China

• China’s first bond default could be good market medicine http://t.co/8ShFniYM Bond trader: “We don’t really have a credit risk culture.” $$ Mar 31, 2012
• Is China’s slowdown worse than previously estimated? http://t.co/CkZw8tLK Could b business conditions that are worst since 2009. $$ Mar 31, 2012
• China Banks Said to Underestimate Local Government Risks http://t.co/qpPicyEe China has a clever bureaucracy; always has; big CYA $$ Mar 25, 2012
• Chinese capitalism is just another knockoff http://t.co/w2hSozQL China is not Capitalist; it rewards Party members, not citizens. $$ Mar 25, 2012
• Debating a “Hard Landing” http://t.co/NMnYk2XX friendly debate – Andrew Batson & Patrick Chovanec over China facing a “hard landing” in 2012 Mar 25, 2012
• I Am Jordan’s Complete Lack of Surprise: Chinese Co’s Forced to Falsify Data http://t.co/BMj7ux0T Command & control economy, not free $$ Mar 25, 2012

Market Dynamics

• The Nature of a Crowded Trade http://t.co/sf1phJjP A July 2008 article of mine where I reflected on the high correlations of the prior 3 yrs Mar 31, 2012
• A Market Lacking Diversification http://t.co/khXUVjaL Correlation conditions similar to 2006-2008, only diversifier hi-qual long bonds $$ Mar 31, 2012
• Pension Deficit for 100 US Company Plans Increased 41% in 2011 http://t.co/FdIZTltW Low long hi-qual rates & cruddy returns on risk assets Mar 31, 2012
• 2277 Stocks and Still Not Diversified? http://t.co/iu0Pw8Ty Recommended solution is similar 2a levered version of the Permanent Portfolio $$ Mar 31, 2012
• New from Aleph Blog The Rules, Part XXXI: The offering of liquidity through limit orders is a real service to th… http://t.co/ZiuzWIo5 Mar 30, 2012
• Passive Aggressive: Index-Linked Securities and Individual Investors http://t.co/ZrjMCKCz Curbs stock picking, encourages factor timing $$ Mar 29, 2012
• Bankers are telling corporate clients this is their chance to refinance http://t.co/Eh9tHEX6 The window of cheap junk financing is open $$ Mar 28, 2012
• New from Aleph Blog Replacing Defined Contributions: I think that it is pretty certain that defined contribution… http://t.co/Dis34ql2 Mar 27, 2012
• What Will Replace the 401(k)? http://t.co/miLAuoYc How about DB pensions where it depends on how much the employee kicks in plus match? $$ Mar 27, 2012
• US Stocks Advance Following Bernanke’s Comments http://t.co/D7sORuIU Stox react 2 increases in inflation expectations. TIPS & Bonds fall $$ Mar 26, 2012
• Hedge Funds Capitulating Buy Most Stocks Since 2010 http://t.co/XHwxzxNO Short-term money alert! Will propel mkt 4 a while, then… $$ Mar 26, 2012
• If Bloomberg Business Week is a better magazine than old Businessweek (I think so), what magazine should we use now 4 a dumb $$ indicator? Mar 26, 2012

Asset Management

• Nontraded REITS should be a nonstarter for clients http://t.co/O1ZuMvX8 And here’s one that just announced a 72% loss: http://t.co/la8d29my Mar 31, 2012
• Oaktree IPO Could Pay 2 Founders $117.2M Each http://t.co/Yufla6Jk The Most Important Thing is getting rewarded 4 building AUM $$ Mar 31, 2012
• The Trouble With Exchange Traded Notes http://t.co/ZL7dVpjO Unsecured credit, total return swaps, low level of regulatory protection $$ Mar 31, 2012
• Good 4 all of us RT @frankvoisin: My interview Research Magazine’s April issue: http://t.co/zioono6R Also features @VitaliyK @alephblog $$ Mar 30, 2012
• Bain Gave Staff Way to Swell IRAs by Investing in Deals http://t.co/4LlAExBt Letting employees in on the fun shares the wealth. Good $$ Mar 30, 2012
• Lying By Omission: Mutual Funds, Track Records & Departing Managers http://t.co/4MUyNRYs Track recrds shuld b suspended when critical ppl go Mar 29, 2012
• New from Aleph Blog A Pox on Promoted Stocks (2): By this time, I would think that it would be worth the the tim… http://t.co/DJkH6E4W Mar 28, 2012
• The Measured Approach to Value http://t.co/XiZOUMOn Features investors Vitaliy Katzenelson & Croft-Leominster, & smaller Frank Voisin & me Mar 28, 2012
• GoodHaven Realizes Its Vision http://t.co/zJVmCFMa The CIO of Markel, Tom Gayner showed them favor and invested with them. Good for them. $$ Mar 27, 2012
• What This Industry Needs is a Good Disruption http://t.co/imKDcElR There r a few areas of the financial industry that justify their fees $$ Mar 27, 2012
• Found PDF slide presentation: http://t.co/0GfhME7m The Market for Financial Advice: An Audit Study $$ Worth a read, paper not free @ SSRN Mar 26, 2012
• Treasuries Rise for Fourth Day on Global Growth Concern http://t.co/JYpanHTu Funny how the sentiment has reversed; who is surprised? $$ Mar 25, 2012

Monetary Policy

• @kyles09 No, not a believer in MMT, MMR, or neoclassical macro. 2 much aggregation, not everything happens at once, goods/services central + Mar 30, 2012
• @kyles09 and $$ only facilitates goods/services. Debt is important, but not central, some goods owned outright, w/no liabs. Money is a + Mar 30, 2012
• @kyles09 creation of a culture, not the government, because @ the edges, FX & commodities will crowd out bad currencies. MMT -> inflation $$ Mar 30, 2012
• What Does Bernanke Know? http://t.co/LydpOqk1 Introduces “The Guy Rate” http://t.co/zNVeUYmP Unemployment of older guys has hi costs Mar 29, 2012
• Demand for U.S. Debt Is Not Limitless http://t.co/NWKHcpCD In 2011, the Fed purchased 61% of Treasury issuance. That can’t last. $$ Mar 29, 2012
• Bitter Money Fights Shaped U.S History http://t.co/36jWnkQq Abandoning Gold Helped Dollar Gain Preeminence http://t.co/QbYMkTNL $$ Mar 28, 2012
• For the last tweet, those r2 good articles by Simon Johnson & James Kwak, authors of “13 Bankers” & co-founders of The Baseline Scenario $$ Mar 28, 2012
• Housing bubbles and interest rates http://t.co/9TfzMpt2 Makes my point that asset price levels should be part of monetary policy $$ Mar 31, 2012

Banking & Finance

• FiveBooks Interviews > @Ritholtz on Causes of the Financial Crisis http://t.co/RQQZfHTz Many good perspectives from 6 authors on the crisis Mar 31, 2012
• Geithner’s Math Puzzle Beyond Numbers for DeMarco http://t.co/Eg9BjcgE Principal forgiveness would have moral hazard impacts. $$ Mar 30, 2012
• Why not make LIBOR off of binding offers of the banks to borrow/lend to any of their group $10M short-term unsecured? Avg — LIBOR/LIBID $$ Mar 30, 2012
• Libor Links Deleted as UK Bank Group Backs Away From Rate http://t.co/HOy8TOof British Bankers’ Association distances itself from LIBOR $$ Mar 30, 2012
• Branson’s Virgin Money Seen Disrupting U.K. Retail Banks http://t.co/bPcD8im7 Always been a Branson skeptic; he have audited financials? Mar 30, 2012
• Why not make LIBOR off of binding bids/offers of the banks to borrow/lend to any of their group 10 million dollars sh… http://t.co/wK3HyopV Mar 29, 2012
• Is Hartford Financial’s market exit a death knell for the annuity crowd or just more Hartford haplessness? http://t.co/AUEVqxWQ Both. $$ Mar 29, 2012
• The Birth (and Death) of the Moral Age of Wall Street http://t.co/eStszd7i At one point the moral code of $GS had some meaning, not much now Mar 29, 2012
• @BarbarianCap More subtle than that; for insurance accounting &the concept of release from risk, it is the conservative side of realistic $$ Mar 27, 2012
• A Proposal for the Resolution of Systemically Important Assets and Liabilities: The Case of the Repo Market http://t.co/WYQGAVVx +1 $$ Mar 26, 2012
• But, disagree. Would b simpler and more effective to disallow repo financiers unrestricted access to collateral even in counterparty default Mar 26, 2012
• Obama Relies on Debt Collectors Profiting From Student Loan Woe http://t.co/pYWwgLq2 How independent debt collectors get people 2 pay $$ Mar 26, 2012
• A Bailout by Another Name http://nyti.ms/GRTNMM GSE writedowns would constitute a direct & sizable gift from taxpayers 2 the largest banks Mar 26, 2012
• Banks’ preemptive strike against Dodd-Frank http://t.co/wjHW0nyv Banks adjusting strategies in order to keep doing as much biz as possible Mar 26, 2012
• MF’s Corzine Ordered Funds Moved to JP Morgan, Memo Says http://t.co/cYaT9sHy The most likely cause may prove to b correct $$ #corzine Mar 26, 2012
• BOE’s Tucker: Rehypothecation Consequences ‘Under the Radar’ http://t.co/0X8ZQMMH Good. Rehypothecation should b reviewed, perhaps limited Mar 26, 2012
• @EpicureanDeal @dsquareddigest I would still lay the blame @ the door of $GS mgmt. Could have grown via retained earnings &stayed private $$ Mar 26, 2012
• @EpicureanDeal @dsquareddigest Also, there r real advantages 2 partnership culture in an investment bank; risk control works a lot better $$ Mar 26, 2012
• The Age of the Shadow Bank Run http://t.co/deJRQGgy Borrow short, lend long; clip a spread. Surprise! During the crisis you lose big! $$ Mar 25, 2012
• The Interest Rate Swaps that Are Bankrupting Local Governments http://t.co/yHQZ1r3u Not true. Gov’ts tried to minimize taxes w/swaps, failed Mar 25, 2012
• Three’s a Crowd http://t.co/KHtbrqpe Disagree w/the conclusion, because $GS did not have to go public; problem is mgmt, not shareholders $$ Mar 25, 2012

Pensions

• Brazil’s pension system http://t.co/90O97tQ4 They allow people to retire too early & offer too much. More unsustainable than Medicare $$ Mar 30, 2012
• @AlexRubalcava Perhaps a cash balance plan would do that. DB plans are not expensive because of explicit costs. They r expensive b/c + Mar 28, 2012
• @AlexRubalcava during boom times benefits look free and get set too high, leading to high costs in the bust phase & plan terminations. $$ Mar 28, 2012

