Category: Macroeconomics

Redacted Version of the July 2013 FOMC Statement

Redacted Version of the July 2013 FOMC Statement

Posted on by David Merkel
June 2013 July 2013 Comments
Information received since the Federal Open Market Committee met in May suggests that economic activity has been expanding at a moderate pace. 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. Shades their view of past GDP down.
Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated. No change
Household spending and business fixed investment advanced, and the housing sector has strengthened further, but 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 somewhat and fiscal policy is restraining economic growth. Shades their view of housing down.? I?m sorry, but balanced budgets promote growth, because economic actors don?t fear their taxes rising in the future.? Also, in Keynesian terms, any deficit is stimulative.
Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable. Partly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable. No change, and not true.? TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.5%, up 0.25% from June.
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 proceed at a moderate 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 since the fall. No change.
The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective. 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. 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, 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. 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 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 change.

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

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

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. No change.
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will closely monitor incoming information on economic and financial developments in coming months. No change. Useless comment.
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. 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. No 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. 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. No change. Vacuous.
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 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. No change
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. 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 2.20%, unchanged from May.? Here?s the graph.? The FOMC has only 0.30% 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; 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; 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. No change
Voting against the action was James Bullard, who believed that the Committee should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings, and 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. Bullard made his point last month, and sits back with the majority.

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.

?

Comments

  • This FOMC Statement was close to a nothing-burger.? They try to take the deflation boogeyman off of the table with words, and no proof.? All the same, they shaded down their views of housing and GDP.
  • 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 might just be dawning on them now.
  • 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.
The Optimal Interest Rate Scenario, Until Now

The Optimal Interest Rate Scenario, Until Now

Posted on by David Merkel

When I was running cashflow tests for life insurers, there was one scenario that was among the best for most insurers (life or otherwise).? The optimal scenario was a slow protracted rise in interest rates, say 1/2% per year for 10 years, or flat (no change).? Yes, with the slow rise, there will be unrealized capital losses, most of which will evaporate with time.? But excess cash flows will be invested at higher rates, raising the value of the firm.

I remember talking about this with people in the finance areas of other life insurers, and there was agreement — a slow rise in rates would benefit the industry as a whole.? Maybe annuity floor guaranties played into that as well.

But there are a number of parties that could not bear with the slow persistent rise.? Most governments of the world, including the US would find their budgets severely inverted if interest rates slowly rose and stuck.? As such, governments will do what they can to avoid such a scenario.? They don’t want to end up like Greece. That said, if they do end up there, expect that the governments hand losses off to bondholders, pensioners and/or medical care recipients.? The prime motive of a secular government is to survive, even if core goals are not achieved.

Thus at present, what is optimal for governments is to keep rates low for a long time.? Let savers get clipped, that government programs get paid for.? The risk here is that the bond market rebels and rates rise whether the government likes it or not.? But should that happen, and the government cannot pay on all promises made, it will force losses onto all long-term recipients of cash flows.

Perhaps policy will relax the strain on those in the private sector who have made long-term promises to pay, like pensions.? I would not count on that.? The government will be content with its own survival.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Rest of the World

 

  • Aflac Wins Wider Access to Japan Post?s Insurance Sales Network http://t.co/IDyLX4dR7c Looks like a win 4 all sides. FD: + $AFL $$ Jul 26, 2013
  • Echoes of the Asian Crisis http://t.co/ZzDbO9TtFV India, Turkey, Brazil, South Africa? all r running substantial current-account deficits $$ Jul 26, 2013
  • Measuring Mario Draghi’s Promises 1 Year On http://t.co/HTs9YDuBXp Mario gambled & won so far. Have the banks used this calm time well? $$ Jul 26, 2013
  • China risks deflation trap as true GDP crumbles http://t.co/5UnQRRi340 Whole economic sectors that recently drove growth have stalled $$ Jul 26, 2013
  • Boring But Important: ECB Relaxes Collateral Rules http://t.co/K4wOPXivpW ECB is wiling 2take less creditworthy collateral, aiding growth $$ Jul 26, 2013
  • Egypt?s Vanishing Currency Black Markets http://t.co/t8FNvy09Ow The military has brought temporary calm, but can they run the economy? $$ Jul 26, 2013
  • Ma Says Taiwan People Override Missiles in Meeting Xi http://t.co/ziCaK6rCFN Taiwan & China might get along, were it not for old grudges $$ Jul 26, 2013
  • Japan Prices Rise Most Since ?08 in Boost for Abe: Economy http://t.co/1Fyej1sMMp May seem 2b a boost, but wait till interest rates rise $$ Jul 26, 2013
  • Moody?s Sees Local Default as $21 Billion Matures http://t.co/63ThxfEOT1 How China deals w/defaults will have a long term market impact $$ Jul 26, 2013
  • An American General Warns the Israeli Right?http://t.co/st9ByUkiyz Arabs either get their own state, or they get Israeli political rights $$ Jul 25, 2013
  • No Menstrual Hygiene For Indian Women Holds Economy Back http://t.co/ToN7a7iYts Be grateful that you don’t live in India if u r a woman $$ Jul 25, 2013
  • Egypt General Stokes Protest http://t.co/DFcjL1Rc9L U.S. Suspends Planned F-16 Delivery as Military Chief Calls for Anti-Morsi Rallies $$ Jul 25, 2013
  • Pope Calls for More Just Society http://t.co/JLrQ4GWtPb Airy-fairy, what do you mean by just? Eliminating crony capitalists & socialists $$ Jul 25, 2013
  • China Coal-Fired Economy Dying of Thirst as Mines Lack Water http://t.co/kvQnHgtqfE China can command projects 2b done; can’t make water $$ Jul 24, 2013
  • Troubled Currencies http://t.co/2jGEw6om6f Iran, North Korea, Argentina, Venezuela, Egypt & Syria. Dig the stats: http://t.co/GR9V3YsvNc $$ Jul 24, 2013
  • Mandela?s Wealth-Sharing Dream Fades in South Africa http://t.co/nRroLnSyoI Black elite replaced a White elite, little change 4 most $$ Jul 23, 2013
  • Record Downgrades Foreshadow First Onshore Default http://t.co/cF5fse1yI3 Reaction 2a default in China will b interesting $$ #willtheyletit Jul 21, 2013
  • China Communist Party Fate Seen Resting on Farmer Rights http://t.co/GWstYr2R10 Will Communist Party grow up & recognize property rights? $$ Jul 21, 2013
  • ‘Desperate’ Cuba voyage is latest scrape for North Korean fleet http://t.co/ET7Y0n1DdE Interesting story on how bad NK merchant marine is $$ Jul 20, 2013
  • Hitting China?s Wall http://t.co/BIU1vF563V Late to the party, Krugman realizes that China’s economy has to rebalance 2 more consumption $$ Jul 20, 2013

 

Detroit

 

