Category: Banks

Evaluating Regulated Financials

Evaluating Regulated Financials

Dear readers, I repost here an edited version of what I shared with a Linked-in group:

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I took Benefit-Cost Analysis from Dr. Hanke of Johns Hopkins in 1980, and so I never gained the benefit of his current proprietary tweaks to the Discounted Cash Flows model for stock valuation.? That said, application of DCF to any regulated financial company is difficult, because not all of the capital is free to be deployed into investment in new business, stock buybacks, or dividends.

The level of required capital at a regulated financial varies with the risks of the blocks of business (liabilities) that it underwrites, the assets they buy with the proceeds from the liabilities, and the cash flow, currency and other mismatches between the assets and the liabilities.

The marginal amount of capital for new business and investments may be significantly different than what is required for old business.? So here is my question to the group, especially the students, to think about: how would you apply your DCF model to a situation like this?

Notes, Mostly on Financials

Three final notes: 1) If you want to experiment with this, here are five very different insurers that are my current favorites: RGA (life reinsurance), ENH (P&C insurance & reinsurance), AIZ (Life, P&C, Warranties, Pensions & Individual Health), SFG (disability), & NWLI (Life insurance and annuities sold to foreigners for flight capital).? Try applying the model to one, and see what you get.

2) Most real risk in large financials does not come from inadequacy of capital, but from borrowing short and investing/lending long.? The key measure is whether an institution has enough high-quality short-term assets to meet a run on the institution, where those that supply funds to the institution demand them back at the same time.

With life insurance companies, failures occasionally happen from a run on the company (General American and ARM financial in 1999), but more often, because regulators think the capital base has shrunk too much because of bad credit risks, and take the company into conservation. (Pacific Standard, Confederation, Kentucky Central, near-miss w/The Equitable, etc.)

With P&C insurers and reinsurers, failure happens because bad underwriting leads to a shrinkage of capital, and the regulators take them into conservation. (Think of Reliance and Saul Steinberg, though a lot of reinsurers were de facto bankrupt in the mid-1980s, but the regulators didn’t catch them.)

With small banks and thrifts, it?s credit problems versus capital.? Liquidity does not usually play a role because of deposit guarantees.

With large banks, it is illiquid and longer assets versus short financing.? In the recent crisis, much of that came from financing mortgage inventories in the repurchase market, where financing had to be renewed daily, and margin requirements in derivative financing that had to be adjusted daily.? In the latter case, a credit downgrade would trigger a need for more capital to be put up as margin, just at the time when liquidity was scarce.? In the former case, deteriorating prices for the assets financed in the repurchase market led to an increase in the capital haircut, requiring more liquidity out of the borrowers at the time they could least afford it. (AIG, Wachovia, Countrywide, etc.)

Finally, remember that the financial markets are talkative.? No one wants to hold unsecured credit from a bank they think will go broke, so if there is a reasonable doubt on failure, liquidity dries up because other banks stop dealing with you (Bear Stearns, Lehman Brothers, Merrill Lynch, etc.)

As an example in my own life, back when I managed and traded corporate bonds back in 2002, when the market was feeling a lot of stress, I joked with my broker, ?Hey, is XYZ Corp trading flat yet??? (With most corporate bonds, when you settle a trade, the pro-rata portion of the next interest payment is added to the price.? A bond like XYZ Corp, when its solvency is doubtful, the dealers start settling bond trades assuming it will not make another payment.)? He told me that it was not trading flat.? The high yield manager, Ed, sitting next to me, after the call ended said, ?Just a matter of time.?

Half an hour later, my broker that talked with before called me back, and in an edgy voice said ?XYZ Corp is now trading flat!? and quickly ended the call.? Ed looked at me and said, ?Dave, don?t do that again.?

Liquidity is plenteous when you don?t need it, and scarce when really needed.? Remember that when investing in financials.

3) The Baltimore CFA Society gives significant discounts for students that want to attend our meetings.? $10 gets you a $30 meal and an interesting speaker or two, so consider yourselves invited.? Next meeting on January 11th is one of our bigger ones.? You even get to meet the aforementioned ?Ed.?

Full disclosure: long RGA, AIZ, NWLI, ENH, SFG

Sorted Weekly Tweets

Sorted Weekly Tweets

Macroeconomics

 

  • Here’s my plan for reducing the deficit: http://t.co/XJPjf8A5 #mydeficitplan via @wsj Draconian, I know, but the budget shoould b balanced Dec 21, 2012
  • Canada?s exports crucial as sluggish growth continues: IMF http://t.co/iIOJ6PoF Bank of Canada should raise rates 2 reduce excessive debt $$ Dec 21, 2012
  • Everything You Need To Know About the Economy in 2012, in 34 Charts http://t.co/aXnjSkR0 Good stuff; could have been formatted better $$ Dec 21, 2012
  • Fiscal Cliff’s Dirty Secret: It’s Not About Taxes At All, But Too Much Spending http://t.co/UY8rKW9h We need 2 deal w/SS, Medicare & Defense Dec 20, 2012
  • We?ve Nationalized the Home Mortgage Market. Now What? http://t.co/YSCrvVmK Congress loves 2 have cows around that they can milk for $$ Dec 20, 2012
  • EU Banking Re-Unions http://t.co/khSA0co0 The lack of a timetable indicates that things aren’t really finalized; not sure this will fly $$ Dec 20, 2012
  • ?Spending Cuts? Lose Something in Translation http://t.co/DYFxVMno Only in DC is reducing planned growth in spending called a cut $$ Dec 20, 2012
  • Money Funds Brace for Flood http://t.co/4J7VWuxx MMFs r between a rock & a hard place: loose Fed policy & regulatory over-reach $$ Dec 20, 2012
  • Wall Street’s Biggest Geniuses Reveal Their Favorite Charts Of 2012 http://t.co/at12mMsV Very long, but lots of good stuff $$ Dec 20, 2012
  • My forward estimates, derived from TIPS are rising, 2014 inflation, and 2018-2022 inflation. The latter has… http://t.co/tgrGfiDG Dec 19, 2012
  • Estimated 2018-2022 inflation rate continues to rise: http://t.co/ebqeM5KJ Stagflation may be coming. cc: @federalreserve #stagflation $$ Dec 19, 2012
  • Estimated 2014 inflation rate continues to rise: http://t.co/ZrvIc5Nk Stagflation may be coming. cc: @federalreserve #stagflation Dec 19, 2012
  • Economics may be dismal, but it is not a science http://t.co/I6B9LbSw No universal economic theory, & new economic thinking must be eclectic Dec 18, 2012
  • Fisher: Fed Risks ‘Hotel California’ Monetary Policy http://t.co/fRKOYl9d When the Fed starts 2 tighten, it will b hard 2 do $$ Dec 17, 2012
  • FDIC Guarantee Program Set to Expire After Senate Block http://t.co/qPdQNWQF Will squeeze the short end of the yield curve further $$ Dec 17, 2012
  • US Banks Lack Liquidity to Withstand Crisis, Study Says http://t.co/psmQEP1z Liquidity mismatches r pernicious; key risk gets ignored $$ Dec 17, 2012
  • Mkts r discounting mechanisms. Temporary events like bond ratings, debt ceiling & fiscal cliff should not affect market much $$ Dec 17, 2012
  • So, as an example, if the govt runs a deficit, it should not stimulate much b/c people discount future econ adjustment b/c of more debt $$ Dec 17, 2012
  • Same 4 monetary policy; the Fed can “stimulate” as much as it likes; mkt players discount the future removal of policy, inflation, etc. $$ Dec 17, 2012
  • Cliff? What Cliff? http://t.co/QEvklDQU Or maybe, just maybe investors don’t care whether we go over the “fiscal cliff” or not. $$ Dec 17, 2012

 

Stocks & Sectors

 

  • There are 272 gold & silver companies trading on US exchanges or OTC. 59 of them have mkt caps > $100M. 22 of them have mkt caps > $1B $$ Dec 21, 2012
  • Aviva Sells US Life Business to Apollo for $1.8B http://t.co/UqM2kqyr When Aviva bot Amerus, I said that they overpaid massively. Proof $$ Dec 21, 2012
  • Value Investing In Practice: A Conversation About Oaktree Capital http://t.co/4FVok5wz Good value investing does not hyper-diversify $$ Dec 20, 2012
  • ICE in Deal to Buy NYSE http://t.co/ik348vsZ New era; expect 2c more deals like this. As an aside average holders of $NYX stock lost $$ Dec 20, 2012
  • Buffett’s Leading The Corporate Buyback Surge http://t.co/U3piJgDv He has the $$, & 1.2x BV is a defensible floor ||| FD: + $BRK.B Dec 19, 2012
  • Investment Fads and Themes by Year, 1996-2012 http://t.co/cvLFKyRE @reformedbroker on what the broad themes this year & back to 1996 $$ Dec 19, 2012
  • Alterra up after deal, analyst positive on Bermuda peers http://t.co/Y5jTB40c Room 4 a new round of consolidation. $MKL buys $ALTE $$ Dec 19, 2012
  • $ALL Bets on Home Insurance as Stock Rally Withstands Sandy http://t.co/XBQOOSB5 Insured damages (excl flood) low4 Sandy; premratesflat $$ Dec 19, 2012
  • Stocks Held Hostage as CEOs Plan Spending Cuts http://t.co/5c7nBKAS It is difficult to avoid deflation; so much uncertainty presently $$ Dec 18, 2012

 

Credit & Fixed Income

 

