May 2013 – Page 3 – The Aleph Blog

Best of the Aleph Blog, Part 20

Posted on 8 May 2013 by David Merkel

These articles appeared between November 2011 and January 2012:

The Foul Deed of the SEC in 2004

Why the SEC is to blame, and not to blame, regarding the net capital rule.? They changed little in 2004, but should have been more aggressive than that.

Bubbles are Easy to Spot, well almost?

How to spot bubbles, and why our world is so messed up from an unwillingness to takes losses on bad debts.

At the Cato Institute?s 29th Annual Monetary Conference (Epilogue)

My thoughts on monetary policy versus the many odd people who come to the conference.

A Large Middle Class Isn?t Necessarily Normal

After all, across human history, middle classes have been abnormal.? Why should they be regarded as normal now?? Has something fundamentally changed?? Lotsa flame-mail on this one. Hot!

Valuing Behemoths

Valuing Behemoths, Redux

On the issues regarding cheaply valued companies where the equity is worth more then $100B.

Improve the Position

We are no good at choosing the best assets, but we are better at choosing assets that are better than what we currently hold.

The Gold Medal Gold Model

I take Eddy Elfenbein’s model and apply regression to it.? The results explain what affects the price of gold — the real cost of carry.

Peak Credit

What I write here will not be rigorous.? We?ve heard about ?peak oil.?? We?ve heard about other resources, and how production will decline over time.

But what of credit? It isn?t that hard to create, but it is hard to create well, particularly when debt levels are high, as in this environment.

The Rules, Part XXVIII

Rebalancing of any sort in investing presumes an underlying stability to the economic system, and thus, market returns.? Rebalancing will not protect against socialism, war, or an overleveraged position.

The Rules, Part XXIX

Risk premiums should never be capitalized, they should only be taken into income as earned.

The Rules, Part XXX (30)

In the recent run-up, there was talk of the infallibility of equities.? This led to a higher level of variable compensation in the economy through option and share issuance and low pressure to raise fixed wages.? This was yet another form of hidden leverage, which hid the unprofitability of enterprises through share dilution.

Stock Prices versus Implied Inflation

Stocks, at least in this environment do better when inflation implied by TIPS rises.

Permanent Asset Allocation

An attempt to explain why Harry Browne’s asset allocation idea works, at least until many realize it, and send gold shooting through the roof.

Too Many Par Claims versus Sub-Par Assets

This sums up the problems of our world today.? Everyone wants to be paid back in full, but many are “bust” and cannot repay.

On Predicting the Future

I reverse-engineered ECRI, and the response is minuscule.? This took a lot of work, and was controversial.

Against Simple Valuation Metrics

On the value of dividends, buybacks, acquisitions, and organic growth.

On Opaque Transparency

After a certain point, the more data you reveal, the harder it gets to evaluate what is going on.? Far better to reveal to the public the core data that explains policy than to make them slog through big data releases.

And in those cases, what is not revealed is the most important data.

Best of the Aleph Blog, Part 19

Posted on 7 May 2013 by David Merkel

These articles appeared between August and October 2011:

Take Prudent Risk

One of the great secrets of investing is taking moderate risk.? High risk fails on average, because those swinging for homers make a lot of strikeouts.? Low risk fails because there is little reward.

De Minimus Laws, Redux

I catalog all of the de minimus laws for Registered Investment Advisers.? Only Texas and Arkansas require registration on the first client.? The rest require it on the sixth client.

How Would You Run a Rating Agency?

Points out the incompatible standards that rating agencies are encouraged to achieve.? It is a no-win situation.

Stagflation-Plus

There is no escape.? There will be a crisis.? Do you want a smaller crisis sooner, or a bigger crisis later?? The actions of our government say, ?A bigger crisis later, much bigger and later if possible.?

The Rules, Part XXIV

Every excess eventually unwinds.? When an excess unwinds, the fall gets exacerbated by trend-followers blowing out of mutual and other pooled funds with lousy relative performance.

Leverage Isn?t Free

A critique of risk parity.? This is implicitly the same idea behind securitization, but it does not get the same criticism.

The Predictions of Michael Pettis

Few global macroeconomists are as perceptive as Michael Pettis.? I have learned a lot from him over the years.

The Folly of Large Acquisitions

I explain what most tends to improve the value of companies with respect to the use of free cash flow.

The Rules, Part XXVI (Efficiency vs Stability)

T+1 will raise volatility.? Often increases in the technical efficiency of information or trading systems increase volatility, because people can act precipitously on information, all at the same time.

Missed Opportunities

The Federal Reserve was the primary architect of the debt bubble that we are now wrestling with.? It is the main reason that we need to eliminate the incompetent, overstaffed Fed.? (Lay off anyone that has a Ph. D.? there.? Dangerous idealists who have little contact with reality.)

On High Correlations

I explain why high asset correlations have to be bearish indicators.

How Do I Find a Job in Finance?

How Do I Find a Job in Finance? (Part 2)

I have helped many people get jobs in finance.? Most of my useful advice is in these two articles.

On Multiparty Transactions

My simple rule to average people when involved in complex transactions is this: be cynical.? No one is interested in your well-being, and most of the transactional terms are skewed against you.? To the extent that you can borrow less, and eliminate some of the parties that would be a part of the transaction, it is to your good that you do so.? The best situation is that you buy for cash, if you have it.

Debt Relief

The main thing holding back our world from recovery, is no one wants to take losses from bad debt, and so central banks extend a lot of credit, as if those pointy-headed intellectuals have any idea about how the economy really works.

Build the Buffer

There are advantage to having surplus cash around.? You can get discounts and minimize risks.

Financial Complexity, Part 1

Alas, there is no part two to this piece.? But this piece explains why financial markets are often not efficient.

The Retirement Bubble

We know we should save for retirement, but we don’t.? That applies to governments, corporations, and individuals.

We Eat Dollar-Weighted Returns

Explains how the average person did poorly investing with Bill Miller, while the few buy-and-hold investors did pretty well.

On Social Media, and How I Built my Blog, Part 1

On Social Media, and How I Built my Blog, Part 2

I divulge almost all of my tricks for building a good blog.

Improving Publishing in the Social Sciences

I adapt the concept of double-blind studies to the social sciences.? It would definitely improve the quality of the research.

Occupy Your Time Productively

I got a lot of hate mail over this, but my main point was that protesters should organize, and form a political party or something like it (think of a leftist version of the Tea Party).? The Occupy movement was lazy, and the results of their actions were minimal.

Industry Ranks May 2013

Posted on 5 May 2013 by David Merkel

My main industry model is illustrated in the graphic. Green industries are cold. Red industries are hot. If you like to play momentum, look at the red zone, and ask the question, ?Where are trends under-discounted?? Price momentum tends to persist, but look for areas where it might be even better in the near term.

If you are a value player, look at the green zone, and ask where trends are over-discounted. Yes, things are bad, but are they all that bad? Perhaps the is room for mean reversion.

My candidates from both categories are in the column labeled ?Dig through.?

You might notice that this time, I have no industries from the red zone.? That is because the market is so high.? I only want to play in cold industries.? They won’t get so badly hit in a decline, and they might have some positive surprises.

If you use any of this, choose what you use off of your own trading style. If you trade frequently, stay in the red zone. Trading infrequently, play in the green zone ? don?t look for momentum, look for mean reversion.? I generally play in the green zone because I hold stocks for 3 years on average.

Whatever you do, be consistent in your methods regarding momentum/mean-reversion, and only change methods if your current method is working well.

