Macroeconomics – Page 35

Sorted Weekly Tweets

Posted on 31 August 2012 by David Merkel

Innovations

30 Innovations That Will Change The World http://t.co/D96omMBz Fascinating list; bookmarking it because I don’t have time now $$ Aug 31, 2012
How ‘Oxygen Foam’ Can Save People Who Aren’t Breathing http://t.co/XIlyIHHA Injectable oxygen can keep people alive when lungs hav probs $$ Aug 31, 2012
Laser-Guided Bullets Will Change The Future Of Warfare http://t.co/N3SFpO7Z Changes bullets into mini-guided missiles $$ Aug 31, 2012
This Nanoparticle System May Lead To A Cure For Cancer http://t.co/GwOYpVDt Clever fusion of drugs, polymers, nanoparticles & infrared $$ Aug 31, 2012
Power Felt Feeds Off Your Body Heat To Generate Electricity http://t.co/Ni5R7oKW If cheap enough could power developing world cellphones $$ Aug 31, 2012
A Tiny Microscope That Attaches To A Cell Phone Could Save Lives Around The World http://t.co/hzOJbdmb & it only costs $10! Amazing $$ Aug 31, 2012
5 Ways Researchers Use Microbes To Make Energy http://t.co/SZVM7ucB First 2 seem most promising. Butanol great replacement 4 ethanol $$ Aug 31, 2012
The Amazing Process That Enabled Paralyzed Rats To Run Again http://t.co/1kMOVWLs Several different technologies used in concert $$ Aug 31, 2012
Check Out The Cancer Detection Program That Won Top Prize At Google’s Science Fair http://t.co/JxZiBuLo WIll save life & pain 4 women $$ Aug 31, 2012
See How Scientists Print Skin That Will Help Treat Burn Victims http://t.co/GNTUZSaU Amazing. Again, the cost will determine viability $$ Aug 31, 2012
This Concentrated Solar Cell Could Be Powering Cities ‘Within Years’ http://t.co/bs57lQoC If this gets cheap enough, will change energy $$ Aug 31, 2012
How This Small Machine Turns Human Waste Into Clean Water Vapor http://t.co/F4jeyerr Neat, is it less expensive than current methods? $$ Aug 31, 2012
The Secret To Making Food Packaging You Can Eat http://t.co/rDYiQG2s Talk about your childhood wishes: you can even eat the dishes $$ Aug 31, 2012

Economics

The Riddle of the Resilient Economy Solved?? http://t.co/okKEWBBI I think many people factor future tax burdens & inflation into their views Sep 01, 2012
Bernanke on The Safe Asset Shortage http://t.co/a8HUxlIh When u become a large part of the market,distort price signals, difficult 2 exit $$ Aug 31, 2012
Not if you count in the rise in debt and unfunded liabilities $$ RT @TheStalwart: America is better off than it was four years ago Aug 31, 2012
‘The Economy Stole My Retirement’ http://t.co/xl4C2t7S I’m sorry; no one owns a retirement, it is not an entitlement; work is good $$ Aug 31, 2012
If Interest Rates Go Negative . . . Or, Be Careful What You Wish For http://t.co/Aw8w6nL3 A fundamental boundary u should not break $$ Aug 29, 2012
U.S. Firms Move Abroad http://t.co/IzSQIbLy US has some of the highest corporate tax rates in world, w/too much social engineering $$ Aug 29, 2012
True, Even if QE does nothing $$ RT @BubblesandBusts: @AlephBlog Even admitting this, Fed may be trapped by stock market expectations Aug 29, 2012
Fiscal Crunch Time in the Nation’s Capitals http://t.co/ys63PPFM Long article on sagging GDP amid difficulaties 4 China’s municipalities $$ Aug 29, 2012
Sadly, yes. Add in student loans for debt-slavery. $$ RT @jasonzweigwsj: Are Debtors? Prisons Coming Back? http://t.co/RU4JOuoM #WSJ $$ Aug 29, 2012
The unintended consequences of QE: not what you think http://t.co/K5ewheL7 QE both inflates and deflates doing almost nothing on net $$ Aug 29, 2012
Richard Koo is overrated, as is damage from austerity. $$ http://t.co/C3iqZ9kR Aug 28, 2012
If I had $1 4 every lame QE3 comment, could fund vacation 4 the Fed RT @ReformedBroker: QE3: SHUT UP, YOU HAVE NO IDEA. http://t.co/IXa3LWgJ Aug 27, 2012

Europe

BOE’s Haldane: Tear Down This “Tower Of Basel” To Stop Crises http://t.co/lNi9DcUc International standards are ill-enforced & squishier $$ Aug 31, 2012
France’s Hollande speeds launch of state investment bank http://t.co/pq7wx0Kl Governments involved in lending help create bubbles $$ Sep 01, 2012
Judgment Days Arrive for Euro Crisis http://t.co/rGebFIc9 September will be busy for the Eurozone. Strap in and enjoy the ride. $$ Aug 31, 2012
Spain Unveils New Financial Reforms http://t.co/zTXMukSr Subordinated debt & government absorb losses, as depositors & investors flee $$ Aug 31, 2012
El-Erian: Who Will Determine Greece’s European Future? http://t.co/nt2cbSux The weaker Italy & Spain r the more the EZone protects Greece $$ Aug 31, 2012
Europe banks find a rare funding window in August http://t.co/TiA8mWXq Can hardly think of assets with a worse risk/return ratio $$ Aug 29, 2012
Deposit flight from Spanish banks smashes record in July http://t.co/U6IECe9B Uncertainty leads to safe-haven-seeking $$ Aug 29, 2012
Turks to EU: No, Thanks http://t.co/A8ck9PAu Turkey grows much faster without the Euro; why end a good thing? $$ #ignorethedebtbubble Aug 29, 2012
France Debt ?Significantly Overvalued,? General Re Says http://t.co/jsmNoyIL France is the core EZ country closest to tipping $$ Aug 28, 2012

Politics

Romney Can Take His Dad?s Idea and Cut Mortgage Tax Break http://t.co/fyL75Wfq Grandfather it, a least 4 a while $$ Aug 31, 2012
I don’t believe someone whose views have shifted radically $$ RT @dpinsen: @AlephBlog He’s telling you what he stands for now Aug 31, 2012
Please, Ron would have been far more skeptical here $$ RT @FriendsRonSmith: Mitt’s hitting it out of the park tonight! Aug 31, 2012
Note on last Tweet: I am not voting 4 Romney; I have no idea what he really stands 4, given his past. Will go 3rd party, if I vote 4 prez $$ Aug 31, 2012
How to Beat President Obama http://t.co/xeX1Nx6W “Obama is losing independents, his base is less enthusiastic, the economy stinks” $$ Aug 31, 2012
Time to Get Serious on Medicare http://t.co/lA70rLtf The elephant in the room for both parties: what will you do with Medicare? $$ Aug 31, 2012
Four Years Later, and a Million Miles From Safety http://t.co/8PkUAJe6 We have not solved TBTF, repo funding, margining, and much more $$ Aug 31, 2012
Republicans Vow 2 Transform Obama?s US by Less Govt http://t.co/aKQ6NnbW Even Reagan only held Federal Register 2 no increase; shrink? Wow Aug 31, 2012
Obama Second Term Would Defy Confidence Measure http://t.co/u8q7zWOz Only reason this race is close is the Reps had no strong candidates Aug 31, 2012
Ryan Pledges GOP Rebirth http://t.co/BQUC2BFx Nice thought, but who will have the guts to cut entitlements or defense or reform taxes $$ Aug 31, 2012
Piecemeal reform that gives the financial sector what it wants would be the worst of all worlds. $$ Repeal it all, pu? http://t.co/BIEKHmS7 Aug 30, 2012
It is days like this that I am grateful that I do not own a TV, or I would be tempted to waste time watching the Republican Convention $$ Aug 29, 2012
Paul Ryan?s Intellectual Muse http://t.co/7yaywBOx Hayek was not a “no government” guy as much as a “limited government” guy $$ Aug 28, 2012
Sen. Corker: Bernanke’s Fed Feeds ‘Perverse Addiction’ http://t.co/xm6uk91h Current policy absorbs $$ from savers to finance US deficit Aug 28, 2012
Will they have the courage to use it, didn’t use their power last time RT @The_Analyst: OLA is some progress, no? http://t.co/FSj8m52D $$ Aug 28, 2012
Didn’t fix TBTF or remove bad regulators RT @CFAInstitute: Sheila Bair: 2Yrs After Dodd-Frank, Y Isn?t Anything Fixed? http://t.co/LaH1CZgI Aug 28, 2012
10 things the post office won?t tell you http://t.co/fLu0qjBC Point 8 I have a lot of experience with, but true of many govt buildings Aug 28, 2012
Partisan Finger-Pointing Misses Real Deficit Story http://t.co/mLrTSMkH Not dealing w/real issues until we deal w/entitlements $$ Aug 28, 2012

China

China?s Growing Economic Crisis http://t.co/LTHw4mss The Communist Party is running out of paces to create fake growth $$ Aug 31, 2012
Credit crisis in China?s richest province Zhejiang http://t.co/anbzYY4k “This is pervasive throughout China,” said Chovanec $$ Aug 29, 2012
China?s bad-debt nightmare http://t.co/YVz8mGMX Another aspect of Chinese malinvestment coming due $$ Aug 28, 2012
Latest missive out from Michael Pettis. Very bearish on commodity prices & Chinese GDP growth. rebalancing Chinese economy will be difficult Aug 28, 2012

