Banks – Page 8 – The Aleph Blog

The Education of an Investment Risk Manager, Part IX (The End)

Posted on 3 October 2013 by David Merkel

I’m bringing this series to a close with some odds and ends — a few links, a few stories, etc.? Here goes:

1) One day, out of the blue, the Chief Investment Officer walked into my office, which was odd, because he rarely left the executive suite, and asked something like: “We own stocks in the General Account, but not as much as we used to.? How much implicit equity exposure do we get from our variable annuities?”? The idea was this: as the equity markets go up, so does our fee stream.? If the equity market goes up or down 1%, how much does the present value of fees change?? I told him I would get back to him, but the answer was an easy one, taking only a few hours to calculate & check — the answer was a nickel, and the next day I walked up to the executive suite and told him: “If we have 20% of our liabilities in variable annuities it is the equivalent to having 1% of assets invested in the stock market.

2) This post, Why are we the Lucky Ones? could have been a post in this series.? At a small broker-dealer, all sorts of charlatans bring their ideas for financing.? The correct answer is usually no, but that conflicts with hope.? Sadly, Finacorp did not consult me on the last deal, which is part of the reason why they don’t exist now.

3) The first half of the post, The Education of a Mortgage Bond Manager, Part IX, would also fit into this series — the amount of math that went into the analysis was considerable, but the regulatory change that drove it led us to stop investing in most RMBS.

4) While working for a hedge fund, I had the opportunity to sit in on asset-liability management meetings for a bank affiliated with our firm.? I was floored by the low level of rigor in the analyses — it made me think that every bank should have at least one actuary to do analyses with the level of rigor in the insurance industry.

Now, this doesn’t apply to the big banks and investment banks because of their complexity, but even they could do well to borrow ideas from the insurance industry, and do stress testing.? Go variable by variable, on a long term basis, and ask:

At what level does this bring line profits to zero?
At what level does this bring company profits to zero?
At what level does this imperil the solvency of the company?

5) This story is a little weird.? One day my boss called me in and said, “There’s a meeting of corporate actuaries at the ACLI in DC.? You are our representative.? They will be discussing setting up an industry fund to cover losses from failures of Guaranteed Investment Contracts.? Your job is to make sure the fund is not created.”

His concern in 1996 was that it would become a black hole, and would encourage overly aggressive writing of GICs.? He didn’t want to get stuck with losses.? I told him the persuasion was not my forte, but I would do my best.? I said that my position was weak, because we were the smallest company at the table, but he said to me, “You have a voice at the table.? Use it.”

A few days later, I was on the Metroliner down to DC.? I tried to understand both sides of the argument.?? I even prayed about it.? Finally it struck me: what might be the unintended consequences from the regulators from setting up a private guaranty fund?? What might be the moral hazard implications?

At the meeting, I found one friend in the room from AIG.? We had worked together, and AIG didn’t like the idea either.? In the the early parts of the meeting it seemed like there were 10 for the industry fund, and 3 against, AIG, Principal, and us.? Not promising.? We talked through various aspects of the proposal, the three representatives taking the opposite side — it seemed like no one was changing their minds, but some opinions were weaker on the other side.

By 3PM the moderator asked for any final comments before the vote.? I raised my hand and said something like, “You have to think of the law of unintended consequences here.? What will be the impact on competition here?? What if one us, a large company decides to be more aggressive as a result of this?? What if regulators look at this as a template, and use it to ask for similar funds more broadly in life insurance??? The state guaranty funds would certainly like the industry to put even more skin into the game.”

The room went silent for a few seconds, and the vote was taken.

4-9 against creating the guaranty fund.

The moderator looked shocked.

The meeting adjourned and I went home.? The next day I told my boss we had won against hard odds.? He was in a grumpy mood so he said, “Yeah, great,” barely acknowledging me.? This is the thanks I get for trying something very hard?

6) In early 2000, I had an e-mail dialogue with Ken Fisher.? I wanted to discuss value investing with him, but he challenged me to develop my own proprietary sources of value.? Throw away the CFA syllabus, and all of the classics — look for what is not known.

So I sat down with my past trading and looked for what I did best.? What I found was that I did best buying strong companies in damaged industries.? That was the key idea that led to my eight portfolio rules. Value investing with industry rotation may be a little unusual, but it fit my new view of the world. I couldn’t always analyze changes in pricing power directly, but I could look at industries where prices had crashed, and pick through the rubble.

In Closing

My career has been odd and varied, which has led to some of the differential insights that I write about here.? In some ways, we are still beginning to understand investment risks — for example, how many saw the financial crisis coming — where a self-reinforcing boom would give way to a self-reinforcing bust?? Not many, and even I did not anticipate the intensity of the bust.? At least I didn’t own any banks, and only owned sound insurers.

Investment risk is elusive because it depends partly on the collective reactions of investors, and not on external shocks like wars, hurricanes, bad policy, etc.? We can create our own crises by moving together in packs, going from bust to boom and back again.

It is my hope after all these words that some will approach investing realizing that avoiding risks is as important as seeking returns, and sometimes, more important.? It is not what you earn, but what you keep that matters.

The Education of an Investment Risk Manager, Part VIII

Posted on 2 October 2013 by David Merkel

“So you’re the new investment risk manager?”

“Yes, I am,” I said.

CA: “Well, I am the Chief Actuary for [the client firm].? I need you to do a project for me.? We have five competitors that are eating our lunch.? I want you to figure out what they are doing, and why we can’t do that.”

Me: “I’ll need to get approval from my boss, but I don’t see why not.? A project like this is right up my alley.”

CA: “What do you mean, right up your alley?”

Me: “I’m a generalist.? I understand liabilities, but I also understand financing structures, and I can look at assets and after a few minutes know what the main risks are and how large they are.? I may not be the best at any of those skills, but when they are combined, it works well.”

CA: “When can you have it to me?”

Me: (pause) “Mmm… shouldn’t take me longer than a month.”

CA: “Great.? I look forward to your report.”

The time was late 1998, just prior to the collapse of LTCM.? Though not well understood at the time, this was the “death throes” of the “bad old days” in the life insurance industry for taking too much asset risk.? Yes, there had been bad times every time the junk bond market crashed, and troubles with commercial mortgages 1989-1992, but the industry had not learned its lessons yet.

The 5 companies he picked were incredibly aggressive companies.? One of them I knew from going to industry meetings came up with novel ways of earning extra money by taking more risk.? I thought the risks were significant, but they hadn’t lost yet.

So what did I do?? I went to EDGAR, and to the websites of the companies in question.? I downloaded the schedule Ds of the subsidiaries in question, as well as the other investing schedules.? I read through the annual statements and annual reports.? I had both my equity investor and bond investor “hats” on.? I went through the entirety of their asset portfolios at a cursory level, and got a firm understanding of how their business models worked.

Here were the main findings:

These companies were using double, and even triple-leveraging to achieve their returns.? Double-leveraging is a normal thing — a holding company owns an operating insurance subsidiary, and the holding company has a large slug of debt.? Triple leveraging occurs when a holding company owns an operating insurance subsidiary, which in turn owns a large operating insurance subsidiary.? This enables the companies to turn a small return on assets into a large return on equity, so long as things go well.
The companies in question were taking every manner of asset risks.? With some of them I said, “What risks aren’t you taking?”? Limited partnerships, odd subordinated asset-backed securities, high yield corporates, residential mortgage bonds with a high risk of prepayment, etc.

So, when I met with the Chief Actuary, I told hid him that the five were taking unconscionable risks, and that some of them would fail soon.? I explained the risks, and why we were not taking those risks.? He objected and said we weren’t willing to take risks.? As LTCM failed, and our portfolios did not get damaged, those accusations rang hollow.

But what happened to the five companies?

Two of them failed within a year — ARM Financial and General American failed because they had insufficient liquid assets to meet a run on their liquidity, amid tough asset markets.
Two of them merged into other companies under stress — Jefferson Pilot was one, and I can’t remember the other one.
Lincoln National still exists, and to me, is still an aggressive company.