Huh? Why change if things are working well? I?m not saying to change if things are working well. I?m saying don?t change if things are working badly. Price momentum and mean-reversion are cyclical, and we tend to make changes at the worst possible moments, just before the pattern changes. Maximum pain drives changes for most people, which is why average investors don?t make much money.

Maximum pleasure when things are going right leaves investors fat, dumb, and happy ? no one thinks of changing then. This is why a disciplined approach that forces changes on a portfolio is useful, as I do 3-4 times a year. It forces me to be bloodless and sell stocks with less potential for those with more potential over the next 1-5 years.

I like some technology names here, some telecom related, some basic materials names, particularly those that are strongly capitalized.

I?m looking for undervalued industries. I?m not saying that there is always a bull market out there, and I will find it for you. But there are places that are relatively better, and I have done relatively well in finding them.

At present, I am trying to be defensive. I don?t have a lot of faith in the market as a whole, so I am biased toward the green zone, looking for mean-reversion, rather than momentum persisting. The red zone is pretty cyclical at present. I will be very happy hanging out in dull stocks for a while.

That said, some dull companies are fetching some pricey valuations these days, particularly those with above average dividends.? This is an overbought area of the market, and it is just a matter of time before the flight to relative safety reverses.

The Red Zone has a Lot of Financials; be wary of those.? I’m considering paring back my insurers.

What I find fascinating about the red momentum zone now, is that it is loaded with noncyclical companies. That said, it has been recently noted in a few places how cyclicals are trading at a discount to noncyclicals at present.

In the green zone, I picked most of the industries. If the companies are sufficiently well-capitalized, and the valuation is low, it can still be an rewarding place to do due diligence.

That said, it is tough when noncyclical companies are relatively expensive to cyclicals in a weak economy. Choose your poison: high valuations, or growth that may disappoint.

But what would the model suggest?

Ah, there I have something for you, and so long as Value Line does not object, I will provide that for you. I looked for companies in the industries listed, but in the top 3 of 5 safety categories, an with returns estimated over 18%/year over the next 3-5 years. The latter category does the value/growth tradeoff automatically. I don?t care if returns come from mean reversion or growth.

But anyway, as a bonus here are the names that are candidates for purchase given this screen. Remember, this is a launching pad for due diligence.

Full disclosure: Long APOL IM

On Questions to Buffett

Posted on 4 May 2013 by David Merkel

I’m going to comment on three articles written before Buffett’s party.? I am not picking on these because they are dumb.? I am picking on them because they are brighter than most, but still don’t get Buffett.

Copying Warren Buffett harder for investors today

No individual investor can copy Buffett in full, unless he buys BRK, which isn’t the worst idea around.? These two articles explain why almost no one can copy Warren:

In general, it is far better to follow the principles that Buffett has espoused — value investing, than to try to mimic Buffett himself.? Buffett is so big that he can’t look at the little opportunities that you and I can look at.? So take advantage of your small size, and buy some of the illiquid companies that Buffett can’t touch, because they don’t move the needle.

That said, if I were in the shoes of Todd Combs or Ted Weschler, I would create a “small cap bucket” for odd names that you know are cheap, but you only want to get at your level.? You don’t want to waste a lot of time on this, but you do want to take advantage of your insights, at least to the level that DFA does.

Buffett?s Bear: 5 Questions Doug Kass Should Ask

I think Doug Kass will have better questions than these, but they are simple enough that I can answer them in my imitation of Buffett’s voice:

1) Why the lackluster returns?

Charlie & I have often said our stock was overvalued.? We recently initiated a buyback, because we no longer thought so.? Since then, performance has been adequate.

But we don’t manage for market returns.? We manage the company to compound the net worth.? We can’t control the capitalization that outside investor might assign the company, so we focus on what we can control.

2) Why shouldn?t Berkshire break-up?

There are real financing advantages to being part of Berkshire Hathaway.? We have chosen firms that will do well in good times and bad and have conservatively financed them.? Further, one of our advantages is that those who sell companies to us know that the culture of the company will be preserved.? That gives us an advantage in acquiring firms that most of private equity does not have.? It makes us eclectic, but it is a good eclectic.

3) Is the stock market overvalued?

We don’t pay much attention to that, but we won’t overpay for investments, and we are not finding much attractive at present.? We just try to grow the net worth of our company.

4) Is Geico moving fast enough?

GEICO has done exceptionally well over the years, underwrites very well, and is one of the lowest cost operators? in personal insurance.? Speed is not what we are concerned with; we are more concerned about the quality of what we do rather than taking chances, as we believe some of the industry is regarding close monitoring of policyholder behavior.? If it truly works, our managers at GEICO will adopt it.

5) Is Berkshire?s business model preventing success?

I empower my managers to make all manner of decisions to enhance the value of the company.? This is not a weakness; they help me make money in good times and in bad times.? The stock market has had a hard run of late; please revisit what we do after the next correction in the market.

(I hope Doug Kass has better questions than these…)

Berkshire Annual Meeting: 5 Questions for Warren Buffett

1) Come on, Warren, isn?t it Ajit?

This isn’t obvious.? We have many excellent managers.? Ajit’s underwriting skills are considerable, as well as his general management skills.? He would do well to succeed me, but there may be others who are better.

2) About that Heinz deal??

Heinz was an excellent deal for us, and we would do more of them.? We have an excellent partner managing the investment, and if it does well, we have a disproportionate amount of the upside in the deal.? If it does middlingly, we do well also.

3) How does the economy look to Berkshire?

Really, we don’t care much about the economy in the short-run.? We are building a business to exist over the long-term.? We are bulls on America; no one has ever won in the long haul being bearish on America.

4) About those new stakes in Goldman Sachs and General Electric?

We have expressed our desires to be long-term holders of Goldman Sachs.? As for General Electric, we admire the company.? Who doesn’t?? That said, we will manage our stakes relative to our long-term expectations of their value.

5) Is your Twitter account due diligence?

We only buy companies where there is no competition, and where we think there is value and sustainable competitive advantage.? We created a Twitter account for me so that we could communicate with those who follow our company.

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I’m sure Buffett would sound better.? That said, even though it is the Wall Street Journal’s reporters, there are better questions to ask.? Hopefully Doug Kass will ask some of them.? That said, Berkshire Hathaway is well thought out.? I think a question that would surprise Buffett would be unlikely.? And if it did surprise Buffett, Charlie would give an adequate terse answer.

