Category: Banks

Book Review: The Crisis of Crowding

Book Review: The Crisis of Crowding

Posted on by David Merkel

 

I am going to say something that I rarely say: I am grateful that this book was written.? Why am I grateful?

  • It highlights the idea that people, even really bright people, do not behave rationally, but imitatively — they follow recent price action — they mimic.
  • It validates the concept of a “crowded trade,” one that offered high returns in the past, may presently offer low returns to a “buy and hold” investor, but will deliver negative returns in the near future, because the holders of the trade are relying on the trade to deliver positive returns in the short run, and will bail if it doesn’t happen.
  • It points up the nonlinearity of markets, and invalidates the efficient markets hypothesis; it validates the concept of the boom-bust cycle both in micro and macro.
  • It teaches us to not take on too much debt, even if we are really, really smart.? We aren’t as smart as we think we are.
  • In short, it sums up a lot of my philosophy at The Aleph Blog.? Real risk control thinks long term, and considers what will happen if liquidity dries up.? Real risk control knows that large positions in any asset relative to the market must be regarded to be “Buy-and-hold” regardless of what your trading intentions are.? False risk control assumes that markets always function, and that your relative size versus the market does not matter.

The author of the book has led a storied life.? He was a quantitative analyst hired to work in risk control for Long Term Capital Management [LTCM] near its inception, and continued with them through the failure.? After that, he worked for Rydex, built FOLIOfn, and worked for the Bank of International Settlements, and Schroders.? He now works as a professor of finance at the University of San Francisco, after having gotten a PhD from MIT.? He knows the markets both practically and experientially, like me, though he is better than me.

LTCM is a great example of what happens when some really smart guys find clever ways to make money in the markets, and then overplay them.? The trade that has a buy-and-hold yield of 10% is genius.? When it is 8% it is bright.? At 6% it is average, why are you playing?? At 4% it is dopey.? But what happens when your trade gets big relative to the market?? The rules change, much like JP Morgan recently.? When you are big enough that you are moving the market as a normal practice, that indicates danger.? You have become the market, and are distorting it.? It will eventually come back to bite you, as JP Morgan recently learned.

The failure of LTCM may have been the template, but the author goes on to explain other disequilibrium situations such as:

  • The quantitative equity panic of August 2007
  • The failure of Bear Stearns.
  • The failures of Fannie and Freddie (free money brings out the worst in all of us)
  • The failure of Lehman Brothers.
  • The failure of the banking system both in the US & Europe
  • The failure of LTCM progeny in 2008 (no, we don’t learn)
  • The Flash Crash
  • The failure of the Eurozone, so far. (It is performance art.? How can we create the biggest failure ever?? We will eclipse the Great Depression! Oui! Ya!)

I’ve written about most of these, and I can tell you the author does a good good job.? Aside from that, he took time to interview primary sources as to their own view of the events that happened, particularly at LTCM and its progeny, and it adds to what we know about the crises that he wrote about.

People need to understand that crises are a normal aspect of markets.? Until you understand that crises are normal, you will always take too much risk.

This is an excellent book; buy it and avoid losses.

Quibbles

In the beginning he got the name of Cramer’s firm wrong.

I would have eliminated the appendices if I were the editor, the audience that can benefit from the math is too narrow to be worth printing it in the book.? Better you should put a PDF out on the web, and put out a slimmer book.

Who would benefit from this book: If you want to understand why crises happen, buy this book.? It is well-written but requires some degree of market knowledge for the reader to benefit.? It is not for beginners.?? If you want to, you can buy it here: The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal (Bloomberg).

Full disclosure: The PR flack asked me if I would like the book and I assented.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

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

 

Book Review: Bailout

Book Review: Bailout

Posted on by David Merkel

What does Washington, DC care about more — people or corporations?? Do you have to ask? DC favors corporations, and all three branches of the government support this.? Both parties favor this.? Why is this so?

The corporations, and those that own them are a more effective means of raising funds to maintain their hold on the offices that the occupy.? Beyond that, there is an attitude that economic policy needs to be carried out through laws that address corporations.

So whether you come from the t-party, Occupy, or someplace else, you might harbor resentment against the status quo: big government in league with big corporations, and wealthy people.

I wish it weren’t so, but the Constitution takes a back seat to “pragmatic” concerns, especially when a “crisis” happens. It should not be that way, but that’s the way it is.

So, what if you drop an idealistic guy, the author, Neil Barofsky, into the job of watchdog for the TARP?? [SIGTARP: Special Inspector General of the Troubled Asset Relief Program] He objects to the uncontrolled nature of how money is being handed out to banks, with few checks as to how the money will be used.

Now, the author could have made a stronger argument.? The FDIC, where does it pump in cash to failed institutions? They protect depositors — that’s the lowest level of the capital structure.? But where did the TARP add capital?? At the highest level of the capital structure; they bought stock and warrants.

Constitutionally, the government has no authority to own corporations.? Further, even if the government had that authority, if it was trying to preserve the soundness of the banking system, the proper way to do it would be to make senior secured loans.? That would guarantee the banking system, but let the common and preferred stockholders, and bondholders go broke before the taxpayer coughs up the first dime.

As it was, the author found himself adrift in DC, cleverly fighting to bring some rules to what was a giveaway to the banks, many of which did not need the bailout, and certainly did not want the limits on executive pay.? He found that DC was a place where the bureaucratic government fights itself.? No one wants to look lazy or foolish, so when someone alleges a crime against a party that another branch of the bureaucracy is supposedly investigating, they fight back.? Applying the principles of Peter Drucker, our government could be smaller, and more effective — there would be fewer turf wars.

Were the Bailouts Wrong?? Did they Fail??

The author makes the case that the bailout has failed. When he says that he is not saying that the bailout as a whole lost money. (I would note that the bailouts have lost money on the home if you include Fannie and Freddie, the auto companies, along with all of the financial institutions including AIG.) He is saying that the problem of too big to fail banks has not only not been solved, is actually gotten worse since the crisis. The big five banks now have around 50% of the deposit base in US. “Too big to fail” is a problem unsolved that still threatens our financial system. This problem is solvable; the US government broke up AT&T (then allowed it to recombine again). Interstate branching could be limited, or ended.

The second problem with bailout is that engenders moral hazard. Because you have done it once, it would be expected next time, which when the financial system once again enters a bull cycle, the bankers will know that the federal government has its back and will not be inclined to limit risk to the same degree that they otherwise might.

The third problem with the bailout is that it was uneven. A logical question for any person harmed by the crisis is, “Where’s my bailout?” Even if bailing out the banks in order to preserve financial systemic integrity was needed, there were other ways to do it, such as being lender of last resort at a penalty rate, or giving vouchers good to reduce debts to every household in America. Particularly that last option would have been viewed as fair by the American people. That could have saved some of the pain felt by those with mortgages, and help the creditworthiness of loans at the banks. Instead, the Obama administration created programs like HAMP, which did little good for most, and actually harmed some.

The fourth problem with bailout and monetary policy that accompanied it was that it was a large transfer of wealth savers to banks. It doesn’t do much for the economy, if the banks have zero cost on their deposits, and all they do is invest in ultrasafe securities, clipping a small, but safe profit.

What was it Like to be There?

More often than not, the Treasury Department did not want to have the Special Inspector General interfering with their plans.? There was a lot of stonewalling, and nondisclosure of pertinent data.? It got fairly contentious at times, and often required members of Congress to intervene on behalf of SIGTARP.? The relationship probably got worse over time, because those working at SIGTARP knew that they would have no influence, no changes would be made, unless they convinced the media that something was wrong, and thus prodded Congress to push for change at Treasury.? The worst that that could happen would be that the President would fire the Special Inspector General, and appoint a new one.

Another part of challenge was realizing the need to build a talented team of lawyers, analysts, PR professionals, etc., to do the work analyzing how TARP funds were being spent, and write reports that would grab attention, and change the terms of the political debate.

That challenge was made more difficult by a lack of adequate facilities.? The initial staff was relegated to some pretty poor accommodations at the Treasury building.? I met with the SIGTARP staff over the AIG bailout in June of 2010 over a paper that I wrote that exposed aspects of the weakness at the domestic insurance subsidiaries.? (For Amazon readers, there is a link to my report at my blog.)? The accommodations that they had were some of the poorest I ran into in DC.

I know from personal experience that the US Treasury was sensitive to any criticism of the TARP.? At the first blogger summit at the Treasury, the officials were prickly over any questioning on the topic.? It did not help that GMAC got another dollop of cash that morning.? (links here, and here)

There were some ugly controversies.? One of the SIGTARP reports noted that if every potential program had been fully tapped the US would have expended $23.7 Trillion.? The report caveated that figure heavily, but it was seized upon by Republicans for partisan advantage.? They took a lot of flak for totaling figures that were in some sense apples and oranges.

On page 190, the question from Democrat Stephen Lynch to Tim Geithner, ?Why didn?t he try harder to cut a better bargain for the American people?? was never answered by Geithner.? Truth, Treasury was making it up as they went, with counsel from money managers and banks, which left the US Treasury vulnerable to those more technically proficient at finance who had at least some degree of conflicts of interest.

One more limitation of SIGTARP, they had no ability to bring cases ? they had to convince the Department of Justice or another prosecutor to take action.? That brought another level of negotiation and bureaucratic infighting.

The end came for the author after he realized that the TARP was winding down, and he was tiring of the Washington scene, and the corrosive effect it was having on his own character.