  • Detroit?s Bankruptcy: What You Need to Know http://t.co/8Y3SFcRIFA Nice summary of how most of the major parties r affected & process $$ Jul 26, 2013
  • How Detroit Drowned in a Sea of Troubles http://t.co/l2aMlTRApk Most disasters result from a series of small bad decisions $$ #detroit #FTL Jul 26, 2013
  • Now That Detroit?s Gone Bust, Is Your City Next? http://t.co/3C9sPJNqAw?s-gone-bust-your-city-next Consider San Diego, doesn’t fit model $$ Jul 23, 2013
  • How Detroit Affects Muni-Bond Investors http://t.co/FhAnmighaI If Detroit forces losses onto bondholders, other municipalities will mimic $$ Jul 21, 2013
  • Detroit Bankruptcy Judge Rhodes Is Ponzi-Law Scholar http://t.co/VgdMDjfTAD Sound like a bright, no-nonsense guy; rules over big problem $$ Jul 21, 2013
  • Detroit Bankruptcy Likely to Spark a Pension Brawl http://t.co/pJybP68iHo How much will benefits b cut4active, deferred & retired workers $$ Jul 21, 2013
  • Pension Payouts May Turn on Whether State or Federal Law Prevails http://t.co/fnTcOfO0i3 If State Law, then defined benefits r protected $$ Jul 21, 2013
  • Moody’s: Detroit bankruptcy filing credit negative http://t.co/2BTQBZ71FI Will b interesting 2c which classes of bonds recover $$ well Jul 20, 2013

 

Obamacare / PPACA

 

  • Bobby Jindal and Scott Walker: Unworkable ObamaCare http://t.co/8IDiKwfzye Opaque rules, big delays & rising costs: The chaos is mounting $$ Jul 26, 2013
  • Will Obamacare Kickstart Health-Care Revolution? http://t.co/E3rffobd6G More likely to boost overall spending until we scrap & start over $$ Jul 25, 2013
  • Obama’s New York Model http://t.co/qn9dtCQ7Km How NY state destroyed its insurance market using ObamaCare rules. PPACA now deregulates $$ Jul 24, 2013
  • Union Fears ?Destructive Consequences? From Obamacare http://t.co/liizu2UBnf Overly complex laws often r attacked piece-by-piece $$ Jul 20, 2013

 

Pensions

 

  • US States And Local Pensions Deficits Still in the Red Zone? http://t.co/absZaz1TRM Big issue. Govts didn’t put in $$, stretched assumptions Jul 26, 2013
  • Corporate Pension Plans Start Return Toward Fully-Funded Status http://t.co/6ay0QU03ep Yields up, risk assets up, DB pension funding up $$ Jul 25, 2013
  • David Skeel: Facing Up to America’s Pension Woes http://t.co/jIVvhQqa7B If you have a public pension, your income will b cut, get ready $$ Jul 25, 2013

 

Energy

 

  • Crack spread 101 http://t.co/aBScYANDQk For a primer on how crude oil refiners make $$ , start here. FD: + $VLO $PSX $MPC Volatile beasts Jul 26, 2013
  • Pimco Prepares for Life After Bill Gross http://t.co/PzFgWZZxRK The key mind that built Pimco; how will it survive without him? $$ #notwell Jul 26, 2013
  • Is Your College Going Broke? http://t.co/D0xoknDZRd Forbes rates 925 schools on financial strength. Scores here 4 free; c who will live. $$ Jul 25, 2013
  • Global Oil Supply Shock? http://t.co/QO1jcw8hjk Special report on Crude covering the US, Canada, Russian Supply, & global demand factors $$ Jul 22, 2013

 

Monetary Policy

 

  • Fed Chief Choice Shapes Up as Race Between Summers, Yellen http://t.co/zXurDGlmMY Sad that it comes to this, neither is competent $$ #FTL Jul 25, 2013
  • Bernanke Seen Slowing QE to $65 Billion in September http://t.co/roO9X8TQFb Y r we listening 2 economists? I don’t c QE tapering in 2013 $$ Jul 24, 2013
  • Fed Criticized on Oversight of Bank-Owned Commodity Units http://t.co/6S07xD8quN Fed has never used its role as lead bank regulator well $$ Jul 24, 2013
  • Biggest Banks Face Fed Restoring Barriers in Commodities http://t.co/daCEcXpwYM Asset allocations to commodities drove financialization $$ Jul 24, 2013
  • Gonzalo Lira: The Democrats Finally Embrace Money Printing http://t.co/hgnJcw3m6F Democrats realize the larger QE is, they can spend more $$ Jul 24, 2013
  • Right now, Larry Summers is the front-runner for Fed chair http://t.co/Gajh9jbKHR Reverse psychology 2 scare us 2 beg Obama pick Yellen $$ Jul 24, 2013
  • Why Fed Has Failed to Lower US Unemployment http://t.co/c7HxlBAoEP Main reason:monetary policy can’t solve unemployment, regulatory issue $$ Jul 22, 2013
  • Janet Yellen for Fed Chair http://t.co/zXW8cR9nKD @calculatedrisk makes a good case 4 Yellen; I would prefer someone more skeptical $$ Jul 20, 2013

 

Daily Journal

 

  • If $DJCO is managing >$100 million in stocks, then y aren’t they filing a 13F-HR w/the SEC as other managers do? http://t.co/nMRJMwC2TL $$ Jul 24, 2013
  • Munger Triples Publisher?s Value With Panic-Era Stock Bet http://t.co/AOAnQdJyun Cagey Munger times the bottom w/quality companies $$ $DJCO Jul 24, 2013

 

Financials

 

  • Easing of Mortgage Curb Weighed http://t.co/2dsxUG9cPy The Apostles of ez debt underwriting preach their gospel 2 regulators in DC $$ #FTL Jul 24, 2013
  • Americans Gambling on Rates With Most ARMs Since 2008 http://t.co/WUIyZLyRQt Proving again that u “Can’t teach a Sneech.” $$ #FTL Jul 24, 2013
  • Athene’s James Belardi, a Controversial Player, Gets Into the Annuities Game http://t.co/FFnKBzJPv3 Regulate him 2 the strictest degree $$ Jul 23, 2013
  • Nontraded REIT Pulls In Bundles Of Cash http://t.co/e51BfrLHhX Avoid any illiquid investment where the promoter knows far more than u $$ Jul 23, 2013
  • Housing Recovery Increasingly Prices Out First-Time Buyers http://t.co/LPInUpbjmJ A good thing; ppl need 2 save&make bigger downpayments $$ Jul 23, 2013
  • Commodities and banks, a recap http://t.co/SerwTZVNTj @izakaminska gives a primer on the financialization of commodities $$ Good read $STUDY Jul 23, 2013
  • Resigned to reform, Wall Street tries a different tack in DC http://t.co/sEANnYTqET Look at the insurance industry, it’s better regulated $$ Jul 23, 2013
  • Gorilla Flipping Homes as Rebound Revives Rapid Trades http://t.co/Z0V3aBPtlL Interesting niche: w/scale buys worst homes, rehabs/flips $$ Jul 22, 2013
  • Mortgage applications fall as refinancings dry up, big opportunities for REITs http://t.co/R5q7RXcJJT REITs can issue private mortgages $$ Jul 22, 2013
  • Prudential Hits Back on Risk Status http://t.co/I2B3ZawBJy $PRU right & FSOC wrong, problem isn’t size, asset quality, but liab liquidity $$ Jul 22, 2013
  • In other words, unless a life insurer is writing biz that is immediately or contingently terminable, they don’t go bad in a crisis $$ $PRU Jul 22, 2013