Politics

• Obama Is a Loser Who Wins, Like FDR in 1936 http://t.co/K0x9go0T Don’t assume a bad economy insures the defeat of Obama. FDR won in ’36 $$ Mar 31, 2012
• The Rejection of Austerity Begins http://t.co/CgWKa9x6 Until failure, ppl vote 4 politicians who promise magic prosperity thru govt fiat $$ Mar 30, 2012
• Germany: The Final Frontier… Whose True Debt/GDP Is Now 140% http://t.co/KgW2d76E When you add up the guarantees, doesn’t look so good. $$ Mar 29, 2012
• Justices Suggest Parts of Health-Care Law May Be Thrown Out http://t.co/cMvKHR20 B best 2 throw the whole law out; let Congress start over Mar 29, 2012
• Contra: Court Can’t Let Broccoli Get in Way of Health Care Law http://t.co/5Yp2o8tB Sup Ct is moving 2 define interstate commerce better Mar 26, 2012
• Death Tax Defying http://t.co/FrkL5yLB Eliminate the estate tax; Tax everyone on unrealized capital gains. $$ Same result. Mar 25, 2012
• Intelligence community can keep data on Americans with no ties to terrorism for up to 5 years http://t.co/PCM7ldiG Stinks; call the ACLU $$ Mar 25, 2012

US Economy

• Why Natural-Gas Prices Could Fade to Red http://t.co/GApb0xie When everyone tries 2 frack @ once, there is too much natgas, price falls Mar 30, 2012
• US coal production declines as industry faces further stress http://t.co/l3WpZtDC Fracking has unpredictable consequences; affects energy $$ Mar 29, 2012
• Bidding Wars Erupt as U.S. Supply of Homes for Sale Falls http://t.co/JsgIdewr In certain locales, & on the low end, there r bidding wars Mar 29, 2012
• The Biggest Bellwether In The World Is Giving Some Ominous Comments About Growth http://t.co/vHWs9lwB $FDX says things r slowing down $$ Mar 29, 2012
• Planned Pipelines to Rival Keystone XL http://t.co/qQZ1Dsj2 Enterprise Products Partners & Enbridge may build competing pipelines $$ Mar 28, 2012
• ‘Pink slime’ producer suspends operations http://t.co/CvptYPhU Goes from 4 factories to 1. 600 people will probably lose their jobs $$ Mar 28, 2012
• @valuewalk @The_Analyst It is better for students to start small businesses. Forget economics, it is a waste. Profit/loss best teacher $$ Mar 27, 2012
• The Economic Surprise Index is now trending down http://t.co/eJCEEdvy @soberlook reminds us that not everything is going well $$ Mar 27, 2012

Miscellaneous

• Like it? I’ve actually bought cars that way! RT @mprobertson: http://t.co/UHdFL0Eu How to buy a car using game theory. very interesting. $$ Mar 31, 2012
• Eating Chocolate Regularly May Make You Leaner, Survey Suggests http://t.co/l8c6MMpA This means one dark chocolate Dove promise/day $$ Mar 27, 2012
• The second most dangerous people in the world are smart people with wrong postulates. Mar 25, 2012
• The most dangerous people in the world are politicians who peddle the views of the smart people with wrong postulates. $$ Mar 25, 2012
• Madoff FBI Files Reveal How He Fooled His Own Employees http://t.co/lmq2AoZG Gives hope to those accused; Madoff controlled data tightly. Mar 25, 2012

There is a proposal afoot to mandate auditor rotation every fiver years or so.  Some don’t like it.  I think it is a great idea, with large benefits relative to the costs.

My insights, or lack thereof come from working in life insurance financial reporting in a number of different ways for around 15 years.  Only on time in 15 years, in what is arguably one of the most complex industries as accounting goes, did I ever find serious questioning going on.  Should I tell this story?

Yeah, I should, because it involves the “piece of work” that I reported to at AIG who told me, “Dealing with auditors is bloodsport.”  He also said, “Dealing with reinsurers is bloodsport.”  Delicious that this came to bite him in both ways.

A certain life reinsurer who was large then (call them Geta Life), but is out of the business now (unimaginable then, but given what happened here, no surprise), reinsured a large portion of the immediate annuities and structured settlements, including rated structured settlements that the AIG domestic life companies had written.

Did the treaties pass risk?  With a vengeance they did; not only did they pass mortality risk, but all investment risks were passed as well.  For this fine service, Geta Life earned 1% per year on the surplus relief, i.e., the difference between the book value of liabilities and assets reinsured.

It was not so well understood then, but mortality risk for structured settlements did not tend to work out well.  After an injury giving rise to a court case which would structure a settlement for the plaintiff, the defendant would ask insurance companies to bid on the settlement, which was a stream of certain and life contingent payments.  When the injury impaired the life of the plaintiff, bidding would get stiffer, because it is cheaper to fund life-contingent payments to those who aren’t likely to live so long.

Or so you would think… there was one case where a two-year old boy was injured, to the point of being in a coma, and the underwriter who bid the case rated him as having the lifespan of one who was age 73.  But the money transferred to the parents in the judgement was more than enough to care for the boy, and have a lot left over for the parents.  Ding!  The kid would live a lot longer than 15 years as a result of the settlement.

Rated settlements, where one bid on impaired lives, carried the “Winner’s Curse.” If you won, you overpaid.

But this was not on the radar screen of the somewhat oblivious Geta Life, until they found that the treaties were passing large losses to them, and they decided to audit the treaty.  Sadly, the actuaries above me, who had signed the treaties before I was employed by AIG, forgot to inform the investment department that the treaty limited the trading of around 20% of the bonds of the company in ways that would be mimicked 10 years later in CDOs.

• Trades may not lower credit quality
• Trades may not lower yield
• The cashflow profile of the assets can’t be materially changed.
• And a few more things…

This problem got dumped in my lap as a young actuary, as I found we were way out of compliance with the treaty terms, selling had gone on with abandon, on assets the reinsurer relied on, reducing the investment income the reinsurer would receive in a falling interest rate environment.

So, I proposed to the reinsurer that I go back in treaty history, and select assets purchased to replace those sold that would have kept the treaty in compliance, and put those into the segregated portfolio, and inform the investment department of the rules.  Once Geta Life understood that, they agreed to my “solution.”  That solution took me several months to work out, but I got it done.

In the meantime, the reinsurance treaties with Geta Life had become so valuable to AIG’s domestic life subsidiaries that if they came into question, the subsidiaries would fail.  The accountants of the auditors, realizing that there was something big to analyze, but not knowing how to do it, called in one of their best actuarial auditors.  My ever-confident boss knew he could beat him.

I still remember critical parts of the meeting as the actuarial auditor slowly checkmated my boss, and forced him to reduce the reserve credit for GAAP accounting, resulting in a sizable loss.

Closing off the story, Geta Life was satisfied on the changes in the asset portfolios, but was still annoyed at the losses.  The changes in assets did not avail much; bad underwriting was pinching.  They came to us saying that “Reinsurance is a good faith venture. You’re not supposed to take advantage of us.  Refund our losses, or we will take you to court for not having having managed the treaty properly from inception.”

I said, “You wrote the treaty.  You accepted my asset changes.  You are supposed to absorb mortality risk, such as there is.  I am not an officer of the company, so if you aren’t happy with this, talk to my boss.”

Shortly after that, I left AIG; it was not a great place to work.  Geta Life sued AIG for damages and won (far more than they should have).  Should have produced a blip in terms of earnings, and didn’t.

Mmmmm…. back to the original point.  Should auditors be rotated?

In all my years of financial reporting, I got wind of things in other areas of the company that I served that auditors should have questioned.  Auditors have often been “lap dogs.”  Only once did I ever see a significant challenge.  More often, I saw the auditors try to help the company explain an “accounting oddity.”  (AIG had a nonstandard way of reporting deferred annuity reserves that was very liberal, and it was proposed by their auditors.)

If auditors know that they are only going to be on the job for five years, they will realize a few things:

• If this is going to die in a few years, it doesn’t matter as much if it dies next year.  Maybe firm reputation is worth more than two more years of a contract.
• My work will be reviewed by someone unsympathetic to me in a few years.  He will have little incentive not to tear my work up, and call for restatements.
• Having a fresh set of eyes on corporate finances will lead to questioning of assumptions that get ignored because they are boilerplate to the continuing auditor.
• If auditing ceases to be an annuity to auditors, they will be less complacent, and might even act like auditors on occasion.

My experience with auditors was that they spent a lot of time on the data, and rarely asked the tough questions on assumptions and methods.  They were bean-counters, not actuaries, and certainly not businessmen.

If auditors are rotated, the incentives for just letting things slide will diminish.  That’s why auditors should be rotated.

I think that it is pretty certain that defined contribution [DC] plans 401(k)s, 403(b)s, 457s, much as they have grown to be dominant, have been a failure.  Many, though not all people like the illusion of control, and seeing their cash balance — makes the pension plan tangible, even if they don’t get what they will really need at retirement.

Pension plan reform has to face three realities.  The first is people don’t know how much to put away for retirement.  I’ll give you a hint: for almost all people, it should be over 10% of your gross pay.  The second is that people don’t know how to invest, so hand it off to advisors who will do it for them, and cheaply.  The third is silent, and leaves a lot of money on the table — most people would be better off taking an annuity from their pension plan than a third party, or trying to manage a lump sum on their own.  This is usually an option only for defined benefit [DB] plans.

On the last point, annuities from insurance companies will almost always be inferior to those from DB plans — the investment policy of the DB plan will likely yield more than the investments of the life insurance company.  The DB plan has more ability to take risk, and its expenses are lower.

And speaking of lower expenses, that’s another reason to replace DC plans.  Not only do DB plans provide better security, they have lower expenses.

But employers don’t want to fund expensive DB plans, particularly in a low interest rate environment.   Fine, that’s not what I am arguing for.  I am suggesting an odd sort of DC plan:

• Participants can contribute what they wish
• Employers can contribute what they wish
• Professionals manage the assets; no asset management by participants.
• During active employment, the cash balance can transfer with a change of employment.
• At retirement, it converts to a DB plan, and an annuity is granted, more generous than could be obtained privately.  The retiree does not get the agony of managing a lump sum.

I think this would lead to much better results for plan participants.  The case would have to be made to participants that they have not done well managing their own funds — they will underperform by less through third party managers.  Also, few are good at managing lump sums for income.

This is the sort of plan that would yield better results for most, given that DB plans are out of favor, and participant-directed DC plans lead to high expense lousy results.  Best to have a hybrid plan.  Trustee-directed DC plan for accumulation.  DB plan for distribution.

That’s how I would structure it at present.  Better ideas are welcomed.  Thoughts?