Sorted Weekly Tweets

Posted on 4 May 2013 by David Merkel

Market Dynamics

Gold, backwardation and the ?time cost of money? http://t.co/AauT82dWoE Many players want 2 make $$ off gold financing but conditions shift May 04, 2013
The sultans of swing http://t.co/rItrBNwPej Short vol pays income & loses in bad times, long vol loses income & wins in bad times $$ May 04, 2013
Public Pensions Underreporting Liabilities?? http://t.co/IdEnrkdcXc Milliman is incented 2 make things look good, or they would lose biz $$ May 03, 2013
It?s Time to Fight the Fed http://t.co/rAnFWIwctu Makes the case that stock market has decoupled from economic reality $$ cc @MicroFundy May 03, 2013
JPMorgan Caught in Swirl of Regulatory Woes http://t.co/RFuywRTw0s When finance gets complex there r many opportunities 4 mischief $$ $JPM May 03, 2013
Why is Doug Kass bearish on Buffett?s Berkshire? http://t.co/aCQVRoxEzv My challenge is2ask original questions that have never been asked $$ May 02, 2013
High-Speed Traders Exploit Loophole http://t.co/aMdRBW72x3 Y can’t the same data feed be provided to all participants? $$ May 02, 2013
Treasury Is Readying Floating-Rate Debt http://t.co/d2ybajZWWO First new Treasury debt product in years. Wonder what the index will be… $$ May 02, 2013
Don’t get me wrong, QE is bad policy. Rather than having a short sharp recession that clears the way 4 growth, Fed traps us in malaise $$ May 02, 2013
When Defensive Stocks Plays Offense http://t.co/aF6MIrTzyQ @ReformedBroker describes effect of $$ flowing in2 low vol stocks, erasing safety May 01, 2013
Gold Rush From Dubai2Turkey Saps Supply as Premiums Jump http://t.co/2I3a2B5npH True in the US too: http://t.co/AmkUqn639p $$ #takedelivery May 01, 2013
Canadian banks r largely shielded from effects of housing downturn b/c government-owned Canada Mtge & Housing insures 64% Canadian mtges $$ May 01, 2013
Meet the man who’s selling Canada short http://t.co/HqStfr9CCe Shorting bank common stocks, & the Loonie. Market prices / rent – high $$ May 01, 2013
My Edge and the Crossroads http://t.co/KfcVQUCCjc @ReformedBroker gives us a glimpse of how he synthesizes disparate market data $$ May 01, 2013
The Great Gold Debate Continues, And It’s Serious http://t.co/Xwtar2rlWE As central banks debase fiat $$ ,gold standard gets more attention Apr 29, 2013
Big Number: Revenues Missing a ‘Beat’ http://t.co/IwTCtzSUZS Only 44% of companies have beaten revenue estimates, rally could slow down $$ Apr 29, 2013
Gold Climbs as Higher Physical Demand Counters Decline From ETPs http://t.co/2c6WAxC5Yn Negative real cost of carry favors gold here $$ $GLD Apr 29, 2013
Gold Bears Defy Rally as Goldman Closes Short Wager http://t.co/WRNWV4MayC Demand 4 physical gold continues while ETPs c outflows $$ $GLD Apr 29, 2013
Market?s $20T Yielding 1% Shows Austerity Mistaken http://t.co/NnEbi5SshB Monetary policy papering over budget deficits aids stagnation $$ Apr 29, 2013
Stock Analysts Tell All! http://t.co/I4ixQlTBeU Follow the $$ | C how analyst comp affects their actions; hedge funds matter, retail doesn’t Apr 29, 2013
The Mind of Jeffrey Gundlach http://t.co/aLmhR5gEuB @eddyelfenbein takes us on a brief tour of how Gundlach came 2b a clever contrarian $$ Apr 29, 2013
Oil demand at lowest level since Oct http://t.co/X6qhQnYOS8 More signs of global sogginess $$ Apr 29, 2013
When Safe Havens Become Bubbles In Disguise http://t.co/XTPtp4jgGa Good article if you view the investing alternatives @ end skeptically $$ Apr 29, 2013
Gold Rout for Central Banks Buying Most Since 1964 http://t.co/Zzkd0slUS8 Gold overshot, but negative real cost of carry favors a rise $$ Apr 28, 2013
Bank-Loan Funds Pose New Risks http://t.co/V0F6rX4TSV This is a minor mania — expected future returns are low to negative. Avoid. Avoid $$ Apr 27, 2013

Other

Cicadas, the Wedding Crashers Who Can Jitterbug http://t.co/jcnOqeJeY0 Will b going2an outdoor wedding in late May, should be a scream $$ 😉 May 03, 2013
Note, Shodan can be used positively 2 identify security flaws in your own systems 😉 $$ http://t.co/PmMo1IWcrp May 03, 2013
SHODAN – Computer Search Engine http://t.co/5stvEHa6Js Why be the last person on your block w/o ability to unprotected computer networks? $$ May 03, 2013
NO PIZZA FOR YOU!!! http://t.co/6BxRJtamn2 Mayor Bloomberg runs into his “Personal Slice Limit,” & has to go to another pizza purveyor $$ May 03, 2013
5 Twitter tools to Unfollow Inactive Users http://t.co/o467OjGtgA Interesting utilities cc: @carney @reformedbroker $$ May 02, 2013
Billionaires Flee Havens as Trillions Pursued Offshore http://t.co/Lbmk1sofQC Politicians interested protecting tax havens 4 their owners $$ Apr 29, 2013
Run or walk: Why science hasn?t determined which exercise is best http://t.co/nFB6BgCPzf Equal expending of calories -> similar results $$ Apr 29, 2013
Texas Town?s Blast Crater Shows Risk From Patchwork Zoning Laws http://t.co/LHYMiBq3l7 Necessary dirty industry has 2 go somewhere $$ Apr 28, 2013
Can You Get a Refund From a Bad Hedge Fund? http://t.co/VO3AsaooVO If your hedge fund has lost $$, u may be able 2 rescind your purchase Apr 28, 2013
Are Bachelor’s Degrees Worth It? http://t.co/AxAWgZmWge Bachelor’s degrees may not b worth it, but community college can bring a return $$ Apr 28, 2013

Rest of the World

Too-Big-to-Fail Danish Banks Seek Bailout Text in Sifi Law http://t.co/jRJigpfsW1 Overleveraged housing sector & banks challenge Denmark $$ May 03, 2013
Chinese Way of Doing Business – In Cash We Trust http://t.co/pGEcUDgMTa More corrupt ur nation is, the more u want 2do cash transactions $$ May 02, 2013
Denmark Exhausts Stimulus Avenues as Housing Losses Persist http://t.co/MjtLztxIeg Denmark is the poster child 4 mtge excess, then Canada $$ May 02, 2013
Japan household spending surges as Abenomics gains momentum http://t.co/9wehqDMxde Inflation genie comes out of the bottle, what next? $$ May 01, 2013
Where the Chinese credit is going? http://t.co/lYHxHMCNeZ “financial distress is another reason why credit expansion has not worked well” $$ May 01, 2013
Why the China Dream Might Be a Mirage http://t.co/hO4YupHbJl Economic change w/o political change will not work much longer in China $$ Apr 30, 2013
Factories to face headwinds from enlarged TPP http://t.co/dbPXgxlqzr Chinese businesses build factories elsewhere 4 cheap labor $$ #surprise Apr 29, 2013
European Leaders? Softening on Austerity May Accelerate http://t.co/VnLL4Npykr Ending austerity is one thing; sharing losses is another $$ Apr 29, 2013
Silvercrest’s Patrick Chovanec http://t.co/H2RgxU16Kq Excellent interview w/ @prchovanec on the difficulties w/old Chinese growth model $$ Apr 29, 2013
Japan’s ‘wall of money’ proves elusive for global markets http://t.co/l9d8RVnqks So far, most of the credit inflation recycled in Japan $$ Apr 29, 2013
The hole the mutual fund industry has dug for itself http://t.co/MEYDxqJgy5 Huge mutual fund fees in Canada shortchange investors $$ #Wow Apr 29, 2013
Europe: Aging deepens debt-laden region?s economic woes http://t.co/jWqDYPaDSO Economic growth relies on a population not shrinking $$ Apr 29, 2013
Danes as Most-Indebted in World Resist Credit http://t.co/PPfvdn12tT Denmark is the poster child 4 what happens w/2 much mortgage debt $$ Apr 29, 2013
Japan’s Abenomics New Export By-Product: Deflation! http://t.co/0YMovyM2Br Growth does not come as more reserves build up in the banks $$ Apr 29, 2013
Japan’s Yen Unintended Consequences – Fukushima and the Yen – Hara-Kiri http://t.co/TRqa9gjIUs Higher fuel costs begin 2 bite in Japan $$ Apr 29, 2013
Europeans Are Thinking the Unthinkable: That Debt Defaults Might Make Sense http://t.co/BQdfWoGknw Only if u can stiff foreign creditors $$ Apr 29, 2013