Four of five gone — I think that justified my opinions well enough, but the Chief Actuary brought another project a year later asking us to show what we had done for them over the years.? This project took two months, but in the end it showed that we had earned 0.70%/yr over Single-A Treasuries over the prior six years, which is? a great return.? The unstated problem was they were selling annuities too cheaply.

That shut him up for a while, but after a merger, the drumbeat continued — you aren’t earning enough for us, and, in 2001-2, how dare you have capital losses.?? Our capital losses were much smaller than most other firms, but our main client was abnormal.

To make it simple, we managed money for an incompetent insurance management team who could only sell product by paying more than most companies did.? No wonder they grew so fast.? If they had not been so focused on growth, we could have been more focused on avoiding losses.

What are the lessons here?

Rapid growth with financials is usually a bad sign.
Analyze liability structures for aggressiveness.? Look at total leverage to the holding company.? How much assets do they control off of what sliver of equity?
If companies predominantly buy risky assets, avoid them.
Avoid slick-talking management teams that don’t know what they are doing.? (This sounds obvious, but 3 out of 4 companies that I worked for fit this description.? It is not obvious to those that fund them.)

And sadly, that applied to the company that I managed the assets for — they destroyed economic value, and has twice been sold to other managers, none of whom are conservative.? Billions have been lost in the process.

It’s sad, but tons of money get lost through some financials because the accounting is opaque, and losses get realized in lumps, as “surprises” come upon them.

Be wary when investing in financial companies, and avoid novel asset risks, credit risk, and excess leverage.

The Education of an Investment Risk Manager, Part VII

Posted on 1 October 2013 by David Merkel

In late 2007, I was unemployed, but had a line on a job with a minority broker-dealer who would allow me to work from home, something that I needed for family reasons at that point.? The fellow who would eventually be my boss called me and said he had a client? that needed valuation help with some trust preferred CDOs that they owned.

Wait, let’s unpack that:

CDO — Collateralized Debt Obligation.? Take a bunch of debts, throw them into a trust, and then sell participations which vary with respect to credit risk.? Risky classes get high returns if there are few losses, and lose it all if there are many losses.
Trust preferred securities are a type of junior debt.? For more information look here.

I got to work, and within four days, I had a working model, which I mentioned here.? It was:

A knockoff of the KMV model, using equity market-oriented variables to price credit.

Uncorrelated reduced discrepancy point sets for the random number generator.

A regime-switching boom-bust cycle for credit

Differing default intensities for trust preferred securities vs. CMBS vs. senior unsecured notes.

It was a total scrounge job, begging, borrowing, and grabbing resources to create a significant model.? I was really proud of it.

But will the client like the answer?? My job was to tell the truth.? The client had bought tranches originally rated single-A from three deals originated by one originator.? There had been losses in the collateral, and the rating agencies had downgraded the formerly BBB tranches, but had not touched the single-A tranches yet.? The junk classes were wiped out.

Thus they were shocked when I told them their securities were worth $20 per $100 of par.? They had them marked in the $80s.

Bank: “$20?! how can they be worth $20.? Moody’s tells us they are worth $85!”

Me: “Then sell them to Moody’s.? By the way, you do know what the last trade on these bonds was?”

B: “$5, but that was a tax-related sale.”

Me: “Yes, but it shows the desperation, and from what I have heard, Bear Stearns is having a hard time unloading it above $5.? Look, you have to get the idea that you are holding the equity in these deals now, and equity has to offer at least a 20% yield in order attract capital now.”

B: “20%?! Can’t you give us a schedule for bond is worth at varying discount rates, and let us decide what the right rate should be?”

Me: “I can do that, so long as you don’t say that I backed a return rate under 20% to the regulators.”

B: “Fine.? Produce the report.”

I wrote the report, and they chose an 11% discount rate, which corresponded to a $60 price.? As an aside, the report from Moody’s was garbage, taking prices from single-A securitizations generally, and not focusing on the long-duration junky collateral relevant to these deals.

In late 2008, amid the crisis, they came back to me and asked what I thought the bonds were worth.? Looking at the additional defaults, and that the bonds no longer paid interest to the single-A tranches, I told them $5.? There was a chance if the credit markets rallied that the bonds might be worth something, but the odds were remote — it would mean no more defaults, and in late 2008 with a lot of junior debt financial exposure, that wasn’t likely.

They never talked to me again.? The bonds never paid a dime again.? I didn’t get paid for running my models a second time.

The bank wrote down the losses one more time, and another time, etc.? How do you eat an elephant?? One bite at a time.? It did not comply well with GAAP, and eventually the bank sold itself to another bank in its area, for a considerably lower price than when they first talked to me.

So what are the lessons here?

Ethics matter.? Don’t sign off on an analysis to make a buck if the assumptions are wrong.
Run your bank in such a way that you can take the hit, rather than spreading the losses over time.? (Like P&C reinsurers did during the 1980s.)? But that’s not how GAAP works, and the CEO & CFO had to sign off on Sarbox.
A model is only as good as the client’s willingness to use it.? There are lots of charlatans willing to provide bogus analyses — but if you use them, you know that you are committing fraud.
Beware of firms that won’t accept bad news.

I don’t know.? Wait, yes, I do know — I just don’t like it.? This is a reason to be skeptical of companies that are flexible in their accounting, and that means most financials.? So be wary, particularly when financials are near or in the “bust” phase — when the credit markets sour.

Sorted Weekly Tweets

Posted on 28 September 2013 by David Merkel

China

Chinese Cities Hooked on Land Revenue Fuel Housing Costs http://t.co/8SXwubzUjk Ppl invest in what they think they ctrl; no alternatives $$ Sep 28, 2013
Amway Bankrolls Harvard Course?For Chinese Cadres http://t.co/XVk5MXV2eh May not b pyramid, but successful sellers mostly recruit sellers $$ Sep 26, 2013
Chanos Undeterred by China Growth as O?Neill Bullish http://t.co/xwvC9mOFHa China will become the biggest windshield bugsplat ever seen $$ Sep 25, 2013
Party Will Pay the Price for China?s Rebalancing http://t.co/inQ5BHYMdn The Day has arrived: Michael Pettis is on Bloomberg. Go Michael! $$ Sep 25, 2013
China?s Generation Winnebago Avoids Traffic in RVs http://t.co/Q8z41qGv1j New Chinese status symbol: RVs. Rest while your driver works $$ Sep 24, 2013
China + Gold = 9 Million iPhones Sold http://t.co/DfIAopLDLV Gold may do nothing, but it is beautiful, & beauty drives much marketing $$ Sep 24, 2013
Michael Pettis, in his current newsletter, reminds us that loan growth outstrips ability to repay in China, recent “growth” is a fake-out $$ Sep 24, 2013

Companies & Industries

Meet Hummingbird: Google Just Revamped Search To Answer Your Long Questions Better http://t.co/mtAf5pxGIA Improved Search Engine $$ $GOOG Sep 28, 2013
JC Penney Is on the Brink http://t.co/UtMX5sa3ZT Now $JCP has liquidity, @ a cost, but can they transform their business model? $$ #unlikely Sep 28, 2013
Penney’s Share Offering Prices at a Discount http://t.co/CWVp8dOKln $JCP Danger Will Robinson! Stock price does not hold secondary level $$ Sep 27, 2013
Kat Cole, Former Hooters Waitress, Runs Cinnabon’s $1B Empire http://t.co/sOe9WKUB1v Ppl go gaga 4 Classic Roll. 60% more cals vs Big Mac $$ Sep 27, 2013
Oaktree group to sell US foreclosed homes http://t.co/dUuGn768TI Too many investors chasing residential RE vs owner occupiers $$ #badsign Sep 24, 2013
Meet Prem Watsa: The Man Riding to BlackBerry?s Rescue http://t.co/flg4xn1MkX A case of regret, throwing good $$ after bad $BBRY Sep 24, 2013
Banks Prove Safer Than Industrials in Bond Rally http://t.co/B2t3pbaNGd I would b willing 2 overweight industrials now; they r safer $$ Sep 24, 2013
Do Amazon’s Lockers Help Retailers? Depends on What They Sell http://t.co/Pbd2cPK6zl Works if $AMZN doesn’t sell what u sell, &vice-versa $$ Sep 23, 2013
FireEye Takes Off as Shares Rise 80% in IPO Debut http://t.co/fnY1YkvvD1 Score processes on weirdness, share info globally 2 stop malware $$ Sep 23, 2013

