan 25, 2012
  • @TimABRussell Yes, I think Bernanke is sincere in what he is doing. That doesn’t mean that it doesn’t confuse, or get the right result. $$ Jan 25, 2012
  • @TimABRussell That was the Greenspan strategy. Talk about the six sides of the square & confuse: Top, bottom, right, left, inside, outside Jan 25, 2012
  • Fed learns that it is easier to hide a needle if they put it in a larger haystack. $$ All for now on the Fed. Back to normal activity. Jan 25, 2012
  • Final Q on fiscal policy asking what if deficits aren’t cut. B says that deficits need to be cut. IT’S OVER!! Jan 25, 2012
  • Bernanke essentially says that everyone has a lot of slack assets, and can invest them after-tax at 2% in the long run. Jan 25, 2012
  • Q on CPI vs PCE, critics saying Fed planning to destroy 2% of currency value per year. B: CPI has made up numbers, healthcare differences $$ Jan 25, 2012
  • French reporter asks whether Fed would extend a loan to the IMF. “Raison detre” cute response, punts to Tsy and Congress $$ Jan 25, 2012
  • Mkt news intl reporter: why have forward guidance when you give out forecasts? Bernanke: guidance describes Fed’s decision, vs expectations Jan 25, 2012
  • Bernanke gets symmetric questions asking whether policy is doing too much or too little, on inflation and unemployment. ;) $$ Jan 25, 2012
  • WP reporter: could the Fed bring unemployment down faster if it were more aggressive? Bernanke really doesn’t answer. Jan 25, 2012
  • In general, people analyze better with limited amounts of data — zero data (w/Kremlinology) and lots of data make analysis harder $$ Jan 25, 2012
  • I think the more data the Fed hands out, the more lost the press and average people get confused. Jan 25, 2012
  • Q: Why isn’t Fed doing more now if you think things will be bad for so long? Internally Bernanke reconsiders the value of press conferences. Jan 25, 2012
  • Bernanke says that low rates conquer all and so providing more data won’t hurt things — expectations are a lesser thing $$ Jan 25, 2012
  • Peter Barnes, Fox Business: possibility of negative expectations because the economy is viewed as much worse than previously thought $$ Jan 25, 2012
  • AP reporter asks about principal reductions for the housing crisis. Bernanke says that the FOMC is concerned, but doesn’t say much really $$ Jan 25, 2012
  • Median b/c FOMC is a “democracy.” In practice, though, the Fed chair has 12 votes Jan 25, 2012
  • Robin Harding of FT asks about forecast, and what it implies for FOMC policy: Bernanke says there’s no mechanism, look at the median Jan 25, 2012
  • to be able to be released — mentions that June 2011 principles are still in force for shrinking the balance sheet (in 2015?!) Jan 25, 2012
  • Reuters reporter asks for more data on balance sheet data, versus data on Fed funds — Bernanke says there is only so much data at a time + Jan 25, 2012
  • RT @joshuademasi: @AlephBlog All fed needs to do is create esoteric invesment vehicle cross hedging USHY in Rand and Real. What could g … Jan 25, 2012
  • Donna Moran (?) of Amer Banker — Basel 3, capital requirements, etc. Me: Fed supervision of biggest institutions not done well in past $$ Jan 25, 2012
  • Bernanke waffles on the question of what happens to savers, confusing saving and investing. Needs to consider what finl intermediation does Jan 25, 2012
  • Greg Robb(?) Marketwatch asks about Republicans, and how older people on fixed incomes survive, and whether he might resign if Reps win Jan 25, 2012
  • Greg Ip questions the asymmetry comments — I think Bernanke would be better off saying “asymmetric in the long run.” Jan 25, 2012
  • @joshuademasi The hate for the Fed exists because they were overly loose 1984-2006, regulated banks poorly & created much of this crisis $$ Jan 25, 2012
  • Hilsenrath asks about confidence in the FOMC’s forecasting abilities. Wonders which dot is Bernanke’s… Bernanke affirms limitations Jan 25, 2012
  • Torres of Bloomberg asks about near-term inflation — The Bernank points to falling commodity prices, slower global growth Jan 25, 2012
  • Decent question on the symmetric nature of monetary policy Jan 25, 2012
  • Toady comments on what he views as strength RT @agwarner: Liesman Alert! $FED Jan 25, 2012
  • Full set of projections from the FOMC: http://t.co/VqWfrYgL Worthy of note that their forecasting ability is subpar. Jan 25, 2012
  • Fed Funds Projections: http://t.co/Wd9lmEeO Jan 25, 2012