Other

Start-up savior? Killing convertible debt http://t.co/eVS2LEDB Proposed Alternative: An modified form of convertible preferreds $$ Aug 31, 2012
Quebec Whodunit: 1/4 of Province?s Syrup Reserves Go Missing http://t.co/cTE4hm6A Did not know that Quebec provides 75% of all syrup $$ Aug 31, 2012
Weekly Wrap: Bernanke speaks in Wisconsin http://t.co/ud7Zklz5 An oops from NPR Marketplace. Jackson Hole is in what state? $$ #Wyoming Aug 31, 2012
Hidden Truths about Calories http://t.co/qHhxA0Kw A Food is Not a Food, A Body is Not a Body, A Microbe is Not a Microbe, A Cal is Not a Cal Aug 31, 2012
?Virtually Untreatable? Tuberculosis Threat Rising http://t.co/He85pwV7 Existing drugs proving useless. TB: coming 2 a country near you $$ Aug 31, 2012
Twelve-Year-Old Programmers Help Fuel IPhone Game Frenzy http://t.co/wSks2b4p SImple computer languages let kids make games, learn2code $$ Aug 29, 2012
Quake ‘Swarm’ Hits California Town http://t.co/r4C07l1f This would be pretty nerve-wracking to have almost constant small quakes $$ Aug 28, 2012
When you homeschool you can never tell the next question; just had a 10 minute discussion w/kids 5 & 6 on franchising, good discussion $$ Aug 28, 2012
‘ @ballenmo 5th is 18, 6th is 15 1/2 — came from a visit to Buffalo Wild Wings where 1 kid tried 2 use coupon only good @ company stores $$ Aug 28, 2012
4 those of you who know me, I review a lot of books, & PR flacks send them 2me in a wide # of ways. 1st time I got 1 via $AMZN today $$ Aug 27, 2012
When “biggest X” is going on, where X is university building campaigns, skyscraper, private equity deal &c credit cycle is about2go bust $$ Aug 25, 2012
Active in Cloud, Amazon Reshapes Computing http://t.co/OmFFCGHu $AMZN is like the cable industry of old: grows rapidly, profit in future $$ Aug 28, 2012
This is why I say it will be a while before high end real estate recovers. NJ suffers as finance shrinks $$ http://t.co/o0VOsQgb Aug 28, 2012
Watson gets ready 4 more uses as $IBM works on voice interface, & broadens its knowledge http://t.co/1QIXoyFA & http://t.co/9kY8Rjiz $$ Aug 28, 2012
This is a reason why the definition of income matters more than the rates it gets taxed at. Many rich people legally ? http://t.co/KR7GQKFK Aug 28, 2012

Rest of the World

Asia’s Tide of Cash Hems in Policy Makers http://t.co/X71xRllk Today’s exhibit on effects of loose monetary policy from US, EU, Japan $$ Aug 29, 2012
Poor in India Starve as Politicians Steal $14.5 Billion of Food http://t.co/OoZWUIQY Food aid should bypass governments or don’t give $$ Aug 29, 2012
Brezhnev Bonds Haunt Putin as Investors Hunt $785 Billion http://t.co/3mNVdpXK Don’t tell me nations don’t default on debts $$ Aug 28, 2012
Canada Says ?Anonymous? May Attack Energy Firm Computers http://t.co/ag4AePsp Threats2Canada?s critical infrastructure r real&will persist Aug 28, 2012

Financial Market Dynamics

Oh No ? Another Post About High Frequency Trading? http://t.co/68PTROlW HFT is the solution to fragmentation of venues 4 executing orders $$ Aug 31, 2012
High-yield ETFs Drive One Tenth Of Bond-Trading Volume http://t.co/IQqjOZ7N That’s significant, & will increase HY mkt volatility $$ Aug 31, 2012
How to dodge market touts and traps http://t.co/3Od4CfBZ Chuck Jaffe goes after promoted penny stocks, similar 2 what I have said $$ Aug 31, 2012
At least a few of us knew that $$ RT @EddyElfenbein: “Short-Selling Bans Don?t Work. Period.” Who knew? http://t.co/SZTfWQIs Aug 30, 2012
Pimco?s Ivascyn Beats Gross?s Flagship http://t.co/o17OhNEh Pimco is misunderstood because of the PR they do w/Gross & El-Erian $$ Aug 29, 2012
How to get a jumbo mortgage now http://t.co/KT74aDe4 One of the more optimistic things I’ve seen in residential real estate lately $$ Aug 29, 2012
SEC Commissioners Fault Schapiro Over Money-Market Rule Debate http://t.co/JgP5t3nb Significant tax probs w/float NAV, acctg probs w/capl Aug 29, 2012
Floating NAVs [4 MMFs] could prove taxing http://t.co/vDnF2eKR I remember when I tried to use a ST bond fund 4 checking; messy tax-wise $$ Aug 28, 2012
The Averaging Down Clown http://t.co/ZmPFEnQ0 This is more a question of time horizon and quality; I average down a lot and make $$ Aug 28, 2012
How Young Homeowners Lost Out by Buying http://t.co/maoi8gWT Remember, homes r primarily an expense & not an investment $$ Aug 28, 2012
Hertz Wins Bid to Buy Dollar Thrifty http://t.co/piYuPHI7 Did not know that Enterprise controls 50% of mkt, Hertz DT 26%, Avis 18% $$ Aug 28, 2012
Presidential Life Corporation To Be Acquired By Athene Annuity & Life Assurance Company http://t.co/oSZ3Pgkp This will not end well $$ #FTL Aug 28, 2012
States Review Insurers’ Capital http://t.co/exgPRO0A State regulators may require addl capital 2b held against non-GSE mortgages $$ Aug 28, 2012

Occupy Wall Street

“I don?t have any sympathy for anyone who has any semblance of middle-class life in this country — no sympathy” http://t.co/Kt8m8E0v #OWS Aug 29, 2012
Last tweet shows attitudes of some in #OWS . Can’t fight something w/nothing, though. Organization will always beat disorganization $$ Aug 29, 2012
Examples: Spartan & Roman armies could beat the less organized that had far larger armies. A real political movement organizes, unlike #OWS Aug 29, 2012
“The article sounds like #OWS is reduced to its fringe elements, which will be unpredictable, but?” ? David_Merkel http://t.co/fU6jkYYu $$ Aug 29, 2012
‘ @jmiah_th read the Bloomberg article on #OWS http://t.co/Kt8m8E0v It almost seems like they are falling apart if the article is right $$ Aug 29, 2012

