Category: Macroeconomics

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

 

Rest of the World

 

  • Wrong: Panic Spreading Across Nations Outranks Trade http://t.co/TbYGmdlL The panic is rational. 2 much debt that cannot b paid back $$ Nov 03, 2012
  • Hong Kong Taxing Homebuyers in Bubble Fight http://t.co/4xEwAl7R Would that other nations had tried this rather than encouraging debt $$ Nov 03, 2012
  • http://t.co/gj6va2hE China’s 18th Communist Party Congress convenes in Beijing on 11/8 4a once-a-decade leadership change $$ Infographic Nov 01, 2012
  • Hollande Ducks as French Industry Bleeds Jobs http://t.co/nyQ89HaH If France doesn’t change, the Eurozone eventually will fall apart $$ Oct 31, 2012
  • Italy in political chaos as election nears http://t.co/fAE84PLn Italy exists 2 flesh out dictionary definitions of corruption & instability Oct 31, 2012
  • Ortega Tops Buffett With Zara Fortune of $53.6 Billion http://t.co/2uE9xajS Tough 2 make that much $$ off retailing apparel but he did it Oct 31, 2012
  • Malaysian Gold Plans Flourish as Savers Seek Higher Yield http://t.co/4OTzlTIW When yields are too low, many bad income schemes arise $$ Oct 31, 2012
  • The EC can claim “success” in CDS regulation http://t.co/kufYPnpz @soberlook tells us how the EU solved sovereign CDS by killing it $$ Oct 29, 2012
  • WHOA: Japan Has Its Own Fiscal Cliff, And People Are Actually Talking About A Risk Of Imminent Technical Default http://t.co/b3ldTp0f $$ Oct 29, 2012
  • Europe’s Crisis Spawns Calls for a Breakup?of Spain http://t.co/RvC0ctZB more here: http://t.co/h1faG4Yd Will b tough 2 stay whole $$ Oct 29, 2012

 

Insurance

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  • Berkshire Hathaway buying Oriental Trading http://t.co/997JvhOS Buffett buys an Omaha company that sells party supplies nationally $$ Nov 03, 2012
  • MetLife’s Big Annuity Charge Linked to Regulatory Concern http://t.co/mNbA192Z Reserving 4 guarantees on variable products can b weak $$ Nov 03, 2012
  • Hartford Moves to Offer Annuity Buyouts http://t.co/dGmfth2h also http://t.co/aUpA2l2X Annuity-holders: don’t accept $HIG ‘s low offers Nov 03, 2012
  • P/C Insurers Can Handle Sandy Losses; Flood Program 2 Bear Brunt http://t.co/4WqN1uq1 Watch $TWGP, maybe $CB, property-centric reinsurers $$ Oct 31, 2012
  • Insurers Won’t Get Whole Tab http://t.co/O7oFk9Wd Important 2c that much damage is not insured, & flood insurance not bot by many $$ Oct 31, 2012
  • Berkshire Extends Housing Bet With Brookfield Venture http://t.co/zquFTiB1 Buffett increases residential real estate sales presence $$ Oct 31, 2012

?

Sandy

?

  • Nomads in Queens Endure Life on the Line as They Forage4 Gas http://t.co/hzMnZnNT Many Running on Empty in Newark http://t.co/CF4LAHWu Nov 03, 2012
  • Many Affected by #Sandy Lacked Flood Coverage http://t.co/0AYx5xb2 Common in low frequency areas to not get the flood cover $$ #rolldice Nov 01, 2012
  • #Sandy Seen Lifting Insurance Prices Amid ?New Reality? http://t.co/13kHQUs6 Might have a small upward move in rates; shouldn’t b big $$ Nov 01, 2012
  • Sandy Delivers a Digital Wallop to Eastern US http://t.co/aGbvoUKv Many datacenters have gotten soaked/fried; hope the data was backed up Nov 01, 2012
  • As far as the US equity indexes are concerned, the two day break for #Sandy had little effect on the stock markets $$ Oct 31, 2012
  • New York Subway System May Take Weeks to Recover From Storm http://t.co/thkL5qca Will be difficult to get into NYC by many means $$ Oct 30, 2012
  • US Stock Trading Shut for Second Day, Joining Bonds http://t.co/wZzh2MTg Markets likely to reopen on Wednesday, things still uncertain $$ Oct 30, 2012
  • Behind Decision to Close Markets http://t.co/nhLOKRQT Contingency plans to operate exchanges remotely will be the rule in the future $$ Oct 30, 2012
  • Hurricane Sandy: Losses Estimated at $45 Billion http://t.co/dUZJ3cmi Seems high, but possible. More realistic: http://t.co/DgB638Ij $$ Oct 30, 2012
  • Sandy knocks out power to 82 percent of LIPA customers http://t.co/NkjJEbcU Astounding $$ Oct 30, 2012

?

Politics

 

  • The progressive case against Obama http://t.co/t8G5PsUL I may write “The Libertarian case against Romney,” b/c we really don’t know him $$ Nov 03, 2012
  • Disasters Create Bigger, Not Better, Government http://t.co/W91nFEqr The challenge is 2 decide in advance what risks r borne by whom $$ Nov 01, 2012

 

Energy

 

  • Mining Canada’s Oil Sands: Suddenly, Not a Sure Thing http://t.co/k77vrfOm High cost 2 produce vs tight oil from fracking in the US $$ Nov 03, 2012
  • Vladimir Putin Is The New Global Shah Of Oil http://t.co/MWckLbRY Putin gains control over Russian oil & gas; how will he use that? $$ Oct 30, 2012

 

Bonds

 

  • In Fixed Income, a Fight to Survive http://t.co/cOtfWbGB Investment banking in bonds favors a market structure w/6-10 major brokers $$ Nov 03, 2012
  • Low Rates Lure Yield Seekers Onto Thin Ice http://t.co/tMhYQOMr When amateurs reach 4 yield they usually don’t know the risks they take $$ Nov 01, 2012
  • Pimco?s Gross Says Quantitative Easing Not Leading to Investment http://t.co/WRlaCAqi Should not b a surprise, only affects HQ rates $$ Nov 01, 2012
  • Bond Sales Topping $3 Trillion Nears 2009 Record http://t.co/qkcYLj9f Corporate debt deserves its chance 2become a bubble. Will u help? $$ Nov 01, 2012
  • Who Loses When Fed Keeps Interest Rates Low? http://t.co/Umt8Wx6Q Savers, Banks, Insurers (Life more), Pensions, Endowments, & Trusts $$ Oct 31, 2012
  • Bernanke?s Cash Fueling Record Corporate Rally http://t.co/gHo8IfwT Corporate credit getting tempted to overissue from low yields $$ Oct 30, 2012
  • Hedge Funds Drawn to Fannie-Freddie Risk-Sharing Plan http://t.co/mQ5Muyum Creating new private mortgage securities in an unusual way $$ Oct 30, 2012
  • Bargain-Addicted Investors Ignore Perils of Low Rates http://t.co/datCWeCz Argues investors & borrowers underestimate economic weakness $$ Oct 29, 2012
  • Treasury Real Yields Turn Positive as Inflation Slows http://t.co/yDEc23uE I prefer the CPI and the GDP IPD 2 the PCE. #alphabetsoup $$ Oct 28, 2012
  • Cost of Bailing Out Fannie and Freddie Expected to Fall Sharply http://t.co/j4KSPeZj Looks more optimistic, so long as housing prices ^ Oct 28, 2012
  • Trusts, Bonds Lead Surge in Credit ‘Gambling’ http://t.co/TnTEmVTz Maturity & risk-based pricing only come after mkts have a failure event Oct 27, 2012
  • New Peril for Parents: Their Kids’ Student Loans http://t.co/tXaLTBNS Safer: Borrow directly & formal lend 2 yr kids $$ #dontcosign Oct 27, 2012
  • Here’s a Tip: Watch Those Pricey TIPS http://t.co/VRVNtqQC People are locking in increasingly larger losses vs the CPI, be wary $$ Oct 27, 2012
  • That said, the enhanced indexing is often a better strategy, but not everyone can do it; it would eventually distort the market $$ Oct 27, 2012
  • Is Your Bond Strategy Wrong? http://t.co/Aqa1zu3k Mkt cap weighting scales &is true idxing; other weighting schemes r enhanced idxing $$ Oct 27, 2012

 

Market Impact

 

  • Does Academic Research Destroy Stock Return Predictability? http://t.co/S8SbDy0r It reduces, but does not destroy; limits to arbitrage $$ Nov 03, 2012
  • Predicting the Next Shock to the Global Economy http://t.co/mMJS0uBu China, Fiscal Cliff, Oil price surge, European Bank failure, Earnings Nov 03, 2012
  • Sectors And Style: Which is the better way to view the market? http://t.co/WjpyjxyC Sectors. Been my view 4a while $$ ht: IndexUniverse Nov 01, 2012
  • Rich Stuck as Salient Curbs Withdrawals for Investors http://t.co/rBEjHpxs The sting of illiquidity at its finest; hedge fund halts w/d $$ Oct 30, 2012
  • THE REAL BEAUTY OF A BALANCED FUND http://t.co/vSxtlGYf “The beauty of rebalancing is that it forces us to do what we won?t want to do” $$ Oct 30, 2012
  • David Rosenberg Brought Down The House With This Depressing Presentation At A Conference This Week http://t.co/uFs8fSAB 2 wks dated $$ Oct 29, 2012
  • ?Misunderstanding Financial Crises?, a Q&A with Gary Gorton http://t.co/DPfiegyK I will b reviewing this book soon; disagree on policy $$ Oct 29, 2012
  • Signal failure:Why illiquidity in one asset can spread quickly to others http://t.co/6o9mSz94 Investors sell risk assets at same time $$ Oct 29, 2012
  • SEC Weighs Bringing Back Fractions in Stock Prices http://t.co/cxwNcah7 Probably a mistake; there r better ways2 solve trading issues $$ Oct 27, 2012
  • Your Fund May Be ‘Adopted.’ So What? http://t.co/uS1ReuFJ Doesn’t affect existing holders, usually done2increase marketing 2 new holders Oct 27, 2012

 

Pensions & Endowments

 

  • Also, it is very difficult 4 avg ppl 2 invest a lump sum over a long horizon; that’s even difficult 4 professionals, unless u have lotsa $$ Nov 01, 2012
  • GM Retirees Take Lump Sum Buyout http://t.co/uyXo5KJU Usually a bad idea to take a lump sum buyout; avg ppl don’t estimate value well $$ $GM Nov 01, 2012
  • Preliminary Data Indicate Educational Endowments Earned Investment Returns Averaging -0.3% in FY2012 http://t.co/QJaU4mZI Tarnished model $$ Oct 29, 2012

 

Companies

 

  • VMware, the bell tolls for thee, and Microsoft is ringing it http://t.co/ykt7oiEa Never thought $MSFT would ever threaten a company again $$ Nov 03, 2012
  • Sharp Says It Faces Material Doubt on Survival http://t.co/3fIHwx6b From Sharp minds come… never mind… tech is a cutthroat sector $$ Nov 01, 2012
  • Honda starts making small jets in US, aims for ‘Civic of the Sky’ http://t.co/BkBhRaqs FD: + $HMC Unique jet may offer many advantages $$ Nov 01, 2012
  • Abbott Labs $ABT Said to Ready a $10B+ Bond Deal http://t.co/4iEG0eX5 Remember bigger 1 in 2002 4 $GE Capital. I passed & it sank $$ Oct 28, 2012