Redacted Version of the January 2012 FOMC Statement

Wednesday, January 25th, 2012
December 2011January 2012Comments
Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth.Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth.No change.
While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated.While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated.The unemployment rate is down, but few jobs are being created, and people are dropping out of the labor force.  This is improvement?
Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed.Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.Shades down their view on business investment.
Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.True for the last few months for goods & services prices, but past isn’t prologue.  TIPS are showing higher inflation expectations.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.No change.  Mentions of the statutory mandate are always meant to hide the distasteful aspects of what they do.
The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.No change.
Strains in global financial markets continue to pose significant downside risks to the economic outlook.Strains in global financial markets continue to pose significant downside risks to the economic outlook.No change.
The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee’s dual mandate.Drops language inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate,To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy.Adds that the FOMC will be highly accommodative, if it hasn’t been so already.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.Extends the period of high accommodation for another 15-18 months.

They moved this paragraph up from last time.

the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.No real change.  Central bank asset policy does not have that big of an impact on economic activity.

They moved this paragraph down from last time.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability. Deletes meaningless sentence.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.Three new regional Fed presidents.  Storm and fury, signifying nothing.
Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.Make that four, with a dissent from Mr. Lacker, who is likely the only one to dissent in 2012.  Talked with him at the Cato Monetary Conference – he is skeptical of the asset policy at the Fed.  This dissent disagrees with the Fed trying to give a time period for how long the Fed funds rate will remain low.

 

Comments

  • So they extend the period of accommodation by a little more than a year.  Sends financial markets flying, and especially TIPS prices, but will have little impact on the economy.  (Do they want the yield on 30 year TIPS to go negative?  Looks that way.)
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.  Inflation has moderated, but whether it will stay that way is another question.
  • In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
  • Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
  • The Fed is out of good policy tools, so it will use bad policy tools instead, and for longer than before.

Questions for Dr. Bernanke:

  • Why do think extending the period of accommodation by a little more than a year will have any significant effect on the economy, aside from stock and bond prices?
  • Is it possible that you don’t really know what would have worked to solve the Great Depression, and you are just committing an entirely new error that will result in a larger problem for us later?
  • Discouraged workers are a large factor in the falling unemployment rate. Why do you think the economy is doing so well at present?
  • Why do you think that holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself?
  • Why will reinvestment in Agency MBS help the economy significantly?  Doesn’t that only help solvent borrowers on the low end of housing, who don’t really need the help?
  • Couldn’t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
  • Isn’t stagflation a possibility here?  I mean, no one expected it in the ‘70s either.
  • Could we end up with another debt bubble from keeping short rates so low?
  • If the Fed ever does shrink its balance sheet, what effect will it have on the banks?

