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The Problem with the Phillips Curve

Saturday, August 16th, 2014

7046305715_824084ddf1_o I remember sitting in my intermediate macroeconomics class at Johns Hopkins, when the Professor was trying to develop the concept of the Phillips Curve, which posits a trade-off between labor unemployment and price inflation, at least in the short run.  The time was the Fall of 1980, and macroeconomics was trying to catch up with what happened with stagflation, because that was not something that expected would come from their policy recommendations that offered the politicians a free lunch.

This trade-off underlies the concept of the dual mandate of the Federal Reserve, where they are not only to try to restrain price inflation, but also aim for full labor employment.  I don’t think it is realistic to do this for two reasons.

1) For the theory of the Phillips Curve to work, the central assumption is that price inflation funnels directly into wage inflation.  This is a questionable assumption, as I will explain below.

2) The FOMC has a hard enough time using monetary policy to restrain or accelerate price inflation.

Why might price inflation vary from wage inflation?  There are two main reasons in the present: technological improvements that require less labor to produce the same or better output, and an increase in overseas laborers available to produce good or services outside the US for sale inside the US.  Notice I am not mentioning immigration, though that might have a small impact on the wages of the lowest-skilled jobs in the short run.

I see both of these factors acting at present, which until our economy adjusts to create more jobs, initially at lower pay than most will want, will restrain the growth in wages, particularly adjusted for inflation.

  1. Now, give Janet Yellen some credit, because she recognizes the weakness of looking at the headline unemployment number as a guide to policy and has broadened out her labor market indicators to reflect that a low U-3 unemployment rate doesn’t mean the labor market is great.  She looks at the rates of layoffs/firings, job openings, voluntary quitting, hiring, and labor force partipation, among others.
  2. This is similar to what I suggested in a recent post on labor underemployment.  Payments to labor are a smaller fraction of the economy, and real wages have flatlined.
  3. That said, I don’t think the Fed can succeed here, because the relationship between monetary policy and real wages is nonexistent as far as I can see.  The Fed is better at inflating assets in an era where the better-off save, than it is in inflating prices, which it more direct effect on than wages.
  4. There is slow but steady pressure for wage rates to equalize globally, slowly but surely.  Being born in the West is not in itself a ticket to above average wages.

I don’t blame the Fed for the poor labor market conditions; it’s not in their power.  Maybe we can blame Congress and the Executive Branch for making laws that inhibit hiring and firing, both at the national and state levels.  We might blame the schools for not taking a more balanced approach to education, stressing vocational education alongside a strong liberal arts education that includes real science and math.  Parents, if the school systems don’t do this, if your children will listen to you, get them thinking along these lines.

You are your own best defender with respect to your own employment, so put some thought into alternative work, should you find yourself unemployed.  Analyze how you can meet the most needs/demands of others and fill those needs/demands, and you will never lack work.

I wish you the best in a tough labor market.

The Shadows of the Bond Market’s Past, Part II

Wednesday, August 13th, 2014

This is the continuation of The Shadows of the Bond Market’s Past, Part I.  If you haven’t read part I, you will need to read it.  Before I start, there is one more thing I want to add regarding 1994-5: the FOMC used signals from the bond markets to give themselves estimates of expected inflation.  Because of that, the FOMC overdid policy, because the dominant seller of Treasuries was not focusing on the economy, but on hedging mortgage bonds.  Had the FOMC paid more attention to what the real economy was doing, they would not have tightened so much or so fast.  Financial markets are only weakly representative of what the real economy is doing; there’s too much noise.

All that said, in 1991 the Fed also overshot policy on the other side in order to let bank balance sheets heal, so let it not be said that the Fed only responds to signals in the real economy.  (No one should wonder who went through the financial crisis that the Fed has an expansive view of its mandate in practice.)

October 2001

2001 changed America.  September 11th led to a greater loosening of credit by the FOMC in order to counteract spreading unease in the credit markets.  Credit spreads were widening quickly as many lenders were unwilling to take risk at a time where times were so unsettled.  The group that I led took more risk, and the story is told here.  The stock market had been falling most of 2001 when 9/11 came.  When the markets reopened, it fell hard, and rallied into early 2002, before falling harder amid all of the scandals and weak economy, finally bottoming in October 2002.

The rapid move down in the Fed funds rate was not accompanied by a move down in long bond yields, creating a very steep curve.  There were conversations among analysts that the banks were healthy, though many industrial firms, like automobiles were not.  Perhaps the Fed was trying to use housing to pull the economy out of the ditch.  Industries that were already over-levered could not absorb more credit from the Fed.  Unemployment was rising, and inflation was falling.

There was no bad result to this time of loosening — another surprise would lurk until mid-2004, when finally the loosening would go away.  By that time, the stock market would be much higher, about as high as it was in October 2001, and credit spreads tighter.

July 2004

At the end of June 2004, the FOMC did its first hike of what would be 17 1/4% rises in the Fed funds rate which would be monotony interspersed with hyper-interpretation of FOMC statement language adjustments, mixed with the wonder of a little kid in the back seat, saying, “Daddy, when will we get there?”  The FOMC had good reason to act.  Inflation was rising, unemployment was falling, and they had just left the policy rate down at 1% for 12 straight months.  In the midst of that in June-August 2003, there was a another small panic in the mortgage bond market, but this time, the FOMC stuck to its guns and did not raise rates, as they did for something larger in 1994.

With the rise in the Fed funds rate to 1 1/4%, the rate was as high as it was when the recession bottomed in November 2002.  That’s quite a long period of low rates.  During that period, the stock market rallied vigorously, credit spreads tightened, and housing prices rallied.  Long bonds stayed largely flat across the whole period, but still volatile.

