Note: there is a vote going on at http://list.ly/list/1HO-top-100-investment-blogs? regarding the best investment blogs.? Whether you vote for me or not, I encourage you to vote up blogs you like.? I voted for 12 or so blogs, I didn’t just vote for myself.? Recommend other blogs if you see fit.
It took me a while to come over to the views of Lacy Hunt, Van Hoisington, and Gary Shilling, but with the addition of Bill Gross, Mizuho Securities, and Jason Zweig, I am beginning to feel crowded.? When abnormal theories begin to get embraced I get concerned that the cycle is changing and that the theory will fail because more people believe it.? In the short-run, it means the long end of the yield curve will rally, in the long run, macroeconomic forces will dominate.
Will long rates continue to fall?? Probably.? Will they stay low??? They might stay low for a few years, but if the US government takes actions that reduce regulation, the economy will grow, banks will lend, and rates will rise.? But if Obama is re-elected, regulations will increase, businesses will not grow, banks will have no reason to lend, and we will remain in this morass.
Note: I am planning on voting for a third party, I don’t care for Romney.? Romney would be far better for the economy than Obama, but economics does not figure into my voting; I look for the man who can best lead us ethically, and that is almost never the Republican or the Democrat.
@AmyResnick One more note: MD benefits from the presence of Johns Hopkins, biotech, NIH, the REIT industry, hotel industry, etc. $$ Jun 02, 2012
@AmyResnick Martin O’Malley spoke2the Baltimore CFA society. Slick. Made many of us wonder if we lived in the same state that he governs $$ Jun 02, 2012
@AmyResnick That’s true.We live next to the US money sink, DC, and we profit from the woes of the nation along with Virginia. $$ Jun 02, 2012
@AmyResnick If my state passed a budget like that, I would b ill & annoyed. Oh wait, I live in the People’s Republic of Maryland. Never mind Jun 02, 2012
Companies
GM cuts $26bn from pension liability http://t.co/wL7hlRab $GM buys annuities from $PRU, and cashes out other pensioners; amazing gain. $$ Jun 02, 2012
Groupon Sinks to New Low as Lock-Up Expires http://t.co/NuE7dA9b A $GRPN share is now cheaper than the amount 1 can save w/a Groupon. 😉 $$ Jun 01, 2012
Chesapeake Valuation Seen Luring Major Deal http://t.co/1n6fnjzZ Natural gas assets r not worth as much; too much marginal cheap supply $$ May 31, 2012
Toyota Tsunami Recovery to Be Seen in 93% U.S. Sales Gain http://t.co/UlO4SSzC $TM stock below where it was one year ago, as w/many autos $$ May 31, 2012
“Chesapeake?s equity and net debt was valued yesterday at $9.19 for each barrel of oil equivalent” Key phrase: “barr? http://t.co/KAcfGoyH May 31, 2012
@TheStreetHub @abnormalreturns will publish my pick 4 the next decade next week. It may not beat $CHK, but there is less risk to it. $$ May 31, 2012
@TheStreetHub Once fracking starts, difficult2turn off economically; there r a lot of places to frack; don’t c NG prices rising anytime soon May 31, 2012
$JPM CIO Swaps Pricing Said 2 Differ From Investment Bank http://t.co/4jgUCTry via @BloombergNews | Not2surprising since trades moved market May 31, 2012
Icahn?s Chesapeake Stake Puts Governance Before Value http://t.co/csRUxisS Icahn has his own version of “doing well by doing good.” $$ $CHK May 31, 2012
Toll Buying Half of a 2,379-Home California Subdivision http://t.co/RDIUQiNK ?There?s not much inventory now in Orange County…? $$ May 31, 2012
Miscellaneous
Heavy rain on Baltimore. Just went out with 3 of my kids. We dug a trench diverting water awa from the house. Boy, did we get wet & dirty $$ Jun 01, 2012
@Alpha_Rook I was proud of their initiative & that they executed my idea, and not theirs, which would not have worked. Yes, it was fun. $$ Jun 02, 2012
Dating Shanghai-Style Draws 38,000 Hopefuls as Weddings Fall http://t.co/ECmp4ppU More men than women, but fewer desirable men than women $$ Jun 01, 2012
Indian-American wins U.S. Spelling Bee http://t.co/ZkjzSSAP Nandipati became the 5th consecutive Indian-American winner & 10th of last 14 $$ Jun 01, 2012
Defectors Cast New Light on Korean Camps http://t.co/TOQtTM3s US intervenes in so many places; one that is @ the top of the list ignored $$ May 31, 2012
Thx, I’m Touched & Impressed $$ RT @valueprax: Notes – AlephBlog Digest #1 – David Merkel On Corporate Bonds ( #bonds http://t.co/vXSPiApn ) May 31, 2012
Energy assets in front line of cyber war http://t.co/4UZG5wJx Ability2use stuxnet2take over SCADA systems running energy/utility assets risk May 31, 2012
10 Things Presidential Candidates Won’t Say http://t.co/8l3tPGEz 1. “I’m powerless to change the economy.” Honest talk u will never hear $$ May 29, 2012
For Healthy Eating, Bitter Is Better http://t.co/A3gPQIYV “It’s also the first step toward eating a broader, healthier diet.” $$ May 28, 2012
Sudan, South Sudan Trade Accusations Ahead of Crisis Talks http://t.co/XFpu79GQ Unless there is a way to share oil revenues, war is possible May 28, 2012
Funds May Wrong-Way Bets Before Price Slump http://t.co/u3garjlL ?surprising to see so much on the long side…trend is down in commodities” May 28, 2012
Why ‘Value’ Stocks Lag http://t.co/Uy5nwkC8 After reading this article & the comments on it, I still don’t get value is doing poorly $$ May 28, 2012
@felixsalmon I would be honored to have you as a client. I’ve done well over the last 12 years, but not the last 16 months. $$ May 27, 2012
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Eurozone
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Euro Area Is Running Significant Risk of Breakup, Rehn Says http://t.co/1Wx5nAEq Presence of negative German short rates is a danger sign $$ Jun 01, 2012
Negative interest rates are like antimatter. They never exist for too long, and the presence of a lot of them means things r dangerous $$ Jun 01, 2012
Berlusconi Says ECB Must Print Euros or Italy May Say ?Ciao? http://t.co/a1sAsDIJ Taking aim @ those who ejected him, back in the hunt $$ Jun 01, 2012
@The_Dumb_Money It’s the 5%+ spread over bund yields that gets people antsy; it indicates a crisis in Italian ability to pay; unstable. $$ Jun 01, 2012
