December 2015 – The Aleph Blog

Response to “In Hoc Anno Domini”

Posted on 23 December 2015 by David Merkel

The Word of God is powerful, as it says in Hebrews 4:12.? That?s why even those that do not believe the Bible will use it on occasion to buttress their positions, whether it is:

Cults that use Psalm 46:10a (?Be still, and know that I am God?) to tell people that they are really God themselves.
Muslims that try to tell us that the promise of the Holy Spirit in John 14:15-27?really promised Mohammed.
Advice columnists that can only misapply the verse, ?Judge not, that you be not judged.? (Luke 6:37)
Liberation theologians that appeal to the Exodus as a motif for taking revolutionary action to overthrow oppression.
Lenin, quoting Paul, ?If any man will not work, he shall not eat.? (2Thessalonians 3:10)
Satan, who quoted Psalm 91:11-12 to Jesus in Luke 4:10-11.

The same is true of Vermont Royster when he wrote ?In Hoc Anno Domini,? which has been run on the Wall Street Journal Editorial Page in late December every year since 1949.? In that piece, he cites the Bible seven times, but always in a way that twists it.? He takes the Bible out of context to support his view of politics.

The Bible says a lot about politics, but that is not its primary thrust.? For the rest of this piece, I will show how Mr. Royster abuses Scripture.? After describing the one-world tyranny of Rome, he writes:

Then, of a sudden, there was a light in the world, and a man from Galilee saying, Render unto Caesar the things which are Caesar?s and unto God the things that are God?s.

He cites Matthew 22:21, Mark 12:17, and/or Luke 20:25.? In the full context, Jewish leaders ask Jesus whether it is right to pay taxes to Caesar or not.? The question was a trap, because the Zealots and Jewish authorities had opposite positions on the question.? Jesus answer rebukes everyone, because he?implies, ?Yes, pay taxes to Caesar, but don?t give Caesar the allegiance that is due to God.?

Jesus was not directly opposed to the political rule of Caesar; indeed, the early church did nothing to protest the rule of Caesar, even as they were persecuted by the Roman Empire. ?Royster continues:

?And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God. Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me. And he sent this gospel of the Kingdom of Man into the uttermost ends of the earth.?

Here he cites Matthew 25:40 and Acts 1:8. Without any support, Royster says that Christ defied Caesar, and offered a Kingdom where all men would not have to bow to Caesar, or anyone else.? Is this the same Jesus that said ?You have heard that it was said, ‘An eye for an eye and a tooth for a tooth.’? But I tell you not to resist an evil person. But whoever slaps you on your right cheek, turn the other to him also.?? If anyone wants to sue you and take away your tunic, let him have your cloak also.? And whoever compels you to go one mile, go with him two.? (Matthew 5:38-41)? Here Jesus encourages submission to the Romans, who would occasionally shake Jews down, and make them carry burdens.? They certainly did many evil things to the Jews.

Royster misapplies Matthew 25:40 and Acts 1:8 ? Jesus did not come to bring political and economic freedom to the common man.? His gospel was not one of political liberation, but that He was the Messiah, the Lamb of God, who came to take away the sin of the world. (John 1:29)? That was the message that the apostles would take to the ends of the Earth, at the cost of their lives. ?Royster then adds:

?So the light came into the world and the men who lived in darkness were afraid, and they tried to lower a curtain so that man would still believe salvation lay with the leaders.

But it came to pass for a while in divers places that the truth did set man free, although the men of darkness were offended and they tried to put out the light. The voice said, Haste ye. Walk while you have the light, lest darkness come upon you, for he that walketh in darkness knoweth not whither he goeth.?

Royster alludes to John 8:32 and cites John 12:35, both out of context.? When Jesus said, ?And you shall know the truth, and the truth shall make you free.” in John 8:32, it was in the context of believing all of the teachings of Jesus.? It?s not the truth in abstract that makes one free, but the truth as taught Jesus, who said, ?I am the way, the truth, and the life. No one comes to the Father except through Me.? (John 14:6)? Also, it is neither political nor economic freedom, but freedom from sin.

When Jesus said in John 12:35, ?Then Jesus said to them, ?A little while longer the light is with you. Walk while you have the light, lest darkness overtake you; he who walks in darkness does not know where he is going.?? he was speaking of His upcoming death on the cross for the forgiveness of sin.

Royster continues:

?Along the road to Damascus the light shone brightly. But afterward Paul of Tarsus, too, was sore afraid. He feared that other Caesars, other prophets, might one day persuade men that man was nothing save a servant unto them, that men might yield up their birthright from God for pottage and walk no more in freedom.?

He alludes to Acts 9 and Genesis 25.? In Genesis 25, Esau trades away his birthright (inheritance) for a bowl of pottage (stew).? Esau is not trading away something political or economic.? He would have been the inheritor of the promises made to Abraham, which undergird salvation.? He gives up on the faith of Abraham.