There were several surprises in store for the FOMC and investors as  the tightening cycle went on:

  1. The stock market continued to rally.
  2. So did housing.
  3. So did long bonds, at least for a time.
  4. Every now and then there were little panics, like the credit convexity panic in May 2005, from a funky long-short CDO bet.
  5. Credit complexity multiplied.  All manner of arbitrage schemes flourished.  Novel structures for making money off of credit, like CPDOs emerge.  (The wisdom of finance bloggers as skeptics grows.)
  6. By the end, the yield curve invests the hard way, with long bonds falling a touch through the cycle.
  7. Private leverage continued to build, and aggressively, particularly in financials.
  8. Lending standards deteriorated.

We know how this one ended, but at the end of the tightening cycle, it seemed like another success.  Only a few nut jobs were dissatisfied, thinking that the banks and homeowners were over-levered.  In hindsight, FOMC policy should have moved faster and stopped at a lower level, maybe then we would have had less leverage to work through.

June 2010

15 months after the bottom of the crisis, the stock market has rallied dramatically, with a recent small fall, but housing continues to fall in value.  There’s more leverage behind houses, so when the prices do finally fall, it gains momentum as people throw in the towel, knowing they have lost it all, and in some cases, more.  For the past year, long bond yields have gone up and down, making a round-trip, but a lot higher than during late 2008.  Credit spreads are still high, but not as high as during late 2008.

Inflation is low and volatile, unemployment is off the peak of a few months earlier, but is still high.  Real GDP is growing at a decent clip, but fitfully, and it is still not up to pre-crisis levels.  Aside from the PPACA [Obamacare], congress hasn’t done much of anything, and the Fed tries to fill the void by expanding its balance sheet through QE1, which ended in June 2010. Things feel pretty punk altogether.

The FOMC can’t cut the Fed funds rate anymore, so it relies on language in its FOMC Statement to tell economic actors that Fed funds will be “exceptionally low” for an “extended period.”  Four months from then, the QE2 would sail, making the balance sheet of the Fed bigger, but probably doing little good for the economy.

The results of this period aren’t fully known yet because we still living in the same essential macro environment, with a few exceptions, which I will take up in the final section.

August 2014

Inflation remains low, but may finally be rising.  Unemployment has fallen, much of it due to discouraged workers, but there is much underemployment.  Housing has finally gotten traction in the last two years, but there are many cross-currents.  The financial crisis eliminated move-up buyers by destroying their equity.  Stocks have continued on a tear, and corporate credit spreads are very tight, tighter than any of the other periods where the yield curve was shaped as it is now.  The long bond has had a few scares, but has confounded market participants by hanging around in a range of 2.5%- 4.0% over the last two years.

There are rumblings from the FOMC that the Fed funds rate may rise sometime in 2015, after 72+ months hanging out at 0%.  QE may end in a few more months, leaving the balance sheet of the Fed at 5 times its pre-crisis size.  Change may be upon us.

This yield curve shape tends to happen over my survey period at a time when change is about to happen (4 of 7 times — 1971, 1977, 1993 and 2004), and one where the FOMC will raise rates aggressively (3 of 7 times — 1977, 1993 and 2004) after fed funds have been left too low for too long.  2 out of 7 times, this yield curve shape appears near the end of a loosening cycle (1991 and 2001).  1 out of 7 times it appears before a deep recession, as in 1971. 1 out of 7 times it appears in the midst of an uncertain recovery — 2010. 3 out 7 times, inflation will rise significantly, such as in 1971, 1977 and 2004.

My tentative conclusion is this… the fed funds rate has been too low for too long, and we will see a rapid rise in rates, unless the weak economy chokes it off because it can’t tolerate any significant rate increases.  One final note before I close: when the tightening starts, watch the long end of the yield curve.  I did this 2004-7, and it helped me understand what would happen better than most observers.  If the yield of the long bond moves down, or even stays even, the FOMC probably won’t persist in raising rates much, as the economy is too weak.  If the long bond runs higher, it might be a doozy of a tightening cycle.

And , for those that speculate, look for places that can’t tolerate or would  love higher short rates.  Same for moves in the long bond either way, or wider credit spreads — they can’t get that much tighter.

This is an unusual environment, and as I like to say, “Unusual typically begets unusual, it does not beget normal.”  What I don’t know is how unusual and where.  Those getting those answers right will do better than most.  But if you can’t figure it out, don’t take much risk.

The Shadows of the Bond Market’s Past, Part I

Tuesday, August 12th, 2014

Simulated Constant Maturity Treasury Yields 8-1-14_24541_image001

 

Source: FRED

Above is the chart, and here is the data for tonight’s piece:

DateT1T3T5T7T10T20T30AAABAASpdNote
3/1/713.694.505.005.425.705.946.01*7.218.461.25High
4/1/775.446.316.797.117.377.677.738.049.071.03Med
12/1/914.385.396.196.697.097.667.708.319.260.95Med
8/1/933.444.365.035.355.686.276.326.857.600.75Med
10/1/012.333.143.914.314.575.345.327.037.910.88Med
7/1/042.103.053.694.114.505.245.235.826.620.80Med
6/1/100.321.172.002.663.203.954.134.886.231.35High
8/1/140.130.941.672.162.523.033.294.184.750.57Low

Source: FRED   |||     * = Simulated data value  |||  Note: T1 means the yield on a one-year Treasury Note, T30, 30-year Treasury Bond, etc.

Above you see the seven yield curves most like the current yield curve, since 1953.  The table also shows yields for Aaa and Baa bonds (25-30 years in length), and the spread between them.

Tonight’s exercise is to describe the historical environments for these time periods, throw in some color from other markets, describe what happened afterward, and see if there might be any lessons for us today.  Let’s go!

