Public Policy – Page 20 – The Aleph Blog

Sorted Weekly Tweets

Posted on 22 February 2014 by David Merkel

Facebook & WhatsApp

Rags-To-Riches Tale Of How Jan Koum Built WhatsApp Into Facebook’s New $19B Baby http://t.co/bJs6kQrlMx Background on WhatsApp founders $$ Feb 22, 2014
WhatsApp Shows How Phone Carriers Lost Out on $33B http://t.co/3gOutvRDzK Perhaps consortium of telephone companies should have bot them $$ Feb 22, 2014
Whatsapp and $19B http://t.co/TWI44XfTOC Explains why $FB decided 2 get into mobile, & how WhatsApp may benefit their mobile push $$ $GOOG Feb 22, 2014
Zuckerberg Bonded With WhatsApp CEO Over Coffee and Dinners http://t.co/EZAR7rFAsG Promise made to respect the unique culture of WhatsApp $$ Feb 22, 2014
Facebook?s horrible, stroke-of-genius IPO @felixsalmon http://t.co/9HrdWMd0Fo Makes point that overvalued $FB stock can b currency 4deals $$ Feb 22, 2014
How Much Sequoia Made On WhatsApp http://t.co/SzzdcObDXJ The funny part is how Zuckerberg pranked Sequoia 10 yrs ago, & regretted it $$ $FB Feb 22, 2014
Facebook Investors Shrug Off Concerns About $19B Deal http://t.co/AwON4bV9tU also http://t.co/TItg9AIJfI & http://t.co/vgKAI4w1Ye $$ $FB Feb 21, 2014

US Politics & Policy

Companies bracing for 1-2 retirement punch http://t.co/bVBBRV1ytu Unlikely that Obama’s proposals would b enacted; hurts powerful people $$ Feb 22, 2014
White House to Propose New Limits on Overseas Corporate Tax Avoidance http://t.co/Me6p3WFG9U This will be difficult 2 enforce; complexity $$ Feb 22, 2014
Gold Rush Ghost Town Bodes Ill for California Power Flow http://t.co/fpor2Toct2 Interesting article on how the drought is affecting CA $$ Feb 22, 2014
Peggy Noonan: Whose Side Are We On? http://t.co/5l2dofDbpg We can have a “Cold War” vs those who hate democracy & human rights $$ $SPY $TLT Feb 22, 2014
NSA Official Warned About Threat 17 Years Before Snowden http://t.co/8utCDM2eug Warned computer system administrators had too much power $$ Feb 22, 2014
Fannie Mae Payments to US Will Exceed Bailout http://t.co/aT1Z8jlrW0 2 bad, b/c government owns $FNMA & will keep it as a piggy bank $$ Feb 22, 2014
An anti-tech backlash in San Francisco http://t.co/NYsVvWZUu7 Note to politicians: don’t bite the hand that feeds u 2 support malcontents $$ Feb 21, 2014
Good: Bumper profits threaten US ethanol support http://t.co/UVjiGT68Wr Time to free *all* energy sources from subsidies adj 4 pollution $$ Feb 21, 2014
Bottlenecks along the Industrial Revolution http://t.co/pzxGIC8GjL There is $$ 2b made in expanding energy infrastructure in America $$ Feb 21, 2014
CBO Is Right: Minimum Wage Hike Can Kill Jobs http://t.co/hKL64NzpJw Suggests raising the Earned Income Tax Credit, which would add jobs $$ Feb 21, 2014
Obama Keystone Pipeline Review Roiled by Nebraska Judge http://t.co/PiF9q1F4nE Governor & Legislature bypassed Public Services Commission $$ Feb 21, 2014
Obamacare’s Latest Surprise for Taxpayers? http://t.co/zirjEk1cP0 @Asymmetricinfo says Obama Admin may extend risk corridors past 3 years $$ Feb 19, 2014
Detroiters Without Cars Seek Jobs in Vain as City Shrinks http://t.co/x76RJvkgza Cities r organic & they can die, like Detroit. Give up $$ Feb 19, 2014
UAW’s Devastating Defeat at a Tennessee Volkswagen Plant: 4 Blunt Points http://t.co/ISoUdA2WBZ Give workers credit 4 rejecting bad deal $$ Feb 17, 2014

Market Impact

Frontier-Market Funds Pour in Boosted by Fixed Currencies http://t.co/YwDTW6bccU 2 much $$ flowing into immature mkts via ETFs; avoid $$ Feb 22, 2014
Learning From a Literary Legend: The Importance of History http://t.co/7QqQ9dkiZd Argues that 10-year stock returns will b below average $$ Feb 21, 2014
Income As The Outcome: Reframing the 401(k) Plan http://t.co/bEWsAPSuiK Int rates fall, 401(k) bond values rise, but future income falls $$ Feb 21, 2014
Wall Street Bond Dealers Renounce Treasuries That Lure Pimco http://t.co/uPxeIqN5uE This is a mess, &no one knows, but I remain long $TLT $$ Feb 19, 2014
FX Traders Facing Extinction as Computers Replace Humans http://t.co/CDqoLCjqsn True if all u r doing is matching trades not if profiting $$ Feb 19, 2014
Information asymmetry, bad incentives and Taibbi http://t.co/K9M8pI1vQR @izakaminska does an excellent takedown of Tabibi’s recent piece $$ Feb 15, 2014

Rest of the World

Japan Record Trade Gap Shows Risk of Abenomics Losing Steam http://t.co/Lfqgvay6KL High debts, trade deficit due 2 low yen, disaster $$ $FXY Feb 22, 2014
For Chinese, It’s Going to Cost More to Become Canadian http://t.co/OlBMh7ZpFv Pity those that want to escape China 2 Canada w/their loot $$ Feb 22, 2014
Nigeria’s Delta Oil Thieves Scrape Out a Precarious Living http://t.co/VxknSU5t3Q Long piece shows a vignette of the troubles in Nigeria $$ Feb 21, 2014
Foreign Investors Scoop Up New Treasuries Even as Fed Cuts Buying http://t.co/zgPmG1NIQu Weaken your currency. Help exporters. Buy US Tsys $$ Feb 21, 2014
India Hedging at Two-Year High as Polls Shroud Outlook http://t.co/mBfYH1HNky Fears of a minority govt have hedgers buying puts on Nifty $$ Feb 21, 2014
Samsung Investors May Discover World of Possibilities http://t.co/8DsBUYHKDu Pity about Sarbanes-Oxley. Samsung shares used 2 trade in US $$ Feb 21, 2014
Emerging Stocks Rise to Three-Week High on Record China Lending http://t.co/bukIP0bFPA W/China overlending already a problem, not helpful $$ Feb 21, 2014
Invading Switzerland? Try Before 8 or After 5 http://t.co/jgBHUG6m84 The Swiss Air Force likes to have the evenings off. War can wait $$ Feb 21, 2014
UN warns North Korea’s Kim Jong-un w/a strongly worded letter http://t.co/AlwVjivIO4 Few things crueler than making a Mom kill own child $$ Feb 21, 2014
Bank of Japan Surprises Markets http://t.co/BbVlwTMHVR Expands Loan Programs, Keeps Main Policy Unchanged, builds bigger debt bubble $$ $FXY Feb 21, 2014
Japan?s GPIF Should Own $600B of Stocks, Ito Says http://t.co/YCfIvErZfb Angling 4a nomination 2 the coveted “Putting in the top” award $$ Feb 21, 2014
As World’s Kids Get Fatter, Doctors Turn to the Knife http://t.co/VdTVjqXu0j Bariatric surgery on a 3-yo, as parents can’t say no re food $$ Feb 21, 2014
China Fund Shifts Focus Away From Energy to US, European Recovery Plays http://t.co/h10gQrGrEs CIC shifts out of power & into real estate $$ Feb 21, 2014
Japan Growth Figures Disappoint http://t.co/FsFtS5qaA5 GDP Increase Comes in Well Below Expectations, perhaps Abe will think twice $$ Feb 21, 2014
China Overtakes India as Gold Consumer http://t.co/XV9WA5p8sT When your property can b confiscated by gov’t, helpful 2 have gold 2 carry $$ Feb 21, 2014
US to Face G-20 Pressure Over Tapering http://t.co/dLYU5cbqKd If the emerging market nations are properly financed, US $$ policy won’t harm Feb 21, 2014
At Asia Air Show, Plenty of Competition for Sales of Drones http://t.co/UCxNe9jQP9 Many uses 4 drones to monitor areas that r hard 2get2 $$ Feb 21, 2014
Russians Return to Cyprus, a Favorite Tax Haven http://t.co/qxW0YkMqlK But they won’t put $$ is Cypriot banks after losing much of it b4 Feb 21, 2014
Billionaire Niel Trains Geeks to Fix France?s Talent Mismatch http://t.co/3jSO5yXExl Sets up a school in France that teaches programming $$ Feb 21, 2014
Elliott vs Argentina: 3 possible resolutions @felixsalmon http://t.co/LuxIKbslsj Sovereign immunity, pari passu & bondholders? ransom $$ Feb 20, 2014
Europe Mending as Markets Signal Even Portuguese Get Work http://t.co/OwqyCMKeGh Less clear than it seems, but Europe is getting better $$ Feb 20, 2014
Sochi Olympics: Vic Wild, American-Born Snowboarder Competing For Russia, Wins Gold http://t.co/uKlhwCdHP3 Far better he got a good wife $$ Feb 20, 2014
What the Heck Is Going on in Venezuela? (Could the Maduro Regime Fall?) http://t.co/JknNNCQpm6 Yes, it could fall, but what will replace? $$ Feb 19, 2014
China Digs Itself Deeper Into Dollar Trap http://t.co/VXRPJEt5o2 Buying Dollar assets supports the cronies of the party that export $$ $FXI Feb 19, 2014
Asia Has Crisis to Thank for Gains in Emerging Rout http://t.co/JMyYasAild Emerging Asia, minus China, in better shape than 1997-8 $$ $FXI Feb 19, 2014
Swiss Fault Lines Exposed as Villagers See Risk to Postcard Life http://t.co/55NLuUb7er Urban vs rural & the “last settler” syndrome $$ $FXF Feb 17, 2014
Salmond Says Forcing Scotland to Drop Pound to Hurt UK http://t.co/bQEK4xwTfY Seriously doubt UK would giveup the seigniorage if Scots go $$ Feb 17, 2014
A Rebuke to Japanese Nationalism http://t.co/iZfr1gfeYM Japan needs 2 give up any sense that what they did in WWII was honorable $$ Feb 17, 2014
Indonesia Says Australian Defense of Spying Is ?Mind Boggling? http://t.co/ykT06aSaxe My, but Snowden opened many cans of worms w/leaks $$ Feb 17, 2014
Saudis Agree to Provide Syrian Rebels With Mobile Antiaircraft Missiles http://t.co/vRawuKKAgj Proxy war between Wahabis & Shia continues $$ Feb 15, 2014