That leaves me with one closing question: What good did the author and his team do?? In one sense, not a lot.? The current financial regulatory environment post-Dodd-Frank continues business as usual with a more complex bureaucracy, with likely more infighting between competing regulators.? My view is when many are responsible, no one is responsible? that is certainly not the fault of SIGTARP, but we are probably in a worse regulatory environment than prior to the crisis.

That said, SIGTARP gathered data on the TARP, which led to a decent number of small and medium-sized fraud cases, and constrained the open-handed nature of the US Treasury toward financial companies, which could have result in a lot more fraud, and/or higher costs to the taxpayer.

Quibbles

Small mistake on page 173, where the author mentions PNC acquiring City National Bank instead of National City Bank.

The book reads a little disjointedly.? It is mostly chronological, but topical by chapter, so sometimes it feels like two steps forward, one step back as far as the time flow goes.

Who would benefit from this book:??This book will benefit anyone who wants a first person account of what it was like to be the Special Inspector General of the TARP.? It is also for those who want to see how dysfunctional politics can be in DC, and how resistant the Treasury Department was to any limits on their autonomy.? Finally, it shows how difficult it is for anyone to change the system in DC.? The author survived in DC for 2+ years as a change agent; that?s difficult enough, but he is gone now, though SIGTARP soldiers on.?? If you want to, you can buy it here: Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.

Full disclosure:?I asked the author to send me data on his PR flack, who I asked to send the book to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

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

What Caused the Crisis?

What Caused the Crisis?

Posted on by David Merkel

I have wanted to write this article for some time, but decided to sit on it in order to consider the matter more closely. What caused the financial crisis of 2008?

In my writings at RealMoney, I anticipated much of the crisis, though not all of it, and certainly not the severity of it. The prime cause of the financial crisis was a buildup of private debt encouraged by the tax code and the Federal Reserve. But let me go through the causes of the financial crisis one by one:

Causes

One) During the Greenspan era, recessions were not allowed to do their job of reducing bad debts. Recessions ended early, and expansions went on too long. This encouraged firms and individuals to borrow too much, and foolishly went under the moniker of the “Great Moderation.”? Monetary policy was too loose 1986-2005.

Two) China wanted to build its industries through exporting. To do that they had to keep their currency cheap. To keep their currency cheap, they had to buy financial claims from the US, so they bought our bonds. This kept our interest rates low, and allowed people to buy houses with low monthly payments, putting them into a larger house than they could afford, should the economy turn down.

Three) Partly because of monetary policy, a risk culture developed for economic actors took more and more risk because they thought that the Fed would rescue them in a crisis. During that era, I saw all manner of unorthodox ways that took a lot of risk to earn excess returns. Examples: leveraged non-prime commercial paper, selling short term at the money volatility, and taking exotic bets on the long side with subprime residential mortgage-backed securities, to name a few.

Four) This probably generates the most controversy, but the crisis was partially driven by total return or yield hogs. Having been a bond manager, I learned that the easiest error to fall into is to always add yield. In the short run, adding yield boosts your performance. The time before the crisis offered many opportunities for bond managers to add yield in structured securities that were rated AAA. Many economic players, especially European banks did so. These yield hogs were the enablers of the investment banks who structured some really crummy deals. Without the yield hogs, those deals could never have been done.

What’s that you say? The yield hogs were duped? I say no. Excluding AIG, most US-based insurance companies avoided those yield hogs securities. Conservative investing kept the insurance industry away from the areas that were going to get killed. If you are an institutional investor, it is incumbent on you to do the due diligence necessary, and not simply trust what the rating agencies say, nor what the underwriters say.

Five) Lenders lent too much against residential real estate. Borrowers borrowed too much. The two go together. Lending terms became too loose as far as underwriting goes. At the same time, loans were made to subprime borrowers who could only afford the “teaser rate,” and not the ultimate rate they would pay.

If you look at graphs that show the amount of equity underlying homes with mortgages, it should have been obvious by 2004 that we were in a bubble. We had never seen this level of indebtedness on housing Italy since the Great Depression or maybe the Panic of 1871.

Six) The GSEs helped facilitate this growth in debt. They charged a low amount to guarantee residential mortgage debt. They did not think it was low, but like the actuary of legend, they were driving looking through the rear view mirror. Past is prologue, and they decided that the future would be like the past, only more so.

Someone with real modeling capability would have developed a dynamic model that would’ve looked at debt service coverage under a variety of real estate pricing scenarios. When I was mortgage bond manager I did that for CMBS, from 1998 through 2001.

The GSEs were under-reserved if housing prices started to fall. We knew that at the hedge fund that I worked for, and waited for housing prices to fall.

Seven) Because banks originated mortgages in order to securitize them, underwriting quality went down. When you originate a loan to hold it, you are far more careful about credit quality.

Eight) Banking regulators were unwilling to regulate. Further, we allowed depository institutions to choose their regulator. Regulators had enough power to shut down sloppy underwriting if they had wanted to. The new laws that have been put into place are superfluous. If regulators will not use the powers granted to them, how will granting them greater powers make them do their job?

Allowing depository institutions to choose their regulator enabled them to choose weak regulators. What could be dumber policy? Far better that a depository institution is assigned a regulator by the government.

Nine) Though deposit insurance avoids runs on the bank, the repo market allowed for new sort of run on bank. By financing securities short term through the repo market, those financing securities left themselves open to the risk that lending terms change against them. As the crisis progressed, those financing in the repo market were forced to put up more capital against their positions, until they ran out of capital, and defaulted. The same was true for portfolio margining requirements. As financial companies were downgraded by the rating agencies, it created a “cliff” for the financial companies, which made their decline more precipitous.? As more capital was needed for margin requirements, less free capital was available, leading to further ratings downgrades, and eventual insolvency.

Ten) In general, capital regulations for banks were too loose. Banks probably needed to have twice the level of capital going into the crisis than they did. Also, rather than trusting banks? internal models of risk for regulatory purposes, it would have been better to have a series of dumb rules that would limit the ability of banks to deal in areas where risk exposures are unclear.

Eleven) Derivatives are regulated wrong. They should be regulated like insurance. They should be regulated by the states. The doctrine of insurable interest should be enforced. In short, those who need to hedge may initiate trades; speculators may not initiate trades.

If rules like this had been in place, the derivative market would never have gotten so big, and only economically necessary trades would’ve been done.

Twelve) We need to move investment banks back to what they used to be: partnerships. That will reduce the amount of risk they take, as senior partners see their retirements in jeopardy if too much risk is taken. The same is true of commercial banks, where the doctrine of double liability should be reinstituted, and managers of banks could lose their personal wealth if the bank takes significant losses.

Thirteen) If we want to end ?too big to fail,? we need to end interstate branching of banks. Make it uneconomic for banks to be big. And, let the states regulate banks. State regulation is good regulation. It is far harder to co-opt 50 state regulators than a single federal regulator, much less several federal regulators that the banks can choose.

Let me put it this way, echoing Francois Mitterand on Germany: ?Don?t get me wrong, I like Bank of America.? In fact, I like Bank of America so much; I think there should be 50 of them, one for each state.?? That will end ?too big to fail.?

This is a bigger factor in the crisis than the repeal of Glass-Steagall, which was a small factor in the crisis.? But if you make the commercial banks smaller, they will not be able to have large investment banks attached to them.

Fourteen) Securitization, aside from warping loan origination incentives, created opaque assets that were difficult to rate and price.? This hindered the recognition of losses as conditions deteriorated, and led to securities that were either ?money good? or a ?zonk? in the midst of the crisis, with a thin tipping point in-between.

Fifteen) The crisis would have happened regardless of what the government would have done with Lehman.? Note that all of the major institutions that were bailed out, bought out, or failed had large exposures to residential mortgages: Bear, Fannie, Freddie, AIG, Merrill, Washington Mutual, Wachovia and Lehman.

What was not part of the Crisis

One) The rating agencies, much as they profited from it, were forced to rate structured finance, because the regulators needed the ratings to calculate capital charges.? They didn?t do well at it, because the rating agencies always do badly with a new asset class ? they don?t have any data to work with.? Don?t blame the rating agencies, blame the regulators that allow their firms to invest in unseasoned securities.

Two) The net capital rule was not a part of the crisis, as I documented here.

Three) Money market funds were not a part of the crisis, as I documented here.

Attitudes

I have often said that ?free money brings out the worst in people.? (Please send the memo to Ben Bernanke, who creates free money.)? Everyone in the crisis points the finger at others, but not at themselves.

The sad truth is that the financial crisis resulted from people speculating on increases in housing prices, and commercial and investment banks that did the same thing, and ignored common sense, which sadly, is not common.

 

Book Review: Moods and Markets

Book Review: Moods and Markets

Posted on by David Merkel

 

To my readers: this is the second time I have written this review. When I pushed the “publish” button earlier this evening, WordPress ate the document. That’s never happened before, so I did not have a backup. As a result, this review is entirely different than the prior one, and I did it using DragonDictate, so it may sound a little more colloquial than other reviews of mine. Let me know what you think, and if you like my reviews please vote them up at Amazon. As always, whether you agree or not, thanks for being a reader of mine.

This book is about the questions every investor wants answers to:

  • Why do I tend to get into and out of the market at the wrong times?
  • Why are professionals prone to the exact same problems?
  • Why do financial crises happen?
  • Is there a way to approximately measure where we are in the overall market cycle?

The author has a theory that he calls “Horizon Preference.” Think of it this way: when the market is near bottom, market players have very short time horizons for investment. They hide in cash. More than that, they choose very generic investments; they stay close to home and keep things simple. Fear drives them back to what they know always works in the very short run, which means any opportunity for gain is lost.