Rest of the World

Irish Billionaire Has ?Boatload? of Customers for Spanish http://t.co/GhyDzrhkhk Get your own Spanish Villa while supplies last! $$ Sep 27, 2013
Debt Disaster Seen Unless VAT Rises to 20% by 2020 http://t.co/fXyeptRNJZ Japan is a bug in search of a windshield; 20% would kill econ $$ Sep 26, 2013
Merkel?s Cold Embrace Leaves SPD Wary of Coalition Talks http://t.co/6pCmU9KgCf If SPD doesn’t compromise, cud a minority government form $$ Sep 24, 2013
Believing Data Not Required W/GDP Warrants http://t.co/36SKEKLcha Do u think Argentina is fudging GDP #s up? Buy Argentine GDP Warrants $$ Sep 23, 2013
For Migrants, New Land of Opportunity Is Mexico http://t.co/jy3XaZeRCA Immigrants r moving to Mexico as the economy deregulates a little $$ Sep 23, 2013
Czechs Yearning for Growth Set to Abandon Merkel Path http://t.co/sU8mxocTL7 No natural political coalition 4 austerity, even when right $$ Sep 23, 2013
Greece Plans Foreclosures to Meet Bailout Demands http://t.co/W7Ryxvv6J6 Inability 2 foreclose gums up Greece’s financial system $$ Sep 23, 2013

Central Banking

Richard Koo says ‘vicious cycle’ taking hold as Fed faces ‘QE trap’ http://t.co/se3uPY5eP1 Similar to my arguments in Easy in, Hard out $$ Sep 27, 2013
Constitutional Money by Richard Timberlake http://t.co/iipZBfnFqm “Treaties may become inapplicable because of changes in circumstances” $$ Sep 25, 2013
US Fed Shouldn’t Give Forward Guidance, Former Bank of Israel Head Fischer Says http://t.co/ZzbTLqTEU9 Correct. Fischer 4 Fed Chair $$ Sep 24, 2013
Why we listen to former FOMC members who r partisans of the Fed, rather than skeptics of central banking, like James Grant, amazes me $$ Sep 24, 2013
Yellen Would Bring Tougher Tone to Fed http://t.co/xoNY2kKWqa Academic economists, like Yellen, do not understand how the economy works $$ Sep 24, 2013

Housing/Mortgages

Mortgage Bonds Without Government Backing Face Tough Time http://t.co/MrtGxmynes Tough 2 mkt private label RMBS, not enough excess spread $$ Sep 28, 2013
Subprime bond bounces back, leaving behind a subprime borrower http://t.co/x7KRB8Rp9n Long article about a deadbeat & his subprime loan $$ Sep 27, 2013
There have been a scad of articles like this, but the guy did not do “due diligence” on the loan, and did not have to buy the house $$ Sep 27, 2013
Home gold rush is over http://t.co/AASXbe14zc Too many investors vs owner occupiers creates an imbalance as smarter players start 2 sell $$ Sep 26, 2013
FHA, Facing Losses, Likely to Tap Treasury http://t.co/Hdpqqdplri Shortfall for Fiscal Year Could b at Least $1B, Early Projection Shows $$ Sep 26, 2013

Financial Sector

BATS Prepares to Take On Big Bell Ringers http://t.co/x8PjU05xE9 NYSE + Arca > BATS + Direct Edge > NASDAQ $$ Graph: http://t.co/rDV3hY7uzf Sep 28, 2013
Shine a Light on Repo http://t.co/KrF4MtaA7Y Did u know that repos r 96 years old? Learn about obscure corner of the fixed income market $$ Sep 27, 2013
The bank that rejects the most mortgages http://t.co/JxD3xhvlY4 $JPM highest rejection rate, $STI lowest, $WFC biggest lender, avg 20.6% $$ Sep 27, 2013
Covenant-Lite Loans Need Uniform Definition http://t.co/RbEywreAEC It would help, but there is always nonstandard data in securitizations $$ Sep 26, 2013
Wells Fargo: New CLO Regulations May Lead to Issuance Slump http://t.co/FcK5NLQvba Forcing securitizers 2 take first losses ruins profits $$ Sep 24, 2013
The VC Secret: 3 Out of 4 Start-Ups Fail http://t.co/jjFrQc9JNP Ratio sounds high, but when VC-backed firm wins, it pays 4a lot of losers $$ Sep 24, 2013
That’s the way 2 manage pension assets if u r big enough. In-source, build up expertise, & keep adding smart people 2 addl asset classes $$ Sep 23, 2013
In-Sourced, Fully Funded, Public, and American http://t.co/ISUDgDvGhC! South Dakota Retirement System manages 65%-70% of assets in-house $$ Sep 23, 2013
America’s latest financial crisis? It’s incredibly personal. http://t.co/yHLcIm7xuR People do NOT understand how to save or handle cash $$ Sep 23, 2013
Value Investor Charles de Vaulx On China, Gold, Apple And Berkshire Hathaway http://t.co/4LgwGyzI7g Longish good interview. $$ $STUDY $BRK.B Sep 23, 2013
Fidelity sued by employees over its own 401(k) plan http://t.co/yo5h32QQD6 Biting hand that feeds them, they object 2 high fees 4 funds $$ Sep 23, 2013
Inside Nasdaq’s succession planning process http://t.co/6uOUsgrpuQ $NDAQ trades at a discount 2 peers; it needs a merger or better mgmt $$ Sep 22, 2013

Other

Billionaires Battle as Bezos-Musk Companies Vie for Launch Pad http://t.co/jEOhw4xXac Fight over a launchpad @ Kennedy Space Center $$ Sep 28, 2013
Supersonic Drones Can Outmaneuver Humans. So Why Do We Still Need Pilots? http://t.co/J5N9FhDVbH Pilots fly better in complex situations $$ Sep 28, 2013
Postal rate hike proposal faces Senate scrutiny http://t.co/aq7gKcDnm1 First Class would go to 49 cents, as internet slowly eats USPS $$ Sep 26, 2013
This Year’s SAT Scores Are Out, and They’re Grim http://t.co/04jtzUJMtL <50% of 2013 graduating seniors got “college-ready” SAT scores $$ Sep 26, 2013
Little GAAP Could Drive Accounting Simplification http://t.co/Ti24zRMFY2 If the acctg is 2 complex, biz is probably 2 complex as well $$ Sep 26, 2013
Work is not waiting for a job. If you don’t have a job, start your own business. http://t.co/pkUXupCOJg Sep 25, 2013
Investors Are Buying High, Yet Again http://t.co/PaTcowZvk8 Opportunities are fewer now, listen to Buffett & Klarman & trim back risk $$ Sep 25, 2013
Tweet tips: Most effective calls to action on Twitter http://t.co/PrcHMiNDMc! U could also ask them to favorite your tweet $$ $TWTR Sep 24, 2013
Death Dinners at Baby Boomers? Tables Take on Dying Taboo http://t.co/68nxd534eB Good 2 talk about death, but r u ready 4 the afterlife? $$ Sep 24, 2013
Here Are The Best Fundamental Investors To Follow On StockTwits http://t.co/a72aV98KUo A good list of resources & teachers; I’m listed #5 $$ Sep 23, 2013
A Backdoor Roth IRA for a High-Income Couple http://t.co/79fYNIF5d6 Invest in regular IRA, convert 2 Roth, repeat process annually $$ Sep 23, 2013

PPACA / Obamacare

Will Obamacare hurt job creation and marriage? http://t.co/n7h7BEkrXK Belief in Obamacare is akin 2 belief in magic; resources r free $$ Sep 27, 2013
Prices Set for New Health-Care Exchanges http://t.co/J4VFjvF5HR Younger Buyers May Face Higher Insurance Premiums $$ Obamacare #FTL Sep 26, 2013
Best of the Web Today: The Young and the Clueless http://t.co/3GbWYOqipM ObamaCare may work, provided no one responds to its incentives. $$ Sep 26, 2013
Young Invincibles Caught in Crossfire Over Obamacare Cost http://t.co/hgyCGtZMaj Note how Obama packs the gallery w/young people $$ Sep 24, 2013