Central Banking

• Been using FRED since it was a bulletin board in 1991. Great job, FRED team! http://t.co/kksvwllM Mar 24, 2012
• The Villain http://t.co/yYReRb4r On Bernanke, the man who expanded the power of the Fed far beyond constitutional limits, if there r any $$ Mar 24, 2012
• Bernanke Sees Need for Higher Household Spending to Fuel Growth http://t.co/3LQUTGji Yes Ben, we will spend more while we are inverted $$ Mar 24, 2012
• Fed’s Evans Calls for Stronger Commitment to Low Rates http://t.co/vSKfU36q Read paper; don’t buy it. ARIMA, no out of sample tests $$ Mar 24, 2012
• Bernanke Says Low Rates Didn’t Fuel Bubble http://t.co/XlF50zKV Perhaps Bernanke can’t remember minor crisis; RMBS extension mid-2003 $$ Mar 24, 2012
• That crisis created a very sharp move up in rates http://t.co/jfNAVN3o $$ Mar 24, 2012
• Bernanke: the man, the legacy and the law http://t.co/zA7OeFc4 “courts have shied away from developing jurisprudence on monetary policy.” $$ Mar 24, 2012
• @fatdaz It is my firm belief that no economic entity can dominate entirely; central banks have been destroyed b4; will happen again $$ Mar 24, 2012
• Masters of the Universe Start to Challenge Ben Bernanke http://t.co/31Pr1yrQ Markets are more powerful than Central Banks, watch out Fed! Mar 23, 2012
• European Banks Would Have Passed Fed’s Stress Test http://t.co/z5bCBeYy Ultimate insult 4 stringency of Fed’s stress tests $$ #devildetails Mar 20, 2012
• Bernanke Stands to Gain Capital-Market Experts With Nominees http://t.co/oX8xOdEU We need some people that doubt neoclassical economics $$ Mar 20, 2012
• Bernanke Returns to Academic Roots to Justify Fed’s Existence http://t.co/ORfma5sE Safe audiences let him talk publicly w/little risk $$ Mar 20, 2012
• Federal Reserve Stress Tests Make Us All Muppets http://t.co/CQu827KD Ignores E-Zone contagion, increase in int rate volatility, etc $$ Mar 19, 2012
• Bernanke: “I Want to Bring Back Irrational Exuberance” http://t.co/p0qlQwXe @brucekrasting on overheating in some debt asset classes $$ Mar 19, 2012

China

• Ai Weiwei: “You’re There but You’re Not Existing” http://t.co/d7mLxHXm RARE interview w/Ai Weiwei, describing his detention in China $$ Mar 24, 2012
• China’s stock-market supervision suffering http://t.co/QEBPC5ya “Understaffed securities regulator, weak legal system cited” $$ #nosurprise Mar 21, 2012
• @Roy_Cam They can’t make money b/c of overcapacity; China invested too much in steel & global growth stinks. US exports of steel r rising $$ Mar 20, 2012
• @Roy_Cam We only import 30% of steel used in US, 4% of which comes from China = 1.2% of steel used is from China http://t.co/FTWt80oa $$ Mar 20, 2012
• @Roy_Cam You are right there, and that’s one reason why profitability is declining in steel industry globally. $$ Mar 20, 2012
• China to increase fuel prices 6-7% http://t.co/dBwrepDj Pump prices at record highs; biggest rise since June 2009 #ouch $$ Mar 20, 2012
• Sad Industry Mantra: Make Steel, Lose Money http://t.co/Pu9e6qFj Insanity; doing same thing, expecting different results. Future bailout $$ Mar 20, 2012
• The State-Owned Enterprises of China http://t.co/55nvgUMs I think a “big bang” would work, but the Communist Party would never do it $$ #Mao Mar 20, 2012
• Chinese property *alert* http://t.co/eklWzXkU Property sales value contracted 20% year on year in the two months ending in February. $$ Mar 20, 2012
• China’s new home prices “no longer rising” http://t.co/UL4T3yzQ The Chinese Gov’t always gets what it wants, until it gets too much of it $$ Mar 19, 2012
• Chinese Companies Forced to Falsify Data, Government Says http://t.co/tH0MUiYn AN example of why I don’t trust Chinese economic data. $$ Mar 18, 2012
• @Xiphos_Trading Don’t know if there will be a crash or not, but there has been a lot of malinvestment in China, like Late 80s Japan $$ Mar 18, 2012

Europe

• Those Catchy Spanish (Yield) Curves http://t.co/qoGmGl7E Yields backing up in the Spanish bond market; this could be the next crisis $$ Mar 24, 2012
• Euro-Zone Banks Get Show of Faith http://t.co/ZWqd8Df5 US MMFs begin adding back yieldy E-zone bank CP $$ #wedontlearnwereallydontlearn Mar 24, 2012
• On second thought, hold off moving that business to Ireland http://t.co/Bdu6ezon Ireland heading into recession; possibility of default? $$ Mar 23, 2012
• @Mapsofworld Gun to the head, I think it fails entirely, but that opinion is not held with high probability $$ Mar 22, 2012
• @Mapsofworld If the E-zone doesn’t move 2a full fiscal union, the Euro will either fail entirely, or become the currency of a smaller group Mar 22, 2012
• The Safe Haven of the Nordic Currencies Is No More http://t.co/FquH5ZWW It’s a little early to get categorical about this $$ Mar 21, 2012
• A Wall St. Firm Advises Greece, With Discretion http://t.co/Y12GeNZq $BLK is one powerful firm that many govts in crisis turn 2 4 help $$ Mar 21, 2012
• Swiss Secrecy Besieged Makes Banks Fret World Money Lure Fading http://t.co/qV197Px1 What good r Swiss banks if no secrecy, tax evasion $$ Mar 20, 2012
• Germany on a Different Track http://t.co/Gl3BNXBA While Much of EZone Deals W/Busts, Property Prices r Rising in Berlin, Hamburg, Munich Mar 20, 2012

Rest of the World

• Israel Billionaires Put Own Interest Ahead of Holders http://t.co/QSTpBn6E What’s mine is mine; what’s yours is negotiable $$ Mar 24, 2012
• Late Shah’s Son Selected As Iran’s Person Of The Year http://t.co/phWmAFRQ This is VOA so take it w/a grain of salt; still funny 2thinkabout Mar 24, 2012
• Latin American Nations in Worse Shape for Crisis, IDB Says http://t.co/zlZvDJi4 “result of lower budget surpluses b4 interest payments” $$ Mar 20, 2012
• What is the real rate of interest telling us? http://t.co/Vbk13I02 Excess capacity in devel world post bubble pop, send cap 2 emerg mkts Mar 20, 2012

Insurance

• @CflGator Life companies should be simple, but product design exploded to the point where reserving can’t keep up; I own only 1 life co. Mar 24, 2012
• @CflGator Variable & Universal life products have secondary gtee issues; there r a variety of long dated term products w/rsv issues $$ Mar 24, 2012
• @CflGator and P&C insurance — life insurance is capital intensive; they are sticking with their simplest biz, aside from long-tail P&C $$ Mar 24, 2012
• @CflGator It really depends; they wrote a lot of complex life products. On the bright side, a company in runoff is a cash cow. $$ Mar 24, 2012
• @CflGator That’s the tough Q. $HIG offered significant secondary guarantees when they were the #1 annuity writer. May not b prop reserved $$ Mar 21, 2012
• Hartford Shares Jump On Split, Analysts Like It Too http://t.co/APFbv4UA Not so fast on $HIG; regulators must approve a split; c my cmmt Mar 21, 2012
• Should Hartford’s Annuity Holders Be Worried? http://t.co/HfuZO3QO Probably not; small annuitants have protection from guaranty funds $$ Mar 21, 2012
• Annuity Case Chills Insurance Agents http://t.co/rHkg68Lw I’m always skeptical of products w/high commissions & surrender charges $$ Mar 19, 2012

Fixed Income

• Why Fixed Income Funds May Fall Short http://t.co/cHmF3hOj On the difficulties of combating tracking error in fixed income ETFs. $$ Mar 24, 2012
• Top Junk Pummels Treasuries for Safest Profits http://t.co/E5vl2qHB That’s the rearview mirror; will be harder to squeeze more returns out Mar 21, 2012
• The differentiation of Agency MBS risk profiles http://t.co/IJN2mbCm Interesting to see long avg life on high coupon underwater mortgages $$ Mar 21, 2012
• Bond Bear Market Yet to Roar http://t.co/oNENX9jc The selloff has been piddling so far, has not affected equities, & it may reverse $$ Mar 21, 2012
• Do High Yield Bonds Know Something Stocks Don’t? http://t.co/986Evuok Equities & Inv Grade corps outperforming HY Corps- call provisions? $$ Mar 19, 2012
• RE: @thearmotrader Thanks, you did the post that I wanted to do.  Now I just have to point to it. http://t.co/Ru22nvom Mar 19, 2012

Exchange Traded Products

• “@HerbGreenberg mentions that once the creation/redemption mechanism “breaks” (my word, not his), that the ETF/ETN sh… http://t.co/jxK0bZfX Mar 23, 2012
• RE: Not likely, but maybe.  If they were forced to see that they were getting a negative (or very low positive) yield… http://t.co/nnxLt2oj Mar 23, 2012
• Exchange-Traded Notes Are Worse Than You Think http://t.co/FAO4IS3H Path-dependent fees, shadow NAVs, high fees, tracking error, credit risk Mar 21, 2012
• Who Uses Leveraged and Inverse ETFs Anyway? http://t.co/cYpkVMr5 Retail owns 80%+. Normal ETFs r mostly held by institutions $$ Mar 21, 2012
• Know Your Client – Leveraged ETF Version http://t.co/gqPtiZtF Doesn’t matter if leverage is internal or external, client needs come first $$ Mar 21, 2012
• Money Managers Serving Clients First, Ego Second http://t.co/gY9bd1iR Using the investment vehicles of competing firms — a good thing $$ Mar 21, 2012
• RE: @finadd “Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by t… http://t.co/cn5TM1cR Mar 20, 2012
• @amy_calistri at the levels implied by the CEF pricing at some funds, it would shave the yield 3% $DHF $MAV $HIX, 5% $PHT, 12% $PHK $$ Mar 19, 2012
• @amy_calistri Right. I watch the premiums on credit-sensitive CEFs as a measure of frothiness. If the underlying at some HY CEFs were bot + Mar 19, 2012
• Anybody know what was up with $EFT today? Floating-rate loan CEF up 4%+, Closed near par last Friday… odd. $$ Mar 19, 2012
• ‘Junk’ ETFs: Tread Lightly http://t.co/lXftKjwB Check the Price vs the NAV before you buy; also, if w/ds start, index bonds will get hit Mar 19, 2012

Individual Equities

• Leon Black’s Bid Gets No Respect as Great Wolf Surges http://t.co/kqS6pNyU Used 2call this stock “little dog;” badly managed frm beginning Mar 24, 2012
• @merrillmatter Bezos is scary-smart. I don’t own $AMZN either $$ Mar 21, 2012
• Just watched it. Wow, very impressive RT @merrillmatter: Skynet shall be renamed SkyBezos — Order Fetch http://t.co/6l9R9bHn $$ Mar 21, 2012
• +1, ugh RT @abnormalreturns: [post] America officially ran out of good corporate names today. http://t.co/lLGEmeAB $ABT $KFT $AAPL $NKE $MCD Mar 21, 2012
• You’re on a roll today @merrillmatter: @AlephBlog soon our robot overlords will deliver our bread and circuses to us in the Bezos Colosseum Mar 21, 2012
• No RT @merrillmatter: @AlephBlog I want to start a consultancy that veto’s stupid company names. Would your anti-consultancy veto that? Mar 21, 2012
• Amazon Wrings Profit From Fulfillment as Spending Soars http://t.co/McHUqMhe Tough work 4 laborers, though. $AMZN pushes pretty hard $$ Mar 21, 2012
• Kraft to Be Renamed Mondelez After Grocery Unit Is Spun Off http://t.co/GONE6x47 Pronounced “Mohn-dah-LEEZ.” Sigh, who got paid 4 this? $$ Mar 21, 2012
• The 400% Man’s New Big Bet http://t.co/33rHut9y Implicitly a bet that $BRKa will always be able to buy back stock @ 1.1x book value $$ Mar 21, 2012
• In a Major Restructuring, $HPQ To Combine Printer and PC Groups http://t.co/Aj3zaKaY FD: +HPQ; seems like a marginal idea, maybe works $$ Mar 20, 2012
• Why $HPQ Really Needs A CEO Succession Plan http://t.co/hkPDVkAy Good cultures should promote from within; HP used to have that $$ FD: +HPQ Mar 20, 2012
• Buffett Message Is ‘Do as I Say, Not as I Do’ http://t.co/Gcblc8oZ Alice Schroeder very acidic on Buffett; half right & half wrong $$ Mar 20, 2012
• $AAPL to Pay Dividend, Buy Back Stock to Return Some of Cash http://t.co/uxf6jEBP About time, if there aren’t opps 2use the $$ Mar 19, 2012