 

Other

 

  • Are You Better Off Now Than You Were Four Years Ago? http://t.co/bCgRBbUU If u r reading @reformedbroker u r. Happy 4th blogoversary! $$ Nov 01, 2012
  • Unsaving the U.S. economy http://t.co/vj0ujChh Low savings rate may aid GDP in the present, at the cost of lower GDP in the future $$ Oct 30, 2012
  • Taming Stomachs With Fodmap Diet Spurs $8 Billion Market http://t.co/kyQlpvAA Eliminate a few sugars from diet & upset stomachs go away $$ Oct 30, 2012
  • Let?s Put America?s Bankers Out of Business Now http://t.co/ypHmnJiG I.e. not finance US debt via China & Japan, OPEC, etc. $$ #tough2do Oct 29, 2012
  • Counting das gold at Fort Knox http://t.co/ZEXNCooP This would be interesting if the Germans can audit it & no Americans can $$ Oct 29, 2012
  • A Dirty Investment http://t.co/vRLzHuhd Watch composition of the financing & get skittish when debt levels get hi4 new transactions $$ Oct 29, 2012
  • Great Ideas Bosses Never Hear http://t.co/lstKcyJF It’s a cultural thing. It’s easy to create a culture where new ideas r put down $$ Oct 29, 2012
  • Practice Makes Perfect?And Not Just for Jocks and Musicians http://t.co/mTlvuiBs Many disciplines benefit by making basics instictive $$ Oct 28, 2012
  • Windows 8 Success Hinges on $10 Component http://t.co/Q48L45Ic Hail the high-tech hinge! Variable friction for enhanced functionality $$ Oct 27, 2012

 

Comments

  • If states declare #Sandy not 2b a “hurricane” so hurricane deductibles don’t apply, expect 2c policy forms rewritten 4 future storms $$ Nov 01, 2012
  • It would be stupid2base your vote off the Friday jobs report. A related variable is better http://t.co/aqDsu4jY Labor Force Participation $$ Nov 01, 2012
  • “Sandy has not affected your ability to write trenchant posts, Josh. Well done.” David_Merkel http://t.co/KAhHWdbT http://t.co/U0KKS3Jm $$ Oct 31, 2012
  • It’s obvious that NYC and a number of coastal areas took some pretty bad whacks. Anyplace further inland get hit that badly? $$ #Sandy Oct 30, 2012
  • Sandy having her last hurrah in Baltimore. We are on the downhill slope from here. 20% of people lost power, much less than feared. $$ Oct 30, 2012
  • Trench on the uphill side of the yard is diverting water downhill and away from the house. Moderate winds & rain at present:Baltimore #Sandy Oct 29, 2012
  • If #Sandy has not turned toward the US Coast by 8AM ET, it will head out to sea. If so, will NOAA issue an apology? $$ Oct 29, 2012
  • Just tossing this out, but what if #Sandy doesn’t make landfall on the US Coast? Storm tracking east of predictions. $$ Oct 29, 2012
  • Men live in a dream world about women. Women live in a dream world about men. Sadly, they aren’t the same dream worlds. $$ Oct 27, 2012
  • And thus, good marriages require communication and compromise Oct 27, 2012

 

Retweets

  • Yeh, or Icahn’s son RT @valuewalk: or his son Nov 01, 2012
  • Carl only plays 4 Carl RT @srussolillo: Whitney Tilson Has ‘Mixed Feelings’ About Carl Icahn’s Netflix Stake http://t.co/r3TKOXK5 $NFLX Nov 01, 2012
  • RT @marketfolly: Tons of hedgies lately saying to avoid long-term treasuries. Makes sense, but contrarian move is obviously for them to … Oct 31, 2012
  • Y I never say IMHO RT @felixsalmon: RT @racheldodes: Observation: those who describe themselves as “humble” r usually the opposite of humble Oct 31, 2012
  • RT @cabaum1: My Bastiatian response to destruction-is-good crew: Why wait for natural diasters when we could nuke and rebuild cities all … Oct 30, 2012
  • +1 RT @Convertbond: I think we’ll see an a leak over to corporate CDS in #Europe as the sovereign short selling bad goes into effect #France Oct 30, 2012
  • RT @grossdm: Irony, and this is the last time I’ll use this pun. Biggest liquidity market to hit NY in decades causing historic illiquid … Oct 29, 2012
  • High required returns & unrealistic views of “alternatives” RT @The_Analyst: you mean illogical/delusional return assumptions, no? $$ Oct 29, 2012
  • Time to celebrate! RT @PragCapitalist: Minor miracle. Server transfer completed without destroying the website. Oct 28, 2012
  • I am with you there, I tell young ppl that RT @rossbrannon: Or don’t let kids get student loans at all. It’s the worst debt there is. $$ Oct 28, 2012

 

Replies

  • @jucojames Typically, I write about Buffett in the late Winter or early Spring, b/c I get the most data then. Quarterly releases r light $$ Nov 03, 2012
  • @jucojames Excellent 2 hear from you my friend. I hope your business continues 2 prosper. When I opened my doors 4 biz, I underperformed 🙁 Nov 03, 2012
  • @researchpuzzler The link to my article has extraneous stuff at the end does not work Nov 01, 2012
  • @BradErvin1 Not sure where you are going — this has cut across everyone, though men, young, old, & minorities more Nov 01, 2012
  • @michaellipson1 This is true, & it is one place where the average individual has an advantage over the actuarial tables; U know yr health $$ Nov 01, 2012
  • @crampell Politicians don’t like to admit that there r problems that r so big & complex that they can’t do anything about them $$ Nov 01, 2012
  • @TheStalwart It’s slower, I think. Many key internet nodes got knocked out by #Sandy. See: http://t.co/aGbvoUKv Nov 01, 2012
  • @merrillmatter @munilass What a cute kid. I don’t have any that small anymore. Kid #8 just turned 10, and she’s still cute, but they grow up Nov 01, 2012
  • @EddyElfenbein How do you dig these little gems up, Eddy? Oct 31, 2012
  • @carney Disasters don’t often happen on a correlated basis; people have cognitive bias 2 think they do; also shutting barn door after cow $$ Oct 31, 2012
  • @carney As a buyside insurance analyst back in 2006, everyone was saying what a bad disaster year it would be. I argued against it. $$ Oct 31, 2012
  • @PlanMaestro Challenge to govts is 2 set rates that reflect risk fairly, avoid permanent subsidy, & discourage efforts at non-compliance $$ Oct 31, 2012
  • @PlanMaestro They typically exist 4 low-frequency high-severity events & areas where insureds can’t or don’t take steps 2 avoid losses $$ Oct 31, 2012
  • @Alea_ Thanks, I get it, I think. Assets r more unbounded than processes like underwriting damages. Fair? Oct 31, 2012
  • @Alea_ But isn’t EVT better than alternatives when dealing w/questions like how do we size reserves 4 events larger than we have seen b4? $$ Oct 31, 2012
  • @finemrespice @carney “Most commercial policies provide flood coverage, though with some limits” http://t.co/UJPiQ8yV but homes, not $$ Oct 31, 2012
  • @joshgiersch The situation in China might be competitive, given the financial repression going on there. Oct 31, 2012
  • @joshgiersch You can say that again. When governments engage in financial repression, they tempt ppl to cut corners on safety 4 income $$ Oct 31, 2012
  • @JamesMarsh79 It’s not just ability, but willingness, and willingness is affected by politics as well as economics Oct 29, 2012
  • @real_taxloss Well done. That was well worth a read. Oct 29, 2012
  • @PlanMaestro I appreciate guys like you that I agree with half the time, and disagree with half the time. Makes me think. $$ Oct 28, 2012
  • @ColoradoCapital Nominally TIPS investor gets CPI – x if held to maturity. The nominal Tsy holder gets his yield [y]. Real: -x vs y-CPI $$ Oct 27, 2012
  • @munilass Is there a brief way to explain what incremental risks exist between a Puerto Rico GO & a generic state GO? Similar laws or not? Oct 27, 2012
Yield is the Last Refuge of Scoundrels

Yield is the Last Refuge of Scoundrels

Posted on by David Merkel

Governments involved in financial repression (keeping savings rates below the inflation rate) encourage their citizens to do stupid things by reaching for yield.? Remember, most people think of yield as a magic chicken that lays eggs on schedule, and never gets sick or dies.? Those who truly understand markets know that yield is an allocation of free cash flow, and that many businesses can’t control their free cash flow, so dividends are less than fully certain.

And so, I’m skeptical of the focus on income investing.? With bonds, I am not as skeptical, because there is a promised, though not guaranteed return of principal.? That doesn’t mean there aren’t problems there.? We are having a record year for issuance of corporate bonds.? Abbott Labs is offering a huge deal.? My experience with huge deals is to avoid them, unless there is some special reason to play, kind of like the last bond deal from Household International in 2002, where I bought and then traded them away for the 3o-year non-deal protected bonds bigtime.

That said, I get concerned over:

China has low interest rates for savers, so many Chinese turn to Wealth Management Products in order to earn something decent on their money.? Many of them may be little different than a Ponzi scheme.? When governments do not allow savers to earn rates exceeding inflation, savers turn to all manner of products that could harm them, both legitimate and illegitimate.

The same thing goes on in Malaysia with their Gold Plans, and suchlike.? But let’s keep things simple: let’s invest in the best corporate bond investment out there: long Baa bonds.

What’s that I see?? We’re at a 50-year low for yields on low investment-grade-rated bonds.? Surely the economy should be booming.

What, like the Great Depression, we are in a liquidity trap?? Seems that way.? Additional capital finds rare incremental productive uses, and often the best use is shrinking the company by buying back stock.

Part of that stems from the folly of the Federal Reserve using its balance sheet to buy up all manner of high quality debts by expanding its balance sheet — its cost of finance is 0% (maybe, wait till the losses come, they came to Fannie and Freddie).? By doing so, they distort pricing in the debt markets, favoring issuers over lenders, favoring the government over the private sector.

It leads to nothing good, because increasingly marginal projects get financed.? As in Japan, the marginal efficiency of capital fell dramatically, and has not risen for two decades plus.? Though it would have been painful it would have been better to have more failures and longer recessions 1986-2007.? The Fed should have kept rates higher for longer.? We would have normal markets today if they had.