Royster says some more and then closes with:

?And so Paul, the apostle of the Son of Man, spoke to his brethren, the Galatians, the words he would have us remember afterward in each of the years of his Lord:

Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage.?

He cites Galatians 5:1.? Galatians 5 summarizes Paul?s argument, and says that if you try to go back to keeping the Law in order to be saved, rather than accept Jesus? sacrifice for sin in faith, you will go to Hell.? You will not be saved from your sins.

The liberty that Paul speaks of is freedom from sin, and ultimately freedom from the penalty for sin ? it is not economic or political liberty.

Summary and Request

Vermont Royster, for whatever reason, used the Bible and a Christmas motif to justify his political views.? When he first wrote it in 1949, there were worries that totalitarianism would take over the world.? I understand the fear.? There is a greater thing to fear, though, as Jesus said in Luke 12:4-5: ?And I say to you, My friends, do not be afraid of those who kill the body, and after that have no more that they can do. But I will show you whom you should fear: Fear Him who, after He has killed, has power to cast into hell; yes, I say to you, fear Him!?

This is the prime message of the Bible, together with the promise that those that trust in Jesus will inherit eternal life, and be spared Hell.

I am not against political or economic freedom, and neither is the Bible.? It is good to promote those.? Indeed, Protestantism gave birth to strong forms of both freedoms that we benefit from today.

That said, it is wrong to publish the distortions of the Bible that Vermont Royster concocted, and even worse to do it yearly.? Editors of the Wall Street Journal, please cease doing that.

Annotated “In Hoc Anno Domini”

Posted on 22 December 201519 June 2017 by David Merkel

At this time of year, people often do holiday posts. ?I’ve never done that. ?I’m going to do it this time, and then probably never do it again.

Close friends of mine know that at the Merkel household, we are Christians that don’t celebrate Christmas. ?The main reason is that it is a human holiday, and not a God-appointed one. ?There are other reasons, too, but that is a topic for another place.

I write this because of an editorial that has been published in the Wall Street Journal since 1949. ?It’s called “In Hoc Anno Domini.” ?It was written?by a longtime editor of the Wall Street Journal, Vermont Royster, in a time where many in the US feared Communism and other forms of totalitarianism.

In that editorial, he cites the Bible seven times without attribution, and every time takes the part of the?Bible?out of its context to support economic and political freedom, and oppose totalitarianism. ?It’s horrible from an intellectual standpoint, because the Bible is not trying to say anything like that at that point. ?I could write an essay showing how the Bible encourages?economic and political freedom, and opposes totalitarianism, but I would quote very different Scriptures, but do so in their proper context. ?But you may as well get Lex Rex by Samuel Rutherford, which influenced Locke and many others.

I’ve looked around the web, and I have yet to find a critique of this editorial. ?I find many posts praising it, probably because its rare to hear something that sounds vaguely Biblical in a major publication. ?But to me, it really grates. ?Here’s why:

Many people may have a favorite author, or a personal hero who writes a book. ?Well, imagine that someone quotes and makes significant allusions to your hero’s book and does so in a way that ruins the original meaning, and replaces it with a meaning of far lesser value very different from the original meaning. ?How would you feel?

Well, I feel annoyed, and my response to that editorial will be in the next blog post. ?If you don’t like Christian reasoning, skip the next post. ?A reduced version of it will be submitted to the Wall Street Journal as a letter to the editor.

The remainder of this post republishes “In Hoc Anno Domini” with a few explanatory notes, to point out what Royster was citing, and clarify some of the language from the King James Version of the Bible. ?(An excellent translation, but the English is dated.)

With no further ado, here is an annotated version of “In Hoc Anno Domini” (In the Year of Our Lord) ?My comments are marked with a DM.

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

When?Saul?of Tarsus set out on his journey to Damascus the whole of the known world lay in bondage. There was one state, and it was Rome. There was one master for it all, and he was?Tiberius Caesar.

Everywhere there was civil order, for the arm of the Roman law was long. Everywhere there was stability, in government and in society, for the centurions saw that it was so.

But everywhere there was something else, too. There was oppression?for those who were not the friends of Tiberius Caesar. There was the tax gatherer to take the grain from the fields and the flax from the spindle to feed the legions or to fill the hungry treasury from which divine Caesar gave largess to the people. There was the impressor to find recruits for the circuses. There were executioners to quiet those whom the Emperor proscribed. What was a man for but to serve Caesar?

There was the persecution of men who dared think differently, who heard strange voices or read strange manuscripts. There was enslavement of men whose tribes came not from Rome, disdain for those who did not have the familiar visage. And most of all, there was everywhere a contempt for human life. What, to the strong, was one man more or less in a crowded world?

Then, of a sudden, there was a light in the world, and a man from Galilee saying, Render unto Caesar the things which are Caesar?s and unto God the things that are God?s.

