One of the dangers of being a generalist is that you get spread too thin. Another is that you overplay your abilities. I probably did a little of both in my recent post on ETNs (and blogging while tired). The fine folks at Index Universe took umbrage at my post, and for good reason. I wrote a sloppy post without enough research.
Here’s what I intended, even though it came out wrong. I liked the post that came from Index Universe, because it highlighted an issue with ETNs that I had been talking about for two years — you have a significant credit risk there. In the two years since I wrote the piece that I cited in my article, I have read dozens of articles on ETNs, and not one of them mentioned credit risk. So, I was glad that someone had taken up my point. Or, at least, I thought it was my point.
Now, how was I to know that some writers at Index Universe had already written on the issue of credit risk? I read pretty broadly, but I can’t dig for everything. Also, they took it as a poke/jab; that was not my intent. I don’t think that way, and I genuinely like Index Universe, even though I don’t read it daily.
I offered my apologies at their site, and I offer my apologies to readers here. I apologize for my mistakes; I am not like some writers on the web that can never be wrong.
One final note: I have been dealing with credit issues since 1992 in the insurance, mortgage bond, and corporate bond businesses. My experience is very relevant here. You would be amazed at the panoply of products resembling ETNs that got trotted out since the mid-1980s, though I ran into them in the 1990s.
In any case, hail Index Universe, and investors remember, ETNs carry credit risk.
I thought Felix Salmon did an excellent job on this post regarding economics blogging. His correspondent proposes standards for and a reward to be handed out to the best bloggers. Felix declines. I decline as well, which I will detail later. There are already ways for financial bloggers to be distinguished against one another:
What’s the Alexa, Technorati, and Quantcast rankings of your site?
Do journalists call you to talk about financial issues? (Happens to me a lot.) Do you get mentioned in the paper? (Uh, not so much… the copy editors leave me on the cutting room floor…)
If someone Googles a given term, where do you show up?
How many hits do you get per day? How many subscribe to your RSS feed? E-mail feed? Seeking Alpha? Other?
The thing is, the web is a very competitive environment, with a lot of bright people. Switching on the web is easier newspapers or magazines.
But why do I blog? Let me answer that with a different question, “Why did/do I write for RealMoney?” Well, it’s not for the money, though I would earn more if I submitted my articles to RealMoney rather than placing them at my blog. I like explaining concepts to people and seeing the light go on. I like hearing that someone made a better investment decision because of my educational writings. I also enjoy the challenge of trying to tease out conclusions from dirty data, using an approach that is eclectic.
Oh, and the money? Sorry, not much there. Though my blog costs me $200/year, it makes roughly $1000/year. The $800/year of profit is not enough to compensate me for my time; given the time required, I’m not sure what would be enough. I don’t do it for the money; I do it for the audience. (I would make more if I submitted it all to RealMoney, but then the audience would not be as wide, and I would not be building my brand.)
Now some bloggers are anonymous. I will mention Equity Private and Accrued Interest. Both know their stuff, and they aren’t pulling anyone’s chains. If someone writes anonymously, and does not know their stuff, their readership will not grow, because it will become known through the comments at the blog — it will not appeal to the intelligent commenters that help build an audience.
Blogging is in many ways tougher than being a young journalist. A blogger starts with no audience, whereas a young journalist has an audience from the publication. The young journalist will be guided in what to write about by his superiors, and will automatically get edited. The blogger has to figure out what he can adequately say, and whether anyone really wants to read him. The young journalist will have discipline imposed on him, whereas most successful bloggers have to develop their own discipline — one consistent with their posting style and frequency. Blog audiences decay rapidly with lack of attention, and there is a lot of competition to be heard. Journalists succeed or fail as a group, and the individual journalist does not have a lot of effect on that.
That last point should be changed to when journalistic organizations succeed or fail, the journalists inside tag along. Their competition does not primarily come from bloggers, but from Craigslist (classified ads), Google (targeted advertising), Ebay (targeted consumer to consumer sales), and Monster (Job ads and applicants), which dries up the real revenue streams. Plus, the younger demographic does not as easily pay for print subscriptions.