Municipal Debt / Detroit

Stockton to Unveil Plan Including Cuts for Creditors http://t.co/zBj3ngCXMz Trying to preserve pensions may draw lawsuit from bondholders $$ Sep 28, 2013
Detroit spent billions extra from pensions http://t.co/UBdb3GaqtI That’s what u get 4 having 1-party rule, w/no 1 to look over shoulder $$ Sep 27, 2013
Orr proposes freeze for Detroit pension funds http://t.co/sSFtqADV23 Unions don’t get that they destroyed the finances of Detroit $$ Sep 27, 2013
Judge Rules Retiree Health Protected Like Pension http://t.co/xg7bcR28oM! Loopy ruling sets Los Angeles on a course 2 bankruptcy $$ Sep 25, 2013
Hands off DIA, pensions, Detroiters say in poll http://t.co/dHmp2qjc5n! Detroit is an example of a complex system self-destructing $$ #dying Sep 23, 2013

Energy

Pipeline Billionaire Ready for Next Round of Deal Making http://t.co/KhTwsdBDRs $ETP CEO thinks there is room to consolidate pipelines $$ Sep 28, 2013
Six Myths About Renewable Energy http://t.co/G0dB1SJ2aU Balanced article. 3 myths pro, 3 myths con. It will b a minority of total energy $$ Sep 23, 2013

The Economic views of Ray Dalio

One more note, this slideshow put together from BI moves a lot faster than Dalio’s video or the… http://t.co/ytGIHQEaxP Sep 24, 2013
And for those that want to read Ray Dalio’s economic template book, it is free here: http://bwater… http://t.co/f1AVlDufxo Sep 24, 2013

US Politics & Policy

Texas Counties Lead in Job Growth, Lag in Wage Gains http://t.co/XdyNF4ZEJt No surprise, but biz leaves CA & there is high unemployment 2 $$ Sep 27, 2013
CHRISTIE KEEPS PENSION PROBE RECORDS FROM PUBLIC VIEW AS GOVERNOR EYES 2ND TERM http://t.co/NmnbLRxRwd! Running mate has pension scandal $$ Sep 24, 2013
Open-Government Laws Fuel Hedge-Fund Profits http://t.co/P5vZBpkiDq Hedge funds file FOIA requests 2get FDA reports on drugs, etc. $$ Sep 23, 2013
At 77 He Prepares Burgers Earning in Week His Former Hourly Wage http://t.co/jQJaWTiQd3 Example of “failed 2 save” Don’t let it happen 2u $$ Sep 23, 2013
Self-Driving Vehicles Progress Faster Than Rules of Road http://t.co/1lFAmdlJKz Regulations, laws, insurance all need 2b revised 4 this $$ Sep 23, 2013
The Hidden Classified Briefing Most of Congress Missed http://t.co/eSBnz0uPxd How intelligence gets disseminated w/o getting disseminated $$ Sep 23, 2013
How the NFL Fleeces Taxpayers http://t.co/OeG5kRTM2O Longish article on how they get free stadiums, pay no federal or state taxes, etc. $$ Sep 23, 2013
Facebook ?Likes? Are Now Legally Protected Speech http://t.co/Oi7XQkYVlB Political speech is protected by the 1st Amendment even “like” $$ Sep 22, 2013

Wrong

Over the Top: Jordan R. VanOort Earns Prestigious CFA Designation http://t.co/jRMcdyRq1R CFA designation is good, but prestigious? $$ Sep 28, 2013
& really, when there are over 100,000 of us, does receiving your CFA Charter really rate a press release? Tougher to become an Actuary $$ Sep 28, 2013
Wrong:Pimco shook hands with Fed – & made a killing http://t.co/gBlELQ6U7p 2 notes: agency MBS r easy 2 understand, & TBA mkt not obscure $$ Sep 27, 2013
Point: Fed could have easily done this internally. What! They can’t find any among their 1000s of Ph.D. economists to get simple mkts? $$ Sep 27, 2013
It is probable that enough data on what the Fed would do escaped over the transom 2 give PIMCO & the other firms insider info. $$ Sep 27, 2013
Wrong: New idiots, same as the? actually these idiots might be worse http://t.co/Xa5jGmbQII US economy grew faster under balanced budgets $$ Sep 27, 2013
Wrong: Reduce working week to 30 hours, say economists http://t.co/HiI7Zmhimo More work means more production means more GDP, Consumption $$ Sep 27, 2013
Loony: Detroit Union Seeks 2 Revive `13th’ Pension Check Policy http://t.co/Lf5YMVBKxW Practice that continues 4 28Y is a tacit agreement $$ Sep 27, 2013
Wishful thinking: Let ObamaCare Collapse http://t.co/n3yNizNAfP Until the US itself fails, no entitlement has ever been eliminated $$ Sep 26, 2013
Wrong:Shinzo Abe: Unleashing the Power of ‘Womenomics’ http://t.co/R00AN5pUEH This comes from nation w/a shrinking population. Ridiculous $$ Sep 26, 2013
Wrong: How Sensitive Is Public Pension Funding to Investment Returns? http://t.co/hSeoOLsvrc! Should use mkt-based assmptns not historic $$ Sep 25, 2013
Wrong: US city, county public pension levels sank in 2012 http://t.co/o2JUwsi5JF! 2 optimistic, b/c risk assets bottomed in late 2002 $$ Sep 25, 2013
Wrong: Don?t Be Alarmed by Obamacare?s Failures http://t.co/fS63xQpaaP PPACA doesn’t make actuarial sense, young people won’t participate $$ Sep 24, 2013
Wrong: Yellen Isn?t a ?Knee-Jerk Dove,? Kroszner Says http://t.co/0aeTM6BIiB Favoring negative interest rates == ?Knee-Jerk Dove? $$ Sep 24, 2013

Replies, Retweets & Comments

Thanks @TightTalk @BabyFreshNuggz @X9T_Trading for being top new followers in my community this week (insight via http://t.co/sern3wLA13) Sep 27, 2013
“Here is part of my solution: accounting for repos should be bifurcated, so that is not treated ?” ? David_Merkel http://t.co/caWGlbe3eL $$ Sep 27, 2013
Loonies, Detroit is dead MT @ToddSullivan: RT @AmyResnick: just wow. Detroit Union Seeks to Revive `13th’ #Pension http://t.co/u3XJAER0bi $$ Sep 27, 2013
Believe MT @ReformedBroker: You’re not gonna believe this – but Detroit’s pension doled billions left and right http://t.co/9i5MinpGAX $$ Sep 27, 2013
RT @ezraklein: Perhaps if President Obama makes the House GOP 300 sandwiches, they’ll agree to lift the debt ceiling. Sep 27, 2013
#FollowFriday Thanks @ReformedBroker @pelias01 @researchpuzzler for being top influencers in my community this week 🙂 Sep 27, 2013
‘ @allstarcharts @jfahmy The 1st discipline of investing/trading is humility; even if you know more, the timing/environment can be tough $$ Sep 27, 2013
Commented on StockTwits: I think Watsa can be trusted. Aside from financials in the old days that were dodgy, I th… http://t.co/dJ8g2rVKmK Sep 27, 2013
Thanks @abnormalreturns @dpinsen for being top engaged members in my community this week (insight via http://t.co/sern3wLA13) Sep 26, 2013
“I never directly pay for research… most of it is freely available on the web. What is not, I?” ? David_Merkel http://t.co/EAk37XXNdJ $$ Sep 26, 2013
“This is already known by those that study the statistics. Look at year over year figures, you ?” ? David_Merkel http://t.co/5J46Rm19vo $$ Sep 26, 2013
I just left a comment in “We’ve got bubbles, we’ve got troubles – MarketWatch” http://t.co/P11awJw1KQ Sep 26, 2013
‘ @Reddy Cummings is my gerrymandered rep. He is by far one of the most intellectually underpowered members of the House, & that says a lot Sep 25, 2013
@moorehn @ReformedBroker @SimoneFoxman @SallyPancakes @kensweet @jennablan They r favorites of mine. $$ Sep 25, 2013
Entitlements will have to be reduced; it is only a question of how and when. Druckenmiller’s presentation:… http://t.co/BsA9S78RTI Sep 24, 2013
Thanks @MarshaCollier @EdmundSLee @rwohlner for being top new followers in my community this week (insight via http://t.co/sern3wLA13) Sep 24, 2013
Thanks @researchpuzzler @pelias01 for being top engaged members in my community this week (insight via http://t.co/sern3wLA13) Sep 23, 2013