Financials & Personal Finance

Wall Street Landlords Buy Bad Loans for Cheaper Homes http://t.co/hrf9Ph0RNq Color me skeptical; when investors own homes, mkt overvalued $$ Feb 22, 2014
Energy Holdings Nears Bankruptcy After Creditor Talks Falter http://t.co/MXMolWYXSg They overpaid & the debt was huge, even Buffett lost $$ Feb 22, 2014
Tender Offer for Insurer Divides a Boardroom http://t.co/uaNnWRYPfq $AFG ‘s offer for $NATL is more than generous, just tender yr shares $$ Feb 22, 2014
Putting Your 401(k) on Autopilot http://t.co/Mby8Yf9iQe Would b better if we made plans where employees could buy defined benefit units $$ Feb 22, 2014
The growing case against ETFs http://t.co/dV8fE2563o Makes same point that Jack Bogle & I make, ETFs get traded badly by most investors $$ Feb 22, 2014
Americans Ramp Up Borrowing http://t.co/qApFJ0KESP US Household Debt Posts Largest Quarterly Increase Since Before Recession $$ #seenthisb4 Feb 21, 2014
Has Small-Business Lending Really Improved? http://t.co/NujuTdfGtk Qty available may b high, but yields r steep @ nontraditional lenders $$ Feb 21, 2014
The Current Opportunity Set http://t.co/k1i9NS5nsD Valuation-sensitive mgrs see fewer & fewer places 2 put $$ 2 work, so cash balances grow Feb 21, 2014
These Wells Fargo robbers were also tellers http://t.co/ERo7JVe2X1 Comments, some think if banks r dishonest they should b stolen from $$ Feb 21, 2014
I, Claudius, caller of bank bonds http://t.co/tlXoiypnQV Memo 2 bond investors: if you buy an odd bond, b sure 2 read the prospectus $$ $TLT Feb 15, 2014
When One Spouse Saves and the Other Spends http://t.co/vtJfjX0W8P I do not get how this person can be a financial advice columnist $$ $TLT Feb 17, 2014
Debt-Market Chill May Leave Banks Out in the Cold–Heard on the Street http://t.co/MdpS2KOwSv No January bounceback 2 make up 4 December $$ Feb 15, 2014

Companies & Industries

10-Gbit Google Fiber is already real, just not from $GOOG http://t.co/6d0nEU3ViN $VZ has tested it & others 2, coming 2 biz, not home $$ Feb 22, 2014
Charter Seen Eyeing Cox After Time Warner Loss http://t.co/S2YpktEr5x Cox family is pretty cagey; $CHTR would have 2 pay through the nose $$ Feb 21, 2014
‘Candy Crush Saga’ Maker Files for an IPO http://t.co/TIUYMDKnIE Put King Digital in the “too hard” pile, hard to predict future success $$ Feb 21, 2014
Google to Push Its Fiber Rollout on Comcast’s Turf http://t.co/qStVon4gvq $GOOG experiments, $CMCSA will have hard time competing w/fiber $$ Feb 21, 2014
My Goldman Sachs Post-Traumatic Stress Disorder (And Why I’m Grateful) http://t.co/1cJJpQzreu Toughened her up, made her more cynical $$ Feb 21, 2014
Chevron’s Free Pizza Offer Only Feeds Public’s Distrust http://t.co/xXsFzIgqT4 It was a cheesy way 2 compensate people 4 their troubles $$ Feb 21, 2014
The Coal Plant an Illinois Town Couldn’t Give Away http://t.co/7tMYEXqV8u $AEE pays $DYN to take over a coal plant. Now $DYN wants 2leave $$ Feb 21, 2014
Rarest of Rare Iridium Gains as Growth Spurs Demand http://t.co/2X7P02FFBb Cheaper than gold, Iridium is used in industrial applications $$ Feb 21, 2014
Buffett?s Coca-Cola Complacency Warning Foretells Troubled Year http://t.co/MaoyseiN8O Listen to Buffett, his intuition is sharp $$ Feb 20, 2014
Steve Perlman’s Amazing Wireless Machine Is Finally Here http://t.co/BGpdOactlf If it works, it is a huge increase 4 mobile bandwidth $$ $T Feb 19, 2014
Actavis Agrees to Buy Forest Labs for $25 Billion http://t.co/bv6o4VtRM8 Kudos 2 @Carl_C_Icahn Quite a string of victories $FRX $ACT $IEP $$ Feb 18, 2014

Fed Notes

Fed Puts Rate Increase on the Radar http://t.co/IdvNVpEmDl Move Before 2015 Unlikely, but Minutes Suggest Some Inflation Hawks R Circling $$ Feb 21, 2014
The Key Passages in the Federal Reserve’s Minutes http://t.co/xUpUwu9IZZ Hawks start discussion on when the Fed Funds rate should rise $$ Feb 21, 2014
Yellen Leads Fed Damned Every Way by Emerging Market Angst http://t.co/TApq07VklJ Can’t win b/c developed mkt $$ policy swamps EM policies Feb 21, 2014

US Economics

Worsening US Divorce Rate Points to Improving Economy http://t.co/f5He5DrfuY “We’re finally doing well, honey. Now we can afford2divorce” $$ Feb 21, 2014
Citi’s Economic Surprise Index Hits Zero http://t.co/Z69Vy85Hfi As such, the economy is slowing & bond yields r falling. Who knew? $$ $TLT Feb 21, 2014

Other

‘Downton Abbey’ Is Downright Un-American http://t.co/zGCbFHWzfY If a servant wrote book about how nice her employer was it wouldn’t sell $$ Feb 21, 2014
Go Ahead, Let Your Kids Fail http://t.co/kHSID4NgpT Fail & bounce back -> Kids gain skills & grit @asymmetricinfo is off on her book tour $$ Feb 21, 2014
I Took the GMAT With No Preparation. Here’s What Happened http://t.co/hXwdxNJiub Journalist gets score good enough 2 go 2 biz school $$ Feb 20, 2014
Friedman and Hanke on Bitcoin http://t.co/T4bK693dJ8 But what happens when 1 party gets cheated in a Bitcoin transaction? Caveat emptor? $$ Feb 20, 2014
The Official Forecast of the US Government Never Saw This Winter Coming http://t.co/w3RS18QJJd We don’t understand climate well $$ $TLT $SPY Feb 19, 2014

Wrong

Wrong: In Buffett We Trust as Berkshire Annual Report Lacks Disclosure http://t.co/JP3U63bhnj There is more than adequate info in the 10K $$ Feb 21, 2014
Wrong: Cut Off Harvard to Save America http://t.co/ro9cIOe2ok When u mess w/what is a nonprofit & not, u can’t tell what will b the result $$ Feb 21, 2014
Wrong: Is China at Risk of a Debt Crisis? Not Really,Bank Says http://t.co/erURFnC3g1 China facing domestic banking crisis, like US 2008 $$ Feb 19, 2014

Comments, Replies and Retweets

“From what I glean, Zuckerberg romanced them & told them $FB wouldn’t touch their baby. We’ll see” ? David_Merkel http://t.co/X25hjO1Fxo $$ Feb 20, 2014
“Well said. It is hard for China to give up forced investment and export promotion. It’s economic heroin” Merkel http://t.co/0eH1kgg0lo $$ Feb 19, 2014
Commented on StockTwits: This: http://t.co/D0mIcnLtIP and if I knew Spanish, could have seen it earlier:… http://t.co/lPajNQAc4w Feb 18, 2014

Seigniorage to the People

Posted on 21 February 2014 by David Merkel

Who wants to make the Fed a hero?? And by the agency of the IRS?

This would require a change in the law, because the Fed must remit its profits in excess of what it pays its stockholders to the US Treasury.? What if they remitted the profits to the taxpayers, in proportion to their taxes paid?

Optically, this would look good for the Fed, as their activities would seemingly benefit average Americans.? Practically, there would be little difference, because taxes or borrowing would have to make up the loss to the US Treasury.

All for now, but maybe the Fed should consider what looks good, even if it doesn’t change much.

