December 2012 – Page 2 – The Aleph Blog

Book Review: The Snowball, Part Three

Posted on 21 December 2012 by David Merkel

Compounding

If you have to make it simple, Warren Buffett is in the compounding business. That is what he has done since he was a young boy. He started with selling gum. He moved on to working inside the family firm.

Once his father moved onto DC as an idealistic Congressman, Buffett had a paper route, and as his assets began to grow, he bought a farm and other assets.? He was always trying to grow his net worth.? That is a constant with Buffett ? he has always tried to grow his net worth.

By the time he linked up with Ben Graham, there were still a lot of ?cigar butts? to pick up and puff.? In that era compounding was easy because the post-depression competition was so low in stock-picking.

But by the late 1960s almost all of the ?cigar butts? had been picked up and smoked.? Easy pickings were gone, and Buffett was saddled with an unproductive textile company ? Berkshire Hathaway, and a mediocre-to-bad department store in Baltimore.

He decreased the activities of the textile company, and reinvested the free cash flows predominantly into insurance, including buying half of GEICO.

(As an aside, Buffett was not a great manager of insurance companies at the beginning, and even the middle.? His early companies had their issues.? Jack Byrne did well running GEICO, followed by Tony Nicely.? Buying Gen Re was a mistake, at least initially ? he bought something so complex, and he assumed that all would be fine, setting himself up for losses in the derivative book, and also in the casualty book, where they were reinsuring losses to avoid accounting issues.)

Then came the era of investing permanent capital, where he bought the ?sainted seven,? and they produced profits for him.? He made more money off his public equity investments in the era of the 80s & 90s, but in short order thereafter it shifted.? Berkshire Hathaway was no longer an investment company akin to a closed end fund or a business development company ? it was a full-fledged conglomerate.? That?s how we should think of it today.? Berkshire Hathaway is a conglomerate that gets a lot of its funding from insurance premiums.

He occupies a unique niche in business.? He will acquire entire firms that are attractive to him, does not change their underlying culture, and rarely if ever sells them.? This appeals to entrepreneurs who built a unique culture, and love their employees.? They will sell to Buffett, because alternative acquirers very likely would destroy the employees and culture for the sake of short-term gain.? Buffett is focused on the long run, and is willing to let a subsidiary underperform for a while, before he sends in additional management to sort things out.

On Buffett?s Wisdom

Buffett has a tremendous memory. He knows all manner of statistics regarding industry, which informs him in his investment decisions.? That is one reason why he makes so many wise decisions.

But another area of Buffett?s wisdom was against the Efficient Markets Hypothesis.? Whether in his debate against Michael Jensen in 1984, which helped to produce the article, ?The Superinvestors of Graham and Doddsville [PDF, 13 pages],? or in his annual shareholder letters, that risk is not volatility ? risk is the permanent impairment of capital.

If you work with a margin of safety, and buy companies that will produce free cash flow, and can grow free cash flow, you will be safer than most investors, and probably more successful as well.

I?ll finish up this review tomorrow.

Blog Notes

Posted on 20 December 2012 by David Merkel

Once again, I have an article the Baltimore Business Review.? You can download it here.? My article is on page 40 of the PDF.

The Baltimore Business Review is unique, a collaboration between Towson University, and the Baltimore CFA Society.? The CFA Institute highlighted it in the past year, though I can’t find the link.

My article deals with what drives residential housing prices, and sadly, it comes to rather ordinary conclusions.? I hate it when I get a normal? conclusion.

Have a read, and tell me what you think.

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Second note: I will be the conference blogger for the NYSSA International Financial Reporting Conference taking place on January 10th.? There is a discount code for Aleph Blog readers: Aleph10, where you save 10%.? Note to CFAs: there is another code where you can save 20%, but I don’t remember what it is.

Accounting is important, and if you are a fundamental investor, it pays to understand it well.? I write this as one who had to learn a lot after becoming an actuary.? I might not know the nuances of all accounting, but I had to learn a lot as I did life insurance accounting, which is more complex than the accounting of most industries.

This is a conference worth attending, though many will ignorantly sneer at accounting conferences.

Sincerely,

David

Book Review: The Snowball, Part Two

Posted on 20 December 201221 December 2012 by David Merkel

According to the book, his wife Susie approached Astrid Menks to care for Warren with food, and other aspects of personal care.? But for a man to have his wife abandon him, with no prospect of return, a pretty 30-year old woman with few requirements would test most men in terms of their fidelity.? According to the book, Susie was surprised that Astrid moved in with Warren.? I think that was naive on her part.? If you want to be a wife, be a wife.? Make up your own mind on what you want, and fault yourself for bad decisions.? Adultery is a bad thing, but Susie is the most to blame by leaving Warren.

Warren is/was a simple guy.? If Susie never left, he would have been happy.? Indeed, he was depressed when she left.? But she got tired of the neglect, and abandoned her marriage vows to him.? She should have borne the neglect, and stayed with him — marriage vows are permanent.? Marry in haste, repent at leisure.? We have no idea of how much Susie may have pleaded with Warren to be connected to her and the family, but the eventual result was a virtual divorce from Susie, which led to another relationship, even though the legal fiction was maintained.

Buffett also had many friends and mentors in the value investing community, most of whom learned from Ben Graham.? In the early years, there was a “Graham Group” that would get together to discuss the principles of Ben Graham.? Bit-by-bit, the group slowly became the “Buffett Group,” because Warren was Graham’s most apt disciple.

But there was one peer who got him thinking more broadly, Charlie Munger.? There were a number of people who thought they would benefit from knowing each other.? They were right; at the very first meeting they hit it off, and found it hard to end the conversation.

Warren received a lot of respect from men in his early years.? They looked at the returns and said, “Wow.”? But his abilities suffered a bit in the late sixties, as “cigar butt” investments disappeared, there was some uncertainty, as to whether Warren would continue to invest.? Fortunately for him, Charlie Munger had given him a new paradigm, which I call “growth at a reasonable price.”

Buffett became very good at estimating opportunities, particularly opportunities that will last.? It is only under such conditions that growth investments will work.

But there are two more entities that shaped him — The Sun Valley Conferences and Bill Gates.? Gates is the more important influence, because his knowledge of the tech sector helped to refine Buffett’s view of moats, because an attractive technology that gets a large market share is its own moat.

The Sun Valley conferences had two aspects.? Buffett presented at a number of them, and during the tech bubble, he drew quiet derision from attendees.? That said, he was a sponge for information, and he understood tech.? What he did not understand was how you could get reliable free cash flow from tech businesses, where obsolescence was such a threat.