Comments

@carney Reminds me of how AIG collateralized their sec lending w/AAA subprime RMBS, or the guy who tried 2 get a loan out of me by pledging+ Aug 31, 2012
@carney 5x the amount of a microcap stock w/ no earnings & neg net worth. Stock cratered and was worth zero 18 months later $$ Aug 31, 2012
The Central Bank of Sweden Prize RT @jasonzweigwsj: why the Nobel Prize in economics isn’t (exactly) a Nobel http://t.co/JqhAg4i5 #WSJ $$ Aug 31, 2012
+1 $$ RT @TheStalwart: #FF: @diana_olick. If you’re not following her, you have no idea what’s happening in real estate. Aug 31, 2012
@crampell Post hoc propter hoc fallacy — QE inflates assets *and* liabilities; it does nothing on net Aug 31, 2012
@SaraMurray What a cute kid. Aug 31, 2012
RT @maoxian: @niubi The plural of Ordos is Overdos. Aug 31, 2012
@The_Analyst She has always been kind to me. Don’t know what to say, I tend to give everyone room in this complex environment $$ Aug 31, 2012
RT @asymmetricinfo: Goodnight, tweeps. Remember: in 100 years, your great-grandchildren will be struggling to believe that anyone cared. Aug 31, 2012
@The_Analyst Heidi is a friend of mine. Why are you so hostile? Most journalists on finance learn as they go, she is better than most. $$ Aug 31, 2012
‘ @BettyInTheLoop Romney will do best being authentic, whatever that is for him; efforts to remake a candidate into what he is not fail $$ Aug 30, 2012
@JeniecePrimus Thanks for the compliment. I try to be as fair as possible, down to my contracts, and the disclaimer on my blog. Aug 30, 2012
It is a loser $$ RT @ritholtz: Jeb Bush Slams Republican Anti-Immigrant Stance as Losing Recipe http://t.co/CyWrYZiF via @BloombergNews $$ Aug 30, 2012
@17thStCap This time he mentioned that he liked $GM; I’ll continue to hold on to my $HMC, but it made me think. FD: +HMC Aug 29, 2012
@moorehn Now, that, made me laugh — caught me needing a laugh too, thanks. Aug 29, 2012
RT @dakyne: @JamesGRickards Nice rebuttal! The gold standard wasn’t the problem–the problem was the price was set too low during the 20 … Aug 30, 2012
RE: @bloombergview Shows why economists are dumb. Unemployment is high because labor is plentiful globally, & wages f? http://t.co/Oyo8MKjH Aug 30, 2012
“Russian money and influence already extends to Cyprus. Short hop to Greece ?” ? David_Merkel http://t.co/j5csjNuY $$ Aug 30, 2012
“”Economic growth is stabilizing at a slow pace.” Nothing to see here. Move along. $$” ? David_Merkel http://t.co/3Zqe9ARY Aug 30, 2012
@groditi I think post-WWII until Roe v Wade, most politics was quieter, w/noise behind closed doors. History pre-WWII & politics was ugly $$ Aug 29, 2012
@danprimack Right, and look at the DEF 14A forms — to test, pulled up the board of Amerus Group in 2006, since bought out by Aviva Aug 29, 2012
“Toss in some moderate sideshows: Japan, Switzerland, Australia. This era is a mess.” ? David_Merkel http://t.co/WGd2wq0v $$ Aug 29, 2012
@ReutersFlasseur @historysquared @firoozye slow preparation on the off-chance of unwinding the Eurozone $$ Aug 29, 2012
‘ @BergCT When I read that, I thought, “I get the politics of demonizing the 1%, I do not get the politics of demonizing the ~75%.” $$ Aug 29, 2012
RT @KeithMcCullough: “Bernanke has becomes a 21st century Pangloss, hoping for the best and quite unprepared for the worst” @JamesGrickards Aug 29, 2012
RT @KeithMcCullough: “Fed has effectively declared currency war on the world” @JamesGRickards Memo from the front: http://t.co/X71xRllk Aug 29, 2012
@susanweiner Scope out the overall idea of what u want to say, then list ~10 articles that will say that. Write, seek feedback, repeat $$ Aug 29, 2012
@grossdm She has worked there long & hard, and from my dealings with Fidelity, has helped to transform them from being only mutual funds $$ Aug 29, 2012
RT @Convertbond: Priceless RT ?@lemasabachthani: RT @Darlington_Dick: Morocco has eur-denom bond maturing on 10/2020. Trades 170bp tight … Aug 29, 2012
@GuardianJessica Would have phrased it more delicately; when some ppl who r selfish have kids, they expand the spheres of their selfishness Aug 29, 2012
@eddtorial I have Tweetdeck up in front of me, and it all people are talking about. I am reading a good book by David X. Martin on risk $$ Aug 29, 2012
RT @jarstone: @TheStalwart As American’s we have a choice to make in this election. We can end up like the NY Times or the Wall Street J … Aug 28, 2012
Used to work near there $$ RT @GlobeStcom:Philadelphia Stock Exchange building in receivership, @NewmarkKF 2market #CRE http://t.co/nOrn1qgK Aug 28, 2012
RT @The_Analyst: Book Review: “Bailout” by @neilbarofsky, or: Why I’ll Never Work in DC & Why Main Street should blame Govt Not Wall … Aug 28, 2012
I just reviewed: ‘The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal… via @alephblog $$ http://t.co/1XMjYKr3 Aug 28, 2012
@DavidSchawel Renting offers flexibility. Owning is a commitment w/large fixed costs. Y tie up capital in 1 levered undiversified asset? $$ Aug 28, 2012
NB: Yuan may b overvalued $$RT @saraeisenFX: Yuan forwards trade at biggest discount to onshore rate since March 2009 on growth slowdown Aug 28, 2012
Commented on StockTwits: There is a time and place for renting vs buying — what are your resources, needs, time hor… http://t.co/WVL0UOaD Aug 28, 2012
@jonsticha Just this: Reagan was pragmatic, but did not want to be… w/majorities in Congress he would have been far more transformative $$ Aug 28, 2012
Garbage. If Reagan had had a strong majority in Congress, he would have balanced the budget & done more on social iss? http://t.co/azU1Zx84 Aug 28, 2012
RT @yvessmith: Why Neil Barofsky?s Book ?Bailout? Matters: Matt Stoller is a fellow at the Roosevelt Institute. You can follow … http: … Aug 28, 2012
RT @ampressman: Brought my daughter to the office this morning to impress her with my piles of folders, pens of much ink and assorted tc … Aug 28, 2012
‘David Frink, a spokesman for Dell, said the company?s bonds are a ?more accurate market indicator,? which are ?tradi? http://t.co/fRXkjiEz Aug 27, 2012
@neilbarofsky My review is out; loved your book: http://t.co/j4QtKVFJ $$ Aug 26, 2012
@The_Analyst I try to release them at the same time. Aug 26, 2012
@The_Analyst Sorry, but I feel late to this one as well. Top reviewer at Amazon has 99/109 positive votes, from a poorly written review $$ Aug 26, 2012
@DynamicHedge FRED has come a long way; used it when it was a bulletin board. Now it is a treasure trove free on the Web $$ Aug 25, 2012
@DynamicHedge http://t.co/geIHWOCP 3M LIBOR minus http://t.co/mA2gVMNj 3M T-bill yield Aug 25, 2012
Ripple effects RT @SoberLook: Post: “The crash of the Dutch housing market reminds us of a much older market bubble” http://t.co/1UsSPRYi $$ Aug 25, 2012
Miss your stuff too, when my blog was down 4 a wk, it was tough $$ RT @jennablan: cc: @kenli729 RT @unstructuredfin So sad without my blog Aug 25, 2012

Book Review: A Decade of Debt

Posted on 30 August 2012 by David Merkel

This is a short book that in some ways is a summary of Reinhart and Rogoff’s greater work This Time Is Different: Eight Centuries of Financial Folly. Think of it as an executive summary in book form.? How short is it?? Less than 160 pages, but in terms of text there’s less than 40 pages of text in this 6″ x 9″ book, so it’s a fast read.

Graphs occupy the remainder of the book, with the latter two-thirds of the book going nation-by-nation, allocating 1-3 pages to each, showing Debt/GDP, and the various sorts of financial crises they have faced.

Main Findings

1) When debt to GDP ratios get above 90%, growth rates fall by 1%.

2) Emerging markets fare worse than developed market on point #1.

3) There’s no relation in the short run regarding public debt and inflation in developed nations.

Other Findings

1) Many nations default continually… I allege cultural problems, but I am willing to be corrected.

2) Banking crises were normal in developed nations prior to WWII.

3) Private debts surge prior to banking crises. This is normal, when banks lend aggressively, they lend badly.

4) When there are banking crises, other crises tend to occur.? No surprise, because restrictions in bank lending leads to difficulties in those seeking financing.

5) Banking crises are associated with sovereign debt crises.

6) Public borrowing follows a repeated boom/bust cycle, particularly in developing markets.

7) Like Michael Pettis’ book, The Volatility Machine: Emerging Economics and the Threat of Financial Collapse, short-term debts tend to accelerate prior to crises in developing markets.

8 ) Public credit ends to absorb private debts after the crisis erupts.

This is a good book,? it summarizes the dangers that come from high national debt levels.? The graphs in the back are a handy reference to the debt histories and crises of most major nations.

Quibbles

None

Who would benefit from this book: I think every serious investor and thinker on economics should be familiar with the findings of Reinhart and Rogoff.? If you want to, you can buy it here: A Decade of Debt (Policy Analyses in International Economics).

Full disclosure: I bought this book with my own money.

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

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

Book Review: The Nature of Risk

Posted on 28 August 201228 August 2012 by David Merkel

I’m here this evening to review another excellent book on risk control by David X Martin.

This is a difficult book to review, because if I describe what happens, I end up spoiling the book.? This is a small book, and I read it in less than an hour.

This book came into existence because the author had a hard time explaining risk to the family of a friend who had died, and then his own family.? He wanted to come up with a simple way to describe risk to those who don’t know markets.? His tool was using common animals in a forest to explain risk, because their behaviors mimic those of different sorts of people as they face risks, or decide to ignore risks.

One thing I appreciate about the book is that it takes an ecological approach to risk.? My view is that markets are not like physical systems, they are like ecological systems.

Risk can never be eliminated, but it can be prepared for and managed.? I think that is the main message of the book.

For most of you reading me at Aleph Blog, this book would be fun for you but not necessary for you.? But consider some of your friends and family members that are not as sharp as you.? Personally, I am planning on having my wife and kids read this book.? Living with me, they pick up a lot, but this book is a clever way to teach risk management without making it seem like it is being taught.

To me the real use of this book is to teach less market oriented friends, family, and children about risk.? This is a small, simple but powerful book.

For those that are advanced, and want something more meaty, please read my review of the author’s book, Risk and the Smart Investor.

Quibbles

It’s a little book, and it is a very good book, but 15 clams for such a small book?? I would have priced it at $10 or so.

Who would benefit from this book: This book is designed for beginners and intermediate investors.? Get it as a gift for friends who you think are taking too much risk, and don’t get that.? Or, use it to educate young people about risk.? If you want to, you can buy it here: The Nature of Risk.