Companies & Industries

Buffett Bets on Business Insurance ?Big Time? http://t.co/tlcMeszcWJ Rounding out underwriting book; more conservative version of $AIG $$ May 03, 2013
Quite a first day of trading for CST Brands, Inc. Common Stock Finance http://t.co/nFzrkovLWN Spun off from Valero | FD: + $CST & $VLO $$ May 02, 2013

?? Endurance Reports First Quarter 2013 Financial Results http://t.co/VC4x9cUQBh I have never seen an earnings beat this big b4 | FD: long $ENH May 01, 2013

How Wall Street Defanged Dodd-Frank http://t.co/FzgwKpOvBh Long, worth a read, describes financial industry’s strategy 2 kill Dodd-Frank $$ May 01, 2013
I don’t like D-F b/c it’s weak in areas that matter, & strong in areas that don’t matter. &, study committees shouldn’t have lotsa power $$ May 01, 2013
I was serious on that last comment. Actuaries serve as honest, semi-neutral advisors to the regulators, & have a significant ethics code $$ May 01, 2013
That makes insurance regulation significantly more brainy than banking regulation. Also tougher, b/c harder 2 co-opt 50 state regulators $$ May 01, 2013
New Ajit Jain Signals in the Berkshire Hathaway Tea Leaves http://t.co/k5sikoCKGM Is Ajit preparing 2b CEO or retire? FD: long $BRK/B $$ Apr 29, 2013
Apple doesn’t deserve top credit rating: Fitch http://t.co/ardXsKVuoB Problem is that the $$ is overseas & the debts r in the US $AAPL Apr 29, 2013
Tech Stocks Are Cheapest in Seven Years http://t.co/InmrCkKmVw Question should b how sustainable revenue streams r in a soggy economy $$ Apr 29, 2013
States Object to ‘Payday’ Lawsuit Lending http://t.co/ZL7vvCz3GQ This looks like a good market 2 avoid; 2 much risk from legal changes $$ Apr 29, 2013

US Economic Policy

Deflation, not inflation, could bedevil markets http://t.co/seyOKKmSZV Watch global weakness weigh on the US, also inventory drawdowns $$ May 03, 2013
US Economy : 6 Critical Indicators of Potential Recession Flashing RED http://t.co/32jNZ3SNrC A stroll through the bearish economic view $$ May 03, 2013
A possible step towards numerical guidance for QE? http://t.co/fjNXmEMPPk Volume/Clarity of Fed communications doesn’t matter $$ #deadend May 03, 2013
Fed weighs tighter cap on bank leverage http://t.co/oLiw2XZdqf Maybe adapt well-designed RBC formula life insurance industry uses $$ #noway May 01, 2013
Obama to Name Congressman Mel Watt to Housing-Finance Post http://t.co/LClhqyLnij This seems like a mistake; Zandi would have been better $$ May 01, 2013
There Will Be Haircuts http://t.co/uGuDijhW7d @pimco gives 4 ways govt will fleece us: negative real rates, inflation, default, cap ctrls $$ May 01, 2013
Roubini: Money supplies holding back economy, but run could last 2 years http://t.co/kaoOK1Nd41 Monetary policy is weak in a liquidity trap Apr 30, 2013
Powerful Union, Upstart Battle Over Shrinking Pie http://t.co/z5N7DME5sT Another sign that unions are a thing of the past. Good riddance $$ Apr 30, 2013
Ebbing Inflation Means More Easy Money http://t.co/32RIuQeX1f Fed’s new job is 2 push the marginal productivity of capital to zero $$ Apr 29, 2013
Wall Street is full of ‘crooks,’ Jeffrey Sachs told Philadelphia Fed audience http://t.co/V8LhcyX8qg Evidence would help, many assertions $$ Apr 29, 2013
US Growth comes Mostly from Inventories http://t.co/WJnRbUGfiJ The current expansion is not robust, IMO will not persist at rates >1.5% $$ Apr 29, 2013
The Federal Financial Triangle http://t.co/tc8vEvK7QP The Fed, the Treasury, & GSEs have mispriced financial risk -> deeper US deficits $$ Apr 29, 2013
Are You Ready for the New Investment Tax? http://t.co/yDSIkClF5H Make a lot of many from investments? This tax could surprise u in 2014 $$ Apr 28, 2013

Fixed Income

DoubleLine’s Gundlach seeks more risk in new closed-end fund http://t.co/EaBoKhCGCv I like the strategy, wonder when will get 2 crowded $$ Apr 29, 2013
Fitch US High Yield Default Insight ? March 2013 http://t.co/8KnB3v1uN7 Lots of good data on the stretched junk bond market $$ $HYG $JNK Apr 29, 2013
Junk Bond Daily Yield Snapshot: 5.289% (Yes, Another Record) http://t.co/1GiDYWac74 Further price gains should b incremental due 2 calls $$ Apr 29, 2013