One other note — many popular bloggers realize that they could become a lot more popular if they head off in a sensationalistic direction, and a few do, with some cost to the truth. They do their readers little service. What I have stared down is that I could write only about stock investing ideas, and my site would be more popular. But those are far less certain than what I write about. I feel comfortable talking about my portfolio, which is over at Stockpickr.com, but individual ideas, particularly the controversial ones, have a lower probability of being correct.
Blogging is easier than being a journalist if you don’t care about being read. Anyone can go to Blogger or Typepad (among others), and start a blog in minutes. It is those bloggers who have something significant to say who will end up with an audience. I thank my audience that reads me regularly; I only hope that I can continue to be worthy of your time.
PS — I recently submitted my blog to Blogged.com, and the editor did not think that much of my blog. If you have a strong opinion about me, positive or negative, perhaps you could write a review. Again, thanks.
Roger, there is a reason to be aware the the ETNs issued by Barclays plc are notes. (or, bonds) If Barclays went bankrupt, the value of the notes would be impaired. From my limited glance through the prospectus:
The Securities are medium-term notes that are uncollateralized debt securities and are linked to the performance of the GSCI? Total Return Index (the “Index”).
and later…
The Securities are unsecured promises of Barclays Bank PLC and are not secured debt. The Securities are riskier than ordinary unsecured debt securities. The return on the Securities is linked to the performance of the Index. Investing in the Securities is not equivalent to investing directly in Index Components or the Index itself.
and much later…
USE OF PROCEEDS
Unless otherwise indicated in the applicable pricing supplement, the net proceeds from the offering of the notes will be applied for our hedging and general corporate purposes.
In essence, a holder of the ETN has bought a senior unsecured zero coupon bond from Barclays, with an ultimate payoff based off of the return on the commodities index less 0.75%/year. But unlike a bond, there is no floor on the implied interest at zero. If commodity indexes fall, the ETN would give a negative return.
I like Barclays. I own the stock. But there is more than one risk to the ETNs: commodity price risk (of course), and Barclays plc credit risk (surprise!).
Position: long BCS, and pondering the days when I used to read structured bond prospectuses regularly…
-=-=-=-
Now, today, I find it funny to see other retail investment commentators catching up with the credit risk angle of ETNs.? Perhaps it is my background in the Equity Indexed Annuity [EIA], Variable Annuity [VA], DC pension and GIC businesses — we had all sorts of guarantees and non-guarantees floating around, so we were used to analyzing the risks.
Now, what if the sponsors packaged the ETN with a default swap (written by third parties) to protect the investors if the company failed?? At that level, the ETN provider should buy Treasuries or Agencies, and layer on the futures or options as the case may be, creating an ETF, because all of the advantage from doing the ETN goes away.
Be wary of ETNs, at least to the level of asking how likely it will be for the sponsor to be in good shape when the ETNs mature.
Every now and then, my hyperactive mind runs the film of the Federal Reserve changing its policy, and an unexpected chain of events happens, triggering a war a long way away. Sound farfetched? US monetary policy with its unending bias toward stimulus, since we are the global reserve currency (for now), pushes inflation out into the countries that lend to us and into the commodity markets as well. (What do you expect from a negative real interest rate?) This has political impacts as the prices for energy, food , and related goods rise.
Nigeria is a basket case because of the light sweet crude buried there. Venezuela gets its share of troubles because nationalized oil gives extra power to their government. Same for Russia, though the politics are different. Now there might be a movement for autonomy in the part of Bolivia where the natural gas is located. I sometimes think that Iran will have internal difficulties once their oil production falls to the degree that they can no longer subsidize their populace.
These are some of the difficulties driven in part by rising energy prices. Now, even in the US rising energy prices pinch. Summer travel will be less (though I will still take my family to the 50th anniversary of my parents — I expect to spend at least $600 on gas… cheaper than plane fare.)
Rationing of rice and other staples is happening globally, even in the US to a limited degree. Personally, I think it will lead to higher prices still and a lot more planting (on land previously considered marginal) for food, not energy purposes.
There are other spillover effects in the US, whether it is pricing/portions in restaurants, or the general rise in price for meats that may come. Remember the meat shortage in the 70s? (Ugh, I am dating myself…) First grain prices rose. Then, ranchers culled their herds/flocks. Meat prices fell. (That may be where we are now.) Once the excess meat was purchased, meat prices rose as well, creating the “meat shortage.”