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

Book Review: The Crisis of Crowding

Posted on 28 August 2012 by David Merkel

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

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

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

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

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

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

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

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

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

Quibbles

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

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

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

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

Sorted Weekly Tweets

Posted on 25 August 2012 by David Merkel

Politics

Bernanke Letter Defends Fed Actions http://t.co/COYtCtzg Hope the election brings enough change that we end up w/a fresh Fed Chairman $$ Aug 25, 2012
Private equity tax questions for Mitt Romney http://t.co/hXaAu0sR 1) Carried interest 2) Corporate interest deductions 3)Mgmt fee waivers $$ Aug 24, 2012
Sorry, Henry Blodget, You’re Wrong About Election 2012 http://t.co/5DghXuzI Religious Conservatives r viewed as suckers 2 support the GOP $$ Aug 24, 2012
Obama Supporter Suggests Anti-Mormon Whisper Campaign http://t.co/ism2YbbR Too obvious. Democrats pay Evangelicals to describe Mormonism $$ Aug 24, 2012
The Treasury?s Oversimplified View of Its Mortgage Relief Effort http://t.co/cwm1rrX8 The program did wonderful things… for the banks $$ Aug 23, 2012
Top six myths about Medicare http://t.co/qKYGtsLT Mostly correct but #3 brings lower quality & #6 is wrong, see: http://t.co/WvPr4giZ $$ Aug 23, 2012
White House Worked With Buyout Firm to Save Plant http://t.co/KPKHvZC5 Government help to get deals done begets more of the same $$ Aug 22, 2012
Consider keeping Bernanke, top Romney adviser says http://t.co/3Kp575gA This is rhetoric, if Romney is elected, Hubbard will chair Fed $$ Aug 22, 2012
Is BUBB (breaking up the big banks) now a ?conservative imperative? ? http://t.co/exRI726x I like $BAC so much; there should b 50 of them $$ Aug 21, 2012
Why Democrats think taxes will need to rise by more than 50% http://t.co/VUlfCM6K Entitlements will drive change in America but what change? Aug 21, 2012
How the tea party beat Occupy Wall Street http://t.co/SAUzzNog No contest. The t-party organized politically, & #OWS didn’t $$ Aug 21, 2012
Lanai owner Larry Ellison used tax loopholes for payouts http://t.co/la7HJMh6 The problem isn’t Larry, it’s the politicians’ bad tax code $$ Aug 21, 2012
The Real Conservative Opportunity This November http://t.co/m5nXtCUH Urges Republicans 2 champion banking reform. $$ #nixonwent2china Aug 20, 2012
Effective protest requires wide organization and general respect for the property rights of others, which these three women did not have $$ Aug 20, 2012
Fannie and Freddie: The Walking Dead http://t.co/u0Y4CgAt Fannie & Freddie may be dead, but the US Govt’s role in housing is not dead $$ Aug 19, 2012

Companies

There?s Warren Buffett ? and then there?s the rest of us http://t.co/rgMH0kjX The new paper on Buffett’s investing has gotten attention $$ Aug 24, 2012
Take that Square! eBay still a leader in mobile payments http://t.co/CxHkNQkG Am I wrong, or is most of the value of $EBAY in Paypal? $$ Aug 23, 2012
Yellow Pages’ Last Lifeline: Clinging to Each Other http://t.co/X347LfLD $DEXO $SPMD hit sell button, internet destroys yellow pages $$ Aug 22, 2012
The Beginning of the End of Print: The Lessons of an Amazingly Prescient 1992 WaPo Memo http://t.co/hVa62p0A No one listened 2 Cassandra $$ Aug 22, 2012
Last tweet FD: long $PSX . Frankly I’m surprised that an oil refiner, transporter, marketer would help come up w/an advance on solar $$ Aug 22, 2012
Phillips 66, South China U of Technology, & Solarmer Energy Set a World Record in Solar Power Conversion Efficiency http://t.co/95ND020R $$ Aug 22, 2012
Zynga Spurning Sale Strands Owners @ Worst Web Value http://t.co/zrKw0fjv Remember u r a outside minority investor. Choose mgmts w/care $$ Aug 22, 2012

http://t.co/xW9zcuWY $AMZN does amazing things as nonprofit $$ Aug 21, 2012

Monsanto Genetic ?X-Ray Glasses? Speed Tastier Tomatoes http://t.co/AJQZDJY9 Interesting comment thread, no one defending $MON $$ Aug 21, 2012
Facebook Shares: Still Too Pricey http://t.co/z38X4OsZ The lack of a reliable revenue model makes $FB a buy at prices ~$9-15 $$ Aug 21, 2012
Barnes & Noble Falls After Second Straight Nook Sales Drop http://t.co/nWNxr3Pw $BKS losing to $AMZN . Slow-motion train wreck $$ Aug 21, 2012
Up Against Retail Giant Amazon, BufferBox Aims to Jump-Start Parcel Delivery http://t.co/MhW35CeB Any of these should team up w/USPS $$ Aug 21, 2012
Amazon Wins Race to the Bottom With Radical Pricing on Long-Term Data Storage
Facebook Investors Brace for More Shares Coming to Market http://t.co/GE7usIDt Test of how much insiders truly believe in Facebook $FB $$ Aug 20, 2012
Aetna to Acquire Coventry Health Care http://t.co/sFRdRDv3 The People’s Republic of Maryland loses another large company $$ #BDK #USFG Aug 20, 2012
Stocks: The ‘Lockup’ Effect http://t.co/SG5sZIXL A lesson learned during the dot-com bubble is forgotten & must b re-learned. $$ #lockup Aug 18, 2012

Financial Markets

Stock Market Indicators http://t.co/sf0D3BDY Interesting take from the normally bullish Ed Yardeni $$ Aug 23, 2012
Hedge funds are betting on disaster http://t.co/dDtO6Cd3 Maybe some hedge funds r putting on “big shorts” through CDS, but most avoid vol $$ Aug 23, 2012
‘Insider Trucking’ Drives Strategy at J.P. Morgan Fund http://t.co/JZyRVZ5P This brings “bottoms up” analysis to a much lower bottom $$ Aug 23, 2012
The bond bubble still has room to grow http://t.co/DNM9teW1 High yield bond defaults typically peak 2-3 years after issuance peaks $$ Aug 22, 2012
FDIC files lawsuit tied to failed bank RMBS investments http://t.co/63GYJ7Zn I know many investors that did due diligence & avoided the prob Aug 22, 2012
The Profession’s Faulty Assumptions: A Top Ten List http://t.co/lAeCIRzq A worthy article displaying common errors for financial planners $$ Aug 22, 2012
Wrong: Why hedge funds may not be right for you http://t.co/SdPmZeRN Only global macro benefits from volatility, other HFs like calm $$ Aug 21, 2012
Is Your Credit-Card Company Secretly Screwing You Over? http://t.co/7ptHex0g Excellent advice from @eddyelfenbein . Follow it & prosper $$ Aug 21, 2012
Goodbye, Growth. Hello, Dividends. http://t.co/AO2STJhx Companies pay divs get more efficient w/capital. Doesn’t slow growth much $$ Aug 20, 2012
When Wall Street Watchdogs Hunt Whistle-Blowers http://t.co/YyY6UREt Really a sad article. Try to do the right thing & many fight u $$ Aug 20, 2012
A Flock of Black Swans http://t.co/ClDRJYho Study history & other cultures &u may find possible some things considered impossible by many $$ Aug 20, 2012
Russell To Close All But One Of Its ETFs http://t.co/wjKsHrEp A trend that I think will come to most marginal ETF providers $$ Aug 20, 2012
Calpers Defends Pension Benefits While Risking Losses http://t.co/1nnyYD7t CALPERS relishes its importance, but not its performance $$ Aug 20, 2012
Five Myths about Glass-Steagall http://t.co/hgzzPkgM What’s the other side of the argument here? The Fed was hollowing out G-S b4 GLB $$ Aug 20, 2012
Revisiting Stocks For The Long Run http://t.co/b1Dz4mOk DIfficulty of using & rolling the 30-yr Tsy… it’s a very special bond $$ Aug 20, 2012
Wrong: Six Investment Moves to Make Now http://t.co/kkoarfR8 Reads like this: missed the rally, so take more risk now to make up 4 it $$ Aug 18, 2012

China

China Confronts Mounting Piles of Unsold Goods http://t.co/qXaOoX0h As w/any command & control economy, eventually get gluts & shortages $$ Aug 24, 2012
How China Sees America http://t.co/Cv0d61KI Believe US a revisionist power, seeks2curtail China’s political influence & harm its interests Aug 24, 2012
Caterpillar Cuts China Production as Digger Slump Reaches Mining http://t.co/Rprs0FS2 China’s coming slump has ripple effects $$ $CAT Aug 24, 2012
China Has Become One Big “Stuffed Channel” http://t.co/aAFwHUyj Strategies of promoting exports & forced industrialization have failed $$ Aug 24, 2012
Weak Demand Drags on Chinese Carmakers, Earnings Growth Stalls http://t.co/dvIrhc0D China slowing rapidly, also c http://t.co/po7PVA3a $$ Aug 22, 2012
For China, Too Much Steel Isn’t Enough http://t.co/af9MjbWT Economic growth happens when actions expand options 4 society as a whole $$ Aug 22, 2012
China’s Brewing Pension Crisis http://t.co/pHq4Ijgg Still at $3T, it’s a lot smaller than what the developed nations r facing $$ Aug 22, 2012
China Reluctance on Reserve Cut Signals Inflation Concern http://t.co/WcH0kKkM If inflation starts running in China, the game changes $$ Aug 20, 2012
China?s Yuan Decades From Challenging Dollar http://t.co/J3hmRaID It takes a long time to create deep/transparent capital markets $$ Aug 20, 2012
China Said to Order Action by Banks as Developer Loans Sour http://t.co/EUj63rb3 This is a liquidity crisis, not a solvency crisis, NOT $$ Aug 18, 2012