Part 3 will come tomorrow.? Stay tuned.

Book Review: The Snowball, Part One

Posted on 18 December 201218 December 2012 by David Merkel

I had wanted to read this book for a long time, and I asked the publisher for a copy of the book.? No copy came, and I asked years ago.

Recently, Alice Schroeder came to speak to the Baltimore CFA Society, and after hearing her good talk, I decided to get a copy from the local library (12 copies available in the system).

This book is complex.? It’s a great book, but you have to appreciate why it was designed the way it was.? Buffett is a complex guy, as you might expect from the only man to become ultra-rich from investing alone.

That’s why the book is long.? I did not mind that; I even read the footnotes to get the nuances on when Alice’s sources did not agree.

Those that criticize Alice Schroeder as not being capable to be a biographer, neglect her significant abilities understanding investment, insurance, and from what I can gather, how a complex man ticks.

She spent years with him, and had access to all of the major sources still living.? Other authors did not have that.

As such, the book focuses on Buffett the man, and less on Buffett the investor.? That’s not a bad thing.? This is a book about Buffett, not a book about how Buffett did it (and how you can too).

The rest of my review will focus on the grand themes of the book as I see them.? Others may differ, but I see it this way:

Overcoming Insecurity

1. Buffett’s mother was a harsh woman, if the book is correct, and did not love her first two kids, of which Warren was one.? On the Mother’s side of the family, there was a history of mental illness.? In terms of early influences, this is the large one.? His Father was at home less, and Leila Buffett was a large influence.

Buffett was industrious as a child, and even during Great Depression earned money.? He quickly realized the value of reinvesting profits, and the concept of compounding come to the young man.

But as with many young men, he had his challenges in his teenage years.? He was not popular.? He got ripped out of his environment to accompany his family to DC, where his father had become a Congressman.? (Think of Ron Paul, but with more idealism, and less contact with his kids.)

Warren became a bit of a rebel, and his grades suffered.? Still amid all of it, his small businesses did well.? In High School, he eventually focused on his studies, and his grades recovered, such that he was able to go to college at the University of Pennsylvania, before transferring to the University of Nebraska at Lincoln.

2. Warren overcame insecurity through the women who cared for him.? In this sense, initially he was a sponge for love, and later, one who would learn to care for friends.? The main women in his life were Leila Buffett, Susie Buffett (wife), Susie Buffett, Jr. (daughter), Kay Graham (Washington Post), Sharon Osberg (bridge partner), and Astrid Menks (mistress, and current wife).? If I may, let me say that men need women to admire them, or they don’t feel whole.? Because Buffett’s mother was sparing with love, Buffett sought a wife, and against all odds, found one that would care for his emotional needs.

Susie was more complex than that, and with Warren’s significant travel, after two decades, she began to seek activities that rewarded her.? This was the beginning of the end of their marriage in real terms, though not legal terms.

More to come in part two, tomorrow.

Selling Options Cheaply (Did You Know?)

Posted on 15 December 201216 December 2012 by David Merkel

Tom Brakke, the Research Puzzler, has started up yet another site to display bits of interesting information that he has run across — Research Puzzle Pieces.? His first piece was an interesting one, and I would like to give you my spin on it.

You may remember some of my writings in this area:

One major ploy of Wall Street is to induce people who need to stretch their income to buy a high yielding security that has weak protections.? All of the options are held by the bond seller.? They might think:

If things go really bad, we can default.? We’ll start another firm later; thank God for limited liability, and forgetful lenders.
If things go neutral-to-bad, and we need to conserve cash, we just pay with more bonds at a slightly higher rate.? In that scenario, there is no way we could borrow more at a similar rate, so we win there as well.
If things go okay, and we don’t have cash needs, we pay the coupon and bide our time.? (This is the only good scenario for bondholders.)
If things go really well, we call the bonds after the first year, paying off the investors who probably do not have great reinvestment options.

For the bondholder, the upside is capped, and the downside is 100%.? The optimal outcome is that you get paid principal & interest to the stated maturity from this bond that is deep in junk territory, CCC+/Caa1-rated, where the proceeds of the deal don’t increase the value of the firm, but are paid as a dividend to the equity holders.

As I said, the bond issuer holds all of the options here.? And what might you get as yield? 8.5-9.0%?? Given the risks here, that is not enough.

Problems of a Yield-Starved Market

PIK bonds and bonds from dividend deals tend to default with higher frequency and severity than equivalently rated deals lacking PIK and/or dividends.? But people invest, hoping that they will come out okay, even in the face of structural bond weakness.? They need the income, because they don’t have enough capital.

This is not a problem unique to investing.? As for PIK toggle bonds, securities underwriting is not all that much different from insurance underwriting.? In the first part of the bull phase of the cycle, pricing/risk margins decline due to competition.? After that, terms & conditions get weakened before the cycle turns.

It is common to see protections in debt securities decline as we get closer to the end of the credit/equity risk cycle.? We may have months to go here, or maybe two years to the peak at most, but we are living on borrowed time in the debt markets at present.? One more sign: premiums paid for loan participation and junk bond closed-end funds.? Most junk closed-end funds are at a premium, which means that there is an incentive to sell more junk debt.

What a world.? Let Bernanke know that his plan to make people take more risk is working, but when you do, tell him it is working for bad, not good.? As for my clients, we are reducing credit risk.

Sorted Weekly Tweets

Posted on 15 December 2012 by David Merkel

Who to Follow

#FF @researchpuzzler @newrulesinvest @felixsalmon @interfluidity @Alea_ I go through my follow list twice/yr & highlight those I respect $$ Dec 15, 2012
#FF @EddyElfenbein @ReformedBroker @smallcapanalyst @BarbarianCap @abnormalreturns @TheStalwart @The_Analyst @mickwe @marketfolly @bondscoop Dec 15, 2012