My endgame for the foolishness for the past 20 years has resembled a repeat of the 1970s, minus country music, truckers being cool, disco, etc. It will have its difficulties; just be grateful to God that you don’t live in Nigeria, or any other place that is coming under stress that is eve n more severe.
Liquidity is like water. Is water a solid, a liquid, or a gas? Depending on the situation, water can be any or all of the three. When I started my blog, my first serious post was “What is Liquidity?” Given what was about to happen in Shanghai seven days later, and what that would do to liquidity, the post was ahead of its time.
Both had a number of good points, though I like my piece better.? Let me borrow from Peter Bernstein, where he said something to the effect of “Liquidity is the ability to have a do-over.”? In other words, if you make an investment mistake, how much does it cost you to reverse it?
The three aspects of liquidity:
What sort of premium does it take to get someone to lock into a long-term commitment?
Slack assets available for deployment into new investments, and
Bid-ask spreads
are correlated.? When there are few slack assets relative to investment needs, large premiums have to be offered to get investors to lock into a long-term investment, and bid-ask spreads tend to be wide as well.
But let’s consider the flip side of liquidity.? Liquidity is akin to holding a long option.? Rising volatility is the friend of one who has liquidity or a long option.? But, being long an option means someone else is short an option.? Having liquidity means that someone else has to provide cash should you choose to buy something.? If you liquidate shares in a money market fund, cash must come either from new investors in the fund who take your spot, or the fund has to raise liquidity internally, handing you some of the proceeds from not entering into an overnight loan.
Or, consider the bid-ask spread in stocks, or other securities.? When the bid-ask spread is tight, it means that the market maker (or specialist), is comfortable that short-term volatility is low enough, that he will be able to profit from the tight spread on average.? When there is severe uncertainty, as there often is in esoteric fixed income instruments during a panic period, the bid-ask spread disappears, and one is reduced to “price discovery, using a broker who is discreet about your intentions regarding buying or selling.? (My, but I got good at that during 2001-2003. ? Ouch.)
I like my definition of liquidity, which is the willingness (price) to enter into or exit fixed commitments.? It covers all three aspects of liquidity, and helps explain why they are usually different manifestations of the same phenomenon.
As for now, versus mid-February 2007, the willingness to enter into fixed commitments has declined markedly, even though it has improved over the last seven weeks.? That is no guarantee that it will continue to improve linearly.? Bear markets have their rallies, and this current rally has been a good one.? It would be rare to have such a short bear market, or one that ended without clearing away most of the prior excess lending problems.? We still have a lot of wood to chop there.
I tried forecasting the non-farm payrolls number when I first came to RealMoney — after all, what other number made as big of a splash? I seemed to do well at it for a while, and then badly, and then I really began to dig in to how the number was calculated. The more I dug into it, the more I concluded that I could not forecast it. Not that it is wrong, made up, whatever. I just could not forecast it, so I gave up.
Not that I like being a quitter, but there are benefits to recognizing reality and respecting it.? I did learn some things along the way, though, and let me explain them:
1) The 12-month change for the seasonally adjusted [SA] and non-seasonally adjusted [NSA] numbers are equal.
2) The seasonal adjustment is more than just an adjustment for seasonality.? There is a distinct annual pattern to the NSA data, and I have done my own seasonal adjustments and they do not reduce that variability nearly as much as the BLS methods which involve ARIMA models.? (As one of my econometrics professors used to say to me, “Practitioners use ARIMA models when they have no idea of what the true model might be.? It’s just a hunt for correlations.”)
In other words, the SA data is not just adjusted for seasonality, but it is smoothed as well.? Now, as an actuary, I can get into smoothing.? We do that all the time when theory would dictate smoothness, as in mortality table construction.? But here the smoothing is opaque to me, and presumes that changes to employment levels happen slowly.? I’m not sure that always holds.
Think of it this way — the SA figures always contain a pad/buffer/fudge factor, whether positive or negative, that gets amortized into future changes in employment.? A particularly large change in the NSA figures will tend to lead to the SA figures changing in the same direction for a little while (or, in some cases, they revise prior months). For what it is worth, I think the pad is small at present.