[DM: Citing Matthew 22:21, Mark 12:16, or Luke 20:25]

And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God. Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me. And he sent this gospel of the Kingdom of Man into the uttermost ends of the earth.

[DM: citing Matthew 25:40 and Acts 1:8, but the phrase ?Kingdom of Man? is nowhere in the Bible ? it should be the Kingdom of heaven or Kingdom of God. Geek note: the book of Daniel uses the phrase ?Kingdom of men? in chapters 4-5, but was used to show that God ruled over all, even Babylon.]

So the light came into the world and the men who lived in darkness were afraid, and they tried to lower a curtain so that man would still believe salvation lay with the leaders.

But it came to pass for a while in divers places that the truth did set man free, although the men of darkness were offended and they tried to put out the light. The voice said, Haste ye. Walk while you have the light, lest darkness come upon you, for he that walketh in darkness knoweth not whither he goeth.

[DM: ?divers? means various.? Cites John 12:35]

Along the road to Damascus the light shone brightly. But afterward Paul of Tarsus, too, was sore afraid. He feared that other Caesars, other prophets, might one day persuade men that man was nothing save a servant unto them, that men might yield up their birthright from God for pottage and walk no more in freedom.

[DM: Alludes to Acts 9 and Genesis 25]

Then might it come to pass that darkness would settle again over the lands and there would be a burning of books and men would think only of what they should eat and what they should wear, and would give heed only to new Caesars and to false prophets. Then might it come to pass that men would not look upward to see even a winter?s star in the East, and once more, there would be no light at all in the darkness.

And so Paul, the apostle of the Son of Man, spoke to his brethren, the Galatians, the words he would have us remember afterward in each of the years of his Lord:

[DM: An apostle is never referred to as an ?apostle of the Son of Man? in the Bible.]

Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage.

[DM: citing Galatians 5:1]

This editorial was written in 1949 by the late Vermont Royster and has been published annually since.

Sell a Fraction of Your Home?

Posted on 22 December 201522 December 2015 by David Merkel

Photo Credit: andrew wertz || Half a house is better than none... — Photo Credit: andrew wertz || Half a house is better than none…

I am usually not into financial complexity, but I ran into a service today called Point that could be useful for some people if they need?credit and:

you have a well maintained property in a neighborhood that has appreciation potential

you have a strong credit history

you have household income that covers your debt obligations (and some)

you have built up some equity in your home. After Point funding, you should still own at least 20% of the equity in your home

you live in one of the areas where Point is currently available

we reach agreement with you on a fair value for your property

you will sell the home within the term of your Point Homeowner Agreement or you will be in a position to repay Point at the end of the term

This is taken from Point’s website

The basic idea is that you sell a fraction of the equity/ownership of your home to Point. ?You will still have to maintain it and service all of the debt on the home, but beyond that, you can live in your home rent-free. ?When you sell the property, Point gets its share of the sales price. ?According to the Bloomberg article:

With Point,?credit scores can be less than 620, but?homeowners must have at least 25 percent to 30 percent equity in their houses. Point adjusts the cost of its investment based on the owner and the property, taking a larger percentage of price appreciation from riskier customers. Should the homeowner not pay Point, the firm has the right to sell the home to recoup its investment and take its portion of the gains.

Those who decide not to sell their homes have to pay the company back at the end of the 10-year period, similar to a loan, with an annual effective interest rate that?s capped at about 15 percent, comparable to rates on some credit cards or unsecured consumer debt. Annual percentage rates at LendingClub range from 5.32 percent to almost 30 percent on three-year personal loans.

Point is investing in properties it expects to appreciate in value, initially focusing on California, with plans to fund homeowners in other states next year, according to a company marketing document.

Repayment with appreciation occurs at the earlier of the end of a 10-year term, sale of the property, or the will of the owner to buy out Point’s stake at the appraised value.

So, what could go wrong?

Personally, I like the idea of selling an equity interest because it delevers the owner. ?The owner does not have to make any additional payments. ?He forfeits some appreciation of?the property, and faces either a need for liquidity or a sale of the property 10 years out. ?(The 10-year limit is probably due to a need to repay Point’s?own property investors.)

Possible issues: you might not like the price to buy out Point should you ever get the resources to do so. ?You may not want to sell the property 10 years out if you realize that you can’t raise the liquidity to buy out Point. ?If you do sell your home, you will incur costs, and may have a hard time buying a similar home in the market that you are in with the proceeds.

But on the whole, I like the idea, and think that it could become an alternative?to reverse mortgages in some markets where properties are appreciating. ?An alternative to that odious product would be welcome.

Full disclosure: I don’t have any financial dealings with Point. ?I just think it is an interesting idea.

