Macroeconomics – Page 37

Sorted Weekly Tweets

Posted on 21 July 2012 by David Merkel

Eurozone

Indebted Valencia asks Spain government for help, markets jolted http://t.co/lDkPC9U2 Better to let a region fail, than bail them out $$ Jul 21, 2012
Favoring the French, a lesson in perception from bonds http://t.co/qa5CJEgL France’s advantage: big, which is weak 4 creditworthiness $$ Jul 21, 2012
Estonia is admirable for their courage, though I can’t imagine why you would want to be part of the Eurozone NOW $$ Jul 20, 2012
Krugmenistan vs. Estonia http://t.co/1tJssWqG Post private debt bubble, Estonia froze pensions, lowered govt wages ~10% & + VAT by 2% $$ Jul 20, 2012
Demand for Spanish Debt Continues to Evaporate http://t.co/TMdIV05Y Piecemeal solutions continue to fail as 10-year rises over 7% $$ Jul 19, 2012
Merkel Says Bailout Liability Undecided http://t.co/HuggOawS “We always get the majority we need,” Ms. Merkel said. $$ Jul 16, 2012

US Economic Policy

FSOC Supports Overhaul to Trim Risk of Money-Market Runs http://t.co/nD1CKeqv Federal Govt owned by the banks, who want to axe a rival $$ Jul 21, 2012
Let States Do the Tax-Collecting Dirty Work http://t.co/Uq1LmPwI States could decide how to tax & remit to the Feds. +1 $$ Jul 21, 2012
How the Elites Built America?s Economic Wall http://t.co/ifCcBhX6 Interesting take on how some “blue state” policies promote inequality $$ Jul 20, 2012
Treasury Auctions 10-Year TIPS at Record Low Negative Yield http://t.co/XvnQmLtg Lock in a loss against CPI to avoid a poss bigger loss $$ Jul 20, 2012
The Coming Defense Crack-Up http://t.co/JKZycDO4 If it forced us to reprioritize Defense & other Federal spending, could b good thing $$ Jul 19, 2012
D&R parties are rival teams @ same country club $$ RT @ampressman: @AlephBlog Yeah, who else would do such a thing? http://t.co/yN4GyGat Jul 19, 2012
The GOP’s Solyndra Wing http://t.co/eNvLU1Wb Republicans who love corporate welfare; this is not merely a problem of the Democrats $$ Jul 19, 2012
Post Office Might Miss Retirees’ Payment http://t.co/YvpRVLWe Draining pension funds is a stopgap, not a real solution. Raise prices. $$ Jul 19, 2012
QE, negative yields and the paradox of thrift http://t.co/oUM0hkI0 QE not only raises asset prices, but liability values as well $$ #fail Jul 18, 2012
At a Wharton conf 22 years ago, I said neg rates were possible b/c of deflation combined w/need to pay to store cash. Instructor laughed. $$ Jul 18, 2012
U.S. Public-Pension Shortfall $4.6 Trillion, Budget Group Says http://t.co/Y4fq7tj0 Probably a little high; Tsy discount rates severe $$ Jul 18, 2012
How Much Could States Benefit From Online Sales Tax? http://t.co/9d3eYZz4 Would bail out a decent amount of many states’ deficits $$ Jul 18, 2012
Wrong: Industrial Production in U.S. Rises in Sign of Resilience http://t.co/RfNT4hM6 Data revisions > current period estimates beat $$ Jul 17, 2012
Ponzi Scheme? http://t.co/kU4Yx1CW Cities r going BK b/c they didn’t adequately project their funding needs?will community ass’ns b next? $$ Jul 17, 2012
Calpers Misses Big on Investment Target http://t.co/HIRzXnw1 Assets < Liabs; A: +1% L: +7.5, plus val adj from 7.75%. Assets <<< Liabs $$ Jul 17, 2012
Romneyconomics – Good but incomplete http://t.co/6n869J9j Generally agree, but shoddy logic in the middle about GDP & debts $$ Jul 16, 2012
Treasuries Doomsday Is Four Years Away for Vanguard http://t.co/nAz67Q3k Vanguard is largest private owner of US debt @ $148 billion $$ Jul 16, 2012

Miscellaneous

I get amused when people misspell Warren Buffett’s name as Buffet. But a high profile organization: @Bloomberg? $$ http://t.co/NRsc8plk Jul 20, 2012
New Sleeping Pill Thwarts Brain?s Up-All-Night Neurons http://t.co/6I0LglFG $MRK Blocks a tiny group of receptors that keep body alert $$ Jul 20, 2012
Fore Sale http://t.co/mkUeWlVb On the plunging prices for houses where you also have to pay annual membership dues for the golf club $$ Jul 20, 2012
Task named editor in chief of Yahoo Finance http://t.co/7aiATNa6 Congratulations 2 @atask ! Great job @ important financial web resource $$ Jul 19, 2012
New Yahoo CEO Mayer is pregnant http://t.co/Kq7ICTcD Happy for the couple; risk to put off kids into late 30s; hope her delivery is easy $$ Jul 17, 2012
Contra: The Secret Behind Romney?s Magical IRA http://t.co/uQHbSbWc Misses preferred shares & valuation issues; better work elsewhere $$ Jul 16, 2012