 

Politics & Policy

 

  • Letters About 401(k) Plan Costs Stir Tempest http://t.co/mFQnQ8k59A problem is that is hard 2 service small account & give them advice $$ Jul 25, 2013
  • Uncertainty and the Slow Labor Market Recovery http://t.co/IvXzr0Dt6l SF Fed estimates that policy uncertainty has held back employment $$ Jul 23, 2013
  • Feeling the heat on climate change http://t.co/MFMu4gUghd Climate is like markets; unpredictable, constantly varying, makes fools of us $$ Jul 23, 2013
  • Parents Shell Out Less Money for Their Kids’ College http://t.co/BD3WIz4bhp Fewer will attend college, instead they will enter trades $$ Jul 23, 2013
  • Reining in the audit industry’s reality distortion field http://t.co/8d6Uakd1p6 Acctg stds 2 flexible & auditors 2 chummy w/cos need chg $$ Jul 22, 2013
  • Tax break that corporate America wants kept secret http://t.co/0si0ts8gpG Not secret, corporations have negotiated taxes w/IRS 4a while $$ Jul 22, 2013
  • Warren?s Mistake About Wall Street Risk-Taking http://t.co/qY6jsau0Lg Crisis came b/c too many financed illiquid assets short-term $$ Jul 22, 2013

 

Market Impact

 

  • It’s Possible to Graduate Debt-Free. Here’s How: http://t.co/GsypSp77mo Scholarships, online courses, use your skills 2make $$ & summer job Jul 24, 2013
  • Three Big Money Mistakes You Could Be Making Right Now http://t.co/lysIFIkV6o Simplified: B careful what you spend; ez 2 waste $$ Jul 23, 2013
  • Gold futures hiccup indicates demand outpacing supply http://t.co/mF13t0jDaE Too much paper gold chasing too little gold; take delivery $$ Jul 23, 2013
  • Investors, Analysts See End of Commodity ‘Supercycle’ http://t.co/SEddMlCxug Probably true intermediate-term, but not long-term $$ Jul 22, 2013
  • Investors Struggle With Cash Conundrum http://t.co/qgTjBIegEy Cash is unique & useful, preserves value when inflation or real rates rise $$ Jul 22, 2013
  • SEC?s White Takes on Two Billionaires in One Day to Make Mark http://t.co/o9F6N9fdoz I like the current aggressive posture of the SEC $$ Jul 21, 2013
  • Junk Bonds Jump as Bonds Boom http://t.co/RA46qT8g8A Yield lust resumes as bonds begin to rally more generally amid new issuance $$ Jul 21, 2013

 

Other

 

  • Advances That Regrow Babies’ Hearts http://t.co/rDJ7c3sEih “Our theory is that a newborn heart has amazing growth potential…” $$ #Cool Jul 23, 2013
  • Does it matter if students can?t write? http://t.co/b8txYKVd0K Yes! Ability 2 write is a proxy for ability 2 analyze qualitative data $$ Jul 24, 2013
  • Wrong: How an Introvert Can Be Happier: Act Like an Extrovert http://t.co/cGEZEr6xu4 B what u like 2b & you will b happy; don’t force chg $$ Jul 23, 2013
  • Duchess Casts Midwife Tradition Aside for Royal Birth http://t.co/EX1mfFiiae 4 normal births midwives r the best, they give better care $$ Jul 23, 2013
  • SIM Cards Have Finally Been Hacked, And The Flaw Could Affect Millions Of Phones http://t.co/hKQbe2x2zp Watch yr cell phone bill 4 chgs $$ Jul 22, 2013
  • Forget campfires, more kids heading to entrepreneur camp http://t.co/6KwzH0rv0J Interesting idea, maybe I’ll send one of my kids $$ Jul 22, 2013
  • Burger Binges at Red Robin Fuel Hospitality Hiring Spree http://t.co/ri97tWIuBd Optimistic sign 4 job growth on the low end of wages $$ Jul 22, 2013
  • What happens to entrepreneurs after their one-hit wonder falls from favor? http://t.co/yYpIqHrsyU 4 examples: what happens after hot->not $$ Jul 22, 2013
  • A Buffett Fortune Fades in Brooklyn http://t.co/bCvLZYVSaw An unscrupulous charity invades the principal of an endowment & fails badly $$ Jul 21, 2013
  • Rise of the Warrior Cop http://t.co/f9vCdBjBiu Cops become more like soldiers, trampling on rights of Americans 2 life, liberty & virtue $$ Jul 21, 2013
  • Fifteen Years After Autism Panic, a Plague of Measles Erupts http://t.co/N7UmpedzYi The measles return after 15+ years of low vaccination $$ Jul 21, 2013
  • Germiest Places – 8 Ways to Protect Yourself in Restaurants http://t.co/BDDbA4i9p3 U may never again feel the same about ketchup bottles $$ Jul 21, 2013

 

Comments, Replies, & Retweets

 

  • Planning would be better http://t.co/eoCliTfLP2 Jul 25, 2013
  • @JLGull1 It applies to Berkshire Hathaway, Perry Corp, Markel, and many other holding companies Jul 25, 2013
  • @kaylatausche Honored to have you following me. Keep up the good work at CNBC; you do it well. Jul 24, 2013
  • @chadstarliper What I saw was fwd rates 5 years out move up pretty hard, and not move back, much Jul 24, 2013
  • @chadstarliper I agree w/ that, though in the short run, most don’t look at the fwd cv. But didn’t the fwd cv move when BB said “taper?” Jul 24, 2013
  • @chadstarliper But it does affect the yield the debt is offered at vs the open market Jul 24, 2013
  • @srochetrading thanks Jul 24, 2013
  • @chadstarliper QE is buying ~50% of US debt issuance, Democrats would like that to continue. Jul 24, 2013
  • @srochetrading I don’t know GL that well, would @ProfSteveKeen talk 2 me if I asked him? Jul 24, 2013
  • I just left a comment in “Warren Buffett sidekick Munger creates a mini-Berkshire at Daily Journal” http://t.co/T4S7rdjHVp Jul 24, 2013
  • I just left a comment in “Warren Buffett’s long-term stock picks – MarketWatch” http://t.co/1DB0TniNTu Jul 24, 2013
  • I just left a comment in “Stagflation: The Fed?s worst nightmare – Irwin Kellner – MarketWatch” http://t.co/cHFQluVzPY Jul 23, 2013
  • @Bonjubs Yes, being a Christian, a Libertarian, a loving father & husband, adopting 5 children & having 3, are all crimes against humanity Jul 22, 2013
  • @Bonjubs Rebellion is almost always a mistake. It has not helped most of the Arab Spring. Most long-lasting change comes via peaceful means Jul 22, 2013
  • RT @StevStiffler: ????? s??? p??? o? ?uo?d ?no? u?n? o? ???? ?up?p no? ?? ??????? Jul 21, 2013

 

The Rules, Part XLVII

The Rules, Part XLVII

Posted on by David Merkel

Crashes are the result of a shift from a positive self-reinforcing cycle to a negative self-reinforcing cycle.