Recent Tweets

Wednesday, January 25th, 2012
  • They may not have meant to publish it, but the results don’t seem too earthshattering — … http://t.co/MkmCtxnJ Jan 25, 2012
  • @Convertbond He was 1 of my professors @ Hopkins, & the only 1 w/a consistently free market viewpoint; Talked w/him @ http://t.co/k4mL15rp Jan 25, 2012
  • India to pay gold instead of dollars for Iranian oil. Oil and gold markets stunned http://t.co/ZRmnIjOz @JamesGRickards sounds like Ch 1 $$ Jan 25, 2012
  • Bears gone wild! http://t.co/s0mvx9LK What does it mean when bears get less pessimistic? Do we rally, or do things fall apart? Or both? $$ Jan 25, 2012
  • Retail in the Age of the Internet http://t.co/4wovantW Difficult 2c how the internet doesn’t change retail; has changed so many things $$ Jan 25, 2012
  • What Makes FPA Crescent Tick? http://t.co/ngisagdY A lot to learn from businesslike clever managers who insist on a margin of safety $$ Jan 25, 2012
  • You don’t WANT to be making iPhones, really http://t.co/cvG1rVqJ Baruach of Ultimi Barbarorum sets the record straight on manufacturing $$ Jan 25, 2012
  • The end of mutual funds is coming http://t.co/V9FhizVt @reformedbroker on the coming dominance of ETFs in 2022. My take in a comment below. Jan 25, 2012
  • The Pimco Premium–Totally Gross? http://t.co/QXBqRSpH Amazing what premiums to NAV some junk CEFs run by Pimco get up to. $$ >+70% Jan 25, 2012
  • Mitt Romney’s SOTU Challenge on the Mortgage Crisis http://t.co/xeTaeswA “u recognize the distress, u take the loss & let people reset.” $$ Jan 25, 2012
  • @MebFaber @onetwoko @The_Analyst Good stuff. I’ve written similar from both equity and debt perspectives. Alternative: NGDP growth+1% $$ Jan 24, 2012
  • @valuewalk yeh, especially for the highly compensated in private DB plans, b/c the PBGC limits the coverage any one person gets. $$ #ouch Jan 24, 2012
  • Examples: Autos and Telecom Bonds back in 2000, MBS (Esp non-GSE), GSEs, CDOs and finance 2007. Today? Governments. The poison of AAA/AA $$ Jan 24, 2012
  • It is usually wise to avoid investing in the largest or fastest growing sectors and subsectors in debt markets; boom presages a bust $$ Jan 24, 2012
  • @valuewalk Yes, that’s right, and the standards for that are squishy. Funny that life co acctg has 2b conservative, but not DB pensions $$ Jan 24, 2012
  • @The_Analyst Been writing about this off and on for the last 20 years in various forms. Sadly, doesn’t get traction because it’s complex $$ Jan 24, 2012
  • @The_Analyst yeh, especially since ERISA doesn’t apply to state & local DB plans; beneficiaries have 2 rely on protection from local laws $$ Jan 24, 2012
  • @The_Analyst There are no actuarial assumptions police for DB plans. W/private corps, the auditors can object (though they rarely do) $$ Jan 24, 2012
  • The Real Problem With the Global Bond Markets http://t.co/rYHw673u Catch my comment here: http://t.co/UCkhtXZx $$ Jan 24, 2012
  • CalPERS 2011 return below its assumed rate by 6.65 percentage points http://t.co/GDoBD6H2 Gets worse when you count in the fall in int rates Jan 24, 2012
  • Rob Arnott is doing enhanced indexing. So do most bond indexers; they match broad characteristics of the index, and … Jan 24, 2012
  • RE: @valuewalk Someone send the memo to Soros: http://t.co/ShMY4LWN http://t.co/6oA7kfMR Jan 24, 2012
  • New from Aleph Blog Against Simple Valuation Metrics: There have been a lot of articles dealing with use of corp… http://t.co/PaZElTUQ Jan 24, 2012
  • The new American divide http://t.co/lOmLT2xs Working class falls further away from marriage & religion & upper class becomes more isolated Jan 23, 2012
  • We Found Bin Laden So Now We’re In Search of Yield http://t.co/4veqJ6xB Y Buffett likes consistent $$ to flow from subs, but he pays no div Jan 23, 2012
  • The biggest Mark to Model error in the country http://t.co/Tgi5DVx7 “Price indexes are more an art than a science.” Manipulable indeed. $$ Jan 23, 2012
  • How executives spend their company’s cash http://t.co/4xadWZqy Buybacks tend 2b procyclical; economically rational w/b countercyclical $$ Jan 23, 2012
  • Europe Stocks Cheapest to US Since ’04 as Net Rises Amid Recession Worry http://t.co/54ajiIQD Worth kicking the tires on nonfinancials $$ Jan 23, 2012
  • Generals have led the US three times already — Washington, Grant, and Eisenhower. That i… http://t.co/9w9C3AM2 Jan 23, 2012