On Emergent Phenomena

Posted on 20 February 2014 by David Merkel

How do you deal with a risk that has never been seen before?? I’m going to focus on financial risks here, but clever people can generalize to other classes of human risk, like war and terrorism.

By “emergent phenomena” I mean what happens when people act as a group pursuing the same strategy.? One person doing a given strategy means nothing.? But when millions do it, that can be significant.? Same for corporations, but the numbers are lower, because corporations are far bigger economically than the average household.

Here are some examples of emergent phenomena:

1987 — Strategies for dynamic hedging became a large enough part of the market that the market became unstable, where parties would buy as the market rose, and sell as the market fell.
Tech stocks were the only place to be 1998-2000, until they weren’t 2000-2003.
Too much hedge fund money was playing the quantitative value plus momentum trade in 2007.? Many players borrowed money to goose returns in 2006-7.? It blew up in August 2007.
The fear of not getting “free money” caused many to overinvest in residential real estate 2004-7, until the free money was not only not free, but billing you for past indiscretions.
There was a frenzy among commercial real estate investor toward the end of the 1980s, which bid prices up amid more buying power from then-cheap commercial mortgage debt, leading to an overshoot, and fall in property value in the early 1990s.
In 2005, the CDO Correlation Trade led to a panic in the corporate bond market, and in auto stocks.
Into the late 1980s, Japanese households and some foreigners plowed progressively more liquid capital into the Japanese stock and warrant markets.? That was the peak, and few if any have made their money back.

Emergent phenomena stem from:

Many people and institutions doing the same thing at the same time.
Using debt to substitute for equity in a trade that has become a “sure thing.”
Multiple companies and industries pursuing the essentially same trade, but in different corners of the markets.? (Think of the real estate bubble.? There were so many different angles that the bulls played: mortgage insurance, financial guaranty, subprime loans and derivatives thereof, weakened lending standards on prime loans, etc.)
And it is more intense when economic agents borrow short-term to finance their efforts, because when things go wrong, the feedback loop is quick.

Everyone runs to the exits in a burning theater, and so, fewer get out amid the struggle, than if everyone patiently walked out.? In financial terms, this is why markets are more volatile than expected, particularly on the downside.? Too many people want to sell in a panic, after having pursued a well-known strategy that had been successful for quite a while.

But no tree grows to the sky.? The intelligent investor notes several things:

Where is the most new debt being applied, and to increasingly little effect?
What fad are players investing in, that you think can’t be maintained long-run?
What is happening that would not be happening if it were not for price momentum?
Where are players relying on price appreciation or else their levered positions will collapse?
Where is money being borrowed short-term to fund long-term assets?

People are prone to imitate past success, even when a rational person would conclude that it doesn’t make any sense to borrow money and buy an asset at a high price.? It’s easier to imitate than to think independently.

In the present market, I see large increases in government debt and student loans.? Beyond that, there is the income craze in investing.? Don’t look at the yield; look at the underlying business.

Be wary.? The stock market has run hard the last ~5 years, and I see valuation-sensitive investors retreating.? Even with bond rates low, that doesn’t mean stocks are better.

All for now.? Comments welcome.

Why are Pensions so Messed Up

Posted on 18 February 2014 by David Merkel

A few days ago, I was reading Felix Salmon’s piece Pension politics.? (Nice title, the type that Tadas likes — the shorter the better.)? I wrote a short response in the comments, largely agreeing with Felix.? Here it is:

Here are the facts:

1) DB pension funding accounting rules are more liberal than life insurance accounting rules.

2) Pension actuaries have long assumed investment earnings rates well in excess of what can be achieved.

3) Longevity has long been increasing for those that buy annuities, and take pensions.

4) Average people are lousy investment managers, they panic and get greedy at the wrong times. Pension asset managers aren?t great, but they largely avoid panic & greed.

5) The PBGC is horribly underfunded, as are most municipal pension plans.

6) Overseas, things can be bad, like Poland, Argentina, India, etc. In those cases being on your own is better. Our custodial systems here are pretty good. (Please ignore MF Global.)

7) Fees are generally too high in asset management, and most people should go for passive management, or a few clever value investors.

8 ) Hedge funds, commodities, and private equity are not the answer. Analyze the returns on an dollar-weighted [IRR] basis and they will be much lower than the illustrated buy & hold returns.

9) Highly paid workers lose out in bankruptcy. Multi-employer trusts are prone to a run on the pension plan if a major employer goes BK.

10) the average person is at best a budgeter, and not an investor. That said, buying inflation insurance is very expensive, if you can achieve it at all.

Summary: in general, you are right, Felix, but it is a question of cost to the corporations funding the DB plans. I think the cost is worth it, but maybe it needs to be shared with workers, taking pre-tax dollars to buy more future DB plan payments. How many people would do that? Sadly, not many.

Pensions have always been a bit of a compromise.? In order to get employers to create Defined Benefit [DB] pensions, the government allowed for funding methods that were liberal — a plan sponsor wouldn’t have to put in as much at the beginning; it can catch up over time.? More than that, the assumptions that DB pensions could use were far more liberal than what life insurers could use for similar contingencies.? Life insurers had to use best estimates and then add risk margins.? Pensions could dream of returns, with no risk margins.

The 401(k) was an accident.? It was tossed into a much larger bill, and no one noticed.? After passage, some benefits consultants, notably Ted Benna, found ways to use it, creating the boom in Defined Contribution [DC] plans.

Corporations initially added DC plans to their DB plans, but as the 90s ended, and equity performance sank, many terminated their DB plans.? Part of it was the asset markets, but another part of it was aging workforces, because the funding rules were weak (unlike life insurance).? Sponsors realized that they would have to spend a lot more on DB plans in the future than they would otherwise want to.? Now stingy corporations cut back on their DC matches, or accept kickbacks out of investment manager fees.

There are two great virtues in defined benefit plans: 1) Investing is handled by professionals.? 2) Level payments are made.? Most people can budget.? Few can invest.? Yes, there is the problem of inflation, should it occur, but pensioners should have assets outside of their pension to deal with inflation.? They need longevity insurance, so that they avoid outliving their assets.

Though it might be hard managing a fixed income versus uncertain inflation over an uncertain lifespan, it is much harder to manage a lump sum over a full retirement.? When finances are tight, it is much harder to make the right decisions.? Hope biases average investors in favor of taking chances, whether the market favors taking chances or not.

Add in the troubles with defaults of DB plan sponsors, and significant benefits can be lost, particularly if you have been highly paid.

I would want to tell most asset allocators that there is little to no magic in alternative investments.? The alternatives face the same risk factors as ordinary investments, and they are not underinvested by pension investors.

Closing Notes

Sorry, I forgot to blame the IRS for limiting overfunding for tax reasons, when the overfunding was really funding, and would have been useful today.

Even without the introduction of the 401(k), corporations would have cut back on DB pensions because of costs.? A lot of that was due to bad funding methods, but without those bad funding methods, many DB plans would never have been done.

Just be grateful you don’t live in other parts of the world, where governments are more graspy, and pension assets are a target to plug holes in the government deficit.

Sorted Weekly Tweets

Posted on 15 February 2014 by David Merkel

Market Impact

Companies Squeeze 401K Plans From Facebook to JPMorgan http://t.co/2glTizHOjm This should not surprise, many companies shrink labor costs $$ Feb 15, 2014
Wells Fargo edges back into subprime as US mortgage market thaws http://t.co/s8AJCKuzOH Isn’t a problem now, problem comes w/imitators $$ Feb 15, 2014
Homebuyers Get Break as Loan Rates Defy Fed Tapering http://t.co/i7PdmGThdz Housing & general economy weakened, so mortgage rates fell $$ Feb 13, 2014
Pension politics http://t.co/3NaaI61AxM @felixsalmon points out how defined benefit plans r in general better 4 workers. Mind the PBGC $$ Feb 13, 2014
Colleges Raise Record $33.8B Exceeding US Peak in 2009 http://t.co/PRjlMrKM9i Donations always follow creation of unrealized cap gains $$ Feb 12, 2014
Some Lines Say Maybe the Stock Market Will Go Down http://t.co/FdkJdRT9qe @matt_levine correctly criticizes the 1928-9 $SPY graph overlay $$ Feb 13, 2014
1929 Stock Market Crash Chart Is Garbage http://t.co/PyPIulerCH Unequal left & right scales make the relationship look tighter than it is $$ Feb 12, 2014
?When to Ignore the Investment Experts http://t.co/K2vyHgb1gv ?When all the experts &forecasts agree ? something else is going 2 happen.? $$ Feb 11, 2014
Comparing Economic Recoveries http://t.co/5za6QtEFKD In 1984-2006, growth was borrowed from future by increasing debt levels-> #payback $$ Feb 11, 2014
Aluminum Lines Still Trouble the London Metal Exchange http://t.co/f5OyWC5EHC Aluminum inventories will b a prob, til short intrates rise $$ Feb 11, 2014
Top Anecdotal Signs of a Market Bubble http://t.co/MavPhxB6vZ Good piece, like one of mine: http://t.co/bON7nJJFfk Watch the credit cycle $$ Feb 11, 2014
Ten Stocks to Own During a Market Correction http://t.co/RzBdaNf1ff Good list. I own a few of them. $$ Feb 11, 2014
Does trend-chasing explain financial markets? http://t.co/3Mkg4R99dx Partly. Difference between investment IRR and total return is big $$ Feb 10, 2014
?Security. Safety. Stability.? http://t.co/VfKVcGgMRJ from @reformedbroker Gold is useful at certain points, but only when it is hated $$ Feb 10, 2014
Flows Don?t Follow Value, They Follow Performance http://t.co/9oIJ4M7HMo @reformedbroker wrote this little gem. Learn & internalize it $$ Feb 10, 2014
Long Term Charts 2: Western Markets Since The Middle Ages http://t.co/lsBfIot8pi Interesting charts from very messy data at Zero Hedge $$ Feb 10, 2014
Most Expensive Place to Find Out Who You Are http://t.co/szQfeKFZxT @jasonzweigwsj : Your reaction 2 minor crisis shows yr risk tolerance $$ Feb 10, 2014