“German 2-yr yields fell below 0 for the 1st time this wk while the yield on similar-maturity Spanish notes rose 11.8 bps to 5.11% today” $$ Jun 01, 2012
It may be wrong, and may harm Italy deeply, but it makes for great politics by encouraging popular resentment of fore? http://t.co/0xm4RY5l Jun 01, 2012
Why France Has So Many 49-Employee Companies http://t.co/nKcECoQK “Sir, we r up to 49 again, shall I start another new company?” “Oui!” $$ May 31, 2012
Spain Ejects Clean-Power Industry With Europe Precedent http://t.co/SFhWg1lF Amazing what happens when u stop subsidies;companies fold/leave May 31, 2012
Iceland Property Bubble Grows With Currency Controls http://t.co/o5IUO1hF Classic. Trapped cash needs 2 protect value so buys real estate $$ May 31, 2012
ECB Opposes Spain Bank Idea http://t.co/Vx9tdeua Spain has reached its notional credit limit, can’t borrow more w/o driving rates up $$ May 31, 2012
EU Proposes ‘Banking Union’ http://t.co/3lK74rxE This is an easy thing to propose, but hard to achieve without nations giving up power $$ May 31, 2012
Greek Democratic Left Demands Euro Pledge to Back Syriza http://t.co/cmkcflzR They dream that they can stay in Euro, and not pay promises $$ May 29, 2012
Leveraged Loan Defaults May Surge to 25% in Europe, Moody?s Says http://t.co/vUpMQisS If credit tightens in Europe, many defaults come $$ May 29, 2012
Greek Pro-Bailout Parties Gain Amid Euro Collapse Concern http://t.co/Ta2m8TDC “Greece is the only country…we can say it?s a failed state” May 28, 2012
Spain roundup: http://t.co/WtGRfFDP & http://t.co/KGwBE4gY & http://t.co/MvlXpx2R Credit situation for Spain as a whole is troubled $$ May 28, 2012
Unsecured Creditors Face Losses in EU?s Plan for Failing Banks http://t.co/xCQFqJqv No free lunch; watch unsec rates rise 4 bonds & CP $$ May 28, 2012
@japhychron No decoupling there that I can see. The likely credit panic is in Europe, with limited spillover the US. $$ May 27, 2012
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Financial Sector
Regulators Adopt New Tools to Prevent Another Flash Crash http://t.co/8aClpGWw These regulations seem reasonable. I’m not used 2 saying that Jun 02, 2012
Volcker Rule? We need a Slurpee Rule http://t.co/a1GNBm7e “Lose $1B -> lose your job.” Great, can we apply this 2 government officials 2? $$ Jun 01, 2012
Bank says: We?re defaulting, but don?t you dare! http://t.co/PmYEk4kW Strange that many think they don’t have to pay if their creditor is BK Jun 01, 2012
Insurance Supervisors Ready to Identify Too-Big-To-Fail Insurers http://t.co/bve0otvq Less risk than banks; liab structures can’t acelr8 $$ May 31, 2012
Woman Who Couldn?t Be Intimidated by Citigroup Wins $31 Million http://t.co/CaznlXxA Post-2008 $C employee blows whistle onlousy mtges $$ May 31, 2012
Look for corporate incest, where capital structures are interlaced between parent & subsidiaries. $AIG had that in sp? http://t.co/2zz1qwmo May 31, 2012
Speculating on the Long Bond
@shamir_k @SoberLook Only 10% of my portfolio; ask u what I asked Shiller, Hoisington & Lacy Hunt: when do u leave? $$ FD: +$TLT Jun 01, 2012
@SoberLook I have too many friends who were burned on $TBT, it will b right eventually… but the trade was 2 popular amid deflation $$ Jun 01, 2012
@SoberLook True enough. I just sold my last TIPS. $TIP Thinking of kicking out my last chunk of $TLT. FD: Long $TLT (me & clients) Jun 01, 2012
Ten-Year Treasury Yield Hits Record Low http://t.co/xkfc1JP2 The benchmark 10-year U.S. Treasury yield sank to an all-time low of 1.659% $$ May 31, 2012
CHART OF THE NIGHT: What A Difference A Year Makes http://t.co/VLqVDCiK Global deflation drives people2grab 4 predictable income streams $$ May 31, 2012
Federal Reserve
He’s pretty connected $$ RT @pdacosta: Done deal? Morgan Stanley Fedster Reinhart now sees 80 percent chance of Fed easing in June. Jun 01, 2012
Rosengren Says Renewed Fed Operation Twist to Spur Growth http://t.co/5lz5Zwof If we all clap Tinkerbell will live! Hasn’t worked yet… $$ Jun 01, 2012
They assume that lowering long Treasury rates will aid growth; it did not work in the Great Depression & WWII. The Fe? http://t.co/IYHxbtML Jun 01, 2012
@vjnttp That’s why I included a link to my article on the topic; it’s more complicated than what Buffett wrote in his annual report $$ Jun 02, 2012
My Goof on NFP
@andrewhorowitz I don’t trust the ADP #s. My model uses 4 wk avg of jobless claims, adjusts4past model errors b/c errors r autocorrelated $$ Jun 01, 2012
@andrewhorowitz Yes, a little above consensus, that’s what the models show, personally I’m more bearish but the models r better than me. $$ Jun 01, 2012
@Estimize I looked at estimize for a place to lodge an NFP est, and couldn’t find it. Do you do those? May 31, 2012
@joelight It’s a blend of 2 models which have different error properties — their point estimates r 145 & 171K. Don’t know CI 4 combined $$ May 31, 2012
I don’t do this often, but here goes — projecting NFP at +158K +/- 13K May 31, 2012
US Economics
RE: @SoberLook This is what stagflation looks like.? Copper reacts to GDP. Gold reacts to real rates. http://t.co/JODgLATu Jun 01, 2012
The Surprising Global Shortage of Skilled Workers http://t.co/6fnJOUZb There r skilled workers w/o work, they don’t have the *right* skills May 31, 2012
Some people kvetch. Some start their own firms, and hire people that don’t kvetch, with skills that match.? The latte? http://t.co/XO57VQa2 May 31, 2012
Totally agree, let govts protect depositors @ most, not banks RT @simonconstable: also a stupid thing to propose. Bust companies should fail May 31, 2012
Rest of the World
Dumb: China?s Blog Censorship Rules Have U.S. Parallels http://t.co/eDmN4L4X Even in colonial times restrictions on speech in US were modest Jun 01, 2012
Intervention From Rupee to Real Shows Focus on Inflation http://t.co/Mr5sIquM Emerging Markets face inflation & policy tightens, currs rise May 31, 2012
China Has No Plan for Large Stimulus to Counter Slowdown http://t.co/Zzo9hzRG Maybe they figured out extending more loans won’t help growth May 31, 2012
Egypt’s Next Leader Won’t Be A Creature of Tahrir Square http://t.co/8UEP48Vg Revolution in Egypt subverted by military & muslim brotherhood May 28, 2012
US Politics
Startup Act Shows Silicon Valley Clout Growing in DC http://t.co/mJYKPeGu How Silicon Valley pushed 4 the JOBS Act. Scammers, PE rejoice $$ May 31, 2012