3) You can’t easily disaggregate the birth/death [B/D] adjustment from the SA figures, because the SA figures come about like this:
Calculate the raw NSA figure
Add the B/D adjustment
perform the seasonal adjustment (and smoothing)
4) The B/D adjustment works sort of like this: estimate the amount of jobs that the economy will add from new businesses that are outside of our survey for the next year.? Add those jobs in using a pattern that reflects our estimate of when businesses add jobs on net.
5) Now, back to the graph at the top of this page.? The blue line is the number of net jobs added over the prior 12 months.? It doesn’t matter whether I use the NSA or SA figures, because over 12 months, they are the same.? The magenta line indicates the number of jobs added by the B/D adjustment over the prior 12 months.
Because I am doing a year-over-year comparison, I escape the problems associated with the seasonal adjustment, and this fairly disaggregates the B/D adjustment.? The yellow line is the proportion of net new jobs coming from the B/D adjustment.? Over the life of the B/D adjustment (since 1/1/2000), the B/D adjustment has made up 82% of all new jobs created.
6) At present, the B/D adjustment is running at an annualized 750-800 thousand jobs per year.? I don’t know if that is right or wrong, but since 2004, it has been near that level.? Recently, non-farm payroll numbers and the B/D adjustment have been declining, but the B/D adjustment has been declining more slowly.?? The B/D adjustment accounts for more than 100% of jobs added over the past twelve months.? That’s not necessarily wrong, but the B/D adjustment does move slowly.
7) I’ve tried to be as neutral as possible here.? Two of my favorite bloggers, Dr. Jeff Miller, and Barry Ritholtz, are on opposite sides of this argument.? I put this out as data for discussion; I am not taking a stand because I can’t vet out the estimates of job creation from the birth/death adjustment.? They could be high, low, or just right.? In a slowdown, perhaps they should be off more, but the global economy is still strong, supporting jobs in some cyclical sectors.
1) If you are looking for an article that describes how the Fed’s new lending facilities work, look here.? It shows the effects on the Fed’s balance sheet of each program.
2) Well, I guess the Fed is willing to further risk its balance sheet in order to force LIBOR down.? Now, this may have knocked 10 basis points off of the TED spread in the short run, but I am not sure what it will do long term.? It may do nothing, because the LIBOR lending markets are so much larger than the Fed.? As is noted in this piece:
Still, RBS Greenwich Capital chief economist Stephen Stanley cautions that adding AAA-rated asset-backed debt may not do the trick. ?This is not likely to be a major change, as the highest quality ABS were getting financed without too much difficulty already,? he wrote in commentary.
3) As I have noted before, the Fed cannot, and should not solve every lending problem.? There is a tendency for the financial system to adjust to monetary laxity and ask for more.?? This is just another aspect of the way our government operates, absorbing many medium-sized crises at the risk of an eventual run on the Dollar.
4) Should the Fed pay interest on reserves?? At present, the Fed has banks lend to each other through the interbank market; if the Fed paid interest, the Fed funds market could become an explicit market where banks loan money to the Fed, rather than to each other.? Now for the Fed to issue debt would allow them more flexibility in their balance sheet, but at a price.? We would have a central bank with additional liabilities beyond the currency, and that would have an impact on their ability to do monetary policy.
5) Funny how the Republicans grab for something unusual — pointing a finger at the Fed for commodity price inflation.? The Fed does have a small role there, but the bigger factor is the development of China, India, Brazil, and many other placesthat need raw materials in a way they did not previously.
6) Though I disagree with this paper, it is worth a read.? I am not a monetarist, I am more of an Austrian economist.? I acknowledge that economic systems are not stable, and that is a good thing in the intermediate-to-long run.? In my opinion, the main weakness of monetarism is that it fails to recognize asset inflation.? When the money supply is growing too rapidly, the money goes somewhere.? If savers predominate, it goes to assets, if spenders, to goods and services.? We mismeasure savings in the US — it is higher than commonly believed.? As such, growth in the money supply boosted asset prices.? But as the Baby Boomers gray, that balance will tilt as they draw on assets to finance consumption.