Sorted Weekly Tweets

Posted on 21 September 2013 by David Merkel

Monetary Policy

Buffett Calls Fed History?s Greatest Hedge Fund http://t.co/vToZwL7D21 Buffett great on practical business economics, lousy on politics $$ Sep 21, 2013
Bernanke Faith in Housing Seen Shaken in Bonds http://t.co/F0xtRsM13v The Fed never had control of the long end of the yield curve $$ #barmy Sep 20, 2013
The Fed has lost all credibility http://t.co/NhXbQjxiNa For an institution that values clear communications, things have been murky $$ Sep 19, 2013
Excellent question on financial regulation from the lady from the American Banker. $$ Sep 18, 2013
Good question from @pdacosta on the labor force participation rate and unemployment. $$ #Fed Sep 18, 2013
Less Tapering Becomes Tightening Credit No Matter What Fed Says http://t.co/rQMp900dxA Q: what total pkg does 2 forward rate expectations $$ Sep 17, 2013

Janet Yellen (we get what we deserve)

White Houses Urges Democratic Senators to Defend Yellen http://t.co/pBd1U1dz7u She seems like a lock: to QE Infinity & Beyond! $$ #FTL Sep 21, 2013
Yellen Chances Grow as Obama Aides Test Senate Support http://t.co/kbDdWmlX4L “She will make Bernanke look like a hawk.” Marc Faber $$ Sep 19, 2013
White House official says Yellen front runner for Fed chair http://t.co/wGor8xIJoI This is to make us oppose the uber-dove #anyonebutyellen Sep 19, 2013
Yellen No Lock for Fed Chair Despite Summers Exit http://t.co/ycEBcedvTe “This was an unprecedented struggle for leadership of the Fed.” $$ Sep 17, 2013
Yellen Now Front-Runner for Fed Chief http://t.co/H4xh8vmot1 Yellen means no change from the current failed policies $$ #anyonebutyellen Sep 17, 2013
Fed Leader Doubt Erodes Low-Rate Message as QE Taper Looms http://t.co/CgyxacYaap Can’t appoint Yellen now, lest it look like a loss $$ Sep 16, 2013
Why Larry Summers Bailed on the Fed http://t.co/lVn10kgYIL Bring on Don Kohn, better still, bring on that monetary dissident John Taylor $$ Sep 16, 2013

Rest of the World

Bermuda’s Search for New Wealth http://t.co/LPMJJvD6QE I like Bermuda a lot, & learned a lot here. No paparazzi, much privacy $$ #humble Sep 20, 2013
Rebel-on-Rebel Violence Seizes Syria http://t.co/LsZUvpQTuo Two player games r easy; Three-or-more player games r tough & confusing $$ Sep 20, 2013
What Happens When the US Isn?t the Biggest Gas Guzzler? http://t.co/pl8X9TkOUM 1 reason y I am long energy stocks: rising global demand $$ Sep 20, 2013
Olympic Athletes in Tokyo Risk Hottest Weather in 120 Years http://t.co/4E9MnDTzv5 Same for FIFA in Qatar, but humidity in Tokyo is a factor Sep 19, 2013
Why Even the Worst Bloggers Are Making Us Smarter http://t.co/PhztCBG6kP It is amazing how many people are writing their ideas on the web Sep 19, 2013
China?s Choking Cities Means Job Cuts at Steel Town: Commodities http://t.co/3Xmz1Z7zqh China has over-invested in heavy industry #japan1989 Sep 19, 2013
In Post-Tsunami Japan, Homeowners Pull Away From Grid http://t.co/kPUIVdYq8b Power is now less reliable, some move to solar & fuel cells Sep 19, 2013
What Egypt Wants: Cheaper Bread http://t.co/S8NE6Zo8JU Demand for Subsidized Food Vexed Ousted President and Pressures Interim Government Sep 19, 2013
Obama Rifts With Allies on Summers-Syria Limit Debt Dealing http://t.co/M8f1f1fPm6 Weakened by bad choices but he is the President! $$ Sep 18, 2013
How Did Advanced Economies Get in So Much Debt? http://t.co/QGF1acUQf8 They absorbed bad private debts, rather than letting them fail $$ Sep 18, 2013
On Putin, his NYT editorial: http://t.co/eb45qkGBq1 Peggy Noonan responds: http://t.co/qwFRsk83cR Avoid interfering in foreign wars $$ Sep 18, 2013
Canadian Household – Drowning in Debt http://t.co/hJz8057OMF Total Canadian Household Debt-to-Income Ratio Rises to Record 165.6% @ 6/13 $$ Sep 17, 2013
$$ @paulvieira Point taken. Q: If someone bot an avg house in Canada 2 rent it out, would he make money; if arb is neg, Canada faces probs Sep 17, 2013
Eleven Countries with Soaring Inflation http://t.co/xl6Ivzr5bx Soaring means >6%/yr; leading the parade are Venezuela, Argentina & Egypt $$ Sep 17, 2013
Political Risk: What Should Investors Know About China’s Interest In Peru? http://t.co/85wGZJ1x3W Biz in Peru means negotiate w/locals $$ Sep 17, 2013
Smallest Ships Profitable Again as Logs Feed China Boom http://t.co/YsPOJMW9ul Chinese demand for wood raises freight 4 small ships $$ Sep 17, 2013
Vladimir Putin, the Richest Man on Earth http://t.co/bpLFDXtPWw Who needs wealth when you control a country? Putin makes his cronies rich $$ Sep 17, 2013
China Reins in Popular Voices With New Microblog Controls http://t.co/0tlX38uI1q The internet is a threat & an aid 2 every government $$ Sep 17, 2013
No Confidence in China Markets Inflates Housing Bubble http://t.co/G8qgXC8OEW Distrust other assets leads Chinese 2 invest in real estate $$ Sep 17, 2013
Germany’s Migrating Seniors http://t.co/Bhsqr6TePo Good care cheap, but you have to move 2 Poland to get it. Solves some old age problems $$ Sep 17, 2013
Germans Export Grandma to Poland as Costs, Care Converge http://t.co/e9w45mHkQe But where will the Poles export their Grandmas? $$ #long Sep 17, 2013