Note: the same thing will happen in 10-15 years to Social Security, but it will b cut by 25%. http://t.co/PpV5XGqO A series of bad surprises May 29, 2012
Congress Unwilling to Address Disability Plan?s Shortfall http://t.co/WrtxovbX In a few years, disability payments will b cut by 21%. $$ May 29, 2012
Go Your Own Way: Correlation Breakdown in the Market http://t.co/3Zwpx3kB @japhychron hints at deterioration in US stocks as USD strengthens May 26, 2012
RE: To me it implies that conservative HY investors are running out of places to put money.? Yellow flag. http://t.co/eUSRq8dY May 25, 2012
Vanguard Closes High-Yield Fund ? ETF Alternatives http://t.co/bMmYUMTC Note: ETFs proposed take more credit risk than Vanguard fund does $$ May 24, 2012
Vanguard’s high yield fund was fairly conservative; they may feel strain in the size of their positions relative to t? http://t.co/lLJFeiYc May 24, 2012
RE: They were called the Americus Trusts, sponsored by the Americus Shareowner Service Corp., and they had Scores and? http://t.co/TPNPkL8T May 23, 2012
Wealthy Americans Turn to Trusts to Shield Assets http://t.co/2rKGuNWb Reasons: taxes, liability, avoid probate. Covetous world $$ May 23, 2012
You can say that again, momentum is addictive $$ RT @credittrader: lol – never learn – especially when momentum feels so good haha May 23, 2012
@credittrader I’m well. Fascinating that $JPM didn’t learn from the correlation crisis in 2005; tranche px/corr relationships shift $$ May 23, 2012
IG CDX diverges from S&P500; JPMorgan advocates mean reversion trade http://t.co/FIsOqhBN Long IG spreads vs HY spreads and equities $$ May 23, 2012
Kroll Sees Supplanting S&P in Rating Commercial Mortgage Bonds http://t.co/IrzfQ6cH Gratuitous trash talk on competitor S&P from Kroll $$ May 22, 2012
Treasuries in Longest Winning Streak Since ?98 on Europe http://t.co/EWJkiN5u Everyone knows that Treasury yields can only fall, right? $$ May 20, 2012
Eurozone
Merkel May Be Persuaded on Euro Debt-Sharing Compromise http://t.co/P3yQaN1K H/L misrepresents Merkel; does not seem likely politically May 25, 2012
Indeed, why not? RT @TimABRussell: ?http://t.co/831diM1O Why not just pick the best person for each position regardless of sex, race, etc? May 25, 2012
If a man will not respect his “wife” by marrying & staying with her, why should you expect him to respect women in mo? http://t.co/83lvXtu1 May 25, 2012
Stock Market Performance Versus Dollar http://t.co/mfrXyqvp Difficult for the US stock market to do well when the $$ is strengthening v Euro May 25, 2012
Slim Family Sees European Crisis as Good Time to Invest http://t.co/XZOgx3xX Buy when there is blood running in the streets $$ #slimchance May 25, 2012
Europe Girds for Greek Exit http://t.co/HMfsVt86 Two problems: Can’t kick Greece out & Greece can only leave Eurozone by leaving EU $$ May 24, 2012
Euro-Zone Economic Contraction Deepens http://t.co/b49VctDj Overindebted Eurozone muddles as politics/bureaucracy strangle growth $$ May 24, 2012
EU Chiefs Clash on Euro Bonds as Crisis Summit Bogs Down http://t.co/S1YnHrbM Fiscal Union requires political union; elephant in room $$ May 24, 2012
The Seeds of the EU?s Crisis Were Sown 60 Years Ago http://t.co/SsWQUvGa Overly ambitious EU goal of “ever closer union” leads 2 crisis $$ May 24, 2012
War-Gaming Greek Euro Exit Shows Hazards in 46-Hour Weekend http://t.co/WD7HSbMI Assumes Greek competence & they care about global mkts $$ May 23, 2012
A Greek Exit Could Make the Euro Area Stronger http://t.co/C7v2mDmM Concludes that a Greek exit would lead the rest 2 pull together $$ May 23, 2012
Campaign for Joint Euro Bonds Builds http://t.co/xXAvSU73 Will the core Eurozone countries give up resources to bail out the fringe? $$ May 23, 2012
Europe?s Prisoner?s Dilemma ? LTRO Needs to Continue for Years http://t.co/NldAsVL2 Until govt debt is gone from finl sector?s bal sht $$ May 23, 2012
Germany to Sell Interest-Free Bonds http://t.co/q7ewNqd2 It is good to be king. People give you their money, & they pay for the honor $$ May 22, 2012
US Politics / Economics
Even with a High Court win, Obamacare won’t work http://t.co/NKhyAe56 Failed ideas @ the states will not add up to a successful Federal plan May 26, 2012
USDA Is a Tough Collector When Mortgages Go Bad http://t.co/ZX24InYJ Definitely has different goals than most of the govt re mortgages May 26, 2012
Report: Negative Equity More Widespread Than Previously Thought http://t.co/UkQBpbGY Adds in value of second liens, 31%+ inverted $$ May 24, 2012
Let Mr. Reid look to his own spending extremism.? As for me, let the tax cuts expire, and automatic cuts happen.? Bet? http://t.co/cabthITQ May 22, 2012
Shale Glut Means $1-a-Gallon Savings at the Pump http://t.co/RHlFbT3L Liquefied Natgas would shave $1/gal over diesel for trucking $$ May 22, 2012
China
New Signs of Global Slowdown http://t.co/2o4kFRkD Weak Reports in U.S., Europe and China Suggest Economies Are Slipping in Sync $$ May 26, 2012
@researchpuzzler Pettis is among the best on China. @ritholtz and John Mauldin are good friends. Trends in China r very negative… $$ May 25, 2012
EM investing: check out the grid http://t.co/dIEGJeJC 3Qs How much electricity do they have? Future development? Probability of success? May 24, 2012
China flash PMIs point to contraction, again http://t.co/DZGf3ZZS The number for May is 48.7, compared to 49.3 in April. 7th decline. $$ May 24, 2012
China, North Korea ties hit rough weather http://t.co/r7TlDbux Kim Jong Un needs lessons showing honor2the Suzerain: Chinese Communist Party May 24, 2012
RE: @SoberLook I’ve heard that Chinese electricity consumption has flatlined.? Another straw in the wind. http://t.co/IqAHJCgo May 21, 2012
Companies
Facebook Investor Spending Month?s Salary Exposes Hype http://t.co/eGhCiHXq Please. Stox r risky. High expectation stox r veryrisky $$ $FB May 24, 2012
General Mills Unveils Restructuring, Job Cuts http://t.co/IUHltbai $GIS Budget-conscious US consumers push back against price increases May 23, 2012
Benihana Agrees to $296 Million Buyout http://t.co/YxJtfun3 Agreed 2b acquired by investment firm Angelo Gordon & Co. for about $296M $$ May 23, 2012