Money Market Funds

Statement Regarding Money Market Funds by Commissioner Luis A. Aguilar http://t.co/6RNScb0L Well-thought out dissent on MMFs. Good job $$ Aug 24, 2012
Wrong: The lurking dangers in money market funds http://t.co/q2X3gSe8 Another scare piece. MMFs are more stable than banks $$ Aug 23, 2012
Just sent Mary Shapiro my compromise proposal on money market funds. Hope she grabs it and runs with it http://t.co/vuNGATPK $$ Aug 23, 2012
Big Blow for Money-Fund Overhaul http://t.co/jnRnfA97 Yay! No changes for MMFs, which are better managed than banks. $$ Aug 23, 2012

Municipal Bonds

The 5 Biggest Muni Defaults Ever http://t.co/BlqI96wY Instructive. CA & OH tobacco bonds, Jefferson County, AL, American Air & WPPSS $$ Aug 23, 2012
Should Muni Investors Follow Buffett to the Exits? http://t.co/6w7wgnzg Sound advice: B selective, only buy what funds necessity $$ Aug 23, 2012
U.S. muni market riled by Fed report on defaults http://t.co/6XC0OmS8 Corrects many false impressions generated by the NY Fed muni piece $$ Aug 23, 2012
School district debt, representing lgst % of California net par insured (35.5%), is ineligible for Chapter 9 BK http://t.co/TU0uG87h $$ $AGO Aug 22, 2012
Buffett?s Exit From Muni-Bonds Signals Trouble Ahead 4 Local Govts http://t.co/Ay9eG3uj Don’t think so; Buffett still owns lotsa munis $$ Aug 21, 2012
Meredith Whitney?s Muni Prediction Gets No Boost From Fed http://t.co/hVWiQBrx Fed study focused on risky areas, non-rated & IDBs $$ Aug 21, 2012

Other

College Tuition’s 1120% Increase http://t.co/632ueDsX Outstrips even the rising cost medical services $$ Graph: http://t.co/bvYQljFC Aug 24, 2012
The closing of American academia http://t.co/MTQjCPQv Adjunct professors earn little&teach a lot. But getting a PhD in Anthropology: Fail $$ Aug 24, 2012
Lawyer separates variable annuity investor & annuitant, allowing him 2 benefit from the deaths of sick people http://t.co/C2xwCtRc $$ Aug 24, 2012
My Last Post – Arnold Kling http://t.co/YvJPt3RH One of the best hangs up his blogging. It’s the way of the internet, ephemeral $$ Aug 24, 2012
Blind Mice Given Sight After Device Cracks Retinal Code http://t.co/pIaxnTtH Looks like a huge advance $$ #goodnews Aug 23, 2012
Wrong: How algorithms will help us spend, spend, spend http://t.co/of3Bhyll People will start blocking it, like telemarketers $$ #FTL #fail Aug 21, 2012
Hopes for Chestnut Revival Growing http://t.co/Y58WfC9n Efforts to restore the chestnut tree seem to be succeeding $$ Aug 21, 2012
Historians, rather than mathematicians usually make better economic predictions, but that’s not saying much… http://t.co/db7NDOKf Aug 20, 2012

Eurozone

Greek Crisis Evasion to Fore as Merkel Hosts Hollande http://t.co/wlXKlz8h Not sure how this will lead to a long-term solution $$ Aug 23, 2012
Last Man Standing Means Europe Investment Banks Resist Cuts http://t.co/eIauqQj1 Total capacity must fall, the survivors get better biz $$ Aug 22, 2012
Wrong: Spain and Italy Are (Probably) Fine http://t.co/5jiC6zRQ Add in the social welfare obligations & dysfunctional politics $$ Aug 20, 2012
Finnish Euro Doubts Hide Business Plea to Commit to Currency http://t.co/rDbf5isL Euro weak 4 core EZ countries, & 2 strong 4 EZ-fringe $$ Aug 20, 2012

Around the World

First Solar to Build India Farms as Outages Propel Sun Power http://t.co/MJGiIrhj Sunshine is more reliable than India’s electric grid $$ Aug 23, 2012
The ECB: Europe’s Conditional Bank http://t.co/6abGujtg “these ideas fail to take account of a key ECB requirement: conditionality.” $$ Aug 21, 2012
A Tax Revolt in Japan, and a Bond Bubble Too http://t.co/CoL7Ticw Unrealistic view; financial claims exceed Japanese resources $$ Aug 22, 2012
What a Tangled Financial Web Terrorist Networks Weave http://t.co/84eBN6Mc In a networked era, difficult2avoid leaving digital breadcrumbs Aug 22, 2012
“The FSA warned that its [risk] survey results were based on self-assessments by individual [hedge fund] managers” http://t.co/KWb6ktQy $$ Aug 21, 2012

Energy

Think Gas Prices Are Bad Now? http://t.co/l4srlshm Between Iran & refinery outages, gas prices are rising particularly on the coasts $$ Aug 21, 2012
The Exquisite Symmetry of the Natural Gas Revolution http://t.co/QSit1HWT 10 points on how cheap natural gas is an aid 2 the economy $$ Aug 21, 2012
Methanol Wins http://t.co/yYP0Z1Qp Interesting experiment fueling a car w/methanol did not take much effort, cheaper & cleaner $$ Aug 20, 2012