Cycles in business and investment tend to be self-reinforcing.? That is true because most men don’t think, they imitate.? Economics needs to revise its view of man as rational, because it hurts to think differently.? It is much easier to go with the flow of your relatively successful neighbors, and imitate them.? Thinking for yourself is needless effort to many.? Why bother with that when doing well is a simple thing?

The trouble is, early imitators are few, because the signal is not so big.? Late imitators are many; the signal is big, and wrong.? The dumb money arrives at the end of a boom.? At that time, asset prices are so high that the asset must make gains over the next ten years in order to cover the capital cost of the investment.? At peaks, it would pay better to hold fixed income, and not play in the hot asset.

At the peak, it only takes a few sellers to overcome the market, because all of the dumb money is exhausted.? They are fully invested.? Valuation-sensitive buyers are wary.? This is one reason why markets rise slower than they fall.? Credit expands to aid the boom, but when the bust comes, new credit is cut off rapidly.? Thus we have crashes, and the economy never moves as quickly as the market, but the economy moves with more persistence.

I want to attack this from a different angle.? In 1929, before the crash, there was an article by J. J. Raskob in Ladies Home Journal entitled, “Everybody Ought to Be Rich.”? Think about that title.? Stocks flew as a result of the easy money policy of the Fed in the ’20s.? Some had invested in the market and made a fortune up to 1929.? Was that sustainable? No.? Did many keep it? No, very few.

But now suppose that everyone had invested in the market in mid-1929, off of Mr. Raskob’s advice.? Stocks would have soared further, and crashed worse.? Why?? The pricing of stocks is not arbitrary — a high price must be justified by high earnings relative to where an investment grade bonds yield.? As it was, the highly indebted economy of 1929 was ripe for a fall, with earnings and bond yields falling dramatically.? At least the Great Depression solved their debt problem — the Great Recession isn’t doing it for us.

But can everyone be rich?? Gotta break it to you, the answer is no.? Part of it is relative — there will always be some differences wealth/income because of a number of factors: some work harder, some work faster, some invest better, some get a better starting position, etc.

But part of it is absolute.? Some jobs don’t make sense unless you have less-skilled workers to accept lower wages for picking fruit, daycare, delivering pizza, etc.? In a society where almost all people marry and have more than two kids naturally on average, that means many of those low level jobs will fall to the young.? In societies where the birth rate is low, a lot of those jobs go to immigrants from poorer nations.? Now if you accept the idea that there is a spread of abilities in people, you know that there are less-skilled people by the time they arrive at age 25.? Some of it is natural.? Some of it is laziness.? Some of it is bad planning.? Many of those that are less skilled will occupy the low-end jobs, and in a society with reasonable population growth, there won’t be much room for immigration.

Everyone ought to be rich?? Because they invest?? If everyone were a value investor of high degree, and we parted with our excess income regularly to invest, where would the opportunities be?? In a situation like that, brighter and more motivated people would try to start businesses where they levered their own abilities without trying to play on the secondary markets, assuming they could find people to work with them.

The idea that “everyone ought to be rich” is hooey.? There are rare times when an asset class gets on a roll and seems invincible:

  • Stocks in the 20s, 50s-60s, 80s-90s
  • Bonds in the 80s-00s
  • Commodities in the 70s, 00s
  • Cash in the 70s
  • Real estate in the 20s, 70s-80s, first half of 00s

But to profit in those eras, you would have to know the right place to be, have proper discretion make wise investments, AND have enough funds socked away in order to make the wise investments.? By the time someone writes a book/article “Everyone ought to be rich,” or “How you can be rich by flipping real estate,” etc., it is too late.? And please ignore the scam ads where penny stocks create millionaires — that applies to those few selling the penny stocks, not those buying.

Few people have achieved great wealth through investing.? The ordinary sorts are those who manage other people’s money in public markets, and a lot of it, and do a middling-to-good job, so that clients don’t leave.? Other do it through private equity, but there again, they are levering other people’s money.? Then there are those that use mostly their own money, like Buffett, Munger, etc., and find undervalued situations relative to prospects regularly.? Those are precious few.

Society has people that make money off of:

  • Work
  • Lending
  • Managing physical assets
  • Managing businesses
  • Managing financial assets

That last category gets too much attention.? Most people have better advantage upgrading their skills, or owning private businesses that they understand well.? That may not make them rich, but it might make them well-off.

Summary

There are booms and busts, and each period has self-reinforcing behavior.? It is difficult to time booms and busts.? Some get the booms; some get the busts; very few get both.? It is tough to make money off of the boom-bust cycle and keep it.? It is really tough to make your living entirely through investing, unless you inherit it.? Work to enhance your skills to your best advantage wherever you work.

But no, everyone can’t be rich, and we have to accept that reality, and reflect that in government policy.? Encourage free and fair competition; eschew crony capitalism.? Don’t give anyone, rich or poor, an unfair advantage.

Finally, recognize what the neoclassical economists won’t admit — you can’t get rid of the boom/bust cycle.? It is a fact of life, and all of the tinkering with policy will never eliminate it — it will only intensify it.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Energy

 

  • US fuel export surge gives refiners surprise summer blockbuster http://t.co/8d3WbY7xZg We need free trade in energy & end corn ethanol $$ Jul 19, 2013
  • US approval of Enbridge pipeline plan irks some oil shippers http://t.co/4YYisxzgFH Limited pipeline capacity versus supply raises rates $$ Jul 19, 2013
  • Deadly derailment won’t stop oil on trains http://t.co/gb7u6riA6S Rail allows 4 flexibility at a higher cost and lower safety $$ Jul 19, 2013
  • The danger of too much ethanol http://t.co/huUzLpgvDX We would b a lot smarter 2 buy ethanol from Brazil, or drop ethanol in entire $$ Jul 17, 2013
  • Surging Gasoline Prices Push CPI Inflation Higher, But Weak Core Fuels Taper Uncertainty http://t.co/0Z5zXMjvlJ Inflation rising, note it $$ Jul 17, 2013
  • Senators Grill Refiners Over High Prices Amid Oil Boom http://t.co/j0jhNhkXSF There is cheap crude in the center of the US, not at coasts $$ Jul 17, 2013
  • US ethanol credits soar to fresh high http://t.co/1gUVMm5O3u Perhaps allow the importing of Brazilian ethanol; that would improve matters $$ Jul 16, 2013