Stupid political things I have said

@jpgriffard When I say great, I mean “large.” I hate them both. Dec 15, 2012
@JoshForde Me too, thanks 4 interacting w/me Dec 15, 2012
@JoshForde Wrong time of year, and Congress is tied up with the budget, so I guess no. NYC mayor provoked me, demanding immediate action Dec 15, 2012
‘ @JoshForde Yes. Unintended consequences. 9-11 and the wars it engendered r my leading exhibits there. The US messed up badly. Dec 15, 2012
@Borderscrossed No they don’t, have a good night. Dec 15, 2012
@JoshForde That I can agree with as well, w/rights come responsibilities, bigtime. Dec 15, 2012
@JoshForde Second-order effects; our policy usually omits those. Example: the Fed & Central Bank freedom; what if they act irresponsibly? Dec 15, 2012
@trmcloughlin I would agree with that also Dec 15, 2012
@incakolanews I would agree w/that Dec 15, 2012
@JoshForde Okay, but I’ve said that before on other topics… this has been a general position of mine on a wide # of issues, not just guns Dec 15, 2012
Auughh! Blam! Drones r another ethical issue that I hate $$ RT @Borderscrossed: @AlephBlog NSA has logged our tweets. Drones on the way. Dec 15, 2012
‘ @jpgriffard He has two great achievements PPACA & Dodd-Frank Dec 15, 2012
@Borderscrossed Wait, you said “Obama” & “do something” in the same tweet. Isn’t that illegal? 😉 Dec 15, 2012
@JoshForde I’m willing to consider… what was insensitive? Dec 15, 2012
‘ @ross_marketment I agree, freedom requires some laws, and here’s one to consider… liability for not securing your gun. Dec 15, 2012
Behind every economic view there is a political view. Unavoidable. All I know is that I get more grief from writing on politics. $$ Dec 15, 2012
@laGiocondaVinci That’s fine hope u do well Dec 15, 2012
My politics r complex; I am mostly a libertarian: I was against Iraq 1 & 2, Afghanistan. I did not like Bush 43, don’t like Obama either $$ Dec 15, 2012
RT @dpinsen: @AlephBlog The same people who now regret the TSA, the PATRIOT Act, etc. rushed through after 9/11 want to rush through mor … Dec 15, 2012
‘ @Borderscrossed I am just saying 4 all legislation consider the second order effects; never act in heated emotion, consider all effects $$ Dec 15, 2012
‘ @ross_marketment Again, 9/11 is my best example. It has harmed Americans more than our enemies. I have been against all our recent wars $$ Dec 15, 2012
@streetbrief Take care Dec 15, 2012
@ross_marketment Not sure. I am saying is consider wide range of effects from policy change; we do not typically do that & we get bad policy Dec 15, 2012
I’m willing 2c intelligent limits on firearms & some degree of liability 4 those that don’t secure them, but rushed policy is bad policy $$ Dec 15, 2012
@ross_marketment Problem: there may be fewer murders, but in the UK they have more “hot robberies” than we do; robbers have more 2fear in US Dec 15, 2012
‘ @trmcloughlin What we don’t know is how many lives have been saved by firearms. We don’t hear the sound of one hand clapping. #2ndorder Dec 15, 2012
No doubt; I have 8 kids; 5 adopted – I feel sorry 4 the parents; grief RT @ross_marketment: and for the minority as well. 26 today Dec 15, 2012
And we get salvation through a plethora of ineffective statutes RT @JamesMarsh79: our society demands intervention $$ Dec 15, 2012
‘ @ross_marketment I don’t own a gun, probably nevr will. I serve the Prince of Peace. I know that a few people ruin freedom 4 the majority Dec 15, 2012
So after a really ugly event like the killing of 6-7 year olds, we need to mourn, leave policy decisions 4 a calmer time, weighing +s/-s $$ Dec 15, 2012
2 many people react 2 an ugly event saying, “This must never, Never, NEVER HAPPEN AGAIN!!” w/o considering what 2nd order effects will b $$ Dec 15, 2012
After 9/11, we made many policy decisions in haste that left us less free. Part of being a free culture –> we must accept some disasters $$ Dec 15, 2012

Wrong

Wrong: Former HP CEO Shifts Blame for Autonomy Deal to Chairman http://t.co/p8xH0BoR No deal can get done w/o sponsorship of the CEO $$ Dec 14, 2012
Wrong: As Dollar Loses Reserve Status Central Banks Diversify http://t.co/lfq2UGNW Bad as the $$ is, no other currency is as investable $$ Dec 14, 2012
Wrong: Canadian Exceptionalism in Compensation http://t.co/Q6VDqm5P France is no exemplar in paying bureaucrats a lot of $$ a % of GDP Dec 14, 2012
Wrong: Our Hero, Ben Bernanke: Why Central Bankers (Not Politicians) Are Saving the Global Economy http://t.co/BawbK79N First do no harm $$ Dec 14, 2012
Wrong: Mozilo Unbowed Says Countrywide Was ?World-Class Company? http://t.co/6pzQQyos Big, yes, but horrible underwriting, 2much debt $$ Dec 14, 2012
Wrong: Bernanke Wields New Tools to Reduce Unemployment Rate http://t.co/M3GXZomh No new tools, only wishful thinking $$ Dec 13, 2012
Wrong: Oil at $60 or $120 Doesn?t Prevent US Supplanting Saudi Arabia http://t.co/sWB1CqEa Decay curve 4 fracking means short advantage $$ Dec 13, 2012
Wrong: Krugman, Krauthammer and Their Implied Authors http://t.co/seOKbPdg U r what u write; Just another aspect of your personality $$ Dec 11, 2012

Companies

And with that, I sign off Twitter 4 the evening (aside from robotic posts). One note b4 I go, $HPQ has not filed its 10-K @ its due date. $$ Dec 15, 2012
Apple Falls as UBS Projects Growth Slowdown http://t.co/f7Gi1Wwm Size is an enemy of growth. Channel check indicates slowdown 4 $AAPL $$ Dec 14, 2012
Hurd was an accounting manipulator; he boosted asset accrual items to paper over flagging profitability. $$ http://t.co/ubjkmR9C $HPQ Dec 14, 2012

Energy

Alberta-Quebec Oil Pipeline Reversal Study Done by June http://t.co/CkqBZul2 Let Quebec find its own oil then $$ Dec 14, 2012
Refiner Phillips 66 would support U.S. crude oil exports-CEO http://t.co/lvKXNlcg More important: infrastructure 4 LNG exports FD: + $PSX Dec 14, 2012
Tokyo Steel Shifts Output as Power Costs Rise Post-Fukushima http://t.co/jYPrhUDA There r real costs to doing w/o nuclear power $$ Dec 14, 2012