Companies & Industries

AIG Takes $832 Million Charge on Death Bets as Hedge Funds Gain http://t.co/JmI7hBy9MH Life settlements should b illegal $$ $MET $AIG $PRU Feb 14, 2014
To Stop the Coffee Apocalypse, Starbucks Buys a Farm http://t.co/CPkyVAUnsR $SBUX helps create a variety of rust resistant Arabica trees $$ Feb 13, 2014
Former BlackRock Manager Finds Billions on Rice Energy http://t.co/aBPTo3u4Ky Few investment mgrs have operating talent; Daniel Rice does $$ Feb 13, 2014
Buffett’s Pal Munger Heads a Very Weird Company http://t.co/ztr3XizpKM Growth of $DJCO thru investing leads 2 # of growing pains & 13F $$ Feb 13, 2014
Here?s Why the Biggest Cable Company in the Country Thinks It Can Get Bigger http://t.co/04cdg1J9VP Feds tolerant of cable re antitrust $$ Feb 13, 2014
Why AOL ended up spending millions on ‘distressed babies’ http://t.co/d2lWs8eJit $AOL chose 2b in healthcare biz 4 its employees & lost $$ Feb 13, 2014
3 High-Yielders To Buy On The Pullback http://t.co/8SUBI1M0ut In total $SNH issues more stock than it pays in divs. Divs -> cap losses $$ Feb 13, 2014
Who is John Thompson? A look at Microsoft’s new chairman http://t.co/W7SrXqxtwm May have right stuff to protect new CEO from meddling $$ Feb 10, 2014

US Politics & Policy

Runaway Drones Map Land, Film ‘Wolf,’ Knock Down People, FAA Gives Chase http://t.co/rcTnjug8w1 Drones r here 2 stay; time license them $$ Feb 15, 2014
Teacher Tenure Put to the Test in California Lawsuit http://t.co/XP5fx6HpR3 Tenure has outlived its usefulness; older teachers can b lazy $$ Feb 15, 2014
Lincoln’s Foreign Policy in Today’s World http://t.co/t2RELj7uRB Kept England & France from joining Civil War; otherwise pragmatic $$ $SPY Feb 15, 2014
What Would Lincoln Do? http://t.co/hi6n4Rb8hl A clever man w/principles, who did not cease to be pragmatic pursuing 1 main goal – Union $$ Feb 15, 2014
Harvard Professor Attacking Google Thrives as Web Sheriff http://t.co/g1W7KXH94K At some point, lack of disclosure will blow up on him $$ Feb 14, 2014
The $2.2B Bird-Scorching Solar Project http://t.co/hIYWhJpUwQ Get used 2 idea: almost every form of energy imposes environmental costs $$ Feb 13, 2014
Obamacare Damage-Control Teams Seek to Calm Complaints http://t.co/bPU95rVMxM Things r tough when u r trying to avoid media embarrassment $$ Feb 13, 2014
Billionaire Musk Gets Brownsville to Pay for SpaceX http://t.co/eoAiygs9mq Like a football owner bargaining 2 get taxpayers buy a stadium $$ Feb 13, 2014
Snowden Swiped Password From NSA Coworker http://t.co/1mJ5D6vGH3 & it cost him his job. Snowden denies it; NSA is Not Saying Anything $$ Feb 13, 2014
Puerto Rico Legislators Amend Bill Calling for Bank-Deposit Shift http://t.co/fMaCvMi7ab Provincial govt’s attempt 2raid cookie jar stopd $$ Feb 13, 2014
Obamacare Will, in Fact, Encourage Employers to Cut Jobs http://t.co/D3vaCFHOZY As the employer mandate comes into force, jobs will b cut $$ Feb 12, 2014
Tea Party Scorns Republicans as House Lifts Debt Ceiling http://t.co/fPohsF6Kbi t-party can b “pure” as Dems raise ceiling w/few GOP $$ $TLT Feb 12, 2014
A Lame Duckish Calm Falls Over the Capital http://t.co/u6bG2cg1nL Parties in DC act as if the next event is the November elections $$ $TLT Feb 12, 2014
Obama Rewrites ObamaCare http://t.co/Ym3CtHt3pI Another day, another lawless exemption, once again for business; WSJ bangs populist drum $$ Feb 11, 2014
The US Senate Again Insists on USPS Saturday Mail Delivery http://t.co/YnzmKE5Xrh 2 timid; end Wednesday & Saturday delivery $$ $UPS $FDX Feb 11, 2014
US firms ?paid effective tax rate of 2.2% in 2011? http://t.co/f2T5Qnrhri More than a tax haven, Ireland helps insurers shave reserves $$ Feb 11, 2014
No Honeymoon for Janet Yellen http://t.co/86QPfTcVE0 QE withdrawal will bite, & what will become of all the deposits? $$ Feb 11, 2014
Please Hold Your Bernanke Applause http://t.co/DCKPttFHNU Remember, when Greenspan left, he was viewed as a success, same as BB now $$ $TLT Feb 11, 2014
Sounding the Tax Alarm, to Little Applause http://t.co/r9JQmmaeLB IRS stiffs whistleblowers who often lose employability 4 being a tipper $$ Feb 10, 2014

Rest of the World

Putin is Playing a Game of His Own http://t.co/19Arh0aJOH Not so fast. Russia has significant resources & influence in Eastern H’sphere $$ Feb 15, 2014
Boy?s Life Hanging on 8-Hour Trip Shows Why Venezuelans Protest http://t.co/8G8CgGwGST Socialism is like a cancer that spreads til death $$ Feb 14, 2014
Let’s Watch Venezuela Destroy Itself http://t.co/g1Uy3zk1W3 Logical extreme of Socialism falls apart; pity that Chavez never lived 2c it $$ Feb 14, 2014
Chinese Join Winklevosses in L.A. Luxury Home Hedges http://t.co/TUdw4AItw8 Amazing what the wealthy will pay 4a fancy foreign retreat $$ Feb 14, 2014
Next crisis won?t come from the emerging markets http://t.co/Jei7oKJ8BD Argues France, Germany, Britain, Australia & Canada-> 2 much debt $$ Feb 13, 2014
Mister Donut, Pan Am and Friendster Found Alive and Well http://t.co/vDaGi33cEN Old brands never die, they just move overseas & make $$ $SPY Feb 13, 2014
Bank of England points to 2015 rate rise, blurs guidance http://t.co/AWhyd8GZmd More precision than 1 can know; the world is messy $$ $FXB Feb 13, 2014
Italy Pays Record Low to Sell 3-Year Debt at Auction http://t.co/PWmUhXufjb Let the leverage build for the next crisis $$ Feb 13, 2014
Fink to Mobius Touting Emerging Stocks Fails to Stem Outflow http://t.co/8PFKbOH8Lg A time 2 nibble, not a time 2 gulp $$ $EEM Be wary Feb 13, 2014
Greek Truckers Show Plight as Groceries Show Up Frozen http://t.co/XgAM737A7h Freeing up the labor market will work as attitudes change $$ Feb 13, 2014
Tunisians Bolt Doors Even After New Constitution Passed http://t.co/lBhXz8iqWb Constitutions cannot create cultural change; asks 2 much $$ Feb 13, 2014
Israel Desalination Shows California Not to Fear Drought http://t.co/BFidhnEF7S When resources r tight there are incentives 2 create tech $$ Feb 13, 2014
London Walkie Talkie Owners to Shield Car-Melting Beam http://t.co/76TP0u2tuT Reflective parabolic curve of building melts cars @ a spot $$ Feb 12, 2014
Rouhani Seeks Economic Fix as Iran Commemorates Revolution http://t.co/EDNL5WLOvB Will have to get the agreement of unelected true rulers $$ Feb 11, 2014
Argentina to Replace Bogus Inflation Index to Mend IMF Ties http://t.co/iSzQizrgnF Argentina tries 2 find cheapest way out of this mess $$ Feb 11, 2014
Who Should Pay for Trusts that Go Bust? http://t.co/aOXFbDltCZ If China is smart, protect depositors, but let banks & WMP holders fail $$ Feb 11, 2014
Iceland Girds for Fight as Suit Targets Half $14B GDP http://t.co/hX6M12PZ48 Icelandic taxpayer will refuse the bill; UK will b stiffed $$ Feb 11, 2014
Mobius Says Emerging-Market Rout Near End as Valuations Lure http://t.co/MMLjlAmN49 I dunno, a 4% earnings yield premium seems small $$ $EEM Feb 11, 2014
Rehabilitating Portugal http://t.co/tFy3GnIwRQ Long; Argues that a Greek-style bailout should b done, or Portugal will eventually default $$ Feb 11, 2014
Iranian TV Shows Rare Broadcast of Band Playing Music http://t.co/jTBFNcRsHJ Christianity has always been easier on music than Islam $$ Feb 11, 2014