The Miracle on Wellington Street http://t.co/DUbSY81d Fairfax Financial Holdings’ tricky transaction for 6.6% of Odyssey Re -> legal trouble May 21, 2012
Barclays to Sell Entire $6.1 Billion BlackRock Investment http://t.co/notUgeFk Basel III rules make it uneconomic to hold as capital $$ May 21, 2012
Houghton Mifflin Harcourt Publishing Files for Bankruptcy http://t.co/heUuF3gj Bank debt -> New Equity, old Equity -> warrants for 5% $$ May 21, 2012
Financial Sector
JPMorgan Gave Risk Oversight to Museum Head Who Sat on AIG Board http://t.co/INr9ebI5 No banking experts on $JPM ‘s risk ctrl committee May 25, 2012
Goldman to JPMorgan Swap Trades Soar on Risks http://t.co/fvSPysAp A cheap-ish option on systemic risk rising. And not in the eurozone! $$ May 25, 2012
JPMorgan Copper ETF Plan Seen Creating Havoc by Merchant Groups http://t.co/zoJ0BfeM They oppose retail hoarding b/c it hurts them $$ May 24, 2012
Advice Regarding Life
I Wish I Had Known: Don?t Underestimate Compounding In EVERYTHING http://t.co/mIdFf5Dx People overrate their ability to change habits $$ May 26, 2012
Compound Experience, Not Just Interest http://t.co/n6CaWLN0 Early behavior influences later behavior, and the options that will be open 2u May 26, 2012
Berkshire Hathaway
Buffett Says Free News Unsustainable, May Add More Papers http://t.co/medRWMWm Strategy: Buy papers, end free distribution on Internet $$ May 25, 2012
Buffett?s Idiot Challenge Seized by Jain in Premium Hunt http://t.co/89qcKilo Misses how Jain blew it reinsuring life & LTC from Swiss Re May 23, 2012
Don’t get me wrong, Ajit Jain knows more about insurance than me; I’m saying he is not perfect; he does not know all insurance equally $$ May 23, 2012
High Frequency Trading
+1 That would work too RT @merrillmatter: @AlephBlog how about for all orders, one second minimum life May 24, 2012
Mutual Funds Promised Haven From Speedsters http://t.co/iCFFZXsU I proposed this HFT solution @ BaltimoreCFA 2 1 of those interviewed $$ May 24, 2012
Miscellaneous
The sex slavery stuff makes me sad/angry. I have daughters. $$ RT @moiracathleen: Brothels on Wheels http://t.co/COBuwJbS @leafjohnson May 25, 2012
How a bizarre legal case involving a mysterious billionaire could force 1.2M Canadians 2b married, against their will http://t.co/zv7QJBCz May 24, 2012
Veterans Face Ruin Awaiting Benefits as Wounded Swamp VA http://t.co/W0Ydcu3x Long sad tale: wounded vets not getting enuf disability pay May 24, 2012
Gold Boom Spreading Mercury as 15 Mln Miners Exposed http://t.co/f7oBSo26 Long fascinating article about mercury poisoning in Colombia $$ May 24, 2012
Rust-Belt Babushkas Live Alone as Fewer Remain to Marry http://t.co/ASbsIAMg % of US single person households up ~250% since 1940, 8%->27% May 23, 2012
Private Spacecraft Lifts Off Toward Space Station http://t.co/JlGRR2m0 The sustainable space age has begun, w/private $$ flying rockets May 23, 2012
Fitch Downgrades Japan http://t.co/rITu0126 Blasts the govt 4 taking a “leisurely” approach2solving country’s spiraling debt problems $$ May 23, 2012
Is the College Cave Age About to End? http://t.co/ispDBLTX Thinner slices of “deeper” knowledge produce less relevant research & teaching May 21, 2012
Getting America on a Diet That Works http://t.co/vooh1iNN What’s funny2me is how little agreement there is today on what works in diets $$ May 21, 2012
+1 Fatal Risk RT @ToddSullivan: AMAZING book…one of my favorites RT @alephblog: Please follow my friend @BoydRoddy, who is new to Twitter May 21, 2012
Please follow my friend @BoydRoddy, who is new to Twitter. $$ May 21, 2012
Read my review: ‘The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds’ by Maneet Ahuja via @alephblog http://t.co/kJf89aVT May 21, 2012
Dynamic hedging only has the potential of working on deep markets.
Arbitrage pricing can reveal proper prices in smaller less liquid markets if there are larger, more liquid markets to compare against.? The process cannot work in reverse, except by accident.
The recent case of JP Morgan’s hedging activities bring to light an observation that should be clear to all but isn’t.? Hedging only works when you are small relative to the markets in which you hedge.
Let’s consider tranched credit index default swaps.? We can create models where the prices of each tranche can be calculated given default frequency and severity.? But default is not a constant beast.? Defaults come in waves, and when incidence is high, so is severity of loss.? Vice-versa when incidence is low, leaving aside fraud.
We might have a good idea of where credit default should trade for a basket of corporate debtors “credits” so long as we look at the thing as a whole,? and don’t carve it up.? In general, a basket of borrowers is easier to predict than individual borrowers.
But the basket gets difficult when we split it up into first loss, second loss, third loss, etc. claims where different parties lose their capital at differing levels of total loss.? Yes, in theory, we can come up with prices.? We can even come up with hedge ratios? that show the theoretical tradeoff between tranches as losses increase or decrease, which might work, might, if you are a small player in that market.
Woe betide you, if you do anything too fancy, and you are big relative to the market.? Because you are big, you have affected the prices of the market.? Price relationships that were normal before you arrived have shifted and reflect your interests, which in the short-run makes your accounting look better.? As the bubble grows, those investing in the bubble look better.? But as the bubble expands, those that have invested in it find a wave of cash fighting against them, but it doesn’t matter, because momentum investors are still buying.
At the end, the large investor amid the bubble finds himself stranded.? The market knows his positions, and he can’t make trades to extricate himself, because the terms are onerous.
Look, I used to trade small-issue lesser-known bonds.? I only bought stuff that I knew would be money-good, i.e. pay off.? In that case, you have the option of speculating when spreads are wide, and selling when they get tight.? But if you do that with bonds that you don’t know whether they will likely pay in full, the ability to hedge is meaningless, because your hedge could break in a default.