Federal Reserve & Central Banks

We would b better off in the long run if the central banks of the world stopped QE & low rates & let us work out bad debts 4 a decade $$ Dec 14, 2012
Houston We Have a Problem – The Abe Approach http://t.co/V9XlZ7pw Fed adopts an approach similar 2 the proposals of Shinzo Abe $$ #FTL Dec 13, 2012
Inside the Risky Bets of Central Banks http://t.co/rKRwTgb9 They talk together, but the central bankers of the world share ignorance $$ Dec 13, 2012
Biggest Opportunity Will Be Shorting the Bond Market: Dalio http://t.co/GdGIGNkQ Shorting bonds is tough b/c of negative carry $$ Dec 13, 2012
RAY DALIO: The US Economy Is Facing A Rare Set Of Circumstances That Will Be Bad For Markets http://t.co/7lgVsmRR Bull mkt 4 cash & gold $$ Dec 13, 2012
BoE’s King warns of growing currency competition http://t.co/zTsohWHT “Beggar thy neighbor” characterizes Central Bank policies globally $$ Dec 13, 2012
“Economists at the BIS, meanwhile, have grown more skeptical about the central bank tilt.” http://t.co/Fje7WTFI All lean the same way $$ Dec 13, 2012
“There is a lot we don’t understand,” said Donald Kohn, the Fed’s former vice chairman. http://t.co/Fje7WTFI You can say that again $$ Dec 13, 2012
Most interesting move of the day was watching long Tsy bonds sell off after Fed said it would buy more http://t.co/wk4ZFhAR “Et tu, QE?” $$ Dec 12, 2012
PS: long a little bit of $TLT 4 me & bond clients, short a little bit of $SPY for hedged clients Dec 12, 2012
Love the DJ reporter asking about Fed forecast accuracy. The answer is they missed financial crisis, & have been shocked by slow recovery $$ Dec 12, 2012
Love those reporters who assume monetary policy can do anything, & that monetary policy can change unemployment w/a snap of the fingers $$ Dec 12, 2012
Change since September in Central tendency of Fed funds Fed forecasts 2013-2015 & longer run: 0.01%, -0.20%, -0.32%, -0.15% $$ Dec 12, 2012
Change since September in Central tendency of PCE inflation Fed forecasts 2013-2015: -0.08% -0.08% -0.05% $$ Dec 12, 2012
Change since September in Central tendency of Unemployment Fed forecasts 2013-2015: -0.27% -0.18% -0.05% $$ Dec 12, 2012
Long Treasuries not liking the Fed Statement, even w/the promise of additional buying FD: long $TLT Dec 12, 2012
Change in Central tendency of GDP Fed forecasts since September 2013-2015: -0.07%, -0.16%, 0.08% $$ Dec 12, 2012
Steve Liesman actually asks a decent question, wow. Dec 12, 2012
Here’s one year forward, one year inflation implied from TIPS over the last 40 days: http://t.co/dmzjrO9W moving up, currently @ 2.01% $$ Dec 12, 2012
Using TIPS, the figure for inflation between one and two years ahead is already 2.01%. Fed did not do its homework, again. $$ Dec 12, 2012
Fed Seen Pumping Up Assets to $4 Trillion in New Buying http://t.co/YkZo23sl Doing same thing over & over & expecting different result $$ Dec 11, 2012

US Politics

How to Keep All of Huck Finn in the Classroom http://t.co/rPo5syl2 We need 2 eliminate the pseudo-intellectual “common core” standards $$ Dec 14, 2012
Dispatches from the public pension wars: http://t.co/rvD9zmAU & http://t.co/oWgfJYGQ & http://t.co/EYvaGTJ2 End pension spiking $$ Dec 14, 2012
It really seems stupid to spend $151B to upgrade Acela when it only has revenue of $0.5B/year http://t.co/SNbmuXJW Slow trains r better $$ Dec 14, 2012
Whose job is it to stop an asteroid from hitting the Earth? http://t.co/dNFyVjJR Would need at least 2 years of lead time, preferably 5 $$ Dec 13, 2012
Big Banks Flunk OCC Risk Tests http://t.co/2f1veBS8 2big2b effectively regulated; left hand doesn’t know what right does, centipede-level $$ Dec 13, 2012
Pimco?s Gross Says Fed Policy Means ?Free? Debt for Treasury http://t.co/d7K7wHm1 Ah, seigniorage; it is good 2b king Dec 13, 2012
Amtrak Plans to Replace All High-Speed Acela Trains http://t.co/SNbmuXJW I like the Acela, but I can’t see how 2 recoup $151B 4 new trains Dec 13, 2012

Rest of the World

Islam in Egypt’s new constitution http://t.co/0oqRk11B Kind of interesting; gives u a feel 4 different types of Islamic casuistry $$ Dec 13, 2012
Assad Losing Syria, Say Russia and NATO http://t.co/rNeKVmhS Could Chavez & Assad lose their power in the same week? $$ Dec 13, 2012
EU Reaches Deal on Bank Supervisor http://t.co/YNFGjnjk A lot of the details have 2b worked out; will b interesting 2c it in action $$ Dec 13, 2012
China’s Economy – weaker than we think http://t.co/FwbPNviK The math is pretty clear: rebalancing will inevitably require lower growth. $$ Dec 13, 2012
What Mario Monti?s Exit Tells Us About Europe?s Debt Crisis http://t.co/Ak8zB6N4 Problems r cultural; politics can’t bring prosperity $$ Dec 13, 2012
?Reckless, Wrong-Headed? Pension Rules Could Savage Europe?s Economy http://t.co/OP7xDSGM Key Q: how large is the equity prem over Tsys? $$ Dec 13, 2012
US Schoolchildren Lag Asian Peers on Academic Tests http://t.co/PEJufbTb Phonics & going back to the “old math” would help considerably $$ Dec 11, 2012
Argentine mom rescues hundreds of sex slaves http://t.co/9dz9sZw9 In rescuing her kidnapped daughter, gains a quest & rescues hundreds $$ Dec 11, 2012
Germany displaces China as US Treasury’s currency villain http://t.co/7giRsoJE Germany > China; biggest source of global trade imbalance $$ Dec 11, 2012
BIS: Policy measures and reduced short-term risks buoyed markets http://t.co/M4k5j2Oq True now, but will make eventual tightening harder $$ Dec 11, 2012
Honey Laundering http://t.co/x2Dl5sdr No way India is now producing so much honey. Imports from China, escapes duties, exports 2 US $$ Dec 11, 2012
Hitler Has a Following in India http://t.co/Mksfyv6R India dislikes the British enough, & desires a strong leader to save them, & thus $$ Dec 11, 2012
Sony Loses Science Talent as Student Resumes Go to Dairies http://t.co/dKJsVDIN Can’t obsolete food; shows caution among Japanese youth $$ Dec 10, 2012
Carson Block Goes Short Unafraid as Chinese Gangsters Chase http://t.co/QVRFxy1i Trying 2 hide information does not change negative FCF $$ Dec 10, 2012
China November factory output jumps to eight-month high http://t.co/Y0HNSoqp And consumer inflation bounced off 33-month lows $$ Dec 10, 2012
Chinese Group Buys 80% of AIG Plane Unit for $4.2B http://t.co/7YLMn3ro Good 2c $AIG simplify. I suspect the seller is the winner here $$ Dec 10, 2012
Raging Oil Price Will Burn OPEC http://t.co/xRnGN9Pa Suggests downward pressure on oil prices. Sell high-cost E&P, maybe $$ Dec 10, 2012
Slowing China Forex Reserves May Spell Trouble http://t.co/Bcy9KnW9 Suggests gold and Singapore $$ off of weakness & capital flight in China Dec 10, 2012