Money Market Funds

• @MarcHochstein Thanks, I found the CFA Institutes comment today, and their view is similar 2 mine in some ways: http://t.co/8yPLcXfX $$ Mar 22, 2012
• @MarcHochstein investment restrictions moved back to 2008 norms. The ability 2 have credit events frees MMFs to pursue best advantage $$ Mar 21, 2012
• @MarcHochstein My idea will work 4 MMFs using inv policies prior 2 2008. The MMF folks aren’t earning $$ now, but they could with + Mar 21, 2012
• @MarcHochstein After reading this: http://t.co/aUoaN4kb Ask them, what if you traded Merkel’s idea 4 a loosening of investment rules? $$ Mar 21, 2012
• @MarcHochstein 1 more thing; if they have any sympathy toward my idea, I live near DC & would be willing to testify to the SEC $$ Mar 20, 2012
• @MarcHochstein Does that help? I still think my proposal, one of the few compromise proposals out there would work best of all. Mar 20, 2012
• @MarcHochstein Having been a life actuary, most regulatory progress happens when actuaries talk w/smarter regulators & forge compromise Mar 20, 2012
• @MarcHochstein Does that help? MMFs are just saying “We r fine, nothing needs 2b done.” 2me that strategy prob loses. Mar 20, 2012
• @MarcHochstein Would ask them if they have any way of stopping MMF runs on a private basis; this is the SEC goal; solve that, they leave Mar 20, 2012
• @MarcHochstein More humbly, I would ask them if they really think they can beat the SEC. SEC’s proposal is horrible, but saying “no” loses Mar 20, 2012
• @MarcHochstein Not so humbly, I would ask that u show them my proposal that I sent to the SEC, & ask them to back it http://t.co/vuNL8tQE Mar 20, 2012

Market Dynamics

• The Easy Money’s Been Made, Four Reasons for Caution http://t.co/9kAXqEU4 E-zone calm, risk tolerance+ , VIX low, FOMC may move soon Mar 24, 2012
• …and then all of a sudden, THE BULLS WENT BERZERK! http://t.co/bJKCVJha Lots of bullishness out there, though Howard Marks thought otherwise Mar 21, 2012
• @byrneseyeview That’s true, & I did a presentation on that. One more complicating factor were financials, which looked cheap but weren’t $$ Mar 21, 2012
• @byrneseyeview Found it. Here: http://t.co/YupRW6yD It’s on a number of topics; it was well-received $$ Mar 21, 2012
• Contra: The Biggest Bubble You’ve Never Heard Of http://t.co/0tzkPyiA Value can’t b a bubble. Growth can b a bubble. Growth & ROE meanrevert Mar 21, 2012
• Is this time really different? http://t.co/eePs0aIV It’s never different. It’s always different. Profit margins will mean-revert; Q is when Mar 21, 2012
• Biggs boosts bullish bets on stocks to 90% net long http://t.co/5fYQDhUC Won’t be the first 2 say this, but makes me doubt the rally $$ Mar 21, 2012
• The Ax is Back http://t.co/B1j3f7nH @reformedbroker Reduced profits on Wall Street translates into reduced perks, bonuses & jobs $$ Mar 21, 2012
• Public Companies: The End Is Near http://t.co/KejHwYDu There r still advantages 2being publicly traded, but has eroded since Sarbox, etc $$ Mar 20, 2012
• S&P 500 Rises to Four-Year High as Apple Plans Dividend http://t.co/RnBf9yEw $AAPL raises the div yld on the S&P 500 by 0.08%. Big! $$ Mar 19, 2012
• Shares and shibboleths http://t.co/CspyJCNX The equity premium over a diversified portfolio of investment grade bonds is ~1%/yr IMO $$ Mar 19, 2012
• Hubble, Bubble, Index Trouble http://t.co/2q3CPx4g Been saying this for years, indexing changes market dynamics, what happens @ reversal? $$ Mar 18, 2012

Politics

• Why Are Your Neighbors Just Like You? http://t.co/0lcPOuLZ On the demise of really knowing your neighbors; we try 2 reach out; few others do Mar 24, 2012
• @traderscrucible @interfluidity My blog (& Steve’s) have always had a strong public policy emphasis. Dreaming, but we suggest better policy. Mar 23, 2012
• Agent Based Models http://t.co/0etJ20fL “Why not keep it simple, and just say, you pay an asset tax for every dollar over $100B?” $$ Mar 23, 2012
• The Warren Buffett Chain Letter http://t.co/31FFSrmm Draconian adjustments. What Buffett did & didn’t say. 3% deficit ejects Congress $$ Mar 21, 2012
• Migration of sovereign debt from private hands to public institutions http://t.co/rQbDTXg3 &the debt sits til liquidity is needed -> crisis! Mar 21, 2012
• To Stay On Top, The US Must Invest In Research Universities http://t.co/P4kyUqY0 FD: + $INTC; do it w/yr own $$ not taxes; c my comment Mar 20, 2012
• RT @BarbarianCap: “cnbc: California Cities Scrambling to Avoid Becoming Insolvent” > the die was cast years ago; clowns, path depende … Mar 20, 2012
• Stopping the National Debt: A Movement Led By a Cowboy, a Colonel, & a Citizens’ Cavalry http://t.co/frqAXCpy Natl Debt Relief Amendment Mar 20, 2012
• Who is REALLY paying in the $25bil TBTF mortgage settlement http://t.co/T2h1B5CO $5B from banks, rest MBS holders eg pension plans, insurers Mar 19, 2012
• The JOBS Act: Plutocracy in Action http://t.co/Fjo3Ppet Another article on the previous topic; don’t downgrade information quality $$ Mar 19, 2012
• Small Biz Jobs Act Is a Bipartisan Bridge Too Far http://t.co/AwBXg184 Would not mess w/securities laws in that way to create growth $$ Mar 19, 2012
• Public Unions Send Medical Bills to Taxpayers http://t.co/Lb2XgAv9 CA Sup Ct foolishly makes healthcare nonreducible. CA will die $$ Mar 18, 2012
• As Unions Lose Their Grip, Indiana Lures Manufacturing Jobs http://t.co/vj177CT2 Like my article that few like http://t.co/WgdN7Mmq $$ Mar 18, 2012
• Pension Legislation Could Cut Contributions, Hike Taxes http://t.co/Tj1UlUz8 Stupid proposals that weaken DB pensions, companies r strongnow Mar 18, 2012

Regulation

• Where is the Center for Audit Quality When We Actually Could Use It? http://t.co/jWt09bcw JOBS Act: destroy info reliability to create jobs Mar 23, 2012
• Fed’s Fisher Says ‘Too-Big-to-Fail’ Problem Remains http://t.co/eLvHGmXt Richard Fisher favors breakup of the biggest banks. $$ Mar 21, 2012
• @carney just read your piece on the net capital rule. Similar to my piece last November http://t.co/tl28NPku Good piece. $$ Mar 21, 2012
• Top Court’s Patent Rejection Alarms the Biotech Industry http://t.co/oK11WlvR ’bout time we forced a more fundamental review of patents Mar 21, 2012

Economics

• Solar’s 80% Plunge Hurts Utilities From Hawaii to Spain http://t.co/m9eACVTp Overcapacity drives down prices of PV panels for now. $$ Mar 21, 2012
• Mean Time Between Failures http://t.co/zkT0z9cX The “recovery” is getting long in the tooth, eg it may end soon; graph: http://t.co/xOHA1IYA Mar 20, 2012
• Obama’s tax hikes threaten a new US recession http://t.co/uNHwBpeJ Looking @ 4 more years of divided govt & stalemate $$ #debtbombgrows Mar 20, 2012
• @The_Dumb_Money I would have liked to see the Banks/Etc. who owned the servicers bear more of the cost $$ Mar 20, 2012
• Partial equilibrium intuitions about choice http://t.co/215kIrmS @interfluidity more difficult to solve general equilibrium Qs than partial Mar 19, 2012
• Understanding the New Price of Oil http://t.co/TaMTaneR No surprise here; most cheap oil has been found, the price of oil should rise $$ Mar 18, 2012

Miscellaneous

• @merrillmatter Factoid: 100,000,000,000 to 1 for a monkey to type the word “banana” from random typewriter jumping Mar 21, 2012
• Is a Calorie a Calorie? http://t.co/4hyTfSvr Yes, but different nutrients come w/calories. Also, a unit of fat has 2x cals vs carbs/protein Mar 21, 2012
• Madoff’s Lament: I Was An Honest Money Manager Once http://t.co/OGp2xRHR The outside world should ignore Madoff now. Attention feeds him. Mar 21, 2012
• Trust no one http://t.co/cFYBkCA7 & http://t.co/ILP0dPlA Independent & regular journalists face conflicts of interest in giving speeches $$ Mar 20, 2012
• On Slime and Water http://t.co/8iezy0FK Pink Slime in burgers, and shortages of potable water in most of the globe, except Canada & US. $$ Mar 18, 2012
• The NSA Is Building the Country’s Biggest Spy Center (Watch What You Say) http://t.co/iUsN5D0t Time to increase encryption key sizes $$ Mar 18, 2012
• @TimABRussell I always read all the books I review; in rare cases when I don’t, I tell readers that I skimmed it. $$ Mar 18, 2012

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Central Banking

·  Been using FRED since it was a bulletin board in 1991. Great job, FRED team! http://t.co/kksvwllMMar 24, 2012

·  The Villain http://t.co/yYReRb4r On Bernanke, the man who expanded the power of the Fed far beyond constitutional limits, if there r any $$ Mar 24, 2012

·  Bernanke Sees Need for Higher Household Spending to Fuel Growth http://t.co/3LQUTGji Yes Ben, we will spend more while we are inverted $$ Mar 24, 2012

·  Fed’s Evans Calls for Stronger Commitment to Low Rates http://t.co/vSKfU36q Read paper; don’t buy it. ARIMA, no out of sample tests $$ Mar 24, 2012

·  Bernanke Says Low Rates Didn’t Fuel Bubble http://t.co/XlF50zKV Perhaps Bernanke can’t remember minor crisis; RMBS extension mid-2003 $$ Mar 24, 2012