And so it was for JP Morgan.? When you get too big relative to the market, it had better be when you are the buyer or seller of last resort, and you are catching the turn.? But in normal markets, bigs are pigs, and are likely to be slaughtered.
It doesn’t matter what your model says is the right tradeoff if you are too big relative to the market.? Your own actions have poisoned the signals that your models receive.
Amaranth fell into this same bucket, with a talented energy trader who understood how the market generally worked.? As his success grew, so did his size, and he didn’t realize that the size of the fund was distorting market prices.? At the end there was one unlikely scenario that was unhedged, and that was the scenario that occurred, and the results led to the collapse of the fund.
If Amaranth had been smaller they could have traded out of it.? At their size, they were “elephants in an elevator.”
Size matters, and for investment purposes, smaller is better.? And for the most part, less complex is better too.? Don’t demand liquidity from markets, or you will lose.? If liquidity comes to your door, and it seems to be a good deal, wave it in.
“Why does a Shiller disciple care about profit margins?“
Now, I am not a disciple of Dr. Shiller, I disagree with him on many issues, Trills for an example.? When Shiller talks, odds are 50-50 that I agree, which makes him interesting to me, unlike Bernanke and Krugman who I almost always disagree with, and James Grant and Caroline Baum, who I almost always agree with.? Someone who agrees with me and disagrees with me equally is interesting, because he makes me think harder.
And with his cyclically-adjusted price-earnings [CAPE] ratio, I was a reluctant partial convert.? Consider this piece.
There are a couple ways to answer the question:
Most stocks are cheap on a forward P/E basis, less so on a trailing P/E basis, and still less so on a P/B or P/S basis.? The difference between P/E and P/S is profit margin — E/S.
Consider the critiques from Dr. John Hussman, who awaits the reset that will come if/when profit margins get competed down.
My answer: we should care about it a little, for the above reasons.? But labor is no longer scarce, which leads to higher profit margins for a time while wages are depressed.
My view is that profit margins will not revert to mean for many years, until the increase in capitalist labor is absorbed.? Until then economic results will be poor those that labor on the low end — you have got a lot of new competition.
A reason to consider the validity of the CAPE is twofold: it has a huge similarity to Tobin’s Q-ratio, which compares market capitalization to replacement cost.? It also has a similarity to Michael Alexander?s Price-to-Resources ratio, out of which the book makes a lot (link here for an example).? It?s a Price-to-Adjusted Book value ratio as I see it.
The CAPE has value as a proxy.? It mirrors overall market value pretty well, like other fundamental ratios.
But I don’t agree, at least in part because profit margins should remain high, until readily obtainable labor is less scarce.? Getting there could be a long time.? Profit margins could remain high for a long time as a result, leaving? markets in a limbo zone, where it treads water as underlying value builds.
So profit margins should remain high for now.? Once labor is scarce globally,? and companies must pay more to get more or better quality labor, then will profit margins come under stress.
One of the problems with many politicians, journalists, financial analysts, economists, etc., is that they don’t think systematically.? Go back to late 2006, when I wrote my piece Wrecking Ball Looms for Big Housing Spec, which was regarding the coming subprime crisis.? (Note: my editor often retitled my pieces; my original title was more circumspect.)? Or read my piece in mid-2005 regarding the impending unwind of leverage and prices in residential real estate, Real Estate?s Top Looms.? Both of those are inside the wall at RealMoney.? Apologies if you can’t read them.
At the beginning of the crisis, most economists, including the present Fed Chairman, said that problems ere limited, because they only affected limited areas of the residential real estate market.? Now, part of that response reveals that the Fed and other regulators beneath them had not been doing their jobs, because it is well-known now that underwriting quality of all residential mortgage lending had deteriorated.
When an economic system is overleveraged, with leverage that is layered, such that a domino effect can occur, small failures can have disproportionate results.? It is almost like the economic system during the bull phase self-organizes for the largest possible failure.? (Note: self-organizing systems do not always optimize for the long term.? Think: what other ideas could that invalidate?)
An overlevered residential real estate system had the possibility of a self-reinforcing decline in prices, once prices started declining nationally.? Now we face a still-overlevered residential real estate sector with a lot of the market inverted, where people owe more than the house is worth, though pockets on the low end of prices show recovery in some areas of the US.
Little things are important.? Some people say, “How can Greece pose so much risk to the rest of Europe?? It’s economy is so small relative to the rest of Europe.? Well, that’s where the leverage comes in again.
Core Eurozone banks have lent to Greek entities, and those banks are not well-capitalized.? If Greece left the Eurozone, and repaid loans in depreciated New Drachma, it would lead to a crisis in confidence regarding loans made to Spain, Portugal, and Italy.? The exposure of core Eurozone banks is significant, to the point where it could cause a broader crisis.
Little things are important where the system has been optimized; where something near perfection is needed to insure the proper performance of the over-evolved system where many entities are playing for a slice of the cash flow, and most have over-borrowed, and overpaid.
The optimized scenario is akin to the dominoes being set up, and they are beautiful, but woe betide the one who knocks over a domino.? (Note: as a kid, I would build domino structures, but would leave out every tenth domino, in order to create something where if I made a mistake, only a little would fall down.? The last dominoes were added with the greatest care.)
There are some worries in the US over European exposure.? I don’t think that is likely, except with some of the biggest banks.? Maybe that could spill over, but I doubt it.? If it does spill over, it will prove that the biggest banks should be broken up.? My favored way is to regulate banks like insurers.? You can do business across state lines, but you are tightly regulated by your state.? Much better than what we have currently.
Survivable systems exist when adequate returns are earned without high leverage.? That may sound vague, but vague is often the best we can do in economics.
When debts are complex, aim for simplicity.? Complex systems tend to die.? Simple systems survive.? This is a rule of value investing, measure simplicity versus reward.? Complexity has a price; avoid it unless well compensated for it.