At the Bloomberg Washington Summit

Bloomberg Washington Summit http://t.co/t1pgPaRBRg The videos from the event can be found here. 5.5 hours of video #BBwash $$ May 03, 2013
At the Bloomberg Washington Summit, Part 5 http://t.co/k3a3maTPST Alan Krueger (Chmn Council of Economic Advisers) & Other Stuff #BBwash $$ May 03, 2013
At the Bloomberg Washington Summit, Part 4 http://t.co/lQVo1drGbc Economics, US Postal Service, Lunch & China #BBwash $$ May 03, 2013
At the Bloomberg Washington Summit, Part 3 http://t.co/i3KmSxbKmz Infrastructure, Corp Tax Reform, Dodd-Frank, & Garry Gensler $$ #BBwash May 03, 2013
At the Bloomberg Washington Summit, Part 2 http://t.co/6m43ZgCm8X Unemployment, Healthcare Spending, & the State of the states $$ #BBwash May 03, 2013
At the Bloomberg Washington Summit, Part 1 http://t.co/Rjgb8zY60u US Budget, Sequester, dysfunctional politics & economics #BBwash $$ May 03, 2013
Back home from #BBwash, watch for a summary post later tonight at http://t.co/HQR2bRfS06 Thanks 2 @bgov, @BoozAllen, @Visa, @Bloomberg Apr 30, 2013
Final panel optimistic about tax reform over the next 2 years Prob over 50%. Can’t say I’m that optimistic #BBwash Apr 30, 2013
John Rogers of the CFA institute asks Q on differential taxation of dividends/interest, of course panel goes 4 ending dbl taxation #BBwash Apr 30, 2013
Take back my last tweet. Panel agrees on every corporate tax cut, but shies away from anything that might affect their interest #BBwash Apr 30, 2013
Final Panel at #BBWash on corporate tax reform, the significant disagreements of panelists indicate y reform will b tough Apr 30, 2013
Last tweet made 2 counter what the VA Governor said about his budget being balanced, along with the rest of the states #BBwash Apr 30, 2013
States only balance on a cash basis. Various pension, healthcare and other liabilities r not fully funded all states in the Union #BBWash Apr 30, 2013
VA Gov McDonnell speaking of the US “Don’t you know we are broke?” Then goes on 2 talk about our unfunded public benefit liabilities #BBwash Apr 30, 2013
VA Governor makes case that sequestration cuts r unfair b/c they disproportionately affect VA. But VA benefited when spending rose #BBwash Apr 30, 2013
#hello still waiting on sequestration’s effect on Virginia #BBWash Apr 30, 2013
Waiting 2 get 2 the main topic w/the VA governor on sequestration, interviewer still grilling on perceived conflict of interest #BBwash Apr 30, 2013
@cate_long Cool, if you were here, I would say “hi.” Instead, I type “hi.” Apr 30, 2013
Gov McDonnell of VA speaking @ #BBWash about sequestration, Instead, gets grilled by interviewer on perceived conflicts of interest Apr 30, 2013
@cate_long Are you here at BBWash or watching on television? Apr 30, 2013
Ravitch says the threat of BK can make all of the parties focus; biggest state risk is confiscatory tax levels, not reduced benefits #BBwash Apr 30, 2013
Rendell makes case 4 telling truth & shared sacrifice. Ravitch: Muni Bankruptcy is an admission that democracy has failed #BBWash Apr 30, 2013
RT @cate_long: Rendell “If city goes bankrupt cant borrow again” BBG’s Glasgall “Orange County went bankrupt and can still borrow” #bbwash Apr 30, 2013
Moderator makes point about the frenzy in the junk muni market, Ravitch says cities & states have no choice but 2 have access 2 mkts #BBWash Apr 30, 2013
Ed Rendell makes case 4 a single payer health system. Same point can be made for no health insurance, which would lower costs more #BBWash Apr 30, 2013
Pension & OPEB panel @ #BBwash is making the case that we are in deep trouble, w/little way out Apr 30, 2013
@cate_long Thanks, useful… Apr 30, 2013
@cate_long Thanks, just puzzled by the moderators comments on OPEB at this panel at #BBwash Apr 30, 2013
@cate_long Cate, most corporations don’t reserve OPEB, b/c they can walk away from it, Governments can’t do the same? Apr 30, 2013
@CescaAntonelli Could be, I think she is the leading candidate as well, but I don’t like her seemingly reflexive dovishness Apr 30, 2013
Never happened b4 2 VC RT @CescaAntonelli: Yellen has right of first refusal at Fed, Meyer says at @BBGlink #bbwash http://t.co/Qwn6MvlmVP Apr 30, 2013
Krueger suggests that people have to adjust their definition of fairness. Trouble is there is no fairness, it is all based on trade #BBwash Apr 30, 2013
@tomkeene brings up corporate tax code given $AAPL bond deal, Krueger says a deal can be done if the base can b broadened #BBWash #notlikely Apr 30, 2013
Krueger goes on talking about inequality, has few solutions; education is slow if it works, throwing $$ @ it hasn’t worked recently #BBWash Apr 30, 2013
Krueger spending a lot of time criticizing the sequester, suggests there is a way to do smart cuts. When have we ever done that? #BBWash Apr 30, 2013
Krueger suggests that fixing infrastructure has the highest payoff. Problem: haven’t *ever* done it, & the budget 2 deep in deficit #BBwash Apr 30, 2013
Kreuger implies Stockman’s opinions r not worthy of consideration #BBWash Apr 30, 2013
Delicious food & good conversation @ #BBwash lunch. Sat w/ @tomkeene & @steve_hanke Apr 30, 2013
@pattersonscott In my opinion, that comes down to misregulation of inv banks & AIG , they should have regulated derivs as if on B/S #bbwash Apr 30, 2013
@pattersonscott & I argued 4 ring-fencing the derivative counterparties, & let the holding companies fail, but had 2 have mtges fail 1st Apr 30, 2013
@pattersonscott derivatives did crater some companies taking one side of the mortgage trade, but mortgages had to go bad first Apr 30, 2013
@pattersonscott for every winner on a derivative, there is a loser. nets to zero — on the original loan there are real loan losses #BBwash Apr 30, 2013
Appreciate CFTC Chairman Gensler’s sense of humor, even if it burns time… #BBwash Apr 30, 2013
#BBwash Gensler says that we will move away from Libor. Me: Any benchmark not based on trades will b gamed, as well as those based on trades Apr 30, 2013
@pattersonscott Some were tied to the mortgages, but the real losses came from the mortgage underwriting, which came first #bbwash Apr 30, 2013
Utterly mistaken RT @cedwaddell: #BBwash Gary Gensler, chair of CFTC, says 8 million jobs lost since 2008 due to unregulated swaps market Apr 30, 2013
Gensler traces the crisis to the derivatives markets when it was really due to bad mortgage lending #BBwash #FTL Apr 30, 2013
@PeterCCook Ask him why derivatives are not regulated like insurance, and require insurable interest #BBwash Apr 30, 2013
@PeterCCook Ask him why derivatives are not regulated like insurance, and require insurable interest Apr 30, 2013
RT @cate_long: “I believe that the role of the Post Office is universal service and overnight delivery is part of that” Sen Cardin #bbwash Apr 30, 2013
USPS CFO thinks there is a long-term solution, needs regulatory changes, allowing delivery of alcohol, etc. wants more independence #BBwash Apr 30, 2013
CFO of $UPS talks about two scenarios for rises in interest rates: good: improvement in productivity, bad: stagflation #BBwash #duh Apr 30, 2013
If business were already agreed on tax policy, tax policy would have changed already #BBwash Apr 30, 2013
Mistaken concept that the business community has 1 clear goal in tax policy, one man’s tax expenditure is more valuable than others #BBwash Apr 30, 2013
Eclectic panel Sen. Ben Cardin (D-Maryland), Kurt Kuehn, CFO UPS & Joseph Corbett, CFO & EVP, USPS — don’t think this goes far #BBwash Apr 30, 2013
PA gov Corbett leaves benefits/fees of fracking to local governments where it is needed #BBwash Apr 30, 2013
Corbett wants to be the “Texas” of Natgas, TX ain’t what it used 2b #BBwash Apr 30, 2013
1 in 6 people in PA on Medicaid would b 1 in 4 under Obamacare, according2 Tom Corbett, PA 2nd highest in Medicaid b/c optional covs #BBWash Apr 30, 2013
@fbonacci @incakolanews @felixsalmon Easy come, easy go, little high, little low… nothing really matters, anyone can see… Apr 30, 2013
At #BBwash , Tom Corbett talks about selling the state liquor stores, when it barely moves the needle in terms of the NPV of the liabs Apr 30, 2013
John Rogers of the CFA Institute asks Engle why we should invest in a new bubble created by the Federal Reserve? Engle waffles. #BBWash Apr 30, 2013
@incakolanews Galileo, Galileo, will you let me go? Apr 30, 2013
Engle correct in noting that the tea party has made washington a 3-party game, which creates a complex blocked situation #BBWash Apr 30, 2013
Gotta give Scaramucci credit for getting on this #BBWash panel, he has said some notably odd things Apr 30, 2013
Federal Reserve less independent since Dodd-Frank, & not in a good way, it supports the US financial sector & government #BBwash Apr 30, 2013
Pitt: if I were a college professor, I would give Congress an “F” 4 Dodd-Frank #BBWash Apr 30, 2013
Humorous panel w/Harvey Pitt, Robert Engle, and Anthony Scaramucci — Engle is clueless, thinking Fed policy can b easily removed #BBwash Apr 30, 2013
Wargaming in economics is impossible; there is no way to predict next economic crisis, writ small. Overlevered systems r risky #BBwash $$ Apr 30, 2013
Too much discussion over bailing out the system. Too little discussion over how to limit overall debt and debt complexity #BBWash $$ Apr 30, 2013
Good discussion @ #BBwash where they describe how more complex laws & regulations make markets more complex rather than clear $$ #worse Apr 30, 2013
Panel on Dodd-Frank arguing about bank capital, arguing that higher capital isn’t so bad. #BBwash $$ That said, liquidity is more important Apr 30, 2013
Panel on Dodd-Frank arguing about bank capital, arguing that higher capital isn’t so bad. #BBwah $$ That said, liquidity is more important Apr 30, 2013
Really disappointed in the lack of reasoning from Larry Meyer, not disappointed in Chris van Hollen, nothing to expect there $$ #BBwash Apr 30, 2013
At the Bloomberg Washington Summit: definitely a liberal bias to first two panels, saying that the current deficits must continue #BBWash $$ Apr 30, 2013