Work Trends

Sheep-Shearing Wells Fargo Banker Bridges US Income Gap http://t.co/utMe1ekmir Sells coffeemakers too; many in US work multiple jobs $$ $TLT Feb 13, 2014
Workers Shed Caution, in a Healthy Sign for Labor Market http://t.co/zTq0NgbO0f When workers r willing 2 quit, labor mkt is healthy $$ $TLT Feb 11, 2014

Practical

A Little Valentine’s Day Straight Talk http://stks.co/j0I6p Sage counsel 2 younger women if they want to get married: start early $$ Feb 15, 2014
The Sex Question Readers Want Answered Most http://t.co/kRhYIgwI2Z Even Long-Married Happy Couples Ask, ‘How Can We Have Sex More Often?’ $$ Feb 11, 2014
Ten Ways You’re Probably Leaving Money on the Table http://t.co/KkjetkJsp9 Simple list of ways to save money for avg upper-middle class $$ Feb 11, 2014
Why Mom’s Time Is Different From Dad’s Time http://t.co/0Xr4IMsFfs Husbands, u can win if u reduce chaos for your overburdened wives $$ Feb 11, 2014

Other

US Scores Fusion-Power Breakthrough http://t.co/h6wDtXHcVj Bad news is Tritium very expensive @ $100K per gram; takes much energy 2 make $$ Feb 13, 2014
If Ocean Heat Pump Switches On, Expect to Feel It http://t.co/FlsYni5c62 Speculative; we don’t understand climate or hurricanes well $$ Feb 11, 2014
Who is Steven Reisman? Meet Hip-Hop VIPs’ Favorite Lawyer, The Man With The $2 Bills http://t.co/B3v87YDWrt Weird. Very, very weird $$ $SPY Feb 11, 2014
What Really Happened to Flappy Bird? http://t.co/3IiBxSIhYx Beware the success u wish 4? Also: http://t.co/ld6A2XaiKs Still a puzzle $$ $SPY Feb 11, 2014

Wrong, etc.

Skeptical: Blackstone-Fueled Single-Family Home Boom Lifts Chicago http://t.co/sETcWifBGx In past hi levels of investor ownership bearish $$ Feb 15, 2014
Wrong: Pros Panic, Retail Investors Stay Cool on Emerging Markets http://t.co/QXXpOcqKYw Too short a period time to judge $$ Feb 14, 2014
Wrong: Social norms: The indignity of no work http://t.co/6isHJo9fkw New technologies will create new jobs & make the whole world better $$ Feb 13, 2014
Wrong: Warren Buffett is laughing at you for selling http://t.co/S5LFS3jUk5 Poorly thought-out piece glues 2unrelated ideas together $$ $EEM Feb 13, 2014
Wrong: The #1 High-Yield Investment Of America’s Elite http://t.co/FUVyBblQpZ Spammy article that talks about REITs as if they r a secret $$ Feb 11, 2014

Replies, Retweets & Comments

10 miles west of Baltimore, MD, we got ~15 inches of snow over the last last 2 days. #snow #weather #pax $$ Feb 14, 2014
“I made this comment six months ago: http://t.co/a82j8TRxm1… & then, I tipped the SEC. ?” ? David_Merkel http://t.co/gthPe5eQoA $$ $DJCO Feb 13, 2014
“Administrative Services Only” plus individual stop loss protection is in general the smart way2?” ? David_Merkel http://t.co/fPV6fQo1i1 $$ Feb 13, 2014
“This is a common confusion in statistics — you can have a high correlation and a low beta. Second?” ? Merkel http://t.co/sa6PLqEhdU $$ Feb 13, 2014
RT @Pawelmorski: Scary parallel my foot. http://t.co/omyovAKQaX Feb 12, 2014
@davidgaffen that would only be a temporary fix. I wrote this 3.5 yrs ago on the topic: http://t.co/q3lbyELN9d The internet eats USPS Feb 11, 2014
@quakkelaar I miss you too. If you are ever near Baltimore/DC, let me know; we can get together, brother. Last few years have been hard Feb 11, 2014
RT @ReformedBroker: Please explain how the wording of this investment advertisement on the Washington Post site could be legal: http://t.co? Feb 10, 2014
‘ @quakkelaar Hail old friend. Yes, same old mistakes, b/c those wishing to retire are making the money sweat, until it rebels on them $$ Feb 09, 2014

Book Review: “The Up Side of Down”

Posted on 14 February 2014 by David Merkel

Failure. We’ve all experienced it. Can we benefit from it?? The answer is maybe, depending on the costs of failure.

If the costs of failure are high, e.g., repaying debts for the rest of life, people will avoid taking risks.? As a result, society will stagnate, because few take risks.

But if the costs of failure are low, people will take more chances, start more businesses, try experiments that might prove something bold.? That is one great thing about America; the penalties for failure are low.? Some have said we are the land of unlimited second chances.? After resigning from the presidency, Richard Nixon became an influential voice on foreign policy.

Megan McArdle uses her own life and many other societal problems to illustrate how a proper use of failure? can benefit individuals and society as a whole.? Failure is how we learn.? As some have said, “The wise learn from the failures of others, normal people learn from their own failures, but the stupid don’t learn.”

I enjoyed this book a great deal, but I want to point out a few of the chapters that particularly struck me.

In Chapter 8, she described the various ways that ideologues described the causes of the financial crisis.? The Left and the Right chose their own monologues to explain the economic failure that occurred.? The truth was far more banal, as average people bought into a housing mania, with financial institutions more than willing to facilitate it, levered as they were.? When the bull market ended, many people found themselves with too much debt relative to the value of their houses.

Chapter 9 was the one from which I learned the most, as it described a probation method used in Hawaii, that I would describe as the judicial equivalent of spanking.? When one on probation violates a term of probation, he gets sent to a rather grim prison for a short period of time.? Like spanking, it is short, and sharp.? Those on probation get tested randomly and regularly.? Most quickly get the idea that they need to change their lives.? The recidivism rate on this program is low.? Small failures get punished.? Resistance to the system means permanent jail.? No failures means freedom.

But what I really appreciated in the book was the willingness of the author to expose her own life failures — jobs, caring for her mother’s health, bad relationships, etc.? She learned from her mistakes, and ended up with a husband who loves her, a good job, and a home in DC, where there is not much debt on the property.? Well done.

My own life has had its share of failures, and they have all taught me something.? The question to you, reader, is what have you learned from your failures?? Memorialize failures, so that you can avoid them and their cousins in the future.? In that sense you can fail well.

There is not a bad chapter in this book.? I recommend it highly, and you will learn a lot.? I learned a lot.

Quibbles

None.

Who would benefit from this book: Anyone could benefit from this great book.? If you want to, you can buy it here: The Up Side of Down: Why Failing Well Is the Key to Success.

Full disclosure: The PR people offered me a book, and I accepted it.? I am glad that I did.

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.

What to do about Tax Havens?

Posted on 13 February 2014 by David Merkel

I’m not crazy about the idea of wealthy people and corporations avoiding taxes by creating subsidiaries with no economic function in tax havens.? Sometimes I wonder if the budgets could be balanced if we were able to eliminate the tax havens.

So, why not have a meeting of NATO of the G-20, or even the ~~Useless~~ United Nations, and discuss a common strategy of dealing with rogue nations/city-states that invite people and corporations to do business through them in order to avoid taxes.

One strategy could be this: use NATO to blockade these places, and tell them to end their tax-avoidance-facilitation policies, or else.

Now that ‘s a little harsh, but almost all of the tax havens with the exception of Ireland are little places that can’t defend themselves.? But maybe there is an alternative.

The coalition of the willing would go to each of the tax havens, and make a deal with them.? “If you raise your tax rates and definition of income to our levels, we will remit foreign aid to you to partially compensate you for your loss.? Remember, we can use military or economic sanctions against you — think of Iran, or North Korea.”

Why it won’t Happen

The main reason it won’t happen is that wealthy supporters of politicians will complain, and many politicians are wealthy themselves.? Sad, but true, and it will remain so until a significant nation nears default.

Sorted Weekly Tweets

Posted on 8 February 2014 by David Merkel

?Note: this is the 100th weekly edition of sorted weekly tweets.

Market Impact

Standing Out from the Crowd: Measuring Crowding in Quantitative Strategies http://t.co/MRjZ8d8GGL Overinvestment in strategy precedes losses Feb 08, 2014
Does Fair Value Accounting Contribute to Market Price Volatility? An Experimental Approach http://t.co/YQqQPrwMwr Short answer: no $$ $XLF Feb 08, 2014
The Deeper Causes of the Financial Crisis: Mortgages Alone Cannot Explain It http://t.co/0P7fMrQWKn But they were the leading cause $$ $XLF Feb 08, 2014
Contagion Rejected as Biggest Bond Buyers Double Down on Junk http://t.co/5wm1k4Ghlw Makes me think the correction will b another crisis $$ Feb 08, 2014
Hedge Funds Preparing for $1T Property Bill http://t.co/RRQN992uat Key Q: Will they limit their risks prior to the next commercl RE bust? $$ Feb 08, 2014
Apollo Credit Twice Size of LBOs Shows Private-Equity Shift http://t.co/J69eh3TPTn Not a good sign, nonstandard lenders r fragile $$ $APO Feb 07, 2014
Five Pointers on Floating-Rate Funds http://t.co/sV6JtizBlN Don’t chase performance, rates may not rise, nor yields, adds credit risk $$ Feb 05, 2014
Inverse VIX Fund Gets Record Cash on Calm Market Bet http://t.co/YSHGpON0DE Be careful to not hold it long $$ $VXX http://t.co/qGCycKbPsX Feb 05, 2014
World’s cheapest stock markets: Where are shares cheap? http://t.co/3Uvq1HZfSF Gives u a rough idea as 2 where values may b found $$ $SPY Feb 04, 2014
Gundlach Shows Why Betting Against Treasuries Is a Fool?s Game http://t.co/R0s4wQLcbu Interesting that he is in long Tsys $$ FD: + $TLT Feb 03, 2014
Monday?s Selloff, by the Numbers http://t.co/LseNtCUEXz That’s 2 large >2% down days in less than 2 weeks $$ $SPY Feb 03, 2014