At such a time, only the most risk tolerant and experienced remain holding risky assets. Valuations are low. The party is over, the young have left, and the old guys are cleaning up the room. If you look in a financial newspaper, or out on the web, the headlines you read are pervasively negative. But at a true bottom, you’ll see that things have stopped getting worse.

Then optimism begins. It’s a fitful at first. It is two steps forward and one step back, before it becomes three steps forward and one step back, before it becomes an unrelentingly good trend. But as this happens, moods, headlines, move from disbelief, to doubt, to wonder, to optimism, and to greed. As this happens, market players expand their horizons. They are willing to take on new risks, with new instruments, and in new places. They are willing to pay remarkably higher prices for risky assets. This happens with individual investors, professional investors, bankers make loans, regulators, accountants who have to make the numbers for management, etc.

At the top everything is wondrous. Nothing can go wrong. At the top, the attitude is “We are going to make a lot of money.??It?s as if money is free, and anyone can make it in the markets now. Everyone can be rich, just invest in the market. All of the neophytes are playing in the market. The experienced professionals who have seen a few market cycles have begun to edge out of the market, if not raise significant cash. Risk control is derided as a way of losing money. Real heavy hitters don’t need risk control.

All of the discretionary cash is applied to the markets. Various forms of leverage are applied to personal investments, real estate, and business investments. Because everyone knows things are going to go well, they figure they may as well play it to the hilt.

But at the top, things stop getting better. Then pessimism begins.? It’s a fitful at first. It is two steps back and one step forward, before it becomes three steps back and one step forward, before it becomes an unrelentingly bad trend.? Sadly, during the phase of pessimism, things move down about twice as fast as they went up. It’s frightening, and it should be. Bear markets tend to persist until the bad ideas and investments of the up cycle are liquidated, unless the government steps in to arrest the fall.

The planning horizons of businessmen and investors shrink, as do valuations, until we hit the bottom, and the cycle starts again.

What I have described to you is the basic framework of the book. The author then applies that framework to the housing bubble, the possible higher education bubble, changes to accounting frameworks as rising preferences change, and where we are today in the markets. He gives a tour of the various phenomena inside corporations that take place at different points in the cycle. Optimism breeds complexity, lack of risk management, concept stocks, big projects, and a lot of credit. Pessimism breeds simplicity, renewed risk management, and bankruptcies.

This book will give you a feel for what part of the market cycle we’re in, and how you can profit from it. It is not math intensive; the book has no equations. There are a lot of graphs, but they are simple to understand.

Quibbles

In one sense, this book is about the credit cycle, and how it affects all risky assets. But it is couched in the language of how moods change of market participants, which then drives the market. My view of the matter is slightly different. I see market players making estimates of their future well-being, and as that estimate changes, so do their moods change, and the prices of risky assets. I don’t think this is a big difference from what the author is saying, so I heartily endorse this book.

Who would benefit from this book:?? Inexperienced investors would definitely benefit from this book. Experienced investors who are having a hard time with the unpredictability of the market of late would also benefit.? If you want to, you can buy it here: Moods and Markets: A New Way to Invest in Good Times and in Bad (Minyanville Media).

Full disclosure:?I got this book in a weird way. I don’t know the author, but we have a mutual friend, and he suggested to the publisher that he send me a copy of the book. That’s how I got it.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

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

On Complexity in Financials, and Insurers Specifically

On Complexity in Financials, and Insurers Specifically

Posted on by David Merkel

I’m not a fan of complexity in financial companies.? Complexity is a sign of trying to be” too clever by half,” as the British might say.? If an economic idea is good it can be executed simply.? Complex financial business stems from a desire to do accounting, regulatory, and other arbitrage.

Like my piece on AIG in 2009, I am doing low level research on an insurer using the statutory data. ?Let me give an example of what I mean.

There is no economic reason to have internal reinsurance treaties aside from sharing losses on short duration coverages.? To have large internal reinsurance credits is a sign that you are passing your reserves to the subsidiaries in domiciles with weak rules.

Also, to have a complex organization chart means that you are taking advantage of weak reserving requirements, capital requirements, except to the extent that national requirements call for a separate subsidiary.

Things are also tough when you interlace the capital of your subsidiaries, whether through equity, preferred stock, trust preferreds, or debt.? And with insurance companies, surplus notes.

That’s one reason why investment banks trade at low valuations, and might be better to be broken up.? Complexity.? “If you are not buying a Sunkist orange, you don’t know what you are eating.”? Okay, that dates me, but if the financials of a company are not transparent, in this environment, they will trade at a discount.? That is what I have said to reporters who have called me.? Complexity deserves a discount.? Level 3 assets deserve a discount.

Also, under-reserving deserves a discount, when you see significant claims arise out of prior year business.

Good financial businesses are simple and have few complexities to make them look like they are trying to scam the accounting rules.? Please remember my folly with Scottish Re, where I was a bull, and when it? got into trouble, I did a deep analysis, and turned into a bear.? When the company announced superficial changes and the price almost doubled, we sold out, though we held ~5% of the stock in a very busy day.? Where did the stock go out at? Zero.? Do I feel bad for losing money? Yes.? Do I feel good for cutting losses? Yes, and even more so.? Risk control is important.

Scottish Re was Bermuda domiciled, and so we didn’t get as much data as with a US domiciled company, but I had enough in the SEC-required documents to see the morass that Scottish Re was in, and the lack of ability for cash to flow to the publicly-traded holding company.

Financials are tough to invest in and the simpler that they are, the better.? To the degree that you can see that margins are assured, they are safe, but that is tough to assure.

Financials require extra caution.? That is most of what I am trying to say.

On Credit Scores

On Credit Scores

Posted on by David Merkel

To give credit where credit is due, this post was triggered by an article at SmartMoney, 10 Things Credit Scores Won’t Say.

In 1996, I got a call from a recruiter suggesting there was a real opportunity with the Philadelphia-based corporation Advanta.? They were looking for an actuary with investment knowledge that could help them in their joint venture with The Progressive to use credit scores in underwriting auto insurance.? Since I was local, and known to be a “nontraditional actuary” with some degree of talent, and my situation at Provident Mutual was deteriorating because of a management change, I accepted the interview.

Being a life actuary, I didn’t know much about P&C insurance, but my career had been one of growth.? I may not know everything there is to know about a given topic, but I learn rapidly, and bring allied knowledge to the table that others may not possess.? The interview was interesting.? If you are a life actuary, you don’t expect interviews like Advanta. Credit cards were reaching their apex, and some clever people were trying to figure out other ways to apply the data from individuals using credit cards.? I ended up being Advanta’s “second choice.”? Bad for them, good for me.? Two years later, I would join the St. Paul’s Investment department in Baltimore.

The key idea was that credit scores were highly predictive regarding personal insurance losses, particularly when combined with traditional underwriting metrics.? The idea was a surprise to me when I first ran into it, but it quickly made sense to me.? Let me explain.

Honoring agreements that you have entered into is an important indicator of your personality.? Those who do not repay are on average less moral than those that repay.? Those that are net creditors on average made efforts that net debtors did not.

Credit scores are important.? In a specific way, they measure your willingness to keep your word.? Anytime you enter into a debt contract, you make a promise to repay.? If you fulfill your promise to repay, you impress others as one of good moral character.? If you don’t repay, it is vice-versa, you appear to be of low moral character.? (Note: I am excluding those that got hoodwinked by lenders that defrauded borrowers in a variety of ways.? That said, if you can be hoodwinked, that says something else about you, and that may have an impact on your creditworthiness as well.)

Now, before I continue, these concepts work on average, and not always in particular.? I have helped some at the edge of society with gifts and loans.? In some cases there is a cascade of bad events that the most intelligent would have a hard time facing.? Being wise helps, but there are some situations that would tax the soul of anyone, and be difficult to claim that they were blameworthy; it’s just the way things happened.

That said, that concept of a “credit score” traveled rapidly to insurance, because moral character is highly correlated with how a person drives.? People who are sloppy with their debts tend to be sloppy with their driving.? As with everything in this post, this is only a general tendency.? It applies on average, it does not always apply.

Some US states were offended at P&C companies using credit scores, and so the companies moved to use “insurance scores,” which were little different from what they aimed to replace.? The insurance companies took the disaggregated data behind the credit scores, did a little more research, and discovered which variables were most predictive of insurance claims, in concert with their own data.

The same is true for many other uses of credit data.? Different parties want different aspects of the underlying data.? Whether it is employers, lessors, lenders, insurers, etc., in an impersonal world, where there are fewer shared ethical values than in the past, economic actors rely on semi-public data to get comfortable about who they are dealing with.

Two final notes:

1) It’s easier to go down than up with credit scores.? But that is similar to many things in life.? One big mistake can undo a hundred lesser things done well.

2) Those who pay off debts rapidly are rewarded with discounts, as many companies want to avoid bad debts.? You might remember my piece, Build the Buffer.? Be wise, and have enough cash around to get discounts over those that pay things monthly/quarterly.

I am happily debt-free aside from paying off the debts regularly on my few credit cards.? The simple truth is that living within your own means, and having enough of a buffer to deal with minor crises is the best place to be.