Comments

“None of the things you mentioned are markets. The article above is about manipulating markets, not?” ? David_Merkel http://t.co/OcU9gn4O Aug 25, 2012
Tropical storm Isaac is likely to miss Tampa anyway, storm is consistently moving west of the forecast track of NOAA $$ Aug 24, 2012
Haiti has trouble w/rain & 40 mph winds, much less 60 mph $$ RT @AnnieLowrey: Forget Tampa. Pray for Haiti. http://t.co/eJBxmukv Aug 24, 2012
@PlanMaestro Thanks 4 passing the article along; some of those benefit designs are astounding $$ Aug 24, 2012
@BubblesandBusts I don’t think so Aug 24, 2012
@AnaCapMgmt Very good points. There are others trying to do things his way, but difficult 2 manage an insurance investing conglomerate $$ Aug 24, 2012
@ToddSullivan Yes, and here it is: http://t.co/SqXcFiqI Aug 24, 2012
RE: @bloombergview The only way medical costs will decline is to move to a first-party payer system. When its your ow? http://t.co/Dzjy8j6b Aug 24, 2012
“Impossible to manipulate markets without leaving accounting trial. Conspiracies r bunk.” http://t.co/WaXMpySm http://t.co/TPnCsHiB $$ Aug 24, 2012
RT @fundmyfund: again why is Japan stock market not up 100% of %,they did many QEs and CB can buy equity assets there.Its mostly psychol … Aug 24, 2012
plus ?a change, plus c’est la m?me chose $$ RT @munilass: So Glenn Hubbard has started blogging and Arnold Kling is giving it up. Egads. Aug 24, 2012
@rajivatbarnard Nice piece. Did not know you had written it, because my RSS reader broke 2 months ago & I have not rebuilt it yet $$ Aug 24, 2012
@ShawnMcFarlane My proposal makes MMF holders take losses in bites, and avoids “runs of funds.” U can read it here: http://t.co/vuNGATPK Aug 24, 2012
RT @merrillmatter: @ShawnMcFarlane @alephblog I disagree. They should not be FDIC insured and should be allowed to ‘break buck’ on occasion. Aug 24, 2012
@politicoroger Isaac may hit the gulf coast on FL panhandle or further west. God is not man or woman, but he represents himself as a man Aug 24, 2012
RE: @bloombergview Hasn’t worked so far. Doing the same thing repeatedly and expecting different results $$ http://ww? http://t.co/tIOtLhYh Aug 23, 2012
@nereidadin Yes, no response yet Aug 23, 2012
@foxjust Just sent it off to her. Commented on her article, but Reuters is having issues w/blogs and comments these days Aug 23, 2012
@SallieKrawcheck @Reuters Would you be willing to review my compromise proposal on money market funds? http://t.co/6vrVXVGS Thanks. Aug 23, 2012
@foxjust Been pushing this idea for 3 years, have sent it to the SEC, but I’m a disinterested nobody. Felix Salmon liked it, as have others Aug 23, 2012
@eisingerj Would you be willing to look at my compromise proposal on MMFs, & tell me what you think? http://t.co/vuNGATPK $$ Aug 23, 2012
@foxjust Would you be willing to look at my compromise proposal on MMFs, & tell me what you think? http://t.co/vuNGATPK $$ Aug 23, 2012
@merrillmatter I’ve even heard that Dihydrogen Monoxide is making is way into the water supplies! $$ #help #thereisalwaysenoughtimetopanic Aug 23, 2012
@TFMkts @The_Analyst Good points, seems to be more mkt timing than disaster, though I know of some putting on CDS trades. Pay prem & hope $$ Aug 23, 2012
@munilass Yes, that’s correct, but I could not fit that in. Aug 23, 2012
@TheStalwart Really seems like Romney was on the aggressive side of legal on taxes, but his investments aren’t unusual for a rich guy $$ Aug 23, 2012
@TheStalwart Do I have this right then: a company that Romney invested in was 1 of the lenders through CLOs to American Media Operations? $$ Aug 23, 2012
@BarbarianCap Thanks for the praise. I just try to write about what is most motivating to me on any given night Aug 23, 2012
@moorehn Read some of the comment letters at the SEC, a non-stable public NAV 4 MMFs would cause significant harm to users. $$ Aug 23, 2012
@Dvolatility Yes, I heard, that was a decade or so in the making. Actuaries sometimes joke that we keep GASB around 2 make FASB look good $$ Aug 23, 2012
@Dvolatility does that affect Poway School district’s ability to service their debt? Yes, data quality varies more with munis than corps Aug 22, 2012
@Dvolatility don’t knowhow to bring their thinking up a level of complexity, and say, if CA is in trouble, and San Diego County, then how + Aug 22, 2012
@Dvolatility Just read a few articles on overlapping debt. Interesting; love to learn. I think some investors don’t look at it b/c they + Aug 22, 2012
@Dvolatility Yes, but I am not an expert on it; as investors go, I am a generalist Aug 22, 2012
@Dvolatility What do you mean by overlapping? I just found it interesting that CA schools can’t use BK Ch 9… Aug 22, 2012
RT @TheStalwart: In the old days, the idea that None Of The Above could actually ‘win’ (thus making an office go unfilled) was promoted … Aug 22, 2012
RT @historysquared: The $Fed is like the frustrated driver who keeps pumping gas into a car that won’t start, eventually flooding the en … Aug 22, 2012
@GaelicTorus I might be inclined to the bank debt of $ZNGA or $GRPN. No way $FB goes broke; it has a franchise $$ Aug 22, 2012
@joshuademasi I’m saying that Japanese society has not yet come to grips with its inability to fund future promises, that’s all $$ Aug 22, 2012
Clever and not what I expected $$ RT @AnnieLowrey: “But at least now we know.” http://t.co/mh5Ldk62 Aug 22, 2012
Just finished complex stock screening: 28 candidates, auto parts, airlines, insurers, regional banks, infotech, retail, etc. $$ #bizarre Aug 22, 2012
“At that price, bondholders will scour the Globe 4 external assets of Belize, and place liens on them” $$ David_Merkel http://t.co/rZGmkSgQ Aug 21, 2012
“Maybe they should team up with the US Postal Service. Lotsa locations, and they need $$” ? David_Merkel http://t.co/lKe9ShxQ Aug 21, 2012
@LarryThompson5 Historically, successful political movements do 1 of 2 things: form a 3rd party, or gain influence over1 of the parties $$ Aug 21, 2012
@LarryThompson5 I would agree w/u that #OWS is not Dem-driven. Some tried to use it, couldn’t figure out how, vs repubs co-opting t-party $$ Aug 21, 2012
Catch my comment http://t.co/FHwMSyLX Yes, 4 2 reasons RT @ritholtz: Is Pension-Plan Shift Into Bonds Permanent? http://t.co/OWjdqPjH $$ Aug 21, 2012
@WatersLogan Good, keep it up. 12% of my readers are Canadian. Aug 21, 2012
@TheStalwart Here it is: http://t.co/fBvKxQXq Aug 21, 2012
@TheStalwart I wrote a data-intensive post on the Poway School Distirict, and you didn’t post it to BI, but lesser posts did make it to BI. Aug 21, 2012
@ETFProfessor1 I understand and that is fine. Aug 21, 2012
@e_d_sanders I’m interested in stopping the next crisis; I would like to end interstate branching, and hand regulation back to the states $$ Aug 21, 2012
@milktrader Thanks, nice to know it is not just me. Aug 20, 2012
Anyone else finding Yahoo Finance to be squirrelly now? $$ Aug 20, 2012
@ritholtz I live near Baltimore. B4 my father-in-law died, wud visit in-laws in La Jolla every few years. Wife’s favorite beach near Romney Aug 20, 2012
I know I have walked past it; didn’t know Romney owned it $$ RT @ritholtz: Mitt Romneys water front LaJolla shack http://t.co/ee8AwnEN Aug 20, 2012
@asymmetricinfo Most homeschoolers in Howard County, MD r secular, many r liberal; the schools r not performing well; HS kids get peer time2 Aug 20, 2012
RT @asymmetricinfo: Why worry homeschool kids won’t get socialized? It’s spending most of your time around a mob of your own age that is … Aug 20, 2012
As a class yes, some won’t gain critical mass $$ RT @GaelicTorus: but bond etf doing ok, right? low costs, asset growth – as a class Aug 20, 2012
Too much honesty there $$ RT @RNPJHP: @The_Analyst @AlephBlog RBC Dominion told me they can’t make 5% returns on client’s money! Aug 20, 2012
@wesbury @ 1st Tsy-blogger summit, I encouraged the high-level people there to do that, & what are they considering now — floaters! $$ Aug 20, 2012
@ETFProfessor1 You would probably know better than me. It seems economics of running a bunch small funds is poor. Open to your thoughts $$ Aug 20, 2012
@abnormalreturns I would consider $FB @ around $8, a touch over book value and a PEEG ratio of 50%, mainly b/c revenue model is unclear $$ Aug 20, 2012
@ToddSullivan I knew you were being sarcastic, just wanted to flesh out my thoughts further Aug 20, 2012
@ToddSullivan Of course that’s easier; I use a technique like that to try to deal w/high growth situations that r uncertain $$ Aug 20, 2012
Hard to compete against $AMZN, which doesn’t have an immediate profit motive. $BKS http://t.co/SC5gA1Ps Aug 20, 2012
“Corporate spread tightening is highly correlated w/VIX, another reason $$” ? David_Merkel http://t.co/R9vTpa7s $$ http://t.co/M7X60pC5 Aug 20, 2012
@ToddSullivan I would try this 4 $AAPL — est mkt size @ maturity, time 2 maturity, value of biz then & discount @ 12% 2 get NPV/sh $$ #swag Aug 20, 2012
“Almost no one arrives early to a fad/motif, so investing of this sort is likely to lose.” ? David_Merkel http://t.co/yCJ0K9SY $$ Aug 20, 2012
Much wisdom from Mr. Berra $$ RT @JATranfo: @AlephBlog As Yogi said, “Making predictions is hard, especially about the future.” Aug 20, 2012
“I get surprised by what gets attention when I write. To have two pieces on the top 10 list is?” ? David_Merkel http://t.co/UpaKEY0I $$ Aug 20, 2012
RE: @bloombergview Pray tell, what interest does Putin have in liberalizing? Current system favors his retention of p? http://t.co/RjR8WI0C Aug 20, 2012
@geronimo2003 It means that mortgage bonds will lose net demand, but F&F will still gtee conforming MBS. Pvt sector can absorb supply $$ Aug 20, 2012
+1 Well done $$ RT @AmityShlaes: Lobsters as metaphor for everything, including Obama trade policy: http://t.co/qDn83Fqs Aug 19, 2012
@StockTwits got the ticker wrong. Mosaic is $MOS , Monsanto is $MON . Both in agriculture… $$ Aug 18, 2012
@prchovanec They should listen to Pettis, Walter, & Shih also Aug 18, 2012
@prchovanec If they are listening to you, that is good for all of us. $$ Aug 18, 2012

On the Specialness of Long Treasuries

Posted on 23 August 2012 by David Merkel

When Gary Schilling presented to the Baltimore CFA Society, he made the comment about how much bonds beat stocks by.? His proxy for bonds was 25-year zero coupon bonds.? Invest in those from 1980 to the present, rolling to the new 25-year regularly, and yeah you can beat stocks handily when interest rates fall and continue to fall.

Think of what a 25-year zero coupon Treasury means.? The price measures how much you are willing to discount inflation and nonexistence of the US government 25 years from now.? When interest rates fall 3% for a 25-year zero, the value of the bond more than doubles.? Falling almost 12% in yield since the peak, that multiplies the value of the bond more than 16 times, far more than the equity market over a similar period, including dividends.

But wait.? How many people would have the stomach to make such a trade even if they were mostly convinced that rates would fall so much?? Few, I think.? The more volatile the investment, the fewer the people who follow through. People lose confidence during extended slumps.? Schilling and Hoisington may have had the courage to do it, but few others did.

The same applies to a 100% equities portfolio.? Few can stomach that level of volatility.

But when one compares bonds to stocks, be careful what you allow to be the bond proxy.? Personally, I would choose the ~~Lehman~~ Barclays’ Aggregate — it’s a good proxy for the investment grade bond market, and there is nothing special about it — it has all risks, and an average level of interest rate sensitivity.? It has done well over the last 30 years, but has not beaten stocks.? Over the last ten years, yes, it has beaten stocks.? But that is normal.? Stocks have bad decades, every three decades or so.? In those decades, bonds often do better.

If one uses 30-year Treasuries, rolling them over the last 30 years, you end up with an incredible result. Not quite as good as 25-year zeroes, but still good enough to beat the S&P 500 with dividends.

What I am arguing is that choosing the narrow area of the bond market that did best over the last 30 years — highest quality noncallable long debt, is not a fair comparison against the stock market as a whole.? We should use the investment grade bond market as a whole, and that means the Barclays’ Aggregate [AGG].

Let me put it this way, if someone can pick the best performing index of bonds to compare against stocks, what is to keep the stock manager from picking the best sub-index of stocks to be the policy comparison?? Hindsight is 20/20, so let’s limit the comparison to broad indexes.

What Caused the Crisis?

Posted on 22 August 2012 by David Merkel

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

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

Causes

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What was not part of the Crisis

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

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

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

Attitudes

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

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

The Future Belongs to Those with Patience

Posted on 18 August 201221 August 2012 by David Merkel

I’ve finished the book “Bailout” and will review it next week.? I am in the midst of the book “The Crisis of Crowding,” and will likely review it next week.? What I write this evening is a bit of an experiment, and preparatory to what I write on “The Crisis of Crowding.”