US Politics & Policy

Benghazi investigators gave Hillary Clinton heads-up on findings http://t.co/6Oimx1LhSx Mrs. Clinton appointed 80% of the review board $$ Sep 21, 2013
Weeds amidst the ivy |http://t.co/nvMFuNioFN A long & relatively thorough analysis of for-profit colleges & how they milk student loans $$ Sep 21, 2013
House GOP Ties Government Funding to Health Law http://t.co/rcNBBl2c6m This is a Q of short- vs long-run. Balancing budget best 4long-run $$ Sep 20, 2013
Big Insurers Skip Health Exchanges http://t.co/JWvGJSYVdQ Y deal w/ markets that attract sick people w/limits on underwriting & pricing? $$ Sep 20, 2013
What caused the financial crisis? The Big Lie goes viral http://t.co/1qFMg1BYGo The crisis was not merely caused by bad regulation Sep 19, 2013
The Queen Mary of macro trends: Rising rates http://t.co/OSgaYzIQkg Less certain than article says, as the economy weakens, no loan growth Sep 19, 2013
Walgreen will drop its traditional health insurance and instead give its 160,000 workers payments 2buy plans http://t.co/dpvbC8IigC via @WSJ Sep 19, 2013
National pension group challenges Pew?s work http://t.co/iiZROFHzRy! Cash balance plans give lower benefits, but maybe that’s affordable Sep 19, 2013
Puerto Rico can only cover 11.2% of pension costs http://t.co/wdnQJFniEF! Puerto Rico exists 2 make Illinois think it is prudent $$ Sep 19, 2013
Obama Feels a Pinch From Congressional Democrats http://t.co/d78z6b9a2c Obama gets constrained by the Left as much as the Right $$ Sep 18, 2013
Republicans Weigh Defunding Health Law, Avoiding Shutdown http://t.co/cbiqo2vBoW Ignore the economists, they don’t know anything, & cut! $$ Sep 18, 2013
Republican Newcomer Influence in Congress Risks Shutdown http://t.co/dtdHcg59po 3-player games r much less stable then 2-player games. $$ Sep 18, 2013
The Financial States of America http://t.co/xGQ8c6uajo Clever infographic; click a state 2c how it ranks; click on categories 4 diff maps $$ Sep 17, 2013
States With The Most Zombie Homes http://t.co/Dj6hphkUrM >20% of foreclosed homes vacant: Indiana, Nevada, Georgia, Florida, MD, AZ, SC $$ Sep 17, 2013
Heroin Pushed on Chicago by Cartel Fueling Gang Murders http://t.co/GmuhpbSxIk Getting a receipt from the Indiana police 4 forfeited cash $$ Sep 17, 2013
Armed EPA raid in Alaska sheds light on 70 fed agencies w/armed divisions http://t.co/90YKg3TWB2 Interesting how many have police units $$ Sep 16, 2013
Obama stands firm on refusal to negotiate over US debt ceiling http://t.co/kUDp9Q4ZL2 Nothing bad happened from sequester; do it again $$ Sep 16, 2013
How the SOPA law got defeated politically http://t.co/X3ZJiTiJ48 Creation of a website to highlight & affect legislative markups was key $$ Sep 16, 2013
Health Law Faces Skepticism http://t.co/AYf9IjdUL9 Complex laws typically don’t work well; Obamacare/PPACA is the epitome of complexity $$ Sep 16, 2013

Market Impact

The Long, Sorry Tale of Pension Promises http://t.co/6Pi2V0yiPA It started w/accounting rules allowing2much flexibility4funding/valuation $$ Sep 21, 2013
ING CEO Says Stress Tests Without Safety Net Bring Risks http://t.co/Bi7IKXvuYK If u fail the stress test, y would anyone recapitalize u $$ Sep 21, 2013
Challenging the Imperial Boardroom http://t.co/VW6IrzKIF9 @Carl_C_Icahn argues 4 mgmt transparency, competence, & shareholder orientation $$ Sep 20, 2013
Money Market Funds Ready for Battle with Regulators http://t.co/1VIxWqfVLE Floating NAVs will kill money market funds; better solutions $$ Sep 20, 2013
Banks? $10B Sweet Spot Sets Off Buying Spree for Lenders http://t.co/2oDNEEqEdY Bank capital rules r helping create medium-large banks $$ Sep 20, 2013
Avoid ?Dividend Yield Traps?, Look To Releveraging Stocks http://t.co/0k3Qs4mJHx 2 risks: higher bond yields compete; free cash flow 2low $$ Sep 20, 2013
Longevity-Proof Your Future http://t.co/0MB5S7Yx5S The main point is that you need to save. Beyond that, invest well, but savings r capital Sep 19, 2013
Novogratz to Burbank See Stocks Surviving First Fed Taper http://t.co/Xeig2UVtvT So what? We already know “Three steps and a stumble.” Sep 19, 2013
How Social Responsible Investing Can Be Irresponsible — Pension Fund To Sell Energy Stocks? http://t.co/JE6g2S8hHC Vacuous city council Sep 19, 2013
Remembering the families at the center of the financial crisis http://t.co/ICSLkY2TcD If finances were related 2 finance/housing it hurt $$ Sep 19, 2013
Judge Dismisses Bank Lawsuit Over Mortgage Foreclosures http://t.co/aJ5VmA64x2 Richmond needs supermajority 2 use eminent domain $$ Sep 17, 2013
Dr Copper & his funny friends disagree tremendously with SP500 level http://t.co/uNpdfvlbC9 On the divergence of stocks & commodities $$ Sep 16, 2013
Is Fiscal Austerity Good for the Economy? http://t.co/gQif4JHXqc “austerity is costly in the short run, it can provide long-run benefits” $$ Sep 16, 2013
Gross?s Trade Sours as Bonds Lose Faith in Fed Guidance http://t.co/YGZgvVries Depends on level of future GDP growth, keep watching $$ Sep 16, 2013
Montepeque of Platts Caught in Battle Over Oil Assessments http://t.co/4o0wvVyCEz All human systems r gamed, just a question of how much $$ Sep 16, 2013
Wall Street trading in US fuel credits hurts consumers http://t.co/8hZ8shAIJJ Very difficult 2manipulate prices in long run: sup/dem chgs $$ Sep 16, 2013
Uh oh. People buying houses fear rising prices http://t.co/FWAAeHwKdz Bubbles persist until financing costs more than implied rents $$ Sep 16, 2013

Companies & Industries

Twitter announces IPO: The Pricing Game begins http://t.co/GlR7MWJz4X Daring Damodaran gives a value 4 $TWTR w/out having any financials $$ Sep 21, 2013
Secret Rocks and Gem Hunters http://t.co/4Dpm6jGavk Colored gems r like small cap stocks, they r unique & illiquid mkts w/odd characters $$ Sep 20, 2013
Companies Seize on Rate Reprieve to Issue Bonds http://t.co/qQJzknEqhp Many think rates will go higher, & so they issue debt now $$ Sep 20, 2013
Google May Stop Using ‘Cookies’ to Track Web Users http://t.co/MgvZtEHo1Q Could concentrate marketing power in hands of a few companies $$ Sep 20, 2013
How ?Cord Never? Generation Poses Sales Drag for Pay TV http://t.co/10M73Td7jL Once you get used to not paying for your video, u don’t pay Sep 19, 2013
Verizon Pays $5.1 Billion in Extra Interest http://t.co/om7PsDAwzO That was the price of getting a big deal done in the short-run. Sep 19, 2013
Companies are increasingly choosing to generate their own power, delivering a jolt to utilities http://t.co/brVyNOWokp Disintermediation Sep 19, 2013
For TV Shows, It’s a Seller’s Market http://t.co/eja7JEhl1t Producers have many more outlets for content & networks must pay up 4 content $$ Sep 18, 2013
Capstone Metering Provides Smart Water Management Solution, Powered By Verizon Wireless Network http://t.co/0xd77Bnz0q fascinating tech $$ Sep 17, 2013
Berkshire Billionaire Found With More Shares Than Gates http://t.co/wqoceUXHJW Tales of old buyers of $BRK.A & cpmny sellers taking stock $$ Sep 17, 2013
Retailer REI Ends Era of Many Happy Returns http://t.co/0xDYFXDV95 Abuse leads REI to end returns on items bought more than one year ago $$ Sep 16, 2013
Wildcatter Hunch Unlocks $1.5T Oil Offshore US http://t.co/4lTsK10aj0 Longish story of how a hunch led2 deepwater drilling, amid failures $$ Sep 16, 2013
How Did Wal-Mart’s IPhone Discount Defeat Apple’s Price Controls? http://t.co/F3ZuYFvbWM $WMT takes a low margin on sales of $AAPL phones $$ Sep 16, 2013
Home, Sweet (Crude) Home in Fort McMurray, Alberta http://t.co/GpuUq289T8 Economies based on resource extraction flourish 4 a time & die $$ Sep 16, 2013

Economics

Women Waiting Tables Provide Most of Female Gains in US http://t.co/eoetZdyRAi Not so much demand 4 workers w/degrees in certain majors $$ Sep 20, 2013
Martin Feldstein: How to Create a Real Economic Stimulus http://t.co/bH2e2Z67mb Suggests mild entitlement reform; we need retirement @ 72 $$ Sep 17, 2013
Want Marital Bliss? Pool Your Money http://t.co/mJQb3XEkZn The more things r shared in marriage the better/tighter the bond becomes $$ Sep 17, 2013
Mysterious Disappearance of James Duesenberry http://t.co/LD3GfjTyka Old article on relative income hypothesis. Ppl r envious not greedy $$ Sep 16, 2013
Explanation of the discrepancy is that poverty is relative. Ppl r not maximizers & economists resist this b/c the pretty math falls apart $$ Sep 16, 2013
& if the pretty math falls apart, economists can’t publish & there goes their jobs. That is y they would rather hang onto a wrong theory $$ Sep 16, 2013