 

Redacted Version of the August 2012 FOMC Statement

Redacted Version of the August 2012 FOMC Statement

Posted on by David Merkel
June 2012 August 2012 Comments
Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Shades the GDP view down.
However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Growth in employment has been slow in recent months, and the unemployment rate remains elevated. No real change.
Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Business fixed investment has continued to advance. Household spending has been rising at a somewhat slower pace than earlier in the year. Despite some further signs of improvement, the housing sector remains depressed. Shades down household spending.
Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable. No change in ?their view of inflation. TIPS are showing flat inflation expectations since the last meeting. (5y forward 5y inflation implied from TIPS.)
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. Why bother saying this?
The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. No change.
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 anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate. No change.
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 expects to maintain a highly accommodative stance for monetary policy. 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 expects to maintain a highly accommodative stance for monetary policy. No change.
In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. No change.
The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, No real change, drops the expanded explanation ? this is small potatoes.
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 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. No real change.
The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. Raises the possibility that they could act before the next meeting in September.
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 continuation of the maturity extension program. Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant an exceptionally low level of the federal funds rate. Confirms that Lacker doesn?t like promising Fed Funds will remain low until 2014.

?

Comments

  • This was a nothing-burger.? Shades down GDP and household spending.? No change in policy, except that the FOMC might act ahead of the next meeting in September.
  • In my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself.
  • Also, the reinvestment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
  • Do they want the yield on 30 year TIPS to go negative?? Only 0.30% of real yield there, and the 20-year real yield in negative.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.? Inflation has moderated, but whether it will stay that way is another question.

Questions for Dr. Bernanke:

  • Is it possible that you don?t really know what would have worked to solve the Great Depression, and you are just committing an entirely new error that will result in a larger problem for us later?
  • Why do think extending the period of accommodation by a little more than two years will have any significant effect on the economy, aside from stock and bond prices?
  • Discouraged workers are a large factor in the falling unemployment rate. Why do you think the economy is doing well?
  • Couldn?t increased unemployment be structural, after all, there is a lot more competition from labor in emerging markets?
  • Why do you think that holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself?
  • Why will reinvestment in Agency MBS help the economy significantly?? Doesn?t that only help solvent borrowers on the low end of housing, who don?t really need the help?
  • Isn?t stagflation a possibility here?? I mean, no one expected it in the ?70s either.
  • If the Fed ever does shrink its balance sheet, what effect will it have on the banks?
Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

 

LIBOR

 

  • Six ways big banks screwed Grandma http://t.co/ltisCJ2P Poorly argued. It’s as if LIBOR could be manipulated without reaction. $$ Jul 28, 2012
  • Fidelity Joins BlackRock in Weighing Libor Action Against Banks http://t.co/9DKR48NY This isn’t as easy as it seems; much 2 prove $$ Jul 26, 2012

 

Eurozone

 

  • Draghi Said to Hold Talks With Weidmann on Bond Purchases http://t.co/SunXLadO If the Buba plays ball, the sky is the limit. $$ #inflation Jul 28, 2012
  • Draghi Says ECB Will Do What?s Needed to Preserve Euro http://t.co/xc4iQ9ji Uncertain that the ECB will buy lots of Italian & Spanish debt Jul 26, 2012
  • Europe Is Cheap?So Why Can?t I Pull the Trigger? http://t.co/yHGHjmoN Wait until things stop getting worse $$ Jul 25, 2012
  • Spanish, Italian Notes Rise on Bets for ESM Enhancement http://t.co/3CBLXOmK ?The idea of making the ESM a bank is a game changer,? $$ #no Jul 25, 2012
  • Spain to struggle to fund 2012 debt crunch http://t.co/iOefCfxz How long until the next last minute rescue? 10-yr yields over 7.5% $$ Jul 25, 2012
  • Europe Stymies Private Equity as Corporate Buyouts Stall http://t.co/QXNGEnQj If the banks won’t lend, private equity deals don’t fly $$ Jul 24, 2012
  • Hollande Transaction Tax Drives Investor Quest for Loopholes http://t.co/hDvZnQfL New trans tax drives investors2use contracts4difference Jul 24, 2012
  • Euro-Zone Government Debts Hit Record http://t.co/o9lXW7f1 Govt debt / GDP 4 whole E-Zone goes from 87.3% @ 12/11 -> 88.2% @ 3/12 $$ Jul 24, 2012
  • Greece Back at Center of Euro Crisis as Spain Yields Soar http://t.co/GLCWfi9e IMF/Core begins to doubt ability to hold it together $$ Jul 23, 2012
  • YIKES: Spanish Yields Are Surging To Record Highs http://t.co/qIQhvlUE Time 4 the Germans to buy summer homes in Spain $$ #evercloserunion Jul 23, 2012

 

US Politics

 

  • There. MMF reform that works, fit into a single tweet. $$ 🙂 Jul 27, 2012
  • Let MMFs keep a stable NAV, pass through losses thru unit reduction if real NAV<.995, reset real NAV @ 1.0025. Runs would strengthen NAV $$ Jul 27, 2012
  • Why Investors Are Dumping Money Market Funds For Short-Duration ETFs http://t.co/TNEpH9F9 My point: treat MMFs like modified ETFs $$ Jul 27, 2012
  • Maryland Governor Defends ‘Millionaires’ Tax’, Denies Job Losses http://t.co/yqfVRYCB Can bend rules, since MD is next 2 DC, which slurps $$ Jul 27, 2012
  • Drilling Strains Rural Roads http://t.co/2tUr6bJY Simple solution: tell energy companies you will not repair roads. They will do it $$ Jul 27, 2012
  • Treasury Eyes Funds Hidden Overseas http://t.co/g38s8z1c IRS goes after foreign trusts, seems 2ba piddling amount of money 2 go after $$ Jul 27, 2012
  • Wrong: How2Break NRA?s Grip on Politics: Michael R. Bloomberg http://t.co/I9vm6KKg The Ethanol lobby is a lot weaker than the gun lobby $$ Jul 27, 2012
  • Estate Tax: Ezra Klein is Wrong! http://t.co/1o5sumfN Never trust anyone whose profession starts w/an “A.” 😉 Accts, Attys, Advisors &c $$ Jul 26, 2012
  • Making the Rich Poorer Doesn?t Enrich the Middle Class http://t.co/fvsUgDfk The govt exists to grow itself until we die. Sad but true $$ Jul 26, 2012
  • The gender wage gap is a myth http://t.co/cNpTi1uZ Diana Furchtgott-Roth makes the same case that many economists have since the 70s $$ Jul 26, 2012
  • New Geithner disclosures further cloud his record http://t.co/heblaDAH Geithner was point man 4the Fed on derivatives. Dropped ball $$ Jul 26, 2012
  • Justice Scalia Disputes Accuracy Of ‘Leak’ http://t.co/OMVCtlAg Wide-ranging interview of Scalia, whose juridical impact may outlive him $$ Jul 25, 2012
  • Former Citigroup CEO Weill Says Banks Should Be Broken Up http://t.co/zftFGEQ6 Good, he changed his view, my view changed on that also $$ Jul 25, 2012
  • 10 Everyday Items That Cost Way More Because of US Taxes http://t.co/KjXUu8Im Interesting list, mostly comprised of protectionist taxes $$ Jul 25, 2012
  • The hidden Mitt Romney http://t.co/rPVcQR7C Romney & Obama have one thing in common: the more you know about them, the less you like them $$ Jul 24, 2012
  • Romney to Attack Obama on Leaks, Defense Cuts http://t.co/hiCrTCtX ?the greatest force for good the world has ever known? US naivete $$ Jul 24, 2012
  • Scalia Offers Up 57 Varieties for Interpreting Legal Texts http://t.co/sSdqUE1m His manifesto on originalism/textualism $$ Jul 23, 2012

 

China

 

  • Lies, Damned Lies, and China’s Economic Statistics http://t.co/Fqpn8YMS I have some skepticism to US statistics, how much more China? $$ Jul 27, 2012
  • Xi Jinping Millionaire Relations Reveal Fortunes of Elite http://t.co/iFz7e6dg Communist Party members have access2loans & IPO allocations Jul 27, 2012
  • Capital Outflows Chime With China?s Bears http://t.co/GIaMbM8g “any currency exchange >$2,000 needs to have a prior reservation made.? $$ Jul 25, 2012

 

Companies

 

  • Alierta Abandons Dividend Penchant to Save Telefonica http://t.co/AHhbFucX Now more interested in $TEF, good cashflow, div shld resume $$ Jul 26, 2012
  • Unilever Warns of Worsening Economy http://t.co/wscXplAV Global economy is weak, even for staple goods. $$ Jul 26, 2012
  • Zynga?s ?Draw Something? Isn?t a Pretty Picture http://t.co/nSrHWTG3 Always be wary of fads that have no balance sheet $$ Jul 26, 2012
  • Sanofi Dengue Vaccine Is Promising http://t.co/7EFL5ioC Good news. Perhaps Dengue Fever may be conquered for the good of mankind $$ Jul 26, 2012
  • Industrias Bachoco Announces Second Quarter 2012 Results http://t.co/n0amblWp Tough read, Q looks good, US acq prob paying off FD:+ $IBA $$ Jul 25, 2012
  • Assurant Reports Second Quarter 2012 Financial Results http://t.co/jdaB09Kh FIring on all cylinders, & shrinking share count FD: + $AIZ $$ Jul 25, 2012
  • Warren Buffett: Great Investor, Lousy Insurance Salesman? http://t.co/4KfZNNP3 Poor article; Buffett is very intelligent insurance exec $$ Jul 25, 2012
  • link 4 last tweet: http://t.co/sj75tC5q You could short the 2.6% bonds and go long default protection for an almost risk-free profit. $$ Jul 25, 2012
  • Someone Is Getting Really Nervous About HP?s Debt http://t.co/Zqj1xEhp If you look at bonds vs CDS, bonds aren’t panicking. FD: + $HPQ $$ Jul 25, 2012
  • Contra: Campbell Chases Millennials With Lentils Madras Curry http://t.co/MBdpXGsJ @ $3/pouch I don’t c a mkt 4 gourmet instant soup $$ Jul 24, 2012
  • Google buys Sparrow for ‘new Gmail project’ http://t.co/q0i3TfZv Sell your company 2 $GOOG 4 $$ . Get new tasks while old technology dies Jul 24, 2012
  • Iraq blacklists Chevron for Kurdish oil deals http://t.co/23opiYYs Not as big as it seems $CVX has no biz in Arab Iraq $$ FD: +CVX Jul 24, 2012

