This is an unusual book for me.? I’m not a natural marketer.? I try to avoid tooting my own horn.
But this book might help me in my weakness.? I try to do it all on my own, when the aid of friends could accomplish so much more.
The author explains how he created and used friends to aid him in his career.? Beyond that, he showed the value of connecting other people, when there was no obvious advantage to him.
This is not a selfish book, though the ideas could be used selfishly.? I have found in my own life that the more I give to aid others, the better I do.? This book is not all that far from that idea.
Quibbles
The author should have spent less time on his own life and in his own current business efforts.
Who would benefit from this book:
Many would benefit from this book.? It has a lot of good ideas that would aid your marketing.
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.
Rapid money supply growth with no consumer price inflation can only really occur within the confines of an asset price bubble, or else, where does the money go?? Interest rates are low at such a time because of the incredible liquidity, and complacency of lenders that they will get an equal amount of purchasing power back.? Perhaps another possibility is when a country?s currency is being used more and more as a shadow currency, like the US in the Third World.? But even that will come home someday.
I wrote this sometime prior to 2003.? But can it be more relevant than today, aside from my comment about being a shadow currency?? Alas, the US Dollar is not a store of value anymore.? It is only a unit of exchange, like trading cigarettes in a prison camp.
The Federal Reserve may pretend that it is the guardian of stability, but it is not so with respect to asset values.? The Fed stays within its mandates: labor unemployment and goods price inflation.? Those are not much affected by Fed policy at present.? But asset values are inflated.
What should we expect of monetary policy?? Additional creation of money or credit should affect the prices of something.? If the Fed does not intend on affecting a price somewhere, what is it up to?? The economy is prices.? What is the Fed if it does not affect prices?? Next press conference, ask Ben what set of prices he is trying to affect.? If he mumbles, as he usually does, you can know that he is without knowledge, or lying.? All monetary policy affects prices, and it is either dishonest or stupid to say otherwise.
That’s all for now.? We are in a rough situation because of errors in government and central bank policy, as well as cultural errors that have favored spending over saving.? Ignore the idiots who talk of the paradox of thrift.? They rely on short-term models which are not relevant in the real economy.? Saving is a good thing, but maybe save in currencies that are not subject to government discretion, like gold.
Before I start this evening, I want to offer corrections to my last piece on REITs.? Sorry, data glitch, and the results are a little different but the conclusions are unchanged.
Here is the correct regression for Mortgage REITs:
And the the correct regression for equity REITs:
Why the change?? The main difficulty was that the first set of regressions was disaligned time-wise because the twenty-year Treasury yield was not estimated by the Fed for about ten years.? This calculation adjusts for that.? Interesting that when you use the correct data, mortgage REITs fit less well.? That’s an odd happenstance.? Equity REITs, are around the same — though the t-statistics look worse because I included two more points on the curve.
But now to the point of tonight’s piece.? After my last piece, one reader said:
This sounds like an interesting scenario to use your grid analysis, where your quantiles might be ranked using (1) equity/mortgage REIT spreads and (2) monetary policy (measured by either short term rates or yield curve slope).
I decided to try it, except for one thing.? I thought that using the spreads or yields in quintiles would have too much information about the future that if an investor knew the limits of how high or low yields could go, it would be too simple.? The surprise was this: I tried it for fun, and it was no better than what I will show you.
I chose two variables:
Yield curve slope, measured by twenty-year yield less one-year yield
Momentum, measured by amount the price is over the ten-month moving average.
I divided both up by quintiles, reasoning that an investor focused on momentum and the yield curve would have enough data from history prior to 1972 to generalize what would be favorable and unfavorable conditions for investment.
Here is what I found for Mortgage REITs:
and what I found for Equity REITs:
Both data series? confirmed one idea.? Momentum matters.? (Now the yield curve matters, but not so much.)? So I constructed a rule to be invested in REITs if they were in the third momentum quintile or higher, or be invested in one year Treasuries otherwise.
So what were the results?? Equity REITs:
The difference in returns is 20.8%/year following the strategy versus 12.0% not following the strategy.
Now what for Mortgage REITs, that properly despised subindustry group?
The difference in returns is 22.4%/year following the strategy versus 5.1% not following the strategy.
The bizarre result is that though equity REITs trounced mortgage REITs? over 38+ years as indexes, the momentum strategy makes mortgage REITs do better then equity REITs.? That is probably because the returns on mortgage REITs are more autocorrelated — they streak more.
I just say wow, and wonder at it all.? I have some daily models for interest-rate sensitive sectors that I haven’t trotted out yet, which switch between mean reversion and mean aversion that do better than this, but I don’t believe them because they are too good.? It is possible to trip onto something parsimonious that explains history if you are smart enough.? I prefer stuff where I have a theory behind it, as with momentum, where people are slow to catch on.