Here’s the issue: I spend more time on liability issues than most investors.? How is an investment financed?? For those that have access to RealMoney, these old articles of mine explain the issues very well:

Managing Liability Affects Stocks, Pt. 1
Separating Weak Holders From the Strong
Get to Know the Holders? Hands, Part 1
Get to Know the Holders? Hands, Part 2

In hindsight, I wish we could have had consistent titles for the articles.? The broad idea is this: how much risk might the holder of the asset be taking on depending on how he finances the asset?? The asset in question is a long duration asset, like a house or a factory.? Consider the spectrum:

I own the asset “free and clear.”? I have other unencumbered assets to deal with uncertainties.
I own the asset “free and clear.”
I have a significant amount of equity invested in the asset, and the rest is borrowed on fixed terms.
I have a normal amount of equity invested in the asset, and the rest is borrowed on fixed terms.
I have a modest amount of equity invested in the asset, and the rest is borrowed on fixed terms.? I had to pay a higher interest rate to do this.
I have a modest amount of equity invested in the asset, and the rest is borrowed on floating rate terms.
I have no equity invested in the asset, and the financing is borrowed on floating rate terms.

As you go down the spectrum, the odds of loss go up that the owner of the asset might ever lose control of the asset.? As financing shifts toward the end of the spectrum, the odds of a bubble go up, as cheap financing allows marginal buyers to buy more of the asset in question.

Now this can be framed more generally: what are the likelihood of outcomes on the assets that I buy versus the fixed commitments needed to support my purchase, or the internals of the asset (i.e. too much internal debt).? The rate needed to support the purchase could be the rate needed to support a happy retirement.

And there is the problem.? When needs are fixed and outcomes are variable, it can be quite a trouble, particularly when asset prices have been rising because of increased buying power from debt arrangements.? Almost all systems would be relatively stable without debt.? Even the dot-com bubble had its slug of debt from internal trade financing, and the need to pay taxes s a result of the options received.

When a large number of people are relying on decent-sized short-term asset price gains in order to do well, that is a recipe for disaster.? Note: at the same time, that don’t need to make money, and have financial flexibility, don’t care to invest, because asset prices are too high compared to the cash flows that they are likely to throw off.? They invest in cash-like equivalents, carefully researched ideas that look weird, biding their time, looking dumb as the mania proceeds.

When those that are inflexible expect a lot, and those that are flexible expect nothing, that is the peak of the market.? There is no one left to buy the speculative assets in question, and things will mean-revert.

Prices of the speculative assets start to fall, and things cascade in ways that few would expect, because as prices fallvarious liabilities are called into question.? And, if the liabilities are called into question, so are those who funded the liabilities, because they are less certain of receiving the cash flows that they expected.? This process continues until only those with modest or no borrowings is left standing, or the government intervenes to protect her chosen.

[Note: all liabilities are assets of someone else, and net in aggregate to zero.? That is even true of the duration of liabilities; aggregate liability durations net to zero as well.? Liabilities are an important sideshow in a world driven by assets.]

The bottom comes when those that are inflexible expect nothing or worse, and those that are flexible expect that will make decent money as they wait.? This is a trite saying, but as a friend of mine once said, “The tritest sayings in life are true,” here is the saying, “Patience is a virtue.”? In investing, good things flow over time to those who are willing to invest during crisis, and sit back during the latter parts of a boom.? Bad things come to those that chase the market, investing when things are hot, and divesting when things are not.

Asset returns are not what the financial planners tell you.? Asset returns are lumpy.? They are feast and famine, with more feast than famine, but with enough famine scare a lot of people away.? The good returns come when most are scared, and think the market is rigged.? The bad returns come after a period of prosperity, and those that don’t understand the market start investing, because it seems to be free money.? As I often say, the lure of seemingly free money brings out the worst in people. (Someone please send the memo to Ben Bernanke.)

Those who are patient in investing earn most of the rewards over the long haul.? Others may clip gains at the edges, but real wealth stems from owning the best assets when few want to invest, and being patient when opportunities are few.

Now, if everyone knew this and acted like this, the market would get really dull, and would grow at the rate of book value, like private businesses do.? But not everyone is patient and provident.? Moral tendencies vary.? In the long run, those that insist on returns in the short run don’t get them, while those those that wait for returns in the long run do.

-==-=–==–=-=-=-=-=-=-=-=-=

I’m planning on writing a summary post on the crisis, to explain what drove the crisis, and what did not.? The framework that I have given here will instruct that process.

Sorted Weekly Tweets

Posted on 17 August 2012 by David Merkel

Note: Tomorrow (Saturday) I will be on WBAL Radio at 8:30 AM Eastern with local radio host Jimmy Mathis, talking about the markets.? If you are up, they do stream the broadcast.

Market Dynamics

Six Weeks of Green: Stocks Quietly Creep Higher http://t.co/XYxAfaOj Markets move up at half the speed they go down http://t.co/d09QUp8y $$ Aug 18, 2012
Premiums dominate in HY CEFs & loan participation CE funds, even the investment grade funds r seeing discounts fade. Too hot. $$ #yieldlust Aug 17, 2012
T. Rowe Price Small Cap Fund Veteran Preston Athey to Exit in 2014 http://t.co/Y6BRCnmW One of $TROW ‘s finest takes a less active role $$ Aug 17, 2012
Paulson Steps Up Gold Bet to 44% of Firm?s Equity Assets http://t.co/5ESGLVdl Makes me bearish on gold. Bad mkt could b a forced seller $$ Aug 17, 2012
What should I do with my money now? http://t.co/xqXtnPqb My view is this, if acctg is conservative, buy stocks P/TB < 1.5, P/E < 10 $$ Aug 17, 2012
Usage: That was a real Facebook of an IPO! 2) We really Facebooked the IPO buyers! 3) Avoid this IPO, it’s going 2b a real Facebook! $FB $$ Aug 17, 2012
Facebook puts follow-on on ice http://t.co/d2CMGLvl Avoiding adding insult to injury. Lousy IPOs in the future will be called “Facebooks” $$ Aug 17, 2012
It’s usually a bad sign when locals are selling, and foreigners buying. How do foreigners have more knowledge? $$ http://t.co/mhOHunFj Aug 16, 2012
Man overrides machine to tackle low bond yield risk http://t.co/IDTSByMr Momentum isn’t everything w/bonds, eventually mean reversion. $$ Aug 16, 2012
Whenever you mention CDS spreads, could you do us the favor of citing that spreads bonds are trading at? You are, aft? http://t.co/o3StHaG0 Aug 15, 2012
You Are Now About to Witness the Strength of Street Knowledge http://t.co/jV4bxWc4 Having a revenue model is an aid to stock performance $$ Aug 15, 2012
Even Amid the Current Turmoil, Stocks Still Beat Bonds http://t.co/fqTWnM6g Issuing this opinion: a crowded trade http://t.co/X6KGWp5b $$ Aug 14, 2012
Silver Hoard Near Record as Hedge-Fund Bulls Recoil http://t.co/gQpc19Hz Pressure for prices to fall amid ETF-based hoarding $$ Aug 14, 2012
Junk-Bond Buyers Plot Escape in Debt Gap http://t.co/lEVYDv9f Smart money moving up in liquidity & down in yield. Junk rally continues $$ Aug 14, 2012
A Green Light for Car Loans http://t.co/VqfWA4AK Banks, Finance Firms Boost Auto Lending; Fed Survey Finds Easier Standards $$ #moredebt Aug 14, 2012
Stocks: The ‘Safety’ Dance http://t.co/N9CNg4aO Defensive stock valuations high relative to cyclicals. Graph: http://t.co/Q17aYeiU $$ Aug 13, 2012
As Corporate-Bond Yields Sink, Risks for Investors Rise http://t.co/WeET5vWD Maybe. Debt-deflation has a funny way of persisting $$ Aug 13, 2012

Rest of World

Mexico’s big oil problem http://t.co/e3b6V19s Yrs of abuse &non-investment by PEMEX, milked by the govt, oil production declining fast $$ Aug 18, 2012
Iranian Currency Traders Find a Haven in Afghanistan http://t.co/Bcw8l03A Sorta fitting that Afghans make $$ breaking sanctions on Iran $$ Aug 18, 2012
Rate Cuts on the Cards for Norway and Sweden http://t.co/REReXdiF We need a new Gresham’s Law on Monetary Policy. See in next tweet $$ Aug 17, 2012
Bad monetary policy drives out good monetary policy when large countries inflate, & exporters in small countries complain about losses $$ Aug 17, 2012
You can say that again $$ RT @saraeisenFX: More signs of worsening credit quality in China http://t.co/KLAApyBy Aug 17, 2012
Aramco Says Virus Attacks Network, Oil Output Unaffected http://t.co/o0p8Rb94 What shall we call this? The Cold Techno-War? $$ Aug 16, 2012
The only way out for China: Andy Xie http://t.co/ROaF0C2S Problems only going2get worse as long as government interferes $$ #chinacrash Aug 15, 2012
Beijing Loan Guarantee Firm Teeters on the Edge http://t.co/XtapRo8W A sign of things to come, and how will China deal with the defaults? $$ Aug 15, 2012
China?s money outflow continues in July http://t.co/xpMby8WI The wealthy of China send capital abroad, so that they can survive anything $$ Aug 15, 2012
German Provinces Struggle to Lure Skilled Workers http://t.co/yN61QTaJ Europe can find work, but will have to find it in Germany $$ Aug 14, 2012
Correlation Breakdown as Proxies for Risk Boost Aussie, Kiwi http://t.co/4zQMFGQd Countries w/good $$ policy draw funds, harming exporters Aug 14, 2012
Africa’s pirates have demands – and letterhead, too http://t.co/GKbc4Jcm Not intimidation, merely “making you an offer you can’t refuse” $$ Aug 13, 2012
Mursi Sidelines Egypt?s Top Generals Amid Power Struggle http://t.co/KAOWGQdE Push is coming to shove; Military vs Muslim Brotherhood $$ Aug 13, 2012