Other

Those Diabolical Anonymous Commenters http://t.co/hl7tGZJ1 If we have to sign our names to what we write, we will b more judicious $$ Dec 14, 2012
The five most disruptive technologies of 2012 http://t.co/AbNJyUSF Pretty fascinating, particularly power storage & cheap internet $$ Dec 13, 2012
Finally did it. Joined the cult of Warren the Wonderful http://t.co/8p67b2yl Now my clients & I can get a discount @ GEICO. FD: + $BRK.B $$ Dec 12, 2012
America’s Milk Business in a ‘Crisis’ http://t.co/ANb8xN6d Maybe if they got rid of the growth hormones, more people would want milk $$ Dec 11, 2012
Bloomberg Weighs Making Bid for The Financial Times http://t.co/E2r3t7hw Creating a more powerful Bloomberg, LP piece-by-piece $$ #FTW Dec 11, 2012
Green energy will come into existence without subsidies when crude is $200/bbl $$ http://t.co/Ufz0Kig2 Dec 11, 2012
They Know What You’re Shopping For http://t.co/MuBloNPi Interesting. Shows how auto dealers get data on you $$ Get “do not track” $$ Dec 08, 2012

US Politics & Economics

When the CPI is up, journos point at the bogus “core” figure. When the CPI is down, journos point at the CPI. Bias http://t.co/ODXMyo1V $$ Dec 14, 2012
The Myth Of Cash On The Sidelines Remains A Myth http://t.co/c6UKgvxV Also have 2 count the cash that collateralizes derivative positions $$ Dec 13, 2012
Mortgage Rates in the US Drop to Near-Record Lows http://t.co/ciJ8b4rd Attractive credit, if u can get it; hey, rhymes and scans $$ Dec 13, 2012
If u r a professional bond investor, researcher would like you 2 take survey on Investor Preferences for Climate Bonds http://t.co/NP4X0iPV Dec 13, 2012
Beef in America is plentiful & affordable, spun out in enormous quantities @ high speeds: bonanza w/hidden dangers. http://t.co/ZhYQcleo $$ Dec 13, 2012
States Faulted Over Teacher Pension Shortfall http://t.co/bMnCE92x (non) Payback coming to teachers 4 negotiating 2 high pension bfts $$ Dec 13, 2012
How Republicans engineered a blow to Michigan’s powerful unions http://t.co/pll6Uo1r Hidden in plain sight; careful planning achieved it $$ Dec 13, 2012
For-Sale Signs Sprout in Heartland http://t.co/Fs7sB8b4 Likely sustainable as there are low levels of debt used to effect buys $$ Dec 13, 2012
I care more for how a man weighs ideas & opinions than what he weighs. http://t.co/9Cf51G9e Dec 12, 2012
“Ferri’s reasoning only looks easy in hindsight. I agree with Barry’s reasoning, though. Consistent w/Q-ratio, etc. $$ http://t.co/I8MPtJlh Dec 12, 2012
Before the public pension crisis ends, some states will remove pension protections in their constitutions, & retroactively cut benefits $$ Dec 12, 2012
$822,000 Worker Shows California Leads U.S. Pay Giveaway http://t.co/YfcZsCWU People r finally getting how big this problem is $$ Dec 12, 2012
Social Security ? 2012 Results http://t.co/GgxzcD4q Social Security & Medicare get worse and worse; US Govt will not b able 2 afford them $$ Dec 13, 2012
Hawaii Real Estate Paradise Returns With Goldman Loan http://t.co/eMAJl5IM Japanese & Korean travelers driving hotel visits $$ Dec 11, 2012
LOOMING CRISIS: State Budgets Soon to be Under Siege http://t.co/IwGIK90g Cash payments r curving up rapidly 4 public employee benefits $$ Dec 11, 2012
Don’t forget the unforced give up of stricter bailout terms, made when $$ was impossible to get; $AIG deal… http://t.co/G9zwHuDV Dec 11, 2012
Please ignore special tax benefits given $AIG & unforced renegotiation of original deal. A loss in economic terms http://t.co/gShXtNIq $$ Dec 11, 2012
Better Gas Mileage, Thanks to the Pentagon http://t.co/rmVBspJ0 As w/the space program, rarely we get positive spillover from Defense $$ Dec 11, 2012
13 Insights From Paul Tudor Jones http://t.co/BsAnkdgS He is not only a successful hedge fund manager but a very original & clear thinker $$ Dec 11, 2012
$GOOG Revenues Sheltered in No-Tax Bermuda Soar 2 $10B http://t.co/az2KrBhI Shock in Hamilton as NATO blockades, seizes shell companies $$ Dec 10, 2012
Hostess Maneuver Deprived Pension http://t.co/tyvhsCF2 Multi-employer pension trusts r weak; PBGC coverage is < single-employer plans $$ Dec 10, 2012
Climate Treaty Hinges on Obama Making Case: Ex-Aides http://t.co/zIA5j27p Obama doesn’t want 2 waste political capital on low odds win $$ Dec 10, 2012
Most Accurate Forecaster Sees Lethargic US Expansion http://t.co/e0nDazST Economic Lethargy girdles the globe, everything slowing $$ Dec 09, 2012
SEC’s Aguilar Warms Up to Money-Fund Overhauls http://t.co/mkLQNYAX Will destroy MMFs & won’t significantly help systemic risk $$ Dec 08, 2012