Now, after all of this, I will tell you I have no money riding on this.? None. Nada. Null.?? Part of this is that it would not be so good when implemented in real-time, and mortgage REITs are a thin industry.? More of it comes from an aversion to what might happen if/when momentum investing becomes pervasive.? We had a taste of that in Summer 2007, where momentum strategies blew up for a short time.? For those willing to see it through, though, it did not amount to much.
So long as? momentum is an incidental strategy to the market, it can work well.? It can never be the main strategy of the market lest matters go totally nuts.
This book is unusual.? Let me give you my quick view: this is a book written by an Orthodox Jew regarding an unscrupulous Jew who used his abilities to communicate to swindle others in a Ponzi scheme.? This is a surmise, because of all the ill-will toward Jews created after the scandal broke, the author tries to differentiate between one who is nominally/ethnically a Jew, and one who takes the ethical principles of Rabbinic Judaism seriously.
As such, this is really two books.? One on the author’s congregation, friends, and extended family, and the good things that they have done as Orthodox Jews, and a book on how the author concluded earlier than anyone else that Scott Rothstein was a fraud, and probably running a Ponzi scheme.? (Alternatives were money-laundering, drug transport, etc.)
I appreciate the logic that the author brings to the table in the book.? I myself have uncovered a variety of investment scams from life settlements, collateralized stock loans, Nigerian schemes, and penny stock promoters.? The author zeroed in on the lack of data to verify the cash flows, and the unlikelihood of so many cases being handled by one man, Scott Rothstein.
As an aside, always be wary when you meet someone that wants a lot of information, but is averse to sharing information.? Divide-and-control is an excellent way to gain power in an organization.? Fight it by connecting with others.
Once the author came to a firm conclusion that Scott Rothstein was dishonest, he faced the question of where to take the information.? Because Rothstein had used some of his clients’ money to buy favor with state and local officials, he decided to go to the FBI as the most competent interested federal organization.? After less than two months after talking to the FBI, the Scott Rothstein’s organization collapsed from a lack of cash flow, partly due to the efforts of the author to convince potential investors not to invest.
And now Scott Rothstein and more than a dozen of his associates are doing time in jail, because of a $1.4 billion Ponzi.? Not the hugest, but give the author credit, he kept it from becoming bigger.
One final note: the title of the book is delicious, because the author and the felon were miles away in distance, but worlds apart in what they valued.
Quibbles
There are a few misspellings, but nothing major.
I understand why he brings up the good deeds of Orthodox Jews, but to have it occupy so many pages of a book dealing with financial fraud will leave some cold.
Also, I disagree with the way Rabbinic Orthodox Judaism interprets the Law (Torah).? We are not to create a hedge around the Law, as the author states.? We cannot be holier than God.? To add to God’s Law is to take away from God’s Law and substitute Man’s Law in its place.? Far better to understand the Law the way Y’Shua Ha’Mushiach (commonly called Jesus) did, and understand that it applies to our hearts and actions, as best expressed by the Larger Catechism Questions 91-153.
Who would benefit from this book:
Most people would benefit from this book — it will make you aware of financial fraud on two levels: the way that the finances of a fraud don’t make sense, and the outward aspects of the life of one committing fraud.? If you end up more suspicious of those offering opportunities that are too good to be true, that will be worth more to you than the price of the book 100 times over.
Full disclosure: I asked the author for this book, and he sent it to me.? I read and review ~80% of the books sent to me, but I never promise a review, or a? favorable review.
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.
I think that the powers that be do not like a low-cost superior source of liquidity that is outside of the banking system.? Why else would there be such regulatory pressure against money market funds, when their losses over their existence would be less than .o1% of yield?? Let the banks compete there… they have lost far, far more.? Which is more badly regulated?
Besides there are simpler ways to fix the problem without adding new charges or bureaucracy.? Let money funds invest as they will, and loosen their credit and maturity constraints.? They would earn better yields on average, and credit events would become a normal aspect of money market funds.? That would bring discipline to the market in a way that regulators rarely bring.? Funds that have credit events would be avoided by investors, but there would be no death spirals, because a run on the fund would improve the NAV.
Money market funds have several advantages over banks:
Their assets are short, like their liabilities.? Unlike banks the cash flow mismatch is small.
Their assets are high-quality.
Their assets are liquid.
As far as depositors go, it would be reasonable to abolish banks, and replace them with money market funds.? Wait, what will happen to the lending market?? That would be replaced by new institutions that borrow longer-term to finance longer-term loans.? It wold be similar to having a small bank sector and a huge REIT sector.? We wouldn’t care if these institutions went bust — they don’t take deposits.? What is better, by separating long-term finance from deposits, we would eliminate that source of most panics, because they occur when short-term liabilities finance long-term assets.? Solve the mismatch, and crises diminish.? Growth may be slower in the short run, but should be the same in the long run.