  • Swaps ?Armageddon? Lingers as New Rules Concentrate Risk http://t.co/QK3s19Hz Clearinghouses r not a panacea; it is possible 4 them 2 fail Dec 21, 2012
  • Americans Hacked Don?t Know Chamber Left Them Alone http://t.co/DSBDUijq Common programs place yr computr @ risk; CoC defends SW makers $$ Dec 21, 2012
  • The Indianapolis 500 of Corporate Bonds Yields http://t.co/dCamXED3 Too much $$ flowing into corporate credit; feels like 2006 Dec 20, 2012
  • India Cash-for-Gold Loans Hide Shadow-Banking Risks http://t.co/BGnO4YWI 2much lending creates a mess; 2much secured lending creates a panic Dec 20, 2012
  • Pimco Sees Spreading Slowdown Boosting [Australian] Bonds http://t.co/oDFSkGoF Pimco buying the debt of fringe developed nations $$ Dec 19, 2012
  • CAB Legislation Expected in January http://t.co/TSuxBmM4 California legislation proposed 2 limit issuance of Capital Appreciation Bonds $$ Dec 19, 2012
  • Why China May Be Facing US-Style Credit Crunch http://t.co/99xMzC3M “To some extent, this is fundamentally a Ponzi scheme,” [Xiao] said. $$ Dec 19, 2012
  • Pimco’s Gross Cuts Back on MBS http://t.co/4FaxLTKq Lightening up on MBS & Corporates, buying developed fringe, sticking w/TIPS $$ Dec 19, 2012
  • Mind the rate risk http://t.co/nVqjlWW9 Rates may stay low 4 a while, but when they run up, total returns could b worse than 1994 $$ Dec 19, 2012
  • Spain House Prices – Deconstructing Spain http://t.co/7ARRPZqS Housing prices continue 2fall, more foreclosures, setting up bad bank fund $$ Dec 17, 2012

 

Energy

 

  • Valero Received Approval 2 Ship US Crude 2 Quebec Refinery http://t.co/ojABCqu1 Could b start of something big: US exports oil FD:+ $VLO Dec 20, 2012
  • Extracting shale oil from a Dead Cow http://t.co/bok4bNE7 Interesting: after the expropriation of Repsol that oil majors line up4more $$ Dec 20, 2012
  • Gasoline at US Pumps Drops to Lowest in a Year on Supply Gain http://t.co/4pI5SXiV Good news coming to users of refined fuel products $$ Dec 19, 2012
  • California refiners dreamin’ of shale oil face hurdles http://t.co/vJgiW4rm Many efforts t get cheap oil 2 CA; $24/bbl price difference $$ Dec 17, 2012

 

Other

 

  • CEOs Concerned about the Time and Cost of Implementing Predictive Analytics http://t.co/QcABrcFH Big data facilitates cluster pricing $$ Dec 20, 2012
  • In the Flesh: The Embedded Dangers of Untested Stem Cell Cosmetics http://t.co/de2aio1V Adult stem cells can do as much harm as good $$ Dec 19, 2012
  • The First Time Tech Ruined the Music Business http://t.co/d0RE4002 As technologies improve all manner of “rights” issues crop up $$ Dec 18, 2012
  • Advisers Question Modern Portfolio Theory http://t.co/lLbCVvgL Look through the security 2 the underlying economics of the investment $$ Dec 17, 2012
  • Twitter has started rolling out the option to download all your tweets http://t.co/IIOVO6mJ Not common yet, but may b coming soon $$ Dec 17, 2012
  • Schools Safer Than 1990s as Educators Anticipate Killers http://t.co/aQaB6G6Q Students r far less likely2b killed in school than elsewhere Dec 17, 2012
  • Highest-Paid California Trooper Is Chief Banking $484,000 http://t.co/JwgYWfg2 Giving officers comp time rather than $$ 4 unused vacation Dec 17, 2012
  • ‘Followers for sale’: Twitter’s very own black market http://t.co/HKCqo074 Fake Follower Check will estimate how many followers r real $$ Dec 17, 2012
  • SEC Says Asset Firm Manipulated Trades to Enrich Some Clients http://t.co/L8IJQ77k I remember their ads, proclaiming their track record $$ Dec 17, 2012

 

Wrong

  • Bad idea: Africa Dreams of Building Telescopes to Study Space http://t.co/gSwkKIBs Would make more sense 4 Africa to fix agriculture $$ Dec 20, 2012
  • Wrong: US should intervene in Nagorno-Karabakh process at the highest level http://t.co/2tJTKtht We should stick 2r own business $$ Dec 18, 2012
  • Wrong: This is why I generally don’t like Quartz; pretending to be smart $$ RT Our favorite charts of 2012 http://t.co/w2bvLDvX Dec 18, 2012

 

Replies & Comments

  • “This would have been a better article if you had put separators between each graph/explanation.” ? David_Merkel http://t.co/uoMy61H1 $$ Dec 21, 2012
  • @EddyElfenbein Thanks, Eddy. Dec 19, 2012
  • @geekpryde Hey, thanks for the kind words, I appreciate that you follow me. Dec 19, 2012
  • @VIXandMore Ludwig is letting us down, and 3 days after his birthday. Call Schroeder 😉 Dec 19, 2012
  • @Alea_ Cool new avatar, I like it Dec 19, 2012
  • @Money_in_Stereo Well said, though I am not an expert there. Thanks for sharing that. Dec 18, 2012
  • @BarbarianCap Hint: if company is offering u a nice buyout, they r offering less than its worth, unless u no more about when u will die $$ Dec 18, 2012
  • @volatilitysmile @carney I knew a close adviser of Mozillo; he told me stories of how disconnected Angelo was w/reality in 2009 $$ Dec 17, 2012
  • @nicster There have been many changes, but they are all local, and don’t make the news. US Govt was stupid on the shoe bomb. Local better $$ Dec 15, 2012

Retweets

  • Amazing RT @moorehn: “the average lifespan of American musical superstars in the pop, rock and rap genre is only 45.” http://t.co/uXVNuStF Dec 20, 2012
  • Practically. Old bond mgr rule: underweight the most rapidly growing debt class $$ RT @ToddSullivan: didn’t they already do student loan? Dec 20, 2012
  • Remember deriving formula when younger $$ RT @munilass: Twelve Days of Christmas and tetrahedral numbers http://t.co/VVNnyU2V (via @ptak) Dec 20, 2012
  • You can say that again $$ RT @japhychron: @AlephBlog Always funny the way they call economics a science. Studying people is anything but. Dec 18, 2012
  • Banks are insolvent & w/large & rapidly growing budget deficit $$ RT @FGoria: DJ: Cyprus May Be Days Away From Default — Fin Min Official Dec 17, 2012
  • Sad & dumb $$ RT @carney: You’d never guess who has a completely self-serving & bonkers theory of the financial crisis. http://t.co/LIAd8WqB Dec 17, 2012

 

Twitter Summary

  • My week on twitter: 72 retweets received, 1 new listings, 85 new followers, 132 mentions. Via: http://t.co/SPrAWil0 Dec 20, 2012

 

Redacted Version of the December 2012 FOMC Statement

Redacted Version of the December 2012 FOMC Statement

October 2012 December 2012 Comments
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions. Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?? More grasping at straws.
Growth in employment has been slow, and the unemployment rate remains elevated. Although the unemployment rate has declined somewhat since the summer, it remains elevated. So long as discouraged workers increase, this is a meaningless statement.
Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed.? The housing sector has shown some further signs of improvement, albeit from a depressed level. Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed. No real change ? just word order differences
Inflation recently picked up somewhat, reflecting higher energy prices.? Longer-term inflation expectations have remained stable. Inflation has been running somewhat below the Committee?s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable. Shades down their view of inflation, blaming energy prices. TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.97%.? The FOMC is wrong on inflation.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. No change.
The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. No change. CPI is at 2.2% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. No change.

Does not mention how the twist will affect those that have to fund long-dated liabilities.

Wonder how long it will take them to saturate agency RMBS market?

 

The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and, in January, will resume rolling over maturing Treasury securities at auction. Operation Twist continues.? Additional absorption of long Treasuries commences.? Fed will make the empty ?monetary base? move from $3 to 4 Trillion by the end of 2013.
These actions, which together will increase the Committee?s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. No real change.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will closely monitor incoming information on economic and financial developments in coming months. No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. Explicitly says that they will buy more long Treasuries.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. No change.

Promises that they won?t change until the economy strengthens.? Good luck with that.

In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee?s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. Not a time limit but economic limits from inflation and employment.

Just ran the calculation ? TIPS implied forward inflation one year forward for one year ? i.e., a rough forecast for 2014, is currently 2.01%.? The FOMC has only 0.49% of margin in their calculation if they are being honest, which I doubt.

Next time, I will provide a graph.

  The Committee views these thresholds as consistent with its earlier date-based guidance. New sentence, and it is not accurate.
  In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. New sentence.? Giving yourself an out clause on the hard-and-fast promises made above?
  When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. New sentence. So what?
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. No change
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted. Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate. Lacker sharpens his hopeless dissent against a flock of doves.? I like that he is opposing the QE, as well as the foolish promises regarding Fed funds.

Unlike the rest, he cares about the institutional reputation of the Fed, and thus opposes asset-side policies.

?

Comments

  • I really think the FOMC lives in a fantasy world.? The economy is not improving materially, and inflation is rising. Note that the CPI is over their 2.2% line in the sand.? TIPS-implied inflation 1X1 (one year ahead for one year) is 2.01%, and 5X5 is 2.97% annualized.? Both of these measures have continued to rise since the last meeting.
  • Current proposed policy is an exercise in wishful thinking.? Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • In my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn?t work, what will they do?
  • Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

More debt will not get us out of this crisis.? The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before World War two started.

Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.? The investments in MBS only help solvent borrowers on the low end of housing, who don?t really need the help.? Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.

The problems with unemployment are structural, not cyclical.? Labor force participation rates continue to decline.? There is greater labor competition around the world, forcing down wages on the low end.? There is nothing that monetary policy can do to change this.? You can create stagflation through your policies, but not prosperity.

When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.? The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.

You haven?t thought through all of the ?second order? effects of your policy.? Even the ?first order? effects, which favor the rich over the poor, seem to elude you.? Assets rise, helping the rich.? Interest rates fall, helping the rich who can borrow.? Commodity prices rise, harming the poor.