 

Rest of the World

 

  • North Korean Mystery Woman Is Leader Kim Jong Un?s Wife http://t.co/CK8seZPc I find it optimistic that he wants to live a normal life $$ Jul 26, 2012
  • Global economy?s cure is worse than the disease http://t.co/isJuL3rn Indirectly suggests the best policy would be benign neglect $$ Jul 25, 2012
  • Cyber Attacks on Activists Traced to FinFisher Spyware of Gamma http://t.co/ZITxw1bu Practice safe computing; scan for rogue processes $$ Jul 25, 2012

 

Public Radio

 

  • Public Radio International acquired by Boston public broadcaster WGBH http://t.co/Mck9Gx0n Interesting when a non-profit corp gets bought $$ Jul 26, 2012
  • If it is the same, could NPR or the Corporation 4 Public Broadcasting sell out also? Buffett could give them a good home. Or the Kochs 😉 $$ Jul 26, 2012
  • Grew up in the insurance world, so I’ve seen non-profit (mutuals) buy another mutual or stock company, but is it the same w/WBGH buying PRI? Jul 26, 2012
  • Renaming 2 Private Radio International 😉 RT @timjeby: Big Public Radio News: WGBH in Boston to acquire Public Radio International #pubmedia Jul 26, 2012

 

Municipal Bonds

 

  • For further reading consider: Some perspective on the recent California bankruptcies by @munilass aka Bond Girl $$ http://t.co/2jwUeNOX Jul 26, 2012
  • Muni Blues Worry Investors http://t.co/r4VvKP4g Municipalities aiming4 strategic default face challenges in courts; favor bondholders $$ Jul 26, 2012
  • Some perspective on the recent California bankruptcies http://t.co/RFAgUt5u @munilass on how unusual wud b4 muni bonds 2not pay principal $$ Jul 24, 2012

 

Federal Reserve

 

  • Bernanke the unready http://t.co/6ppUDOMl Fed is impotent, but can’t admit it. Bernanke is wrong on monetary policy near 0%. $$ Jul 26, 2012
  • Fed strives to replenish depleted toolkit http://t.co/Yhy4pMy2 Doing the same thing, over & over again, but expecting different results $$ Jul 25, 2012
  • Fed Sees Action if Growth Doesn’t Pick Up Soon http://t.co/2TddWIZz Doing the same thing over&over again&expecting different results $$ Jul 24, 2012
  • Coming: The End of Fiat Money http://t.co/jHhnlPs0 Nice try. Lot of good stuff 2 read here, but no clincher 4 the return of gold $$ Jul 23, 2012

 

US Housing

 

  • By October of 2005 the prices of residential real estate peaked, which led to most of the leverage unwind that was about to happen. $$ Jul 25, 2012
  • Office of Financial Research Annual Report http://t.co/w9Xm4i9J Pp 8-9, first difficulty: by 2005 it was too late to stop the crisis $$ Jul 25, 2012
  • Is This What a Housing Bottom Looks Like? http://t.co/pSwtryX4 Lazy recovery, as people sell when they can avoid losses $$ Jul 27, 2012
  • Wrong: Reverse mortgages as popular as IRAs in 10 years http://t.co/pp7qoG63 Must have equity & creditworthy rev mtge lenders. Complex 2 $$ Jul 25, 2012
  • Home Values Post First Year-Over-Year Increase Since 2007 http://t.co/VHFnG83k Prices rising on the low end; higher priced problematic $$ Jul 24, 2012
  • Subprime Rally Building as Dealers Sop Up Supply http://t.co/s7BVK0v2 Combination of yield lust & rising housing prices drive up bonds $$ Jul 24, 2012

 

Miscellaneous

 

  • Pig Tissue Seen Fixing Injury That Sidelined Lin http://t.co/ys0kWDNb New tech uses pig tissue undoes painful damage from torn meniscus $$ Jul 27, 2012
  • Can a Food for Cows Make Healthier Snickerdoodles? http://t.co/o8vF4h5e Adding some DDG 2baked goods adds protein & fiber, good yes? $$ Jul 26, 2012
  • Closing In on a Cure for Vision Loss http://t.co/QCNZohN7 Testing “gene therapy, stem-cell therapy & a modified version of vitamin A” $$ Jul 24, 2012
  • Will the world’s greatest startup machine ever stall? http://t.co/R1wFzGsM Long interview w/President of Stanford re Silicon Valley ties $$ Jul 24, 2012
  • Breadbaskets of Last Resort See Once-in-a-Lifetime Prices http://t.co/A0AePuJx Focuses on upper Midwest; great time to have good corn $$ Jul 24, 2012
  • MIT Researchers’ `Cool’ Idea http://t.co/SMPitSjO Way cool, allowing 4 cheaper, better milk in rural areas where power is spotty. $$ Jul 24, 2012
  • Contra: The One Capitalism That Dare Not Speak Its Name http://t.co/jaZfeluf State Capitalism more prone 2 bubbles than laissez-faire $$ Jul 24, 2012
  • America’s Energy Situation In 15 Maps http://t.co/lw0vOwnc Refining, production, prices, intl concerns, natgas, crude, coal, solar, wind $$ Jul 23, 2012
  • THE DEFINING DECADE: Why You Can’t Afford To Waste Your Twenties http://t.co/8gl9RqGG Early success compounds; so does early failure $$ Jul 23, 2012
  • Lobbying Works! Big Spenders Reap Big Stock Gains Says Trennert http://t.co/2vsJyEXB But what happens if the US Government has to shrink $$ Jul 23, 2012
  • Who Really Invented the Internet? http://t.co/LkvW1xwM Many did, & they were standing on the shoulders of giants. $$ #ittakesavillage 😉 Jul 23, 2012

 

Market Dynamics

 

  • Fidelity Targets Securities Lending http://t.co/stEvATII The buyside is beginning to fight back against the trust & investment banks $$ Jul 27, 2012
  • Study: High-Speed Trading Hurts Long-term Investors http://t.co/ZhMhkiCG This probably affects those w/higher turnover more $$ Jul 27, 2012
  • Currencies: from Nullifying to Negative http://t.co/lxqwZZKw What is the game? To make money, or avoid losing a lot? Neg int rates a pain $$ Jul 25, 2012
  • Bond Trading Loses Some Swagger Amid Upheaval http://t.co/l93Vp7xL Except 4 the most liquid corporates, need broker2find liquidity/bonds $$ Jul 25, 2012

 

Comments

 