If Greece Quits Euro, Its Ruin Will Be Pointless http://t.co/2DotggME Suggests Greece will face more pain if leaves E-zone than stays $$ May 17, 2012
Experts Try to Chart Path for Exit From Currency http://t.co/dtIAoo3g Let’s see, where is that manual for unscrambling eggs? Mmm… $$ May 17, 2012
On the E-zone: the politicians, like sorcerer’s apprentices, thought they could reshape Europe; end up fighting forces beyond their power $$ May 17, 2012
The Running of the Bank Depositors http://t.co/WC7aN5LP Governments r smaller than economies, which r smaller than cultures $$ #fightgravity May 17, 2012
Governments are smaller than economies, which are smaller than cultures.? The Eurozone is a huge experiment that igno? http://t.co/YUqGTSLN May 17, 2012
Greek President Told Banks Anxious as Deposits Pulled http://t.co/mx5626V2 If u thot u faced a conversion 2 new drachmas, ud w/d euros2 $$ May 16, 2012
ECB Said to Stick to Current Crisis Stance as Tools Reviewed http://t.co/vSKBTnax No worries; ECB policies r meeting the challenge $$ 😉 May 16, 2012
Bet on Greek Bonds Paid Off for ?Vulture Fund? http://t.co/nrka09y7 While Greece is in disarray, makes full pmt2 hedge fund Dart Management May 15, 2012
Lightning Strike Delays Hollande Trip http://t.co/G0hgIGsP Weird, but he gets to Germany anyway to have a disagreement w/Merkel $$ May 15, 2012
Hazardous Greek-Exit Scenario http://t.co/LZooTMlf WSJ goes through the steps and effects of an orderly Greek exit, should there b1 $$ May 15, 2012
European Officials Warn Greece http://t.co/WJ4Wmk5B No way to kick Greece out; what do you do if they refuse to pay? $$ #enduredefault May 14, 2012
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Rest of the World
Hugo Ch?vez’s Enemy No. 1 http://t.co/LtdZXcM7 Henrique Capriles, governor of Miranda state & candidate selected by the united opposition May 19, 2012
Kolatch Bullish on Argentina?s Debt http://t.co/8dfUoRdv When someone is willing to cheat others, he is more likely to cheat you $$ #FTL May 17, 2012
Iranian Rapper Fears for His Life After Fatwa http://t.co/AD27SHZY Interesting how killing ceases 2b murder after cleric issues fatwa $$ May 16, 2012
Bond Markets
US insurers seek $300 mln cat bond cover http://t.co/rNw0b4hu There’s a hard property reinsurance market, so alternatives r attractive $$ May 18, 2012
Junk-Debt ETFs Set Markets ?Abuzz? After Record Trades http://t.co/Zzq4BHV2 New ways of putting biggish HY positions on/off quietly $$ May 18, 2012
@Fullcarry @munilass At least the Treasury yield curve is “out of this world.” Have long Tsys on as a hedge in my bond strat, when2punt? $$ May 17, 2012
Every two years, the annual shareholder filing for the iShares Trust, which holds the big bond ETFs, doubles in size: now 20MB $$ May 15, 2012
RT @Munisrgood: @munilass More room to go. If you subscribe to Hoisington’s predictions, (I do to an extent) 30 yr tsy could be 75-100 l … May 15, 2012
+1 Needle in red zone $$ RT @groditi: HY CEF wavg premium 15%; min -8.27 max 67.3%; +1.1stdevs; sample-size: $11B (40 funds) #YieldChase May 14, 2012
Euro-Zone Fears Drive Bund Yield to Record Low http://t.co/sNntlOYU Opposite risk: Germany might leave EZone; ECB actions disliked $$ May 14, 2012
Euro Officials Begin to Weigh Greek Exit as Euro Weakens http://t.co/nERx6dAG Note the shift, indicates the bailouts may b over 4Greece $$ May 14, 2012
Elderly Poverty
See pg 26 4 details http://t.co/NnS2Jyo2 Figure is low IMO b/c 25% “don’t know” what they have saved. They r prob below $50K, so ~60% <$50K May 17, 2012
Report says “Overall, slightly more than one-third have saved less than $50,000.” http://t.co/NnS2Jyo2 Still thought the % was higher, ~50% May 17, 2012
Same here RT @ballenmo: @AlephBlog @fundmyfund 20%? I?m surprised the number is so low. May 17, 2012
+1 that’s what I think RT @fundmyfund: @AlephBlog 20% of 50 and 60 yr old dont have 50K to their name, not to mention saved for retirement May 17, 2012
Expected worse RT @MoneyMag_Penny 20% of workers in 50s & 60s have saved less than $50,000 for retirement: Transmerica http://t.co/PqWIm74w May 17, 2012
JP Morgan
Lawrence Lindsey: Why Washington Hates Jamie Dimon http://t.co/dZEzVnOq Not a diplomat & does not perform kowtows to politicians $$ $JPM May 18, 2012
For JP Morgan Trader, From ‘Caveman’ to ‘Whale’ http://t.co/U2iXH2uJ It is often dangerous to win, next step is try to win big & fail $$ May 17, 2012
Romney Vowing Dodd-Frank Repeal Hits JPMorgan Risky Trades http://t.co/Y9aMyHR0 Tough sell; existing law had enuf pwr, but regs didn’t use May 14, 2012
The core problems with JPMorgan’s failed trades http://t.co/HktxLRnq When that illiquid, putting positions into runoff only solution $$ May 14, 2012
Dimon Fortress Breached as Push From Hedging to Betting Blows Up http://t.co/Rc5TXU9E $JPM too big relative 2market; hard2mark prices $$ May 14, 2012
Bank Order Led to Losing Trades http://t.co/00llzrIO $JPM ‘s Efforts2Shield Itself From European Market Fallout Prompted Disastrous Bets May 12, 2012
Buffett & Newspapers
Why Warren Buffett is buying newspapers http://t.co/a6qVZAet It certainly isn’t for economic reasons; he overpaid, plain & simple. $$ $BRK.B May 18, 2012
Warren Buffett buys into ‘declining’ newspapers http://t.co/BYmAmiZT $MEG does have TV and data businesses, not sure how much that helps. May 17, 2012
Berkshire Buys Media General Newspapers for $142 Million http://t.co/ISIniNZG add in a $400 million term loan with an rate of 10.5% $$ May 17, 2012
(As an aside, if you read any of my comments on Buffett, newspapers, and Media General, I made the mistake of think that he had bought Media General, when he bought most of their newspapers, a portion of the company, and lent them $400 million at 10.5% with a first priority of payment in bankruptcy.? Now that I realize my mistake, I can?t say whether Buffett got a good, bad, or indifferent deal.? Apologies for the mistake.)
