Public Policy – Page 15 – The Aleph Blog

A Few Investment Notes

Posted on 9 August 201410 August 2014 by David Merkel

Just a few notes for this evening:

1) I’ve been a bull on the long end of the Treasury curve for a while. ?It’s been a winning bet, and the drumbeat of “interest rates have nowhere to go but up” continues. ?Here’s an argument from Jeffrey Gundlach on why long rates should remain low, and maybe go lower:

Gundlach, however, was one of the very few people?who believed rates would stay low, especially with the Federal Reserve committed to keeping rates low with its loose monetary policy.

It’s important to note that U.S. Treasuries don’t have the lowest yields in the world. French and?German government bonds have yields?that are about 100 basis points lower than those of Treasuries. In other words, those European bonds actually make U.S. bonds look cheap, meaning that yields have room to go lower.

This will trend toward lower rates will eventually have to end, but neither GDP growth, inflation, or business lending justifies it at present.

2) From Josh Brown, he notes that correlations went up considerably with all risk assets in the last bitty panic. ?Worth a read. ?My two cents on the matter comes from my recent article, On the Recent Anxiety in High Yield Bonds, where I noted how much yieldy stocks got hit — much more than expected. ?I suspect that some asset allocators with short-dated or small stop-loss trading rules began selling into the bitty panic, but that is just a guess.

3) That would help to explain the loss of liquidity in the bond market during the bitty panic. ?This article from Tracy Alloway at the FT explores that topic. ?One commenter asked:

Isn’t it a bit odd to say lots of people sold quickly *and* that there isn’t enough liquidity??

Liquidity means a number of things. ?In this situation, spreads widened enough that parties that wanted to sell had to give up price to do so, allowing the brokers more room to sell them to skittish buyers willing to commit funds. ?Sellers were able to get trades done at unfavorable levels, but they were determined to get the trades done, and so they were done, and a lot of them. ?Buyers probably had some spread target that they could easily achieve during the bitty panic, and so were willing to take on the bonds. ?Having a balance sheet with slack is a great thing when others need liquidity now.

One other thing to note from the article is that it mentioned that retail investors now own 37%?of credit, versus?29% in 2007, according to RBS. Also that?investment funds has been able to buy?all?of the new corporate debt sold since 2008.

There’s more good stuff in the article including how “matrix pricing” may have influenced the selloff. ?When spreads were so tight, it may not have taken a very large initial sale to make the estimated prices of other bonds trade down, particularly if the sales were of lower-rated, less-traded bonds. ?Again, worth a read.

4) Regarding credit scores, three articles:

Are We Giving Americans Too Much Credit?
FICO Recalibrates Its Credit Scores
On Credit Scores?(an old article of mine)

From the WSJ article:

Fair Isaac?Corp.?said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.

I think there is less here than meets the eye. ?This only affects those borrowing from lenders using the particular FICO scores that were modified. ?Not all lenders use that particular score, and many use FICO data disaggregated to create their own score, or ask FICO to give them a custom score that they use. ?Again, from the WSJ article:

Fair Isaac releases new scoring models every few years, and it is up to lenders to choose which ones to use. The new score will likely be adopted by credit-card and auto lenders first, says John Ulzheimer, president of consumer education at CreditSesame.com and a former Fair Isaac manager.

Mortgages are likely to lag, since the FICO scores used by most mortgage lenders are two versions old.

The?impact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers’ credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points, said Mr. Ulzheimer.

The lower weight given to unpaid medical debt could increase some affected borrowers’ FICO scores by 25 points, said Mr. Sprauve.

But lowering the FICO score by itself doesn’t do anything. ?Some lenders don’t adjust their hurdles to reflect the scores, if they think the score is a better measure of credit for their time-horizon, and they want more loan volume. ?Others adjust their hurdles up, because they want only a certain volume of loans to be made, and they want better quality loans at existing pricing.