Rest of the World

Japanese Consumers Reconsidering Rice Loyalty http://t.co/W4WuhvKj Food grown in Japan is suspect since Fukushima; foreign rice limited $$ Jul 20, 2012
Fast slowdown $$ RT @Thevalueteam: China?s steel and concrete sectors are indicative of something potentially wrong http://t.co/ufK0Vaob ^KM Jul 17, 2012
China’s Version of ‘Too Big to Fail’ http://t.co/tNKduuPn Never knew China had a CDO mkt; also suggests a private equity bubble in China $$ Jul 16, 2012

Market Dynamics

Here?s Another Indicator Pointing Toward Recession http://t.co/c3ImTeZF Sharp cuts in earnings estimates indicate a recession coming $$ Jul 21, 2012
Mortgage Bonds Yield Hopeful Signs on Housing Recovery http://t.co/gzm1Fefi A lot of disagreement over proper credit loss assumptions $$ Jul 20, 2012
Plotting a Securitization Sequel http://t.co/WE0uhTYI Don’t think securitizing rental payments will work. no property behind cashflow $$ Jul 20, 2012
Economic Fears Hurting Obama, Poll Indicates http://t.co/vq7JzIEe No surprise, there are few policies that work against debt deflation $$ Jul 20, 2012
Everyone Hates Treasurys Now http://t.co/LGYAIcTU That’s what makes it such a great trade @carney, w/many needing2invest 4 long liabs $$ Jul 20, 2012
Passel of articles on LIBOR-like scandals http://t.co/lQfSaOUE & http://t.co/64rzFL5q & http://t.co/GQJnUZZK Damages hard2prove $$ Jul 19, 2012
Failing to Connect the Boom to the Bust http://t.co/jrKGIVKs Surges in debt r associated w/booms in asset prices, vice-versa 4 busts $$ Jul 19, 2012
CMBS Leverage Most Since ?07 as Standards Loosen http://t.co/1R5FYTwb 4a long time I was a realtive fan of CMBS, but now I say: AVOID $$ Jul 18, 2012
They got hit by the shalestorm $$ RT @PlanMaestro: Wilbur Ross Says U.S. Coal Is Facing Years Of Headwinds http://t.co/2TJMPDQ8 Jul 17, 2012
Contra: Libor Flaws Allowed Banks to Rig Rates Without Conspiracy http://t.co/khuqkHTr Does not proves its case; just hypotheticals $$ Jul 16, 2012
Negative Real Interest Rates: The Conundrum for Investment and Spending Policies http://t.co/OTDe5p9Y Policies should follow nomnl yields $$ Jul 16, 2012

Companies

Marissa Mayer: Google?s Chic Geek http://t.co/Ge3zFk1l Good background piece on new CEO of $YHOO. Q: Can a technologist make a good CEO? $$ Jul 16, 2012
Buffett Empowers Deputies by Raising Funds to $8 Billion http://t.co/6C3YO1Ml Note: buying smaller companies than WB does but still big $$ Jul 16, 2012