As I have said before, investors don’t do well when they don’t have a place to park excess money for a small real return.? I’m not looking for the ’80s, when the return was often huge, but something above inflation, fairly estimated.? Until then, the misguided plans of the Fed will continue to do little, as businesses look at the low marginal efficiency of capital, and shrink their operations.? Remember, when businessmen see economic policies that can’t persist, they don’t take advantage of the situation — they pull in their horns and become defensive.? Thus the budget deficits, QE, and the ZIRP lead to a slower economy in the intermediate-term.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Insurance

 

  • Insurers Must Boost Reserves for Residential Mortgage Bonds http://t.co/z1Plcc9z Pretty trivial; change small, not worth making $$ Oct 26, 2012
  • The Randian and the Bailout http://t.co/45wGJSo2 Without a tax gift from the US Tsy, $AIG couldn’t pay off the bailout http://t.co/2O4k7vpA Oct 25, 2012
  • For that last tweet, full disclosure, long $AIZ for clients and me Oct 24, 2012
  • Assurant Reports 3rd Quarter 2012 Financial Results http://t.co/pTbHUunV Over 8.75 yrs $AIZ has shrunk its share count from 142M to 78M $$ Oct 24, 2012
  • Weschler Rise From Grace Leads to Role Advising Buffett http://t.co/uUlYUPVK Interesting tale of a guy who can deal4 & value companies $$ Oct 22, 2012
  • Goldman Sachs Creates a Dividend+Buybacks Measure, & 4 Insurer Stocks Shine http://t.co/myQ8Ga1e I own 2 of them 4 clients. Which 2? $$ Oct 22, 2012

 

Central Banking

 

  • Here Comes the Dollar Wave Again http://t.co/5EO5Ejve Defend exports, import inflation, asset bubbles “Our currency, but your problem.” Oct 25, 2012
  • Approach risks ?distorting? decisions & ?it might be economically inefficient 2try2 push prices up so much,? Shiller http://t.co/Bs5GJPGX Oct 24, 2012
  • Redacted Version of the October 2012 FOMC Statement http://t.co/2jOMkLje Note: CPI inflation is at 2%, also inflation expectations rising $$ Oct 24, 2012
  • FOMC Statement: http://t.co/E2BOFdrr Oct 24, 2012
  • “We fail 2c the direct link, or even an indirect link, btw the size of the Fed’s balance sheet & the unemp rate” http://t.co/bM149U5Z $$ Oct 24, 2012
  • Buffett: ‘”I get a little worried about continuously expanding” the Fed’s balance sheet, he said on CNBC.’ http://t.co/KWIVYBIS $$ Oct 24, 2012
  • Traders Calling Singer?s Bluff on Intervention as Koruna Gains http://t.co/Y1ml4EZ4 Czech National Bank playing with fire, will burn $$ Oct 22, 2012
  • Would mean that the external effect of loose monetary policy have been played out, & the next big move is coming (but from where)? $$ Oct 22, 2012
  • Worst Carry Trades Show Central Banks at Stimulus Limit http://t.co/IDxi6uVq Interesting thought: if carrytraders can’t make money… $$ Oct 22, 2012

 

Fiscal Cliff

 

  • Firms Hit Brakes Before Fiscal Cliff http://t.co/z1Plcc9z Tap brakes is more like it. Most think we won’t go over the cliff #gridlock $$ Oct 26, 2012
  • Aha! Here’s The REAL Reason Corporate Executives Are Freaking Out About The Fiscal Cliff http://t.co/oS8VZpsi Favors initiatives of Dems $$ Oct 22, 2012

 

Other

 

  • How Supap Kirtsaeng?s Textbooks Idea Led to Supreme Court http://t.co/h1CDWk1q What rights exist to re-sell something that you bought? $$ Oct 26, 2012
  • The Plot to Destroy America’s Beer http://t.co/3ElPpvvx A tale of cost-cutting, quality reductions. Light beers ascendant. $$ Oct 26, 2012
  • Sandy Nears Jamaica, Forecasters Weigh New England Threat http://t.co/R1HNSDm8 High Incidence, Low Power 4 Tropical Storms in 2012 $$ Oct 24, 2012
  • Calling All Germs http://t.co/BkfuReQq Cellphones Are Great for Sharing Photos?and Bacteria; Cleaning May Harm Screens $$ Oct 23, 2012
  • Romney?s Air Force Comparison Misses U.S. Edge in Jets http://t.co/3lFkg4KL There r some situations where more lower tech jets would help Oct 24, 2012
  • Dean, Marathon Split-Offs on Tap http://t.co/m5OLbAuI Post-split $DF looks interesting, if boring. More room 2 focus $$ Oct 22, 2012

 

Energy

 

  • Shale Glut Becomes $2 Diesel Using Gas-to-Liquids Plants http://t.co/sjUDsrVK This is the Holy Grail, because gasoline is tough2produce $$ Oct 26, 2012
  • The internal combustion engine is far from dead http://t.co/Ewa60lrw Most real improvements in energy efficiency deal w/fossil fuels $$ Oct 22, 2012
  • Americans Buying Fewer New Cars in Lifetime http://t.co/viB6dIlU long-term probably not a good sign; autos drive a lot of the economy $$ Oct 22, 2012
  • The Myth of Affordable Energy – Interview with Ed Dolan http://t.co/8jWI1faC Energy efficiency is increasing. Full cost pricing desirable $$ Oct 20, 2012

 

Demographics

 

  • Russian Funds Band Together to Repel Government Cash Grab http://t.co/72KWo3Bg Gotta b careful on pension funds cuz govts like 2 raid them Oct 26, 2012
  • More Americans delaying retirement until their 80s http://t.co/dZM4Tmqm This is the way it should be. Retirement s/b 4-5 years at most Oct 25, 2012
  • Can Japan?s Elderly Become Its Growth Engine? http://t.co/eqhsu54i This seems like wishful thinking to me. Spending from savings <> wages $$ Oct 24, 2012

 

Financials

 

  • U.S. securities regulator questions need for new broker standard http://t.co/iNUVJKIp Extending fiduciary standards 2 brokers in question Oct 24, 2012
  • Forcing frequent failures http://t.co/OL6WSfOM @interfluidity hits a home run in dealing with bank failures, & how to regulate Oct 24, 2012
  • Low Rates Pummel Banks http://t.co/577Fsc1i Borrowers Benefit, but Industry Lending Profits Hit Lowest Level in Three Years $$ Oct 23, 2012
  • Marsico: When Going Private Goes Wrong http://t.co/Vxyc40u7 June 2007 was the wrong time 2 LBO, then performance lags $$ My sympathies2them Oct 23, 2012
  • 3 key money topics Romney-Obama debates ignored http://t.co/7j79IQ4V Housing prices, Investor protections & Retirement Savings $$ Oct 23, 2012
  • The end of stock market crashes? http://t.co/VjIALNEm I’m sorry, but the conclusion is bogus. Even if its works, only some could escape $$ Oct 23, 2012
  • Mortgage risks underestimated, economists conclude http://t.co/TFDpqz70 FHA uses a model that leads it to underestimate delinquency risk $$ Oct 22, 2012
  • Annaly Says Michael Farrell Dies After Cancer Diagnosed http://t.co/n5VNgi8m He was kind2me ~2000; willing2share ideas w/little me $$ $NLY Oct 22, 2012
  • Mortgage REITs: Not Just Yet http://t.co/20kPVBs2 I would be careful here & reduce exposure… they are always unstable vehicles $$ Oct 21, 2012
  • The Winner for Investors Is… http://t.co/eBQM5Ws4 @jasonzweigwsj points out the connection between returns & politics is tenuous $$ Oct 21, 2012

 

Economy

 

  • Firings Highest Since 2010 as Ford to Dow Face Slump http://t.co/9q87q63I This is the US economy. We can’t support workers relative2profit Oct 26, 2012
  • Weak Tea at Unilever Persists Amid Innovation at Rivals http://t.co/ryqjkEof Did not even know that Lipton was a Unilever brand $$ $UL $UN Oct 24, 2012
  • Doom Heralded at Hayman by Widening Trade Deficit: Japan Credit http://t.co/CZS09whs Japan?s debt is the ?cleanest dirty shirt.? Not. $$ Oct 23, 2012
  • Hunger Stalks My Father?s India Long After Starvation End http://t.co/dkVTXxaO Long article, makes me grateful that I can feed my kids $$ Oct 23, 2012
  • Electrolux, Philips Warn Of US Slowdown http://t.co/6k5hxTe2 Another soggy data point; less demand 4 bigger-ticket consumer items $$ Oct 22, 2012

 

Retweets

 

  • Ya, true RT @glenntyrpa: @barnejek @AlephBlog @sikorskiradek Yea. When did Japan invade China? Was that 1930? 🙂 we Americans forget. Oct 26, 2012
  • RT @PragCapitalist: Today’s financial tip: don’t ever buy a boat. Instead, find a friend with a boat. If necessary, buy the friend. … Oct 24, 2012
  • Clever RT @BradErvin1: @AlephBlog @PragCapitalist This is Buffett, courtesy legacy @kevindepew articles @Minyanville http://t.co/dGTNG9kl $$ Oct 24, 2012
  • Stinks, just stinks RT @ritholtz: THE SELLSIDE: SAME AS IT EVER WAS Courthouse News Service http://t.co/K9LDmj5m via @CourthouseNews $$ Oct 24, 2012
  • RT @KathrynTully: The last of Sarah Thornton’s top reasons for quitting art market surely belongs in top 10 reasons not to be a journo. … Oct 24, 2012
  • RT @emckean: LOVE THIS RT @aniajakubek: There’s a Polish saying that means “Not my problem” & literally translates to “Not my circus … Oct 24, 2012
  • SIFMA gets an infamous big name to speak to them RT @LaurenLaCapra: #greenspan http://t.co/rjVlCfV5 Oct 23, 2012
  • At my house too RT @retheauditors: Halloween is dead to me. Oct 22, 2012

 

Replies

 