Retweets

To the main point: High speed rail is a boondoggle. Slow will do. RT @finemrespice: @AlephBlog http://t.co/UKb2A9hO Dec 14, 2012
Not indice, index $$ RT @weigu: Shanghai Composite Index is the 2nd-worst performing stock indice in the world this year, just after Spain. Dec 13, 2012
RT @randy_cass: Hint #1 that we’ve gotten conditioned to stimulus. Journalist asked question and referenced ‘$45 Billion a month’ as ‘a … Dec 13, 2012
Inertia RT @AsifSuria: Why does Best Buy still pay a dividend? $BBY Dec 13, 2012
Here’s a graph of it for those who don’t know where 2c it: http://t.co/G2P4kknG RT @TheStalwart: @AlephBlog tanked right at 8 PM ET $$ Dec 13, 2012
RT @Convertbond: Scary US Percentage of High Yield Bonds Trading ABOVE next Call Price 2012 40% 2011 30% 2010 22% 2009 0% 2008 5% 2007 … Dec 12, 2012
You said it RT @credittrader: umm benny – look at 5y5y fwds! come on man…. Dec 12, 2012
He can’t mean that $$ RT @davidgaffen: “I don’t think any policymaker, including the Fed, should respond to markets.” -BB 12/12/12 Dec 12, 2012
RT @Kathleen_Hays: CBS news guy asks Bernanke how does tying rate change to 6.5% jobless help economy? Bernanke says better communicatio … Dec 12, 2012
RT @LaMonicaBuzz: Where’s Chuck Barris? The Bernanke press conference is approaching the hour-long mark. Time for someone to ring a big … Dec 12, 2012
Muted response from $GLD, $TLT down, $SPY up/down since stmt RT @jamessaft: it is not the reporters who scare me, it is the investors $$ Dec 12, 2012
I assume we r both “persona non grata” there RT @cabaum1: @AlephBlog Use my name. It’ll get you a seat in the very back. Dec 12, 2012
You made me laugh; I applied to be in the press, they didn’t take me RT @cabaum1: @AlephBlog Be nice. He’s playing Helen Thomas. $$ Dec 12, 2012
RT @WildestFacts: Only 70% of people will understand the following: 2 + 2 = Fish. 3 + 3 = Eight. 7 + 7 = Triangle. RT if you get it. Dec 12, 2012
RT @tracyalloway: So long European aversion? Yankee bonds of European issuers now trading at pre-debt crisis levels, BarCap says: http:/ … Dec 11, 2012
Can’t make this up $$ RT @Alea_:[ pictures ]Mayan apocalypse: Chinese farmer builds survival pods in case of a disaster http://t.co/zWWNTWdr Dec 11, 2012
RT @MKTWBurton: What if the stock market is rigged? @abnormalreturns @felixsalmon @alephblog @bclund @nastrading: http://t.co/mkaMbNBE … Dec 11, 2012
+1 RT @fmanjoo: The University of California’s new logo is just unbelievably bad http://t.co/SFMdC22j Dec 10, 2012
Faith too RT @Mctaguej: It’s the growing number of collectivists among us that most concerns me. American individualism is in steep decline Dec 08, 2012

Replies

@e_d_sanders But once they are set up, most of the costs are incurred already, even the externalized ones. Dec 14, 2012
‘ @JonathanProber My advice to all investors is to be wary of asset accrual items that seem too big relative to assets & profits $$ Dec 14, 2012
@JonathanProber I grew up on life insurance acctg, which is probably the most complex acctg of any industry, except investment banking Dec 14, 2012
@bundesbank Die Buba ist jetzt auf Twitter. Feiern Sie mit! Holen Sie sich eine Currywurst, Sauerkraut und ein Bier! $$ 😉 Dec 14, 2012
@finemrespice Living near Baltimore, idea of turning it in2a toxic nuclear waste dump could b an improvement. Better 40 miles SW, though $$ Dec 14, 2012
@quartznews Queen: “At least we don’t have to worry about whether this gold exists. Pity about the colonies & Fort Knox…” Dec 14, 2012
@Pedant_Bot This *is* Twitter, u know. Often we use less than optimal words 4 space reasons. Or, r u referrring to a blog post of mine? $$ Dec 14, 2012
@ritholtz I’m agreeing w/u, Barry – there is less cash available 2b invested than most think, b/c much of it is encumbered Dec 14, 2012
@ReformedBroker Thanks, Josh. You have my respect; it’s tough to put out quality content w/frequency, variety & regularity Dec 13, 2012
@SimoneFoxman “At least we don’t have to worry about whether this gold exists. Pity about the colonies & Fort Knox…” Dec 13, 2012
@finemrespice Got me to laugh. Yeh, hedge funds r the financial equivalent 2 alchemists. Let them propose alternative math, c who buys it $$ Dec 13, 2012
@finemrespice Alas, but mathematics is a tough foe. Let alternative mathematics try to make $$ by outcompeting traditional math 😉 Dec 13, 2012
@TheStalwart Not much in today’s trading… why, is something happening in Asia? Dec 13, 2012
@LaurenYoung The saints will laugh, the sinners will cry http://t.co/5cwaOtbH Dec 13, 2012
‘ @Healey_trades I think the market is adjusting to the idea of higher future inflation, the Fed will not be able to maintain its policy $$ Dec 13, 2012
@OVVOFinancial I’ve never agreed with that — that would be why median CPI or trimmed mean CPI would be preferred Dec 12, 2012
@OVVOFinancial And if you use chained CPI vs chained PCE, they are virtually the same over the last 10 years Dec 12, 2012
@OVVOFinancial Over the last 10 years that would shave 0.2% off CPI inflation Dec 12, 2012
@OVVOFinancial I understand that Fed uses PCE $ TIPS r CPI-based, but there are no objective forward measures for PCE Dec 12, 2012
@cate_long Here’s 1-yr forward, 1-yr inflation implied from TIPS over the last 40 days: http://t.co/dmzjrO9W moving up, currently @ 2.01% $$ Dec 12, 2012
@cate_long Here’s a graph for that: http://t.co/dmzjrO9W Dec 12, 2012
@TheStalwart Ready at the criticism turret! Dec 12, 2012
‘ @Kevin_Holloway As the market has run, $$ has grown, approaching max cash limit; 1.2x BV $BRK.B is below; well-run, difficult to replicate Dec 12, 2012
@WildestFacts 70% sounds high, but the process is simple, flip one and paste over the other for a picture Dec 12, 2012
“4 of 6 companies graphed are housing related. $CLGX is not an insurer. Maybe you need to revise?” ? David_Merkel http://t.co/vTGZv3i2 $$ Dec 10, 2012
Many thanks to my 6000th Twitter follower @syedasyraf4 . Wherever you are, I pray things go well for you. Dec 09, 2012
‘ @muffiehbs05 @carney I guess you’re right, Muffie, much more than a fund http://t.co/78kXw5Rf A home 4 student & alumni moral decay $$ Dec 08, 2012
.@historysquared The slow corruption of the last set of strong balance sheets in the US. Leverage is being substituted for organic growth $$ Dec 08, 2012

FWIW

My week on twitter: 57 retweets received, 1 new listings, 54 new followers, 65 mentions. Via: http://t.co/SPrAWil0 Dec 13, 2012

Book Review: Think, Act, and Invest Like Warren Buffett

Posted on 14 December 2012 by David Merkel

This is a tough book to review, because I generally respect the author, but there are many things I don’t like about the book.? Let’s start with the main one:

My friend Alice Schroeder came to speak to the Baltimore CFA Society early in November.? It was a great talk, and afterward, I took her back to the Amtrak station.? What was our main topic of conversation?? The many authors with limited or no dealings with Warren Buffett who invoke his name in order to get better sales.? I won’t name names.? I have relationships with a number of them.