Comments

@jake_f My original tweet stems from CMBS-like structures that did not fare well, b/c underlying property economics was too volatile $$ Jul 20, 2012
@jake_f That’s a good point; if they use that structure, could work, but will they have high enough “interest rates” to absorb losses? $$ Jul 20, 2012
@jake_f @DavidSchawel It’s probably a little of both; housing prices improving on low end, but there is a huge demand for yield now $$ Jul 20, 2012
@historysquared US paid down much of their debts post-WWII, inflated away more Jul 20, 2012
RT @AmyResnick: RT @SimonCYWong: Entertaining cartoon primer on #Basel 3: What it is & why it is needed http://t.co/rM0zPNkM via @fo … Jul 20, 2012
“We home school. We replace the teacher. Superior to the public schools because one-on-one?” ? David_Merkel http://t.co/Hia2soVu $$ Jul 19, 2012
“Good for you, KD. Glad you are safe, and powered. I grew up in Wisconsin, so I was used to the?” ? David_Merkel http://t.co/FjYt10DN $$ Jul 19, 2012
@jdstein I’m not saying those things aren’t in the LDS; those exist in other religions 2. It’s not what makes the LDS distinctive. Jul 19, 2012
@jdstein I am referring to the eighth and ninth paragraphs of the original article. Jul 19, 2012
RE: @bloombergview The virtues of Mormonism that the author thinks exist are not core to Mormonism. Romney knows well? http://t.co/qj5VH9gZ Jul 19, 2012
@kyles09 I’m in the Austrian School w/slight modification from the Santa Fe Institute Jul 19, 2012
@Jesse_Livermore @PragCapitalist Total share to wages down, profits up, well known since 1990. Profit margins will mean-revert someday $$ Jul 19, 2012
@Jesse_Livermore @PragCapitalist Ok, I get it, though my wage figure is a little higher. Real GDP rising @ 2.5%/yr vs real avg wages @ 1%/y Jul 19, 2012
@Jesse_Livermore @PragCapitalist You might need to spill the calculation for me, I don’t see that. Jul 19, 2012
@PragCapitalist At least for the average, no not stagnant, maybe not as good as post WWII, & it might be worth looking at median vs mean. $$ Jul 19, 2012
@PragCapitalist and the CPI-U average is 2.51%, looks like about 1% real average wage growth, which doesn’t seem unreasonable. Jul 19, 2012
@PragCapitalist looking at the AWI tables, http://t.co/Xy1cg1VZ it has almost doubled over that period – 3.47%/yr compounded $$ Jul 19, 2012
RE: @marketfolly They are all ruling out a depression scenario. Long Treasuries continue to rally; very contrarian. http://t.co/GumjLkeJ Jul 18, 2012
RE: @bloombergview Thanks for the old news; trouble is, kids need downtime, and our schools aren’t very good — your ? http://t.co/XBEWunfe Jul 18, 2012
@stockspot2000 Interesting, have not seen evernote before. Thanks. Jul 18, 2012
@footnoted Pension and healthcare systems will not be able to fund the obligations; lesser benefits will be paid. $$ Jul 18, 2012
Could we audit the gold at Fort Knox, also? Amazing secrecy there. http://t.co/cclHfpLk Jul 17, 2012
@mattyglesias Heard you on NPR this evening, please review http://t.co/kvzJmCXQ because it explains Romney’s IRA strategies. $$ Jul 18, 2012
RE: @bloombergview Fail: you did not mention the preferred stock. You did not do your homework. This is a perfect e? http://t.co/74HUrube Jul 16, 2012
@BarbarianCap I’m glad you like it; it works out to a minute per every 4 tweets — making it 1 of my shorter writing efforts for my blog $$ Jul 15, 2012
@BarbarianCap So far I have turned down a few book deals, mainly 4 time use reasons: asset management biz doesn’t support the family yet $$ Jul 15, 2012

Three Notes on the Present Deflation

Posted on 18 July 2012 by David Merkel

Today I received in my e-mail missives from:

Hoisington Investment Management
Michael Pettis
and John Mauldin

I have come to value each of their opinions.? Hoisington has been one of the leading deflationists for the last 20 years, racking up a 10%+ return annually in T-bonds.? I don’t know of anyone that can beat that in bonds. Their commentary is not posted on their website yet, but they did say:

Based upon the historical record of effects of excessive and low quality indebtedness, along with the academic research, the 30-year Treasury bond, with a recent yield of less than 3%, still holds value for patient long-term investors. Even when this bond drops to a 2% yield, it may still have value in relation to other assets. If high indebtedness is indeed the main determinant of future economic growth and further government ?stimulus? is counterproductive, then a prolonged state of debt induced coma may so limit returns on other riskier assets that a 30-year Treasury bond with a 2% yield would be a highly desirable asset to hold.

Michael Pettis is a leading observer of China and other emerging economies.? You can read half of his commentary here.? The rest comes if you get on his e-mail list.

China’s GDP growth is slowing, and a rebalancing is necessary so that domestic consumption can fuel the Chinese economy.? That may be happening now but will likely require that Chinese GDP growth slows further.? A quotation near the end of the piece, not on the blog:

Since these two processes, commodity de-stocking and flight capital, work in opposite ways to affect the trade account, it is hard to tell whether China?s real trade surplus is lower or higher than the reported surplus. But once de-stocking stops, we should remember that the trade numbers probably conceal capital outflows.

How does all this affect the world? In the short term rebalancing may increase the amount of global demand absorbed by China, but over the longer term it should reduce it. Rebalancing will inevitably result in falling prices for hard commodities, and so will hurt countries like Australia and Brazil that have gotten fat on Chinese overinvestment. Rising Chinese consumption demand over the long term and lower commodity prices, however, are positive for global growth overall, and especially for net commodity importers. Slower growth in China, it turns out, is not necessarily bad for the world. The key is the evolution of the trade surplus.

I am less convinced that the rebalancing is taking place, because of the command & control mindset of many Chinese leaders; it is hard to exit the “growth via forced investment” mindset.

John Mauldin is well-known to many. I have known of him since the ’80s.? He is a flexible reasoner who thinks we will get significant deflation, before we get significant inflation.? I tend to agree, but that leaves us watching for a change in bank-lending to see when the scenario shifts.? Here is his most recent missive.? Comparing alchemy and central banking is fitting, I think, with central bankers toying with the asset side of the balance sheet, since liability policy has hit the zero bound.? Sorcerer’s apprentices, I think; they do not know what they are doing.