Companies & Industries

Big Pizza Chains Use Web to Slice Out Bigger Market Share http://t.co/C6xQeSWmlr Easier 4 large chains 2 implement online ordering $$ $PZZA Feb 08, 2014
SodaStream?s New Mainstream Rivals: Coke and Green Mountain http://t.co/zOkwpBpOiK All the more reason 4 $PEP 2 buy $SODA $$ Feb 07, 2014
Why Discount Airlines Draw Fewer Complaints (Hint: It’s Not Better Service) http://t.co/a8rzqrf0DU Friendlier attitudes r better service $$ Feb 07, 2014
Satyajit Das: The Truth About Bank Earnings http://t.co/9FzkPbbyIm Bank earnings r lower quality; getting harder to increase them $$ $XLF Feb 05, 2014
Experts testify on true cost of Target breach http://t.co/FGVRFBvc6K Magnetic stripes will go away, & chips &/or PINs will appear $$ $TGT Feb 05, 2014
Apple Quietly Builds New Networks http://t.co/bncx84P4RW $AAPL certainly has spare $$ to throw at it, enhancing service quality $NFLX $GOOG Feb 04, 2014
H-P Finds Accounting Errors at Autonomy Unit http://t.co/9cQFBamwpI We knew it was a dumb deal at the time, now $HPQ shows just how dumb $$ Feb 04, 2014
Prophet of No Profit: How Jeff Bezos won the faith of Wall Street. http://t.co/eaZmKgfnir Moats, operating leverage, pricing power $$ $AMZN Feb 01, 2014
Ask Buffett what he would be willing 2pay 4 $AMZN — after all, it has significant moats. I think he would put it in the “too hard” pile $$ Feb 01, 2014

Rest of the World

China, the Death Star of Emerging Markets http://t.co/zFmo0RkXva @williampesek points at financial bubble in China; what will make it pop $$ Feb 08, 2014
Scandal Tests Chinese President’s Standing With Military http://t.co/cHGvLtROFE Corruption is a major issue 4 China, between Party & Army $$ Feb 08, 2014
Saudi Twitter Debate as Citizens Criticize Government http://t.co/quwkxpkHDX Social media allows criticism tht would not b done in public $$ Feb 05, 2014
China Savers? Penchant for Property Magnifies Bust Danger http://t.co/yrfDYQK5KH Anytime a single investment strategy dominates -> worry $$ Feb 05, 2014
Pimco?s Bill Gross Says He Avoids China ?Mystery Meat? http://t.co/My6P5x1jE0 Great phrase as we do not know much about indebted China $$ Feb 05, 2014
Sao Paulo Biggest Water-Supply System May Run Dry Within 45 Days http://t.co/fEcioInfjX Many water systems r near their limits globally $$ Feb 05, 2014
Emerging Stocks Drop to 5-Month Low Led by China as Ruble Gains http://t.co/aWgDSdVBUt Not all emerging mkts r equal, some financed wrong $$ Feb 04, 2014
Japan Sees Worst Developed-Stock Rout as Nikkei 225 Drops http://t.co/UQDhX1a3XL Current mkt reveals weak underlying fundamentals $$ $FXY Feb 04, 2014
Dad Can?t Buy Daughter Shoes as Argentine Currency Falls http://t.co/WTnUn1Okf0 ?Do you know how I feel buying my daughter used shoes?? $$ Feb 04, 2014
Argentina Scrambles To Raise $10B, Avoid Reserve Collapse; BONARs Bidless http://t.co/Xx4t0dFqCk Only hold hard assets in Silverland $$ Feb 04, 2014
EM rout? Or Intervention Sunday? http://t.co/d54Qjj4X2S Difficult to tell what Developed Mkt policymakers will do, they r strapped @ home $$ Feb 04, 2014
Argentina Bust Lures Investors After 200 Years of Defaults http://t.co/YoWjotidcp Invest in the hard stuff, land does not depreciate $$ $IRS Feb 04, 2014
Emerging-Market Rout Seen Enduring on Low Real Rates http://t.co/RTxP6GjMVw Funding structures of some emerging markets fall, $$ goes 2 $TLT Feb 04, 2014
Canadian Oil Rises as California Ships in Record Amount by Rail http://t.co/CKvu4BEqJl Retweet after me: Pipelines r cleaner & safer $$ Feb 04, 2014
Analysis: Emerging markets outlook not rosy, but valuations tempt http://t.co/hADIRvUK5g This may b a time 2nibble, not a time 2gulp $$ $EEM Feb 04, 2014

US Politics & Policy

AOL is leading the way to make 401(k)s worse for everyone http://t.co/AnlQ1Ud6Ds Meh; new employers will compensate workers that lose $$ Feb 08, 2014
‘Six Californias’ plan difficult but doable, assessment shows http://t.co/nuw3S6rLVl Ideas like this come & go in a fragmented California $$ Feb 08, 2014
No, CBO did not say Obamacare will kill 2M jobs http://t.co/RHsSai7rwv Rather, will discourage 2M from working full-time; big deal $$ Feb 08, 2014
Ex-NSA Chief Details Snowden’s Hiring at Agency, Booz Allen http://t.co/EWRuqlViXW Snowden set back US intelligence by 20+ yrs. Good. $$ Feb 06, 2014
The Tyranny and Lethargy of the Times Editorial Page http://t.co/hbW20h6Vjn Inside baseball, picture sums up story http://t.co/USlMTh4Bm0 $$ Feb 05, 2014
Puerto Rico Has Credit Rating Cut One Step 2Junk by S&P http://t.co/4Av3ftwL8q also http://t.co/QkwCnXQdcy Well-deserved, default coming $$ Feb 05, 2014
Going on 30, Living With Mom and Dad http://t.co/Wo4YB74mKo Part is being slow 2 marry, then education, poor career choices, motivation $$ Feb 04, 2014
Crop Insurers Win as Congress is Poised to Pass Farm Law http://t.co/rFNrEDhYkZ If we can’t reduce ag subsidies when ag is healthy… $$ Feb 04, 2014
Obamacare Wonks Flunk Data Analysis http://t.co/Ss2Tc3q2e9 You can show lots of savings if u show your winners & hide your losers $$ $SPY Feb 04, 2014
CBO: Obamacare Will Lead To 2M Fewer Workers In Labor Force By 2017 http://t.co/OsCrQOUORb Unintended consequences; fix this, break that $$ Feb 04, 2014
Fed Presidents Say Stock Decline Unlikely to Derail QE Taper http://t.co/pdoloENc9L In the short-run true, but if the decline persists… $$ Feb 05, 2014
Investment Manager Explains Why 99.5% Of Americans Can Never Win http://t.co/MqngZy7zZW Tax code is cockeyed, wealthy can avoid taxation $$ Feb 04, 2014
How Feds? Double Standard Enables Bad Bankers http://t.co/AGok7eeqdU Simple: little bankers get prosecuted; big banks get fined $$ $BNK $XLF Feb 04, 2014
Early Drive for Hillary Clinton Unsettles Democrats http://t.co/Hb3lJnpnr6 Some Worry It Will Siphon $$ from Candidates in Midterm Elections Feb 04, 2014
You Can Thank or Blame Richard Stanger for Writing 401(k) http://t.co/wX38lGA4m4 Many important laws r accidental; killed DB pensions $$ Feb 04, 2014
ISM Miss Is Ugly All Around http://t.co/Px97nGSccl I’ve been arguing that the economy is weaker than it looks 4 a while; here’s a clue $$ Feb 04, 2014
US Banks Ease Loan Standards in Fed Survey as Demand Rises http://t.co/etkDJPLLhN Can inflation b far behind if this persists? $$ $TLT $TIP Feb 04, 2014
California Dries Up as Brown Pushes $15B Tunnel http://t.co/r4boO9Tzzo If u don’t allocate water economically, becomes a political fight $$ Feb 04, 2014

Other

Financial Blogging: How to Write Powerful Posts That Attract Clients http://t.co/fxmxkLJKbS My longer review: http://t.co/lOqexXT7RO $$ Feb 08, 2014
Why I Did Not Go To Jail http://t.co/4EtyFFyTyg @bhorowitz good read on the importance of proper company, legal, & incentives structure $$ Feb 08, 2014
Daniel Suarez Sees Into the Future http://t.co/kkLkxcmvnv ‘Influx’ may propel sci-fi writer in2 void left by Tom Clancy &Michael Crichton $$ Feb 08, 2014
Why Melted Cheese Does the Trick http://t.co/ZACj1EaWKB Creaminess enhances the textures and flavors of other foods $$ $KFT $DF Feb 06, 2014
Deadly New Bird Flu Strain Spawned by Virus Behind H5N1 http://t.co/b0fLG89fkg This is overblown. People die from the flu each year $$ $SPY Feb 05, 2014
Young Bankers Seek ?Good Yield? With Their Own Nonprofits http://t.co/gJZVwJ5lse Wealthy & powerful like 2b thought benefactors $$ Lk 22:25 Feb 04, 2014
How the Seattle Seahawks solved Peyton Manning http://t.co/0P0kiHnddI Even if u r not into football, interesting 4 understanding strategy $$ Feb 04, 2014
Super Bowl Safety Is Blow for Broncos and Las Vegas Sportsbooks http://t.co/2vXpm4IRbl The odds r interesting to read 4 unusual bets $$ $SPY Feb 04, 2014
Microsoft Adds Momentum to ?Open Science? |http://t.co/Ar6WCDKNug Understand that scientists r not neutral observers; they have 2 publish $$ Feb 04, 2014
Carney leaving CNBC for WSJ?s ?Heard on the Street? |http://t.co/dRNtplkOQB @carney gets a significant promotion! Congrats! $$ $SPY $TLT $GE Feb 01, 2014