I will review “The Snowball” soon.? Alice Schroeder spent around five years creating that lengthy book, and I can see why she would be upset over those that use Buffett for their own personal gain.

This book is another example of that.? Only chapters 1 and 2 have anything to do with Buffett, and there he is quoted extensively to the point where he should be listed as a secondary author, and get a cut of the royalties.? But in the next nine sections have almost nothing from Buffett; it is all the philosophy of Larry Swedroe.

Don’t get me wrong.? Larry Swedroe is a very bright guy, and worthy of being read.? But his philosophy is not that of Buffett.? Yes, Buffett said a number of things stressing that average investors should invest passively, because they have no information edge.? But that’s not what Buffett does himself.

I have written elsewhere that Buffett cannot be imitated by the rest of us (Part one, part two).? (For those reading me at Amazon, please come to Aleph Blog to get links.)? Buffett buys whole companies.? Few of us can do that.? Buffett has a holding company that produces the ability to fund investments cheaply.? None of us have that, and this book by Larry Swedroe, does not even touch on the most powerful and distinct things that Buffett does to earn returns.

Chapters three and beyond are really basic stuff that average people should do to manage their investments wisely.? Larry Swedroe is great with that sort of thing. But it has nothing to do with Buffett.

That’s the main thing that irritates me here.? Don’t put Buffett in the title if the book is not about Buffett.? This book is not about Buffett, it is about how average people should manage what excess assets they have.

Now, all that said, if you read the personal finance section of my blog (which is free) you won’t gain any additional insights from this book, and you won’t pay any money either.? That said, giving a book like this to a friend who doesn’t get the management of assets could be very good for him.? Show a man a website, and he ignores it.? But a physical book — he might read it.

Quibbles

Swedroe does not get corporate bonds.? They are valuable during the bull phase of the credit cycle.? Those of us that follow the credit cycle make excess returns as a result.? You have to be opportunistic and disciplined to do this.? Yes, corporate bonds are hybrid investments — part equity, part guarantee.? But intelligent investors can do well with corporate bonds — it is much less efficient than the stock market.

Also, he overestimates the number of stocks needed to diversify a portfolio on page 68.

On page 77, he engages in data-mining to show what would have worked best in the past, which has no relevance to what will work well in the future.

On page 113, he tells a story from “Time Management for Dummies,” without attribution.

On pages 126-7, he errs, because risk and reward are not correlated.? Also, high yields usually portend risk, but that is not always true.

Finally, on page 131, he is too absolutist on corporate bonds.? Most of the time, it might be better to hold stocks and Treasury bonds, but there are times when corporate bonds are mispriced in a panic, and it is time to buy them.

Who would benefit from this book: ? If you want basic book on asset allocation for average people, this could have value.? If you want to imitate Buffett, this book will not help you in the slightest. If you want to, you can buy it here:Think, Act, and Invest Like Warren Buffett.

Full disclosure: I asked the publisher for the book, and he sent it.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Considering Selling the Long End

Posted on 13 December 2012 by David Merkel

This will not be a long post.? My bond strategy has always included longer bonds from LQD, and very long bonds from TLT.? They have made money for me & my bond clients.? But now I am thinking of selling them.? Why?

Let’s consider the history of QE:

Action	Date	TLT Return
QE4	12/12/2012	-1.16%
QE3	9/13/2012	-0.39%
Operation Twist	9/21/2011	3.31%
QE2	11/3/2010	-2.04%
QE1	11/25/2008	2.94%

Now, QE2 was kind of wimpy, and disappointed the markets.? All the other actions qualified as bold, but bold actions are not moving the needle at present.? Why?

I suspect that bond investors are embedding higher inflation forecasts into their prices, and that the balance has tipped. Inflation is coming, and I am likely to trade away longer nominal bonds for short bonds, and inflation-adjusted bonds.

The market is responding differently to loose monetary policy than it used to respond.? Time to adjust; the illusions of the Fed are finally failing, I think, and markets may be about to discipline them with stagflation.

Full disclosure: long TLT & LQD, but might be moving for cover.

Redacted Version of the December 2012 FOMC Statement

Posted on 12 December 2012 by David Merkel

Comments

I really think the FOMC lives in a fantasy world.? The economy is not improving materially, and inflation is rising. Note that the CPI is over their 2.2% line in the sand.? TIPS-implied inflation 1X1 (one year ahead for one year) is 2.01%, and 5X5 is 2.97% annualized.? Both of these measures have continued to rise since the last meeting.
Current proposed policy is an exercise in wishful thinking.? Monetary policy does not work in reducing unemployment, and I think we should end the charade.
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. When this policy doesn?t work, what will they do?
Also, the investment 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.
GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

More debt will not get us out of this crisis.? The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before World War two started.

Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.? The investments in MBS only help solvent borrowers on the low end of housing, who don?t really need the help.? Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.

The problems with unemployment are structural, not cyclical.? Labor force participation rates continue to decline.? There is greater labor competition around the world, forcing down wages on the low end.? There is nothing that monetary policy can do to change this.? You can create stagflation through your policies, but not prosperity.

When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.? The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.

You haven?t thought through all of the ?second order? effects of your policy.? Even the ?first order? effects, which favor the rich over the poor, seem to elude you.? Assets rise, helping the rich.? Interest rates fall, helping the rich who can borrow.? Commodity prices rise, harming the poor.

Insanity is doing the same thing over and over, and expecting a different result.? When will you realize that the policies of the Fed aren?t helping, and need to be abandoned?

Post 2000

Posted on 12 December 2012 by David Merkel

This has been a lot of fun.? This has been a lot of work.? This has been a “labor of love.”

When I wrote for RealMoney, I would sometimes say to my editor Gretchen, “Here’s another labor of love piece,” to which she would give a hearty response, because she liked editing me.? She told me she always learned a lot from me.? I liked working with her a lot.

Unlike some writers at RealMoney, I would sometimes troll through the comments on Cramer’s blog.? Sometimes I would defend him, at minimum I would try to explain him.