There you go.? We live in deflation world for now until the time for inflation is ripe, where banks compete for loans.?? One thing is for sure, when things shift, they will shift dramatically.? I don’t believe that the central banks of our world have more forecasting power than the rest of us.? I think they have less, because they always have to defend their prior bad decisions.? Those with nothing to defend can look at the future, and estimate with less bias.? Remember that some of those who called the housing bubble were business economists who did not buy into the idea that debt is neutral.? Debt is not neutral; wherever there too much of it, failures occur.? The big expansion of debt is with governments now; what happens if they have a lack of willingness to pay for political reasons?? Inflation or repression are more likely, but higher taxes or government defaults are not impossible if the politics lead to a stalemate, where no one is willing to compromise.

Book Review: The Malign Hand of the Markets

Posted on 17 July 2012 by David Merkel

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

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

To the Book

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Quibbles

None.? Great book.

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

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

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

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

Sorted Weekly Tweets

Posted on 13 July 2012 by David Merkel

Bond Markets

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

Politics

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

LIBOR

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

Eurozone

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

Residential Housing

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

Market Impact

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

Pensions

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

Companies

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

Central Banking

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

Miscellaneous

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

Rest of the World

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

Economics

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

Finance Companies

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

Comments

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

On Floating Rates

Posted on 12 July 2012 by David Merkel

I have to admit I don’t have much sympathy for those who lent or borrowed at floating rates like LIBOR.? Personally, I have always preferred fixed-rate deals where everything is locked in from the beginning.? It means the terms are fixed, and either you can meet them or you can’t.

There are two problems with floating rate deals.? The first is that you can’t control your funding costs.? This stems from two things: short rates are volatile, and the index is typically not controlled, though it often acts like it is.? Here is an example: there were mortgages that floated off of the one-year Treasury Note rate.? Then the Treasury cancelled the one-year Treasury Note auction, and investment banks scrambled to come up with a substitute.? As I recall, they used the interpolated rate on six month bills, and two year notes.

When I was a corporate bond manager, aside from rare occasions, I never bought floating rate debt.? Why?? I needed more certainty for the client.? Fixed rate bonds and loans are more certain.? When you float, you are subject to the vicissitudes of the index, whether a borrower or a lender.

Whatever else is true, you do not control a floating rate index.? If a related party has some influence on it, that is a negative surprise, but there may be nothing illegal about their influence, particularly if it is moderate as is likely with LIBOR.

As I say to so many others in related situations: don’t give others options against you; don’t play in their casino by their rules.? Average people should not let financial institutions have variability of terms; terms should be fixed to the greatest extent possible.

And, why do borrowers go for floating rates, if they can be harmed by them?? Because they are cheaper on average.? Yield lust works on the downside as well, and many borrow shorter than is prudent for them, in order to save a little.? Works most of the time, but not all of the time, and when it doesn’t work, it can be ugly.

Thus I encourage fixed rate finance, as always, and encourage lenders and borrowers to fix their financing in advance.

New Highs, New Lows, Yield Greed

Posted on 12 July 201212 July 2012 by David Merkel

When I read this post by Ivan Hoff, I decided to look at the new high and new lows lists, which I never do now, but used to do regularly back in the days when I read a paper Wall Street Journal every day.? Now our philosophies for doing so differ.? He is looking for buy high, sell higher, and I am looking for misunderstood companies that are first safe, then cheap.

So after the close, I copied the new highs and new lows for the NYSE, NASDAQ, and Amex as a group.? There were 203 highs and 89 lows.

But then I noticed something funny: a large number (53) of the new highs came from preferred stock, hybrid debt, and bonds — yieldy stuff.? With the lows, there was some weird stuff, but 7 companies had rights and warrants, hitting new lows, and one new muni bond fund, NKGD, which was just noise.

Then I looked at the industries that they were in, mostly to separate out the ETPs and CEFs from everything else.? Here are the tables:

New Highs

	Values
Row Labels	Sum of mktcap	Count of ticker
0715 – Insurance (Property & Casualty)	205,242	2
0524 – Tobacco	97,162	2
0803 – Biotechnology & Drugs	62,010	8
0521 – Personal & Household Products	40,837	2
0963 – Retail (Specialty Non-Apparel)	38,396	1
1203 – Electric Utilities	20,944	7
0515 – Food Processing	17,571	1
0721 – Misc. Financial Services	15,158	57
0115 – Forestry & Wood Products	11,980	1
0727 – Regional Banks	6,434	22
0806 – Healthcare Facilities	5,358	3
1209 – Water Utilities	4,356	2
1106 – Airline	3,595	2
1206 – Natural Gas Utilities	3,363	2
0812 – Medical Equipment & Supplies	3,209	4
0957 – Retail (Grocery)	2,472	3
0951 – Retail (Department & Discount)	2,356	1
1018 – Computer Services	2,039	1
1024 – Electronic Instruments & Controls	1,790	1
0612 – Oil Well Services & Equipment	1,335	1
0730 – S&Ls/Savings Banks	1,290	9
0915 – Communications Services	1,007	2
1036 – Software & Programming	832	2
0718 – Investment Services	548	2
0209 – Construction – Supplies and Fixtures	494	2
0712 – Insurance (Miscellaneous)	347	1
0942 – Restaurants	333	1
0703 – Consumer Financial Services	322	2
1033 – Semiconductors	316	1
0421 – Furniture & Fixtures	120	1
0909 – Business Services	33	1
1003 – Communications Equipment	31	1
0133 – Paper & Paper Products	17	1
0912 – Casinos & Gaming	0	1
Grand Total	551,295	150

Exclude Misc Fin Svcs	536,137	93

New Lows

	Values
Row Labels	Sum of mktcap	Count of ticker
0118 – Gold & Silver	41,488	9
1036 – Software & Programming	16,268	7
1003 – Communications Equipment	14,856	7
0515 – Food Processing	12,732	2
1033 – Semiconductors	10,351	2
1109 – Misc. Transportation	8,131	1
0206 – Construction & Agricultural Machinery	5,849	1
0948 – Retail (Catalog & Mail Order)	5,451	1
0951 – Retail (Department & Discount)	4,837	1
0603 – Coal	4,479	2
0424 – Jewelry & Silverware	4,243	1
0103 – Chemical Manufacturing	3,933	3
0203 – Aerospace and Defense	2,995	1
1018 – Computer Services	2,851	3
0218 – Misc. Capital Goods	2,300	2
0924 – Personal Services	2,292	1
0927 – Printing & Publishing	2,043	1
0124 – Metal Mining	2,024	2
0721 – Misc. Financial Services	1,903	2
0215 – Construction Services	1,802	1
0939 – Rental & Leasing	1,760	1
0915 – Communications Services	1,616	1
0418 – Footwear	1,439	1
1024 – Electronic Instruments & Controls	1,384	2
0909 – Business Services	1,223	1
0812 – Medical Equipment & Supplies	1,077	5
0612 – Oil Well Services & Equipment	1,075	1
0918 – Hotels & Motels	937	1
0969 – Schools	836	1
0609 – Oil & Gas Operations	820	1
0933 – Real Estate Operations	731	1
0415 – Auto & Truck Parts	703	2
0127 – Misc. Fabricated Products	693	2
1021 – Computer Storage Devices	512	2
0966 – Retail (Technology)	418	1
0703 – Consumer Financial Services	195	1
0806 – Healthcare Facilities	64	1
0727 – Regional Banks	61	1
0803 – Biotechnology & Drugs	54	2
0930 – Printing Services	6	1
0942 – Restaurants	5	1
0421 – Furniture & Fixtures	4	1
Grand Total	166,437	81

Exclude Misc Fin Svcs	164,534	79

By the time you are done separating out the passive vehicles, because one is miscategorized in the new highs, you have for regular stocks 92 highs versus 79 lows.? The market cap spread favors the highs because of Berkshire Hathaway, Altria, Amgen, Target, Kimberly Clark, Reynolds American, and H.J. Heinz.? The only large company among the lows was Barrick Gold.

I should add that all of the ETPs and CEFs making new highs were all fixed income funds.? ALL!

Then I looked at the yields of the common stocks that were making new highs and new lows.? For new highs, 35 out of 92 (38%) have yields over 2%.? For new lows, 10 out of 79 (13%) have yields over 2%.

This is a market that is driven by yield and safety/non-cyclicality.? The new highs are predominantly in stable industries, and the new lows in cyclical industries.

I’ve said it before, but I’ll say it again, yield is not real.? It is a residual of a larger economic process.? If you own a bond, preferred stock, or common stock that pays dividends, your future well-being relies on the economic success of that company.? With stocks, that connection is direct, with bonds it means avoiding default.? Other securities face similar limits.? Yields cease to exist when companies fail; chasing yield as a main strategy will fail, because fund shareholders will give up during the hard times when capital gets marked down, and sell.

Though the portfolio that I manage for clients has an above average dividend yield, I do not look for dividend yields; I look for solid companies, and the dividend yields find me.? (Buybacks too.)? I do not reach for yield.? There are many investors that are reaching for yield in this environment, and I think they will eventually get burned.

So be wary over yield.? It may not pop for a year or two; it might pop tomorrow.? I identify risks, and risks typically don’t come with dates.? Just be wary.? When everyone is scrambling for yield, it is probably best to not aim for a yieldy portfolio.

PS — note all the banks and S&Ls on the new highs list, and they are almost all small firms.