  • #FF @NickTimiraos @carney @grossdm @annsaphir @ritholtz @ToddSullivan @PlanMaestro @RolfeWinkler @LaurenLaCapra @davidgaffen @jennablan $$ Oct 27, 2012
  • @TraderNewsFeed No, I don’t think that. I think we should enjoy our work, and enjoy it for as long as we can, until we can no longer work $$ Oct 26, 2012
  • @rjwile True, but that’s the price of not saving enough. There is no right to a retirement. Someone send the EU the memo. $$ Oct 26, 2012
  • @OVVOFinancial I largely agree. Reducing the real value of debts would help. My only fear is that nominal incomes might not grow much $$ Oct 25, 2012
  • @OVVOFinancial Missed that, thanks. Still, the Chain-weighted PCE deflator is 1.5% yoy at present. Oct 25, 2012
  • @barnejek oops Oct 24, 2012
  • @PragCapitalist A boat is a hole in the water into which you pour money $$ That said, the recession created a lot of used boats 4 sale Oct 24, 2012
  • @tebaho I am not a Romney backer Oct 24, 2012
  • @EddyElfenbein lifted the stake above 50% by 1995. Oct 24, 2012
  • @EddyElfenbein In 1977, GEICO was ~6% of his public investments, before $BRK.B acquired 33% of the company by 1980, and buybacks + Oct 24, 2012
  • @EddyElfenbein In 1981, GEICO was ~30% of his public investments — no data on how big his private investments were then $BRK.B $$ Oct 24, 2012
  • @EddyElfenbein 1996-7 around 16% of pretax income. Prior to that, it was not wholly owned, and so Buffett acctd 4 it as an investment $$ Oct 24, 2012
  • @EddyElfenbein $BRK.B would not want to live without GEICO, but in my opinion, it could live without it Oct 24, 2012
  • @EddyElfenbein It’s about 5% of BRK’s pretax profits. The float it generates is very short and is only 5% of liabilities. Oct 24, 2012
  • @PragCapitalist It’s a conglomerate fueled by a set of huge insurance companies, where assets r sourced privately & publicly $$ $BRK.B Oct 24, 2012
  • @PlanMaestro @aarontask @TheStalwart I think it is spurious correlation b/c I c many other variable that r weak. US economy is flat. $$ Oct 24, 2012
  • @felixsalmon In the NT Greek, there r2 words for God’s will, &1 tells u God ordains everything, the other, he doesn’t approve everything Oct 24, 2012
  • @CflGator I would ask the question, how is $TGT going to deploy the capital? The answer probably lies there. Oct 24, 2012
  • @LDrogen America’s politicians have always made appeals based on religion, & then abandoned the religious voters that support them (not new) Oct 24, 2012
  • @joshuademasi I realize with Japan, it is unlikely 4 there 2b an external default, until the external debt gets big enough Oct 24, 2012
  • @aarontask This is a stock versus flow issue. The banks reap capital gains now, but it will reduce their future interest margins/income $$ Oct 24, 2012
  • @CflGator Think they are trying to free up capital for alternative uses. Oct 24, 2012
  • @LDrogen But all people have unprovable a priori opinions, and many will affect their views on public policy, whether “religious” or not Oct 24, 2012
  • @LDrogen It becomes the same paradox that philosophers go through with respect to the concept of free will vs determinism Oct 24, 2012
  • @LDrogen Even 2a Christian like me, God’s will is a highly nuanced, b/c there r 2 words in NT Greek 4 “will” & they mean different things Oct 24, 2012
  • @LDrogen One of my close friends came into existence as a result of a rape. Two good people adopted him; biological mother was courageous Oct 24, 2012
  • . @aarontask will look for it — if anyone has a link 2 it, pass it 2 me Oct 24, 2012
  • @joshuademasi Nations with their own currencies don’t have to default on debts. I think some will choose to default for political reasons $$ Oct 23, 2012
  • “This brings up something @ritholtz would say ~ blog traffic goes up during a crisis?” ? David_Merkel http://t.co/9U0OxjLe $$ Oct 23, 2012
  • @joshuademasi Not sure he will lose; he has a decent chance of being correct. Japan has preceded the global economy for past 20 years $$ Oct 23, 2012
  • “5. Tadas, as you have said before, investment/finance blogging is hard. And many of the best of us?” $$ David_Merkel http://t.co/EuaE0hmB Oct 23, 2012
  • @StephenShiflett I distrust polls generally. I am not a Romney supporter. Most statistical comments in the media r not well-founded $$ Oct 23, 2012
  • @StephenShiflett Stratification matters more. The size was smaller than most polls I c, & instant senses of who 1r often not correct Oct 23, 2012
  • @DUNNER2 @CBSNews Now there was a poll that no one asked for, the sample size was far too small, but actually had a real impact. Sad. Oct 23, 2012
  • @Shwaver should be more like 5% if the poll is well stratified, and most polls aren’t Oct 23, 2012
  • @thejudge1082 @cbsnews I would criticize that as well. Most polls are too small and not well stratified Oct 23, 2012
  • @nmariecrumbie @DJDougMadrid @cbsnews I am *not* a backer of Romney. I am voting for the Constitution Party. I am a statistician, are you? Oct 23, 2012
  • @Justsaying1104 @CBSNews size *always* matters. I am a statisticiam by training. The hyper-short news cycle forced out a poll Oct 23, 2012
  • @Justsaying1104 @cbsnews of course size matters — what I object to is trying to get instant answers to what people are thinking $$ Oct 23, 2012
  • @ituzzip On a 500 person poll the error bounds are wider +/- 5%. But Rs answer polls less often than Ds. Oct 23, 2012
  • @JW28 Sorry, I am not a Romney backer Oct 23, 2012
  • @DJDougMadrid I don’t believe in instant, & I am voting 3rd party. Oct 23, 2012
  • @StephenShiflett Most polls I see are double that, it was still small, given the short time after the debate. Oct 23, 2012
  • @CBSNews Small sample size Oct 23, 2012
  • @TheStalwart I think you are fair and balanced, because A third of the time I agree, a third I disagree, and a third I an in-between. $$ Oct 23, 2012
  • @wallstCS FD: long $SFG — You do realize that revenue is not a useful valuation metric for insurers, right? Earnings & Book r relevant $$ Oct 22, 2012
  • @groditi @GaelicTorus it drives a lot of technology development, materials science, design (or lack thereof), advertising, energy efficiency Oct 22, 2012
  • @BradErvin1 No, the point is that corrupt governments tend to spawn corruption in society Oct 20, 2012
Higher Taxes, Inflation, Default (Choose One)

Higher Taxes, Inflation, Default (Choose One)

Posted on by David Merkel

I am a mix of analysis and intuition. Few argue with my analysis, a decent number argue with my intuition.? But I am not the only one concerned about monetary policy.? Listen to Warren Buffett (pages 12-16, but he comments elsewhere on the cost of capital and the inability to compete on an unlevered basis because of low rates.? Buffett is uncomfortable with the idea that the Fed can expand its balance sheet indefinitely.? He doesn’t know why it won’t work, but he knows that there are no free lunches, and wonders what might happen as a result.

Or, read this piece that disses quantitative easing.? Truth, there is no easy transmission mechanism between quantitative easing and employment.? It is a fools game, and when I say that, I say that neoclassical economists are sophomores, that is, “wise fools.”

Are they bright? Yes.? Have they imbibed dumb ideas that have a patina of intelligence? Yes.? Too much private debt leads to banking crises.? Too much public debt leads to worries over higher taxes, inflation and default, which inhibits private action, leading to a slower economy.

The Federal Reserve has discovered that they have a real balance sheet.? They not only have a liability policy, as in the old days, but they have an asset policy, allowing them to take on pseudo-fiscal stimulus.? Sadly, the idea that a central bank should not take asset risks is out the window.

Just as the referendum process makes legislators lazy, in the same way delegating economic policy to a central bank makes legislatures lazy — they can do nothing, and let the central bank react.

Part of the problem here is that we are relying on the models of the economists who argued that debt is neutral, and could not see the crisis coming.? Debt is the problem.? Debt-based systems are inherently inflexible and lead to crises when they are too big.? All significant economic crises are debt crises.

We need to get the neoclassical economists out of the Fed.? They can’t think broadly enough to see the problems we are in.? We need people who can think long-term, like actuaries and value investors.? (Please tell the SOA, CAS, and CFA Institute to rid their curricula of neoclassical economics.)? There is enough intelligence in those two groups that a new theory of what to do could emerge, perhaps realizing that optimizing the short-term ruins the long-term, and vice-versa — sometimes you have to take a depression to realign your economy.

In general, the US Government has not displayed any real talent in managing the economy.? If I could rewrite the Constitution, I would limit the Federal role in matters economic, and eliminate the possibility of a central bank.? Even when it did work well under Martin and Volcker, it does not make up for Greenspan, Bernanke, Burns, Miller, Harding, Crissinger, and Young.

I would also require balanced budgets on an accrual basis, ending the problems of non-funding Social Security and Medicare.? The problem of promises now, performance later will bite us hard, and most of the rest of the world also, because changing old age security from a personal issue to a collective issue has this problem: there is no reason for any husband and wife to have more children.? This is hitting the rest of the world harder than the US, because the (mostly dead) Protestant optimism of the US leads people to have more have more children. (Please remember that the group in history that had the largest completed family size was not the Catholics or the Mormons, but the New England Puritans, who averaged 9.5 children in families where the wife survived.)? Also note that Puritan husbands cared for their wives deeply.

As for me, my wife and I bore 3 children, but not for lack of trying for more.? We never used birth control.? We also adopted 5, sending us through the social work system 5 times.? It is challenging to raise a large family, but it was worth it.? We are on the receding side of it, with our youngest now aged 10.? The challenge of raising older children is significant.

Um, I got off-track.? The grand scheme is that many think that they can borrow big in the present, and it won’t have any significant consequences in the future.? That idea will fail in some way in the future, but how it fails is an open issue.

Redacted Version of the October 2012 FOMC Statement

Redacted Version of the October 2012 FOMC Statement

Posted on by David Merkel
September 2012 October 2012 Comments
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months. No change.
Growth in employment has been slow, and the unemployment rate remains elevated. Growth in employment has been slow, and the unemployment rate remains elevated. No change.
Household spending has continued to advance, but growth in business fixed investment appears to have slowed.? The housing sector has shown some further signs of improvement, albeit from a depressed level. Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed.? The housing sector has shown some further signs of improvement, albeit from a depressed level. Shades up household spending.? Shades down business investment.
Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable. Inflation recently picked up somewhat, reflecting higher energy prices.? Longer-term inflation expectations have remained stable. Shades up their view of inflation, blaming energy prices. TIPS are showing rising inflation expectations since the last meeting. (5y forward 5y inflation implied from TIPS.)
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side.
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. No change.
The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective. No change. CPI is at 2.0% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.? The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.? These actions, which together will increase the Committee?s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.? The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.? These actions, which together will increase the Committee?s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. No real change.

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

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

 
The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee will closely monitor incoming information on economic and financial developments in coming months. No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. No change.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases. The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. No change.

Promises that they won?t change until the economy strengthens.? Good luck with that.
In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. No change
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. No change
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted. Lacker sharpens his hopeless dissent against a flock of doves.

?

Comments

  • No big changes.? The FOMC?s views on household spending and inflation have risen.? Note that the CPI is at their 2.0% line in the sand.
  • In my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn?t work, what will they do?
  • Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
  • GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

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

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

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

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

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

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

The Rules, Part XXXIV

The Rules, Part XXXIV

Posted on by David Merkel

“Once something is used for hedging purposes, it becomes useless for predictive purposes.”

I know this is kind of a trivial insight now, but when I originally wrote it, it was more cutting-edge.? That said, it is still not fundamentally understood by most.? Most still look at a fragment of the puzzle.? Few look at the whole.

My poster-child for fragmentary thinking is this article: The end of stock market crashes? Do I disagree that correlations begin rising among risky assets toward the end of a bull market?? Not at all.? I have even written about it on occasion.

But if few understand this, then only a few will take shelter when correlations get high.? The rest will continue the disorderly party until the “market cops” show up in the bear market.

If it becomes a widespread idea, a market rule, etc., it may constrain behavior for some time, leading to no large crashes, but after a long while with no crashes some will assume that such crashes are not possible, and the rule is out-of-date.? Four? examples:

  • Stocks should yield more than Treasury bonds.
  • Stocks should yield more than 3%.
  • Q-ratio
  • CAPE10

Many items that have intermediate-term wisdom, and are known to have that wisdom, eventually get ignored.? The first two I listed were common market nostrums in their day.? The second seem to have more long-term validity, but get ignored by many who say, “It’s different this time!”

But even if everyone agrees that a certain risk measure is a correct risk measure, and it becomes a part of the market’s furniture, that doesn’t mean risk ceases.? It does mean risk takes a different form.? I think of all of the people decided not to take equity risk during 2000-2007, and decided to invest in residential real estate, or take risk through CDOs, subprime RMBS, etc.