Insanity is doing the same thing over and over, and expecting a different result.? When will you realize that the policies of the Fed aren?t helping, and need to be abandoned?

The Beginning of the End of Money Market Funds

The Beginning of the End of Money Market Funds

Say goodbye to money market funds, and hello to more volatility, whether in money market funds, or their substitutes.? As with all of the financial crisis, it would have been better if the Fed and Treasury had not intervened.? Most money market funds would have survived.? The market panicked less than the regulators did.

But now we have the capitulation of Luis Aguilar, perhaps giving in to the pressures of the banks that hate competition from the money market funds.? Who is more powerful? Banks.? Where are there more systemic losses?? Banks.

Money market funds are not the problem.? If there is a crisis, let them fail.? The losses will be ~2% of principal; banks will do far worse.

Publishing the net asset value of Money Market Funds will destabilize them; rising NAVs will attract more money, and falling NAVs will lead to a run on the MM funds.?? It is a recipe for disaster.

Far better is my proposal, which is an excellent compromise.

To those analyzing policy for money market funds at the SEC:

Greetings. My name is David Merkel, and I run Aleph Investments, LLC, a Maryland RIA. I manage stock and bond portfolios for upper middle class people, and for small institutions. I am a Chartered Financial Analyst, and in the past, I was a life actuary, where I developed stable value products for pension plans.

It is much harder to assure a stable share price with longer dated assets, but I was able to do so via a variety of strategies. Doing the same thing for money market funds is simple.

Before I continue, I want to make clear that I have no economic interest in money market funds, aside from being an investor in them. At present, the SEC is proposing a variety of changes to money market funds that practically render them uneconomic. No wonder the companies managing the MM funds oppose that.

But the companies managing the MM funds are unrealistic as well, they don?t see any reason for change. I have a proposal that splits the difference, and is trivial to carry out.

My proposal says this: Funds calculate their internal NAV, but do not disclose it to the public. They only disclose it in the rare case where the NAV drops below 0.995, and it would ?break the buck.?

When a fund ?breaks the buck,? it announces a credit event. It tells shareholders that they have lost money, and to protect the interests of all shareholders, all shareholders will suffer a small capital loss.

Whatever the fairly calculated NAV is when a capital loss is announced, the new NAV would be 1.0025, and the number of shares reduced to the level that supports that NAV. If the value of the assets has been accurately calculated, and there are withdrawals, the premium to NAV should rise, not fall, for the remaining shareholders.
As an example, imagine a fund makes bad decisions, and the internal NAV calculation reveals an NAV of 0.9825. The fund would announce a credit event, and roughly 2% of all units would be lost, and the new internal NAV would be 1.0025. Those leaving the next day would only strengthen the fund.

Few will like the concept of a credit event in money market funds. That said, the idea would have many salutary effects on money market funds:

  1. It would eliminate runs on the funds.
  2. It would get people used to the idea that there is some risk in money market funds, though limited.
  3. It would eliminate the need for the government to intervene and insure money market funds.
  4. It would allow some money market funds to take more risk, and offer more return. There would be less need to constrain maturity and credit quality of the investments in the MMFs so tightly.
  5. The cost would be minimal, most of the time losses would be 1-2%, which would be paid for through interest in less than a year.

My proposal is better because it treats money market funds like ETFs ? they are pass-through vehicles, and as such, do not need capital buffers.

And, my proposal is better, because it recognizes that credit events should be rare but acceptable aspects of how money market funds work. Think about it: particularly when short term interest rates are so low, there is no way for interest to cover even the slightest discrepancies versus NAV.

Under my way of doing things, let there be stable net asset values, freedom in investment guidelines, but the possibility of credit events. The present set of restrictions in investing does no one any good, because the problem is not length of maturity or credit quality, but issuer concentration.

But let money market fundholders analyze the tradeoff between yield and risk. Guess what? Short-term bond fund holders have to do the same thing.

But why are we going after money market funds? When they fail, the cost is pennies on the dollar, and it rarely happens. Why not go after banks? They fail far more frequently, with much larger losses. I say let money market funds fail, and do not increase regulations on them. Rather, let them be like ETFs, and let them be constrained by the prudence of the free markets. What? You can have investment without the possibility of loss? Ridiculous.

Regulate the banks tightly, but let money market funds go free, but advertise that losses are more than possible.
I strongly urge that you adopt my proposal. The money market funds will not like it, but they can live with it. The SEC may not like it entirely, but it accomplishes all of goals that you care about. This is a compromise proposal where everyone can win.

Sincerely,

David J. Merkel, CFA, MA

To my readers, I only ask one thing — do you have contacts at Fidelity, Vanguard, Federated, ICI, etc., who care about this?? I wa able to put my proposal before the SEC through Commissioner Luis Aguilar.? I talked with two senior attorneys at the SEC in August.

But I am a political nobody.? I may have a bright idea, and many have told me that, but I need an entity with political clout to absorb my idea, and use it.? I don’t care if I get credit; I just want to do something good to minimize regulation, but deliver bad results to those who choose bad managers.

All that said, if the SEC acts as it is indicating, they will destroy money market funds, and we will all be the poorer for it.

Sorted Weekly Tweets

Sorted Weekly Tweets

Eurozone

 

  • Depression Deepens Greek Middle Class Despair With Crime http://t.co/PlMwTLpw They need to leave the euro & end early retirement $$ Dec 07, 2012
  • Global Shipping Industry?s Troubles R Threat for Biggest German Banks http://t.co/ZKojm5iZ During good times bankers forget cyclicality $$ Dec 06, 2012
  • All recent French Presidents are good examples of why the power of the office should be weakened & term shortened http://t.co/NbtxCyJY $$ Dec 06, 2012
  • Don?t Tax Our Wine Irish Cry as Austerity Finds Threshold http://t.co/HdL8bkLI Alcohol exists 2 prevent the Irish from ruling the world $$ Dec 06, 2012
  • Paris Faces Darkness as City Set for Illumination Ban http://t.co/sbmoaBEv French politicians r the worst enemies France has $$ #inthedark Dec 05, 2012
  • Paulson Said to Blame Bet Against Europe4 Most of Loss http://t.co/AHDHtUNK Betting on disaster is tough; getting timing right tougher $$ Dec 05, 2012
  • Merkel’s euro push leaves E. Germany out in the cold http://t.co/3T9Yw6Uu Angela faces weakness in E. Germany politically & economically $$ Dec 03, 2012
  • France Sexy No More for Entrepreneurs Escaping Hollande http://t.co/S8OVxgRu The “invisible foot” opposes increasing taxes in France $$ Dec 03, 2012

 

Central Banking

 

  • Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion http://t.co/u4Ek0vbc The Fed will never significantly shrink its balance sheet $$ Dec 07, 2012
  • Bernanke Cliff Analogy Overstates Immediate Economic Harm http://t.co/dSQxcMtP After the cliff, 2014 will be a good year, &2015 better $$ Dec 07, 2012
  • At Press Conference After ECB Interest Rate Decision, Draghi Faces Frustrations & Mistrust http://t.co/nzpJhUE3 No magic, only illusions $$ Dec 07, 2012
  • How canceling central banks? holdings of government debt could be a useful thing http://t.co/mOdKposd I don’t agree, but worth reading $$ Dec 06, 2012
  • Fed holds lenders’ feet to the fire on mortgages http://t.co/PpeKIjQm Simple: absence of competition w/the lack of shadow banking $$ Dec 04, 2012

 

US Politics

 

  • Fannie and Freddie Are Not Piggy Banks http://t.co/8H5VVXg2 Tosh, Congress loves a slush fund, Fed’l Financing Bank, FHA, Ag credit sys $$ Dec 07, 2012
  • Obama?s Tax Increases Will Find the Middle Class http://t.co/8ai0z1ID @cabaum1 After all, that is where most of the income 2 tax is $$ Dec 07, 2012
  • Push to Curb Union Power Advances in Michigan http://t.co/Qiw3HyyU No one should be forced to join a union, or pay dues 2 get any job $$ Dec 07, 2012
  • The Real Reason Warren Buffett Should Pay More Taxes http://t.co/UOWtRvA9 Labor & Capital should b taxed @ same rate, w/no deferral $$ Dec 07, 2012
  • Obama?s Tax Plan Would Spare Many Affluent Families http://t.co/C33CRpGi Why the definition of income is more important than tax rates $$ Dec 07, 2012
  • Defense Industry Cuts Exceed 500,000 Workers Over Cliff http://t.co/065xIlv2 Living on the DC side of Baltimore, the effect will be big $$ Dec 06, 2012
  • Greenspan Says Painless Solution to US Debt is Fantasy http://t.co/fO15WZ1P This is one of the two times per day for this stopped clock $$ Dec 06, 2012
  • Medicare is unsustainable in current form http://t.co/WNoFEsKo “As it stands now, Medicare cannot keep its promises 2future seniors” $$ Dec 06, 2012
  • Deck the Halls with Macro Follies http://t.co/7gGKMN4R A new video from the guy who brought you Keynes vs. Hayek at EconStories.tv $$ Dec 06, 2012
  • Sallie Krawcheck should not run the SEC http://t.co/AECw2pun Her prior career does not suggest that she would be a good regulator $$ Dec 05, 2012
  • Elizabeth Warren would bring real smarts to the position. Now if we can find spots for Barofsky and Kauffman. http://t.co/sTf2Piy8 Dec 05, 2012
  • Wrong: Five States 2Increase Class Time in Some Schools http://t.co/BNY4Twj4 Little correlation btw class time & educational progress $$ Dec 04, 2012
  • Republicans Reprise 2011 Debt-Limit Threat in Cliff Talks http://t.co/njnFXhVO This is not a 2-player game but a 3-player game: t-party $$ Dec 03, 2012
  • Obama Bets Re-Election Gave Him Power to Win Fiscal Cliff http://t.co/1hA1Xn4j Think this idea is overplayed; players same now as b4 $$ Dec 03, 2012
  • +1 We need genuine capitalists, & not defenders of Wall Street & big business @ the SEC $$ @davidgaffen @footnoted @nminow @Reuters Dec 03, 2012