  • Our Olympic Gold in Wit $$ RT @TheLondonWhale: RT take a bow @ReformedBroker: Switzerland tough to beat in gold vaulting Jul 28, 2012
  • “Cultural change cannot be achieved by outsiders, in 1 generation, no matter how much $$ gets spent.” ? David_Merkel http://t.co/5eBdsBlO Jul 27, 2012
  • @brettsimonson Think the direction I would have headed was public policy, which involves a finer view of asset/liab mgmt, run avoidance etc Jul 27, 2012
  • @brettsimonson Hi Brett, no part 2 from what I can see. Very disorganized that week — no power for a week Jul 27, 2012
  • Ditto, well-deserved $$ RT @ReformedBroker: we love you, simone RT @SimoneFoxman: Yay, 5K! Thanks for following, everyone!! Jul 27, 2012
  • @munilass Also, if a kid was disconsolate for a while, before 2AM it was mine. After, it was hers. Jul 27, 2012
  • @munilass When the family was young, my wife & I had a deal. I took midnight feedings, she took the early morning feedings. Jul 27, 2012
  • @munilass My house works like this: I work late b/c it is quiet. My wife who homeschools the kids gets up early b/c it is quiet. Jul 27, 2012
  • @munilass I know many classes of bonds and other fixed income instruments. But I only know enough about munis to be dangerous. Thus I ask. Jul 27, 2012
  • @munilass Decided to review the book “Investing in the High Yield Municipal Market” by Triet Nguyen. If I have Qs, can I ask you? Jul 27, 2012
  • @e_d_sanders Both parties stand for different shades of nothing. They give rhetoric to their bases, do little, and cling to power. $$ Jul 27, 2012
  • RT @Convertbond: Sell the US equity rally hard when Spain’s 2s \ 10s curve starts to re-flatten #Government #Bonds 2 year & 10 year … Jul 26, 2012
  • “”Of course this food is organic. We used Organic Chemistry to create it.”” ? David_Merkel http://t.co/CvYhIQ7p $$ $DF Jul 26, 2012
  • Happy 2b your 1st subscriber $$ RT @SNLFinancial: Follow SNL Financial reporters so you?re always in the know: http://t.co/Rbwi9Jn3 Jul 26, 2012
  • “Why we need to dismantle the Democrat & Republican parties: the national budget slaves for local interests” Merkel http://t.co/gllFMcec $$ Jul 26, 2012
  • A weather forecaster for either WBAL or WTOP said that Maryland gets a derecho once every 5-10 years. Two in one year? Hope not. $$ Jul 26, 2012
  • Just what we need, another derecho $$ RT @BloombergNews: Severe storms, possible derecho forecast for Northeast US http://t.co/XPGdJQoC Jul 26, 2012
  • RE: @bloombergview Not worthy to be read $$ http://t.co/TsRQZdTI Jul 26, 2012
  • RE: Loads of 12% coming out mean that only 88% of the money is going to work for the investor.? Doesn’t matter where ? http://t.co/hJgSPGrT Jul 26, 2012
  • Commented on The Economist | Monetary policy: Bernanke the unready http://t.co/rsqLZm7A Jul 26, 2012
  • “Marriage civilizes, & gives us some hope that he will normalize N. Korea. He lived outside NK 4?” ? David_Merkel http://t.co/uxDl62iM $$ Jul 26, 2012
  • RT @ReformedBroker: RT @jamielissette: *MOODY’S CHANGES OUTLOOK ON 17 GERMAN BANKING GROUPS TO NEGATIVE Jul 25, 2012
  • “For what it is worth, that’s the way Canada does it. Income taxed @ FMV @ death. No estate tax.” ? David_Merkel http://t.co/lQx4RjYN $$ Jul 25, 2012
  • RE: @CSMonitor The book “Hungry Ghosts” documents The Great Leap Forward very well. Worth a read. $$ http://t.co/LQ5dChjQ Jul 25, 2012
  • “It would be cleaner to tax unrealized capital gains at death, and eliminate the estate tax.” ? David_Merkel http://t.co/GqPiMZ5r $$ Jul 25, 2012
  • “Rating agencies are supposed to be behind the curve. They rate over the full credit cycle?” ? David_Merkel http://t.co/z80RTQCv $$ Jul 25, 2012
  • @e_d_sanders He could have included 1 or 2 more words & it would have been crystal clear. I think the ambiguity was deliberate. I cud bwrong Jul 25, 2012
  • “Don’t open suspicious attachments. Use procexp to review processes. Disable processes you can’t?” ? David_Merkel http://t.co/PUaCZKOf $$ Jul 25, 2012
  • “When computers screen applicants, a skills shortage emerges. Computers seek current perfection, not?” David_Merkel http://t.co/HVRm6HOP $$ Jul 25, 2012
  • “A case where so many things went wrong, it is amazing that they almost won. Really, they were?” ? David_Merkel http://t.co/hJcw4tCX $$ Jul 25, 2012
  • @e_d_sanders I’m voting third party; I don’t like the GOP either; it’s obvious that no one man builds infrastructure; not a point 2 make Jul 25, 2012
  • @e_d_sanders It’s not a misquote. Read the two paragraphs in context; he is downplaying individual initiative. Jul 25, 2012
  • @havocp I copied the quote from the WH website. Given what O said in the above that, both interpretations are legitimate. Could b clearer. Jul 25, 2012
  • @havocp and I appreciate your comment. I like those that comment, and even those that disagree with me highly. Jul 25, 2012
  • @havocp Doesn’t matter to me. Concentrating effort is significant and deserves a reward, not condescension. $$ Jul 25, 2012
  • RT @pdacosta: Crisis contained, to inhabited areas. RT @SJosephBurns: “The Subprime Crisis will not affect the economy overall.” – Ben B … Jul 25, 2012
  • RT @ritholtz: WSJ reporting ?Federal Reserve moving closer to action to spur growth” Bond buying, rate guidance, lower reserve rate amon … Jul 24, 2012
  • RE: @bloombergview You’re still going to need LIBOR, however calculated, for existing contracts. Replacement will be ? http://t.co/smOdgXbd Jul 24, 2012
  • “Ethics comes before competence. Doesn’t matter how good you are, if you are unethical. The?” ? David_Merkel http://t.co/6bgcT6nT $$ Jul 23, 2012
  • RT @AmityShlaes: “The post office ought to be self supporting. At present business men are deluged with useless mail.” — Calvin Coolidg … Jul 22, 2012
  • @niubi No, b/c many babies do not sleep through the night @ 3 months Jul 21, 2012
  • If I could ship the rain in Maryland 2 the Midwest, I would. But Maryland farmers r having a good year. Corn looks normal & prices r high $$ Jul 21, 2012
Book Review: The Malign Hand of the Markets

Book Review: The Malign Hand of the Markets

Posted on by David Merkel

When I first saw the book, and read the introduction, my heart sank and I said to myself, “I doubt I will like this one.”

I was wrong, very wrong, and liked the book more and more as I read it.? The author is a professor of Psychology, Biology and Neurobiology, and is writing about economics.? Those who have read me for some time know that I favor ecological analogies to explain economics, rather than the pseudo-physics that most neoclassical economists employ.? I am beginning to think that non-economists have a better chance of understanding economics than most economists do, because they are free from the indoctrination that comes in the early economics classes where they teach you to assume away all reality, and assume that all men are maximizers of utility or profits, and that the world is radically simple, when it is really very messy.

To the Book

Sorry to be verbose, but I found the author’s approach to be refreshing.? Men are economically rational, but what do we mean by rational?? To some, being rational means imitating what seems good.? “My neighbor is making lots of money speculating in real estate, I will do this also.”? Or rationality can mean something higher, “Real Estate prices are getting far beyond the prices that rentals could justify, I think I will sell my house and rent.”? The difference is the degree of analysis, and the willingness to think about the system as a whole.

The book also highlights why free markets and democracy do not necessarily go together.? There is pressure from the moneyed to affect the democratic process, and there is pressure from the less-well-off to vote money to themselves from the public purse.

The book takes on the concept of economic efficiency, and shows that it leads to instability, as I have argued.? Stable economic systems have slack.? Stable systems do not optimize to the hilt.

He describes the process where more and more loans were provided to the housing market, leading to a bubble.? The bubble involved some sideshows, like CDOs, where Collateralized Debt Obligation buyers provided cheap capital that purchased risky pieces of residential mortgage loans.

Economists like to talk about equilibrium, because that allows them to publish their complex math papers, but economies are big on variation, things are far more volatile than theory can admit.

He takes a dim view of central banking but does not see how we can get rid of it.? The politics are too strong, and the aversion to gold too great.? He lays most of the blame for the bubble and bust at the feet of the Fed, which is right.

He finds Keynes to be a bright guy but with many unrealistic assumptions, and too much aggregation.? The simplification of the economy is too great, and the models don’t work.

Unlike many other books, he offers solutions, and I think they are reasonable.? He inveighs against insurance where the risk is voluntarily takes on.? We should not backstop voluntary risks, nor should we allow people to speculate on the losses of others, as I have argued elsewhere.

He also argues that the Dodd-Frank bill will largely be ineffective because it does not set rules. You can have rules or scrutiny.? We have used scrutiny in the past for financial regulation and it has not worked, because the regulators were wimps.? Over the last 30 years, they have mostly been wimps.

Rules have value, and insurance regulation has been more rules-based, which helps to account for its success.? Principles-based approaches allow a minority to bend the principles, leading to financial failure.

Particularly the Fed has been lax in financial oversight, as they are the overall regulator, and they have not been tough on the regulators that they oversee.

Naive faith in economic efficiency leads many to neglect the need to regulate banks tightly.? It is far better to set rules that provide negative feedback to banks that are taking too much risk, and negative feedback to those who borrow from or lend to other banks, which increases systemic risk.

At the end, he offers four rules that I will summarize:

  1. Limit the monetary policy discretion of the Fed. (Yes!)
  2. No bailouts.
  3. Insurance products that have the possibility of positive feedback should be banned.
  4. Investment Banks should be partnerships, and commercial banks should be limited from investment banking business.

I am in hearty agreement with all of this.? He adds one further proposal that suggests taxing investment banks on the riskiness of their books; if that can be properly achieved that is a worthy idea.

Quibbles

None.? Great book.

Who would benefit from this book:?? Anyone who wants to understand economics and the crisis better would benefit from this book.? If you want to, you can buy it here: The Malign Hand of the Markets: The Insidious Forces on Wall Street that are Destroying Financial Markets ? and What We Can Do About it.

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

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

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

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Bond Markets

 

  • TIPS 20-Year 3.375 04/15/2032 166-21? / 0.00 -0-02+ / 0.002 15:09; They are trading flat to CPI 4 next 20 years http://t.co/2sJ5NEDK $$s Jul 13, 2012
  • Buffett Says Muni Bankruptcies Set to Climb as Stigma Lifts http://t.co/WBYjoUW1 Buffett’s claim is modest, but current trend is down $$ Jul 13, 2012
  • Indeed excellent RT @munilass: Excellent discussion of CA bankruptcies from @randalljensen http://t.co/iSEudKw5 Jul 13, 2012
  • Big Dealers Sweat as Swaps Face Reckoning http://t.co/iAmp2p4X Interest rate swaps should be vanilla enough to clear on exchanges $$ Jul 10, 2012

 

Politics

 