Yes, they avoided risk in the stock market.? They ran into something far more fundamental.? The risk from all risky assets, public, private, leveraged, unleveraged, is everywhere, and it is very difficult to hide while taking risk.

The markets incorporate a lot of rules that have partial validity.? They are known variably, and apply variably.? At some points these rules seem sharp and prescient.? At other times they seem weak and outmoded.

This brings me back to my view that the market is an ecosystem where no strategy has permanent validity.? Strategies ebb and flow as many parties search for scarce returns.? There are well-known limits to markets, like the Q-ratio and CAPE10.? If the markets come up with another one, like risky asset correlations, it will have validity, restraining speculative behavior, until people overwhelm it, and a new bust happens.

The boom-bust cycle cannot be repealed.? But it takes many forms.

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Sorry I missed last week.? Thanks to those who like this.

 

Monetary Policy

 

  • Black Monday and the Greenspan put http://t.co/f9nvCtLd Initial error of Alan Greenspan. Fine-tuning monetary policy 2 remove volatility $$ Oct 20, 2012
  • Southeast Asia Seen Leading Rate Increases Next Year http://t.co/KFsz14Wj I doubt it; $$ laxity is the rule of the time; tough 2 fight Oct 19, 2012
  • Wall Street CMOs Crushed as Sales @ 3-Yr Low http://t.co/n4avsQeR Wouldn’t call a 15% drop “crushed.” Fed feeding on their collateral $$ Oct 18, 2012
  • Fed-Induced Stock P/E Gains Seen Ending Soon http://t.co/FdN3zvgm Effects of QE3 s/b fully anticipated by now. $$ Oct 18, 2012
  • Currency Wars: US Attack http://t.co/XbjCmjhB Axel Merk criticizes Bernanke’s claim that US monetary policy isn’t a major prob 4 emg mkts $$ Oct 17, 2012
  • Yes, it is more complex, but easy developed country monetary policy does make life tough for emerging… http://t.co/qPiFz9pQ Oct 15, 2012

 

Financial Blogging

 

  • The Critic Wall Street Loves to Lunch With http://t.co/ZdomDj3R @felixsalmon one of the leaders of financial blogging gets profiled here $$ Oct 20, 2012
  • 6 blogs u should be reading http://t.co/7aohlAcp @reformedbroker @thestalwart @calculatedrisk @pragcapitalist @convertbond & Bess Levin Oct 18, 2012

 

Hoisington

 

  • Prior tweets courtesy of Van R. Hoisington & Lacy H. Hunt, Ph.D. Whole thing will be posted here http://t.co/pZ4jJrQ1 in a few days $$ Oct 12, 2012
  • Until the excessive debt issues r addressed, the multiyear trend in inflation, & thus the long Treasury bond yields will remain downward $$ Oct 12, 2012
  • “During all of the Fed actions since 2008 the velocity of money has plummeted and now stands at a five decade low” Hoisington & Hunt Oct 12, 2012
  • A jump in daily essentials has a more profound negative impact on living standards in economies with lower levels of real per capita income. Oct 12, 2012
  • How the Fed expects economic traction from higher stock prices when rising commodity prices r curtailing real income & spending is puzzling Oct 12, 2012
  • These three studies show that the impact of wealth on spending is miniscule?indeed, ?nearly not observable.? Hoisington Oct 12, 2012
  • “Fed Chair Ben Bernanke and other Fed advocates believe the ?wealth effect? of QE3 will bring life to the economy.” Hoisington Oct 12, 2012
  • Prior Tweet quotes Hoisington & “unintended consequence of these Federal Reserve actions, however, is to actually slow economic activity” Oct 12, 2012
  • QE3 is a tacit admission by the Fed that earlier efforts failed, but this action will also fail to bring about stronger economic growth. $$ Oct 12, 2012

 

Rest of the World

  • Devastating Photos Of India’s Illegal Coal Mines http://t.co/iiuN8bo9 Government nationalizes coal mines; mafia springs up2 mine coal $$ Oct 20, 2012
  • Why China Has The Worst Farms In The World http://t.co/zFnHnLH8 Worst in the sense of productivity per worker; they have lots of workers $$ Oct 19, 2012
  • Why Indians Are Getting Poorer http://t.co/PMyTpfEC Over past year, the Indian currency lost around 20% of its value against the US $$ Oct 19, 2012
  • China Faces Tough Choice on Growth http://t.co/i0i1n35l Does the CCP continue to favor short-term self-interest, or long-term power? $$ Oct 19, 2012
  • Zhang Weiying: China’s Anti-Keynesian Insurgent http://t.co/TGNGlo9e Fascinating tale of an Austrian economist surviving in China $$ Oct 13, 2012
  • Iran Low on Options as Hyperinflation Concerns Spark Gold Dash http://t.co/rYqDjinO Hyperinflations spawn currency substitutions: gold, $$ Oct 09, 2012
  • Chavez Win Called by BofA Sparks Selloff as Barclays Flops http://t.co/DNPxpVzO Sad that Chavez won, but the bonds reflected a loss $$ Oct 09, 2012
  • Cheapest Chinese Stocks Since ?97 Not Enough to Signal Rally http://t.co/rTEm2MNF Noneconomic actors compete & drive down future profit $$ Oct 08, 2012
  • The Iran Hyperinflation Fact Sheet http://t.co/bitjVaqn From my former professor @ JHU, Steve Hanke. Financial sanctions r biting in Iran $$ Oct 07, 2012

 

Financial Reform

 

  • A Simpler Way to End Too Big to Fail http://t.co/z680Sq1q Limit non-deposit liabilities; banks will scream; worthy 2b tried $$ Oct 19, 2012
  • EU, Japan Warn Against New US Swaps Rules http://t.co/9F7hTHpy Technical efficiency of mkts is less important than resiliency of mkts $$ Oct 18, 2012
  • Ex-GE Bankers Convicted of Municipal Bond Bid-Rig Scheme http://t.co/fFnANPyk 4 years of jail time; restitution plus 20% would b better $$ Oct 18, 2012
  • Swaps Collateral Costs May Increase Under Rules Weighed by SEC http://t.co/hbrVnyHx Raises costs some, probably the right idea $$ Oct 17, 2012
  • Treasurers Worry Over Accounting for MMF Changes http://t.co/RtF6jlve Geithner tries MMF reform. Better: http://t.co/vuNGATPK $$ Oct 16, 2012

 

Energy

 

  • Gasoline prices _ finally _ begin to slide http://t.co/zuEXNaIx Refineries finally catch up w/maintenance, outages & demand $$ Oct 19, 2012
  • First oil nears for Kazakhstan’s supergiant field http://t.co/Bzx5q6Td Kazakhstan reduces the amount of time that foreigner scan profit $$ Oct 18, 2012
  • California Asks Court to Reinstate Carbon Fuel Standard http://t.co/gLqnqTdj I am happy that I left California at age 27; unrealistic $$ Oct 17, 2012
  • Gas Market Stung by Rapid Traders http://t.co/UI9DqJjI HFT and “news” trading games in the futures markets. Running stops is not new $$ Oct 16, 2012

 

Eurozone

 

  • Spanish Borrowing Costs Ease http://t.co/evRNryY7 It won’t last, but enjoy it 4 now. $$ Oct 18, 2012
  • Retirement No Option for Older Workers in Europe?s Crisis http://t.co/KgjUYc01 Problem is greater in Europe because of lower fertility $$ Oct 17, 2012
  • Hollande Robbed of Growth Engine as Companies Cut Investment http://t.co/ZGdrllIG Logical 2 invest less when EU & France r a mess $$ Oct 12, 2012
  • EU Wins Nobel Peace Prize http://t.co/VoTaN3ZK Nobel committee finally “jumps the shark.” The EU is unstable; a war waiting 2 happen $$ Oct 12, 2012
  • Spanish Bonds Risk Forced Selling as Rating Approaches Junk http://t.co/yO8XWNl4 The Rating agencies r flawed, but on credit they r honest Oct 12, 2012
  • IMF?s Blanchard: Healing From Crisis Could Take Decades http://t.co/NXYmLjU3 Crisis won’t b healed until total debt levels normalize $$ Oct 11, 2012
  • IMF Sees ?Alarmingly High? Risk of Deeper Global Slump http://t.co/B7Dg9Ah9 A stopped clock is right twice/day, $ the IMF is right now $$ Oct 09, 2012
  • Why a U.S. buyout firm is investing in Greece http://t.co/26oB31e9 ht: @danprimack – Companies w/global markets insensitive 2 local probs $$ Oct 08, 2012
  • Sicily, a Portrait of Italian Dysfunction http://t.co/w3dn2JFe Core Europe is to Italy as Italy is to Sicily. $$ gone & hard work starts Oct 08, 2012

 

Politics

 

  • Dem convention used corporate cash, despite pledge http://t.co/vCJuCrSa No one is truly a politician until they break a promise $$ Oct 18, 2012
  • Obama Pursuing Leakers Sends Warning to Whistle-Blowers http://t.co/hZ86Cx6O Hard to believe, but Obama outdoes Bush, Jr. 4 opacity $$ Oct 18, 2012
  • Romney?s Rates Seen Spurring Growth Too Little 2 Late http://t.co/fcogGy0V Nice 2c Obama & Romney competing 4 who can harm economy most $$ Oct 18, 2012
  • A123 Bankruptcy Gives Romney New Example of Green-Energy ?Loser? $$ $AONE http://t.co/gR2LvxRV Make green energy advocates take Physics Oct 17, 2012
  • Sorry, US Recoveries Really Aren?t Different http://t.co/5cseU4Nn Reinhart & Rogoff take on Romney’s advisors who say the US is different Oct 16, 2012
  • Romney Rolls in Rural Vote That May Provide Swing-State Margins http://t.co/D3dSdJBB Interesting perspective, but is that a big bloc? $$ Oct 16, 2012
  • Dividends: Start Screaming http://t.co/B37C7k9a This one is tough. Probability of a cooperative Congress after the elections is low $$ Oct 13, 2012
  • California Facing $5 Gasoline Stirs Brown to Relax Rules http://t.co/uQUPOz8f There is a pain point 4 everyone, just found 4 CA gas $5 $$ Oct 08, 2012

 

Economic Strength / Weakness

 

  • Winners and losers as US weather patterns change http://t.co/1txs8dcg Worth a read 4 the list of winners & losers near the end $$ Oct 18, 2012
  • Challenges forcing change in trucking strategy http://t.co/mHjc4udb Definitely a soggy data point; US & global economies seem 2b slowing $$ Oct 18, 2012

 

Agriculture

 

Taxpayers get hosed. Farmers doing fairly well $$ Oct 18, 2012

  • Drought brings record US cost for crop insurance subsidy http://t.co/ceUOLMUQ 2012, Taxpayers pay more, Insurers pay some, farmers benefit Oct 17, 2012
  • Milk-Cow Drought Culling Accelerates as Prices Jump http://t.co/WvHEturP Anything involved in animal husbandry is having tough time now $$ Oct 11, 2012
  • Midwest Drought Claims Poultry Producer http://t.co/9K4cL3Gx Many firms involved in the meat biz r having a rough time now. $$ Oct 11, 2012
  • At this rate, growing tobacco should be prohibited. Oh, wait, we tried that with alcohol. Never mind. $$? http://t.co/hU9nI6l2 Oct 09, 2012