 

Pensions

 

  • Benefits Leader Reins In 401(k)s http://t.co/Z8foHZLK $IBM defers 401(k) match 2 yearend; if u leave early, except retiring, u lose $$ Dec 07, 2012
  • Baby boomers need annuity simplicity http://t.co/34gJlJKA SPIAs r good annuities don’t sell b/c agents never earn another commission $$ Dec 06, 2012
  • Milwaukee task force studies changes to pension system http://t.co/GHBuGNGf Will raise retirement ages & lower the multipliers 4 svc yrs $$ Dec 03, 2012
  • Officials call pension reforms a must http://t.co/64PzD8UI Kentucky reduces future pension benefits; good 4 taxpayers, bad 4 employees $$ Dec 03, 2012

 

Other

 

  • #FF @Fullcarry @KidDynamiteBlog @Convertbond @foxjust @EconOfContempt @GregorMacdonald @edwardnh @MatthewPhillips @srussolillo $$ Dec 08, 2012
  • To Quote Thomas Jefferson, ‘I Never Actually Said That’ http://t.co/mA9MzDbb Yogi Berra, “I never said most of the things I said.” $$ Dec 07, 2012
  • Big Test at Johns Hopkins (biz school) http://t.co/fbf5FeKP Scuttlebutt is that it is not doing so well w/their Int’l student focus $$ Dec 06, 2012
  • http://t.co/0fOBmunB “[Ransomware] is the new Nigerian email scam,? Mr Haley said. ?We?ll be talking about this for the next two years.? $$ Dec 06, 2012
  • The Insourcing Boom http://t.co/h67gWIA3 Can improve labor costs, morale, R&D, product quality, time to market. Wave of the future $$ Dec 06, 2012
  • My week on twitter: 42 retweets received, 3 new listings, 26 new followers, 65 mentions. Via: http://t.co/SPrAWil0 Dec 06, 2012
  • Dial-a-maid, get-a-slave in middle class India http://t.co/LRlkfbTg No, slavery is not dead yet & women bear the brunt of it $$ Dec 05, 2012
  • Hospital Incentives Help Babies Determine Own Birth Dates http://t.co/rAKVBv4X Washington State finds a way 2reduce caesarean-sections $$ Dec 05, 2012
  • While at RealMoney, Steve Smith & I tried 2 get Lenny Dykstra 2 explain the risks of his strategies; he never responded http://t.co/ynHZJgoa Dec 05, 2012
  • Deere Gets the Wright Stuff http://t.co/88RdyGkb My friend Bill Wright is now making standing lawn mowers 4 $DE ; both firms benefit $$ Dec 04, 2012
  • Warren?s Way http://t.co/cW8OQQq4 I respect Buffett a lot, but he is a hypocrite on taxes. Pay off the DTL, Sell $BRK shares, pay a div $$ Dec 05, 2012
  • Online Classes Mean No Dorm, Gym or Debt http://t.co/gPttIwpJ My wife thinks there is room 4a quality college w/o the frills $$ #worthatry Dec 03, 2012
  • Not news: Burying the “Fed model” http://t.co/BTCVsigi Have 2 decompose in2 real rates & inflation expectations. Result known since 1994 $$ Dec 03, 2012
  • Wall Street finds a foreign detour around U.S. derivatives rules http://t.co/4Ypf0atI Do foreign biz through their London subs $$ Dec 03, 2012
  • A Free-Market Fix for the Copyright Racket http://t.co/RDPofMPk Keep copyright protections, but limit them to 28 years $$ Dec 03, 2012

 

Fixed Income

?

  • Despite Risks, Investors Just Can’t Quit US Treasurys [sic] http://t.co/AefCG5rw One of the better deflation hedges out there $$ Dec 04, 2012
  • Talking Macro, Fixed Income, & the Strategic Alpha Bond Fund w/Loomis Sayles? Matt Eagan http://t.co/PTWJKX22 w/ @DavidSchawel Well done $$ Dec 07, 2012
  • California moves toward open source ratings for city bonds http://t.co/hn8GCnMa Researcher makes case here: http://t.co/r04PVuWA $$ Dec 06, 2012
  • Yield-Starved Investors Hoarding EM Bonds http://t.co/kvShvcx5 There is yield & their govts r running finances more orthodox way $$ Dec 06, 2012
  • We Were Stunned By The Brand New Patent That’s Been Awarded To Bill Gross http://t.co/zYuLDREM Easy ideas should not be patentable $$ Dec 06, 2012
  • Women analysts dominate muniland http://t.co/dQwgDg5U Funny, but when I was a corporate bond mgr, most of my analysts were bright ladies $$ Dec 06, 2012
  • BlackRock’s new bond plan http://t.co/rdUd5zmG $BLK does a kind of structuring of covenants (buyer’s due diligence) & coinvests in volume $$ Dec 05, 2012
  • Scrounging for Income http://t.co/hfFtkhm4 Okay advice, but if you can reduce need 4 income or harvest capital gains would b better $$ Dec 03, 2012
  • Leveraged loans return 0.31% in November; YTD return is 8.8% http://t.co/loDwDKW9 Interesting part of article is strength of CLO bid $$ Dec 03, 2012
  • The Great Yield Gamble http://t.co/fRspStAj When risk-free rate is being used as a policy tool, it is harder 2 make rational choices $$ Dec 03, 2012
  • Panasonic Swings Ruin Funds? Appetite for BBB Debt http://t.co/w36bv9nQ No notes rated <BBB+ by Japanese assessors offered in November $$ Dec 03, 2012
  • High Yield Exhaustion http://t.co/zLSy4GaC High yield feels tired between high supply, and potentially weakening demand $$ Dec 03, 2012

Rest of the World

 

  • China listings may soon flee US, expert says http://t.co/0EuxyoAC I usually don’t like when foreign listings leave; exception: China $$ Dec 06, 2012
  • Sellers in Toronto, Vancouver just say no as housing markets sink http://t.co/HUTgOVnh Feels like the US in late 2006 $$ Dec 06, 2012
  • Russia’s problem is not a petrified Soviet economics but corrupt politics impeding growth w/o fully blocking it $$ http://t.co/YL7QGR9j Dec 05, 2012
  • Top US Firms Are Cash-Rich Abroad, Cash-Poor at Home http://t.co/EZcwLITM Buy foreign businesses & hire clever transfer pricing accts $$ Dec 04, 2012
  • Are We Watching Another North American Financial Crisis Unfold? http://t.co/BmwRzIPp Canadian taxpayers r on the hook for >C$1T in mtges $$ Dec 04, 2012
  • Shangai broken dreams – changing gear? http://t.co/nWX3jIuz Argues Chinese mkt has broken support, but might have value 2 locals that dig $$ Dec 03, 2012

 

Companies

 

  • Cook Says Lives Enriched Matters More Than Money Made http://t.co/cJ7XWQkM Summary & Manufacturing Macs in US http://t.co/hyvQAdRB $$ Dec 06, 2012
  • Apple?s Halo Cracked http://t.co/EHrFjZGG $AAPL ‘s valuation requires that their products remain competitive for a long time to come $$ Dec 06, 2012
  • Banks book record profits off Fannie and Freddie http://t.co/Z4Ej4Zlu It’s more that much origination capacity is gone -> wide spreads $$ Dec 06, 2012
  • Freeport to Buy Plains, McMoRan for $9 Billion http://t.co/avB6cIII I prefer resource extraction firms to be focused, not diversified $$ Dec 05, 2012
  • Steak Price Rising as Cattle Seen 20% Higher at JBS http://t.co/58h0CsHp Combination of loose $$ policy & high feed prices from weather Dec 05, 2012
  • That fiscal cliff? $DOW Chemical says China’s a bigger worry http://t.co/H1viDTWR Not a good sign for commodity chemical producers $$ Dec 04, 2012
  • Trucks — Boats – Planes – Trains http://t.co/vFirg2PB Transports are hinting at more economic weakness $$ Dec 04, 2012
  • Diamonds Dug in Gusty Arctic Too Remote for Diesel Fuel http://t.co/AZiGApP4 How mining companies generate power in remote areas $$ #wow Dec 03, 2012

 

Insurers

 

  • Insurers’ Sandy Claims Estimates Show No Long-Term Damage http://t.co/HJq6Ufmk Prudent insurance underwriters & investors bounce back $$ Dec 06, 2012
  • Re: Principles based stat reserving. As a life actuary, I wonder what will happen to old blocks of biz that get reinsured 2 get new acctg $$ Dec 03, 2012
  • Insurers Add Reserve Power http://t.co/5X4htlOh Move 2 principles-based reserving 4 Stat acctg is a mistake; lower margin of safety $$ Dec 03, 2012

 

Retweets

 