On Financial Intermediation

Wednesday, January 25th, 2012

I appreciate Steve Randy Waldman, who writes the excellent blog Interfluidity.  Even before I started blogging, while I was at RealMoney, we interacted over CPDOs, along with Alea, and several others that were onto the scam.  That was a fun time, because aside from the Canadian rating agency Dominion, there was no one else questioning the idiocy of the AAA ratings aside from a few bloggers — we are the conscience of Wall Street, but that doesn’t mean that we get any pay as a result.  We write these things as a public service.

Recently, he wrote two  articles on financial intermediation.  Now I’d like to try my own thoughts on the topic.

Financial intermediation has two purposes: transactions and safety.  People want to buy and sell, but don’t want to have a currency where its value shifts radically day-to-day, which would complicate their decisions considerably.  They want a stable unit of account, and don’t want the possibility that they lose a lot of money as a result.  (Yes, during conditions of hyperinflation that boundary disappears, but that’s because they are already losing value already each day from holding the formerly “safe” transactional asset.  They get more careless on the intermediary, because of the risks of holding the safe asset.)

The second goal is safety/preservation/growth of purchasing power.  Can I park money or a short to long amount of time and be assured that when the term is up, I will:

  • Receive receive back as much or more in purchasing power terms.
  • Reduce my risks or the risks of those I care for from death and other calamities.

Financial intermediation leaves money on the table.  It does not seek the best investment outcome, but takes a lesser return, so that goals can be achieved with greater certainty.

Now, that provides an advantage to the financial intermediaries.  It means that they get cheap funding under most conditions.  Now, can they invest it over the likely lifetime of the funding and not lose money?  That’s a lot of what solvency regulation is about in banks and insurers.   Because financial promises made can’t be easily analyzed for quality by those that offer money, there are two responses by the government:

  • Capital rules (which vary by liability and investments)
  • Insurance, so that users don’t have to worry about loss.

And, for what it is worth, 12 years ago I played a large role in setting the rules for Maryland life insurers in place, both writing the law, and explaining to the legislators how it protected the public interest.  (Hey! Passed unanimously on the first try, and with the d-word! (Derivatives)  My bill allowed risk mitigation but not risk taking with derivatives.)  The then-governor dressed like a mafia don at the bill signing, for what it is worth… My boss and I and our external and internal legal counsels spent a lot of time on this, but I was the prime mover on getting it done.

As an aside, sitting around in hearings in Annapolis, not knowing when your bill will come up is a chore.  If you know me well, you know I brought work to do, and if that wore out, good books to read.  I was never sitting there with nothing, bored. In the process I learned that Johns Hopkins owns Maryland, but declines from making that public, except when they care. ;) When they spoke up, the legislature rolls over and asks for a scratch on the tummy. Arf!

Sorry, got lost in reminiscing.  Can I say that it was weird?  (I will leave out my dealings with the Department of Insurance, which were surreal.)  I’m not political for the most part, but in the end, the Maryland life insurance investment code is one of the best of the 50 states.  Kind of sad that we don’t have more life insurers here.

The last three paragraphs were quite a detour.  Let me take a different tack.  Yes, intermediation is opaque; that is true by necessity.  Depositors and insureds do not know how their money is invested.  I am here to tell you that that is a feature and not a bug, because the regulators know you can’t analyze the safety of your deposited assets.

In most things, I am a libertarian, but in areas where average people can’t ascertain truth or or falsehood, I support some form of regulation.  Financial promises fall under that rubric, because they are hard to discern.

To close this off, my main point is this: people want financial intermediation, particularly during the bear phases of the financial cycle.  They want to be protected, and transact, and save.  It is reasonable that the government regulates this, because the ability to make future promises that people rely on is valuable to society as a whole.

 

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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