·  That crisis created a very sharp move up in rates http://t.co/jfNAVN3o $$ Mar 24, 2012

·  Bernanke: the man, the legacy and the law http://t.co/zA7OeFc4 “courts have shied away from developing jurisprudence on monetary policy.” $$ Mar 24, 2012

·  @fatdaz It is my firm belief that no economic entity can dominate entirely; central banks have been destroyed b4; will happen again $$ Mar 24, 2012

·  Masters of the Universe Start to Challenge Ben Bernanke http://t.co/31Pr1yrQ Markets are more powerful than Central Banks, watch out Fed! Mar 23, 2012

·  European Banks Would Have Passed Fed’s Stress Test http://t.co/z5bCBeYy Ultimate insult 4 stringency of Fed’s stress tests $$ #devildetails Mar 20, 2012

·  Bernanke Stands to Gain Capital-Market Experts With Nominees http://t.co/oX8xOdEU We need some people that doubt neoclassical economics $$ Mar 20, 2012

·  Bernanke Returns to Academic Roots to Justify Fed’s Existence http://t.co/ORfma5sE Safe audiences let him talk publicly w/little risk $$ Mar 20, 2012

·  Federal Reserve Stress Tests Make Us All Muppets http://t.co/CQu827KD Ignores E-Zone contagion, increase in int rate volatility, etc $$ Mar 19, 2012

·  Bernanke: “I Want to Bring Back Irrational Exuberance” http://t.co/p0qlQwXe @brucekrasting on overheating in some debt asset classes $$ Mar 19, 2012

China

·  Ai Weiwei: “You’re There but You’re Not Existing” http://t.co/d7mLxHXm RARE interview w/Ai Weiwei, describing his detention in China $$ Mar 24, 2012

·  China’s stock-market supervision suffering http://t.co/QEBPC5ya “Understaffed securities regulator, weak legal system cited” $$ #nosurprise Mar 21, 2012

·  @Roy_Cam They can’t make money b/c of overcapacity; China invested too much in steel & global growth stinks. US exports of steel r rising $$ Mar 20, 2012

·  @Roy_Cam We only import 30% of steel used in US, 4% of which comes from China = 1.2% of steel used is from China http://t.co/FTWt80oa $$ Mar 20, 2012

·  @Roy_Cam You are right there, and that’s one reason why profitability is declining in steel industry globally. $$ Mar 20, 2012

·  China to increase fuel prices 6-7% http://t.co/dBwrepDj Pump prices at record highs; biggest rise since June 2009 #ouch $$ Mar 20, 2012

·  Sad Industry Mantra: Make Steel, Lose Money http://t.co/Pu9e6qFj Insanity; doing same thing, expecting different results. Future bailout $$ Mar 20, 2012

·  The State-Owned Enterprises of China http://t.co/55nvgUMs I think a “big bang” would work, but the Communist Party would never do it $$ #Mao Mar 20, 2012

·  Chinese property *alert* http://t.co/eklWzXkU Property sales value contracted 20% year on year in the two months ending in February. $$ Mar 20, 2012

·  China’s new home prices “no longer rising” http://t.co/UL4T3yzQ The Chinese Gov’t always gets what it wants, until it gets too much of it $$ Mar 19, 2012

·  Chinese Companies Forced to Falsify Data, Government Says http://t.co/tH0MUiYn AN example of why I don’t trust Chinese economic data. $$ Mar 18, 2012

·  @Xiphos_Trading Don’t know if there will be a crash or not, but there has been a lot of malinvestment in China, like Late 80s Japan $$ Mar 18, 2012

Europe

·  Those Catchy Spanish (Yield) Curves http://t.co/qoGmGl7E Yields backing up in the Spanish bond market; this could be the next crisis $$ Mar 24, 2012

·  Euro-Zone Banks Get Show of Faith http://t.co/ZWqd8Df5 US MMFs begin adding back yieldy E-zone bank CP $$ #wedontlearnwereallydontlearn Mar 24, 2012

·  On second thought, hold off moving that business to Ireland http://t.co/Bdu6ezon Ireland heading into recession; possibility of default? $$ Mar 23, 2012

·  @Mapsofworld Gun to the head, I think it fails entirely, but that opinion is not held with high probability $$ Mar 22, 2012

·  @Mapsofworld If the E-zone doesn’t move 2a full fiscal union, the Euro will either fail entirely, or become the currency of a smaller group Mar 22, 2012

·  The Safe Haven of the Nordic Currencies Is No More http://t.co/FquH5ZWW It’s a little early to get categorical about this $$ Mar 21, 2012

·  A Wall St. Firm Advises Greece, With Discretion http://t.co/Y12GeNZq $BLK is one powerful firm that many govts in crisis turn 2 4 help $$ Mar 21, 2012

·  Swiss Secrecy Besieged Makes Banks Fret World Money Lure Fading http://t.co/qV197Px1 What good r Swiss banks if no secrecy, tax evasion $$ Mar 20, 2012

·  Germany on a Different Track http://t.co/Gl3BNXBA While Much of EZone Deals W/Busts, Property Prices r Rising in Berlin, Hamburg, Munich Mar 20, 2012

Rest of the World

·  Israel Billionaires Put Own Interest Ahead of Holders http://t.co/QSTpBn6E What’s mine is mine; what’s yours is negotiable $$ Mar 24, 2012

·  Late Shah’s Son Selected As Iran’s Person Of The Year http://t.co/phWmAFRQ This is VOA so take it w/a grain of salt; still funny 2thinkabout Mar 24, 2012

·  Latin American Nations in Worse Shape for Crisis, IDB Says http://t.co/zlZvDJi4 “result of lower budget surpluses b4 interest payments” $$ Mar 20, 2012

·  What is the real rate of interest telling us? http://t.co/Vbk13I02 Excess capacity in devel world post bubble pop, send cap 2 emerg mkts Mar 20, 2012

Insurance

·  @CflGator Life companies should be simple, but product design exploded to the point where reserving can’t keep up; I own only 1 life co. Mar 24, 2012

·  @CflGator Variable & Universal life products have secondary gtee issues; there r a variety of long dated term products w/rsv issues $$ Mar 24, 2012

·  @CflGator and P&C insurance — life insurance is capital intensive; they are sticking with their simplest biz, aside from long-tail P&C $$ Mar 24, 2012

·  @CflGator It really depends; they wrote a lot of complex life products. On the bright side, a company in runoff is a cash cow. $$ Mar 24, 2012

·  @CflGator That’s the tough Q. $HIG offered significant secondary guarantees when they were the #1 annuity writer. May not b prop reserved $$ Mar 21, 2012

·  Hartford Shares Jump On Split, Analysts Like It Too http://t.co/APFbv4UA Not so fast on $HIG; regulators must approve a split; c my cmmt Mar 21, 2012

·  Should Hartford’s Annuity Holders Be Worried? http://t.co/HfuZO3QO Probably not; small annuitants have protection from guaranty funds $$ Mar 21, 2012

·  Annuity Case Chills Insurance Agents http://t.co/rHkg68Lw I’m always skeptical of products w/high commissions & surrender charges $$ Mar 19, 2012

Fixed Income

·  Why Fixed Income Funds May Fall Short http://t.co/cHmF3hOj On the difficulties of combating tracking error in fixed income ETFs. $$ Mar 24, 2012

·  Top Junk Pummels Treasuries for Safest Profits http://t.co/E5vl2qHB That’s the rearview mirror; will be harder to squeeze more returns out Mar 21, 2012

·  The differentiation of Agency MBS risk profiles http://t.co/IJN2mbCm Interesting to see long avg life on high coupon underwater mortgages $$ Mar 21, 2012

·  Bond Bear Market Yet to Roar http://t.co/oNENX9jc The selloff has been piddling so far, has not affected equities, & it may reverse $$ Mar 21, 2012

·  Do High Yield Bonds Know Something Stocks Don’t? http://t.co/986Evuok Equities & Inv Grade corps outperforming HY Corps- call provisions? $$ Mar 19, 2012

·  RE: @thearmotrader Thanks, you did the post that I wanted to do.  Now I just have to point to it. http://t.co/Ru22nvom Mar 19, 2012

Exchange Traded Products

·  “@HerbGreenberg mentions that once the creation/redemption mechanism “breaks” (my word, not his), that the ETF/ETN sh… http://t.co/jxK0bZfX Mar 23, 2012

·  RE: Not likely, but maybe.  If they were forced to see that they were getting a negative (or very low positive) yield… http://t.co/nnxLt2oj Mar 23, 2012

·  Exchange-Traded Notes Are Worse Than You Think http://t.co/FAO4IS3H Path-dependent fees, shadow NAVs, high fees, tracking error, credit risk Mar 21, 2012

·  Who Uses Leveraged and Inverse ETFs Anyway? http://t.co/cYpkVMr5 Retail owns 80%+. Normal ETFs r mostly held by institutions $$ Mar 21, 2012

·  Know Your Client – Leveraged ETF Version http://t.co/gqPtiZtF Doesn’t matter if leverage is internal or external, client needs come first $$ Mar 21, 2012

·  Money Managers Serving Clients First, Ego Second http://t.co/gY9bd1iR Using the investment vehicles of competing firms — a good thing $$ Mar 21, 2012

·  RE: @finadd “Our results indicate that the extensive purchases of risky private-label mortgage-backed securities by t… http://t.co/cn5TM1cR Mar 20, 2012

·  @amy_calistri at the levels implied by the CEF pricing at some funds, it would shave the yield 3% $DHF $MAV $HIX, 5% $PHT, 12% $PHK $$ Mar 19, 2012

·  @amy_calistri Right. I watch the premiums on credit-sensitive CEFs as a measure of frothiness. If the underlying at some HY CEFs were bot + Mar 19, 2012

·  Anybody know what was up with $EFT today? Floating-rate loan CEF up 4%+, Closed near par last Friday… odd. $$ Mar 19, 2012

·  ‘Junk’ ETFs: Tread Lightly http://t.co/lXftKjwB Check the Price vs the NAV before you buy; also, if w/ds start, index bonds will get hit Mar 19, 2012

Individual Equities

·  Leon Black’s Bid Gets No Respect as Great Wolf Surges http://t.co/kqS6pNyU Used 2call this stock “little dog;” badly managed frm beginning Mar 24, 2012

·  @merrillmatter Bezos is scary-smart. I don’t own $AMZN either $$ Mar 21, 2012

·  Just watched it. Wow, very impressive RT @merrillmatter: Skynet shall be renamed SkyBezos — Order Fetch http://t.co/6l9R9bHn $$ Mar 21, 2012

·  +1, ugh RT @abnormalreturns: [post] America officially ran out of good corporate names today. http://t.co/lLGEmeAB $ABT $KFT $AAPL $NKE $MCD Mar 21, 2012

·  You’re on a roll today @merrillmatter: @AlephBlog soon our robot overlords will deliver our bread and circuses to us in the Bezos Colosseum Mar 21, 2012

·  No RT @merrillmatter: @AlephBlog I want to start a consultancy that veto’s stupid company names. Would your anti-consultancy veto that? Mar 21, 2012