Direction Matters More Than Position with Monetary Policy

Posted on 19 December 201520 December 2015 by David Merkel

Photo Credit: International Monetary Fund

As I was reading today, I ran across a quotation from Stanley Fischer, Vice-Chairman of the Federal Reserve. ?It was from an interview on CNBC in April 2015. ?I went to get the original source, and here it is:

Still, Fischer emphasized that a tightening would be slight.

“We have to ask what will go wrong,” he said. “I say that if we get this in proportion, we’re going to be changing monetary policy from the most extremely expansionary we’ve been able to do in all of history, to an extremely expansionary monetary policy.”

Fischer added that the expected increase of a quarter of a percent would be the lowest rates had ever been if not for the recent move to zero.

This is the same mistake that Ben Bernanke made when he talked about the “taper” back in 2013, and the same error that Janet Yellen is making now. At any given point in time, there is a schedule of interest rates going out into the future that reflects the future path of rates that the Fed controls.??This isn’t perfect because?almost none of us can borrow at those rates, but if credit spreads don’t vary much, movements in the schedule of rates, driven by expectations of monetary policy, affect business actions.

This implies two things:

Direction matters more than position in monetary policy. ?If expectations have moved from “zero for a long time” to “over 1% by the end of next year,” that is a large shift in expectations, and should slow business down as a result.
As a result, you can look at the Treasury curve as a proxy for the effectiveness of monetary policy.

On that second point, I have collected the Treasury yield curves since the middle of 2015 on the days after monetary policy announcements. ?Here they are, so far:

Maturity	1MO	3MO	6MO	1	2	3	5	7	10	20	30
6/18/2015	0.00	0.01	0.08	0.26	0.66	1.03	1.65	2.08	2.35	2.86	3.14
7/30/2015	0.05	0.07	0.15	0.36	0.72	1.07	1.62	2.02	2.28	2.66	2.96
9/18/2015	0.00	0.00	0.10	0.35	0.69	0.97	1.45	1.83	2.13	2.58	2.93
10/29/2015	0.02	0.07	0.21	0.33	0.75	1.05	1.53	1.90	2.19	2.60	2.96
12/17/2015	0.18	0.23	0.48	0.69	1.00	1.33	1.73	2.05	2.24	2.57	2.94

You can see the impact of the FOMC tightening out to five years, maybe seven. ?After that, there is no effect, so far, except to say that the yield curve is already flattening, and that the Fed my end up stopping much sooner than many expect — including the FOMC and their “dot plot” which expects a 2%+ Fed funds rate in 2017, and 3%+ in 2018. ?Unless the long end of the yield curve reprices up in yield, there is no way those higher Fed funds rates?will happen.

Which brings me back to Stanley Fischer. ?He’s a smart guy, perhaps the smartest on the Fed Board. ?Maybe he meant there was no way rates could rise much for a long time. ?If that’s the case, he may be way ahead of the curve. ?Only time will tell.

The Graphs Go Southeast

Posted on 18 December 2015 by David Merkel

If you always overestimate, and don't change, what does that imply? — If you always overestimate, and don’t change, what does that imply?

Since the FOMC started providing their estimates on economic aggregates four years ago, I’ve been simplifying them, and posted a weighted average to cut through the clutter of their releases. ?From the above graph, you can see one thing that is consistent: ?They overestimate GDP. ?Far from seeing GDP over 3%, GDP has come in squarely in the 2% range.

It may even be that this is slowly wearing on the participants, who have progressively lowered their initial estimates of future GDP over time. ?You can see that in the initial estimates of GDP 2014-2018, and also the decline in long-term GDP moving from 2.5% to 2.0% in four short years.

The FOMC is no different than the rest of us — they are subject to groupthink and playing catch-up.

You can give them a little more credit on unemployment. ?At least things are going the way they would like. ?That said, improvement in the unemployment rate has exceeded their estimates, while GDP has fallen under their estimates.

They live in a bubble, so please don’t tell them that labor measures don’t correlate so tightly with the economy as a whole. ?I mean, in the long run, the correlation is high and significant, but as far as short-term policy goes, the relationship has a lot of noise, particularly amid globalization and improvements in technology.

Same applies to the PCE inflation rate… they think they can get inflation going (whether truly desirable or not). ?So where is it? ?Federal Reserve, you say you have the vaunted powers to create and destroy inflation. ?If you can do something, do it.

My guess is that the Fed?won’t do it. ?As with most central banks, they have engaged in a game where they increase some aspects of internal credit, and in a way where precious little if any leaks out to the unfavored wretches with no access.

On the short-term bright side, they absorb government debt, which makes it easier for the US Government to keep our taxes low. ?On the dim side, central banks buying lots of government debt has tended to backfire in the past.

Finally, the FOMC participants have overestimated for the last four years the need and willingness to tighten monetary policy.

Can we agree that QE really didn’t do that much, and that the unemployment rate pretty much solved itself, aside from losing a lot workers permanently? ?These graphs behave the way a bunch of “true believers” would think their great power should ?work, and them slowly give in to reality annually, but not permanently.