 

Market Dynamics

 

  • Throwing Out Insiders Won’t Fix Corporate Boards http://t.co/ANKyNPiq Good boards watch over mgmt & have decent industry & company knowledge Oct 17, 2012
  • All-Time Highs, Almost There http://t.co/Aj1LR8AY Will the market hit new highs this year, in 2013, or when? $$ Oct 17, 2012
  • Legg Mason?s Miller Redeemed as Housing Bull http://t.co/n3tRTmF6 2 soon 2 say. Miller doesn’t seek a “margin of safety” when investing $$ Oct 15, 2012
  • Vanguard to JPMorgan Dodging Neediest Borrowers http://t.co/PsNN8UKG This is what you tend to see 1-2 years in advance of the crash $$ Oct 14, 2012
  • As an aside, there’s kind of a rule of thumb for Bermuda insurers on buybacks: >1.3x tangible book: special dividends. <1.3x TB buybacks $$ Oct 12, 2012
  • The Buyback Epidemic http://t.co/l9SvTwZM @reformedbroker notes that buybacks make less sense, the higher valuations get. I concur $$ Oct 12, 2012
  • New Regime http://t.co/L2JaQC2J @reformedbroker notes a sea change in the markets. I’ve been heading that way; still thinking about it $$ Oct 12, 2012
  • CNBC: Jim Rogers vs. Marc Faber (FULL) 10/04/2012 http://t.co/b5sEOEZb Faber & Rogers on the same segment? What a hoot! $$ $GLD $SPY $TLT Oct 12, 2012
  • OCC Forced JPMorgan, Wells Fargo to Write Down Home-Equity Loans http://t.co/qxXjXBoS FD: + $WFC – ’bout time. Recoveries poor on HEL $$ Oct 12, 2012
  • California Leading U.S. Out of Housing Bust http://t.co/oEaOG4nf I would be wary of “dead cat” bounces here $$ Oct 12, 2012
  • Bubble-Era Financing Returns as Profits Falter http://t.co/yhxBEFxq Pay-in-kind bonds return, very nice. 2 years of rally left at most $$ Oct 11, 2012
  • Wrong: Bullish Sign for Stocks: Leverage Is Up http://t.co/1Qvcdkh9 What matters more is whether leverage will rise in the future $$ Oct 09, 2012
  • Not New York Towers Rise With Embrace of Yield http://t.co/3MKpRdVi When vacancy rates r this high, ordinarily rents fall. Y not now? $$ Oct 08, 2012

 

Other

 

  • Welcome to the ?Desert of the Real? ? a postmodern economy http://t.co/g42NKcoa Increasing abstraction destroys economic intuition $$ Oct 18, 2012
  • Why Data Will Never Replace Thinking http://t.co/Yhi5xWaR Every bit of data requires the creation of a hypothesis to give it meaning $$ Oct 17, 2012
  • Global Finance Chiefs at Odds http://t.co/av5MQ01i Everyone pursuing similar policies (Loose $$ & deficits) reduces effectiveness 4 all Oct 15, 2012
  • Heidi N. Moore joins the Guardian’s US Team as Finance & Economics Editor http://t.co/In2oDnC6 Congrats @moorehn ! Will b reading u there $$ Oct 15, 2012
  • I’m not much of an #Orioles fan, but don’t you have to love a team of nobodies who can challenge the highly paid #Yankees? $$ Oct 12, 2012
  • Tech Firms Become Real- Estate Trusts http://t.co/GrHU2bo5 Tech firms that own a lot of real estate take advantage of becoming REITs $$ Oct 11, 2012
  • The UN has declared today as the International Day of the Girl Child http://t.co/L0nS6wtd Sex selection abortion kills the most girls $$ Oct 11, 2012
  • Please follow Cato Scholar and JHU professor that I learned a lot from: @steve_hanke Oct 10, 2012
  • Musk?s SpaceX Launches Craft for Space Station Deliveries http://t.co/Z3MH68Ud Space age begins as governments r less of a factor $$ Oct 08, 2012

 

Insurance

 

  • Insurers Shed Annuity Assets http://t.co/bUZ2brqT This doesn’t feel right. other times when financial guys buy insurers, doesn’t work $$ Oct 18, 2012
  • If Only T. Boone Pickens Had Died http://t.co/tpXYGeCV Score: TB Pickens 0, Wealthy donors 0, Oklahoma State Univ. 0, Life Actuaries 1 $$ Oct 08, 2012

 

Replies & Comments

?

  • @PlanMaestro 2 notes: rsv strengthing in Australia a concern, but not big. 2) Low ROE biz of the 90s is fading; life re was a loser then $$ Oct 20, 2012
  • @PlanMaestro I love $RGA . Good mgmt team. Less interest rate & stock market dependent than life insurers FD: long RGA for me and clients $$ Oct 20, 2012
  • @TheStalwart I get a few ridiculous marketing requests/day. Do all bloggers get them? I reply2them this picture $$ http://t.co/TGc2q4Er Oct 19, 2012
  • @BarbarianCap Sigh. Baltimore County is not as far gone as Baltimore City (which is also a county), but this is not wise or arms length $$ Oct 19, 2012
  • I just left a comment in “6 Wall Street blogs you should be reading – Jon Friedman’s Media Web – MarketWatch” http://t.co/qpeTAHcI Oct 18, 2012
  • @MattGGriffith Thanks. Will probably do a post in the near future expaning on that last paragraph. It struck me at the end $$ Oct 18, 2012
  • @laurenfosternyc Have you ever seen the “Gold Medal Gold Model?” http://t.co/5rPvqfEz Gold prices r a function of real interest rates $$ Oct 18, 2012
  • @CflGator these are deferred annuities so the life table plays no role. Problem is investing “too clever” inside a regulated life insurer $$ Oct 18, 2012
  • I just left a comment in “Student-loan debt is a good investment – Outside the Box – MarketWatch” http://t.co/AnaHcGKh Oct 15, 2012
  • I just left a comment in “Student-loan debt is a good investment – Outside the Box – MarketWatch” http://t.co/22AyCQ9I Oct 15, 2012
  • . @paulnovell It will be public in a few days — they e-mail it out to friends & clients b4 posting it here: http://t.co/pZ4jJrQ1 $$ Oct 12, 2012
  • @wanderinggull Which? I don’t know. What was meant to produce “ever closer union” seems to be producing the opposite. Nobel = Pollyanna Oct 12, 2012
  • “Good post, Josh. You have identified many of the best. No one of us covers it all; it’s a strong list” ? David_Merkel http://t.co/3Qg6WWZk Oct 10, 2012
  • @munilass Get to sleep, Babylass will need you tomorrow. 🙂 Oct 09, 2012
  • @PavChyt @matinastevis Her *former* husband. She kept the name b/c it was good politics. She did not keep him. Oct 08, 2012
  • @PavChyt @MatinaStevis I received the name Merkel at birth. Angela got it from her 1st husband. At least people r spelling it right now $$ Oct 08, 2012

?

Retweets

 

  • Yeah, & that is BV net of AOCI RT @PlanMaestro: $RGA : book value per share http://t.co/EQWDgiSL FD: long $RGA for myself & clients Oct 20, 2012
  • Jack speaks the truth, listen 2 him $$ RT @ReformedBroker: Jack Bogle: Get Out of the Casino http://t.co/gL0siD6v Oct 18, 2012
  • RT @fivethirtyeight: All polling data is massaged A LOT in an era when only 10% of people respond to surveys. So that also introduces a … Oct 17, 2012
  • RT @MuniCredit: Citi Muni Presentation: http://t.co/ONrQe9gA #muniland h/t: @bondgirl Oct 12, 2012
  • I appreciate retweets RT @LSilverspar: Not enough for the value of your posts. If you value the retweets, I will do so far more often. $$ Oct 12, 2012
  • RT @danprimack: Every time people get all worked up over a national presidential poll, I wonder if the electoral college was eliminated … Oct 08, 2012
  • True of many notable CEOs w/earnings 2 smooth RT @rcwhalen: GE’s Jack Welch Knows All About Cooking the Books http://t.co/5vJeRux6 $$ Oct 08, 2012
  • RT @Convertbond: “Markets are increasingly distorted by Central Banks, attempts to squeeze drops of growth from overindebted developed w … Oct 07, 2012
  • Shock! $$ RT @BarbarianCap: Revised Greek GDP figures show recession deeper than thought http://t.co/FCspv2gU. > data released friday night Oct 06, 2012
Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Hoisington Capital Management

 

  • . @paulnovell It will be public in a few days — they e-mail it out to friends & clients b4 posting it here: http://t.co/pZ4jJrQ1 $$ Oct 12, 2012
  • Prior tweets courtesy of Van R. Hoisington & Lacy H. Hunt, Ph.D. Whole thing will be posted here http://t.co/pZ4jJrQ1 in a few days $$ Oct 12, 2012
  • @wanderinggull Which? I don’t know. What was meant to produce “ever closer union” seems to be producing the opposite. Nobel = Pollyanna Oct 12, 2012
  • Until the excessive debt issues r addressed, the multiyear trend in inflation, & thus the long Treasury bond yields will remain downward $$ Oct 12, 2012
  • “During all of the Fed actions since 2008 the velocity of money has plummeted and now stands at a five decade low” Hoisington & Hunt Oct 12, 2012
  • A jump in daily essentials has a more profound negative impact on living standards in economies with lower levels of real per capita income. Oct 12, 2012
  • How the Fed expects economic traction from higher stock prices when rising commodity prices r curtailing real income & spending is puzzling Oct 12, 2012
  • These three studies show that the impact of wealth on spending is miniscule?indeed, ?nearly not observable.? Hoisington Oct 12, 2012
  • “Fed Chair Ben Bernanke and other Fed advocates believe the ?wealth effect? of QE3 will bring life to the economy.” Hoisington Oct 12, 2012
  • Prior Tweet a quotes Hoisington & “unintended consequence of these Federal Reserve actions, however, is to actually slow economic activity” Oct 12, 2012
  • QE3 is a tacit admission by the Fed that earlier efforts failed, but this action will also fail to bring about stronger economic growth. $$ Oct 12, 2012

?