·  Amazon Wrings Profit From Fulfillment as Spending Soars http://t.co/McHUqMhe Tough work 4 laborers, though. $AMZN pushes pretty hard $$ Mar 21, 2012

·  Kraft to Be Renamed Mondelez After Grocery Unit Is Spun Off http://t.co/GONE6x47 Pronounced “Mohn-dah-LEEZ.” Sigh, who got paid 4 this? $$ Mar 21, 2012

·  The 400% Man’s New Big Bet http://t.co/33rHut9y Implicitly a bet that $BRKa will always be able to buy back stock @ 1.1x book value $$ Mar 21, 2012

·  In a Major Restructuring, $HPQ To Combine Printer and PC Groups http://t.co/Aj3zaKaY FD: +HPQ; seems like a marginal idea, maybe works $$ Mar 20, 2012

·  Why $HPQ Really Needs A CEO Succession Plan http://t.co/hkPDVkAy Good cultures should promote from within; HP used to have that $$ FD: +HPQ Mar 20, 2012

·  Buffett Message Is ‘Do as I Say, Not as I Do’ http://t.co/Gcblc8oZ Alice Schroeder very acidic on Buffett; half right & half wrong $$ Mar 20, 2012

·  $AAPL to Pay Dividend, Buy Back Stock to Return Some of Cash http://t.co/uxf6jEBP About time, if there aren’t opps 2use the $$ Mar 19, 2012

Money Market Funds

·  @MarcHochstein Thanks, I found the CFA Institutes comment today, and their view is similar 2 mine in some ways: http://t.co/8yPLcXfX $$ Mar 22, 2012

·  @MarcHochstein investment restrictions moved back to 2008 norms. The ability 2 have credit events frees MMFs to pursue best advantage $$ Mar 21, 2012

·  @MarcHochstein My idea will work 4 MMFs using inv policies prior 2 2008. The MMF folks aren’t earning $$ now, but they could with + Mar 21, 2012

·  @MarcHochstein After reading this: http://t.co/aUoaN4kb Ask them, what if you traded Merkel’s idea 4 a loosening of investment rules? $$ Mar 21, 2012

·  @MarcHochstein 1 more thing; if they have any sympathy toward my idea, I live near DC & would be willing to testify to the SEC $$ Mar 20, 2012

·  @MarcHochstein Does that help? I still think my proposal, one of the few compromise proposals out there would work best of all. Mar 20, 2012

·  @MarcHochstein Having been a life actuary, most regulatory progress happens when actuaries talk w/smarter regulators & forge compromise Mar 20, 2012

·  @MarcHochstein Does that help? MMFs are just saying “We r fine, nothing needs 2b done.” 2me that strategy prob loses. Mar 20, 2012

·  @MarcHochstein Would ask them if they have any way of stopping MMF runs on a private basis; this is the SEC goal; solve that, they leave Mar 20, 2012

·  @MarcHochstein More humbly, I would ask them if they really think they can beat the SEC. SEC’s proposal is horrible, but saying “no” loses Mar 20, 2012

·  @MarcHochstein Not so humbly, I would ask that u show them my proposal that I sent to the SEC, & ask them to back it http://t.co/vuNL8tQE Mar 20, 2012

Market Dynamics

·  The Easy Money’s Been Made, Four Reasons for Caution http://t.co/9kAXqEU4 E-zone calm, risk tolerance+ , VIX low, FOMC may move soon Mar 24, 2012

·  …and then all of a sudden, THE BULLS WENT BERZERK! http://t.co/bJKCVJha Lots of bullishness out there, though Howard Marks thought otherwise Mar 21, 2012

·  @byrneseyeview That’s true, & I did a presentation on that. One more complicating factor were financials, which looked cheap but weren’t $$ Mar 21, 2012

·  @byrneseyeview Found it. Here: http://t.co/YupRW6yD It’s on a number of topics; it was well-received $$ Mar 21, 2012

·  Contra: The Biggest Bubble You’ve Never Heard Of http://t.co/0tzkPyiA Value can’t b a bubble. Growth can b a bubble. Growth & ROE meanrevert Mar 21, 2012

·  Is this time really different? http://t.co/eePs0aIV It’s never different. It’s always different. Profit margins will mean-revert; Q is when Mar 21, 2012

·  Biggs boosts bullish bets on stocks to 90% net long http://t.co/5fYQDhUC Won’t be the first 2 say this, but makes me doubt the rally $$ Mar 21, 2012

·  The Ax is Back http://t.co/B1j3f7nH @reformedbroker Reduced profits on Wall Street translates into reduced perks, bonuses & jobs $$ Mar 21, 2012

·  Public Companies: The End Is Near http://t.co/KejHwYDu There r still advantages 2being publicly traded, but has eroded since Sarbox, etc $$ Mar 20, 2012

·  S&P 500 Rises to Four-Year High as Apple Plans Dividend http://t.co/RnBf9yEw $AAPL raises the div yld on the S&P 500 by 0.08%. Big! $$ Mar 19, 2012

·  Shares and shibboleths http://t.co/CspyJCNX The equity premium over a diversified portfolio of investment grade bonds is ~1%/yr IMO $$ Mar 19, 2012

·  Hubble, Bubble, Index Trouble http://t.co/2q3CPx4g Been saying this for years, indexing changes market dynamics, what happens @ reversal? $$ Mar 18, 2012

Politics

·  Why Are Your Neighbors Just Like You? http://t.co/0lcPOuLZ On the demise of really knowing your neighbors; we try 2 reach out; few others do Mar 24, 2012

·  @traderscrucible @interfluidity My blog (& Steve’s) have always had a strong public policy emphasis. Dreaming, but we suggest better policy. Mar 23, 2012

·  Agent Based Models http://t.co/0etJ20fL “Why not keep it simple, and just say, you pay an asset tax for every dollar over $100B?” $$ Mar 23, 2012

·  The Warren Buffett Chain Letter http://t.co/31FFSrmm Draconian adjustments. What Buffett did & didn’t say. 3% deficit ejects Congress $$ Mar 21, 2012

·  Migration of sovereign debt from private hands to public institutions http://t.co/rQbDTXg3 &the debt sits til liquidity is needed -> crisis! Mar 21, 2012

·  To Stay On Top, The US Must Invest In Research Universities http://t.co/P4kyUqY0 FD: + $INTC; do it w/yr own $$ not taxes; c my comment Mar 20, 2012

·  RT @BarbarianCap: “cnbc: California Cities Scrambling to Avoid Becoming Insolvent” > the die was cast years ago; clowns, path depende … Mar 20, 2012

·  Stopping the National Debt: A Movement Led By a Cowboy, a Colonel, & a Citizens’ Cavalry http://t.co/frqAXCpy Natl Debt Relief Amendment Mar 20, 2012

·  Who is REALLY paying in the $25bil TBTF mortgage settlement http://t.co/T2h1B5CO $5B from banks, rest MBS holders eg pension plans, insurers Mar 19, 2012

·  The JOBS Act: Plutocracy in Action http://t.co/Fjo3Ppet Another article on the previous topic; don’t downgrade information quality $$ Mar 19, 2012

·  Small Biz Jobs Act Is a Bipartisan Bridge Too Far http://t.co/AwBXg184 Would not mess w/securities laws in that way to create growth $$ Mar 19, 2012

·  Public Unions Send Medical Bills to Taxpayers http://t.co/Lb2XgAv9 CA Sup Ct foolishly makes healthcare nonreducible. CA will die $$ Mar 18, 2012

·  As Unions Lose Their Grip, Indiana Lures Manufacturing Jobs http://t.co/vj177CT2 Like my article that few like http://t.co/WgdN7Mmq $$ Mar 18, 2012

·  Pension Legislation Could Cut Contributions, Hike Taxes http://t.co/Tj1UlUz8 Stupid proposals that weaken DB pensions, companies r strongnow Mar 18, 2012

Regulation

·  Where is the Center for Audit Quality When We Actually Could Use It? http://t.co/jWt09bcw JOBS Act: destroy info reliability to create jobs Mar 23, 2012

·  Fed’s Fisher Says ‘Too-Big-to-Fail’ Problem Remains http://t.co/eLvHGmXt Richard Fisher favors breakup of the biggest banks. $$ Mar 21, 2012

·  @carney just read your piece on the net capital rule. Similar to my piece last November http://t.co/tl28NPku Good piece. $$ Mar 21, 2012

·  Top Court’s Patent Rejection Alarms the Biotech Industry http://t.co/oK11WlvR ’bout time we forced a more fundamental review of patents Mar 21, 2012

Economics

·  Solar’s 80% Plunge Hurts Utilities From Hawaii to Spain http://t.co/m9eACVTp Overcapacity drives down prices of PV panels for now. $$ Mar 21, 2012

·  Mean Time Between Failures http://t.co/zkT0z9cX The “recovery” is getting long in the tooth, eg it may end soon; graph: http://t.co/xOHA1IYA Mar 20, 2012

·  Obama’s tax hikes threaten a new US recession http://t.co/uNHwBpeJ Looking @ 4 more years of divided govt & stalemate $$ #debtbombgrows Mar 20, 2012

·  @The_Dumb_Money I would have liked to see the Banks/Etc. who owned the servicers bear more of the cost $$ Mar 20, 2012

·  Partial equilibrium intuitions about choice http://t.co/215kIrmS @interfluidity more difficult to solve general equilibrium Qs than partial Mar 19, 2012

·  Understanding the New Price of Oil http://t.co/TaMTaneR No surprise here; most cheap oil has been found, the price of oil should rise $$ Mar 18, 2012

Miscellaneous

·  @merrillmatter Factoid: 100,000,000,000 to 1 for a monkey to type the word “banana” from random typewriter jumping Mar 21, 2012

·  Is a Calorie a Calorie? http://t.co/4hyTfSvr Yes, but different nutrients come w/calories. Also, a unit of fat has 2x cals vs carbs/protein Mar 21, 2012

·  Madoff’s Lament: I Was An Honest Money Manager Once http://t.co/OGp2xRHR The outside world should ignore Madoff now. Attention feeds him. Mar 21, 2012

·  Trust no one http://t.co/cFYBkCA7 & http://t.co/ILP0dPlA Independent & regular journalists face conflicts of interest in giving speeches $$ Mar 20, 2012

·  On Slime and Water http://t.co/8iezy0FK Pink Slime in burgers, and shortages of potable water in most of the globe, except Canada & US. $$ Mar 18, 2012

·  The NSA Is Building the Country’s Biggest Spy Center (Watch What You Say) http://t.co/iUsN5D0t Time to increase encryption key sizes $$ Mar 18, 2012

·  @TimABRussell I always read all the books I review; in rare cases when I don’t, I tell readers that I skimmed it. $$ Mar 18, 2012

This should be a short post, because my comprehensive view on tax reform is found here.  The summary is that the problem is not tax rates.  The problem is the definition of income.  Just as in ancient times, people would make themselves look poor when the taxman came, so do the wealthy do today.  “Income? I hardly earn any income.”