 

China

 

  • China Loosens a Key Control Over Banks http://t.co/AS6hzeD9vY Not sure this is big; eliminating floor interest rate allows 4 lower rates $$ Jul 19, 2013
  • China’s Zhu Changhong Helps Steer Nation’s Currency Reserves http://t.co/WcjpJD4YiC Aligns China’s interests more tightly w/the US $$ Jul 17, 2013
  • China Keeps On Gobbling Up Treasurys http://t.co/4gOipjltfJ Meet the Fed’s competitor 4 acquiring Treasury bonds; forced buyers both $$ Jul 17, 2013
  • Wealth Products Threaten China Banks on Ponzi-Scheme Risk http://t.co/BB8162405P Chinese banks will b threatened by runs in a few years $$ Jul 17, 2013
  • Police Say Sexual Favors Spur $1.5 Billion Glaxo China Sales http://t.co/hrPhrJjGkb China sells itself cheap if this is true $$ #SAD Jul 17, 2013

 

Central Banking

 

  • Curse of the front-runner a bad omen for Fed contender Yellen? http://t.co/CabkT1vGRV We need someone other than a neoclassical economist $$ Jul 19, 2013
  • The Summers or Geithner nightmare http://t.co/oltKKRvRMC They benefit from not being Yellen. Otherwise, no reason to consider them. $$ Jul 19, 2013
  • Bernanke Says Unwinding of Risky Bets Boosts Borrowing Costs http://t.co/QVVmtUPUnq Interesting argument, given his prior encouragement $$ Jul 19, 2013
  • Bernanke: Three Reasons Interest Rates Have Risen http://t.co/AJ7fVb2Csp Stronger economy, ‘fraidy cat markets, & leverage unwind $$ Jul 19, 2013
  • Hilsenrath: What Bernanke Means http://t.co/riIsNWgsCq When you have a poor communications strategy, a lot of people r needed to explain $$ Jul 18, 2013
  • Four Factors the Fed Faces on Bond-Buying Exit http://t.co/nDpYsdDKef Fed does not get labor market, inflation, & fiscal concerns $$ Jul 17, 2013
  • 3 reasons why Larry Summers should not b next Fed chairman http://t.co/kS6d0VcThG Many reasons y da conceited fool should not b Fed chair $$ Jul 17, 2013
  • Bernanke Boom Signaled by Yield Surge as Market Recalculates http://t.co/H7miGoHpoI Watch rates fall again on economic weakness $$ Jul 16, 2013

 

Rest of the World

 

  • Female Footballers Covered Head to Toe Inflame Islamists http://t.co/WWTPU4EIqu No matter how hard u try, some people won’t b happy $$ Jul 19, 2013
  • Honda?s Fujino Readies ?Flying Acura? to Challenge Cessna http://t.co/fAaOQ7Oq3v Honda pours lotsa $$ into a long-shot small plane venture Jul 19, 2013
  • Honda Builds ?World?s Fastest Lawn Mower? http://t.co/WpCe7DciTf Can go 130MPH, or 15MPH when it is cutting grass. All bragging 4 rights $$ Jul 19, 2013
  • Rudd Home Sale Thwarted as Canberra Market Slows Pre-Vote http://t.co/uts4KwqXru Housing prices fall as economy slows & govt shrinks $$ Jul 18, 2013
  • Abe Unleashed After Vote Seen in Biggest Risk Drop http://t.co/mKuANJSeKL Social-security costs r already 31% of government budget $$ Jul 18, 2013
  • Payday Looms on Dictator?s Defaulted Bonds in Peru http://t.co/0gDmQGzGu5 Expropriation in the 70s demands repayment 4 those that lost $$ Jul 18, 2013
  • Ahmadinejad Departure in Iran Means Moving Desk Down Hall http://t.co/Iiv0lTr3nI Never underestimate the staying power of a bad idea. $$ Jul 17, 2013
  • International Paper’s Big Pulp Bet Hits a Frosty Siberia http://t.co/zOv3fPyKC9 Cheap Timber & transport stymied by Russian bureaucracy $$ Jul 17, 2013
  • Merkel?s Unseen Power Beate Baumann Misses No Chancellor Details http://t.co/G23npBa7qF Baumann works behind scenes on policy & politics $$ Jul 16, 2013
  • In Egypt, the ‘Deep State’ Rises Again http://t.co/GEXtZ1kR63 Collusion between Army & Opposition parties against Muslim Brotherhood $$ Jul 13, 2013

 

Market Impact

 

  • A portfolio for all seasons? http://t.co/GZle4jAj2U If Harry Browne’s idea were more widely adopted, the price of gold would fly. $$ Jul 19, 2013
  • The 100 Best Finance Blogs: All The Internet?s a Stage http://t.co/6nUipa6mbv Aleph Blog is pleased to make the list @ # 48. Great blogs $$ Jul 19, 2013
  • Red Bull-Fueled All-Nighters Put Fortress Fund on Top http://t.co/VhA7FTlNNJ Diminishing marginal returns 2 scale; time spent late poor $$ Jul 18, 2013
  • Excellence Hurts Returns in US Stock Study http://t.co/IgN41lyuUA Stock performance mimics bond performance; junk stocks & bonds do well $$ Jul 18, 2013
  • Judge Slams S&P’s Defense in US Lawsuit http://t.co/PP9FNRlGGj Puffery: lousy argument 4a rating agency 2make b/c ur supposed 2b honest $$ Jul 18, 2013
  • Meet the Man Who Has Worked at Goldman for 80 Years http://t.co/JsQTRY20Vl Alfred Feld is still plugging away for clients @ $GS at age 98 $$ Jul 18, 2013
  • Eminent Domain Plan Decried by DoubleLine Sees New Life http://t.co/h78U7z5i5i Myth: ordinary people were innocent in housing bubble $$ Jul 17, 2013
  • Biggest Muni Sale of 2013 Set to Price for Texas Roadway http://t.co/VYTI7TAqH2 There is demand 4 muni deals; this is a prime example $$ Jul 17, 2013
  • Should You Invest in the New Wave of IPOs? http://t.co/CSBOFQYpIa When IPOs r many, often the quality is lower. B careful w/IPOs here $$ Jul 13, 2013
  • Senators Introduce Bill to Separate Trading Activities From Big Banks http://t.co/2ig1nWw4hH There r better reforms that need 2b made $$ Jul 13, 2013
  • The Yankees parking lots that went bankrupt, skipped city payments and took city land http://t.co/aIylgsyrmf Read; fascinating tale $$ Jul 13, 2013

 

Other

 