Anyway, consider these articles post-Fed tightening:

Fed Ends Zero-Rate Era; Signals 4 Quarter-Point Increases in 2016 Bloomberg)

This article is too excited, the math of the FOMC indicates more like 3 quarter-point moves. ?Also note that the FOMC is not very permanent about their views, plans, or whatever.

The Fed and Wall Street Differ on How High Rates Will Go (Bloomberg)

Wall Street, correctly looking at the past says that the Fed has moved slower than they said they would. ?Why should it be any different now?

Fed Raised Rates Without a Hitch, and It Only Took $105 Billion (Bloomberg)

Too triumphalist about the first tightening. ?Wait for the cost of funds to catch up at the banks.

Fed Hikes, but Some Rates Veer Lower (WSJ) Subtitle:?Yields on Treasurys drop after central-bank move

That’s part of what I would tell you to watch — if the yield curve flattens quickly, the FOMC will not do so much, most likely. ?They will still keep going till something blows up.

One final note, and one that I don’t have a link for… Moody’s suggested in a macroeconomic note that yield spreads on junk debt are too high for the FOMC to tighten much. ?Nice thought, though we are in an unusual situation for both Fed funds and junk debt. ?That rule may?not apply.

Redacted Version of the December 2015 FOMC Statement

Posted on 16 December 2015 by David Merkel

Photo Credit: Day Donaldson

October 2015	December 2015	Comments
Information received since the Federal Open Market Committee met in September suggests that economic activity has been expanding at a moderate pace.	Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace.	No change.
Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft.	Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft.	No change.
The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.	A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year.	Shades labor employment up.
Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.	Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports.	No real change.
Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.	Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.	Little change and mixed.? TIPS are showing lower inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 1.71%, down 0.08% from September.
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 expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate.	The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen.	Shifts language to reflect moving from easing to tightening.
The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring global economic and financial developments.	Overall, taking into account domestic and international developments, the Committee sees the risks to the outlook for both economic activity and the labor market as balanced.	Flips the sentence around with little change in meaning.
Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.	Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.	CPI is at +0.4% now, yoy.? Not much change in the meaning.
The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.	The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective.	Sentence moved from below.? I reordered the last FOMC Statement to reflect the change. Language changes to reflect the move to tightening.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate.	Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent.	Language changes to reflect the move to tightening.
In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.	The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.	Language changes to reflect the move to tightening.
	In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.	New sentence.? Gives expected measures for analysis of policy.
This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.	This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.	No change.? Gives the FOMC flexibility in decision-making, because they really don?t know what matters, and whether they can truly do anything with monetary policy.
	In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.	New sentence.? Says that they will go slowly, and react to new data.? Big surprises, those.
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 of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.	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 of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.	Says it will keep reinvesting maturing proceeds of agency debt and MBS, which blunts any tightening.
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. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.		Sentence no longer needed.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.	Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.	All agree on tightening, but do they agree on why?
Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.		Lacker got what he wanted.

Comments

They finally tightened. The next two questions are how much and how quickly.? The last question is what they do when something blows up.
The only data change for the FOMC is that labor indicators are stronger. I still don?t see it, aside from the unemployment rate.? Too many people dropped out of the labor force.
Equities steady and bonds rise. Commodity prices rise and the dollar falls.? Maybe some expected a bigger move.
The FOMC says that any future change to policy is contingent on almost everything.
Don?t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain?t moving rates up, absent improvement in labor market indicators, much higher inflation, or a US Dollar crisis.

Seven Thoughts on the Markets

Posted on 16 December 2015 by David Merkel

Photo Credit: t m || Seven sisters sitting on the hill

1) I started in this game as an amateur, and built up my skills gradually, reading widely. ?My academic studies ended at age 25, and it was after that that I began learning the practical knowledge. ?Though I had investment-related jobs, I never held a position in investing, until I was 38, and I never wrote on investing for the public in any significant way until I was 42, when Cramer invited me to write for RealMoney. ?I’m now 55, and I think I am still growing in my knowledge of investing.

i write this to simply say that you don’t have to take a traditional path into the investment business. ?I am grateful that I want through the circuitous path through the insurance industry, because it deepened my perspective on investing. ?All of the asset-liability modeling, where I often tried to challenge existing paradigms, helped me to understand why often the conventional wisdom is true. ?Where it is not true, there is usually an anomaly to profit from.

The other reason that I write this, is that it is possible to get significant knowledge as an amateur, and on a book basis, as good as many professionals. ?You won’t get the respect from professionals until you are a professional, but who cares? ?You can do better for yourself in investing. ?Just don’t get arrogant and forget to put risk control forst.

2) After all of the political fights are over, OPEC nations will once again agree that they will cut production as a group. ?Remember, much of OPEC has a low cost of production, and so when production decreases in a coordinated way, profits will rise for almost all OPEC nations.