And that is because of loopholes in the tax code for social engineering purposes, but even more for the ability to defer taxation of what should be income.  My view is that we should all be taxed like traders, with no opportunity to defer taxation.  No tax deferral for IRAs, HSAs, 401(k)s, DB pensions, insurance, annuities, endowments, stock (even private stock will have to report transactions).   As asset prices rise, you would get taxed.  No deferral.

You might think this is an ugly system, and it is, though Zillow would have one amazing business when the government uses it to tax increases in housing values, with a true-up at the eventual sale.  They might even find new business by creating pricing grids for other sets of illiquid assets.

The idea is that taxation should follow value creation, which is income, even if it is not cash income.  Gone would be the days where one has an appreciating asset, and borrows against it, and pays no tax.  All increases in value would be taxed, and assets where the increase can’t be measured would assume a 15% annual return for taxation purposes, with a true-up at the sale of the asset.

Deferred tax liabilities would be made payable in a few years, and deferred tax assets would receive payment in the same period.  Deferred gains in stock would be immediately taxable.  Hello, Mr. Buffett, you want the rich to pay taxes, here is your bill.

This would include an elimination of all deductions, corporate and individual.  And, I would beef up the IRS to enforce this.  Once the concept of income gets simple and immediate, enforcement gets easier.  The IRS could focus on one question: how much are they prospering?  Tax in proportion to that.

A proposal like this could rapidly balance the budget without raising tax rates.  Now none of the midgets running for President would adopt such an idea — it offends both the left and the right.  But it would raise taxes on the rich, unlike what an otherwise bright guy like Buffett proposes.  Rates aren’t the question, the question is the definition of income.

And until we focus on the definition of income, we will continue to drift as a nation, at least until a crisis hits that reveals our weakness.

I have long wanted to see a book that would teach ordinary investors how to avoid being cheated by those that create/sell financial products.  If this book isn’t it, the one that surpasses it will be astounding.  If Wall Street is a show, this book gives you a peek behind the curtain.

This book is really four mini-books in one:

1) How the author became a broker, and the ethical difficulties that were forced on him in the process.

2) The difficulties faced by do-it-yourself  investors, and the benefits of exchange-traded funds [ETFs].

3) On Brokerages, and all their conflicts of interest, culminating in the straight line pitch.

4) Investments to avoid, and advice from the wise.

That it is four in one is not a weakness but a strength.  Wall Street has many ways to skin investors, and each section provides insights that different people will benefit from.  It is a more comprehensive book in its short 240 pages as a result.

On Brokers

The first part of the book describes Wall Street as it was and is, with all of the players and their motives.  Josh spares no one; the tone of the book is cynical, but not unduly so, noting all of the problems with a profane sense of humor.  Some of the funniest bits of the book are recollections of conversations with greedy parties seeing an edge.

There is a certain level of despair for young brokers as they “cold call,” knowing that if they don’t succeed, they will be let go, but driven by the possibility of riches should they succeed.  Those who are successful gain money, prestige, bragging rights, and some level of freedom from tight control.

I have my own experience with this. though mostly on the institutional side where I told such brokers “Why would my client want that?!”  It’s astounding what level of deception those who sell investments will engage in, until they realize you can’t be conned, and then they use your ideas to con others.  (The institutional brokers only make money on transactions; if they know you are smart, they facilitate your ideas at the expense of those less talented.  Ugly, I know, but I didn’t invent this.)

On Do-it-Yourselfers

Now, if you are a total “do-it-yourselfer” like I was in the ’90s, where I researched and bought my own stocks for myself, with some success, this is not for you.  This is for those who research and use mutual funds and ETFs.  It goes into the history and development of asset management fund structures, explaining why they are how they are.

He also describes how the modern era came into existence with discount brokerages in the ’70s, and how during the bull of the ’90 it morphed into anyone can make tons of money, just buy stock!  One thing Josh does not talk a lot about, but was significant, was how when fixed commisions ended, the real reason for maintaining research staffs died.  And, when tick sizes moved from a eighth to a sixteenth to a penny, the reasons for having market makers and specialists dried up.  But you can’t cover everything.

One particularly funny part is page 110, with its real-life definitions of fund types.  Josh is at his best in the section where goes after leveraged and inverse ETFs, where a lot of investors lose money because they are meant to track daily performance of indexes, and generally lose money for those that hold them long-term.  He is similarly good when he criticizes the proliferation of ETFs that are too unique, and will never get a broad following.

On Brokerages

Brokers position themselves as experts, when they are really order-takers.  They hire analysts that are not that good on average, and issue more buy than sell opinions, which facilitate the investment banking and trading businesses.  It talks about the stories that brokerages tell in order to captivate people and make them invest.

And then, Josh discloses the “Straight-Line Pitch,” which has been used on many investors to make them invest with the brokerage.  I have to admit, given some of the initial publicity on this point, and my own experience with brokers, I was dubious about this part of the book, and, Josh leaves it to the end — this is the climax!

I was pleasantly surprised, and I would recommend that all investors read chapter 20.  Why?  To immunize yourself from the clever talk that boxes you in as they offer slick answers to your objections.  That is a major reason why I read books on marketing: I can’t be tricked!  (But it does force me to do my own research.)  If you don’t want to be tricked by clever brokers, read chapter 20.  It isn’t necessarily the best chapter of the the book, that will depend on your own needs, but chapter 20 is unique.

Oh, and why have I not experienced this? Being a total do-it-yourselfer, I told brokers that I knew better than they did; it led to some weird conversations as they found I knew more about it than their talking points.

Investments to Avoid — Advice from the Wise

Most bad investments are either volatile or illiquid.  Why do brokers sell illiquid investments?  Because they get high commissions.  Same for insurance agents.

Then there are investments that sneak between the regulatory cracks, like Chinese reverse mergers, Special Purpose Acquisition Corporations, and anything with secondary guarantees, or the sale of options to enhance income.

Ask the broker this: who can I sell this to if I don’t like it someday?  Who makes an active market in this?  Any pause on this, and don’t buy.  No pause, but an answer — write it down, and check it out.

In one sense, part of the answer to the problems this book brings up is to realize there is no urgency.  If it is a good idea today, it will be good a week from now, let me talk with smart friends and figure out if the idea makes sense.

As for advice from the wise, he invites about eight of his friends to opine on a variety of topics.  Most of them are well-known, but at least a few of them are obscure, unless you are in the business.  I found the counsel to be sound, aside from an obscure former actuary who writes on investments.

Quibbles

On page 118, he talks about how Vanguard would have been a natural for the ETF business, and how Bogle delayed them from getting in.  This is true, but Bogle resigned in 1999; I was at a dinner for his retirement in 1998 in Philadelphia, and met him and Brennan, his successor.  The first Vanguard ETF was created in 2001, VTI is the ticker.  Vanguard did not play a large role in ETFs until 2005, but to say they weren’t in the business is not correct.

Also, ETFs are not as good as they seem, because average investors in them trade them wrong, buying high and selling low.  ETFs do not correct for bad investor timing, even if they are lower-cost.

Who would benefit from this book: If you aren’t a total Do-it-Yourselfer in investments, you can benefit from this book, because it will teach you about the motivations of those who try to sell investments to you, and those who manage money for you.  If you want to, you can buy it here: Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments.

Full disclosure: The author is a friend of mine, so I asked for the book.  He said “yes” and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

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

Central Banking

• Norway Faces Housing Bubble as Krone Steals Policy Agenda http://t.co/15hzb0So By cheapening the currency Norway gets an asset bubble $$ Mar 17, 2012
• Unintended Consequences http://t.co/eLrKtCJc Sprott suggests that the financial system has a chemical dependency on the Central Banks. $$ Mar 17, 2012
• Is the bond market tightening for the Fed? http://t.co/iRSerA8X The bond market is larger than the Fed; they can’t control the curve $$ Mar 17, 2012
• Germany Turns Up Pressure on ECB http://t.co/w2yyfvU1 Difficult to see how the liquidity drains out of the ECB ~3 years from now $$ Mar 13, 2012
• China central bank news conference on policy, yuan http://t.co/w8cy5K1Z & http://t.co/XcIFAbvb Japan buys Yuan, don’t think it means much Mar 13, 2012
• Bond market certainly did not like the FOMC statement. “Don’t worry about energy prices, we got it all under control.” $$ #fuelinginfltion Mar 13, 2012

Investment Banking

• Why banks will continue to rip off clients http://t.co/oTT9fd2i Conflicts on Wall Street, especially at $GS. Big guys know that. So what? Mar 17, 2012
• Goldman Sachs’s long history of duping its clients http://t.co/2sXmKl0D Tells the story of how $GS foxed its way out of Penn Central CP $$ Mar 17, 2012
• The CMBS maturity wall is here http://t.co/GrcEm1KO I remember buying CMBS deals 11-12 years ago. Bullet loans weak if can’t refinance $$ Mar 17, 2012
• Goldman Roiled by Op-Ed Loses $2.2B for Shareholders http://t.co/yz0f0oLy A passing matter; of course IBs have conflicts of interest #duh Mar 17, 2012

China

• Bo’s Ides of March http://t.co/mnKFU8Zx Not so much a move to the right as a statement against being flashy and self-promoting $$ Mar 17, 2012
• Chinese Economy Already in ‘Hard Landing,’ JPMorgan’s Mowat Says http://t.co/kwFW2Ty6 Cyclical industries will produce less in China 2012. Mar 17, 2012
• China’s official admission of slowing commerce activities http://t.co/br7H4D2o When a long trend changes, often moves further than expected Mar 17, 2012
• China’s fixed asset investment growth moderating http://t.co/CEl5mZTc “Growth in real estate and manufacturing projects remains steady.” $$ Mar 13, 2012
• GMO: Something’s Fishy in China http://t.co/DO8v4w8p Goes through the 10 signs of a bubble; finds that Chinese economy has most of them $$ Mar 13, 2012
• US and Europe Move on China Minerals http://t.co/xyGsdkDq WTO ruled against China in January, pressing similar case 17 rare-earth metals Mar 13, 2012
• Another call for an end to China driven industrial commodities “super-cycle” http://t.co/VAd5gR0D Investment is way too high & unproductive Mar 13, 2012

Rest of the World

• Sarkozy’s Yield Drop at Risk With Hollande Victory http://t.co/ti25ozdq Surprise, if Hollande cares for poor in France, E-Zone suffers $$ Mar 17, 2012
• Saudi Arabia Lifts Curtain on Diplomacy as Syria Killings Spur King to Act http://t.co/H8g8D5nG Favors 85% Sunnis over ruling 15% Alawites Mar 13, 2012
• How about those Japanese net-net’s? http://t.co/SAZEcofy Making money in very ill-known small companies in Japan $$ Mar 13, 2012
• The Islamic World’s Quiet Revolution http://t.co/ChNksuFm They’re having fewer children, which I already noted here: http://t.co/KnOGFeOA $$ Mar 13, 2012
• Portugal Yield at 13% Says Greek Deal Not Unique http://t.co/bPBconfk After Greece, the next places to watch are Portugal & Spain. $$ Mar 13, 2012
• Iran-Israel History Suggests a Different Future http://t.co/M1IzxuuB I never knew that Israel sold weapons to Iran in the ’80s. $$ Mar 13, 2012