  • Three Ways to Unlock Great Insights http://t.co/wNpdgGcwp5 Consider anomalies, new perspectives,& desperation $$ Jul 19, 2013
  • South Carolina Psychiatric Patient Stuck 38 Days in ER http://t.co/ublh93VwXe Eats up a lot of hospital resources, but what to do? $$ Jul 18, 2013
  • For His Next Trick, the Cronut Maker Reinvents the S?more http://t.co/dyMYB1V6BO I am into cooking, but this sort of stuff makes me blink $$ Jul 18, 2013
  • The Cronut Maker Reinvents the S’more http://t.co/AqIfdAtEyo If you add enough calories to any recipe, it will be delicious. $$ Jul 18, 2013
  • Smartphone Upgrades Slow as ‘Wow’ Factor Fades http://t.co/G1dKzoe1Zm Every trend fades. Exponential goes linear, linear goes logarithmic $$ Jul 17, 2013
  • Health Insurance Shoppers Put Low Price Above Other Options http://t.co/qBBuCCvHXV People want basic coverage 4a moderate price $$ Jul 16, 2013

Wrong

?

  • Wrong: China’s Flying Propaganda Weapon Will Blow Your Mind http://t.co/OtBvBMFKle Will b an ez target, given RF signature & 4 turboprops $$ Jul 19, 2013
  • Wrong: Consumers Most Penny-Wise in Almost 50 Years http://t.co/LTuUGB3eEW A high correlation doesn’t mean a beta of one $$ #studystatistics Jul 19, 2013
The Rules, Part XLIV

The Rules, Part XLIV

Posted on by David Merkel

Expectations are a part of the game.

As expectations change, so do the markets.? What could be simpler?? Markets are discounting mechanisms, so why aren’t expectations the whole game?

Expectations are the whole game for widely traded assets that are analyzed by many.? But there are complex assets and smaller assets for which expectations, should they exist, are not well-defined.? A large example would be Berkshire Hathaway.? When the stock of Berkshire Hathaway begins to care about making/missing earnings estimates, that will be a real change in the way the stock is viewed.

I have a number of other stocks in my portfolio that have no analyst coverage, so whatever expectation their is for the company is ill-defined.? Earnings shrink?? Stay flat? Rise a little, lot, or more?? Often the reactions are muted, because expectations are ill-defined.

With cheap stocks, I often view results in two ways:

  • Expectations mode: are they beating earnings expectations or not?
  • Book value mode: are they earning enough to justify the current market price?? (And are the earnings real?)

It’s hard to lose money on companies that trade below book and have a single-digit P/E.? The value accretes and eventually market prices follow.? You just have to be happy with firms that are boring, but profitable.

Cheap stocks with good balance sheets do not get killed when there are earnings disappointments.? With those stocks, we can sit back and wait for a better day.

All that said, earnings estimates provide a feedback mechanism for those stocks that have an adequate number of analysts following them.? Imperfect as it is, it guides the way we react to quarterly releases of adjusted earnings.? And when companies attempt to show adjusted earnings that are liberal, it is no surprise when the market rejects their presentation, and the stock goes down.

But this rule applies to policymakers as well.? Over the last 27 years, the Federal Reserve has placed a greater emphasis on communications.? I think that was a mistake, but the Fed made it a goal to shape the expectations of the market.? And they did so.

But once you sharpen the focus of the market to your promises, should it surprise you that when you give the least bit of equivocation, that the market reacts badly?? Hey, you made your bed, now sleep in it.? You trusted in your ability to communicate, and now you reap the result.

Even with no current change in policy, a change in expectations can have a huge effect on markets, particularly when novel policy tools are being used.? Ben Bernanke should not have been surprised by the reaction of the market to his comments to the press after the last FOMC meeting.? All of the efforts since that time to take it back have bolstered the stock market, but have not affected the bond market much.? Remember that the bond market is usually smarter than the stock market, thus I remain bearish.

 

 

Full disclosure: Long BRK/B

The Rules, Part XLIII

The Rules, Part XLIII

Posted on by David Merkel

Modify Purchasing Power Parity by adding in stocks and bonds

An optimal currency board price basket would contain both assets and goods.

In one sense, assets are future goods.? Assets throw off an uncertain stream of future benefits, which can be used to purchase goods at that time.? Based on the demographics of an economy, if marginal dollars tend to be saved versus spent, stimulus would affect the economy differently:

  • Spent: we get goods/services price inflation.
  • Saved/Invested: we get asset price inflation.

Asset price inflation is different.? It is difficult to transfer resources from the present to the future.? Even a zero coupon bond relies on the solvency of the issuer, and the realized goods/services inflation.? Hoarding gold/commodities relies on the idea that they will be more scarce in the future, which is unlikely as prices rise to encourage more supply.

Cash rarely earns more than the CPI.? Bonds have long cycles where they are alternatively “certificates of confiscation” or “beneficiaries of deflation.”

Asset prices rising is not always a good thing.? The rise in prices may reflect additional productivity or they may reflect a higher price for transferring goods to the future.

When I was a bond manager for an insurance company that had long-dated promises to pay, I bought a variety of fixed-rate bonds that that appreciated dramatically in value in a falling interest rate environment.? What did that do to my expected cash flow stream?? Nothing.? If anything, it meant we would earn less because we would reinvest excess cash flows at rates lower than the market yield of the bonds.

This is a reason why QE from the Fed is questionable.? Their asset purchases push up the price of assets, but the cash flows don’t change.? Maybe a few more entities decide to issue debt in the process, but that doesn’t mean the debt gets used for expansion.? It may well replace equity, given its cheapness.

Maybe the answer here is to look at inflation as a credit phenomenon, whether the credit is used to purchase assets or goods/services.? At present, assets are inflating more than goods/services, and that has been true for some time.? I suspect that relationship will reverse, but when that will come I can’t predict.

Book Review: Poverty and Progress

Book Review: Poverty and Progress

Posted on by David Merkel

I appreciated this book.? In my early 20s, I wanted to do development work in developing countries, but I ran into a problem.? All of the interventionist solutions didn’t work, and countries that ignored the advice of development economists tended to do better.? That has continued to be true since then.? Among academic economists, the battle goes on between the socialists and free marketers.? The battle goes on in many arenas:

  • It is easy to do cross-sectional time-series regressions across countries, and twist the data to your bias.? In general, more flexible the econometric technique, the lower the probability that it tells an accurate story.? Noise gets interpreted as signal. [The Ph. D.s at the Fed are experts at this.]
  • How much of poverty is due to culture, recalcitrant governments denying property rights to their people, etc?
  • How much different was it for the now developed nations to develop during their era?? Do the same principles apply?
  • Are there really “poverty traps” in development?
  • Are there structural problems in development that naturally occur, or does it stem from government interference?

This book takes an optimistic view on development, against the crowd that creates complex models in order to allege market imperfections, rather than government imperfections.? The truth is that poverty in the world is in retreat, and abject poverty may not exist in another generation, aside from nations that sabotage themselves.? Nations that are growing can follow the same path of freedom as the developed nations did.