Megan McArdle at Bloomberg View asks a different question as to whether it is good to extend more credit to marginal borrowers? ?Didn’t things go wrong doing that before? ?Her conclusion:

That in itself [DM: pushing for more loans to marginal borrowers as a matter of policy] is an interesting development. Ten years ago, politicians were pressing hard for banks to extend the precious boon of homeownership to every man, woman and shell corporation in America. Five years ago, when people were pushing for something like the CFPB, the focus of the public debate had dramatically shifted toward protecting people from credit. Oh, there were complaints about the cost of subprime loans, but ultimately, on most of those loans, the problem?wasn?t the interest rate but the principal: Too many people had taken out loans that they could not realistically afford to pay, especially if anything at all went wrong in their lives, from a job loss to a divorce to an unexpected illness. And so you heard a lot of complaints about predatory lenders who gave people more credit than they could handle.

Credit has tightened considerably since then, and now, it appears, we?re unhappy with that. We want cheaper, easier credit for everyone, and particularly for the kind of financially struggling people who have seen their credit scores pummeled over the last decade. And so we see the CFPB pressing FICO to go easier on people with satisfied collections.

That?s not to say that the CFPB is wrong; I don?t know what the ideal amount of credit is in a society, or whether we are undershooting the mark. What I do think is that the U.S. political system — and, for that matter, the U.S. financial system — seems to have a pretty heavy bias toward credit expansion. Which explains a lot about the last 10 years.

Personally, I look at this, and I think we don’t learn. ?Credit pulls demand into the present, which is fine if it doesn’t push losses and heartache into the future. ?We are better off with a slower, less indebted economy for a time, and in the end, the economy as a whole will be better off, with people saving to buy in the future, rather than running the risk of defaults, and a very punk economy while we work through the financial losses.

Regarding Underemployment

Posted on 2 August 20142 August 2014 by David Merkel

This is just meant to be a few thoughts. ?I haven’t worked everything out, but I want to talk about how the labor markets are weak.

Yes, the headline statistics are strong. ?The U-3 unemployment figure is low at 6.2%. ?But look at a few other statistics:

My, but wages as a share of GDP has been falling.

And real wages have flatlined. ?No surprise that many feel pinched in the present environment. ?Even the Federal Reserve Chairwoman Janet Yellen expresses her doubts about the labor markets, which was expressed through the most recent FOMC Statement.

The problem is this: the relationship between labor employment and monetary policy is weak. ?It is weaker than pushing on a string. ?There are two major factors retarding the US labor market, and they are globalization and increased productivity from technology.

The value of knowledge is rising relative to less-skilled labor. ?As such, we are seeing increased income inequality in the US, but lower income inequality globally. ?Bright people in foreign lands who can transmit their skills over the internet can do better for themselves, even as more expensive counterparts in the US lose business.

Call this the revenge of the nerds. ?The internet enables bright people to profit from their differential knowledge, as it can be applied to wider opportunities.

Think of India for a moment. ?Many bright people with advanced degrees, but education amounts to little unless you can use it for your own benefit.

Here’s my main point. ?The FOMC con’t do much about the labor markets; their power is weak. ?The bigger factors of globalization and technology can’t be fought. ?They are too big.

Thus, you are on your own. ?The US Government does not have the power to re-create the unique middle class prosperity of the ’50s and ’60s. ?If you work for others, you are not your own master. ?Aim to make yourself the master of your situation, by making yourself invaluable to your clients.

Not Apt, Not Teed Up, Not Going

Posted on 2 August 2014 by David Merkel

Okay, let’s run the promoted stocks scoreboard:

Ticker	Date of Article	Price @ Article	Price @ 6/27/14	Decline	Annualized	Splits
GTXO	5/27/2008	2.45	0.022	-99.1%	-53.3%
BONZ	10/22/2009	0.35	0.001	-99.8%	-72.8%
BONU	10/22/2009	0.89	0.000	-100.0%	-85.1%
UTOG	3/30/2011	1.55	0.000	-100.0%	-92.3%
OBJE	4/29/2011	116.00	0.069	-99.9%	-89.7%	1:40
LSTG	10/5/2011	1.12	0.010	-99.1%	-81.2%
AERN	10/5/2011	0.0770	0.0001	-99.9%	-90.5%
IRYS	3/15/2012	0.261	0.000	-100.0%	-100.0%	Dead
RCGP	3/22/2012	1.47	0.045	-96.9%	-77.2%
STVF	3/28/2012	3.24	0.340	-89.5%	-61.8%
CRCL	5/1/2012	2.22	0.008	-99.6%	-91.7%
ORYN	5/30/2012	0.93	0.026	-97.2%	-80.7%
BRFH	5/30/2012	1.16	0.779	-32.8%	-16.8%
LUXR	6/12/2012	1.59	0.006	-99.7%	-93.0%
IMSC	7/9/2012	1.5	1.220	-18.7%	-9.5%
DIDG	7/18/2012	0.65	0.042	-93.6%	-74.0%
GRPH	11/30/2012	0.8715	0.073	-91.6%	-77.4%
IMNG	12/4/2012	0.76	0.015	-98.0%	-90.6%
ECAU	1/24/2013	1.42	0.004	-99.7%	-97.8%
DPHS	6/3/2013	0.59	0.007	-98.9%	-97.9%
POLR	6/10/2013	5.75	0.050	-99.1%	-98.4%
NORX	6/11/2013	0.91	0.090	-90.1%	-86.9%
ARTH	7/11/2013	1.24	0.200	-83.9%	-82.2%
NAMG	7/25/2013	0.85	0.085	-90.0%	-89.6%
MDDD	12/9/2013	0.79	0.060	-92.4%	-98.2%
TGRO	12/30/2013	1.2	0.150	-87.5%	-97.1%
VEND	2/4/2014	4.34	1.500	-65.4%	-88.7%
HTPG	3/18/2014	0.72	0.100	-86.1%	-99.5%
WSTI	6/27/2014	1.35	0.735	-45.6%	-99.8%
	8/1/2014		Median	-97.2%	-89.6%

Now for tonight’s loser-in-waiting: Apptigo [APPG]. ?This is a company that ?until four months ago was a development stage company for selling Irish horses in the US. ?This is a company that has never earned any money, and only has positive net worth at present because of raising capital when the prior company acquired Apptigo in a reverse marger, and renamed itself Apptigo.

This is a company that says it will make money off of selling apps. ?Well, they have one app at present, and it is called?SCORE – Match Maker. ?It has a grand total of seven likes at the iTunes Store. ?Now let me hazard a guess here, and say that it is difficult to create a broad network for matchmaking. ?The value of a network goes up proportional to the square of its nodes. ?How will they attract enough attention in the iTunes ecosystem to make ?a significant network? ?Even if this is a legitimate company, I don’t see how it will be easy to make it work, as the promoter said it would be easy.

The promoter also said this in tiny type:

Important Notice and Disclaimer: Flying Under the Radar Stocks is an independent paid circulation newsletter. This report is a solicitation for subscriptions and a paid promotional advertisement of Apptigo, Inc. (APPG). Flying Under the Radar Stocks received an editorial fee of twenty five thousand dollars from Micro Cap Media Ltd. APPG was chosen to be profiled after Flying Under the Radar Stocks completed due diligence on APPG. Flying Under the Radar Stocks expects to generate new subscriber revenue the amount of which is unknown at this time resulting from the distribution of this report. Micro Cap Media Ltd. paid nine hundred forty-eight thousand, three hundred sixty-three dollars to advertising agencies for the cost of creating and distributing this report, including printing and postage, in an effort to build investor awareness. This report does not provide an analysis of a company’s financial position, operations or prospects and this is not to be construed as a recommendation by Micro Cap Media Ltd. or an offer to buy or sell any security or investment advice. An offer to buy or sell can only be made with accompanying disclosure documents and only in states and provinces for which they are approved. Do not base any investment decision based solely on information in this report. Although the information contained in this advertisement is believed to be reliable, Micro Cap Media Ltd. makes no warranties as to the accuracy of any of the contents herein and accepts no liability for how readers may choose to utilize the content. Readers should perform their own due diligence, including consulting with a licensed, qualified investment professional. Further, readers are strongly urged to independently verify all statements made in this report APPG?s financial position and all other information regarding APPG should be verified directly with APPG Audited financial statements and other relevant information about APPG can be found at the Security and Exchange Commission’s website at www.sec.gov. It is recommended that any investment in any security should be made only after consulting with your investment advisor and only after reviewing all publicly available information, including the financial statements of the company. The information contained herein contains forward-looking information within the meaning of section 27a of the Securities Act of 1933 as amended and section 21e of the Securities Act of 1934 as amended including statements regarding growth of APPG. In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act, statements contained herein that look forward in time, which include everything other than historical information, involve risks and uncertainties. ?All forward-looking statements are based upon current assumptions that are believed to be reasonable. In the event any such assumptions turn out to be incorrect, forward-looking statements based upon those assumptions will not be accurate. Flying Under the Radar Stocks presents information in this report believed to be reliable, but its accuracy cannot be guaranteed. More information can be found at APPG’s website www.apptigo.com. (underline emphasis mine)