March 1971

Fed funds hits a local low point as the FOMC loosens policy under Burns to boost the economy, to fight rising unemployment, so that Richard Nixon could be reassured re-election.  The S&P 500 was near an all-time high.  Corporate yield spreads  were high; maybe the corporate bond market was skeptical.

1971 was a tough year, with the Vietnam War being unpopular. Inflation was rising, Nixon severed the final link that the US Dollar had to Gold, an Imposed wage and price controls.  There were two moon landings in 1971 — the US Government was in some ways trying to do too much with too little.

Monetary policy remained loose for most of 1972, tightening late in the years, with the result coming in 1973-4: a severe recession accompanied by high inflation, and a severe bear market.  I remember the economic news of that era, even though I was a teenager watching Louis Rukeyser on Friday nights with my Mom.

April 1977

Once again, Fed funds is very near its local low point for that cycle, and inflation is rising.  After the 1975-6 recovery, the stock market is muddling along.  The post-election period is the only period of time in the Carter presidency where the economy feels decent.  The corporate bond market is getting close to finishing its spread narrowing after the 1973-4 recession.

The “energy crisis” and the Cold War were in full swing in April 1977.  Economically, there was no malaise at the time, but in 3 short years, the Fed funds rate would rise from 4.73% to 17.61% in April 1980, as Paul Volcker slammed on the brakes in an effort to contain rising inflation.  A lotta things weren’t secured and flew through the metaphorical windshield, including the bond market, real GDP, unemployment, and Carter’s re-election chances.  Oddly, the stock market did not fall but muddled, with a lot of short-term volatility.

December 1991

This yield curve is the second most like today’s yield curve.  It comes very near the end of the loosening that the FOMC was doing in order to rescue the banks from all of the bad commercial real estate lending they had done in the late 1980s.  A wide yield curve would give surviving banks the ability to make profits and heal themselves (sound familiar?).  Supposedly at the beginning of that process in late 1990, Alan Greenspan said something to the effect of “We’re going to give the banks a lay-up!”  Thus Fed funds went from 7.3% to 4.4% in the 12 months prior to December 1991, before settling out at 3% 12 months later.  Inflation and unemployment were relatively flat.

1991 was a triumphant year in the US, with the Soviet Union falling, Gulf War I ending in a victory (though with an uncertain future), 30-year bond yields hitting new lows, and the stock market hitting new all time highs.  Corporate bonds were doing well also, with tightening spreads.

What would the future bring?  The next section will tell you.

August 1993

This yield curve is the most like today’s yield curve.  Fed funds are in the 13th month out of 19 where they have been held there amid a strengthening economy.  The housing market is doing well, and mortgage refinancing has been high for the last three years, creating a situation where those investing in mortgages securities have a limited set of coupon rates that they can buy if they want to put money to work in size.

An aside before I go on — 1989 through 1993 was the era of clever mortgage bond managers, as CMOs sliced and diced bundles of mortgage payments so that managers could make exotic bets on moves in interest and prepayment rates.  Prior to 1994, it seemed the more risk you took, the better returns were.  The models that most used were crude, but they thought they had sophisticated models.  The 1990s were an era where prepayment occurred at lower and lower thresholds of interest rate savings.

As short rates stayed low, long bonds rallied for two reasons: mortgage bond managers would hedge their portfolios by buying Treasuries as prepayments occurred.  They did that to try to maintain a constant degree of interest rate sensitivity to overall moves in interest rates.  Second, when you hold down short rates long enough, and you give the impression that they will stay there (extended period language was used — though no FOMC Statements were made prior to 1994), bond managers start to speculate by buying longer securities in an effort to clip extra income.  (This is the era that this story (number 2 in this article) took place in, which is part of how the era affected me.)

At the time, nothing felt too unusual.  The economy was growing, inflation was tame, unemployment was flat.  But six months later came the comeuppance in the bond market, which had some knock-on effects to the economy, but primarily was just a bond market issue.   The FOMC hiked the Fed funds rate in February 1994 by one quarter percent, together with a novel statement issued by Chairman Greenspan.  The bond market was caught by surprise, and as rates rose, prepayments fell.  To maintain a neutral market posture, mortgage bond managers sold long Treasury and mortgage bonds, forcing long rates still higher.  In the midst of this the FOMC began raising the fed funds rate higher and higher as they feared economic growth would lead to inflation, with rising long rates a possible sign of higher expected inflation.  The FOMC raises Fed fund by 1/2%.

In April, thinking they see continued rises in inflation expectation, they do an inter-meeting surprise 1/4% raise of Fed funds, followed by another 1/2% in May.  It is at this pint that Vice Chairman McDonough tentatively realizes [page 27] that the mortgage market has now tightly coupled the response of the long end of the bond market to the short end the bond market, and thus, Fed policy.  This was never mentioned again in the FOMC Transcripts, though it was the dominant factor moving the bond markets.  The Fed was so focused on the real economy, that they did not realize their actions were mostly affecting the financial economy.

FOMC policy continued: Nothing in July, 1/2% rise in August, nothing in September, 3/4% rise in November, nothing in December, and 1/2% rise in February 1995, ending the tightening. In late December 1994 and January of 1995, the US Treasury and the Fed participated in a rescue of the Mexican peso, which was mostly caused by bad Mexican economic policy, but higher rates in the US diminished demand for the cetes, short-term US Dollar-denominated Mexican government notes.

The stock market muddled during this period, and the real economy kept growing, inflation in check, and unemployment unaffected.  Corporate spreads tightened; I remember that it was difficult to get good yields for my Guaranteed Investment Contract [GIC] business back then.