Full Disclosure: long AMGN

The Failure of Government-Provided Prosperity

Posted on 7 July 2012 by David Merkel

If I had one bit of advice to reach the ears of Barack Obama, Mitt Romney, and Ben Bernanke, it would be this: stop the illusion that you have any significant control over the US economy.? Government is designed for justice, and does not do well when trying to promote prosperity.? At most, economically, the government can set ground rules that reduce the probability of fraud.

As it is, at present, the US still has an over-indebted economy, and as a result, will grow slowly, because businesses and individuals in danger of default do not spend freely.

Politicians claim that they can being prosperity, but they rarely do that.? I’m not talking about marginal tax rates, or monetary policy, which offer transitory relief, but changes in regulations.? The economy as a whole would do a lot better if marginal regulation were reduced.? That would be a help, but few politicians in either party want to reduce the power of the government.

Prosperity exists aside from the government.? Yes, in the short-run the government can tweak the economy to grow faster, but at the price of the situation we are now in, where nothing works.? Far better for the government to focus on things it can do well: defense, internal security, public health, etc.? But it does not do well with macroeconomic management, so it should give up on that, run balanced budgets, and replace the Fed with a currency board.

At that point, we would have predictable policy, and businessmen might be willing to take more risk and grow the economy.? Unsustainable policies cause producers and consumers to pull back.

At best, in economics governments set ground rules to reduce fraud.? Beyond that, governments reduce the flexibility of economies, and reduce growth.? Socialistic governments produce dependency cultures that inhibit work, initiative, and growth.

Do not look to the government for prosperity.? Governments are umpires; Umpires allow for good games, but they aren’t the ones playing the games and creating the excitement.? Governments can never make us prosperous; if government action were what made us well off, the Soviet Union would be dictating term s to the world today.

Sorted Weekly Tweets

Posted on 6 July 2012 by David Merkel

LIBOR

Commented on The Economist | The LIBOR scandal: The rotten heart of finance $$ LIBOR may not be as rotten as advertised http://t.co/GfXH4hRq Jul 06, 2012
LIBOR scandal: The rotten heart of finance http://t.co/g2RBmaNy Proving actual damages will b tough; don’t think this will amount2much $$ Jul 05, 2012
Libor, central banks and financial stability http://t.co/9DBCcZaK The degree of damage from Libor-fixing is arguable; more analysis2come Jul 04, 2012
LIBOR: Everything You Want to Know, but were Afraid to Ask http://t.co/eYwKF68v Good summary article. $$ Jul 04, 2012

Eurozone

Europe Recalls Hamilton as Desperation Turns on the Debt http://t.co/K8RvS9dP Time running out; will EZone pull together or fly apart $$ Jul 07, 2012
This Is A Fantastic Presentation On Why ‘Germany Is Riskier Than You Think’ http://t.co/UPcEg8yS Cost: Support Euro < Abandon Euro $$ Jul 04, 2012
France Signals More Austerity http://t.co/gCiXPLKl Fascinating:Hollande may b delivering more conservative fiscal policy than Sarkozy $$ Jul 03, 2012

US Politics

Obama Fails to Gain as Unemployment Stuck Since March http://t.co/vX87x6vQ W/policy unsustainable, business owners reluctant 2 hire $$ Jul 06, 2012
Cities Consider Seizing Mortgages http://t.co/V9CKARiC Abuse of eminent domain will not hold up in court. Theft by another name. $$ Jul 05, 2012
How Stockton went broke: A 15-year spending binge http://t.co/VGy6fWv7 Offered enhanced employee benefits, which required no cash outlay $$ Jul 05, 2012
Thx 4 sharing this; worth the read $$ RT @LaurenLaCapra: How Stockton went broke: A 15-year spending binge | Reuters http://t.co/LK9VKq4q Jul 05, 2012
Yes, there is a free-market alternative to Obamacare http://t.co/gOpygz04 Support high deductible insurance, even if govt has2do it4the poor Jul 04, 2012
Who Is John…Allison? A Randian, Libertarian Business Icon Takes Over the Cato Institute http://t.co/Bms310O7 Met him @ #CMC29. Nice guy Jul 04, 2012
Debt Forgiveness Would Revive the Economy http://t.co/D5lkF7b6 @JamesGRickards argues this, as I have elsewhere: http://t.co/LdeYyBkh $$ Jul 03, 2012