I actually like this disclaimer, except for the fact that it is in tiny type, while the proclamation of the investment’s fake virtues are in big type. ?So, I have a simple proposal for the SEC regarding newsletters like this: the type size of any disclaimer must be as large as the the largest type in the document.

This is fair, and consistent with other laws that regulate “the fine print.”

I emailed the CEO of Apptigo to ask him whether he knew about the stock promotions (there are three going on), and whether the company, its major shareholders, or its management was benefiting from the promotion. ?There was no answer, though I wrote to him on Thursday.

Regardless, avoid promoted stocks, dear friends. ?No company of any good reputation pays anyone to promote their stock. ?Avoid promoted stocks.

Social Security Troubles

Posted on 31 July 2014 by David Merkel

We have known for many years that Social Security’s Disability Trust Fund was in far worse ?shape than the Retirement Trust Fund, which is also not in good shape. ?The rolls for?Social Security Disability have risen dramatically since 2009, with many applying for disability amid a time where jobs are hard to find. ?Personally, I think that people should plan for their own possible disability, and it not be something that the government covers.

That said, the disability trust fund will run out of money in 2016. ?The most likely result in my opinion, is that ?the disability trust fund will borrow from the the retirement trust fund, accelerating the insolvency of the retirement trust fund, currently scheduled to?make a change to payments in 2026, when it has only one year of payments left in the trust fund, and will have to pro-rate all payments, so that the payments will be made from existing tax payments plus assets on hand. ?This means that social security retirement and disability payments will be cut by around 27%.

The politics of this is complicated, and I don’t pretend to have an absolute answer to how this will all work out. ?My past dealings with these issues indicate that if the problem can be deferred, it will be deferred. ? Borrowing from the retirement trust fund ruffles few feathers, and allows politicians 10 years or so of breathing room, after whichthey may have resigned or retired.

At some point in the future the following phrase will be common: “You got what you deserved, because you trusted the government.” ?Add in the troubles at Medicare, where the trust fund also will run out before 2020.

If you are relying on Social Security, you are in a bad spot, ?Either taxes will be raised, or benefits will be cut, either across-the-board, or selectively.

This will be a fight, as most other things in our government budget are, and there is no telling how it will turn out. ?There is only one certain thing: if we had dealt with this 25-35 years ago, we would not be in this pickle now. ?Shame on our parents’ generation, and shame on us, if you are over age 35. ?More guilt to those who are older.

Redacted Version of the July 2014 FOMC Statement

Posted on 30 July 2014 by David Merkel

Comments

The two main points of this FOMC statement are: 1) ?The Fed recognizes that inflation has risen, and is likely to persist. 2) ? Despite lower unemployment levels, labor market conditions are still pretty punk.? Much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.? Wage growth is weak also.
Markets don’t move much on the news. ?Really, not a lot here.
Small $10 B/month taper.? Equities and long bonds both rise.? Commodity prices rise.? The FOMC says that any future change to policy is contingent on almost everything.
Don?t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
The FOMC needs to chop the ?dead wood? out of its statement.? Brief communication is clear communication.? If a sentence doesn?t change often, remove it.
In the past I have said, ?When [holding down longer-term rates on the highest-quality debt] doesn?t work, what will they do?? I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.? The Fed is playing with forces bigger than themselves, and it isn?t dawning on them yet.
The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent improvement in labor market indicators, much higher inflation, or a US Dollar crisis.