But the bond markets left their own impacts: many seemingly clever mortgage bond managers blew up, as did the finances of Orange County, whose Treasurer was a mortgage bond speculator.  Certain interest rate derivatives blew up, such as the ones at Procter & Gamble.  Several life insurers lost a bundle in the floating rate GIC market; the company I served was not one of them.  We even made extra money that year.

The main point of August 1993 is this: holding short rates low for an extended period builds up imbalances in some part of the financial sector — in this case, it was residential mortgages.  There are costs to providing too much liquidity, but the FOMC is not an institution with foresight, and I don’t think they learn, either.

This has already gotten too long, so I will close up here, and do part II tomorrow.  Thanks for reading.

Regarding Underemployment

Saturday, August 2nd, 2014

This is just meant to be a few thoughts.  I haven’t worked everything out, but I want to talk about how the labor markets are weak.

Yes, the headline statistics are strong.  The U-3 unemployment figure is low at 6.2%.  But look at a few other statistics:

My, but wages as a share of GDP has been falling.

And real wages have flatlined.  No surprise that many feel pinched in the present environment.  Even the Federal Reserve Chairwoman Janet Yellen expresses her doubts about the labor markets, which was expressed through the most recent FOMC Statement.

The problem is this: the relationship between labor employment and monetary policy is weak.  It is weaker than pushing on a string.  There are two major factors retarding the US labor market, and they are globalization and increased productivity from technology.

The value of knowledge is rising relative to less-skilled labor.  As such, we are seeing increased income inequality in the US, but lower income inequality globally.  Bright people in foreign lands who can transmit their skills over the internet can do better for themselves, even as more expensive counterparts in the US lose business.

Call this the revenge of the nerds.  The internet enables bright people to profit from their differential knowledge, as it can be applied to wider opportunities.

Think of India for a moment.  Many bright people with advanced degrees, but education amounts to little unless you can use it for your own benefit.

Here’s my main point.  The FOMC con’t do much about the labor markets; their power is weak.  The bigger factors of globalization and technology can’t be fought.  They are too big.

Thus, you are on your own.  The US Government does not have the power to re-create the unique middle class prosperity of the ’50s and ’60s.  If you work for others, you are not your own master.  Aim to make yourself the master of your situation, by making yourself invaluable to your clients.

Redacted Version of the July 2014 FOMC Statement

Wednesday, July 30th, 2014
June 2014July 2014Comments
Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months.Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter.This is another overestimate by the FOMC.
Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources. More people working some amount of time, but many discouraged workers, part-time workers, lower paid positions, etc.
Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.No real change

 

Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.No change.  Funny that they don’t call their tapering a “restraint.”
Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.Inflation has moved somewhat closer to the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.Finally notes that inflation has risen.  TIPS are showing slightly higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.60%, up 0.14% from June.
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 and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate.The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate.Adds in inflation, also changes measure of the labor market to broaden it from “conditions” to “indicators,” not that that will help much.

They can’t truly affect the labor markets in any effective way.

The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.CPI is at 2.1% now, yoy.  They shade up their view on inflation’s amount and persistence.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.No change.
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month.In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month.Reduces the purchase rate by $5 billion each on Treasuries and MBS.  No big deal.

 

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.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.No change
The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.No change.  But it has almost no impact on interest rates on the long end, which are rallying into a weakening global economy.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.No change. Useless paragraph.
If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetingsNo change.  Says that purchases will likely continue to decline if the economy continues to improve.
However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.No change.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.No change.
In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. 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 developments.In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. 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 developments.No change.  Monetary policy is like jazz; we make it up as we go.  Also note that progress can be expected progress – presumably that means looking at the change in forward expectations for inflation, etc.
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.No change.  Its standards for raising Fed funds are arbitrary.
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.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.No change.
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.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.No change.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo.Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.Plosser dissents.  Finally someone with a little courage.
 Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.Thank you, Mr. Plosser.  The end to easing is coming, but what will happen when it starts to bite?

 

Comments

  • The two main points of this FOMC statement are: 1)  The Fed recognizes that inflation has risen, and is likely to persist. 2)   Despite lower unemployment levels, labor market conditions are still pretty punk.  Much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.  Wage growth is weak also.
  • Markets don’t move much on the news.  Really, not a lot here.
  • Small $10 B/month taper.  Equities and long bonds both rise.  Commodity prices rise.  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 FOMC needs to chop the “dead wood” out of its statement.  Brief communication is clear communication.  If a sentence doesn’t change often, remove it.
  • In the past I have said, “When [holding down longer-term rates on the highest-quality debt] doesn’t work, what will they do?  I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.  The Fed is playing with forces bigger than themselves, and it isn’t dawning on them yet.
  • 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.

A Few Notes on Bonds

Wednesday, June 25th, 2014

My comments this evening stem from a Bloomberg.com article entitled Bond Market Has $900 Billion Mom-and-Pop Problem When Rates Rise.  A few excerpts with my comments:

It’s never been easier for individuals to enter some of the most esoteric debt markets. Wall Street’s biggest firms are worried that it’ll be just as simple for them to leave.

Investors have piled more than $900 billion into taxable bond funds since the 2008 financial crisis, buying stock-like shares of mutual and exchange-traded funds to gain access to infrequently-traded markets. This flood of cash has helped cause prices to surge and yields to plunge.

Once bonds are issued, they are issued.  What changes is the perception of market players as they evaluate where they will get the best returns relative expected future yields, defaults, etc.

Regarding ETFs, yes, ETFs grow in bull markets because it pays to create new units.  They will shrink in bear markets, because it will pay to dissolve units.  That said when ETF units are dissolved, the bonds formerly in the ETF don’t disappear — someone else holds them.

But in a crisis, there is no desire to exchange existing cash for new bonds that have not been issued yet.  Issuance plummets as yields rise and prices fall for risky debt.  The opposite often happens with the safest debt.  New money seeks safety amid the panic.