This book will open your eyes on global poverty, and make you realize that we are close to success, aside from self-inflicted wounds.? It will also make you think through the metaphysics and ethics of global warming, and explain to you why it is unfair for the developed nations to constrain the developing nations regarding use of hydrocarbons.? [For those that are rabid bigots on global warming, this book argues that global cooling is happening.? Is your mind open enough to consider the argument?]

I recommend this book highly.? Well written, and not afraid to take some non-consensus views in favor of freedom.

Quibbles

None.

Who would benefit from this book: You have to be interested in development economics to enjoy this book.? If you want to, you can buy it here: Poverty and Progress: Realities and Myths about Global Poverty.

Full disclosure: The publisher sent me a copy of the book for free.

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.

 

Temporary Prosperity at the Cost of Longer-term Prosperity

Temporary Prosperity at the Cost of Longer-term Prosperity

Posted on by David Merkel

Apologies for last night’s post on Bernanke.? I have deleted it.? It was not one of my finer efforts (it was late), and I went down some rabbit-trails that overshadowed my main, and valid point.? Bernanke has no business criticizing Congress for running a less accommodative policy, when he is signaling a less accommodative policy.? Congress does not have a communications strategy that investors rely on.? The Fed does, and Bernanke has made a lot out of transparent communications, which I believe is a harmful concept that is bearing bad fruit now.? So when he signals that policy accommodation will be less, and sooner than you think, why should he be surprised at the carnage in the bond market?? Markets are discounting mechanisms, they anticipate.? Why can’t the Fed Chairman recognize that, rather than saying the market misunderstood him?

That was a good thing with the Fed, pre-Greenspan.? It was much easier to understand the Fed when they said nothing.? Onto tonight’s piece:

Borrowing from the Future to Take Care of the Present

I am a fan of balanced budgets.? Why?? Balanced budgets are sustainable.? This is particularly true if budgets are balanced on an accrual basis.

Politicians like to promise more than they deliver.? They are like J. Wellington Wimpy, who said, “I would gladly pay you Tuesday for a hamburger today.”? Goods and services today, payment later.

This happens in a lot of ways, large and small:

  • Federal Pension Plans are unfunded, supported by the taxation authority of the Federal Government.
  • Running large deficits that don’t do much good for the economy as a whole, while racking up debts that will have to be paid by future generations.
  • Running monetary policies that improve conditions today, but will worsen future conditions as a result.? Far better to let recessions bite, eliminating bad debt & projects, and leave behind a less indebted society, ready to grow.
  • Social Security & Medicare are unsustainable programs created by our grandparents, sustained by our parents.? These programs will kill the rest of us with their costs.? Our forebears ate sour grapes, and our teeth are set on edge.? And with each generation it gets worse, as the demographic crisis makes it harder to sustain.
  • Obamacare front-end loaded taxes, and back-end loaded benefits.? We are now faced with the costs, and the taxes have been spent on other matters.? Aside from that, the estimates when the bill was passed were dishonest.
  • States & municipalities played with their pension assumptions for years, offering generous benefits that could not be afforded under intelligent assumptions.? It becomes benefits today, taxes tomorrow.
  • Tax policy encourages debt rather than equity, creating industries that over-borrow.

Things could have been better at this point had the Fed done its job and let recessions bite, eliminating bad debts.? Congress could have run balanced budgets, constraining spending on all departments.? The Social Security surplus could have been walled off from the government, and invested in index funds.? States & municipalities could have funded their pension plans fully, and not used the flexibility to fund other spending.? We could have had a tax code that did not tax dividends, but offered no deduction for interest.? We could have constrained the Fed’s ability to act.

We have a mess now as a result of politicians promising, with funding to some later.? In the 1840s over-indebted governments defaulted, and there were many revolutions in Europe.? What will be the price in the modern era, with our over-indebted governments?

I don’t know.? But I suspect it will be ugly.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Monetary Policy

 

  • Fed stops short of the clarity global markets crave http://t.co/fdQUJlHDX3 Fed has shown that it does not understand global debt markets $$ Jul 12, 2013
  • Unintended consequences made the PBOC?s strategy fail to work http://t.co/iQGNVFelw3 Highlights lack of liquidity in Chinese banking $$ Jul 12, 2013
  • Bernanke Supports Continuing Stimulus Amid Debate Over QE http://t.co/oPhi1HGF40 Bernanke really doesn’t know, but he is afraid 2 tell u $$ Jul 11, 2013
  • Bernanke reduces future policy accommodation &sez Fed is stimulating, then criticizes fiscal policy as tight for running smaller deficits $$ Jul 11, 2013
  • Fed Affirms Easy-Money Tilt http://t.co/62OXSxaCNu Transparent communications requires many words & misunderstandings to get msg right $$ 🙁 Jul 11, 2013

 

Michael Pettis

 

  • Pettis: An analysis that points to an unsustainable trend is always right if the trend turned out indeed to be unsustainable. $$ Jul 11, 2013
  • Pettis: That it took many years before the limits were reached is not an indication the model was wrong. It’s how the economy works. $$ Jul 11, 2013
  • Pettis does not like those who criticize those who pointed to unsustainable debt trends as “Stopped clocks that are right twice a day.” $$ Jul 11, 2013
  • It’s impossible to precisely time leverage unwinds, merely seeing it in advance qualifies as a win, whether US Housing, Eurozone, China $$ Jul 11, 2013

 

PPACA [Obamacare]

 

  • Obamacare called ‘The fiasco for the ages’ http://t.co/ZHFA72sIGe Call it an unforced error; stupid policy that destroys better policy $$ Jul 09, 2013
  • Decision to Delay Employer Mandate Will Cause More Employers to Drop Coverage http://t.co/02lqVlAdxN Obamacare the dumbest idea out there $$ Jul 09, 2013
  • Part-Time America http://t.co/ikzsOSOeaG There r more people “employed” but many have several part-time jobs, b/c of Obamacare [PPACA] $$ Jul 07, 2013

 

Rest of the World

 

  • Haredim Harassing Women Prompt Ultra-Orthodox Backlash http://t.co/tj4aXNM7IU Q: has wailing wall become an idol 2 some Jews? $$ Jul 11, 2013
  • After all, u can pray anywhere. God is everywhere, so he will hear u. Whether he will favor u is another matter. Jul 11, 2013
  • Greek outlook bleaker than lenders think, local think tank calculates http://t.co/Ktuc9JMRUS Austerity should not increase from here $$ Jul 11, 2013
  • Value of the Syrian Pound Hits an All-Time Low http://t.co/wz8t1hkqZP Unsound currency is a common casualty of any war, especially civil $$ Jul 10, 2013
  • Pimco Shuns Korea to Turkey Covered Debt on Liquidity http://t.co/HN0wdw7xqo Liquidity is not free: requires quality, size & simplicity $$ Jul 10, 2013
  • The Muslim Brotherhood?s Legacy: Controls, Shortages and Inflation http://t.co/GaTU9LBp16 Brotherhood wanted power for Islamic reasons $$ Jul 09, 2013
  • Japan in a Bind on Planned Tax: Fears Are It Will Hurt Rebound http://t.co/43NQV3EXFd Far better to cut government spending; much wasted $$ Jul 07, 2013