Financial Markets

Big Board’s New Dark-Pool Ammo: Sub-Penny Quotes http://t.co/FgvZ7ebD I agree w/the guy quoted @ end; A step in the wrong direction $$ Jul 06, 2012
The High-Frequency Conspiracy http://t.co/iOs8buSu HFT and the market makers / specialists work together to extract $$ from stock traders. Jul 04, 2012
@TraderNewsFeed I don’t share that view; I think the GSEs deserve some blame, the Fed a lot of blame, & invt banks a lot of blame, but… $$ Jul 04, 2012
@TraderNewsFeed Pt 2, the investors deserve blame as well. U can’t have a derivative hedge without a yield hog seeking additional income $$ Jul 04, 2012
Tail Risk and Hedge Fund Returns http://t.co/uqcs0Bcg ht: @PragCapitalist As I have argued B4, hedge funds as a whole r short volatility $$ Jul 04, 2012
Blackstone Makes Foray Into Houses for Rent http://t.co/UaRvTRqE Economics of managing a lot of single family houses is difficult $$ Jul 04, 2012
Ex-JPMorgan Trader Feldstein Wins in Betting Against Bank http://t.co/pSfwA1xd This is a good example of how frenemies act on Wall Street Jul 04, 2012
The Changing Face of U.S. Equity Ownership http://t.co/aqQXXVFF Individuals own less, Institutions more; Graph: http://t.co/gb7M6RgY Jul 04, 2012
Stocks for Bond Lovers http://t.co/nzNrE6RA If dividends grow rapidly, a rising income stream beats bonds, if market value persists $$ Jul 04, 2012
Pimco’s Bond King Regains Investor Favor http://t.co/MwSZ8hUu Owning long Treasuries is too fashionable, think I have2sell $TLT FD: +TLT Jul 04, 2012
“There is a high correlation between stocks & anticipated inflation. $$ http://t.co/mKr4SFcn Aleph Blog article: http://t.co/MWBP9Ib7 Jul 03, 2012
Pimco?s El-Erian Says US, Emerging Markets R Top Investments http://t.co/LwbYAIzs EM r in good shape, US better than other big nations $$ Jul 03, 2012

China

For CFAs: China?s Fragile Foundations http://t.co/jwf1IJJB Fraser Howie of CLSA Asia-Pacific explains the economic weaknesses of China $$ Jul 05, 2012
China?s New Rules May Curb Credit Growth http://t.co/KQcRe9uQ Loosen with one hand; tighten w/the other. Now that’s a monetary policy $$ Jul 05, 2012
BRICs Priced for Economic Meltdown http://t.co/wTf6nRp9 It is the lack of “rule of law” that makes them cheap, not possible slump $$ Jul 04, 2012
Jim Chanos ?China Makes Greece and Spain Look Like Child?s Play? http://t.co/GA2woEwn Chanos is an accounting expert; sniffs out failures $$ Jul 03, 2012

Miscellaneous

Good for about 45 minutes as well, eh? $$ RT @BloombergNews: Central banks deliver 45-minute salvo as growth weakens http://t.co/MzlnAUXQ Jul 05, 2012
A New Market for Schools http://t.co/HbMuSfcK Be wary; costs of the degree including foregone wages may not be worth it. $$ Jul 05, 2012
The Green Mountain saga: a cup of joe to go http://t.co/uUPtr1Ht Once again, revenue policies take center stage for accounting quality $$ Jul 04, 2012
Loeb’s Third Point fund moves into Chesapeake http://t.co/3yYeKOhq The plot thickens, as a group of activist investors gathers $$ Jul 04, 2012
Contra: Carlyle Bets Big on U.S. Energy http://t.co/0bT7y1LM This does not look like a big bet to me. $$ Jul 04, 2012
Been experimenting with a spreadsheet that takes @yahoofinance news, and weeds out the chaff, I like it; improves quality, takes work $$ Jul 03, 2012
DNA Mapping of Alzheimer?s Patients Gives Deep Dive View http://t.co/L5M0ATIN May be promising, but not every disease is gene-based $$ Jul 03, 2012

Comments

“It will be very difficult to prove actual damages in these cases. I don’t think this will amount to much.” http://t.co/BP18Tw8D $$ Jul 05, 2012
“Organic growth is one of the toughest tasks in business, and also the most valuable.” ? David_Merkel http://t.co/T2MMseVx $$ $BLK Jul 05, 2012
“W/all of that liquidity, they can buy a bigger string to push on.” ? David_Merkel http://t.co/N0EOuYnB $$ http://t.co/P456cjMP Jul 05, 2012
“It’s lousy fiscal policy to subsidize things in oversupply, like homes and banks. No spillover?” ? David_Merkel http://t.co/AItUK466 $$ Jul 05, 2012
On second thought, thanks to all of my Twitter followers. I am honored that you want to listen to me & I will do my best to serve you $$ Jul 05, 2012
Many thanks to @Clarityspring, my 5,000th Twitter follower; never thought I would enjoy Twitter so much! Jul 05, 2012
Quirky, but interesting. http://t.co/RZSAG652 Jul 04, 2012
RE: @TheStreet_News I think all orders should be good for at least one second. Until them, I will use discretionary r? http://t.co/dxvv58RA Jul 03, 2012
“What a fragmented market: top 10 have ~45%. Not much of a story here. Next. $$” ? David_Merkel http://t.co/nChBIcF2 $JPM $BAC $C $DBK $BARC Jul 02, 2012
“Only one way to lower healthcare costs: move back to a first-party payer system. Individuals decide?” ? David_Merkel http://t.co/lGZaDFJW Jul 02, 2012
“Difficult proposition: choke the economy to achieve an uncertain environmental benefit.” ? David_Merkel http://t.co/ngsN5VdG $$ Jul 02, 2012