Last week, Fed Chair Janet Yellen said she didn’t see more than a moderate level of risk to financial stability from leverage or the ballooning volumes of debt. Even though it may be concerning that Bank of America Merrill Lynch index data shows yields on junk bonds have plunged to 5.6 percent, the lowest ever and 3.4 percentage points below the decade-long average, the outlook for defaults does look pretty good.

Moody’s Investors Service predicts the global speculative-grade default rate will decline to 2.1 percent at year-end from 2.3 percent in May. Both are less than half the rate’s historical average of 4.7 percent.

Janet Yellen would not know financial risk even if Satan himself showed up on her doorstep offering to sell private subprime asset-backed securities for a yield of Treasuries plus 2%.  I exaggerate, but yields on high-yield bonds are at an all-time low:

Could spreads grind tighter?  Maybe, we are at 3.35% now.  The record on the BofA ML HY Master II is 2.41% back in mid-2007, when interest rates were much higher, and the credit frenzy was astounding.

But when overall rates are higher, investors are willing to take spread lower.  There is an intrinsic unwillingness for both rates and spreads to be at their lowest at the same time.  That has not happened historically, though admittedly, the data is sparse.  Spread data began in the ’90s, and yield data in a detailed way in the ’80s.  The Moody’s investment grade series go further back, but those are very special series of long bonds, and may not represent reality for modern markets.

Also, with default rates, it is not wise to think of them in terms of averages.  Defaults are either cascading or absent, the rating agencies, most economists and analysts do not call the turning points well.  The transition from “no risk at all” in mid-2007 to mega-risk 15 months later was very quick.  A few bears called it, but few bears called it shifting their view in 2007 – most had been calling it for a few years.

The tough thing is knowing when too much debt has built up versus ability to service it, and have all short-term ways to issue yet a little more debt been exhausted?  Consider the warning signs ignored from mid-2007 to the failure of Lehman Brothers:

  • Shanghai market takes a whack (okay, early 2007)
  • [Structured Investment Vehicles] SIVs fall apart.
  • Quant hedge funds have a mini meltdown
  • Subprime MBS begins its meltdown
  • Bear Stearns is bought out by JP Morgan under stress
  • Auction-rate preferred securities market fails.
  • And there was more, but it eludes me now…

Do we have the same amount of tomfoolery in the credit markets today?  That’s a hard question to answer.  Outstanding derivatives usage is high, but I haven’t seen egregious behavior.  The Fed is the leader in tomfoolery, engaging in QE, and creating lots of bank reserves, no telling what they will do if the economy finally heats up and banks want to lend to private parties with abandon.

That concern is also revealed in BlackRock Inc.’s pitch in a paper published last month that regulators should consider redemption restrictions for some bond mutual funds, including extra fees for large redeemers.

A year ago, bond funds suffered record withdrawals amid hysteria about a sudden increase in benchmark yields. A 0.8 percentage point rise in the 10-year Treasury yield in May and June last year spurred a sell-off that caused $248 billion of market value losses on the Bank of America Merrill Lynch U.S. Corporate and High Yield Index.

Of course, yields on 10-year Treasuries (USGG10YR) have since fallen to 2.6 percent from 3 percent at the end of December and company bonds have resumed their rally. Analysts are worrying about what happens when the gift of easy money goes away for good.

With demand for credit still weak, it is more likely that rates go lower for now.  That makes a statement for the next few months, not the next year.  The ending of QE and future rising fed funds rate is already reflected in current yields.  Bloomberg.com must be breaking in new writers, because the end of Fed easing is already expected by the market as a whole.  Deviations from that will affect the market.  But if the economy remains weak, and lending to businesses stays punk, then rates can go lower for some time, until private lending starts in earnest.

Summary

  • Is too much credit risk being taken?  Probably.  Spreads are low, and yields are record low.
  • Is a credit crisis near?  Wait a year, then ask again.
  • Typically, most people are surprised when credit turns negative, so if you have questions, be cautious.
  • Does the end of QE mean higher long rates?  Not necessarily, but watch bank lending and inflation.  More of either of those could drive rates higher.

To the Fed: A Picture is Worth 1000 Words

Thursday, June 19th, 2014

The FOMC statements are much longer than they used to be, and as such, are less clear, giving faulty signals to the markets.  If language is not likely to change much  for a while, why not drop the language  entirely, especially in cases where it affirms ideas that are obvious.

We may all know people in our lives who will say more and more if you don’t agree with them, because if you don’t agree with them, you don’t understand.  More words will bring clarity to you, and you will understand.  But what if they are nuts, and you are a sane person?  This is how I think about the FOMC — they are bad forecasters, and they don’t understand how weak monetary policy is in a period where there is too much debt.

So let’s try some pictures to replace the words of the FOMC:

central tendency_10374_image001

 

As I have said before, the FOMC is composed of overly optimistic neoclassical economists, who don’t know that their theories don’t work when and economy is too indebted.  They think: Real growth is our birthright, and price inflation promotes growth.  Neither are true.

central tendency_22274_image001

 

Note that they have been consistently pessimistic on the unemployment rate, flawed measure that it is.  Thus they think they need to keep monetary loose.

central tendency_26254_image001

 

Their views of PCE inflation reflect a view that monetary policy can easily achieve a 2% rate of inflation in the long run.  Pray tell, when have actions of the FOMC ever led to an equilibrium result?

Aside from that, the PCE index does not fairly represent inflation for the average person in the economy.  Maybe it reflects what the rich experience.

central tendency_29831_image001

 

This is a study in contrasts.  They were once more optimistic that Fed Funds rates would rise sooner, and that has not happened.  That said, they are now more certain that the Fed Funds rate will rise significantly in 2016.  As for the long run they are getting more pessimistic about economic growth, at least in their Fed Funds forecasts.

central tendency_1915_image001

This is another example of where the FOMC should take a step back, and not try to interpret every short-term wiggle.  As a group, they whipsawed in their view of when tightening would happen over the last three datapoints, when I would not have changed much.