Financial Sector

• MetLife CEO’s Stress Test http://t.co/YaVV4GMp $MET doesn’t deserve to be treated as a systemically risky firm. Long liabilities protect Mar 17, 2012
• Assurant Falls as California Seeks Rate Cuts http://t.co/d0OcDS09 FD: long $AIZ; this is overrated; ability of the commissioner limited $$ Mar 17, 2012
• Felix Salmon At Columbia Journalism School: Don’t Blame Journalists For Failing To Prevent Financial Crisis http://t.co/0LrCwisB true, but Mar 13, 2012
• Journalists, even if they understood what was going on in the finl mkts would face a tough time writing warnings in the midst of boom $$ Mar 13, 2012
• US Government Agencies Comparing Notes On Algo Feeds http://t.co/15oAxpn9 Little speed advantages w/econ data can lead to big profits #SEC Mar 13, 2012
• Marketview:Point of Reference http://t.co/Xlp5jczH “4 the 1st time this yr I can feel the true bullish sentiment among the investing public” Mar 13, 2012
• Banks foreclosing on churches in record numbers http://t.co/fR3Ro9CJ Frankly, I am surprised that banks lend to some churches. $$ Mar 13, 2012
• Banks Buy Treasuries at Seven Times Pace in 2011 http://t.co/SDKsJIUB What else to do with all the excess liquidity & weak borrowing $$ Mar 13, 2012

US Government-Related

• Pension Benefit Costs Cut by Record 43 States, Study Says http://t.co/B8ZRg4gZ State take actions to reduce benefits to active employees Mar 17, 2012
• Best Treasury Forecaster Says 10-Year Yield to Drop From Highs http://t.co/ma8YoN4u Don’t be too sure about Treasury rates rising $$ Mar 17, 2012
• International Demand for U.S. Assets Rises http://t.co/FwdXqrWH As the E-Zone gets worse, demand for US debt improves. $$ Mar 17, 2012

Investing

• Temporary Hedges eventually force Deleveraging http://t.co/0jVSWRzw On Energy Future Holdings, & why predicting the future is tough $$ Mar 17, 2012
• Cyclicals persistent underperformance http://t.co/KkJ2q05p Cyclicals started underperforming in August. Relatively they never recovered. $$ Mar 17, 2012
• Magnetic Fields http://t.co/S6VYIe5Y Good post. This graph is worth a look: http://t.co/EBhPh6ZN May help explain recent lost decade $$ Mar 13, 2012
• Stock Compensation, Tax Law, Financial Reporting and Facebook’s IPO http://t.co/ULyVLNkr Future dilution may pressure $FB shares $$ Mar 13, 2012
• A Value Investor’s Take on Shorting http://t.co/cZYueqGH Tactical discipline, not structural, b/c market can go nuts. Can help hedge $$ Mar 13, 2012

Miscellaneous

• Considering Bankruptcy? Head to the Mall http://t.co/UvgEArMj Legal services offered for simple situations in mall locations. $$ Mar 13, 2012

This is two books in one, and very well done.  The main part of the book explains risk and uncertainty in general terms, such that most people can understand it.  But for those that can deal with complex math, the latter part of the book offers a lot of additional firepower.

Risk is a tough subject because history only vaguely informs you as to how bad things can get.  Past is not prologue.  There are two possibilities, the past contains and event that was so horrible that it can never happen again, or, the past does not tell you how bad things can be.

Market observers took the first view, that the Great Depression could not repeat.  As a result, few prepared for a situation where there was too much debt, and insufficient ability to service it.

The subtitle of the book is rightly “Uncertainty at the Core of Finance.” Not risk, but uncertainty.  The distinct is important, because risks are things that we know some things about the possible economic outcomes, and can control them to a degree.  Uncertainty is where we don’t really understand the dimensions of the outcomes, and have little if any control.

There is fundamental uncertainty to the simplest aspect of finance, money.  Money seems stable enough in the short-run, but every now and then it fails due to hyperinflation, or the slow steady failure in the store of value sense of moderate inflation over long periods.

Wealth itself is uncertain.  Even if you own it free and clear, there’s no way to tell what it will be exchangeable for next year, much less further out.  There are a lot of people who thought they knew what their homes were worth 5-7 years ago that are decidedly disappointed.

Government debt is uncertain, as governments think they can always roll it over, but political and other obstacles can lead to a refusal to pay when debt service becomes high relative to tax revenues.

Banking is uncertain, mainly because of borrowing short to lend long.  If banks limited themselves to facilitating transactions, a lot of the uncertainty would go away.  Banks would be a lot smaller, less profitable, and there would be fewer of them, and the economy would be more stable.  (Entities with longer liability structures, like pension plans, endowments, and life insurers would become the new source of lending. More would be financed through equity.)

Credit is uncertain.  During boom times, corporate bonds behave independently, and diversification evens out results.  As a result, corporate credit seems safer than it really is, and marginal ideas get to borrow.  During bust times, far more corporate debt defaults than would be expected — there’s almost no such thing as an average year.  It’s either feast or famine.

There are things that can be done to try to mitigate uncertainty: credit ratings, or any scoring system for assets, lending at a more senior level, and Value-at-Risk.  Also using more robust assumptions on possible outcomes, which would lead to smaller position sizes, less leverage, or more cash.

The book has a real strength in showing how the the assumption of normally-distributed risks fails dramatically in many cases, and offers alternatives that would work better.  Trouble is, once you realize how volatile the world really is, a lot of strategies either don’t work, or need to be scaled back.

The book praises actuaries as risk managers, with their ethic codes and stress tests, as opposed to quants with Value-at-Risk and no ethics code.  Banks and Wall Street would be better off in the long run hiring actuaries, who think about risk more holistically, and getting rid of the quants in their risk control departments.  Same for the regulators who evaluate banks.

There are other controversial ideas here: is it possible that the strong economic growth of the past is an anomaly?  Is it possible that growth for nations, and the world as a whole follows S-curves, like products and companies?

This is an ambitious book, and I like it a lot because it is willing to cross boundaries and apply the principles in one  area to another that seemingly should not receive it.  I liked it a lot, and would recommend it to many.

Quibbles

On page 17, he thinks of currency as a put option, but I think of it as 0% overnight commercial paper.  On page 37, he confuses Moses and Joseph, having Moses predict the 7 good followed by 7 bad years, when it was Joseph who did that.

Who would benefit from this book: Every financial regulator should have this book.  Every academic burdened by the lies of Modern Portfolio Theory should get this book.  Anyone who fancies himself to be a risk manager should have this book.  Finally, if you want to understand why financial markets are inherently uncertain, this book will teach you well.  If you want to, you can buy it here: Pandora’s Risk: Uncertainty at the Core of Finance (Columbia Business School Publishing).

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

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

Comments

• No significant changes from last time.  They do note that energy prices are rising, but they don’t see that affecting inflation.
• In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
• Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
• The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.  As a result, the FOMC ain’t moving rates up, absent increases in employment, or a US Dollar crisis.  Labor employment is the key metric.
• The Fed is out of good policy tools, so it will use bad policy tools instead, and for longer than before.
• Do they want the yield on 30 year TIPS to go negative?  Looks that way.
• GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.  Inflation has moderated, but whether it will stay that way is another question.

Questions for Dr. Bernanke:

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

This period of the Aleph Blog covers May through July of 2010.  The one big series that I started in that era was “The Education of a Corporate Bond Manager” series.  The idea was to describe how a neophyte was thrust into an unusual position and thrived, after some difficulties.

The Education of a Corporate Bond Manager, Part I

How I learned the basics, and survived 9/11.

The Education of a Corporate Bond Manager, Part II

How I learned to trade bonds, and engage in intelligent price discovery.

The Education of a Corporate Bond Manager, Part III

What is the new issue bond allocation process like, and what games get played around it?

The Education of a Corporate Bond Manager, Part IV

On the games that can be played in dealing with brokers.

The Education of a Corporate Bond Manager, Part V

On selling hot sectors, and dealing with the dirty details of unusual bonds.

The Education of a Corporate Bond Manager, Part VI

On dealing with ignorant clients, and taking out-of-consensus risks.

Then there was the continuation of “The Rules” series:

The Rules, Part XIII, subpart A

On the biases the come from yield-seeking.

The Rules, Part XIII, subpart B

Repeat after me, “Yield is not free.”

The Rules, Part XIII, subpart C

Reaching for yield always has risks, but the penalties are most intense at the top of the cycle, when credit spreads are tight, and the Fed’s loosening cycle is nearing its end.  It is at that point that a good bond manager tosses as much risk as he can overboard without bringing yield so low that his client screams.

The Rules, Part XV

Securitization segments a security into liquid and illiquid components.

The Rules, Part XVI

“Governments are smaller than markets; markets are smaller than cultures.“

A fundamental rule of mine, but one with a lot of punch.

The Rules, Part XVII

On the differences between panics and booms.

The Journal of Failed Finance Research

Much research fails quietly, but other researchers don’t learn about the dead ends.  Better that they should learn of the failures, and avoid the dead ends.

How I Minimize Taxes on my Stock Investing

Sell low tax cost lots and donate appreciated stock to charities.

Place Political Limits on Overly Compliant Central Banks

Gives a simple rule to control central banks so that they avoid the present troubles.

Yield, the Oldest Scam in the Books

Yes, offering yield is the oldest way to trick people into handing over their money.

A Summary of my Writings on Analyzing Insurance Stocks

A good place to get started if one wants to get up to speed on insurance stocks, but there is a lot there.

Economics is Hard; the Bad Assumptions of Economists Makes it Harder

Going over Kartik Athreya’s letter criticizing nonprofessional economics bloggers.  Why the math behind macroeconomics and microeconomics doesn’t work.

Why Are We The Lucky Ones?

When you are a part of a small broker-dealer, all manner of harebrained deals get offered to you.  This explores three of them.  Note: management did not ask my opinion on the fourth deal, and that is a large part of why they no longer exist.

One more note: the guy who was going to pledge $5 million of stock in example 2 for a $1 million loan?  The stock is worth $7,000 today.

Watch the State of the States

The economics of the states tells us a lot more about the national health because they can’t print money to buy national debts.  (Though they can can raid accrual accounts…)

We Might Be Dead In The Long-Run, But What Do We Leave Our Children?

My view is that neoclassical economists are wrong.  Aggregate demand has failed for four reasons:

1. Overleveraged consumers will not readily buy.
2. Citizens of overleveraged governments will not readily spend, for fear of what may come later from the taxman, or from fear of future unemployment.
3. Aggregate demand is mean-reverting.  It overshot because of the buildup of debt, and is now in the process of returning to more sustainable levels.  The same is true of private debt levels, which are being reduced to levels that will allow consumers to buy more freely once again.
4. When the financial system is in trouble, people get skittish.

The Market Goes to the Dogs, Which Chase Their Tail Risk

Complex and expensive hedging solutions, many of which embed some credit risk, can be less effective than lowering leverage, and (horrors) holding some cash.

Fishing at a Paradox. No Toil, No Thrift, No Fish, No Paradox.

This one had its detractors, because I believe the paradox of thrift is wrong.  Too much aggregation, and it does not allow the dynamism of the economy to adjust over time, even from severe conditions.