What is needed is a willingness for central bankers to stand in the way of investment/lending booms, and raise rates to deflate investment/lending bubbles before they deflate themselves, with large consequences to the economy.? That’s not coming anytime soon.
1) Desperation and the Dollar. In mid-March, pessimism over the US economy and monetary policy were so thick that people were considering the old Greenspanian rate of 1% Fed funds as possible. Well, times change, at least for now. The orange line above is the 2-year Treasury yield which gives a fair read on expectations of monetary policy, which bottomed in mid-March. It took the Dollar a little longer to move along, but the present course of dollar is up in the short-term (consider the Euro). That doesn’t address the possibilities of a wider lending problem, or the overly aggressive fiscal policies that will be employed by the next President. (Deficits don’t matter, until they are big enough to matter.)
2) I’ve talked about the US Dollar and the five stages of grieving. I think the G7 got to the second stage, anger, in threatening action recently. I think they get a respite from fear because of the bounce in US monetary expectations. My guess is that they would intervene when the Dollar gets to $1.70/Euro. Neither the threats nor the intervention will have much impact in the long run, though. This will only change when foreigners stop buying our bonds, and start buying our goods and services.
3) Another thing that correlates with the shift in expectations of US monetary policy are yields in long government bonds around the world. Surprise, as the anticipated future financing rates rise, the willingness to try to clip a spread off of long bonds declines.
4) So what could replace the Dollar as the global reserve currency? The Euro, maybe? The Yen and Pound are too small, and everything else is smaller still. The Yuan might be ready in 15 years when their financial markets are developed. It takes a long time for the reserve currency to shift.
5) So, why not the Euro? I’m still a skeptic that the EU will hang together without political union. Also, a strong Euro is testing the monetary union in places where credit markets are weak, and export markets are weakening because the US is getting more competitive with the weak Dollar. That said a persistently weak dollar raises the incentives for other countries to look for a new reserve currency. Leaving aside the potential instability of the EU (unlikely in the short run) the Euro is probably the best alternative.
6) This piece by Felix Salmon helps point out why why Iceland is the canary in the coal mine. They are the smallest economy with a floating currency. It seems like they are successfully defending their currency at present, at the cost of 15% interest rates.
7) Is the UK economy just a miniature version of the US economy?
8 ) Why is Chinese inflation rising? Loose monetary policy, and an undervalued Yuan, at least versus the Dollar. Now, maybe the Chinese will start buying Euro-denominated bonds, and sell more to the EU than they buy. (Note that I am not the only skeptic on the Euro’s survival.)
9) What of the Gulf States? What will they do with all of the dollars that they have? Along with China, their huge depreciating Dollar reserves are fueling inflation. Personally, if I were in their shoes, I would buy US corporations quietly, perhaps through the purchase of ETFs. But the huge accumulation of dollars threatens to create the same “white elephant” development schemes that they experienced in the early 80s, when the socialist Gulf governments had too many Dollars, and too few places to use them.
10) Inflation is rising in the OECD. This is a “sea change” in terms of economics. Policymakers have enjoyed falling inflation rates for so long that perhaps they aren’t ready for the degree of monetary tightening necessary to squeeze out inflation.
11) Development isn’t easy after a point. It reveals shortages, as India is experiencing in semi-skilled and skilled labor. This will eventually work out, but in the short run, it makes infrastructure and construction projects difficult. Bodies aren’t enough; skills are needed, and many better skilled Indians work abroad, where they can make more.
12) A rice cartel? Everything old is new again. I remember in the 1970s when the US talked about a wheat/corn cartel, in response to the new strength of OPEC. Personally, I don’t think it would be effective. Agriculture is too flexible for cartel-like schemes to work in the intermediate-term. But, let them try. It will be interesting to see what happens.
Uh, this is an off-topic piece. One of the benefits of working from home is that I can listen to my wife teaching our children, and every now and then, I drop in and explain some aspect of the topic further. Out of the corner of my ear, I heard my wife Ruth explaining Greatest Common Factors and Least Common Multiples to our fifth child, Jonathan.
When I was a kid, I was kind of a prodigy with math (I am not so now), and when we went through it in school, I remember tutoring my classmates on the two topics. I always thought the two concepts were related, but I never understood how, until it struck me last week.