To the Fed I say, “Say less, and provide more graphs.”  I understand that you don’t want to discredit yourselves because you are bad forecasters, but maybe you could get your points across in a more potent way by not diluting your message by many needless words.

 

 

Redacted Version of the June 2014 FOMC Statement

Wednesday, June 18th, 2014
April 2014June 2014Comments
Information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions.Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months.The FOMC has constantly overestimated GDP growth, They forecast badly because they serve their political masters, who demand optimism to delude the public.
Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated.Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.No significant change.  What improvement?
Household spending appears to be rising more quickly. Business fixed investment edged down, while the recovery in the housing sector remained slow.Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.Shades household spending down, raises their view on business fixed investment.

The FOMC needs to stop interpreting every short-term wiggle in the data.  They whipsawed on business fixed investment over the last three periods.

Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.No change.  Funny that they don’t call their tapering a “restraint.”
Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.No change.  TIPS are showing slightly higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.46%, up 0.05% from April.
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 and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate.The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate.No change.
The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced.The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced.No change.
The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.No change.  CPI is at 2.1% now, yoy.  Hey, above the threshold, and no comment from the FOMC?
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.No change.
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in May, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $20 billion per month rather than $25 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $25 billion per month rather than $30 billion per month.In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month.Reduces the purchase rate by $5 billion each on Treasuries and MBS.  No big deal.

 

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.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.No change
The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.No change.  But it has almost no impact on interest rates on the long end, which are rallying into a weakening global economy.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.No change. Useless paragraph.
If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.No change.  Says that purchases will likely continue to decline if the economy continues to improve.
However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.No change.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.No change.
In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. 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 developments.In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. 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 developments.No change.  Monetary policy is like jazz; we make it up as we go.  Also note that progress can be expected progress – presumably that means looking at the change in forward expectations for inflation, etc.
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.No change.  Its standards for raising Fed funds are arbitrary.
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.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.No change.
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.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.No change.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo.Stanley Fischer is an interesting addition to the FOMC, because he would be capable of an independent opinion, not that he will ever do that.  Brainard and Mester are sock puppets.  If we see a dissent out of them, I will be shocked, and revise my opinion.

 

Comments

  • Small $10 B/month taper.  Equities and long bonds both rise.  Commodity prices rise.  The FOMC says that any future change to policy is contingent on almost everything.
  • They shaded household spending down, and raised their view on business fixed investment.  Don’t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
  • The FOMC is ignoring rising inflation data.
  • The FOMC needs to chop the “dead wood” out of its statement.  Brief communication is clear communication.  If a sentence doesn’t change often, remove it.
  • In the past I have said, “When [holding down longer-term rates on the highest-quality debt] doesn’t work, what will they do?  I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.  The Fed is playing with forces bigger than themselves, and it isn’t dawning on them yet.
  • 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 much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.

Post 2500: What is the Aleph Blog About?

Thursday, June 12th, 2014

Every hundred or so posts, I take a step back, and try to think about broader issues about blogging about finance.  Tonight, I want to explain to new readers what the Aleph Blog is about.

There have been many new followers added to my blog recently,  through e-mail, RSS, and natively.  This is because of this great article at Marketwatch, which builds off of this great article at Michael Kitces’ blog.

I am humbled to be included among Barry Ritholtz, Josh Brown, and Cullen Roche, and am genuinely surprised to be at number 4 among RIAs in social media influence.  Soli Deo Gloria.

What Does the Aleph Blog Care About?

I’m writing this primarily for new readers, because I’ve written a lot, and over a lot of areas.  I write about a broader range of topics than almost all finance bloggers do because:

  • I’m both a quantitative analyst and a qualitative analyst.
  • I’m an economist that is skeptical about the current received wisdom.
  • I like reading books, so I write a lot of book reviews.
  • I’m also a skeptic regarding Modern Portfolio Theory, and would like to see it discarded from the CFA and SOA syllabuses.
  • I believe in value investing, in both the quantitative and qualitative varieties.
  • I believe that risk control is a core concept for making money — you make more money by not losing it.
  • I believe that good government policy focuses on ethics, not results.  The bailouts were not fair to average Americans.  What would have been fair would have been to let the bank/financial holding companies fail, while protecting the interests of depositors.  The taxpayers would have been spared, and there would have been no systematic crisis had that been done.
  • I care about people not getting cheated.  That includes penny stocks, structured notes, private REITs, and many other financial innovations.  No one on Wall Street wants to do you a favor, so do your own research and buy what you want to own, not what someone wants to sell you.
  • Again, I don’t want to see people cheated, so I write about  insurance.  As a former actuary, and insurance buy-side analyst, I know a lot about insurance.  I don’t know this for sure, but I think this is the blog that writes the most about insurance on the web for free.  I write as one that invests in insurance stocks, and generally, I buy the stocks because I like the management teams.  Ethical, hard working insurance management teams do the best.
  • Oddly, this is regarded to be a good accounting blog, because as a user of accounting statements, I write about accounting issues.
  • I am a skeptic on monetary and fiscal policy, and believe both of them tend to sacrifice the future to benefit the present.  Our grandchildren will hate us.   That brings up another issue: I write about the effects of demographics on the markets.  In a world where populations are shrinking in developed nations, and will be shrinking globally by 2040, there are significant economic impacts.  Economies don’t do well when workers are shrinking in proportion to those who are not working.  (Note: include stay-at-home moms and dads in those who work.  They are valuable.)
  • I care about the bond market.  There aren’t that many good bond market blogs.  I won’t write about it every day, but I will write about i when it is important.
  • I care about pensions.  Most of the financial media knows things are screwed up there, but they do not grasp how bad the eventual outcome will likely be.  This is scary stuff — choose the state you live in with care.