In the long run, economics triumphs over politics. ?The challenge comes in the short-run from trying to figure out who cuts how much from what baseline. ?Even after that, discipline takes a while to achieve, because the incentive to cheat is high.

I stand by the view that in the intermediate term, crude oil prices will be around $50. ?Demand for crude oil is growing globally, not shrinking, and marginal supplies would price out at around $50/barrel, if OPEC nations act to maximize their profits, rather than engage in a market share war. ?(Prices would be higher still ?if OPEC nations acted to maximize the present value of their long-run profits, but I doubt that will happen until the profligate producers deplete their reserves.

3) The ferment in high yield bonds is unlikely to peak before there are significant defaults. ?It’s possible that we get a rally from here in the short run — yield spreads are relatively wide compared to earnings yields on stock. ?At this point, it doesn’t pay so well to borrow money and buy back stock. ?That isn’t stopping many corporations from doing their buybacks. ?Buybacks should be tactical rather than constant. ?Only buy back when there is a significant discount to the fair market value of the firm.

That said, it’s unusual for a large amount of credit stress to go away without defaults. ?It’s rare to see a credit problem work out by firms growing out of it. ?Thus what might be more likely than a junk rally is a fall in stock prices. ?Perhaps the most optimistic scenario would be that only energy is affected — it has defaults, and the rest of the market continues to rally. ?Not impossible.

4) Regarding F&G Life — congrats to holders, you won. ?A dumb aggressive foreign buyer jumped on the grenade for you. (Now let’s see, has that ever happened before to F&G Life?) ?Be grateful and sell. ?Let the arbs take the risk of the deal not going through.

5) One phrase that all investors should learn is, “I missed that one.” ?You can’t catch every opportunity. ?Some will pass you by despite your best efforts. ?Rather than jump on late, it is better to look for the next opportunity, lest you buy high and sell low.

On the opposite side of timing, if you tend to get to opportunities too early, maybe consider waiting until the price breaks the 200-day moving average from below. ?Let the market confirm that it agrees with your thesis, and then invest.

6) Regarding the Fed, I think too much is being made out of them for now. ?I will be watching the yield curve for clues, and seeing if the curve flattens or steepens. ?I expect it to flatten more quickly than the market currently expects,?limiting the total amount of Fed tightening.

As it is, every time the Fed tightens, the short interest-bearing deposits at banks reprice up, with some lesser amount pass-through to lending rates. ?I would expect bank profits to be squeezed.

Aside from that, most of what the FOMC will say tomorrow will just be noise. ?They don’t have a theory that guides them; they are just making it up as they go, so they wander and try to discover what their goals should be.

7) I’ve sometimes commented that at the start of a tightening cycle that those who have been cheating blow up, like Third Avenue Focused Credit, which bought assets far less liquid than the shares of its mutual fund. ?At the end of the tightening cycle, something blows up that would be a surprise now, which sometimes jolts the FOMC to stop tightening. ?The question here is: what could that group of economic entities be? ?China, Brazil, repo markets, agricultural loans, auto loans, or something else? ?Worth thinking about — we know about energy, but what else has issued the most debt since the end of 2008?

(As an aside, the recent moves to make China more integrated with the global economy also make it more subject to financial risks that are global, and not just local, of which it has enough.)

How Much is that Asset in the Window? (III)

Posted on 12 December 2015 by David Merkel

A: How are you doing? Are you here for more enlightening banter?

Q: Not so well. ?Have you heard of the Third Avenue?Focused Credit Fund [TFCIX]?

A: Uh, the one that is in the news?

Q:?Come on.

A: Yes, I know about it, but not much more than I have recently read. ?Of all of Third Avenue’s Funds I know it least well.

Q: Weren’t you a bond manager who liked to take concentrated positions though? ?You should be able to say something about this mess.

A: I dealt mainly with investment grade credit. ?What’s more, I had a real balance sheet behind me at the life insurance company. ?An ordinary open-end mutual fund has investors that can leave whenever they want — often at the worst possible time for them, or in this case, those that could not get out.

The main difference was that I could never be forced to sell, under most conditions. ?I could buy and hold, and if the eventual credit of the borrower was good, my client would receive all that he expected. ?TFCIX faced significant redemptions, and increasingly had mostly bonds that could not be quickly sold, and thus, were difficult to value. ?That’s why they cut off redemptions — they couldn’t?liquidate assets to give cash to customers on a favorable basis. ?Personally, I think setting up the liquidation trust was the best that could be done. ?That will allow Third Avenue to negotiate with interested buyers of the bonds without being rushed by redemptions. ?The remaining fundholders should be grateful for them doing this now, though it would have been better to act sooner.

Q: But I own shares in?TFCIX and need the money now. ?What can I do?

A: Oh, my. ?My sympathies. ?You can’t do?much. ?There might be some off the beaten track lenders out there that might take it off your hands, but they wear “panky rangs,” as a mortgage borrower once said to me.