Other Economics

Free Checking Is Disappearing Perk http://t.co/pZwsA0u3sl Smaller banks often offer better deals than big banks on checking $$ $XLF $SPY Feb 08, 2014
More Men in Prime Working Ages Don’t Have Jobs http://t.co/YmAjNcQrc5 1 of the qualitative factors that show how punk the economy is $$ $SPY Feb 08, 2014
An International Gold Standard Beats The Rule Of The Governing Elite http://t.co/GoTHUVusXK Old, makes point gold standard was better $$ Feb 05, 2014

Wrong

Wrong: High unemployment putting the ECB in isolation http://t.co/wlBQOP7JqM Loose monetary policy doesn’t lower L-T unemployment $$ #global Feb 08, 2014
Wrong: America The Startup http://t.co/C0Rax7KPJP Worth a read, but the writer does not really understand the Pilgrims or the Puritans $$ Feb 04, 2014

Retweets, Replies, & Comments

@HistoryInPix Cemented the creation of the graphical user interface, buggy in prior versions, aside from pricey Macintosh ghetto Feb 06, 2014
‘ @catofwallstreet the credit cards will have chips, not us- already have these in Europe. Also, consider amillenialism or postmillenialism. Feb 05, 2014
RT @PUMPSandDUMPS: This fan says it all http://t.co/MryfT9l04a #pennystocks Feb 05, 2014
Ice falling, branches too, west of Baltimore — kind of pretty $$ #weather Feb 05, 2014
@DavidSchawel The difference between dollar-weighted & Time-weighted returns is crucial but few get that. Good tweet on $DBLTX $$ Feb 05, 2014
RT @DavidSchawel: Retail psychology: chasing performance, then puking the bottom & missing the bounce-DBLTX Fund assets vs adjusted NAV htt? Feb 05, 2014
RT @cate_long: Cheers! “@carney: Thanks everyone! Very excited to be joining the @wsjheard team! Some details here http://t.co/sjLSyTMIEH Feb 01, 2014
@dpinsen not all, but a majority Feb 01, 2014

You Would Be Better Off Buying McDonalds

Posted on 5 February 2014 by David Merkel

Okay let’s roll the promoted stocks scoreboard:

Ticker	Date of Article	Price @ Article	Price @ 2/4/14	Decline	Annualized	Splits
GTXO	5/27/2008	2.45	0.014	-99.4%	-59.9%
BONZ	10/22/2009	0.35	0.001	-99.6%	-72.4%
BONU	10/22/2009	0.89	0.001	-99.9%	-81.1%
UTOG	3/30/2011	1.55	0.000	-100.0%	-95.0%
OBJE	4/29/2011	116.00	0.200	-99.8%	-89.9%	1:40
LSTG	10/5/2011	1.12	0.017	-98.5%	-83.3%
AERN	10/5/2011	0.0770	0.0001	-99.9%	-94.2%
IRYS	3/15/2012	0.261	0.000	-100.0%	-100.0%	Dead
RCGP	3/22/2012	1.47	0.160	-89.1%	-69.4%
STVF	3/28/2012	3.24	0.500	-84.6%	-63.5%
CRCL	5/1/2012	2.22	0.015	-99.3%	-94.1%
ORYN	5/30/2012	0.93	0.132	-85.8%	-68.6%
BRFH	5/30/2012	1.16	0.440	-62.1%	-43.8%
LUXR	6/12/2012	1.59	0.013	-99.2%	-94.6%
IMSC	7/9/2012	1.5	0.780	-48.0%	-34.0%
DIDG	7/18/2012	0.65	0.038	-94.2%	-84.0%
GRPH	11/30/2012	0.8715	0.108	-87.6%	-83.0%
IMNG	12/4/2012	0.76	0.070	-90.9%	-87.1%
ECAU	1/24/2013	1.42	0.225	-84.2%	-83.3%
DPHS	6/3/2013	0.59	0.007	-98.9%	-99.9%
POLR	6/10/2013	5.75	0.060	-99.0%	-99.9%
NORX	6/11/2013	0.91	0.225	-75.3%	-88.3%
ARTH	7/11/2013	1.24	0.300	-75.8%	-91.7%
NAMG	7/25/2013	0.85	0.230	-72.9%	-91.5%
MDDD	12/9/2013	0.79	1.150	45.6%	1009.0%
TGRO	12/30/2013	1.2	0.350	-70.8%	-100.0%

	2/4/2014		Median	-92.5%	-85.5%

Tonight’s loser-in-waiting is Fresh Healthy Vending [VEND].? But before I go there, let me point you to an article I read today regarding promoted stock scams.

We’ll start with the fact that there is [sic] essentially four kinds of penny stock companies in the Pump & Dump world: (1) the kind where the management is in on the scam and is directly knowledgeable and complicit with the intent to deceive the public; (2) the kind where some poor schmoe has a great idea (at least he thinks it is) that requires financing, and becomes the mark of a parasitic “funder” who makes all kinds of promises of unlimited monies and riches beyond the mark’s wildest dream; (3) the kind where the company is absolutely for real but the shares have been hyped (sometimes hijacked) into ridiculous valuations; and, (4) a hijacked empty and inactive shell.

The following article explains each type of promoted stock scam.? I appreciated it, because it clarified my thinking — I’ve seen all four of these, but I did n’t realize it until now.? My error was looking for one common modus operandi, when there are a variety of parties that can benefit from a stock promotion.

Fresh Healthy Vending fits the first category of promoted stock scams.? Read this portion of the Disclaimer:

The Wall Street Revelator and/or its publisher, Andrew & Lynn Carpenter, dba The Wall Street Revelator has received a total amount of Seventeen thousand five hundred dollars in cash compensation to assist in the writing of this Advertisement, as well as potential future subscription and advertising revenues, the amount of which is not known at this time with respect to the publication of this Advertisement and future publications. Brown Dog Marketing, Inc. paid two million three hundred thousand dollars to marketing vendors to pay for all the costs of creating and distributing this Advertisement, including printing and postage, in an effort to build investor and market awareness.

If successful, the Advertisement will increase investor and market awareness, which may result in increased numbers of shareholders owning and trading the common stock of Fresh Healthy Vending Inc. increased trading volumes, and possibly increased share price of the common stock of Fresh Healthy Vending Inc.

Brown Dog Marketing, Inc. was paid by non-affiliate shareholders who fully intend to sell their shares without notice into this Advertisement/market awareness campaign, including selling into increased volume and share price that may result from this Advertisement/market awareness campaign. The non-affiliate shareholders may also purchase shares without notice at any time before, during or after this Advertisement/market awareness campaign. Non-affiliate shareholders acted-as-advisors to Brown Dog Marketing, Inc. in this Advertisement and market awareness campaign, including providing outside research, materials, and information to outside writers to compile written materials as part of this market awareness campaign.

The bolding is mine.

The scam is rarely this bald.? The type for the disclaimer is 5 or 6 points.? Very tiny, though I have seen smaller.? But why be so plain?? Because few read it, and it immunizes them from any lawsuits.

In this case, one guy owns ~65% of the company, and he got the shares at a very low cost in the reverse merger that converted a “green advertising” company into a company that vends healthy snacks.? He has a history of his own that should raise a yellow flag.? But the rest of the holders that provided financing, have the chance to get out at much higher valuations as a result of the pump and dump going on here.

As a result of the reverse merger, this is a real company, unlike most promoted stocks.? It has real revenues, but still has negative net worth and regular losses.? Why this company has a market cap over $100 million is a mystery to me, aside from the promotional activity over the last few months.? Aside from that, its revenue growth is slowing, and it faces a number of lawsuits over its behavior as a franchisor.

Given trading volumes since the promotions began, it would not surprise me if the selling shareholders are out of their positions in full by now.? It would also not surprise me if this company did a PIPE or a secondary to monetize the gains of the main holder at a lower valuation.

As with all promoted stocks, this is something to stay away from.? On a speculative level, one can never tell where a stock like this will break down, but I can tell you this, it is coming soon, and holders at this price level will lose money.

Differences in US States? Unemployment over the Last 36 Years

Posted on 4 February 20144 February 2014 by David Merkel

I would encourage you to have a read of the 2014 Baltimore Business Review.? Produced by the CFA Institute? — Baltimore, and Towson University, it? is a great example of how academics and practitioners can work together.? Here is my article, reformatted so that it looks better on my blog:

Differences in US States? Unemployment over the Last 36 Years

Unemployment is often treated as a national issue, but unemployment is often driven by regional or industry sector issues. This article pries apart the causes of unemployment since 1976, state-by-state.