On Internal Indexes, like LIBOR

Posted on 5 July 2012 by David Merkel

When I was a life actuary, following the deferred annuity market, the concept of market-value-adjusted annuities arose.? Annuity values could react like bonds to:

An external index rate, or,
An internal index, driven off of the new money rate for annuities

Now, the internal index sounds soft, but it is not so.? Yes, you can lower your new money rate but reserves grow on indexed products.? You can raise your rates, but reserves will shrink.? It’s not perfect here, but the internal index will work over the long haul.

So when I look at LIBOR and potential manipulation, I don’t see a lot of reason for concern.

When bond deals are priced, the relative yield is what is priced; it does not matter what the benchmark is, roughly the same overall yield would have been obtained.? Spreads are a way of expressing the excess yield over equivalent maturity government or AA bank (swap/LIBOR) yields.? They are a result of the process, not a driver of the process.

If 3-month LIBOR were replaced by the on-the-run 3-month Treasury yield, new deals would be priced, and the spreads would be higher by the TED (EuroDollar – Treasury) yield spread.

When I was a bond manager, dealer desks would often try to sell or buy bonds off of unusual benchmarks.? I would always make the necessary adjustments to calculate the option adjusted spread over interpolated swap rates, with further adjustments for the degree of premium or discount to par.? (Note: A premium bond carries extra credit risk because if it defaults, the most you can recover is par.? Opposite for discount bonds.? There is a mathematical method for calculating the amount of yield tradeoff between premium/par/discount bonds, even in the absence of a credit default swap [CDS] market.? You assume that the spread over swap is the CDS premium, and calculate the annual cost of insuring the premium to par.? Deduct that from the current spread, and you have the hypothetical true par spread.? Once you have that, you can make rational swap trades.)

What I am trying to say is that benchmarks/indexes aren’t all powerful.? Bright bond investors look past them, and analyze the economics of the situation.? Same for intelligent borrowers; they know that LIBOR rises during times of financial stress.? If you are a floating rate investor/borrower, you ought to analyze the rate that your investment/loan is tied to.

Many commentators with knowledge of the situation think that lawsuits regarding LIBOR will amount to little (one, two).? Yes, there may have been some manipulation in a micro-sense for some banks, but in terms of having a big effect on many, I don’t think that is possible.? There might be some degree to which borrowers benefited and savers/lenders lost.? That’s a tough case to press on any side.? Courts favor borrowers, and they benefited from any manipulation.

In closing, I don’t think much will come from the “LIBOR scandal” the same way that nothing will come from the “rating agencies scandal.” Both are examples of summarizing information/opinions that investors can use at their own risk.? They are not fiduciaries; those who use the information do so at their own risk.

The Rules, Part XXXIII

Posted on 3 July 201220 June 2017 by David Merkel

When politicians don?t have answers, they blame speculators, financiers (Wall Street), or foreigners.? They do anything to take the spotlight off their culpability or ineptitude.

The above saying is similar to the idea that when a company blames short sellers, it is usually a sign that the short sellers are right, and the company is mismanaged.? Think about it: when a short seller builds a short position, someone else is building a long position.? The borrowed shares that are sold have to be sold to someone.? Also note that the shorting does not change the cash flows of the company.? Even the dividends don?t change because the shorts pay dividends to the extra shares.

The shorting is a side bet on a greater question: will the company be able to produce free cash flow adequate to justify the current stock price?

What applies to companies also applies to nations.? During a debt crisis or a currency crisis, there will be an appeal against speculators that are shorting the debt.? Well, guess what, for every unit of debt shorted, there is another party buying the debt.? This applies to credit default swaps as well ? on the other side of the trade there is a guy saying, ?What a nice yield.?

The politicians complain, but they could fight back: they could buy in their debts and squeeze the shorts.? What?s that, you say?? If they did that, they would either have to raise taxes or cut programs?? And that is anathema?? Well, then the shorts aren?t to blame.? The government is to blame; it has made its own bed, let them sleep in it.

After all, shorts target companies that are mismanaged; they have no free cash flow, and can?t fight back.? The same for nations that are mismanaged; they have structural budget deficits, and a political culture that won?t change it.? No surprise that the shorts show up.

The shorts don?t change anything; they recognize a fundamentally weak situation, and locate a stock lender and a dumb buyer.? Same thing for a bond lender, and a dumb buyer as far as countries or deeply distressed companies are concerned.? And all of this can occur via derivatives if this is the best manner of doing the trade.

In the end, only free cash flows matter, and companies with large free cash flow never have to worry about the shorts.? Same for nations that have their budgets in accrual balance.