  • Financial Advice for Presidential Candidates http://t.co/MUqMOWNv Tips from Brett Arends for politicians on how to handle money. $$ Jul 14, 2012
  • Too clever $$ RT @hblodget Here’s One Of The Clever Financial Tricks That Mitt Romney Used To Become Dynastically Rich http://t.co/frz1hkxP Jul 13, 2012
  • Condi for VP? Mitt’s Done It Before http://t.co/ns1Kj6s7 Article makes a good case that MR could pick someone unexpected, as before $$ Jul 13, 2012
  • Chavez Hits Campaign Trail in Bid to Prove He?s Cancer-Free http://t.co/dQCPHEU2 Dream, Hugo; ur dying as your goals on Earth r dying $$ Jul 13, 2012
  • In Kansas, Stronger Mix of Ethanol http://t.co/Iv7LrQpA Economically and environmentally, corn-based ethanol is one big boondoggle $$ Jul 12, 2012
  • Peugeot to Close Plant http://t.co/uUvm4vNK If u make it difficult 4 employers 2 terminate workers, they will hesitate 2 create jobs $$ Jul 12, 2012
  • Social Security Hole Overwhelms Taxes, Cuts http://t.co/DLbk9MgD Analysis right, prescription wrong. Dumb comments by innumerate readers Jul 12, 2012
  • Company to acquire part of Marcus Hook refinery http://t.co/VTXySbbv Spending $75,000/job saved is dumb, even if you lock Braskem in. $$ Jul 12, 2012
  • A New, Improved Draft? No Thanks http://t.co/wH8fcpHx Conscripted labor of youths would be a false economy; work would b poorly done $$ Jul 11, 2012
  • And that leaves aside the constitutional & legal aspects of conscription in peacetime; I do not favor reviving the draft. $$ Jul 11, 2012
  • FBI warned Labor Department data might be leaked http://t.co/KpsZplxo Until DC pays up 4 some good quants, lots of games won’t b caught $$ Jul 11, 2012
  • Helpless President, Hopeless Congress http://t.co/aVq8gq5d Becomes difficult as the # of factions expands. t-party fractures consensus $$ Jul 11, 2012
  • No Sign of Voter Polarization Waning http://t.co/7FXzckao Good smile from Obama; dee red, dey get redder, dee bloo, dey get blooer $$ Jul 10, 2012
  • Obama Intensifies Tax Fight http://t.co/GG0C1Eo5 Looks like a recipe 4 gridlock. BTW, Obama needs2work on his smile, very pouty pics $$ Jul 10, 2012
  • “It is the regulators who require ratings, largely for purposes of measuring risk at financial institutions.” $$ http://t.co/nPGJNhjy Jul 10, 2012
  • America Already Is Europe http://t.co/BCK8nfnI similarities: growing government & equalizing incomes, cronyism, Uninformed electorate $$ Jul 10, 2012
  • LBJ?s Lessons for Obama http://t.co/ILtH9ZH9 Politics is the art of avoiding making permanent enemies & Obama is aloof 2 his enemies $$ Jul 09, 2012
  • States Interpret Ruling to Cut Medicaid Now http://t.co/ArPTMDPp File this under “unintended consequences;” some poor lose some care $$ Jul 09, 2012

 

LIBOR

 

  • NY Fed does not deserve much credit here. They only began investigating after leverage began collapsing… http://t.co/5WHt8Rrt Jul 13, 2012
  • They only began investigating after leverage began collapsing with bank off-balance sheet vehicles. $$ Jul 13, 2012
  • They were more concerned w/LIBOR being viewed as2high as primarily a systemic risk issue, & secondarily as a “is LIBOR accurate” issue. $$ Jul 13, 2012
  • In Libor Scandal, a Push For Criminal Charges http://t.co/eBkV0926 Outside the mainstream here; I don’t think criminal charges will work $$ Jul 13, 2012
  • Fed knew of Libor issue in 2007-08, proposed reforms http://t.co/hHUdUXnP The Fed moves slowly on regulatory issues. Very slowly. $$ Jul 11, 2012
  • Exactly & few say that $$ RT @carney: Running the numbers on March 13, 2006 Libor. I don’t see how Barclays could have manipulated it. Jul 11, 2012
  • So I Need To “Be An Adult” About Fraud Eh? http://t.co/t8owUMbU Yes Karl, being adult means waiting until fraud is proven b4 rash speech $$ Jul 10, 2012

 

 

Eurozone

 

  • Spanish Bank Borrowing from ECB Surges http://t.co/3cIvgaZu Feel sorry for the ECB; politicians do little so they try2do it alone $$ Jul 13, 2012
  • Euro-Zone Banks Still Hoarding http://t.co/3cIvgaZu The ECB can solve it all; just ask them they’ll tell you $$ Jul 13, 2012
  • Euro-Split Case Drives Danish Krone Appeal in Binary Bet http://t.co/tgPPZgKW People r willing to lock in losses 2 avoid bigger losses $$ Jul 11, 2012
  • Euro zone fragmenting faster than EU can act http://t.co/GpqSfYht “Deposit flight from Spanish banks has been gaining pace” $$ Jul 09, 2012
  • German anti-euro backlash gathers pace http://t.co/ZK57rBp3 The compromises hammered together r starting to come apart at the seams $$ Jul 09, 2012
  • Hollande Urged to Deliver Competitive Shock By Executives http://t.co/oZj9D7Jt Strange brew. Socialist pushes labor productivity rise $$ Jul 09, 2012
  • Spain Braces for Renewed Austerity as Tax Take Hemorrhages http://t.co/EIhmTfja I don’t suppose reducing govt size is an option here? $$ Jul 09, 2012
  • Spanish Yield Hits 7%, Stocks Slip http://t.co/QD7icJSX Okay, what new “baby step” toward mutualizing debts will the EZone try now? $$ Jul 09, 2012

 

Residential Housing

 

  • Blackstone, Hovnanian in Land Banking Deal http://t.co/KGx60uQs Too much $$ on the sidelines waiting to play in residential real estate Jul 13, 2012
  • Americans Living Larger As New-Home Sizes Defy Economy http://t.co/KjPRALro 1st ping I’ve seen on improvement for high-end home demand $$ Jul 13, 2012
  • Shadow inventory should also include those inverted on their mortgages, and will sell when prices are high enough. $$ http://t.co/HMT2rdci Jul 13, 2012
  • Housing Passes a Milestone http://t.co/x1rch8KR Lows seen in some areas, in low-end housing, look4those who waited4better prices2sell $$ Jul 12, 2012

 

 

Market Impact

 

  • Hedge Funds Trail Vanguard as Elliott Returns Atypical http://t.co/y91Uboqf Hedge funds seek yield & shun volatility, need fair weather $$ Jul 13, 2012
  • Watch income producing investments w/care RT @stockspot2000: $$ A Big Captain Hook in DividendLand http://t.co/mF9i6wnX $DVY $FED $PCEF Jul 12, 2012
  • Contra: Financial conditions are actually quite normal http://t.co/zSHolTk2 W/long Tsys yielding little, conditions r anything but normal $$ Jul 11, 2012
  • Not surprising in a time of debt deflation $$ RT @sm_sears: Finding a reliable counter party on Wall Street is becoming a rare commodity. Jul 11, 2012
  • Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms http://t.co/68BGLh8l They should know better $$ Suffering from proximity bias… Jul 09, 2012

 

Pensions

 

  • Common when low funded RT @BobBrinker: “San Bernardino has seen its workers? pension costs more than double since 2006” http://t.co/CLX7jhkC Jul 13, 2012
  • The new retirement age: 70 http://t.co/SdIVhjwE That is, if it isn’t 70+. Too few years to accrue savings vs many to spend over $$ Jul 11, 2012

 

Companies

 

  • Activist Investor Sets Sights on P&G http://t.co/5kGN1m5W $PG too big; Ackman bites off more than he can chew, IMO. $$ Jul 13, 2012
  • What went wrong at Supervalu (plenty) and who could buy it? (um?) http://t.co/9GfsQZZ6 Wonder what $SVU bulls @ Seeking Alpha r saying? $$ Jul 12, 2012
  • Apple Quitting Green Registry Leads to Purchasing Fallout http://t.co/Y4vOZ9Vm Interesting article, but the comments section is rabid $$ Jul 12, 2012
  • Silicon Valley’s Biggest Secret Technology Company — 7 Clues http://t.co/35rQYQuy One more clue: Its name starts with a “V.” $$ $V Jul 11, 2012
  • Billionaire Forrest Leads BlackRock Buying Iron Ore http://t.co/XNP3FGXv Only invest what u can afford2lose 4 an industry in oversupply $$ Jul 11, 2012
  • Patriot Bankruptcy May Leave Peabody Liable for Expense http://t.co/S0Upoai8 W/low natural gas prices, many coal companies suffer $$ Jul 11, 2012
  • Chesapeake retreat ends American energy land grab http://t.co/k7TsqNz3 Fracking creates new energy ecology, lower prices, less coal use $$ Jul 10, 2012

 

Central Banking

 

  • That’s what I thought also $$ RT @Alea_: so employee of Markets Group of the New York Fed doesn’t know how to use bloomberg #brilliant Jul 13, 2012
  • John B. Taylor: Monetary Policy and the Next Crisis http://t.co/9ajScehv Argues Fed kept rates2low in 2000s, leading2current crisis $$ Jul 11, 2012
  • What’s Wrong With the Federal Reserve? http://t.co/JxFpBArR ALLAN H. MELTZER explains y activist monetary & fiscal policies r failing $$ Jul 10, 2012
  • What if the Fed Throws a QE3 and Nobody Comes? http://t.co/kU3N83aX Hussman:”The way out is2restructure bad debt instead of rescuing it.” $$ Jul 09, 2012
  • Dealers Declining Bernanke Twist Invitation http://t.co/ZGVObmE1 Fed eats large % of long Tsys, dealers get into act front-running them $$ Jul 09, 2012
  • Fed Weighs Revamped Monetary Report as Guide to Policy http://t.co/PXGKNfSv No, @federalreserve, ur not unclear 2 us; just bad $$ policy Jul 09, 2012

 