Please Follow

 

  • #FF @japhychron @danprimack @treehcapital @insidermonkey @vitaliyk @herbgreenberg @tracyalloway @nancefinance @marykissel @diana_olick $$ Oct 13, 2012
  • Please follow Cato Scholar and JHU professor that I learned a lot from: @steve_hanke Oct 10, 2012

 

Market Dynamics

 

  • As an aside, there’s kind of a rule of thumb for Bermuda insurers on buybacks: >1.3x tangible book: special dividends. <1.3x TB buybacks $$ Oct 12, 2012
  • The Buyback Epidemic http://t.co/l9SvTwZM @reformedbroker notes that buybacks make less sense, the higher valuations get. I concur $$ Oct 12, 2012
  • New Regime http://t.co/L2JaQC2J @reformedbroker notes a sea change in the markets. I’ve been heading that way; still thinking about it $$ Oct 12, 2012
  • CNBC: Jim Rogers vs. Marc Faber (FULL) 10/04/2012 http://t.co/b5sEOEZb Faber & Rogers on the same segment? What a hoot! $$ $GLD $SPY $TLT Oct 12, 2012
  • Bubble-Era Financing Returns as Profits Falter http://t.co/yhxBEFxq Pay-in-kind bonds return, very nice. 2 years of rally left at most $$ Oct 11, 2012
  • Wrong: Bullish Sign for Stocks: Leverage Is Up http://t.co/1Qvcdkh9 What matters more is whether leverage will rise in the future $$ Oct 09, 2012

 

Rest of the World

 

  • Zhang Weiying: China’s Anti-Keynesian Insurgent http://t.co/TGNGlo9e Fascinating tale of an Austrian economist surviving in China $$ Oct 13, 2012
  • Hollande Robbed of Growth Engine as Companies Cut Investment http://t.co/ZGdrllIG Logical 2 invest less when EU & France r a mess $$ Oct 12, 2012
  • EU Wins Nobel Peace Prize http://t.co/VoTaN3ZK Nobel committee finally “jumps the shark.” The EU is unstable; a war waiting 2 happen $$ Oct 12, 2012
  • Spanish Bonds Risk Forced Selling as Rating Approaches Junk http://t.co/yO8XWNl4 The Rating agencies r flawed, but on credit they r honest Oct 12, 2012
  • IMF?s Blanchard: Healing From Crisis Could Take Decades http://t.co/NXYmLjU3 Crisis won’t b healed until total debt levels normalize $$ Oct 11, 2012
  • IMF Sees ?Alarmingly High? Risk of Deeper Global Slump http://t.co/B7Dg9Ah9 A stopped clock is right twice/day, $ the IMF is right now $$ Oct 09, 2012
  • Iran Low on Options as Hyperinflation Concerns Spark Gold Dash http://t.co/rYqDjinO Hyperinflations spawn currency substitutions: gold, $$ Oct 09, 2012
  • Chavez Win Called by BofA Sparks Selloff as Barclays Flops http://t.co/DNPxpVzO Sad that Chavez won, but the bonds reflected a loss $$ Oct 09, 2012
  • Why a U.S. buyout firm is investing in Greece http://t.co/26oB31e9 ht: @danprimack – Companies w/global markets insensitive 2 local probs $$ Oct 08, 2012
  • Sicily, a Portrait of Italian Dysfunction http://t.co/w3dn2JFe Core Europe is to Italy as Italy is to Sicily. $$ gone & hard work starts Oct 08, 2012
  • Cheapest Chinese Stocks Since ?97 Not Enough to Signal Rally http://t.co/rTEm2MNF Noneconomic actors compete & drive down future profit $$ Oct 08, 2012
  • The Iran Hyperinflation Fact Sheet http://t.co/bitjVaqn From my former professor @ JHU, Steve Hanke. Financial sanctions r biting in Iran $$ Oct 07, 2012

 

US Real Estate

 

  • OCC Forced JPMorgan, Wells Fargo to Write Down Home-Equity Loans http://t.co/qxXjXBoS FD: + $WFC – ’bout time. Recoveries poor on HEL $$ Oct 12, 2012
  • California Leading U.S. Out of Housing Bust http://t.co/oEaOG4nf I would be wary of “dead cat” bounces here $$ Oct 12, 2012
  • Tech Firms Become Real- Estate Trusts http://t.co/GrHU2bo5 Tech firms that own a lot of real estate take advantage of becoming REITs $$ Oct 11, 2012
  • Not New York Towers Rise With Embrace of Yield http://t.co/3MKpRdVi When vacancy rates r this high, ordinarily rents fall. Y not now? $$ Oct 08, 2012

 

Agriculture

 

  • Milk-Cow Drought Culling Accelerates as Prices Jump http://t.co/WvHEturP Anything involved in animal husbandry is having tough time now $$ Oct 11, 2012
  • Midwest Drought Claims Poultry Producer http://t.co/9K4cL3Gx Many firms involved in the meat biz r having a rough time now. $$ Oct 11, 2012

 

Other

 

  • I’m not much of an #Orioles fan, but don’t you have to love a team of nobodies who can challenge the highly paid #Yankees? $$ Oct 12, 2012
  • The UN has declared today as the International Day of the Girl Child http://t.co/L0nS6wtd Sex selection abortion kills the most girls $$ Oct 11, 2012
  • If Only T. Boone Pickens Had Died http://t.co/tpXYGeCV Score: TB Pickens 0, Wealthy donors 0, Oklahoma State Univ. 0, Life Actuaries 1 $$ Oct 08, 2012
  • Musk?s SpaceX Launches Craft for Space Station Deliveries http://t.co/Z3MH68Ud Space age begins as governments r less of a factor $$ Oct 08, 2012
  • California Facing $5 Gasoline Stirs Brown to Relax Rules http://t.co/uQUPOz8f There is a pain point 4 everyone, just found 4 CA gas $5 $$ Oct 08, 2012

 

Comments

?

  • “Good post, Josh. You have identified many of the best. No one of us covers it all; it’s a strong list” ? David_Merkel http://t.co/3Qg6WWZk Oct 10, 2012
  • At this rate, growing tobacco should be prohibited. Oh, wait, we tried that with alcohol. Never mind. $$? http://t.co/hU9nI6l2 Oct 09, 2012

?

?

On Angela

?

  • @PavChyt @matinastevis Her *former* husband. She kept the name b/c it was good politics. She did not keep him. Oct 08, 2012
  • @PavChyt @MatinaStevis I received the name Merkel at birth. Angela got it from her 1st husband. At least people r spelling it right now $$ Oct 08, 2012

?

Retweets

 

  • RT @MuniCredit: Citi Muni Presentation: http://t.co/ONrQe9gA #muniland h/t: @bondgirl Oct 12, 2012
  • I appreciate retweets RT @LSilverspar: Not enough for the value of your posts. If you value the retweets, I will do so far more often. $$ Oct 12, 2012
  • My week on twitter: 22 retweets received, 22 new followers, 16 mentions. Via: http://t.co/SPrAWil0 Oct 11, 2012
  • RT @danprimack: Every time people get all worked up over a national presidential poll, I wonder if the electoral college was eliminated … Oct 08, 2012
  • True of many notable CEOs w/earnings 2 smooth RT @rcwhalen: GE’s Jack Welch Knows All About Cooking the Books http://t.co/5vJeRux6 $$ Oct 08, 2012
  • RT @Convertbond: “Markets are increasingly distorted by Central Banks, attempts to squeeze drops of growth from overindebted developed w … Oct 07, 2012
  • Shock! $$ RT @BarbarianCap: Revised Greek GDP figures show recession deeper than thought http://t.co/FCspv2gU. > data released friday night Oct 06, 2012
Broken Ruler

Broken Ruler

Posted on by David Merkel

Sorry for the lack of publishing recently.? I have not been feeling well.? Not sure what it is, but I am feeling a little better now.

Under normal circumstances, where a few defaults don’t threaten the whole economic system, and the government is running close to a balanced budget, and the Fed isn’t in a liquidity trap that they themselves created, there are relationships that are useful for analyzing value in the markets.

During those times the slope of the yield curve tells you a lot, and credit spreads tell you a lot as well.? But when the Fed tries to incite yield lust through QE, with Fed funds near zero, all of those relationships end.? The same is true for those who rely on yield curve slope to indicate likelihood of recession or expansion.

These are not normal times.? Yield spread relationships do not reflect risk differentials.? Collateralized Loan and Debt Obligations have returned.? That indicates we are in the final phase of this credit cycle.? When we begin to lever up junk credit, we have 2-3 years to go or so, before the credit cycle crests.? The issuance of junk bonds has reached new highs, and again, defaults will take 2-3 more years to ripen.? Like 2005-2007, the credit ratings for the junk being issued are more weighted to single-B and CCC debt, rather than BB debt.? 2015 could shape up to be really interesting.

For now, does that mean we play on, given that the credit cycle has been seemingly repealed?? Maybe.? If we’re only talking about junk bonds, what matters is being conservative at the time of crisis.? Junk bonds rarely trade off in a slow manner.

The tough question is what impacts the big four economic problems will have on asset returns:

1) Does the Eurozone centralize, dissolve, or muddle interminably?

2) Does China’s GDP growth slow dramatically, or even shrink, or respond to “stimulus?”

3) Does aging Japan finally have difficulty rolling over government debt at low rates?

4) How does the US emerge from long-term unsustainable monetary and fiscal policies?

5) How does the rest of the world deal with most of the large powers attempting to cheapen their currencies, thus forcing them to let their currencies rise, or import loose monetary policy?

Okay, five problems… the point is that when few are pursuing sustainable policies globally, it is difficult to make plans, because there are few historical analogies to guide us.

This is partly a problem because when there does not seem to be anything that is risk-free offering a positive nominal return, investors are even more prone to make subpar investment decisions, because a risk-free asset is needed to allow investors to tune their risk levels.? Retail investors, and most professionals would have a hard time with all assets being risky.

As for me at a time like this, I am trying to manage by avoiding companies that carry too much financing risk, and those with ill-defined business models.? Sometimes it works better, but while the financing bubble expands, I fear my caution is ill-rewarded.

My motto is “safe and cheap.”? I will keep doing this; it does not mean that I will always win, but it does mean that I will likely win in the long run. Lord helping me.

Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Rest of the World

 

  • Chavez ?Likely? to Lose, Supporting Bonds, Barclays Says http://t.co/zcufsNLN Something optimistic 4a Friday afternoon; but will he go? $$ Oct 05, 2012
  • Spain Sees Divorce Driving Breakup of Towns in Recession http://t.co/J423DVhS Badly handled, economic problems lead2 relationship problems Oct 05, 2012
  • BOJ Seeks Help Against Deflation http://t.co/G1ONwoA7 Contrary to popular belief, low central bank policy rates inhibit growth $$ Oct 05, 2012
  • Europe Jumps on Bank-Overhaul Bandwagon http://t.co/daaAcm0l also http://t.co/oxESdQiY Basel has done a bad job setting capital levels Oct 03, 2012
  • How ECB Chief Outflanked German Foe in Fight for Euro http://t.co/KWlbuvkT Clever politician sways Merkel through Hollande & wins4now $$ Oct 03, 2012
  • The real risk is the Capriles wins by a little, & Chavez finds a way to retain power. $$ http://t.co/k5f5082A Oct 03, 2012
  • Property Funds, Bonds Supplant Europe Lenders http://t.co/ebXwgIxa Banks can’t lend; watch currency risk, liquidity risk & credit risk $$ Oct 02, 2012
  • Longest Rally in Nine Years for JGBs on Deflation http://t.co/dCzC59cM 6th straight quarter of gains: matches a similar stretch in 2003 $$ Oct 02, 2012
  • Norway?s Wealth Fund Targets U.S. Real Estate by End 2013 http://t.co/JQalAy2U They have a long time horizon; this isn’t 4 speculators $$ Oct 02, 2012
  • Spain Expects a Wider Budget Gap http://t.co/5AHLEGGI No surprise, Eurozone numbers r routinely gamed, b/c there is no enforcement $$ Oct 02, 2012
  • Trade Slows Around World http://t.co/YkTFRBDE Kind of a soggy feeling w/China slowing, huge gov’t deficits & loose $$ policy Oct 02, 2012