At the time, there were some financial blogs that I liked a lot — Jeff Miller, Barry Ritholtz, Roger Nusbaum, Steven Randy Waldman, Eddy Elfenbein, Alea… I know there are more, but I can’t remember now.? I resisted starting a blog for 1-2 years, because I felt RealMoney was my blog.? I especially liked participating in the Columnist’s Conversation.? (Note: if RealMoney would like to invite me back, I am open to the idea.? That said, the CFA Institute has encouraged me to blog for them as well — just don’t know how much content I can produce, because everyone wants original content.)

But I realized that RealMoney and I had different goals, and in talking with some of those that commented at Cramer’s blog, I decided to launch Aleph Blog.? Why call it Aleph Blog?? Many reasons, as noted in the link, but part of the fun was getting to read Borges, who I had not previously read.

When I launched Aleph Blog, I had no idea what I was getting into, and I did not intend on leaving RealMoney.? I liked the editorial freedom, though, and liked the broader interaction with many voices across the internet, rather than only RealMoney columnists, good as they were.? I did research when I started, and so I created my own domain, signed up with Seeking Alpha, and launched just prior to the mini-crisis where the Chinese stock market crashed in Shanghai.? When that happened, I wrote a popular piece that Seeking Alpha picked up that my friend Cody Willard promoted as well.

And off we went!? A grand experiment, allowing me to spread my wings more wide than at RealMoney.? My goal was to do a brain dump of areas where I thought I had competence.? I didn’t want to be like many bloggers where over 50% of their post is quoting others — I wanted to write from my heart, expressing my views on a wide number of topics relating to economics, finance and investment, from my unusual framework, which is Evangelical Christian, mostly libertarian (but not for financials), actuarial, value investor, doubting neoclassical economics and modern portfolio theory.

I was recently at a Baltimore CFA Society meeting, when a few people came up to me telling me how much they liked my blog.? Some quoted to me recent pieces I had written.? This was new; I was surprised.? I have never had local people come to me and say that.? Yes, stats for Maryland on my blog are above average, but my work helping the local CFA Society always seemed to be detached from other things that I do.? My worlds are merging, maybe.

My worlds are also merging from the many evangelical Christians who write to me.? This is a blog written by a Christian, not a Christian blog.? I’m here to serve everyone, but my views on ethics will color all that I write.

At the beginning, I tried focused linkfests, where I drew together posts on a hot topic, and narrated them to give my thoughts.? Those were a lot of work.? Today, my linkfests occur through Twitter.

Twitter: it took me even more pain to decide to do Twitter.? Given that my blogging is more long-form than most — why should I do Twitter?!? My answer for today is simple: to have good conversations, and push good content to readers.? And, for those who don’t do Twitter, they can read my weekly sorted tweets.? I got the idea from History Squared, a newer blog that I like.? Sorting the tweets makes them more useful to readers, so if it takes half an hour to do so each week, it is worth it.

But now I have more followers on Twitter than on RSS.? 6000 vs 5300.? I prefer RSS because people see the whole post, but I understand how the lower bandwidth on Twitter allows people to choose what attracts them.? Twitter makes us all epigram writers in AOL-ese.? It is challenging to do, but I like a good challenge.

I’ve written a number of series that have been significant:

I’m sure there are more, but I can’t think of them now.? At the same Baltimore CFA Society meeting as mentioned before, one person asked me, “How do you write about the wide variety of topics that you do?”

Part of it is my varied career, and educational background.? I have worked in a large number of areas, and have not been afraid to branch out and try things slightly outside my grasp.? You only learn when you fail.? I’ve learned a lot. I’ve failed a lot.

If you don’t take reasonable chances, you won’t grow.? Look for opportunities to expand your abilities — who can tell where you will go?!? Opportunities go to those who are there, grab hold of them, and win.? If you don’t try, you won’t win.

I know that my blog is an acquired taste, and best for professionals and advanced amateurs.? If you are a beginner, best you should focus on my personal finance category.

My goal has been to give something back to my readers.? I’ve had an interesting career, with many unusual and entertaining experiences.? I don’t have to have more fame or clients.? I enjoy relating the truths of the markets to others, whether they are beautiful or ugly.

To my readers: I don’t know if I will last another thousand posts, but I appreciate that you read me, eclectic as I am.? The one thing I promise: I will do my best for you, poor as that may be.

Your Servant,

David

PS — I know that my views on Fed policy and economics will win me few friends, but someone has to point out that the paradigm is broken.? Same for Modern Portfolio Theory….

October 2012	December 2012	Comments
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months.	Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions.	Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?? More grasping at straws.
Growth in employment has been slow, and the unemployment rate remains elevated.	Although the unemployment rate has declined somewhat since the summer, it remains elevated.	So long as discouraged workers increase, this is a meaningless statement.
Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed.? The housing sector has shown some further signs of improvement, albeit from a depressed level.	Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed.	No real change ? just word order differences
Inflation recently picked up somewhat, reflecting higher energy prices.? Longer-term inflation expectations have remained stable.	Inflation has been running somewhat below the Committee?s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.	Shades down their view of inflation, blaming energy prices. TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.97%.? The FOMC is wrong on inflation.
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. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.	The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.	Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.	Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.	No change.
The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.	The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.	No change. CPI is at 2.2% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.	To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.	No change. Does not mention how the twist will affect those that have to fund long-dated liabilities. Wonder how long it will take them to saturate agency RMBS market?
The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.	The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction.	Operation Twist continues.? Additional absorption of long Treasuries commences.? Fed will make the empty ?monetary base? move from $3 to 4 Trillion by the end of 2013.
These actions, which together will increase the Committee?s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.	Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.	No real change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.	The Committee will closely monitor incoming information on economic and financial developments in coming months.	No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.	If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.	Explicitly says that they will buy more long Treasuries.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.	In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.	The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.	To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.	No change. Promises that they won?t change until the economy strengthens.? Good luck with that.
In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.	In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee?s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.	Not a time limit but economic limits from inflation and employment. Just ran the calculation ? TIPS implied forward inflation one year forward for one year ? i.e., a rough forecast for 2014, is currently 2.01%.? The FOMC has only 0.49% of margin in their calculation if they are being honest, which I doubt. Next time, I will provide a graph.
	The Committee views these thresholds as consistent with its earlier date-based guidance.	New sentence, and it is not accurate.
	In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	New sentence.? Giving yourself an out clause on the hard-and-fast promises made above?
	When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	New sentence. So what?
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; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; 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; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.	No change
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.	Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.	Lacker sharpens his hopeless dissent against a flock of doves.? I like that he is opposing the QE, as well as the foolish promises regarding Fed funds. Unlike the rest, he cares about the institutional reputation of the Fed, and thus opposes asset-side policies.