Book Review: Surveillance Nation

Posted on 30 July 2014 by David Merkel

After I married my wife, I met her cousin and his wife, who was a Marxist. ?Oddly, I found we had a lot of areas of agreement, because we both distrusted the powers that be. ?In the same manner, what does a libertarian like me have to do with liberals like those who write for “The Nation?”

The answer is a lot. ?There is a tendency for the political middle of the US to simply trust the politicians, assuming they are doing good. It is more accurate to assume that they are pursuing the goals of the ek=lite in the US. ? The Wealthy will do well; the rest of us, meh.

We ?need to be concerned about what data the government gathers on us, because it may infringe upon our constitutional rights. ?Personally, I would end the CIA, NSA, and FBI. ?Let chaos pursue us, and after that, let’s figure out what security we need.

I do not trust our government. ?There is too much power, and too little transparency.

As for this book, it was prescient with respect to the US government collecting data on average citizens. ?We live in an era when our actions are no longer private, unless we are rich enough and clever enough to conceal it.

I highly recommend this book. ?It points out the errors of the US government as it aims toward secrecy, when it should disclose the information.

Quibbles

As time goes on the arguments verge from arguing for the common man, to arguing for the different man.

Summary

Many people would benefit from this book. ?It will teach you about how we are all losing our freedom of speech bit-by-bit. ?If you want to, you can buy it here:?Surveillance Nation.

Full disclosure: The PR flack?asked me if I would like a copy and I said ?yes.?

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.

On Learning Compound Interest Math

Posted on 19 July 201420 July 2014 by David Merkel

When I read articles like?this where people get scammed borrowing money, I say to myself, “we need to teach children the compound interest math.”

Even my dear wife does not get it, and she sends the children to me when they don’t get it. ?But beyond learning the math, a healthy skepticism of borrowing needs to be encouraged, especially for depreciating items like autos.

The compound interest math is really one of the more simple items of Algebra 2. ?Everyone should be able to calculate the value of a non-contingent annuity at a given interest rate.

Once people learn that, they might have more skepticism regarding the long-dated pension-like promises that the government makes, because they can look at the future payment stream, and say, “I can’t see how we fund that.”

All for now.

On Current Credit Conditions

Posted on 18 July 201418 July 2014 by David Merkel

This should be short. ?Remember that credit and equity volatility are strongly related.

I am dubious about conditions in the bank loan market because Collateralized Loan Obligations [CLOs] are hot now and there are many that want to take the highest level of risk there. ?I realize that I am usually early on credit?issues, but there are many piling into CLOs, and willing to take the first loss in exchange for a high yield. ?Intermediate-term, this is not a good sign.

Note that corporations take 0n more debt when rates are low. ?They overestimate how much debt they can service, because if rates rise, they are not prepared for the effect on earnings per share, should the cost of the debt reprice.

It’s a different issue, but consider China with all of the bad loans its banks have made. ?They are facing another significant default, and the Chinese Government looks like it will let the default happen. ?That will not likely be true if the solvency of one of their banks is threatened, so keep aware as the risks unfold.

Finally, look at the peace and calm of low implied volatilities of the equity markets. ?It feels like 2006, when parties were willing to sell volatility with abandon because the central banks of our world had everything under control. ?Ah, remember that? ?Maybe it is time to buy volatility when it is cheap. ?Now here is my question to readers: aside from buying long Treasury bonds, what investments can you think of that benefit from rising implied volatility and credit spreads, aside from options and derivatives? ?Leave you answers in the comments or email me.