US Economy
?One Recession Away? From Next Bull Market ? John Mauldin http://t.co/WwOL8nj7 5 min interview, short-term bearish, long-term bullish $$ May 17, 2012
Paul Krugman’s Simple — or Is It Simplistic? — Reasoning http://t.co/0lmcAVSQ Is there any level of govt spending or debt that is2much? May 17, 2012
North Dakota Tops US States in Credit Ranking as Florida Rises http://t.co/cttmsatF Amazing what energy & the influx of elderly will do $$ May 17, 2012
North Dakota Tops Alaska in Oil Output http://t.co/Ulo7jzcU The US potentially has more hydrocarbons than Saudi Arabia. TX, ND, AK $$ May 17, 2012
RE: @bloombergview The two papers look pretty good, but would the bureaucracy have the guts to rein in a boom based o? http://t.co/mvScOD74 May 16, 2012
Tom Frost: The Big Danger With Big Banks http://t.co/414ZAkTV Fine, but it was mortgage lending that led the crisis, not invt banking $$ May 16, 2012
When I used to mix sound, there was a knob on my board called “contour.” That’s what QE is to the Fed.? When I would ? http://t.co/DC0O0kjS May 17, 2012
Midwest Sees a Sand Rush http://t.co/815yYdBQ Fracking Spurs Demand for the Stuff, Sparking a Mining Boom?& Vexing Some #midwestboom $$ May 14, 2012
US Politics, Regulation, and Culture
SEC Probes Role of Hedge Fund in CDOs http://t.co/wMUFuoPt Don’t forget the blame due the yield hogs 4 their inadequate due diligence $$ May 17, 2012
Dental Abuse Seen Driven by Private Equity Investments http://t.co/QzEb161T Long article on unscrupulous dentists that harm poor kids 4 $$ May 17, 2012
The creeping disaster for USPS is that as they cut services, they become irrelevant. The internet changes everything? http://t.co/ION20cep May 17, 2012
School-Test Backlash Grows http://t.co/RIiaRg1Z Some Parents, Teachers & Boards Rebel, Saying Education Is Being Stifled $$ #room4both May 16, 2012
Please apply the same logic to the liberal justices of the court, who have flouted the Constitution for far longer. http://t.co/gEsZGazC May 16, 2012
Jerry Brown vs. Chris Christie http://t.co/T0uyb6iC More states r realizing that the road2fiscal hell is paved w/progressive intentions May 15, 2012
California Deficit Swells to $16 Billion, Governor Says http://t.co/LJT9Dl1s & http://t.co/2Rg8E98K CA in self-reinforcing neg spiral $$ May 14, 2012
Obama Hits Romney on Bain as He Raises Wall Street Money http://t.co/09M2hhHK “The pot calls the kettle black.” $$ (has 2ba better phrase) May 14, 2012
Midnight Was Movie Hour, Nap Time in New York Air Tower http://t.co/cNT0C080 Long piece; parts of the FAA r seriously messed up $$ #unions May 12, 2012
Trouble in Coal Country for Obama http://t.co/dJoko2Aj If persists, could mean Obama wins popvote, Romney win the election $$ #kingcoal May 12, 2012
Companies
Tsst… $COP is no longer in the refining biz, it spun of $PSX which is.? FD: +COP, +PSX $$ Oh, and selling the comp? http://t.co/LxFTP91s May 17, 2012
Facebook ($FB) announces that they will no longer accept General Motors ($GM) cars in exchange 4 advertising exposure $$ 😉 #lamejoke May 15, 2012
Avon Shares Tumble After Coty Pulls Bid http://t.co/SVZ4zZgN Coty might b better off creating the parts of $AVP it wants organically $$ May 15, 2012
Margin Call: The Most Exposed http://t.co/4v2IsU16 Interesting what CEOs have borrowed against shares of the companies that they run $$ May 15, 2012
Yahoo CEO’s resignation spotlights tech action http://t.co/mUF19hRa We keep the board of $YHOO around 2make that of $HPQ happy. FD +HPQ May 14, 2012
Miscellaneous
Paper Plane Champ Watches His Record Fly, Fly Away http://t.co/zdPMR62e Division of labor in design & tossing-> paper airplane record $$ May 18, 2012
@ReformedBroker You really had lunch w/Mauldin? Cool, I know he is friends w/ @ritholtz ; I just reviewed his recent “Little Book.” $$ May 17, 2012
When people get 2 deep into a sliver of knowledge, they get dumb RT @jasonzweigwsj: is your sense of self an illusion? http://t.co/PHUXLmdB May 17, 2012
5. They sometimes bring specialized knowledge of the topic at hand. 6. They tend to write for users, not reviewers o? http://t.co/T3oElbxQ May 17, 2012
Going for Gold?or Whatever http://t.co/F6kSto8O Secret to an Aging Olympian’s Endurance: Don’t Let Training Get in the Way of Fun $$ May 16, 2012
When you show up DD, you usually make me smile $$ RT @DoubleDeuce: Wisdom: “try to convince, don?t gripe” by @AlephBlog http://t.co/kDwSKgYJ May 15, 2012
?Trigger-Happy? Investors Boost IPO Insurance Through Litigation http://t.co/GQKdNia3 Looks like Errors & Omissions coverage applied 2IPOs May 14, 2012
Two years ago, I was at a board meeting for a nonprofit that I serve, and during a break, one of the older gentlemen made a statement that the big problem with America is that we don’t make anything anymore.? I suggested to him that many services enhance and replace the need for some goods.
Now, I don’t have a Facebook account, and I have no intent of getting one.? But I must have been thinking about Facebook as an investment, because I asked him, “What about something like Facebook then?? Doesn’t that have value?? It’s profitable, and current estimates say it might be worth $25-50 billion dollars.”? He replied that Facebook was emblematic of what was wrong with our economy, because it doesn’t produce anything, and consumes a lot of productive time in the process.? I had to call the meeting back to order, so I had to leave it there.
Today, with the Facebook IPO, I heard on the radio a number of times, “We don’t make anything anymore.”? From politicians, “We need manufacturing jobs.”? When Governor Martin O’Malley spoke to the Baltimore CFA Society two weeks ago, he sounded the theme of manufacturing jobs as well.? Afterward, I spoke with a Deputy Secretary at the Maryland Department of Business & Economic Development, and in passing mentioned that I owned part of a manufacturer operating in Maryland.? He asked me for the name, and when I mentioned it, he said, ‘I visited there two weeks ago.? Great firm!”
I know it is a great firm, but I also know that it costs Maryland and the Federal Government to encourage manufacturing.? I see the pro-rata deductions on my personal taxes, and wonder at why we care so much about manufacturing.
When I go places with my kids, I sometimes point out to them business parks where light industrial work goes on.? We are very good today at hiding where things get made, and so people think that factories don’t exist.? We have ordinances on noise, pollution, etc., and most of these entities have moved outside the big cities where the land values are cheaper.
So part of my answer here is that we are still making things here in America.? We just don’t notice it.
America is an amazing place.? The breadth of resources that can be extracted, the crops that are grown, the amazing division of labor, the level of technological innovation, and the relative degree of freedom to pursue any of these is astounding.
We make a lot of things.? We just do it with far fewer people than we used to.
And that is the great increase in manufacturing productivity. We don’t need as many people to makes things as we used to.? That’s a good thing, so people can be released to more productive uses.
Labor productivity is a squishy thing, though.? Measuring labor productivity in manufacturing is relatively easy, because the output and its value is easily measured.
With services, the same calculation can be done: output/revenue per worker, but it doesn’t have the same punch, because goods produced have mostly the same quality, but the quality of services varies widely.