Miscellaneous

 

  • Anne-Marie Slaughter on having it all http://t.co/bz7oQly4 No one can have it all; life is a series of choices 4 men & women $$ Jul 13, 2012
  • The death of cash http://t.co/aCoVfmsP Few technologies die totally; we have phonographs, tube mikes, AM radio. $$ will continue smaller Jul 12, 2012
  • Agreed, cash is a form of freedom RT @DavidBCollum: @AlephBlog Cashless society should be feared. Jul 12, 2012
  • Cocoa Grader: Hard Job, Sweet Perks http://t.co/wn8YXGVt Becoming a cocoa beans grader is ~4x harder than passing the NY State Bar exam Jul 12, 2012
  • A Cut Above: In These Knife Fights, Only Pride Gets Wounded http://t.co/xPvWlxA9 Very American & weird. Very, very weird. $$ #enjoy Jul 12, 2012
  • Wall Street’s Secret Weapon for Getting an Edge http://t.co/UJtMPEJu Testosterone injections to feel great & b dumb as a teenage boy $$ Jul 11, 2012
  • Climate was HOTTER in Roman, medieval times than now http://t.co/cc5fNyyI “cooling effect of orbital shifting on the climate” $$ Jul 11, 2012
  • Congratulations to one of the best financial bloggers still active $$ RT @EddyElfenbein: Crossing Wall Street turns seven years old today. Jul 11, 2012
  • Does This Smell Clean to You? http://t.co/pT1qlfxg There r many new scents giving sense of clean: ginger, hibiscus, greens, jasmine.. $$ Jul 11, 2012
  • Air Conditioning, Blessed Invention http://t.co/TSvTonfJ A most significant invention; no server farms w/o air conditioning $$ Jul 11, 2012
  • Interesting posts at Pepsico blogs in how $PEP is trying to sell snacks in China http://t.co/U6S3rGoT & http://t.co/IpkmsmKL $$ Jul 11, 2012
  • Last Amateur Bannister Is No LeBron Chasing Olympic Ideal http://t.co/Nwi4173U Last of the true amateurs, he breaks the 4-minute mile $$ Jul 11, 2012
  • Living Cells Show How to Fix the Financial System http://t.co/li0tmyHJ Healthy biological systems inspire economics systems $$ Jul 11, 2012
  • How the Mormons Make Money http://t.co/BAi5CF9W Really about how the Mormon “church” has significant businesses that make lots of money $$ Jul 11, 2012
  • Game Written by a 14-Year-Old Passes Angry Birds as Top Free iPhone App http://t.co/fAGtex2A Bubble Ball popular & Mom helps out $$ Jul 09, 2012

 

Rest of the World

 

  • Banks play cat-and-mouse with Beijing to comply with rules http://t.co/Nin3k8xH Banks are the weak link of the Chinese economy $$ Jul 12, 2012
  • Hit at home, China’s ghost fleet sails high seas http://t.co/aGSF13Ue Are there any more ways to increase oversupply of shipping? $$ Jul 11, 2012
  • Canadian Banks Seen Superior by Regulator Surviving Global Shock http://t.co/rKNfUc2M When housing prices fall in Canada will b tested $$ Jul 11, 2012
  • Eric Schmidt: The Great Firewall of China will fall http://t.co/N3vm0IuL You can’t build a sophisticated economy… w/active censorship $$ Jul 10, 2012
  • Norway Banks Under Pressure as Asset-Bubble Risks Swell http://t.co/BcHyayIQ Norwegians have never had such a high % of debt/net income $$ Jul 09, 2012
  • Tokyo Considers Buying Islands China Claims http://t.co/vWUmR6Zr Another potentialflashpoint in Asia, though war is impossible 😉 $$ Jul 09, 2012

 

Economics

 

  • Contra: The problem with ?structural? explanations for U.S. unemployment http://t.co/32zfqXyW Foreign competition limits job creation $$ Jul 11, 2012
  • Low-Paid Grads On Tight Budgets Switching to Discounters http://t.co/v4kEfPMq B4 going to college, ask what future employers might like $$ Jul 10, 2012
  • Murdoch, Moguls Head to Sun Valley as Mobile Shapes Media http://t.co/YFVQcQwm Content is King, can u squeeze dat onto my dinky device? $$ Jul 10, 2012
  • Fracking claims an unusual victim $PCX $$ RT @BloombergNews: BREAKING: Patriot Coal Bankruptcy Filing Said To Come as Soon as Today Jul 09, 2012
  • Patent ‘Troll’ Tactics Spread http://t.co/MECQeMFO Tour through grand diversity of games companies play w/patents 4 offense & defense $$ Jul 09, 2012

 

Finance Companies

 

  • SAC?s Cohen Joins Loeb Starting Reinsurer for Capital http://t.co/8aSjsa3w Adv: Captive $$. Disadv: Can lose $$ if underwriting is poor 🙁 Jul 10, 2012
  • JPMorgan Silence on Risk Model Spurs Calls for Disclosure http://t.co/btmeSkbM Banks should share their risk modelsw/regulators yearly $$ Jul 10, 2012
  • Indentured Students Rise as Loans Corrode College Ticket http://t.co/VvNosGcC Students tricked into debt-slavery “pursuing their bliss” $$ Jul 09, 2012
  • Price of Plastic Going Up? Merchants May Get Surcharge Rights http://t.co/e2wXuCC5 Will make4interesting competition & ppl hold more $$ Jul 09, 2012

 

Comments

 

  • Commented on Banks Defend Against Libor Lawsuits By Asking “Libor? Who Uses Libor, Anyway?” / Dealbreaker http://t.co/oIRzvh72 Jul 13, 2012
  • Fun fact: Take the current $VIX, divide it by the square root of 52. That’s the market’s one standard deviation forecast for the next week Jul 12, 2012
  • RT @EddyElfenbein: Fun fact: Take the current $VIX, divide it by the square root of 12. That’s the market’s one standard deviation forec … Jul 12, 2012
  • “Very low value analysis. Did a computer write this?” ? David_Merkel http://t.co/pUs2DJaj http://t.co/zmt4cMgf $$ Jul 12, 2012
  • “Banks feel more confident to foreclose when they can sell the property for a small loss at worst.” ? David_Merkel http://t.co/z3EUOoRk $$ Jul 12, 2012
  • “?Everyone needs to lighten up.? No, everyone needs to *tighten* up, and respect the rights of the?” ? David_Merkel http://t.co/yVrsu4jc $$ Jul 12, 2012
  • “On the new highs list, look at all the bond CEFs, ETFs, preferreds, etc. Everyone is grabbing income!” ? David_Merkel http://t.co/8ek4vm4E Jul 11, 2012
  • @Royal_Arse @LDrogen definitely think it doesn’t make sense LT, but long Tsy yields could go lower b4 a rather nasty whippy reversal $$ Jul 11, 2012
  • low quality $$ RT @jsphctrl: It’s unconventional, certainly. (Bloomberg:) *Urpilainen: One Collateral Option Is Shares From Spanish Banks Jul 11, 2012
  • @LDrogen with interest, even $JNK made $$, I’m not saying it is the only signal, but $TLT shows a demand4long certain cash flow FD: +TLT Jul 11, 2012
  • @LDrogen 1 yr price return only $JNK -2%, $LQD +7%, $TLT +32%. I would argue that indicates economic weakness FD: +LQD, +TLT 4 me&clients $$ Jul 11, 2012
  • “I think they are dreaming. China overbuilt its steel industry & they are losing $$ now.” ? David_Merkel http://t.co/RyQOw5tD Jul 11, 2012
  • @izakaminska @TheStalwart Problem happening w/Danish bonds also http://t.co/tgPPZgKW Ppl willing 2 lock in a loss 2 prevent larger loss $$ Jul 11, 2012
  • “Because those that are politically powerful in Europe have their own Swiss Bank accounts. Can’t?” ? David_Merkel http://t.co/8F93WNQm $$ Jul 11, 2012
  • +1, we r starved 4 news $$ RT @Fullcarry: FED minutes today probably not that important since BB had a presser after the meeting. Jul 11, 2012
  • Cat bond sales double in H1http://reut.rs/Nm0whV More alternative reinsurance capacity. Diversifies junk portfolios; invites catastrophes $$ Jul 10, 2012
  • @historysquared trouble is, few cat bonds have ever triggered, looks like free $$ to many HY bond mgrs, terms will tighten 2deliver losses Jul 10, 2012
  • When I look at the data for 3/13/06, Barclays actions had no effect on 3M LIBOR. It was excluded from the… http://t.co/gbEPYIXN Jul 10, 2012
  • “Life actuaries reveal their models annually to the regulators, though not to the public. The same?” ? David_Merkel http://t.co/pTqT1F2L $$ Jul 10, 2012
  • @randomroger Congratulations on the AdvisorShares Global Alpha & Beta, Roger! $RRGR $$ Jul 09, 2012
  • ‘ @Nonrelatedsense 4 mkt val measures: Q-ratio, CAPE10, Price-Resources (Michael Alexander), & @eddyelfenbein ‘s stocks as a bond measure $$ Jul 09, 2012
  • “P/E has been an unreliable measure of value for the market as a whole. Why rely on it?” ? David_Merkel http://t.co/B4ZuMOLz $$ Jul 09, 2012
  • Commented on The Economist | The LIBOR scandal: The rotten heart of finance http://t.co/qvSysBKt Jul 08, 2012
  • Commented on The Economist | The LIBOR scandal: The rotten heart of finance http://t.co/Y7JVFkDP Jul 08, 2012
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