Wrong

Wrong: Fed Seen Slowing Stimulus With QE Cut by End of This Year http://t.co/h2ckgPDc3e Sorry, but the Fed will increase its QE in 2013 $$ May 02, 2013
Wrong: Europe?s New Path: Austerity with a Human Face http://t.co/HXzbWFx2v9 Real austerity hasn’t been tried yet, only debt monetization $$ Apr 29, 2013
Wrong: ?Peak Fossil Fuels? Is Closer Than You Think: BNEF – Bloomberg http://t.co/XoKYF1qoEW No way; governments of world won’t cooperate $$ Apr 28, 2013
New York Times Moves Toward Netflix Model as Ads Tumble http://t.co/rHrbxxAe8e I think $NYT is eventually a zero as the internet eats it $$ Apr 28, 2013

Replies, Retweets & Comments

5.5% annualized growth $$ RT @EddyElfenbein: Nominal S&P 500 earnings are expected to be roughly double this year compared with 2000 May 03, 2013
@EddyElfenbein http://t.co/FvBzLDzuGI On the IBM Industrial Average, where I propose the News Corp Industrial Average May 03, 2013
@H_X_S Thanks, Janetter looks interesting. May 03, 2013
Liked the old Tweetdeck better $$ RT @danprimack: Does Twitter know that some of us probably would have paid to keep tweetdeck alive? May 03, 2013
@AndreCimini It’s all a part of the current “race to the bottom” monetary policy game. Trying to figure out how this one blows up May 03, 2013
@fsmontenegro Thanks, missed that, relied on a friend May 03, 2013
‘ @JayLeonard No doubt, & realize these are marginal rates, which few pay because of the Swiss cheese nature of the corp tax code $$ May 03, 2013
@alestuma I get that — that’s y some investors co-locate servers at the exchanges. But not getting the same feed initially is different May 02, 2013
‘ @WarrenBuffett Good 4u, Mr. Buffett. We all await your wise counsel, especially me, a student of yours & a shareholder. $$ FD: + $BRK.B May 02, 2013
@TheStalwart I don’t think much happened overnight, but I did publish a five piece set of articles on the Bloomberg Washington Summit May 02, 2013
@notgunnamatta Yes May 02, 2013
@dpinsen There r no good solutions in the bust. The only sane thing is to try to prevent booms from getting out of control, a la Martin $$ May 02, 2013
@CardiffGarcia If I had the data, would be interesting to try a parabolic fit, & look at the coefficients, looks like it would flop May 01, 2013
@rubicon59 @PlanMaestro @SajKarsan I think I was the only one that did public analyses of the 3 Maiden Lane trusts, but I was wrong there 2 May 01, 2013
@rubicon59 @PlanMaestro @SajKarsan Yes, I did; I presumed that the really junky assets that they had would default far more than they did May 01, 2013
Cool $$ RT @jasonzweigwsj: our great Fed-speak comparison machine: see how the FOMC’s statements change over time http://t.co/CubyVqQ6KL May 01, 2013
@Matthew_C_Klein Next in line r colonialists who exploited Belgium/Congo, Germany/SW Africa, Spanish in the new World, Black Slavery $$ May 01, 2013
@Matthew_C_Klein Historically, it is fascinating how many attempts at forced collectivization led to massive deaths, Ukraine, Cambodia $$ May 01, 2013
His rhetoric usually leaves me cold $$ RT @TheStalwart: Some folks asking who, exactly, Krugman has persuaded. Fair question. May 01, 2013
@Matthew_C_Klein I’ve seen higher estimates on the deaths c book “Hungry Ghosts;” the statistics r hard 2 come by; most don’t want 2 talk $$ May 01, 2013
“Any anomaly can be overfished. The low volatility anomaly was one of the more durable ones, but?” ? David_Merkel http://t.co/syjdr5nHDU May 01, 2013
@CFAevents Honored that you would mention me. Thanks. Osband’s book was one of the best I have read on the topic. May 01, 2013
@djoalpha11 @tomkeene What flash crash? Apr 30, 2013
@csissoko But most of the issuance of bad mtges were prime, not subprime — the issuance of Fannie & Freddie were more responsible 4 crisis Apr 30, 2013
@csissoko Yes, the lust for yield drove willingness to enter into CDS, taking risk, receiving premium, which led some issuance of bad mtges Apr 30, 2013
@Nonrelatedsense I read otherwise in an article yesterday… but thanks for the correction Apr 30, 2013
Apologies, you are right RT @Nonrelatedsense: @AlephBlog DSL is absolutely a Closed End Fund. Prospectus: http://t.co/vXcUpTEZi9 Apr 30, 2013
@Nonrelatedsense It’s an ETF, not a CEF Apr 30, 2013
Also leads 2 creation of more shares, grows the fund $$ RT @vzban123: Per doubline website, IPO price is almost 5% premium to NAV. Apr 29, 2013
Yeh, saw that. Just another symptom of yield lust. $$ RT @vzban123: @AlephBlog Per doubline website, IPO price is almost 5% premium to NAV Apr 29, 2013
It’s a great job if you have the skills to get it; it’s even better if you have business skills as well… http://t.co/ji5jgSLPA9 Apr 29, 2013
@aneiro Any stats on what %age of the market is trading to call, rather than maturity? Apr 29, 2013
@codywillard I suspect there r a lot of games going on w/ETPs, certainly in Europe, regulation is tighter here, collateral issues & arb Apr 29, 2013
@codywillard I was against the bailouts dear friend; what I puzzle over is how many games r *presently* being played on Wall Street Apr 29, 2013
@EddyElfenbein model 2 minimizes the sum of squared ratios between actual & modeled prices. Model 2 more reliable, IMO, though fits worse Apr 29, 2013
@EddyElfenbein model 1 minimizes the sum of squared differences between actual & modeled prices. Apr 29, 2013
@Jesse_Livermore Emerging Market Government Bonds, maybe Long Treasuries — it is a deflationary environment, kinda, maybe, sorta, meh $$ Apr 27, 2013

FWIW

My week on twitter: 47 retweets received, 48 new followers, 89 mentions. Via: http://t.co/cPSEMLXpb8 May 02, 2013

On the Laffer Curve Regarding Marginal Corporate Tax Rates

Posted on 3 May 2013 by David Merkel

Twitter is serendipitous to me.? I don’t track it all day long, or I would never get anything done.? Usually, I keep it off, unless I am sending off tweets.? But I accidentally saw a tweet from Cardiff Garcia of FT Alphaville. regarding a presentation done by Brad DeLong.? Here it is:

CardiffGarcia Cardiff Garcia 1 May

This slide from @delong‘s presentation made me belly-laugh (via http://bit.ly/ZmqeKq?): pic.twitter.com/beZcJs8Rwk

So I looked, and here is what I found:

I looked at it and said, “Huh, yeah, whoever did this was a total hack.? Totally arbitrary curve drawing.”? But then I thought a little more.? “If I estimated a quadratic equation (parabola) what would it look like versus the data?”