Q: Panky Rangs?

A: Pinky rings. ?He was from the deep South. ?I.e., no one is going to give you a decent bid for your shares, even if you could find someone willing to do so. ?First, the value of the bonds is questionable, and the timing of the sales are?uncertain.

In some ways, this reminds me a little of The London Whale incident.

Q: How is that relevant?

A: JP Morgan became too great of a part of the indexed credit derivatives market, and as a result, they lost the ability to value their positions, because they were too big relative to the market in which they traded. ?Their very buying and selling had a huge impact on the pricing. ?Though a value was placed on the positions, the entire situation was impossible to value accurately; ?you couldn’t assemble a group to buy it all.

Some clever hedge funds took note of it, and began taking the opposite positions, thinking that they were overvalued, and fed JP Morgan more of what it was already bloated with. ?Now maybe, if there hadn’t been so much press furor over it, together with the accounting questions that affected the financials of JP Morgan, they could have found a way out. ?JP Morgan’s balance sheet was big enough, and if you left them alone, they would have all self -liquidated. ?They might not have made the money they wanted that way, but it could have been done. ?As it was, they were forced to liquidate more rapidly, and if I recall, they even called upon one of the opposing hedge funds to help them.

In any case, the forced liquidation led to losses. ?Most forced liquidations do.

Q: So, what do think my shares are worth?

A: They are worth the liquidating distributions that you will receive.

Q: That’s no help.

A: Is the Federal Reserve willing to step up and buy the assets as they did with?the Maiden Lane Trusts? ?No one has a bigger balance sheet than they do, oh, oops. ?Maybe they can’t do that anymore… who know where those emergency lending rules go…

Look, I’m sorry that you are stuck. ?The Madoff “investors” were stuck also. ?They had to wait quite a while. ?In the end, they got paid more than most imagined they ever would. ?Subject to credit conditions,?I would suspect that the more time Third Avenue takes to liquidate, the more you will get.

Q: But that’s dribs and drabs over time, and I need it now.

A: Patience is a virtue. ?Make other adjustments; sell something else; scale back plans… it’s no different than most people have to do when they have a loss. ?It happens.

Q: I guess… but it would help to know what it was worth, so that I could estimate tradeoffs.

A: yes, it would, but the timing and amount of liquidations are uncertain, and the “market prices” don’t really exist for the underlying — they are too influenced by Third Avenue’s holdings.

Maybe they could have converted it into a closed-end fund, ?but that would have cost money, and there still would have been the valuation issue. ?People could have gotten paid now if that had happened, but I bet they would have blanched at the size of the unrealized losses. ?I would just accept the payments as they come, that will probably give the best return, subject to future credit conditions.

Q: Do we have to modify?your statement was true when we first started this discussion:

Q: What is an asset worth?

A: An asset is worth whatever the highest bidder will pay for it at the time you offer it for sale.

After all, if it is worth the liquidating distributions if I wait, maybe you should add, “or the cash flows you receive over time.”

A: I will do that, and that is part of what I have been arguing for here, but the price here and now is not that. ?Just because you can’t sell it now doesn’t mean it doesn’t have value… we just don’t know what that value is.

Anyway, lunch is on me today, because there is another thing that you can’t sell that has value.

Q: What’s that?

A: Me. ?A friend.

Q: Let’s go…

The Limits of Risky Asset Diversification

Posted on 11 December 2015 by David Merkel

Photo Credit: Baynham Goredema || When things are crowded, how much freedom to move do you have?

Stock diversification is overrated.

Alternatives are more overrated.

High quality bonds are underrated.

This post was triggered by a guy from the UK who sent me an infographic on reducing risk that I thought was mediocre at best. ?First, I don’t like infographics or video. ?I want to learn things quickly. ?Give me well-written text to read. ?A picture is worth maybe fifty words, not a thousand, when it comes to business writing, perhaps excluding some well-designed graphs.

Here’s the problem. ?Do you want to reduce?the volatility of your asset portfolio? ?I have the solution for you. ?Buy bonds and hold some cash.

And some say to me, “Wait, I want my money to work hard. ?Can’t you find investments that offer a higher return that diversify my portfolio of stocks and other risky assets?” ?In a word the answer is “no,” though some will tell you otherwise.

Now once upon a time, in ancient times, prior to the Nixon Era, no one hedged, and no one looked for alternative investments. ?Those buying stocks stuck to well-financed “blue chip” companies.

Some clever people realized that they could take risk in other areas, and so they broadened their stock exposure to include:

Growth stocks
Midcap stocks (value & growth)
Small cap stocks (value & growth)
REITs and other income passthrough vehicles (BDCs, Royalty Trusts, MLPs, etc.)
Developed International stocks (of all kinds)
Emerging Market stocks
Frontier Market stocks
And more…

And initially, it worked. ?There was significant diversification until… the new asset subclasses were crowded with institutional money seeking the same things as the original diversifiers.