  • Kind of fitting that $UBS discovered it $$ RT @graemehein: Swiss counter-intel is making Canada look good! http://t.co/394i35mW Dec 04, 2012
  • OTOH, many other schools r athletic progs glued2 educ charity $$ RT @carney: Is Harvard really just a giant hedge fund? http://t.co/9AgVniPZ Dec 07, 2012
  • I believe it has a small educational charity attached $$ RT @carney: Is Harvard really just a giant hedge fund? http://t.co/9AgVniPZ Dec 07, 2012
  • I think Andrea encourages him to get fresh air now & then $$ RT @ecchymosis2009: Who let him out of his crypt? Dec 06, 2012
  • Barofsky 4 SEC Chair RT @matthewstoller: Important statements from @neilbarofsky on how to reform the SEC. http://t.co/Tty50eQi $$ Dec 06, 2012
  • +1 Good news $$ RT @cate_long: .@matthewstoller reporting that Sallie Krawcheck seems to have been knocked out of the running as head of SEC Dec 06, 2012
  • Probably correct $$ RT @munilass: CalPERS likely 2 lose next court battle, San Bernardino bankruptcy observers predict http://t.co/QxsiiNUD Dec 05, 2012
  • You got it RT @James_Karn: @AlephBlog Don’t forget ethanol policy as a factor in high feed prices. Dec 05, 2012
  • UN = Useless Nations $$ RT @marykissel: Debacle-in-the-making: @UN takes a step toward regulating the #Internet http://t.co/tngedHds Dec 05, 2012
  • +1 true $$ RT @LorcanRK: congrats to whoever is running the @euromoney account these days. Has completely transformed a semi-dormant feed. Dec 04, 2012
  • RT @ritholtz: ENOUGH ALREADY! I propose the hashmark #CLIFFHYPE to mark conversations about the excess hype regarding the so called Fis … Dec 04, 2012
  • Incongruous, huh? Or maybe it takes a thief… $$ RT @felixsalmon: Bob Merton on a financial stability committee??? http://t.co/tnJvIOIJ Dec 03, 2012
  • Yes, & I lost some $$ on it last year RT @GaelicTorus: @AlephBlog panasonic is a value trap, imo $PC Dec 03, 2012
  • +1 For sure RT @footnoted: @joshuademasi @AlephBlog Well, nobody would accuse me of being a defender. That’s for sure. Dec 03, 2012
  • +1 RT @neilbarofsky: The more things change…Good for @benlawsky for voting no: New Rules for Life Insurers http://t.co/gVW1Zl80 $$ Dec 03, 2012
  • Had good ideas in 2001 now jumps shark $$ RT @LDrogen: Taleb should have quit while he was ahead, this is just nonsense http://t.co/rRPrCLLT Dec 02, 2012

 

Replies

 

  • @Ryknow16 Not yet.. I expect the Fed to overdo it until it is obvious that they have to shift & then some; when shift comes it will b brutal Dec 08, 2012
  • “Thanks for writing this… this will be an important signal when the Fed finally hints at tightening,” David_Merkel http://t.co/AXbhvTBv $$ Dec 08, 2012
  • @DividendMaster Granted, but I have a rule of thumb: Removal of policy accommodation always is tougher than the Fed claims & imagines $$ Dec 07, 2012
  • @DavidSchawel You are welcome. Excellent interview & ideas. I also follow Pettis & Lacy Hunt — I’m an information hound $$ Dec 07, 2012
  • @EddyElfenbein It was a good indicator, but now it is used for policy purposes in Operation Twist, making it useless as an indicator now. $$ Dec 07, 2012
  • “Challenge for Apple is perpetuating successful innovation. Difficult to continually get high ROEs?” ? David_Merkel http://t.co/WfTxOVbJ $$ Dec 06, 2012
  • @neilbarofsky I have a compromise proposal on MMFs that gives everyone 90% of what they want. Can I show it to you? http://t.co/uTaSQoIv Dec 07, 2012
  • @DoubleDeuce Women I was speaking of were investment analysts, not actuaries, but u r right there also; famale actuaries tend 2b junior $$ Dec 06, 2012
  • @USTreasury Don’t care if this came from McConnell or Paul Krugman. The executive is *not* supposed to have any power over spending. Dumb $$ Dec 06, 2012
  • @DoubleDeuce Yo, friend. Men tend to be better at the risk-return tradeoff. Women tend to be better at estimating risk. Dec 06, 2012
  • @ivorroy I won’t live longer; eating meat in moderation is good 4u, &enjoying your life prolongs life far more than avoiding a few toxins $$ Dec 05, 2012
  • @Dan_Dicker Wrote a piece similar 2your “Embrace the Cliff” http://t.co/pseXvwlP last June. “Might not be so Bad” http://t.co/pYICXUOq $$ Dec 05, 2012
  • @cate_long I have a compromise proposal b4 the SEC on MMFs. Talked w/senior lawyers there: http://t.co/OG4zyTQy Really tough 2do good $$ Dec 05, 2012
  • @cate_long Personally, I think running the SEC is beyond everyone. The $$, the politics, can’t easily fire/hire people, etc. Dec 05, 2012
  • @cate_long Only be Chairman of the SEC. Only difficulties r managing the politics & incompetence. I would be willing 2 help. Dec 05, 2012
  • @rszbt Maybe we should nominate Cate Long. never reada bad article from her. Dec 05, 2012
  • @CondorOptions Ted Kauffman, Sheila Bair, Neil Barofsky, (giggle) Harry Markopolous, David Merkel (who?), Jack Ciesielski, I have more $$ Dec 05, 2012
  • @nelson3748 I expect nonsense from academics. Dec 05, 2012
  • @nelson3748 How has she been a disaster for consumer banking, and local and regional banks? Many of her proposal seem reasonable. Dec 05, 2012
  • @AppFlyer Yes, I heard about that… thought it was more dumb than lying… it was lying, but I didn’t see how she would gain from it. Dec 05, 2012
  • @AppFlyer Maybe I’m out of it. How is she a liar & a cheat? Links welcome. Dec 05, 2012
  • ‘ @StockRealist Hello from another member of the penny stock truth squad. Article of mine: http://t.co/jJ79L4Ac Got $IMNG today #spitspit $$ Dec 04, 2012
  • .@drVTC It’s more what u do w/whatever time u spend w/kids, than the amount of time. I agree, tho; character is the most important factor $$ Dec 04, 2012
  • @paulvieira Typically u hear a few pops b4 the tree falls; inn the US that was mid-2007 $$ Dec 04, 2012
  • @EddyElfenbein Makes sense, thanks Dec 04, 2012
  • @buzzfeedben What r u looking for from someone to run your possible business vertical? I know of a lot of talent in financial writing… Dec 04, 2012
  • @EddyElfenbein your latest piece deals w/correlations — how well do the betas match up? Dec 04, 2012
  • @Fechtmeyer Thanks, I get it now. But technology is creative destruction, while Wall Street’s risk control methods were just wrong. $$ Dec 03, 2012
  • @Fechtmeyer SV? WS? Dec 03, 2012
  • @LDrogen “They that can give up essential liberty to obtain a little temporary safety deserve neither safety nor liberty.” Ben Franklin $$ Dec 02, 2012
  • @kyles09 That is, how much profit there is in the deal 4 the originator, whether in % upfront, or in the excess interest strip Dec 02, 2012
Sorted Weekly Tweets

Sorted Weekly Tweets

Credit Markets

 

  • Credit Suisse Raises $802M CLO; Prudential Closes Fund http://t.co/RbXDgtPU Watch arb from creation of CDOs & CLOs: clue 2 bond rally end Dec 01, 2012
  • Caisse Thinks Bond Party Is Over? http://t.co/j6lWdJjA Shifting $$ from bonds 2 infrastructure; usually good though liquidity is underpriced Dec 01, 2012
  • Bond Yields May Fall Short of Corporate Pension Fund Needshttp://on.barrons.com/VkWekV Bonds in DB plans r4 risk reduction not just yield $$ Dec 01, 2012
  • My point is that it is difficult to tell whether we will be getting inflation or deflation. My bond portfolios are barbelled: long &short $$ Nov 30, 2012
  • Investors Unprepared for Bond Danger, BlackRock?s Rosenberg Says http://t.co/56kv1CrS B wary of owning 2 much or 2 little long bonds $$ Nov 30, 2012
  • Safe or junk, bonds in bubble trouble http://t.co/Nd5iEYPy Fuss told the summit in New York there was evidence of “a spread bubble” $$ Nov 28, 2012
  • Overnight Rates Surge in Fed?s Operation Twist http://t.co/xwvKCPGb Large supply of short Treasuries raises Repo rates over LIBOR $$ Nov 26, 2012

 

Muni Markets and Pensions

 

  • Bankruptcy threat back on the table in Pennsylvania city as filing ban ends http://t.co/NgMGQs2Z Will b tough to stiff muni bondholders $$ Dec 01, 2012
  • Calpers Seeks to Sue San Bernardino Over Pension Payments http://t.co/xv0OqQV9 Will have2show a place in CA law/constitution reqrng pmt $$ Nov 28, 2012
  • Fierce Debt Puts Pensions at Risk in Puerto Rico http://t.co/w2oGk8YW Future curse: May u starve like a Puerto Rican pensioner! Uh, yeh $$ Nov 27, 2012
  • Proponents of pension reform face steep hurdles http://t.co/n2AYvghT Choose: raise taxes, reduce services, attempt constitutional change $$ Nov 26, 2012
  • San Bernardino?s ?Toxic Politics? Snarl Calpers Debt http://t.co/N4YWPCTD Be careful what you put into your city’s Charter. $$ Nov 26, 2012

 

Market Dynamics

 

  • The Great 2012 Cashout http://t.co/i4lZvD0c Special dividends r coming fast & furious; last call 4 low tax rates; next stop: Caymans $$ Dec 01, 2012
  • Wells Fargo CEO: ‘Bad players are gone’ from finance http://t.co/AwSGY8gz FD: + $WFC | Sadly, false. There may be fewer, but not all gone $$ Nov 30, 2012
  • Nontraded BDC sales on a tear despite closing of first fund http://t.co/ML7oVkIu Poison, beware. BDCs are bad enough w/o the illiquidity $$ Nov 30, 2012
  • Beware the Smart Money: Hedge Funds Issue Sell Signal http://t.co/HXBKD5ZO When fast money is “all in” it just takes a jolt2make mkt fall $$ Nov 30, 2012
  • Home Equity Loans Make Comeback Fueling US Spending http://t.co/3WULRzOO We never learn, we never learn, we never learn, we never learn $$ Nov 27, 2012
  • Private-Equity Managers Make Moves as Tax Increases Near http://t.co/eKKsH5w6 refinancing investments, accelerating gains, etc. $$ Nov 26, 2012
  • The Faustian Bargain between States and Banks http://t.co/gGUHGWIa I lend 2u, u lend 2me. I lend 2u, u lend 2me. What could go wrong? $$ Nov 26, 2012
  • The Manufacturing Boom You Won’t Notice http://t.co/R62nFiae Productivity continues 2 improve -> more mfg in US, but not more mfg jobs $$ Nov 26, 2012
  • Overlooking Overvaluation http://t.co/nWfA1KMe Hussman interacts w/long-term valuation measures. He finds the market overvalued $$ #whatelse Nov 26, 2012
  • Everything You Know About Investing is Wrong http://t.co/v8wAYPg6 Single-vble measures of valuation fail in short-run, some in long-run $$ Nov 26, 2012
  • The prior BB article is a little deceptive, because regulated entities use them under regulation. Many r quite safe, like auto ABS, etc. $$ Nov 24, 2012
  • Shadow Banking Grows to $67 Trillion Industry, Regulators Say http://t.co/houN2uhM Many are SPV securities held by banks & ins cos $$ Nov 24, 2012