Now, if you want my most basic advice, visit my personal finance category.

If you want my view of what my best articles have been, visit my best articles category.

If you want to read about my “rules,” read the rules category.

Maybe you want to read some of my most popular series:

My blog is not for everyone.  I write about what I feel most strongly about each evening.  Since I have a wide array of interests, that makes for uneven reading, because not everyone cares about all the things that I do.  If that makes my readership smaller, so be it.  My blog expresses my point of view; it is not meant to be the largest website on finance.  I want to be special, even if that means small, expressing my point  of view to those who will listen.

I thank all of my readers for reading me.  I appreciate all of you, and thank you for taking the time to read me.

As one final comment, I need to say this.  I note people unfollowing my blog at certain times, and I say to myself, “Oh, I haven’t been writing about his pet issue for a while.”  Lo, and behold, after these people leave, I start writing about it again.  That is not intentional, but it is very similar to how the market works.   People buy and sell investments at the wrong times.

To all my readers, thank you for reading me.  I value all of you, and though I can’t answer all e-mails, I read all e-mails.

In summary: the Aleph Blog is about ethics and competence.  I want to do what is right, and do what gives the best investment performance, in that order.

 

Sorted Weekly Tweets

Saturday, May 24th, 2014

Market Impact 

  • Giving Yourself an Investing Makeover http://t.co/u1MmwlWiKP @jasonzweigwsj describes Guy Spier & his efforts 2b a more rational investor $$ May 24, 2014
  • The Bearish Signs Junk Buyers Reject in Stoking ’14 Rally http://t.co/xsYEJeKTnU BBs beat CCCs amid a falling Russell 2000 index $$ #odd May 23, 2014
  • Penny Stocks Like Latteno Foods Rally, Fueling Big-Dollar Dreams http://t.co/IiqCWeAyOW Fascinating 2c this amid a pullback in small caps $$ May 23, 2014
  • Buffett Too Rich for Buffett Is Sign Bargains Are Gone http://t.co/cbjQ0MDmSR I’m still finding some cheap stocks but they r unusual $$ $SPY May 23, 2014
  • For Sale: 20% Stake in Hedge Fund. Terms: Complicated. http://t.co/kDoik1H4LT “You don’t want to be wearing someone else’s underwear.” $$ May 23, 2014
  • Boomers Cash In as Bull Market Aids Exodus From Workforce http://t.co/uKRIfO4qMQ Asset illusions delude Boomers who think they r rich $$ May 23, 2014
  • Wall Street Finds New Subprime With 125% Business Loans http://t.co/USvBIvP5Vj The businesses would get better rates on Prosper $$ #dumb May 23, 2014
  • Debt Rises in Leveraged Buyouts Despite Warnings http://t.co/6T8TIpdxWc Debt makes financial systems less flexible; depend on fixed pmts $$ May 21, 2014
  • Chasing Yield, Investors Plow Into Junk Bonds http://t.co/lWFufDu7Hy Yields have never been lower 4 CCC-rated debts $$ May 21, 2014

 

Rest of the World

  • What China Property Crash? Economists See Growth Bump http://t.co/kcXGitJH1l Economists c new empty buildings & mark up GDP $$ $FXI #FTL May 23, 2014
  • Putin’s Singapore Dream Costs Crimea Banks and Burgers http://t.co/OmmtpYDB7G Singapore is not so much created by laws but by ppl culture $$ May 23, 2014
  • Russia, China Sign $400B Gas Deal After Decade of Talks http://t.co/4k8PSE5NrM The infrastructure must b created 2 make this work; not ez $$ May 23, 2014
  • Brazil World Cup Win Risks Stock Drop in Boon to Rousseff http://t.co/dPb8GVbtSZ Brazil wins, Rousseff win odds rise, stocks will fall $$ May 23, 2014
  • BlackRock Has Cut Portugal Bond Holdings Over Past Couple of Weeks http://t.co/U3CuYpUu81 Some Emerging-Market Debt > Euro-Zone Bonds $$ May 23, 2014
  • Norway Loses Reputation as Stable Investment as Firms Recoil http://t.co/fqQkiM2H3k Tax 2 highly & businesses run away $$ May 21, 2014
  • It’s a Good Time to Globalize Your Stock Portfolio http://t.co/8pqTAwFbqj Many foreign companies r trade cheaper than US stocks $$ $SPY $EFA May 21, 2014
  • UK House Prices Rise to Record High in April http://t.co/vo6gYZNlAQ B sure 2add wealthy foreigners buying in London as investment/hedge $$ May 19, 2014
  • Bank of England’s Mark Carney Highlights Housing Market’s Threat to UK Economy http://t.co/5XOwH0cIsJ 100% of all UK mtges r short-dated $$ May 19, 2014
  • Good Time To Be A Farmer In China? http://t.co/04V9YEmSQm China aggressively pushing crop insurance, & larger scale agriculture $$ $FXI $SPY May 19, 2014

Energy

  • Without Keystone XL http://t.co/qpDcgET7J3 Economic & public health costs of forgoing a new oil pipeline $$ {Sound of oil train derailing} May 24, 2014
  • Secrecy of Oil-by-Train Shipments Causes Concern Across the US http://t.co/knapJHOx1k Butane, propane & ethane should be removed b4 shpng $$ May 23, 2014
  • Oil Nations Put Out Welcome Mat for Western Companies http://t.co/cvarvyMDCt If u make the cost of drilling2high, fewer bbls get produced $$ May 19, 2014