This will sound weird, but I am not as much worried about government bond rates rising, as I am with credit spreads rising. ?Again, remember, I am likely early here, so don’t go nuts applying my logic.

PS — weakly related, also consider the pervasiveness of BlackRock’s risk control model. ?Dominant risk control models may not truly control risk, because who will they sell to? ?Just another imbalance of which to be wary.

Book Review: The Secret Club that Runs the World

Posted on 15 July 2014 by David Merkel

This is a very good book; I learned a lot as I read it, and you will too.

In this book, Kate Kelly takes on the economic sector?of commodities. ?This involves production, distribution, trading, hedging, and ultimate use.

There are many players trying to profit in many different ways. ?There are hedge funds, commodity trading advisers, investment banks, producers, refiners. ?Some do just one facet of the commodities sector; some do everything.

This book is replete with stories from the run-up in commodity prices, and all of the games that went on. ? It tells of those who made a lot of money, and those that want ?broke working in a very volatile part of the economy.

It is a book that gives a testimony that information is king, and those that understand future supply, demand, and transportation costs can make a great deal of money by buying cheap, transporting, and selling high.

That said, the math can get overly precise versus the real world… the book gives examples of hedging programs that were too clever by half, ending in disaster when prices moved too aggressively.

With hedging, simplicity is beauty. ?But after some success in trading well, companies think that instead of hedging, let trading become a profit center of its own . ?Far from reducing risk, risks rise beyond measure, until the scheme blows up.

The book also considers non-market players like politicians and regulators, and how they are almost always a few steps behind those they regulate. ?A key theme of the book is whether market participants can manipulate prices or not. ?I would invite all market participants to consider my writings on penny stocks. ?Can the price be manipulated? ?Yes. ?For how long? ?Maybe a month or two at best. ?In bigger markets like commodities, I?suspect the ability to manipulate prices is less, because there are more players trading, and the power is equal between buyers and sellers. ?There are powerful parties on both sides seeking their advantage.

The Glencore/Xtsrata merger and Delta Airlines hedging program/buying a refinery occupy a decent amount of the book. ?Glencore/Xstrata illustrates the desire for scale and control in owning production in trading assets in commodities. ?Delta Airlines illustrates the difficulties involve in being a heavy energy user in a cyclical, capital-intensive business that carries a lot of debt. ?It’s too early to tell whether owning their own oil refining operation was the right decision or not, though typically companies do better to specialize, rather than vertically integrate.

One you have read this book, you will have a good top-level view of how the commodities sector operates, and thus I recommend the book.

Quibbles

The book title is vastly overstated. ?There is no secret. ?Just becuse many people don’t know about them doesn’t mean they are secret. ?There is adequate data about them if you look.

There is no club. ?Yes, some move from one position in one firm to a position in another. ?Some even become regulators. ?That is common to most industries.

They don’t run the world. ?At most, they have a weak hold over commodities markets, because the traders have better data on global supply and demand than most large producers and consumers do. ?That information allows them to profit on spreads, but it doesn’t let them move markets.

Summary

Given my quibbles, I thought it was a great book. ?A marketing guy probably wrote the title, so I give the author a pass on that. ?If you want a readable high-level view of the commodities markets, you can get it in this book. ?If you want to, you can buy it here:?The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders.

Full disclosure: The PR flack asked me if I would like a copy and I said “yes.”

Aiming for Transparency

Posted on 12 July 201412 July 2014 by David Merkel

Here’s another letter from a reader:

David,

I’m starting this fund, and I wanted to get your opinion.

?It is best explained on YouTube in 55 seconds: let me know what you think?https://www.youtube.com/watch?v=frwOrQd3f6w. It (hopefully) will provide incentive for transparency in funds.

?Thank you!

Okay, I can’t embed?the short video, so click on the link above and watch it — it is less than a minute, and well-done.

To the writer:

I admire your efforts at providing transparency here, but let me tell you where I think this may have unintended negative consequences.