 

Companies

 

  • How a desperate HP suspended disbelief for Autonomy deal http://t.co/qv1vIWcQ If $HPQ had been focused on organic growth, wouldnta happened Nov 30, 2012
  • Berkshire Hathaway, CaixaBank Agree to Reinsurance Deal http://t.co/RDQqXhMl Berky hasn’t done well w/Life Re — I would be cautious $$ Nov 30, 2012
  • Google Has Officially Eaten the Newspaper Industry http://t.co/TGqEWK7T $GOOG now has more advertising revenue than all print media $$ Nov 28, 2012
  • Investors Demand CEO Face Time http://t.co/4CPugaAV CEO griping about time spent on investors is wrong; a good CEO is Mr. Outside $$ Nov 28, 2012
  • Global Steel Industry Faces Capacity Glut http://t.co/DhU7BaWa We need to see 20% of the steel industry fail b4 buying steel stocks $$ Nov 28, 2012
  • Lehman Sells Archstone in Deal Worth $6.5B http://t.co/f2V5K7tk Losses taken; Lehman more liquid; Sam Zell lives 2 gravedance $$ $EQR $AVB Nov 27, 2012
  • $AMZN ‘s bond offering will b a bit of a “museum piece.” I.e. unusual issuer unlikely to issue more; should get tight deal spreads $$ yld<2% Nov 26, 2012
  • $ICOA Says $GOOG Didn’t Acquire the Company http://t.co/y3XXagL7 Whoever put out the press release will be an easy target 4 the SEC $$ Nov 26, 2012
  • France to ArcelorMittal: if you don?t like losing money, get out of France http://t.co/gYQ31NOk Invisible foot punishes France 4 bad policy Nov 26, 2012
  • Flowers Foods Sizes Up Hostess http://t.co/4DYwu6p6 Might buy brands, marketing arrangements, factories., etc. Won’t hire unions $$ $FLO Nov 26, 2012

 

Central Banking

 

  • Japan?s Ill-Fated Experiment With Money Doctoring http://t.co/OgCSJ4KB Interesting tale of Asia conquest; what does it imply 4 the US? $$ Nov 30, 2012
  • The death of volatility? http://t.co/04RNO7z1 “Central bank puts have done a great job of removing tail risks.” for now h/t: @izakaminska Nov 29, 2012
  • When the Credit Transmission Mechanism Breaks? http://t.co/HvCddUDh While we r delevering monetary policy won’t work well. h/t: @pragcap $$ Nov 28, 2012
  • The Indiana Jones economy http://t.co/GqjOk5Ql @izakaminska explains how economic transmission mechanisms r short-circuited by hoarding $$ Nov 28, 2012
  • Brazil real jumps as central bank eclipses Mantega http://t.co/xUpU6tE2 Loose developed mkt $$ polcy forces choice: exports or inflation? $$ Nov 26, 2012

 

Politics & Policy

 

  • Mortgage interest rate tax deduction scores political points ? but little else http://t.co/xiaLfUkT Limit to $20K of interest $$ @hnmoore Nov 30, 2012
  • IMNSHO, the PPACA was designed to destroy the parts of the US health care system that worked well, in order 2 move 2a single-payer system $$ Nov 30, 2012
  • Unaffordable Cost Seen for Some Under Affordable Care Act http://t.co/iEPsMhdh When this law goes live in 2014, people will hate it $$ Nov 30, 2012
  • In D.C., Social-Media Surveillance Pays Off http://t.co/XkLcZ3nm What they glean from social media aids service to constituents $$ Nov 29, 2012
  • 10 Things the SEC Won’t Tell You http://t.co/QOfbkvhC 11) U r your own best defense; we can’t help u much if u r stupid, b skeptical $$ Nov 28, 2012
  • Going to college is not of itself a good thing economically. You have to choose something that will pay off if you dare borrow money $$ Nov 28, 2012
  • Federal Student Lending Swells http://t.co/Wvi2d6vT We need to eliminate student loans. They do more harm than good. $$ Nov 28, 2012
  • Time running out on debt ceiling http://t.co/iZ6BLqdP Follows months behind the “fiscal cliff.” Will probably cause as much angst. $$ Nov 27, 2012
  • “Y is the burden of proof on those who want 2 return 2 the proven statutory & regulatory approaches of the past?” http://t.co/GJuNCS1X $$ Nov 26, 2012
  • Disabled parents face bias, loss of kids: report http://t.co/SvW3g3Xn Found this 2b disturbing; govt should avoid meddling w/families $$ Nov 26, 2012
  • A Minimum Tax for the Wealthy http://t.co/THiT0YGK Let Warren pay tax on his deferred gains in $BRK.A shares, & pay the large DTL also $$ Nov 26, 2012

 

Rest of the World

 

  • China?s over-investment problem http://t.co/WJVLvnMD IMF working paper says what China skeptics have said for years: 2 much investment $$ Nov 30, 2012
  • China Mafia-Style Hack Attack Drives California Firm to Brink http://t.co/cmnb4qco Chinese hackers steal software & hack software firm $$ Nov 28, 2012
  • A UK Exit From EU Offers No Promise of Better Fortunes http://t.co/TBmi6as7 EU is a failed experiment; Y should the UK continue there? $$ Nov 28, 2012
  • French jobless total hits 14-yr high http://t.co/NYdjc6Rs Francois Hollande getting costly economics lessons, paid4 by the French people $$ Nov 27, 2012
  • China Wage Gains Hurt by Weaker Profit Damp Consumption http://t.co/tESRToBZ Malinvestment leads2 lower profits, then wages can’t grow $$ Nov 27, 2012
  • China?s nemesis: bribes, banquets and backslapping http://t.co/D7V7yF06 Difficult 2 develop highly when rule of law is not followed $$ Nov 26, 2012

?? Sovereign CDS trading plummets http://t.co/jKBj47bv Will eventually lead discretionary holders to lighten sovereign positions $$ Nov 26, 2012

  • Egyptian Army allowed Morsi in2 power 2 avoid riots & allow him 2 mess up, so that Egyptians would support military rule again. US wins 2 $$ Nov 26, 2012

 

Wrong

 

  • Wrong: Misconceptions 101: Why College Costs Aren?t Soaring http://t.co/nZWYKQSQ Doesn’t square w/the rise in delinquent student loans $$ Nov 28, 2012
  • Wrong: Obama To Meet Romney Tomorrow Amid Fiscal Cliff Talks http://t.co/2VfO7Fxz Doesn’t Obama realize Romney has no power in the GOP? $$ Nov 28, 2012
  • Wrong: Fed’s Easing Yields Hidden Benefit http://t.co/6bJejPB1 1994 is not 2013. The banks/financials/households were in good shape $$ Nov 28, 2012
  • Taleb Mishandles Fragility http://t.co/qIGbLQHl Taleb needs new ideas, but does not perceive that. He is mired in the past. $$ Nov 28, 2012
  • Russell Napier’s “Most Important Chart In The World” http://t.co/XYKdagZm While we’re at it let’s reprise the Nikkei vs Nasdaq charts $$ Nov 28, 2012

 

Other

 

  • THE FUTURE OF DIGITAL [SLIDE DECK] http://t.co/RabKP5EC Good but long piece from BI on the future of digital media $$ Nov 30, 2012
  • Alleged Insider Group Includes Website Editor http://t.co/Llnmz2aE In general insider info is a curse to the upright; ties your hands $$ Nov 30, 2012
  • Texas Feral Hog Wrecks Mark Losing Battle With Animals http://t.co/TMPpFNh6 This is Texas, no one said anything about losing. $$ Nov 29, 2012
  • He Carries On, She Likes to Check http://t.co/4D1Fd5Td Men and women are different when they fly. This explains it. $$ Nov 29, 2012
  • . @izakaminska is a favorite writer of mine. She helps me with the nuances of tightly nested markets, finding the variable that is valuable Nov 29, 2012
  • American Housing Casino Revives After Big Drop: Mortgages http://t.co/lZmmHo9s Setting up conditions for the naive 2 lose again $$ Nov 28, 2012
  • FHA?s Biggest Loser: No-Money-Down Mortgages http://t.co/bJgwTdtV Surprise! Lend2 someone w/nothing 2 lose & they default a lot more $$ Nov 26, 2012

 

Teaching Math

 

  • Helping Parents Score on the Homework Front http://t.co/7FPGjA0n 6-yr olds should not be doing fractions. Parents aren’t the problem $$ Nov 28, 2012
  • The push to think abstractly about math does not work w/kids. You can start with girls around 13, boys around 14; misguided idealism $$ Nov 26, 2012
  • Children learn math best through drill, giving way to problem-solving, giving way to algebra (abstraction), further abstraction Calculus Nov 26, 2012
  • A New Kind of Problem: The Common Core Math Standards http://t.co/VGxxQGqr This is as bad as the “New Math” of the 1960s; utterly idiotic $$ Nov 26, 2012