US Economy

The case for supply-side tax cuts http://t.co/EYfStM7t Tax increase of 1% of GDP reduces output over the next 3 years by nearly 3% $$ Aug 17, 2012
London Firings Seen Surging as Finance Firms Add NY Jobs http://t.co/D0to5HSo Finance jobs grow where the regulations are lowest $$ Aug 17, 2012
5 years forward, five year inflation: http://t.co/q98ZknDn Seems to top out @ 2.7% recently, 3% longer-term http://t.co/rqFkN26r $$ Aug 16, 2012
Farmland Prices Surge Across the Plains States http://t.co/we6hZAcP Poss causes: hi grain prices & widespread use of crop insurance $$ Aug 16, 2012
The Downside of a Recovery in Housing http://t.co/BfzmDdYr “potential uptick in inflation measures, of which housing is a big component” Aug 16, 2012
Will births come back with the economy? http://t.co/sYqJjBXm Yes, people have more children when they are optimistic about the future $$ Aug 15, 2012
Wrong: What if baby boomers don’t live forever? http://t.co/kRLnHqrA Even if mortality does not improve @ prior rate, makes little $$ diff Aug 15, 2012
Mathematically Possible http://t.co/ziQNoQx4 Correcting the false assumptions of Obama’s tax gurus | Govt in DC is always dishonest $$ Aug 14, 2012
Clarity of communication is not the Fed’s problem. If you have bad policy, it doesn’t matter how you present it. http://t.co/C27MJ2QX Aug 13, 2012

Pensions

Unions protest Democrats at Illinois State Fair http://t.co/uU7twsOK Govt workers learn hard reality. Benefits not protected by ERISA + $$ Aug 18, 2012
Which means underfunded benefits may never b paid at the level promised. Taxes can’t b raised enough to make it work, either. Sorry $$ 🙁 Aug 18, 2012
@mckpartners There r 3 parties not getting blame here aside from the standard ones: 1) accountants that dreamed up lousy funding rules + $$ Aug 18, 2012
@mckpartners 2) Actuaries didn’t pushback on investment assumptions & 3) Union negotiators thot they were smart trading salary 4 pensions $$ Aug 18, 2012
Annals of dubious research, 401(k) loan-default edition http://t.co/LDLsN0f1 401k loan defaults r 2% of what widely-cited study claims $$ Aug 13, 2012

GSE Bailout Change

Fannie?s and Freddie?s Forgettable Friday http://t.co/kvfNkBcI Investment whose value is dependent on unknowable government policy $$ Aug 18, 2012
GSEs expected to unload delinquent loans after Treasury change http://t.co/2g7tiIxI Portolios to shrink through prepays/writeoffs 15%/yr $$ Aug 17, 2012
Anybody have guesses as2what $FNMA $FMCC $FNMAT $FMCCK should be worth? Pfds ~ 2 coupon pmts? Common stock ~ 0? Prob(going-away present)? $$ Aug 17, 2012
Treasury to wind down GSEs faster, only to be replaced with (insert solution here) http://t.co/mAtyKpHs Future of the GSEs in question $$ Aug 17, 2012
Treasury to Amend Terms of Fannie, Freddie Bailout http://t.co/iZcCdXML Cancels 10% div, all profits go2 Tsy. Comm stocks down 20-25% $$ Aug 17, 2012
Fannie, Freddie Pfds Sink As Treasury Amends Bailout Terms http://t.co/3pGEjsrF Down 52-55% today. That was the crunch you heard $$ Aug 17, 2012

Municipal Bonds

Bondholders, insurers challenge San Bernardino bankruptcy http://t.co/WE2vRb6e They allege SB finances are not in a state of emergency $$ Aug 18, 2012
That really stinks, can’t comment there also $$ RT @Tubulus: @munilass I think your head will slam into your desk – http://t.co/8G1e0plE Aug 16, 2012
The Untold Story of Municipal Bond Defaults http://t.co/2UKKOIUA Trivial thots from researchers @ NYFed, my comment: http://t.co/EP5aUq29 $$ Aug 15, 2012
Looking for Higher Yields? Try ‘Junky’ Municipal Bonds http://t.co/qo9DfZKt Safer than corporate junk, but less liquid. Be careful $$ Aug 13, 2012

Other

Apple judge: ?I see risk? and 7 more newsmaker quotes http://t.co/wyBoToT7 Notable quotes in the business world $$ Aug 17, 2012
The Valley of Free Food: How One Firm Caters to California’s High Tech Giants http://t.co/cijDNgdC Companies r armies; travel on stomach $$ Aug 17, 2012
Texas Seeks Seizure of Life Partners http://t.co/MWofrEv2 ‘Bout time. Life settlements should b illegal; no insurable interest $LPHI $$ Aug 17, 2012
More trial, less error: An effort to improve scientific studies http://t.co/i2PLAD5h Why I am skeptical of much biometric research $$ Aug 16, 2012
when $AMGN ‘s scientists tried to replicate 53 prominent studies in basic cancer biology … they were able to confirm the results of only 6 Aug 16, 2012
Mobile pay war: Wal-Mart and others vs. Google http://t.co/Q30PZQGP So much innovation in payment systems; wonder which will win? $$ Aug 15, 2012
Nassim Taleb: Stay Out of the Investment Industry http://t.co/ZyomTwjB Superinvestors of Graham & Doddsville r @ work & still making $$ Aug 15, 2012
Deep ocean lure grows as high-tech drilling pays off http://t.co/P4UP4ZWs The technology for extracting oil grows ever more complex $$ Aug 15, 2012
Buyers Beware: The Goodwill Games http://t.co/eA7XEXjr Check the cash from operations. Should exceed earnings if Goodwill is valid. $$ Aug 14, 2012
CLEAN UP THE BALANCE SHEET: GET RID OF DEFERRED TAXES http://t.co/DTfT8bRg Future income or losses can’t be assured, so not asset or liab $$ Aug 13, 2012

Comments

@BarbarianCap The firm I was with sold $AIG the day it went into the Dow. Close to a “top tick.” $HIG , did not do hearly as well 🙁 $$ Aug 18, 2012
@The_Dumb_Money @pkedrosky is a bright guy. Many got it right, but fads suck people in. Aug 17, 2012
RE: @boingboing Not too surprising. Many corporations pay low taxes b/c of govt incentives. Relationship 2 mgmt pay s? http://t.co/KoChJizm Aug 17, 2012
@Breakingviews The sooner the euro dissolves, the less will be the pain for all involved. It was a mistake from the start. $$ Aug 17, 2012
@pelias01 Many thanks for the many times you have asked people to follow me. I really appreciate it. Aug 17, 2012
@JimPethokoukis I’m reading it now; that’s a fair assessment. Beyond that, it reinforces how hard it is to do anything in DC $$ Aug 16, 2012
RT @PragCapitalist: Pushing up stock prices does not make underlying assets more profitable. The whole premise of the Bernanke Put is f … Aug 16, 2012
@FeeOnlyIndy I try to be fair, I don’t always succeed, and I do have my biases, so take me with a grain of salt, but thanks $$ Aug 16, 2012
@izakaminska Whenever I go to Boston, I always take the Water Taxi from the airport. Lets me off in Downtown –beautiful view of the city $$ Aug 15, 2012
@munilass Glad u said: “The Fed really ought to be embarrassed that it published something like this.” I didn’t say that & should have $$ Aug 15, 2012
@The_Analyst true… too much quantitative talent went to Wall Street, applied the wrong model: physics, rather than right model: ecology $$ Aug 15, 2012
My friend Eric Hovde sadly didn’t win the Wisconsin Republican Senate primary; Eric would’ve shaken up DC. Thompson is business as usual $$ Aug 15, 2012
“Proppants prop open cracks when hydraulic fracturing is done. $$” ? David_Merkel http://t.co/OuqTSMAc Aug 14, 2012
?I wasn’t that impressed w/Inker’s analysis. Does not take into account dollar-weighted returns. $$ http://t.co/C5Gh0pOl Aug 13, 2012
@nancefinance I was pretty nerdy, though not withdrawn, back then. My mom was a self-taught investor. I caught the bug from her. $$ Aug 13, 2012
When I was a teenager, I remember looking through the bond tables, noting that almost all prices were below 100. Today it is the opposite $$ Aug 13, 2012
@japhychron @Peter_Atwater You were more than mostly right, it’s a great book. Only wish it could have been bigger. $$ Aug 12, 2012

Book Review: Moods and Markets

Posted on 11 August 201213 August 2012 by David Merkel

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

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

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

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

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

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

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

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

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

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

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

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

Quibbles

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

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

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