Anytime you provide total transparency, you invite front-running, if the manager is any good. ?New ideas are often most potent at their beginning, and given the delay between notifying mutual fund shareholders, voting and implementation, critical time is sacrificed, and some of your shareholders may front-run you.

Imagine a person investing the minimum in your fund so that he could front-run your picks with a greater amount of money. ?But even if front-running does not happen, it is generally wise to move rapidly once the manager has come to a decision. ?The delay from?having shareholders vote on it is likely a money-loser. ?Also during times of crisis, the manager may have some of his best ideas, but when average people are scared, will they be willing to pull the trigger? ?I have my doubts.

In general, I favor investment methods where decision-making is done by individuals. ?If I were running a hedge fund, or a large mutual fund, I would delegate all decisions to the sector/industry analysts. ?Let sharp opinions prevail. ?I’ve worked in areas where groupthink muddies investment decisions — it does not lead to outperformance.

Transparency

You don’t need to have shareholders vote on investments to have transparency. ?You could do what I do, because all of my investors have full transparency.

I manage separate accounts using Interactive Brokers. ?We buy and sell as a group. ?We all get the same buy and sell prices. ?I don’t trade often, but any investor can monitor his/her account all day long. ?They can set up a daily download so that they can see what actions have been taken, if any. ?There is total transparency, to the degree that my investors want to make the effort. ?And remember, making investors go through a lot of effort is a negative.

If I Were in Your Shoes

If I wanted to give your investors transparency, I would give them access to a website showing the portfolio in real time, set up in such a way that only they could see it. ?I would not let them vote on investments. ?If you are hiring a manager, let him manage. ?Second-guessing and delay are a waste of time and money.

Now those are my thoughts, and maybe your views on running a democratic fund are important to you. ?Do what you think is best — just remember that democracy is not the same as transparency, and to achieve transparency, democracy is not needed. ?Information is power, and you want to be careful in how you share it.

All that said, I hope you succeed, and that it works out well for you and your shareholders!

June 2014	July 2014	Comments
Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months.	Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter.	This is another overestimate by the FOMC.
Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated.	Labor market conditions improved, with the unemployment rate declining further. However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.	More people working some amount of time, but many discouraged workers, part-time workers, lower paid positions, etc.
Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.	Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow.	No real change
Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.	Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.	No change.? Funny that they don?t call their tapering a ?restraint.?
Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.	Inflation has moved somewhat closer to the Committee’s longer-run objective. Longer-term inflation expectations have remained stable.	Finally notes that inflation has risen.? TIPS are showing slightly higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.60%, up 0.14% from June.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.	No change. Any time they mention the ?statutory mandate,? it is to excuse bad policy.
The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate.	The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate.	Adds in inflation, also changes measure of the labor market to broaden it from ?conditions? to ?indicators,? not that that will help much. They can?t truly affect the labor markets in any effective way.
The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.	The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat.	CPI is at 2.1% now, yoy.? They shade up their view on inflation?s amount and persistence.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.	The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions.	No change.
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month.	In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month.	Reduces the purchase rate by $5 billion each on Treasuries and MBS.? No big deal.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.	The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.	No change
The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.	The Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee’s dual mandate.	No change.? But it has almost no impact on interest rates on the long end, which are rallying into a weakening global economy.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.	The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.	No change. Useless paragraph.
If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.	If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings	No change.? Says that purchases will likely continue to decline if the economy continues to improve.
However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.	However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.	No change.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.	To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate.	No change.
In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.	No change.? Monetary policy is like jazz; we make it up as we go.? Also note that progress can be expected progress ? presumably that means looking at the change in forward expectations for inflation, etc.
The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.	The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.	No change.? Its standards for raising Fed funds are arbitrary.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.	No change.
The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.	The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.	No change.
Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo.	Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.	Plosser dissents.? Finally someone with a little courage.
	Voting against was Charles I. Plosser who objected to the guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for “a considerable time after the asset purchase program ends,” because such language is time dependent and does not reflect the considerable economic progress that has been made toward the Committee’s goals.	Thank you, Mr. Plosser.? The end to easing is coming, but what will happen when it starts to bite?