 

 

Retweets

 

  • RT @prchovanec: Market should be rooting for China to buckle down to real econ adjustment, not hit yesterday’s growth targets with yeste … Dec 01, 2012
  • Would put the fraction at 80%, but I agree $$ RT @GMRobertson: if they are risk free they are solely for risk reduction, IG is about 2/3 so Dec 01, 2012
  • Wow! RT @prchovanec: Chinese company debt climbed to 122% of GDP in 2012 from 108% last year, highest level in 15 years http://t.co/ujKmHpTx Dec 01, 2012
  • Probably $$ RT @merrillmatter: @hnmoore I think eliminating (slowly) the 2nd home tax deduction is more palatable and possible. Nov 30, 2012
  • Blameworthy RT @grossdm: anybody ask boehner about the time he voted for massive new medicare entitlement without a funding mechanism yet? Nov 30, 2012
  • +1 RT @jonsticha: as is mine. Large bets on rates either way are a bad bet IMO Nov 30, 2012
  • RT @MuniTrader: @AlephBlog completely agree. credit risk front end, high coupon quality on the back end. pretty obvious but best way to … Nov 30, 2012
  • RT @PlanMaestro: If you don?t know enough to know about the business instantly, you won?t know enough in a month or in two? ? Buffett H/ … Nov 29, 2012
  • Needs2meet an actuary RT @TheStalwart: James Galbraith is only economist who talks about lowering the retirement age http://t.co/3srMzYX3 Nov 29, 2012
  • Recognizing reality, & verbally shading down fwd GDP $$ RT @carney: What does the beige book change from “moderate” to “modest” growth mean? Nov 28, 2012
  • Thanks, still think Eurozone should dissolve, replace w/mere free trade zone $$ RT @euromoney: Another take (quick): http://t.co/WxSquHKf Nov 28, 2012
  • RT @John_Hempton: Nassim Nicholas Taleb is a humourless git… and his publishers censor the internet. Do not buy his book… http://t.c … Nov 28, 2012
  • RT @munilass: Over 300 drone strikes and 2,500 people killed without a policy in place for when such attacks should be authorized http:/ … Nov 27, 2012
  • To the best of my knowledge, never RT @merrillmatter: do humans ever (in toto, as a society) voluntarily deleverage? Nov 27, 2012
  • Sad but true RT @AppFlyer: we never learn. Nov 27, 2012
  • That’s a big gap w/Moody’s @ Baa1 – S&P looks at balance sheet, Moody’s at Income Stmt? $$ http://t.co/C4wCNzaM RT @jonsticha: AA- @ S&P Nov 26, 2012
  • Rated Baa1 $$ RT @SimoneFoxman: RT @chrisadamsmkts: Amazon is today set to issue its first bond in more than a decade http://t.co/k03iJNi4 Nov 26, 2012
  • That’s why we homeschool RT @Nonrelatedsense: @AlephBlog pull kids from public schools if you can afford it. Nov 26, 2012
  • Bigtime $$ RT @Pawelmorski: Though anyone who thinks Canada is bubble-free might care to follow @garthturner and read his blog. Nov 26, 2012
  • Can we get the PBOC to take Yellen? $$ RT @TheStalwart: I’m definitely on board with this Central Bank poaching/global market place thing… Nov 26, 2012
  • Wow. Whoever published the original release will be an easy target $$ RT @mickwe: @AlephBlog so did all these guys http://t.co/sdUtAnlN Nov 26, 2012
  • AP goofs RT @mickwe: oh… RT @allthingsd: Google Sources: Acquisition of ICOA Wireless Are ‘Not True’ -by @ahess247 http://t.co/aGVCteBf Nov 26, 2012
  • RT @mickwe: That wifi co Google just bought for $400m? Loses $ and ‘Cash and cash equivalents were $10 at June 30, 2012’ http://t.co/PXB … Nov 26, 2012
  • Warranties r usually ripoffs RT @danielckoontz: Anybody who’s ever bot an extended warranty should read this post twice http://t.co/Ryl1AkKn Nov 25, 2012
  • A good guy; I appreciate him $$ RT @PlanMaestro: Retail Industry’s Ninja Mind Tricks http://t.co/DxJfueu4 #biases Nov 25, 2012

 

Replies

 

  • @LSilverspar as @EpicureanDeal says: “Names will be changed to protect the innocent, if we find any.” Few clean hands among banks, S&Ls, etc Nov 30, 2012
  • @Frank_McG Consider it a different way… I think it would b more likely to see a case prosecuted over insider information w/ CDS trading $$ Nov 30, 2012
  • @Frank_McG I’ve never seen a case tried for insider information on bonds, because gains r less, but technically, legally it is possible $$ Nov 30, 2012
  • Congress controls the purse strings, not the Presidency, which is too powerful as an office already. Bad… http://t.co/iGBUVgtw Nov 30, 2012
  • But when she became CEO, she could have paid the ~$100MM breakup fee. She didn’t, so she is partly to blame. http://t.co/N1xiZ0mh Nov 30, 2012
  • @ritholtz Dear Barry, is that a real plus? We have increasing delinquencies there, in the face of nondischargability in bankruptcy $$ Nov 29, 2012
  • @danielckoontz Thank you, dear friend Nov 29, 2012
  • @munilass I’m no expert, but CALPERS would have2 point @ California statutes/constitution requiring the payment http://t.co/UJpO1m3T Nov 28, 2012
  • @williamalden Not surprising. Academics & pseudo-academics r easy to co-opt. Most of the members worked in finance & r its friends $$ Nov 28, 2012
  • @Sir_Strangelove Free trade is a simple concept, & is hindered by Eurocrats. Free trade means fewer laws & regulations, not more $$ Nov 28, 2012
  • @Sir_Strangelove No. The Euro is the worst of it, but nations need to have their own unique rules to function well, not standardization $$ Nov 28, 2012
  • @EddyElfenbein Funny in a way, because at the beginning of his career, his main research tools were S&P and Moody’s stock reports $$ Nov 28, 2012
  • “You have more to say than Taleb. He has not had a useful new idea in 10 years.” ? David_Merkel http://t.co/sSh4Qetw $$ @reformedbroker Nov 28, 2012
  • @JayLeonard So, more like $2.0-2.5T per year Nov 27, 2012
  • @JayLeonard I think they are wrong. Other statistics I have seen indicate the amount is 8% of GDP, or $1.2T plus whatever the current gap is Nov 27, 2012
  • @carney My comment: If you pay $400M to get $500M over 30 years, the IRR is 1.45%. Better to buy a ladder of muni or corporate bonds. $$ Nov 27, 2012
  • @AppFlyer Care 2 clarify? Nov 27, 2012
  • @BryanMortenson Thanks, appreciated. Nov 27, 2012
  • @BryanMortenson Has the latest Financial Report of the US Government come out yet? Due soon. Thought I was on the email list… Nov 27, 2012
  • @carney Best place to look would be Canadian Mortgage bubble articles like this: http://t.co/w1Zk7Uhc Nov 27, 2012
  • @TheStalwart This is why I don’t follow any monthly numbers for my investing: noise/signal is high. Even a year of data, noise swamps signal Nov 27, 2012
  • @richtoscano I largely agree. My main disagreement is that the majority says rates must go up, and for some time, but they don’t $$ Nov 27, 2012
  • @richtoscano They R the best comparisons that we have 2 the current situation. I respect U, Rich, but wht wld B a better comparison? $$ Nov 27, 2012
  • “You may have a long wait. Great Depression & Modern Japan went on over 10 years.” ? David_Merkel http://t.co/YlMSAU9c http://t.co/XVq1wgWO Nov 26, 2012
  • @jonsticha Used 2 manage corporates for Fidelity & Guaranty Life. I only guessed, but big rating gaps mean there r two stories told $$ Nov 26, 2012
  • @japhychron I don’t know. So many things are messed up that it is impossible to say… 🙁 Nov 26, 2012
  • “But Buffett’s tax proposal barely nicks him because he makes little income. His shadow income is?” ? David_Merkel http://t.co/7zWRb4SV $$ Nov 26, 2012
  • @mickwe Basically, $GOOG bot out a penny stock, $ICOA, virtually inactive & broke. Pays a ~nickel/share for something $.0001 Friday. Huh? $$ Nov 26, 2012
  • @BarbarianCap $HOGS Tough company to analyze; doubts as to the reality of assets, financials, according to some Nov 26, 2012
  • @GaelicTorus I’ve been through the social work system five times in my life, each time to rescue a child & adopt him. I am not naive. Nov 26, 2012
  • @Nonrelatedsense I knew that, but I still think that Taleb had great insights in his first book, and has not grown from there. Nov 25, 2012
  • @volatilitysmile A good warning to all of us who put our opinions forthto the public. Nov 25, 2012
  • “Taleb has jumped the shark” ? David_Merkel http://t.co/QNdVE57V Sorry to be so blunt $$ Nov 25, 2012
  • @PlanMaestro I have friends working in South Sudan on that. Bigger problem is a lack of tending the fields; the culture is not aggressive $$ Nov 25, 2012
  • @PlanMaestro One of the most important initial things a developing nation can do is get agriculture right; other things tend to follow $$ Nov 25, 2012
  • @moorehn I liked Taleb’s first book a lot. His insights since then have not increased. I think he is on his 16th minute of Warhol’s fame. $$ Nov 24, 2012
  • @Convertbond Is there a link for that? Investment dept @ ins co in 93 was reaching for yield through duration @ wrong time 94 bad year 4 dur Nov 24, 2012
  • @JamesGRickards If you’re in Baltimore/DC and want to talk, I would be interested in what you are thinking. Let me know. Nov 24, 2012
  • @JamesGRickards Too speculative. We should be happy saying that we don’t know. The Bible does not speak to the issue, nor do the Fathers. Nov 24, 2012

For what it is worth

  • My week on twitter: 51 retweets received, 3 new listings, 48 new followers, 106 mentions. Via: http://t.co/SPrAWil0 Nov 29, 2012

?