Now, was there no diversification left? ?Not much. ?The diversification from investor behavior is largely gone (the liability side of correlation). ?Different sectors of the global economy don’t move in perfect lockstep,?so natively the return drivers of the assets are 60-90% correlated (the asset side of correlation, think of how the cost of capital moves in a correlated way across companies). ?Yes, there are a few nooks and crannies that are neglected, like Russia and Brazil, industries that are deeply out of favor like gold, oil E&P, coal, mining, etc., but you have to hold your nose and take reputational risk to buy them. ?How many institutional investors want to take a 25% chance of losing a lot of clients by failing unconventionally?

Why do I hear crickets? ?Hmm…

Well, the game wasn’t up yet, and those that pursued diversification pursued alternatives, and they bought:

Timberland
Real Estate
Private Equity
Collateralized debt obligations of many flavors
Junk bonds
Distressed Debt
Merger Arbitrage
Convertible Arbitrage
Other types of arbitrage
Commodities
Off-the-beaten track bonds and derivatives, both long and short
And more… one that stunned me during the last bubble was leverage nonprime commercial paper.

Well guess what? ?Much the same thing happened here as happened with non-“blue chip” stocks. ?Initially, it worked. ?There was significant diversification until… the new asset subclasses were crowded with institutional money seeking the same things as the original diversifiers.

Now, was there no diversification left? ?Some, but less. ?Not everyone was willing to do all of these. ?The diversification from investor behavior was reduced?(the liability side of correlation). ?These don’t move in perfect lockstep,?so natively the return drivers of the risky components of the assets are 60-90% correlated over the long run (the asset side of correlation, think of how the cost of capital moves in a correlated way across companies). ?Yes, there are some?that are neglected, but you have to hold your nose and take reputational risk to buy them, or sell them short. ?Many of those blew up last time. ?How many institutional investors want to take a 25% chance of losing a lot of clients by failing unconventionally?

Why do I hear crickets again? ?Hmm…

That’s why I don’t think there is a lot to do anymore in diversifying risky assets beyond a certain point. ?Spread your exposures, and do it intelligently, such that the eggs are in baskets are different as they can be, without neglecting the effort to buy attractive assets.

But beyond that, hold dry powder. ?Think of cash, which doesn’t earn much or lose much. ?Think of some longer high quality bonds that do well when things are bad, like long treasuries.

Remember, the reward for taking business risk in general varies over time. ?Rewards are relatively thin now, valuations are somewhere in the 9th decile (80-90%). ?This isn’t a call to go nuts and sell all of your risky asset positions. ?That requires more knowledge than I will ever have. ?But it does mean having some dry powder. ?The amount is up to you as you evaluate your time horizon and your opportunities. ?Choose wisely. ?As for me, about 20-30% of my total assets are safe, but I?have been a risk-taker most of my life. ?Again, choose wisely.

PS — if the low volatility anomaly weren’t overfished, along with other aspects of factor investing (Smart Beta!) those might also offer some diversification. ?You will have to wait for those ideas to be forgotten. ?Wait to see a few fund closures, and a severe reduction in AUM for the leaders…

Book Review: The Devil’s Financial Dictionary

Posted on 10 December 2015 by David Merkel

This book is not what I expected; it’s still very good. Let me explain, and it will give you a better flavor of the book.

The author, Jason Zweig, is one of the top columnists writing about the markets for The Wall Street Journal. ?He is very knowledgeable, properly cautious, and wise. ?The title of the book Ambrose Bierce’s book that is commonly called The Devil’s Dictionary.

There are three differences in style between Zweig and Bierce:

Bierce is more cynical and satiric.
Bierce is usually shorter in his definitions, but occasionally threw in whole poems.
Zweig spends more time explaining the history of concepts and practices, and how words evolved to mean what they do today in financial matters.

If you read this book, will you learn a lot about the markets? ?Yes. ?Will it be fun? ?Also yes. ?Is it enough to read this and be well-educated? ?No, and truly, you need some knowledge of the markets to appreciate the book. ?It’s not a book for novices, but someone of intermediate or higher levels of knowledge will get some chuckles out of it, and will nod as he agrees along with the author that the markets are a treacherous place disguised as an easy place to make money.

As one person once said, “Whoever called them securities had a wicked sense of humor.” ?Enjoy the book; it doesn’t take long to read, and it can be put down and picked up with no loss of continuity.

Quibbles

None

Summary / Who Would Benefit from this Book

If you have some knowledge of the markets, and you want to have a good time seeing the?wholesome image of the markets?skewered, you will enjoy this book. ?if you want to buy it, you can buy it here: The Devil’s Financial Dictionary.

Full disclosure:?The author sent a free copy?to me via his publisher.

If you enter Amazon through my site, and you buy anything, including books, 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.)

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