 

Market Impact

 

  • Hedge Funds Are for Suckers http://t.co/RBpyL1c84z There are limits to leverage, arbitrage, good ideas, no limits 2 high costs, though $$ Jul 12, 2013
  • Property Crushes Hedge Funds in Alternative Markets http://t.co/SDCFgPHxxE Fell hard 2007-9, has come back hard since, but so have stocks $$ Jul 12, 2013
  • US Banks Seen Freezing Payouts Under Harsh Leverage Rule http://t.co/ZRMqXy2Z2k This will eventually be gamed, as capital is squishy $$ Jul 11, 2013
  • Corporate Insiders Shift From ‘Buy’ to ‘Sell’ as Bankruptcy Nears http://t.co/uk2QIagvIz Now u tell us. Really? Potent Inside information $$ Jul 11, 2013
  • REITs Deepening Bond Losses as Leverage Forces Sales http://t.co/3fQ15I9ITC Is it possible we get another self-reinforcing selloff? $$ $NLY Jul 11, 2013
  • SEC Lifts Ban on Hedge Fund Ads http://t.co/2jcKBcpDaS Probably a mistake, but let the big guys take their lumps w/survivor bias $$ Jul 11, 2013
  • Senator Hatch says insurance firms can ease US pension crisis http://t.co/yAJMEf43zs Cute idea, but life insurance industry is 2 small $$ Jul 11, 2013
  • U.S. Boosts Bank Capital Demands Above Global Standards http://t.co/J8jHFQ3Qdk Big banks will squeal, but their size poses systemic risks $$ Jul 10, 2013
  • Kevyn Orrs’ plan for paying bondholders could cost Michigan cities http://t.co/vSLW5f8h2d 2nd-order effects r neglected by the desperate $$ Jul 09, 2013
  • S&P Raises Puffery Defense Against US Ratings Case http://t.co/V0HGTyPjeV Reasonable. Wise investors know to ignore rating, read review $$ Jul 09, 2013
  • The New Breed of Income Fund http://t.co/ryMg2SN47u Risks r higher on these funds b/c stocks r not as safe as bonds, they can fall more $$ Jul 07, 2013

 

Companies & Industries

 

  • Fracking Firms Face New Crop of Competitors http://t.co/iVhNbNkQkw High profit margins drive competition; benefit goes 2 E&P firms $$ Jul 10, 2013
  • Tanker Cars in Fatal Quebec Rail Crash Had Drawn Scrutiny http://t.co/O3i6GCVKEh Relative safety of pipelines becomes apparent post-fire $$ Jul 10, 2013
  • Deadly Train Derailment Fuels Crude-by-Rail Concerns http://t.co/V3CPfaTGMP This was a case of operator error; it does not generalize $$ Jul 09, 2013
  • Alcoa Facing ?Hard Decisions? on Aluminum Plants http://t.co/wuZO515yrS Plant shutdowns teach investors where good opportunities may be $$ Jul 09, 2013
  • At 88, Former AIG Boss Is Building a New Empire http://t.co/I8x1siazJn He did not deserve to be thrown out of AIG; now he builds anew $$ Jul 07, 2013

 

Other

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  • Oregon Tuition Plan Punishes Graduates? Success http://t.co/Li3tr4X95J Will attract the less successful, paying 3% of earnings 4 25 years $$ Jul 13, 2013
  • Math, Science Popular Until Students Realize They?re Hard http://t.co/UXA00o0Sqc Yes, math & science r hard & not squishy, but rewarding $$ Jul 12, 2013
  • Gangs Ruled Prison as For-Profit Model Put Blood on Floor http://t.co/8HxXWEZ5sR Long article describing lousy control at some prisons $$ Jul 12, 2013
  • Father Cancels Tiramisu to Cable Under Pentagon Furloughs http://t.co/kNdLn2PuEm Watch 4 the impact of the next round of base closings $$ Jul 12, 2013
  • Can Spider Web Be Replicated? A Japanese Startup Thinks So. http://t.co/N4B0yKprnU Something 2watch, many uses 4 light ultrastrong fabric $$ Jul 10, 2013
  • Non-Farm Payrolls Revisited – Strong Weaknesses http://t.co/JsMeYetfNh Part-time work grew, full-time work fell. Does this look healthy? $$ Jul 09, 2013
  • Show Me the Jobs That Immigrants Steal http://t.co/mwfUqVVEUj Immigrants do things that the native-born won’t do. Who wants 2 pick fruit? $$ Jul 07, 2013

Wrong

  • Dumb: Fed?s risky codependency with the markets http://t.co/KxfOrHxD9j Increased communication yields more losses than gains, duh $$ Jul 12, 2013
  • Wrong: ?Middle-class revolution? fuels Pentagon war plan – MarketWatch http://t.co/CNxA1AO9JJ What a dope, Marketwatch should be ashamed $$ Jul 12, 2013
  • Dumb: 8 Things Really Successful People Do http://t.co/EvhKoxfpWK Points 6 & 7: Religion necessary for Spirituality & Ethics $$ Jul 11, 2013
  • Wrong: The Second Great Depression http://t.co/5WUd24YZlk If u don’t c the problem as 2 much private debt creating a boom, u don’t get it $$ Jul 10, 2013
  • The Fed facilitated that boom, & when excess liquidity was gone, a scad of broken balance sheets resulted; leverage still 2 high now $$ Jul 10, 2013

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Replies, Retweets, and Comments

  • @auaurelija Not sure I would have analyzed it that way. That piece only highlights increases, and many cos in the table still have low debt Jul 12, 2013
  • @felixsalmon Yes, & the dual mandate led to providing too much stimulus 1987-2007, leading to the mess we r in now. Single mandate better Jul 12, 2013
  • @auaurelija So where do you see the increase in leverage? Most companies seem not to be doing that, as far as I see. Jul 12, 2013
  • RT @pdacosta: The Fed’s message to the markets is clear: the path of rates will depend on stuff happening or not happening. Jul 12, 2013
  • A great time w/ @japhychron as we discussed math, computing, economics, security, secuities, equities, bonds, FX, banking, & work. Jul 11, 2013
  • “I disagree; there is emotionless investing. It depends on realizing that you have a long time?” ? David_Merkel http://t.co/qoT1BrMgIt $$ Jul 11, 2013
  • RT @ggreenwald: Don’t worry: a court that meets in total secrecy, housed inside the DOJ, with only the Govt allowed to be present, is reall? Jul 08, 2013

 

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