Other

The Time a Cleveland Newspaper Divulged Manhattan Project http://t.co/mFDKvhJTlW Fascinating tale; clever reporter http://t.co/o5CzDU61nL $$ Sep 21, 2013
Our Chat With Jeremy Grantham http://t.co/FSlADefGi0 In general, need 4 technological change has driven technological change; we will win $$ Sep 21, 2013
Marc Faber’s Biggest Mistake http://t.co/Dui1ZehA09 Really pretty minor. Interesting guy who gets things right, but speaks bearish Sep 21, 2013
Pope Warns Church Focusing Too Much on Divisive Issues http://t.co/2yEMa3O89I More than other Popes, this one is a slave2 liberal opinion $$ Sep 20, 2013
How a 91-Year-Old Geek Helped Keep the Aged Independent http://t.co/GD1AmUK6OQ Small cheap sensors monitor oldsters, watching their needs Sep 19, 2013
Say Goodbye to the Password http://t.co/pTnQ4ng2Xn New technology aims to offer security that is more convenient and more effective $$ Sep 18, 2013
Veggie-Heavy Stress Reduction Regimen Shown to Modify Cell Aging http://t.co/b3KNrSOdSY Cooking from scratch improves your life & health $$ Sep 17, 2013
Jonathan Jacobs: As Education Declines, So Does Civic Culture http://t.co/tk7WHue1mS Biggest complaint about new analysts: can’t write $$ Sep 17, 2013
Gonorrhea Among Drug-Resisting Germs Sickening Millions http://t.co/Fbgw14Q4ZQ Add C. difficile & E. coli; resistance 2 antibiotics grows $$ Sep 17, 2013
Twitter Co-Founder Evan Williams Lays Out His Plan For The Future Of Media http://t.co/e7nv4u8Z0T Need the equivalent of @abnormalreturns $$ Sep 16, 2013
Google?s Boss and a Princeton Professor Agree: College Is a Dinosaur http://t.co/ffUTIQFxdV True, but what do we do 2prove knowledge then $$ Sep 16, 2013

Replies, Retweets, & Comments

Thanks @MarshaCollier @EdmundSLee for being top new followers in my community this week 🙂 | insight by http://t.co/sern3wLA13 Sep 20, 2013
#FollowFriday Thanks @ReformedBroker @pelias01 @researchpuzzler for being top influencers in my community this week 🙂 Sep 20, 2013
@dpinsen I almost never read fiction. Sep 20, 2013
RT @interfluidity: the Fed has learned the trick about stretching your feet out beyond the covers then pulling them back in to feel warm. Sep 19, 2013
RT @BloombergNews: Sold for sex at puberty is village girls’ fate in wealthier India | http://t.co/oZsp9d2LcV Saddest article I have read Sep 19, 2013
@ppearlman Congratulations, Phil. One of my favorite websites is going to get better still. Sep 17, 2013
$$ @joebrusuelas Wrong. Yellen is an imitation of the policies of Bernanke & QE. They don’t work. Summers — rejection of the Rubin clique. Sep 17, 2013
@rj_trades Worked 4 me. Don’t know what’s wrong… Sep 16, 2013

Redacted Version of the September 2013 FOMC Statement

Posted on 18 September 201318 September 2013 by David Merkel

Comments

No taper yet.? Equities, long bonds, and gold rally.? The FOMC says that any change to policy is contingent on almost everything.
They shaded their views of housing down and GDP up.
Longer statement.? They think that if they use more words, they will be clearer.? Longer statements are harder to parse and understand.
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 the past I have said, ?When [holding down longer-term rates on the highest-quality debt] doesn?t work, what will they do?? I have to imagine that they are wondering whether QE works at all, given the recent rise in long rates.? The Fed is playing with forces bigger than themselves, and it isn?t dawning on them yet.
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 much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.

On Principles-Based Accounting for Financials

Posted on 18 September 201318 September 2013 by David Merkel

I may lose some friends in the industry for writing this.? Accounting bases vary for three reasons at minimum:

Accurate portrayal of the change in value of the firm (GAAP, IFRS)
Assuring solvency of financial institutions (Statutory)
Making sure taxes get paid (Tax)

Here’s the problem: when assets or liabilities get complex, accounting rules have a hard time setting values for them.? This is especially difficult for anything that does not trade regularly, if at all, and anything that has unique personal characteristics.? The value of a life insurance contract varies from person to person, even if major underwriting variables are the same.

But this applies to other areas.? Living benefits for variable insurance contracts do not have a good theory behind them, because the performance of asset markets is unpredictable.

Another example: letting banks set reserves for credit losses off of internal models.? Remember the rating agencies calculating subordination levels for ABS, RMBS & CMBS?? These securities had never been through a failure cycle, so they used default rates from non-securitized lending.? But those that lend and retain the risk are more conservative than those that lend and sell the risk.

The internal models have the potential to be more accurate than accounting rules, but they have greater potential to be more liberal, as management teams lean on accountants, quants, and actuaries for a desired accounting result.

I think it is better the the accounting standards setters to spend some money, hire people with expertise, and craft better rules.? Here’s another example: I think that the pension accounting standard should not allow investment earnings and discount rate assumptions higher than 2% over the ten-year Treasury.

I am in favor of rules-based accounting for solvency purposes.? Let the regulators be conservative.? Principles based accounting might be fine for GAAP/IFRS, but it destroys comparability across companies, and makes equity analysis a lot harder.? Better to have rules-based accounting there too.

If we had God doing accounting, yes, principles-based would be better, because he knows the future perfectly.? But we don’t know the future, so we have to build in conservatism via rules.

I have two more ideas for accounting simplification.? First, tax financial companies on their GAAP income.? That aligns taxation with their priorities.? If they offer a modified GAAP income that reflects how value is delivered, tax them on that.? Income should be taxed on the true increase in value.

Second, eliminate the statutory accounting basis by using GAAP/IFRS, and boost the level of statutory capital that financial firms need to hold.? Adjust the capital levels off of the business mix, penalizing secondary guarantees.

These two proposals would radically reduce the accounting efforts that financial firms go through, while increasing taxes, and enhancing solvency.

One final note: require that those who prepare the squishy parts of financial statements have an ethics code, like CFAs and Actuaries.? That’s not perfect, but training in ethics generally makes people more conservative in accounting.

The Rules, Part LIII

Posted on 9 September 201320 June 2017 by David Merkel

The tech market washes out about every eight years or so.? The broad market, which is a more robust beast, washes out far less frequently.? My question: are these variants of the same phenomenon?

I wrote this back in early 2003.? I can now answer my own question: No.

I’ve looked at this question many times, and debated the answer, but there are a few things that have made me decide “No.”

Sectors often move independently of the market as a whole, particularly growthy sectors that lose their growth.
The big moves of the market as a whole have usually been correlated with credit crises, which are part of the financial sector, not the tech sector.
The tech sector grows more slowly as a whole now, and hasn’t washed out for a while.
The financial sector fails because of financial leverage, the firms are too levered, and take too much credit risk.? The tech sector fails because market players bid up the prices of stock assuming permanently high rates of growth.? These are fundamentally different reasons for over-valuation, because most tech stocks have little debt.

Credit crises lead to big overall declines in market values, particularly with financial stocks, but affecting all other stocks, because when credit conditions are tight, things slow for all firms.

When tech stocks are overbid, it is more of a local mania where market players overestimate the degree of growth the sector can achieve.? There is little collateral damage to the market.? A seeming exception to this is 2000-2002, where the market went down with tech, but financials were less affected. In that drawdown, tight Fed policy drew everything down, and tech more than everything else.? Remember the NASDAQ over 5000?? Still hasn’t returned there, while the Dow, S&P 500, and Russell 2000 have hit new highs.

Here’s the summary: financial stress tends to be pervasive, affecting everything.? Stress from growth expectations that disappoint tend to be sector-specific, and don’t drag down the market as a whole.

And so the answer to my question that I asked 10+ years ago is “no.”