Energy

 

  • Bakken Crude Prices Rise as Railroad Reach Grows http://t.co/m34o45AD Fascinating 2c transportation matching crude supply & demand $$ Oct 05, 2012
  • Natural Gas Glut Pushes Exports http://t.co/ycNBikZR Usually big, aggressive investments don’t work out. Small ones are manageable $$ Oct 05, 2012
  • California Refiners Ration Gasoline as Prices Near Record http://t.co/sWGlRBF1 also http://t.co/gk85k7jC Price of EPA fuel rules $$ Oct 05, 2012
  • Regulations help create shortages because gas in 1 area can’t be used in another. Time to simplify & have fewer blend? http://t.co/Y925MhFg Oct 04, 2012

 

Companies

 

  • Jet-Lease Billionaire Udvar-Hazy Takes On $AIG Hand That Fed Him http://t.co/04THKwF7 When AIG bot ILFC, took stock to avoid taxes, oops Oct 05, 2012
  • Apple?s Steve Jobs: What He Knew in 1983 http://t.co/JyLPvlbW Jobs was an amazing guy. What he foresaw makes him even more amazing. $$ Oct 04, 2012
  • Dan Loeb and Boyz II Men: Break Up Murphy Oil http://t.co/MdPhjujW $MUR doesn’t want to break up, but many oils cos r going that way $$ Oct 04, 2012

 

Federal Reserve

 

  • When central banks feel they need to reveal more & show action, they fall into a trap of over-acting, which leads to a liquidity trap $$ Oct 05, 2012
  • Fed Seeks to Clarify Plans http://t.co/DzOT2NXj Fed transparency is a bad idea. Fed managed $$ policy better when it revealed little Oct 05, 2012
  • Rubik?s Revolutions http://t.co/Q3SAYuJ6 @izkaminska takes us through the vagaries of why QE doesn’t do that much. We r Japan now $$ Oct 03, 2012
  • Don?t call it money printing, rubiks cube edition http://t.co/Eo5vkEkN No, QE is not money printing, but it won’t be easy 2 undo $$ Oct 03, 2012
  • Bernanke Seeks Gains for Stocks in Push for Jobs http://t.co/Xby6Bvd9 Monetary policy favors the rich over the poor in the current Fed $$ Oct 03, 2012
  • TIPS Show Inflation Alarm Fading as Options Give Fed Time http://t.co/YgLi0BDr Off ~15 bps since QE3 launch $$ http://t.co/J90Ch2FL Oct 02, 2012

 

Market Dynamics

 

  • Despite Gains, Many Flee Stock Market http://t.co/JRhWY0c8 Y retail investors tend to lose- fail 2 buy & hold @ a moderate risk level $$ Oct 05, 2012
  • Investors Jump Off the ‘Junk’ Pile http://t.co/iqbZRo5b New record in junk issuance, & a very low proportion of BBs, feels like 2006 $$ Oct 05, 2012
  • Merrill Lynch, Morgan Stanley, Wells Fargo Keep Losing Market Share, And They May Be OK With It http://t.co/1gKpSevF RIAs Ascendent $$ Oct 04, 2012
  • My (Not so) Golden Rules About Investing (& Not Investing) http://t.co/YNReadXs HT: @reformedbroker 25.75 tungsten-filled investing rules $$ Oct 04, 2012
  • Early Impact Of 401(k) Fee Disclosure Rules http://t.co/HBdtk7Oy This will be big. When you really c how much expenses they charge, ouch $$ Oct 04, 2012
  • They’re back! Yield hunt pushes funds into CLOs, CDOs http://t.co/x47V6xSc Into the final phase of the credit rally. Wind it tighter! $$ Oct 04, 2012
  • Stop Me Before I Do Something Stupid http://t.co/tOjyLW7R Tips for becoming a more disciplined investor?and boosting your returns $$ Oct 03, 2012
  • The Three Most Overrated (& Underrated) Financial Planning Recommendations http://t.co/eIMjtTjt Worth a read $$ Oct 03, 2012
  • For Warren Buffett, the cash option is priceless http://t.co/srmJcalh If you have the discipline, the cash option has value, if not no $$ Oct 03, 2012
  • Damages http://t.co/MzXBB2QR Bill Gross takes an inflationary view, & assumes that the deflationary forces of the world will go away $$ Oct 03, 2012
  • Dylan Grice Writes His Most Negative Note Ever http://t.co/VIhFGEEc Notes that the present QE policy favors the rich over the poor $$ Oct 02, 2012
  • America?s new subprime boom: This time it?s cars http://t.co/EBkXqw0a This will b a positive trend for 2 yrs; worry out in 2014 $$ Oct 02, 2012
  • 6 reasons to dump a bad mutual fund http://t.co/IleCG33t Could b simpler: sell when you find a fund w/better prospects net of loads $$ Oct 02, 2012

 

Politics

  • The Romney Reboot Arrives http://t.co/ViEoTb5L I’m voting 3rd party, but it is interesting 2c the presidential contest liven up $$ Oct 04, 2012
  • How to Make an Ailing World Economy Even Sicker http://t.co/XDiOkq5U The idea of gradually reducing the deficit is politically naive $$ Oct 03, 2012
  • Romney’s Middle-Class Tax Sale http://t.co/qywvSVXM The devil is in the details, & true of Obama as well. Ended up being Bush-plus $$ Oct 03, 2012
  • Romney Floats Idea of Itemized Deduction Cap http://t.co/E5nkUUO3 Has to be a cleaner way 2 do this. Ah, return to TRA ’86. Simple $$ Oct 03, 2012
  • Obama Cabinet Flunks Disclosure Test With 19 in 20 Ignoring Law http://t.co/Nt07Bgwu Less transparent than Bush http://t.co/NZ6A3PIs $$ Oct 02, 2012

 

Bank Regulation

 

  • Bank-Friendly US Regulator Shifts Focus to Revamp Reputation http://t.co/xUVY1UOE OCC is actually going to regulate banks?! Who knew? $$ Oct 04, 2012
  • Freddie’s Foreclosure Plan Hits Roadblock http://t.co/XrUeAjze We don’t get it. After 2 much debt financing housing we seek more debt $$ Oct 03, 2012
  • Banking should be a low ROE business.? High capital levels keep the banking system safe. $$ http://t.co/uUntNaXw Oct 03, 2012
  • Intelligence Exits Washington, Vacancies Rise http://t.co/VJt1y4KU Will b interesting 2c how comm RE pricing shifts as Wash DC retrenches Oct 03, 2012
  • Banks Like Munis; Mom-and-Pop Investors Don’t http://t.co/ugDPBL4F I don’t get how banks w/short liabilities can buy long munis $$ Oct 03, 2012
  • Sheila Bair: The one thing banking regulators should do now http://t.co/tu5jGYx4 Her solution is to raise capital requirements $$ Oct 02, 2012
  • A Very Strange Way to Assess the Safety of Banks http://t.co/8u05kbZO Simpler metrics than Basel r needed; complex ones r easy 2 game $$ Oct 02, 2012

 

Other

 

  • Big Picture Conference 10/10/12 http://t.co/IrsvZtU0 Lineup: Barofsky, Grice, Yamarone, O’Shaughnessy, Ritholtz, Rosenberg, Bianco & more $$ Oct 04, 2012
  • Bill Gross calls for a balanced budget so that all Treasury bonds & his bonds will get paid in full. $$ http://t.co/lTzq5zmf Oct 02, 2012
  • SEC Leads From Behind as High-Frequency Trading Shows Data Gap http://t.co/H6YnjVWr SEC way behind $NDAQ & $NYX in understanding HFT $$ Oct 02, 2012

 

Comments

 

  • RE: She bought Paypal, the most valuable part of $EBAY . What more could you ask for? $$ http://t.co/tfEVghRF Oct 04, 2012
  • Commented on StockTwits: Name 3 insurers that have managed Life & P&C operations well… I am a former insurance buy… http://t.co/aMsgW4nN Oct 03, 2012
  • Commented on StockTwits: Pretty certain that the DTAs would be divided up in a breakup. Insurance acctg tracks DTAs … http://t.co/NGmkWSmk Oct 03, 2012
  • RE: @bloombergview This really seems like wishful thinking. Huge difference in the way most Muslims & Westerners thin? http://t.co/rMt8w3zf Oct 03, 2012
  • Commented on StockTwits: $HIG has issues with variable products 2a higher degree, even though $AIG has the same issu… http://t.co/JWzZSvrV Oct 03, 2012
  • Commented on StockTwits: There r no synergies btw each of the 3 groups: no advantage to having P&C, Life & Other tog… http://t.co/sRU7zWys Oct 03, 2012
  • Commented on StockTwits: I would split P&C & Life & everything else — still a valid idea. http://t.co/FPAXZZUX Oct 02, 2012
  • RE: @PS46MMUCF4PDUIQ4LRUF3DMW2A That doesn’t solve “fat finger” problems, rogue automated trader, or feedback loop pr? http://t.co/EgjYsqbZ Oct 02, 2012

 

Replies

 

  • @incakolanews Could be… or maybe Barclays is trying to reduce its VZ bond inventory… Oct 05, 2012
  • . @The_Analyst The life insurance industry got burnt on CDO crops 1 (1998) & 2 (2001), but not 3 (2008), what will crop 4 yield? $$ Oct 04, 2012
  • @BlackRaven999 Both stock & flow are important, that is what makes this complex 2 understand Oct 03, 2012
  • @DividendMaster I think that either a significant recession &/or inflation is unavoidable. Delayed deficit decline means no deficit decline Oct 03, 2012
  • @BlackRaven999 Waiting till maturity leaves QE deposits in the system 4a long time due to twist. All removal of policy accommodation is hard Oct 03, 2012
  • @hook910 Take it up w/Buffett who has done it successfully. Intelligent businessmen do it: buy cheap assets when opportunities allow. $$ Oct 03, 2012
  • @hook910 With a long enough time horizon, and patient capital, market timing can succeed, value mgrs do this. This is what Buffett & FPA do Oct 03, 2012
  • @hook910 So you admit that the value of dry powder does change over time. Thanks! 😉 Oct 03, 2012
  • @hook910 It is not on option on cash, but cash can b thought of as an option on other assets. Was dry powder valuable in late 2008? Yes $$ Oct 03, 2012
  • @wanderinggull I think it is a bit of a stretch Oct 02, 2012
  • @DividendMaster They r attempting to lock in a smaller loss. Wonder when the yield on the 30-yr TIPS goes negative? $$ Oct 02, 2012
  • @ReformedBroker I respect Chuck Royce, but basically he is estimating the odds of deflation as being very low. What if China shrinks? $$ Oct 02, 2012
  • @TheStalwart Big installed base for LIBOR, easy to offer something better: even total up all US interbank lending 4a day, calc avg rate $$ Oct 02, 2012

 

Retweets

 

  • RT @ppearlman: RT @AlephBlog: Break up $AIG. I said it first here: http://t.co/MKsYqMYo then here: http://t.co/fZ6EW85e $$ Oct 02, 2012
  • Break up AIG $$ RT @ppearlman: RT @RonReuven @ppearlman no one understands all of $AIG’s assets or businesslines, including most of $AIG Oct 02, 2012

 

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