So I took the points and eyeball estimated the values, and dropped them into an Excel spreadsheet, and ran the regression.? Turns out that both DeLong and the Wall Street Journal, and those they relied on were wrong.? Remember that the horizontal axis is marginal corporate tax rate, and the vertical axis is corporate taxes received as a percentage of GDP.

At a 5% level of significance, the equation is not significant, and the coefficients are not significant, though they are close.? The signs all go the right way, and the intercept is near zero.? That said, the prob-value for the equation as a whole (F test), is 6.5%, not far from the 5% threshold, so it looks like there is some validity to the idea that as marginal corporate tax rates rise, so do corporate taxes as a percentage of GDP, until the taxes get too high.

Only one data point of the above analysis, Norway, is statistically significant, with an error 3+ standard deviations versus the model.? Norway is different, with its huge sovereign wealth fund, so what happens to the model if we exclude it, and re-run the model?

Under these conditions, at a 5% level of significance, the equation is significant, with a prob-value of 1.4%, and all but one of the coefficients are significant, and the coefficient on the squared term has a prob value of 11.6%.? The signs all go the right way, and the intercept is near zero.? It looks like there is some validity to the idea that as marginal corporate tax rates rise, so do corporate taxes as a percentage of GDP, until the taxes get too high.

I didn’t test anything else.? With both equations we learn two ideas:

The tax take tops out at a 30% marginal rate
You don’t give up much if you set the marginal rate at 20%

Now, this is a cursory analysis on a limited data set.? But the idea that corporations start to go elsewhere when tax rates get too high is a reasonable hypothesis.? The WSJ analysis was a joke, but so was DeLong’s dismissal of the data.

I’m no great fan of the idea of the Laffer Curve, never have been, but this was the first time I gained some sympathy for the idea.? So, be wary who you listen to, study statistics and their limitations, and generally, be skeptical, but not cynical.? There is truth out there, we just need to find it.

PS — If anyone wants me to publish the detailed statistics, I will, but I omitted them because they make most of my readers’ eyes glaze over.

At the Bloomberg Washington Summit, Part 5

Posted on 2 May 2013 by David Merkel

Alan Krueger (Chairman of President Barack Obama’s Council of Economic Advisers)

Tweets:

Krueger implies Stockman’s opinions r not worthy of consideration “…not a serious scholar of the economy.”

Krueger suggests that fixing infrastructure has the highest payoff. Problem: haven’t *ever* done it, & the budget 2 deep in deficit

Krueger spending a lot of time criticizing the sequester, suggests there is a way to do smart cuts. When have we ever done that?

Krueger on Jobs data: “Numbers are very volatile. Too much attention given to monthly jobs number.”

Krueger goes on talking about inequality, has few solutions; education is slow if it works, throwing $$ @ it hasn’t worked recently

Krueger suggests that people have to adjust their definition of fairness. Trouble is there is no fairness, it is all based on trade

Disappointing answers from Krueger on the inflation topic. Seems disconnected from what Main Street is feeling.

“‘Fix it First’ infrastructure program, $40B from winding down wars, will help job growth.”

I would only add that education is no panacea.? We?ve thrown a lot of money at it for years, with little incremental results.? Structural changes are needed to remove substandard teachers, eliminate collective bargaining if needed, move back to a ?basics? curriculum similar to that used in the 50s (with updated science & history), etc.? We have to recognize that we have let fools dictate our curricula, and reverse the damage.

Other Stuff

Thanks to Peter Cook, Tom Keene, and Stephanie Call at Bloomberg for humoring me.? Thanks to Cate Long (bright lady) and other tweeters for covering the conference.

There was a lot of love for Canada, thinking it to be far better run than the US, as its financial economy teeters with too much mortgage debt.

And some more tweets:

Humorous panel w/Harvey Pitt, Robert Engle, and Anthony Scaramucci — Engle is clueless, thinking Fed policy can be easily removed

Pitt: if I were a college professor, I would give Congress an “F” for Dodd-Frank

Federal Reserve less independent since Dodd-Frank, & not in a good way, it supports the US financial sector & government

Gotta give Scaramucci credit for getting on this panel, he has said some notably odd things

Engle correct in noting that the tea party has made Washington a 3-party game, which creates a complex blocked situation

John Rogers of the CFA Institute asks Engle why we should invest in a new bubble created by the Federal Reserve? Engle waffles.

I also got the final question on that panel:

Why should investors be confident when economic policy is unpredictable, and debt levels are higher than that in the Great Depression?

They didn?t have a good answer, though Engle tried.? That said, with valuations so high, it looks like investors are confident, or they ?have learned to stop worrying, and learned to love the Bomb.?

It was a very good conference; I learned a lot.? You can view the videos off of Bloomberg.

At the Bloomberg Washington Summit, Part 4

Posted on 2 May 2013 by David Merkel

Economics

CFO of UPS talked about two scenarios for rises in interest rates: good: improvement in productivity, bad: stagflation. Senator Ben Cardin said “We know that if interest rates go up it would make it very difficult for the Federal Government to participate in creating growth.” (As if the government can create growth without getting out of the way.)

Cardin also Congress has schizophrenia about the Fed.? He asked if we would rather have Congress run monetary policy.? I would say someone has to be responsible to the electorate over monetary policy.? Central Bank independence is nice in concept, but what if you get a bunch of deluded idealists who believe in an untested policy, like we have today?? As voters, we need to have the ability to replace them, or better, limit the abilities of the central bank so that it doesn?t matter so much what they do.? Then Congress will have to take hard actions, knowing they can be replaced in a few years.

?Yellen has right of first refusal at Fed, as the next Chairman,? Laurence Meyer said.? Another commented that the Vice-Chair has never succeeded the Chairman before.? Personally, I think she would be worse than Greenspan and Bernanke.? More dovish than both.? Maybe bring on Warsh, Lacker, Prosser, etc.

US Postal Service

Cardin commented “I don?t think outsourcing saves money for government.”? I would agree, but it means returning to a government with more bodies, paid less, and limiting the influence of lobbyists.? It also means reducing complexity in laws and regulations.

He also commented “I believe that the role of the Post Office is universal service and overnight delivery is part of that.”

One twitter commenter wrote: USPS Corbett is asked if we even need the postal service. Quick answer: Yes. Audience quietly whispers: ?Dinosaur.?

USPS CFO thought there was a long-term solution. He wants regulatory changes, allowing delivery of alcohol, and other things prohibited now. He wants more independence from current regulations.

Lunch

I had delicious food and good conversation at lunch. I sat with Tom Keene & my former professor Steve Hanke of Johns Hopkins & the Cato Institute.? The two of them talked about their mutual experiences at the same school in Colorado for undergraduate study.? Keene asked what he should ask Krueger on unemployment.? The table volunteered a number of good ideas, mine was to ask whether the higher unemployment wasn?t structural because of global competition.

China

Here are a few tweets, none written by me:

“Hot money goes out of QE economies to emerging economies… they are fighting too much credit.” Steve Hanke/John Hopkins

“Whatever the standard is the Chinese will meet it and compete” Steve Hanke/John Hopkins #bbwash

At #bbwash intl economist Dambisa Mayo says #China a monopsonist for #iron and #copper

Once again, I got the final question:

China has enough credit problems to slow their economy dramatically.? They have overinvested in industries that are in oversupply.? Why should we be concerned about China, when they are in the same position as Japan in 1989?