The Fed Needs Valuation Actuaries (and More Steel in the Spine)

Posted on 20 August 2013 by David Merkel

I reviewed the following report from the Federal Reserve to Congress today, and found it disappointing.? From my prior experience as an actuary, and the time that I spent on the asset-liability committee of a small bank, I know that? the banking industry is far behind the life insurance industry on risk control.? The Fed would have done far better to have studied the works of the Society of Actuaries and the National Association of Insurance Commissioners, and learned from their efforts.

Now, I know that the contingencies of banks are far less predictable then those of life insurers.? Further, life insurers have long liabilities, whereas the liabilities of banks are short, and thus, they are more subject to runs.? But liquidity risk management does not play a large role in their document — and this is a severe defect in what they write.? Almost all failures of financial firms are due to loss of liquidity.? The word liquidity only appears once in the document, on page 15.? This shows the amateurish work of the writers.

The Fed focuses on a lot of process issues that don’t matter as much as the substantive issues of discovering forward-looking measures of risk, and changing business processes to reflect those risks.

Here are some examples:

1) Internal controls matter, but it is a rare internal control auditor that can truly analyze a complex mathematical process.? They don’t have the capacity to review those processes, or they would be doing it and earning far more.

2) Risk identification is important, but the Fed document would have not helped in 2007-2009.? How do you detect risks that have (seemingly) never happened before?? Further, if you do detect a major problem that has happened before, and it would impair some very profitable businesses, why do you think management will kill profits to appease your lunacy?

3) Governance is important, but the board gets data so late that it is useless.? This is not worth bothering with.? Management has to do the job here.

4) The language on capital targets is weak, and allows the banks way too much latitude in performing their own calculations.? The Fed needs to be far more specific, and prescribe the scenarios that need to be tested.? It need to prescribe the loss severities, asset class by asset class.? It needs to prescribe the correlations, if any, that can be used in the models.

5) The document does not speak of ethics.? Valuation Actuaries do the same work on a higher level, and they have an ethics code.? That may occasionally make them oppose the management team that pays them, but it is a necessary check against managements trying to manipulate results.

6)? The piece spends too much time on the dividend policies of bank holding companies, and no significant time on the abilities of the subsidiaries ability to dividend to the bank holding companies.? The proper focus of a bank regulator is on the health of the operating subsidiaries.? Who care if the holding company goes broke?? Big deal, at least we protected depositors.

Banking regulators should adopt the same policy as insurance regulators.? Outside of ordinary limits, they can deny any special dividends from subsidiaries to the holding company.

7) The piece does not get forward-looking estimates of risk.? On new classes of assets, you don’t have historical data to aid in estimates of risk.? At such a point, one must look at similar businesses that have gone through a failure cycle, or do something even more difficult: do a cash flow model to estimate where losses will fall if asset values decline for an unspecified reason (okay, no more ability to buy…)

8 ) Macroeconomic factors rarely correlate well with the factors that lead to losses on assets.? Most of that effort is a waste.

9) As Buffett said (something like): “We’re paid to think about things that can’t happen.”? This is why the Fed has to specify scenarios, and be definite.? The mealy-mouthed language of the document can be gainsayed.? Life Actuaries have better guidance.

10) So all of the banks did not pass the mark.? With the vagueness of the guidelines, no surprise.? Let the Fed put forth real guidelines for bank stress tests, and let the banks scream when they get them.? Better to have slow growth in the banking sector than another crisis.

Value Investing when Debt Levels are High

Posted on 15 August 2013 by David Merkel

I would ask yourself how to implement value investing in an era where debt is no longer expanding. Arguably an era where inflation is increasing (albeit from a low starting point).

A few years ago, everyone ?knew? housing prices never went down nation wide. Today, CNBC constantly tells us that the consumer is 70% of the economy? undoubtedly true when debt levels were expanding. But consumer income is not growing as fast as the cost of living, and debt levels cannot expand again. The ?consumer is 70% of the economy? assumption probably won?t hold over the next few decades like it did in the past few decades. How does one implement value investing in such an environment?

So asked on reader in response to last night’s post.? His full comment was similar to some of the musings of Bill Gross, in that we don’t live long enough to really prove we have skill in investing, but over the last 40 years the overall macroeconomic regime of expanding debt favored certain classes of investors.

A few thoughts:

1) Value investing is SAFE and cheap, not CHEAP and safe.? Focus on margin of safety.? Spend time asking what can go wrong.? Test the strength of moats.

2) In 2008-2009, there were a lot of value investors that got savaged.? Why?? They invested a lot in statistically cheap financial companies that were carrying a lot of credit risk.? Having worked for a hedge fund 2003-2007 that did the opposite, my own investing was constrained because I feared what might happen when the bear part of the credit cycle emerged (leaving aside a mortgage REIT that I foolishly held onto).

Credit-sensitive financials are like cyclical non-financials that have over-invested in productive capacity.? They have high operating leverage, and will only prosper when demand is strong/credit is good.? Cyclical companies often have low P/E multiples near the top of the cycle, because the bear phase is anticipated.? They have high or negative P/E multiples near the bottom of the cycle, because the bull phase is anticipated.

The main idea here is to be skeptical of companies carrying a lot of credit risk, particularly after they have succeeded for some time.? When the credit risk manifests, it is savage.

3)?? Avoid debt and products that require it.? My portfolios ordinarily avoid companies with a lot of debt.? I like companies that finance themselves internally through retained earnings.? During bear market phases, companies with financial flexibility do better.? It is always better to get financing at a time when you don’t *have* to get it.? Seeking liquidity when little is available is never an attractive place to be.

Also remember that big ticket items like houses, cars, boats, RVs, college educations, do badly when credit conditions tighten.? Luxuries are disadvantaged versus necessities also.? Before the bear part of the credit cycle hits, own companies that are self-financing, and have stable revenues.

4) Inflation tends to favor value investing based on flow (income statement, cash flow statement) versus stock (balance sheet).? In one sense, corporate pricing power boosts the value of companies that can pass on the inflation and then some.? This was true in the ’70s when value investor did relatively well.

In summary, I would say that in the future, value investors need to focus on:

Safety first
Avoidance of credit risk, implicit and explicit
Investing in companies that don’t have to seek external finance
Companies that can pass on the effects of inflation.

July 2013	September 2013	Comments
Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year.	Information received since the Federal Open Market Committee met in July suggests that economic activity has been expanding at a moderate pace.	Shades their view of GDP growth up.
Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated.	Some indicators of labor market conditions have shown further improvement in recent months, but the unemployment rate remains elevated.	Adds weasel words because the participation rate is falling, and wages are stagnant.
Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen somewhat and fiscal policy is restraining economic growth.	Household spending and business fixed investment advanced, and the housing sector has been strengthening, but mortgage rates have risen further and fiscal policy is restraining economic growth.	Shades their view of housing down.? The Fed hasn?t learned that they can?t control the long end of the yield curve
Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.	Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.	Little change.? TIPS are showing similar inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.45%, down 0.05% from July.
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 expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.	The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.	No change.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?
The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.	The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall, but the tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market.	Does not take credit that the tightening of financial conditions happened largely because of FOMC communications.
The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.	The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.	No change.? CPI is at 1.8% now, yoy.? It may be closer than they think.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate,	Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.	The notable paragraph, saying that the ?taper? is not starting because fiscal policy is not as stimulative as the Fed wants.
the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities 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 of rolling over maturing Treasury securities at auction.	Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities 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 of rolling over maturing Treasury securities at auction.	No real change.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.
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.	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, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.
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.
The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.	and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.	No real change.
The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.	In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.	Drops the concept that they might increase the pace of purchases.? Aside from that, this section says about the same thing as July.
	Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.	New sentence, but it really doesn?t add much.? Didn?t we know that already?
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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.	To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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 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.	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 2.39%, up 19 bp from July.? Here?s the graph.? The FOMC has only 0.11% of margin in their calculation.
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.	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.	No change.
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.	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.	No change.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.	Two doves leave the FOMC
Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.	Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.	George continues to make her point that is the same as mine in my piece Easy In, Hard Out; that the Fed may have greater problems as a result of its abnormal policies, whatever they do in the future.