Consider the numbers 60 and 144. What are their Greatest Common Factors and Least Common Multiples? To start, let’s factor the two numbers:
Then, let’s place the common factors in the intersection set.
The greatest common factor is the product in the intersection set, in this case, 3x2x2 = 12. The product of the union set (just multiply across) is the least common multiple — 5x3x2x2x3x2x2 = 720.
When I realized this, I drew it out for Ruth and Jonathan, and told them “Look at the ravings of a madman.” But later that evening, Ruth came to me and thanked me for it, because it worked with Jon, and clarified it to her.
As a mathematician, I am nothing great, but my intuition has been a great help to me at many points. This was one of them.
Update Saturday Afternoon
As F comments, “Which has the consequence that LCM*GCM = number1*number2.”
I should have written that myself, but didn’t.? Thanks for pointing that out.? It is an application of the rule that:
set A + set B = union of A&B + intersection of A&B
In my blogging, in my other research and in investing, I gain some degree of comfort from being criticized by both bulls and bears. Worst of all would be no criticism; it would mean that I am not saying much. Criticism from both sides means that I am probably not blindly taking a partisan view, or talking my own book.
Briefly this evening, I want to point out some of the costs of our current monetary policies. Now, some things are going well, and the Fed might want to take some credit.? But the costs are soft costs, ones that are preferable to systemic financial collapse. That said, there are smarter and dumber ways to do bailouts. When I criticized the Bear Stearns bailout, I tried to point out how there have been better ways of doing bailouts from history, and that the Fed should have known this. I understand that the Fed may have felt rushed at the time, leading to a suboptimal decision, but they should be better read on economic history. Bailouts should be very painful for those bailed out, or else others line up for them.
Well, now that there has been one bailout, why not more? Other shaky areas of the economy could use a bailout… student lenders, homedebtors, home lenders, etc. Are they less worthy than Bear Stearns? Ignore the student lenders, because they pose little systemic risk. If housing prices fall another 20%, the systemic risk issues could be severe. Consider there two quotes from the article:
“There is no way to put the genie back in the bottle,” Minneapolis Fed President Gary Stern said in an interview with Fox Business Network on April 18. “What worries me most about where we wind up is that we will have an expansion of the safety net without adequate incentives to contain it.”
and
Richmond Fed chief Jeffrey Lacker and policy adviser Marvin Goodfriend wrote in a 1999 paper that central bank lending creates ever-expanding expectations. “The rate of incidence of financial distress that calls for central bank lending should tend to increase over time,” they wrote. That “creates a potentially severe moral-hazard problem.”
We’re on that slippery slope now. Should the Fed bend monetary policy even more to compensate for areas of lending where they have inadequate control? To the extent that you believe in central banking, central banks should deal with the big issues, and leave the little ones alone. Lend at a penalty rate during a crisis; don’t try to make things normal. Where there is systemic risk, stand behind the core but not the fringe; defend debt claims, and wipe out equity claims.
Or, consider the second order effects that our monetary policy creates: the weak dollar and the responses that foreign governments must follow: let their export sector wither, or follow US policy down, and accept more inflation. It will take a long time for the US to lose its reserve currency status, but we are on that path. Here’s to the day when we have to borrow in the currencies of oil exporters, or China. (Please no. 🙁 )
Or, consider the troubles that the states are in, since they have to run balanced budgets, unlike the Federal government, which can borrow in dollars, and inflate the currency as needed. I follow state tax revenues; it is an excellent coincident read on the economy. Well, sales tax revenues are falling. Also, some states are considering one of the “dumbest ideas ever” — pension bonds (borrowing to fund pension plans, relying on clever investing to beat the rate paid on the bonds). New Jersey lost big on their last attempt at pension bonds. Far better to consistently fund municipal pensions through general revenues. For those that have read me before on municipal pensions, their claim to fame is that they make private sector funding look good.
Finally, to end on a less sad note, is Iceland looking better, or , is it just part of an overall bear market rally?? (What of Argentina?) ? My guess is the latter, but maybe they have successfully defended their currency. Then again, we can look at Brazil, which is now investment grade on one side (from S&P). Good news follow good policies, and Brazil has been on the right track — they have become a net creditor, unlike the US. Hey, maybe the Real should be a reserve currency.