Mayo attempted to answer, but she really didn’t get the question, and stuck to her own script.

At the Bloomberg Washington Summit, Part 3

Posted on 2 May 2013 by David Merkel

Infrastructure

This was a shibboleth muttered by many, that fixing infrastructure was a no-brainer of an idea, and I partially agree.? I would say, “Fine, what programs are you going to cut in order to fix infrastructure?” Government decisions work best when you compare spending versus spending, and taxes versus taxes.? If we did that, we would have better spending and better taxes.

Personally, I would eliminate whole government departments and hand the responsibility back to the states.? That would reduce subsidy problems, and make government more responsible.? National government is irresponsible government.

Corporate Tax Reform

Those that talked about corporate tax reform had a seeming unity, but that existed only where cute were to be made.? Any structural changes had some who would oppose. As I have said: If business were already agreed on tax policy, tax policy would have changed already.? Though the panelists were optimistic on corporate tax reform, I am not.? If it were easy, it would be done already.

Tom Keene brought up the corporate tax code given the Apple bond deal. Krueger said a deal could be done if the tax base could be broadened.? (Apple borrows money in the US to buy back stock, leaving cash overseas that it cannot repatriate without getting taxed.)

John Rogers of the CFA Institute asked a question on differential taxation of dividends/interest, and of course the panel goes for ending double taxation.

The final question from the audience was mine, where I asked:

So how if various business interests can?t agree, why should we expect corporate tax reform to succeed?

They said the agreement was close enough.? Wishful thinking to me.

Dodd-Frank

Many argued for more capital at banks. A few argued that there was enough capital already.? No one argued that there was not enough liquidity, which is my position.? Most financial crises are liquidity crises, and can be solved by having a large amount of high quality unencumbered assets.

Many felt that Dodd-Frank was unduly complex, somewhat of a waste, and subject to the reasoning of study committees.? Some felt there was no “too big to fail problem,” and that we ought to leave the big banks alone.? Not a lot of agreement among panelists.

My conclusion was this:

Too much discussion over bailing out the system. Too little discussion over how to limit overall debt and debt complexity

Wargaming in economics is impossible; there is no way to predict next economic crisis, writ small. Overlevered systems are risky

My point is this: you can’t solve busts.? You can constrain booms, if you dare (calling William McChesney Martin), and that will preserve the economy, though many will complain.

Gary Gensler

Gensler, chair of CFTC, traced the crisis to the derivatives markets when it was really due to bad mortgage lending.? I say that some losses were tied to the derivatives, but the real losses came from the mortgage underwriting, which came first.

For every winner on a derivative, there is a loser. The costs net to zero, but on the original loan there are real loan losses.? Solvency regulation should have prohibited financial institutions from taking default risk using derivatives, unless fully hedged.? Or, all derivative positions have to be reflected in the balance sheets, and disclosed in the footnotes, in detail, like insurance companies do.

What?s that, you say? They won?t do derivatives then?? Good.

He also alleged that 8 million jobs lost since 2008 due to unregulated swaps market.? Not likely in my opinion; again, the economy suffers from bad mortgage lending.

Gensler said that we will move away from Libor. I think that any benchmark not based on trades will be gamed, as well as those based on trades.? You can?t get away from gaming in financial markets.? Punish it where you find it, but you will never find it all.

Gensler used humor to avoid questions, and burned a lot of time (like running down the shot clock in Basketball).? The final question came from me:

Will the US Government stand behind a derivatives clearinghouse if it fails?

Give the guy some credit: he said no.

At the Bloomberg Washington Summit, Part 2

Posted on 2 May 2013 by David Merkel

Unemployment

A few in the first panel suggested the new normal for unemployment was 6.5%-7.0%.? I think it should be higher.? To Alan Krueger, Chairman of the?White House Council of Economic Advisers, my question was asked,

Given global competition in the labor markets, if our wages on the low end don?t reduce, isn?t that a significant reason why our labor force participation rate so low?

He mumbled for a bit and partially agreed and disagreed.? The answer wasn’t that coherent.? He did say at the end that low-paid workers in the US don’t compete against foreign workers, which is partially true.

Healthcare Spending

A number said the PPACA [Obamacare] will bring down health costs.? That’s not true, costs have already risen significantly, and will rise more, as sicker patients now get insured.? That’s the “affordable” in the “Affordable Care Act.”? It makes insurance more expensive for most people, while making it affordable for the sick.? More of the discussion on healthcare spending came under discussions of state finances, and Medicare.

On the State of the States

Tom Corbett, Governor of Pennsylvania hangs his hat on selling the state liquor monopoly and fracking.? The former is a one-shot deal, and isn?t large enough to significantly affect unfunded liabilities.

He mentioned that 1 in 6 people in Pennsylvania on Medicaid would become 1 in 4 under Obamacare. Pennsylvania is 2nd highest state for expenses per head in Medicaid because of optional coverages that Pennsylvania covers.? Perhaps the optional coverages will get dropped.

Pennsylvania also leaves the benefits/fees of fracking to local governments, where it is needed.? Some municipalities have reduced taxes as a result.

On pensions he was asked how current policy was sustainable, because it wouldn’t fly in private sector.? He did not have a good answer.

The estimable Cate Long sent me this: Report: Pension Litigation Summary Across the States. It summarizes all of the cases that the States are trying to fight in order to reduce the pension & retiree health benefits they pay to employees.

On the Pension & Other Post-Employment Benefits panel, they made the case that the states are in deep trouble, with little way out.? Ed Rendell made the case for a single payer health system. I say the same point can be made for no health insurance, which would lower costs more.

Ed Rendell made the comment “If a city goes bankrupt, it can?t borrow again.” Bloomberg’s Glasgall replied, “Orange County went bankrupt and can still borrow.”

Ravitch commented “Wall Street keeps going to cities and convincing them to borrow against future revenues. It should stop.?? It is a trap, but municipalities can borrow against the future, like the Poway School District in California.

Rendell made the case for telling truth & shared sacrifice. He thinks the voters aren?t dumb and that if you made the case to them, they would agree to higher taxes.

Ravitch commented that municipal bankruptcy is an admission that democracy has failed.? He added the threat of bankruptcy can make all of the parties focus; the biggest state risk is confiscatory tax levels, not reduced benefits. He also said the upping Medicare age to 67 would not just help the deficit; money would have to come from somewhere to pay 65-66 medical costs.

The moderator made a point about the frenzy in the junk municipal market, where the returns were comparable to equities over the past year. ?Ravitch commented that cities & states have no choice but to have access to debt markets

Governor McDonnell of Virginia was supposed to speak about sequestration, Instead, he got grilled by interviewer on perceived conflicts of interest regarding Star Scientific.? This was newsworthy, but not what the conference was supposed to be about.? Bloomberg should have had its interviewer stick to the topic at hand.? This was an economic conference, and not a general interview.

Once the intended interview got going McDonnell said: “Everyone knows we are broke. At some point the crushing amount of debt will catch up with us.”? He then went on to talk about our unfunded entitlement liabilities.? He then added as a Governor his state?s budget had to be balanced, as it was with the rest of the states.

Sadly, states only balance on a cash basis, which means if they have a penny left in the till at the end of year, they are balanced. Various pension, healthcare and other liabilities are not fully funded all states in the Union.? There is no state in the union which has all of its future liabilities funded.

Not one.