 

US Politics & Policy

  • How Timothy Geithner failed his stress test http://t.co/qSu9V6oZvX When @rortybomb & I agree on something, that is notable $$ #housingbubble May 23, 2014
  • Meet Jessica Rosenworcel, the FCC Swing Vote http://t.co/VtIzieSnqI Marches to her own drummer, willing to cut deals 4 the greater good $$ May 23, 2014
  • How to Turn Homes Back Into Piggy Banks http://t.co/fB9PTlBwxZ Housing Personal Savings Acct & Equity Principal Tax Credit; elim mtge ded $$ May 23, 2014
  • NJ Gov. Christie under fire for cutting pension payments to state workers http://t.co/rGwAKla3aT Definite mistake; cashflows compound $$ May 23, 2014
  • BlackRock’s Fink Says Housing Structure More Unsound Now http://t.co/xeMYQmjYGG GSEs took too much default risk pre-crisis, returning $$ May 21, 2014
  • GOP’s Business Wing Sends Tea Party a Chilling Message http://t.co/W5QCHBrJrW Business fights small government GOP candidates $$ May 19, 2014
  • Why Republicans Should Take Rick Santorum Seriously http://t.co/wN7tUmnhbV Represents the middle class populist part of the GOP $$ May 19, 2014
  • California’s Drinking Problem http://t.co/GZnmdInHGY California does not have enough water for Ag, Industry, People, w/o right incentives $$ May 19, 2014

 

US Monetary Policy

  • New Faces Behind Fed Dots Seen Roiling Markets as Forecasts Move http://t.co/M2AcqPEQTX Y publish estimates if u don’t want us 2read them $$ May 23, 2014
  • Bubble States Underemployment Rates Haunt Yellen http://t.co/fRzLYozafe Monetary policy is impotent w/debt defation; Fed on wrong track $$ May 23, 2014
  • New Faces Behind Fed Dots Seen Roiling Markets as Forecasts Move http://t.co/M2AcqPEQTX Y publish estimates if u don’t want us 2read them $$ May 23, 2014
  • Yellen Adds Disadvantaged to Full-Employment Definition http://t.co/10PSrxYI9c Alas, monetary policy is weak when dealing e/employment $$ May 21, 2014
  • Fed’s Rate-Change System Up for Revamp http://t.co/srqZoDDMhK The Fed is lost. The Fed is lost. The Fed is lost. The Fed is lost… $$ $TLT May 19, 2014

 

Companies & Industries

  • Google Developing Tablet With Advanced Vision Capabilities http://t.co/ABO9NObY1h Will b interesting 2c what new apps get developed $$ $GOOG May 23, 2014
  • Planting Corn at Warp Speed Using High-Tech Tools http://t.co/tDF9EaJoy6 Astounding application of technology transforms planting seed $$ May 23, 2014
  • Golf Market Stuck in Bunker as Thousands Leave the Sport http://t.co/ju7aFEx2lp Costs 2 much $$ takes up 2 much time, but growing in Asia May 23, 2014
  • Family Dining Offers Barometer of Middle Income http://t.co/5IzzOFfS3j Ugly valuations means stocks will fall if sales don’t rise 4%/yr+ $$ May 23, 2014
  • Silicon Valley’s Laundry-App Race http://t.co/GyvIWxd5ux Long article on the efforts to turn laundry into a scalable attractive business $$ May 23, 2014

 

Personal Finance

 

  • Dueling Strategies for 401(k)s, IRAs and Your Other Retirement Funds http://t.co/DGzSDVhDZ6 Do what maxes long-term purchasing power $$ $SPY May 23, 2014
  • 40 Financial Things You Should Know by 40 http://t.co/8qqFlp1TUB 2013 article, but I thought it covered the personal financial basics $$ May 19, 2014

 

Other

  • New Study: Is No Degree Better Than A Liberal Arts Degree? http://t.co/MOYUZTngoD Depends. It helps in getting some jobs, but not all $$ May 21, 2014
  • BBC News – ‘Biggest dinosaur ever’ discovered http://t.co/Yg2qTuS27T Interesting b/c it probably was once much warmer in Patagonia $$ May 19, 2014
  • Haverford Speaker Bowen Criticizes Students Over Protests http://t.co/QXkWoAh0iE Former Princeton President calls them “immature.” Bingo! $$ May 19, 2014

 

Wrong

  • Overrated: Russia, China sign deal to bypass USD http://t.co/YNgu6bwK7H What matters is where u invest the proceeds from goods exported $$ May 23, 2014
  • Wrong: Investing: The herd isn’t always dumb http://t.co/dt0xuXKNCJ Then explain y dollar-weighted returns underperform buy & hold $$ #panic May 23, 2014
  • Wrong: Cutting Off Emergency Unemployment Benefits Hasn’t Pushed People Back to Work http://t.co/3GwlHcvq70 We run unsustainable deficits $$ May 23, 2014
  • Wrong: Ikea Economics Lure Central Bankers Seeking New Tools http://t.co/peVUXrPpKs Don’t try negative interest rates; will b a disaster $$ May 23, 2014
  • Wrong: The Retirement Apocalypse That Isn’t Coming http://t.co/ILYSCOzKTm I might buy this if we weren’t running large deficits $$ $TLT $SPY May 21, 2014

 

Retweets, Replies & Comments

  • ‘ @DGenchev I am analyzing the investors as a group, thus what % of the mkt cap is relevant. I go to EDGAR and copy XML files into Excel May 24, 2014
  • If I were doing your project, I would not have chosen any of your “governance experts.” I would have chosen a group…http://t.co/XWlYm8HaVD May 22, 2014

 

Disclaimer


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


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


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

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