But maybe we can look at this a different way.? Even though it is not easily measurable, what if the right thing to value is not production, but happiness, health, or freedom?
Services provide value, or people would not pay for them.? Facebook exists because it allows people flexibility and facility of communicating with many people.? It makes money from ads that are targeted off of data collected from users.
Many people like using Facebook.? It is a large part of their lives.? For most it is not a part of their work, but a part of their recreation.? Recreation is valuable, and people use their extra time as suits them best.? Keeping “friends” informed on what you are doing and thinking has subjective value to those who do it.
Services make life easier, and sometimes make manufacturing more productive.? The consultant that reviews a factory’s activities, and submits a report to enhance productivity did not make anything, but made producing things less expensive.
Having more people employed in services is not a weakness.? As productivity increases, we need fewer people for extraction and production, and this is true globally.? Manufacturing employment is falling globally.? So is agricultural employment.? As a result, we have many people available to tailor services that make our lives richer.? We don’t just need goods; we need help.? In that way, the service economy is not a waste, but closer to what we need than “goods.”
I know this is not erudite, complete, whatever.? I am comfortable (absent major war), that the “lack of manufacturing” in America is not true, and even if true, is not a problem.? So relax, and enjoy the good life you have in America, with all the help that is available at a price.
It was late 1993, and I knew that we could make a lot of money if I sold floating-rate Guaranteed Investment Contracts.? Let me quote an earlier piece:
My goal as an actuarial businessman was to make profits with modest risk for my ultimate owners, who were the mutual policyholders.? Once I faced a situation where there might be easy profits ? writing floating rate GICs.? So, I went to my models and tried to figure out how we could make money safely while our interest rates would shift every three months.? I came to the conclusion that there was no safe way to do so, and so I walked into the office of my boss and told him so.? He surprised me by supporting my thesis, and in his usual back-of-the-envelope way, explained to me in a few minutes why it had to be so.
A few weeks later, he informed me that an actuary from Goldman Sachs (yes), would be dropping by to tell about one of their new derivative contracts that would enable us to write floating rate GICs profitably.? The meeting day came, and I validated the expectations of my boss.? The year was 1993.? I asked the actuary from Goldman what happens if the yield curve inverts.? He answered honestly, ?This strategy blows up when the yield curve inverts.?? Score a small victory for me.? I gave myself points for avoiding trendy bad ideas.? Over the next twelve months, two major insurers and one investment bank would announce billion-dollar blowups from following that strategy.
After the blowups, I went back to the buyers of floating-rate GICs, and asked them if they would accept a lower spread over LIBOR.? The response was a firm ?no.?? So much for that market.
Those few players in that market had mispriced the risk.? Is it any surprise that they got a lot of volume?
Two years after that, I was at the Society of Actuaries annual meeting, where I met a well-known actuary who had worked inside the corporate actuarial area of the Equitable during the critical years.? I.e., he watched and analyzed the assets and the liabilities as they arose.? The conversation went something like this:
David: What was it like working inside the Equitable during that period of fast growth?
Corporate Actuary: It was amazing.? It took everything we could do to stay on top of it, and still we fell behind.
D: Didn?t you think that perhaps you were offering guaranteed rates that were too attractive?
C: We wondered about it, but with money coming in, everyone felt great about the growth.? We simply had to find ways to productively deploy all of the cash flow.
D: But wait.? Didn?t the investment department have a difficult time investing all of the proceeds?? With that much money coming in, the likelihood of making severe errors would be high.
C: Were you a bug on the wall at our meetings?? Yes, that is exactly what happened.? The money came in faster than we could invest it prudently.
D: Wow.? I thought that was what happened, but it amazes me to hear it confirmed.
They offered free options, and surprise, investors took them up on them.? They couldn?t make enough to fund the promises, and undertook a risky strategy in the late 80s that I called ?double or nothing.?? The strategy failed, and they almost went broke, except that AXA bought them, pumped in a little capital, and then the real estate market turned.
What?s my point here?? Twofold: one, rapid growth in financial institutions is rarely a good thing; it usually means that an error has been made.? Two, there is a barrier in many financial decisions, where responsible parties are loath to cry foul until it is way past obvious, because the cost of being wrong is high.
Long Term Capital Management became large relative to the markets that they “arbitraged.”? Anytime you can feel yourself moving the market, it is time to stop.
There was a correlation crisis in the CDO market in 2005.? For those with access to RealMoney, I wrote about it here.? Some quants with clever ideas, much like the current JPM fiasco, thought that they could hedge mezzanine against subordinated.? True when the trade is small, wrong when the trade is big.
Beyond that, we have the brain-dead example of AIG.? They dominated the market for AAA subprime mortgage insurance.? It was free money, until it wasn’t.? If you have a large share of a market where there are no barriers to entry, you should stop and ask why you are the only smart one.
The problem with becoming large relative to the market, is that you begin distorting the price signals of the market.? If you have a large long position and the price starts to fall, it is easy to justify purchases, because your internal model indicates that it is cheap.? But every model has weaknesses, consider the examples listed above.? Anytime you get a large fraction of the market’s volume, you should stop, and re-evaluate.? You’re probably doing something wrong.
Markets by their nature invite diversity, and do not admit anyone to dominate them except under abnormal circumstances.
So, if you find yourself growing large relative to your market, calm down, and re-evaluate your positions, before they get large enough to bite you.
There will be elderly poor.? Look at page 26 of this PDF.? I interpret those that don’t know or declined as being well below $50K in assets.? That means 60% of those reaching “retirement age” will have less than two years income stored up.
That said I feel more sorry for younger workers who have to pay high amounts into Social Security/Medicare, and they will not get out of program what they put in.? There’s a longish article here, excerpting from a recently released book on the topic.? In general, the older you are, the sweeter the deal was for those who received payments from Social Security, at least until 2026 when benefits will be cut by 25%, or taxes raised.
What this means is that in aggregate, Americans don’t save enough, particularly the Baby Boomers, of which I am one, but not a negligent one.
We are heading for elderly poverty/work for a large portion of Americans.? I suspect that many older people will continue to work, solving their problem but taking jobs from those who are younger.
This should be no surprise.? Incomes should be declining for lower skilled people in the US, because there are more people who can do that work abroad.? My advice to all readers is to make sure you cannot be obsoleted by foreigners.
One more note: don’t expect the asset markets to bail you out.? Returns to financial assets will do poorly as so many begin to sell them to pay for living expenses, whether directly as individuals, or indirectly as defined benefit plans pay retirement benefits.
This is on top of the problem that when high-quality long interest rates are so low, it is typically a bad time to try to make money in financial assets, because returns on risky assets are typically only 0-2% percent higher than the yield on long BBB/Baa debt over the long run.