Forget deposit insurance for money market funds.? My solution is cheaper, simpler, and would allow for greater flexibility of fund management.? Let the banks justify their existence, and raise their FDIC premiums to a fair level.? After that, let the criticisms of money market funds begin.
PS — the banking lobby is so much more powerful than the money market funds — it is no surprise that the banks win here.? We would all be better off if we eliminated the power of banks to take deposits, and handed it over to money market funds.? Of course the Fed would scream, because their power would be emasculated.? All the better. 😀
When I think about REITs, I think about their asset-liability structure.? With equity REITs, they own buildings where rents adjust annually, within limits.? They borrow using mortgages with 10-year terms.? Most of their bond offerings have ten year maturities.
But when articles cite the yields of Equity REITs (from NAREIT) they usually compare it to the 10-year Treasury to ascertain cheapness/dearness.? But is that the best measure?
Possibly not.? In a multiple regression using 1, 5, 10 and 20-year Treasury yields, the coefficient for the 10-year yield is negative and significant.
Wait.? If you add up the coefficients for 5, 10, and 20 year yields, it is positive, where Equity REIT yields move 0.75% for every 1% move in the parallel move of 5, 10 and 20-year rates.
But what the configuration points out? is that when the curve is humped, where 10-year yields are high relative to 5 and 20-year yields, equity REIT yields have tended to be low relative to 5-20 year Treasuries.? That would correspond in most cases to a time of monetary looseness.??? Monetary tightness, vice-versa.
Also note that equity REIT yields fall as the 1-year rate falls.? Rents tend to move in line with short yields.
The story isn’t much different for Mortgage REITs.? Mortgage REITs buy debt interests in real estate, often financing with equity and short debt. The debt interests are usually intermediate to long in length.? In principle, you would think that Mortgage REITs would be safer vehicles than Equity REITs.? Trouble is, the leverage is a lot higher on Mortgage REITs, which can lead to some spectacular flameouts.? (And even with Equity REITs, the less levered REITs with lower yields have tended to outperform.? I think this is another version of how moderate risk-taking tends to beat high risk-taking and low risk-taking.)
So is comparing the spread on mortgage yields versus the 10-year Treasury useful? Probably not.? In a multiple regression using 1, 5, 10 and 20-year Treasury yields, the coefficient for the 10-year yield is negative and significant.
But if you add up the coefficients for 5, 10, and 20 year yields, it is positive, where Equity REIT yields move 0.14% for every 1% move in the parallel move of 5, 10 and 20-year rates.
But what the configuration points out? is that when the curve is humped, where 10-year yields are high relative to 5 and 20-year yields, mortgage REIT yields have tended to be low relative to 5-20 year Treasuries.? That would correspond in most cases to a time of monetary looseness.??? Monetary tightness, vice-versa.
Summary
There are two quick conclusions to draw here:
1) Using the spread to the yield on the 10-year Treasury is probably not the best choice to illustrate REIT spreads.? That said, those wanting a simple measure may be unlikely to get anything better.? The average person would have a tough time following the results of? multiple regression.
2) Be wary of paying up for REITs during times of monetary looseness, and be willing to consider REITs during times of monetary tightness, when all seems lost.? I would only add don’t catch a falling knife; my worst loss ever came from a mortgage REIT.? This may be a glorified way of saying “Buy low, sell high,” but only where there is a margin of safety.? Perhaps apply a 200-day moving average rule to prevent stupidity; you won’t get the bottom, but you won’t find your capital permanently impaired.
Personal note: hey, this article turned out better than I thought it would. 😀
I was surprised by this book.? There is very little math in this book, which would make it a popular book for giving someone an introduction the bond markets.
It covers all of the non-credit, non-mortgage markets.? It will not replace Handbook of Fixed Income Securities 7th Edition, but it will supplement it, because this is an easier read on the areas that it covers.
Swaps, futures, rolls, options — this book gives a friendly introduction to all of them.
Quibbles
The flipside of no math is that many things are not explained as well as they should be, or get glossed over.? It would be better to ignore principal components analysis than to mention it and not give much explanation.? (A brief appendix, maybe?? Same for other math topics?)
Who would benefit from this book:
Beginners with a serious interest in the fixed income markets would benefit.? No one else.
Full disclosure: I asked the publisher for this book, and they sent it to me.? I read and review ~80% of the books sent to me, but I never promise a review, or a? favorable review.
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.
, but it will supplement it, because this is an easier read on the areas that it covers.