Cato Institute 30th Annual Monetary Conference, Epilogue

Cato Institute 30th Annual Monetary Conference, Epilogue

I’m back home, and now I can give my opinions on the presenters at the Cato Monetary Conference.

Vernon Smith was relatively realistic.? He understands that this is a debt crisis, and that reducing debt is the main priority.? Overindebted economies don’t grow well.? Households and corporations that have too much debt tend to be reluctant to spend.

Thomas Hoenig had a number of good points.? Argues for simple capital regs, with harder regulators adding to the capital as they judge riskiness.

Jeffrey A. Miron had issues.? I think it is simpler to regulate banks than to try to fix crises.? My reasoning is that average people don’t differentiate between banks, and can’t understand balance sheets.

Lawrence H. White argued that if we remove guarantees, people will be more careful.? The boom-bust cycle suggests otherwise.? People cast away care during booms, and get skewered during busts.? If you’re going to have a fiat currency, better to lean against debt levels, than inflation or unemployment.

Poole criticized loose monetary policy in the late 90s and 2003-4, but why does he not go after Greenspan from 1986-98?? Debt levels screamed higher during that era.? Greenspan facilitated the growth in bad debt, and while it worked, he became the “Maestro.”

The main point of Warsh was that loose monetary policy won’t work.? If you have a lot of excess reserves, more excess reserve won’t help.

O?Driscoll argued that the Fed was by nature no independent of the US Government.? It is a statutory creation.

David Malpass stirred opinions.? Many liked his statements, many disliked.? His main point was that the Fed was sucking Treasury Duration out of the fixed income markets.? Personally, I think that eventually it will erase two years worth of seiniorage.

John Taylor was mostly against policy rules that were too volatile, whether reacting to the output gap, asset prices, or anything else.? Pointed out that the current Fed is overpromising versus the Taylor rule, in projecting that they will hold Fed funds low until 2015.? (2016 for the overly loose Yellen.)

All of the commenters on the Eurozone were too optimistic.? It is only a matter of time before the the pain of holding the Eurozone together becomes greater than the pain of breaking it apart.? On the bright side, future generations will not consider the dopey idea of currency unions without political union.

The China panel was ridiculous.? The first speaker dared to say that Chinese economic policy was better than that of the US, and as a result I signaled my disapproval.? China has no idea for what it is doing.? They are blind, and their slack resources are running out.

China will not have a reserve currency, it cuts against more important goals.? Democracy is also unlikely in China, unless the Communist Party is overthrown.? Unlikely, but looking forward to that.

Plosser is concerned for the institutional image of the Fed, and trying to be more orthodox, and rules-based.? He wants the Fed to move away from the relatively unorthodox policy currently followed.

-=-=-==-=–=-=-=-=-=-=

All that said, the Fed moves on.? They don’t care that their ideas don’t work.? They don’t care that their ideas harm/distort investment markets.? They just pursue the wrongheaded ideas of Ben Bernanke, who assumed that the Great Depression occurred because banks would not lend, when the banks had overlent in the past.

I met my share of cranks today, both liberal and conservative.? We need a new paradigm where debt levels are an important factor in economic decisions.

Cato Institute 30th Annual Monetary Conference, Part 7

Cato Institute 30th Annual Monetary Conference, Part 7

Charles I. Plosser
President, Federal Reserve Bank of Philadelphia

Plosser?s speech: ?Good Intentions in the Short Term with Risky Consequences for the Long Term.?

Since Plosser is reading his speech almost verbatim, for me to take notes would be superfluous.? I have to run to get my car, so I won’t be here for the Q&A.

In short, Plosser is concerned for the institutional image of the Fed, and trying to be more orthodox, and rules-based.? He wants the Fed to move away from the relatively unorthodox policy currently followed.

I’ll have a summary post this evening with my views of the meeting as a whole, and where I think various speakers hit and missed.

Cato Institute 30th Annual Monetary Conference, Part 6

Cato Institute 30th Annual Monetary Conference, Part 6

Moderator: Tao Zhang
U.S. Bureau Chief, Caixin Media

Capital Freedom for China

 

Eswar S. Prasad
Tolani Senior Professor of Trade Policy, Cornell University

Renminbi as a reserve currency 3 conditions:

  1. Internationalization
  2. Capital Account Convertibility
  3. Do other countries hold Renminbi assets as protection against payments crises. (DM: also, do you want to have a lot of debt for foreigners to invest in.

Much progress on #1, little on #2 and 3.

Second order effects of opening: Institutional market development, financial market development.? Try out experiments in Hong Kong.

Size of China, macroeconomic policy potentially allow for? reserve currency, but the banking and financial markets are not capable of absorbing the volatility.

PBOC creating Renminbi swap lines.? IMF more involved w/China; SDR basket membership coming.? Renminbi becoming a bigger factor in the global economy.

Yukon Huang
Senior Associate, Carnegie Endowment for International Peace

400 years ago, China was a reserve currency with 30% share of Gross World Product.

Being a reserve currency lowers trading costs, lends prestige.? Serves as a “Trojan Horse” for reform in China. Seiniorage.

Triffin dilemma, conflict between domestic and foreign goals, adds to currency risk.

China has partially internationalized with capital controls.

Also, reserve currencies are typically issued by democracies.

Chinese authorities use banks to motivate growth and development.? Not markets.

Capital flight happening.? Huang thinks that is good: diversification and other benefits.

Zhiwu Chen
Professor of Finance, Yale School of Management

Money used to settle increasingly more transactions in China, whether it is housing, wages, etc.? Everything is no longer tied to the government.? “Rise of the individual in China.”? McDonald’s in China originated “I’m loving it.”

As rule of law diminishes across Chinese industries, state ownership tends to rise.? The more free the movement of capital in Chinese industries, state ownership tends to fall.

China late to develop limited liability corporations in the late 19th century.

SOEs ran into major losses in the 1980s, and private corporations came back.? But most large firms are still controlled by the government.

Q&A

Possibility of democracy in China?

Prasad: No.? Communists have largely delivered the goods.? Regional problems.

Chen: Yes. Options for the Communist Party are limited. Change may be forced when the good can’t be delivered any more.

Huang: property rights are uneven, and Party members abuse their power.

Cato Institute 30th Annual Monetary Conference, Part 5

Cato Institute 30th Annual Monetary Conference, Part 5

Moderator: Mary Anastasia O’Grady
Member, Editorial Board, Wall Street Journal

Lessons from the Euro Crisis

Opens by saying that the Euro was started with good intentions.? (DM: low praise that it was not designed to fail.)

George S. Tavlas
Director, Bank of Greece

Euro was anticipated to reduce economic problems in Greece, and it worked for a while after 2001.? Interest rates fell and became stable.? Government deficits rose.? Net public saving fell.

Crisis hit. Yields screamed up. Real GDP falls 20% 2008-present, maybe another 6% next year.

Difficult to run large external deficits under a gold standard.? Relatively easy to do so in the short run in the Eurozone.? Mundell’s optimal currency union requiring flexible wages and prices is necessary but not sufficient.

Under a gold standard, credit spreads are high and restrain government borrowing.? Eurozone membership facilitated Greek overborrowing.

Can’t hold a peg without credible fiscal policies.

J?rgen Stark
Former Chief Economist, European Central Bank

ECB will ride to the rescue of European Governments.? This is not a sustainable policy.? Adjustments need to take place.

ECB — principles & rules based. (DM: somewhat subverted at present).? Some countries were allowed to join the Euro who really were not qualified.? Rules were not upheld. Countries did not get the practical impacts of sharing a currency.

Five points to overcome the crisis:

  1. Stabilize and reduce govt debt
  2. Structural reforms — flexibility
  3. Reorganize & recapitalize banking sectors
  4. Reform monetary union
  5. ECB provides liquidity to banking sector

Crisis policies not well thought out, ad hoc, reactive, leaves too much to the ECB to do, too little done by govts

 

Wolfgang M?nchau
Associate Editor, Financial Times

OMT policy not started yet — will it work?? Fundamental problem of Eurozone: No bailout, no default, no exit (inconsistent).? Believes Greece will eventually be bailed out… would go easy on austerity as a policy in Greece.

Banking union necessary to get ECB out of the OMT problem.

Argues that low level economic reform necessary in order to create a economic union.? Political union would likely be needed.

Five conditions for a currency zone:

  1. Real conversions and similarity
  2. (sounded similar to 1)
  3. Political consensus on fiscal & monetary union
  4. Banking union
  5. A willingness to bend political/fiscal priorities in a crisis

Thinks Eurozone will not break up.

Pedro Schwartz Giron
Professor of Economics, San Pablo University, Madrid

How the Eurozone could survive.? Quasi-gold standard — ECB was supposed to be independent from all.? No exploiting money illusion. No devaluation. No excessive debt.

Debt Intolerance: Debt> 90% GDP in developed countries. 60% in emerging markets.? Spain at 90%+ in 2013.

Monetary must be rules-based because we don’t really understand what monetary policy does in the intermediate-term

Inflation will happen instead of default or dissolution

Q&A

Tavlas: Argentina 2001 vs Greece now — like gold standard in Great Depression, those that left early did best.? Leaving euro: capital flight, new currency has extreme risks, foreigners would not accept new drachma, contagion effects.? Credit Anstalt failure turned a recession into a depression (DM: something would have failed… too much debt.)

O’Grady: Argentina: convertibility, not a currency board.? Very different.? Argentina has not had good results.

Stark: Latvia, Ireland austerity may be working.? Austerity fatigue in the south.

Munchau: Can Germany leave the EU?? Not likely and only Americans ever suggest it.? Unthinkable politically.

Stark: Anyone suggesting this does not understand European history or politics.

Basel II impacts on the crisis 1.6% capital lending to Greece, 8% to a German corporation?? Stark: this is not a key problem.

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