Though there is a national component to every US state?s unemployment level, it is notable that local factors often dominate national trends. Here are some examples:

North Dakota has an energy boom amid increasing unemployment following the housing bust in 2008.
Texas had increasing unemployment in the mid-1980s as energy prices fell dramatically, in the midst of an economic boom.
Coastal economies benefited during the housing boom (pre-2008), and were punished in the bust ? this is parallel to the US economy as a whole, but more severe.
The Rust Belt prospered slowly in the early 1980s as the rest of the nation began to prosper rapidly.

The rest of this article will explain the causes of unemployment over the last 36 years, related to how connected a state is to the rest of the US economy, and how well the industry mix in a given state is doing.

Data & Method

Unemployment data for each state and the US as a whole was obtained from the St. Louis Federal Reserve?s Federal Reserve Economic Data (FRED) database. The data covers the period from 1976 to August 2013. Ordinary least squares regression was used to calculate how sensitive unemployment rates were in each state relative to overall US unemployment rates. The equation looks like this:

U_state,t = ?_state + ?_stateU_US,t + ?_state,t

The intuition behind this equation is that the unemployment rate of a given state can be explained by the amount that it varies in proportion to the unemployment rate for the US as a whole (the beta term), a fixed difference (the alpha term), and the error term. Here were the results by State:

State	Alpha	Beta	Alpha SD	Beta SD	R-squared	Alpha T-stat	Beta T-Stat	Correlation Group
Michigan	???? (2.50)	?1.67	??????? 0.25	????? 0.04	81.46%	?????????? (9.98)	???????? 17.82	3
Nevada	???? (2.44)	?1.42	??????? 0.22	????? 0.03	80.77%	???????? (11.22)	???????? 12.80	2
Indiana	???? (2.47)	?1.35	??????? 0.20	????? 0.03	81.90%	???????? (12.42)	???????? 11.63	3
Alabama	???? (1.80)	?1.32	??????? 0.23	????? 0.03	75.95%	?????????? (7.72)	????????? 9.06	6
West Virginia	????? 0.28	?1.24	??????? 0.48	????? 0.07	40.15%	??????????? 0.59*	????????? 3.42	6
Ohio	???? (1.10)	?1.23	??????? 0.17	????? 0.03	83.93%	?????????? (6.49)	????????? 9.21	3
Rhode Island	???? (1.03)	?1.17	??????? 0.26	????? 0.04	65.95%	?????????? (3.88)	????????? 4.33	5
Illinois	???? (0.51)	?1.17	??????? 0.14	????? 0.02	87.48%	?????????? (3.64)	????????? 8.08	3
Tennessee	???? (0.86)	?1.17	??????? 0.15	????? 0.02	85.25%	?????????? (5.65)	????????? 7.29	3
North Carolina	???? (1.44)	?1.14	??????? 0.19	????? 0.03	77.35%	?????????? (7.40)	????????? 4.85	2
Oregon	???? (0.00)	?1.13	??????? 0.17	????? 0.03	80.95%	?????????? (0.03)*	????????? 5.11	3
South Carolina	???? (0.72)	?1.13	??????? 0.18	????? 0.03	79.11%	?????????? (3.94)	????????? 4.69	2
California	????? 0.20	?1.12	??????? 0.18	????? 0.03	79.43%	??????????? 1.14*	????????? 4.61	5
Washington	????? 0.07	?1.09	??????? 0.15	????? 0.02	83.84%	??????????? 0.49*	????????? 3.98	6
Florida	???? (0.53)	?1.07	??????? 0.18	????? 0.03	78.09%	?????????? (2.93)	????????? 2.80	5
Pennsylvania	???? (0.33)	?1.07	??????? 0.14	????? 0.02	85.43%	?????????? (2.40)	????????? 3.52	6
Wisconsin	???? (1.30)	?1.07	??????? 0.17	????? 0.03	78.88%	?????????? (7.49)	????????? 2.57	3
Arizona	???? (0.50)	?1.06	??????? 0.18	????? 0.03	77.62%	?????????? (2.81)	????????? 2.28	2
Kentucky	????? 0.20	?1.05	??????? 0.20	????? 0.03	72.97%	??????????? 1.00*	????????? 1.56*	3
New Jersey	???? (0.10)	?1.01	??????? 0.21	????? 0.03	68.87%	?????????? (0.47)*	????????? 0.32*	5
Mississippi	????? 1.57	?0.99	??????? 0.27	????? 0.04	57.37%	??????????? 5.86	???????? (0.29)*	3
Missouri	???? (0.28)	?0.97	??????? 0.12	????? 0.02	86.47%	?????????? (2.35)	???????? (1.54)*	4
Georgia	???? (0.22)	?0.96	??????? 0.16	????? 0.02	78.07%	?????????? (1.37)*	???????? (1.81)*	2
Delaware	???? (0.83)	?0.95	??????? 0.20	????? 0.03	67.93%	?????????? (4.05)	???????? (1.73)*	1
Connecticut	???? (0.41)	?0.91	??????? 0.23	????? 0.03	61.44%	?????????? (1.80)*	???????? (2.79)	5
Utah	???? (0.60)	?0.88	??????? 0.15	????? 0.02	76.69%	?????????? (3.91)	???????? (5.13)	3
Idaho	????? 0.36	?0.88	??????? 0.20	????? 0.03	65.13%	??????????? 1.77*	???????? (4.09)	6
Colorado	???? (0.01)	?0.87	??????? 0.17	????? 0.03	71.86%	?????????? (0.04)*	???????? (5.06)	4
Maine	????? 0.31	?0.87	??????? 0.19	????? 0.03	66.45%	??????????? 1.61*	???????? (4.49)	1
Massachusetts	????? 0.17	?0.86	??????? 0.24	????? 0.04	55.28%	??????????? 0.72*	???????? (3.94)	5
Minnesota	???? (0.29)	?0.82	??????? 0.12	????? 0.02	82.17%	?????????? (2.43)	???????? (9.78)	3
District of Columbia	????? 2.45	?0.81	??????? 0.18	????? 0.03	66.11%	????????? 13.40	???????? (6.86)	1
New York	????? 1.48	?0.81	??????? 0.18	????? 0.03	67.90%	??????????? 8.45	???????? (7.28)	1
Arkansas	????? 1.46	?0.79	??????? 0.18	????? 0.03	66.27%	??????????? 8.23	???????? (7.87)	6
Virginia	???? (0.30)	?0.78	??????? 0.08	????? 0.01	90.79%	?????????? (3.84)	??????? (18.90)	1
Maryland	????? 0.31	?0.78	??????? 0.12	????? 0.02	81.92%	??????????? 2.66	??????? (12.83)	1
Iowa	???? (0.17)	?0.77	??????? 0.19	????? 0.03	61.15%	?????????? (0.86)*	???????? (7.98)	3
Vermont	????? 0.06	?0.74	??????? 0.19	????? 0.03	60.28%	??????????? 0.34*	???????? (9.04)	1
Louisiana	????? 2.45	?0.73	??????? 0.38	????? 0.06	26.41%	??????????? 6.40	???????? (4.69)	6
New Hampshire	????? 0.12	?0.68	??????? 0.20	????? 0.03	52.48%	??????????? 0.60*	??????? (10.73)	1
New Mexico	????? 2.67	?0.64	??????? 0.21	????? 0.03	48.44%	????????? 12.78	??????? (11.36)	6
Montana	????? 1.84	?0.61	??????? 0.21	????? 0.03	45.25%	??????????? 8.65	??????? (12.16)	6
Oklahoma	????? 1.49	?0.59	??????? 0.22	????? 0.03	41.23%	??????????? 6.70	??????? (12.25)	3
Wyoming	????? 1.48	?0.56	??????? 0.29	????? 0.04	26.35%	??????????? 5.08	??????? (10.17)	3
Alaska	????? 4.52	?0.53	??????? 0.28	????? 0.04	25.87%	????????? 16.05	??????? (11.13)	6
Hawaii	????? 1.46	?0.52	??????? 0.27	????? 0.04	27.58%	??????????? 5.52	??????? (12.07)	1
Texas	????? 2.89	?0.52	??????? 0.19	????? 0.03	41.71%	????????? 15.10	??????? (16.90)	4
Kansas	????? 1.68	?0.48	??????? 0.13	????? 0.02	55.86%	????????? 12.53	??????? (25.79)	4
Nebraska	????? 0.61	?0.46	??????? 0.13	????? 0.02	54.10%	??????????? 4.62	??????? (27.48)	3
South Dakota	????? 0.95	?0.45	??????? 0.11	????? 0.02	63.95%	??????????? 8.93	??????? (34.82)	3
North Dakota	????? 1.49	?0.39	??????? 0.18	????? 0.03	31.54%	??????????? 8.14	??????? (22.19)	6

* Indicates not statistically significant from zero for alpha, and one for beta at a 5% level.

The difference in sensitivity to the US unemployment rate is considerable by state. If the unemployment rate rose 1% in the US, Michigan?s unemployment rate would tend to rise 1.67%, while the North Dakota?s unemployment rate would only tend to rise 0.39%.

The states were then divided into five beta groups, symmetric around 1.0, with a width of 0.2 for the three middle groups. On a map, it looks like this:

The highest sensitivity states to US unemployment rates are largely found in states with high exposure to the Auto and Gambling industries. When times are bad, people shepherd their money more carefully. They cut back on buying new cars, and gambling. High sensitivity states tend to have a lot of gearing to industrial activity, which tends to be more boom-bust than other economic activity. Average sensitivity states tend to have balanced economies, reflecting a mix of business similar to that of the US as a whole. Low-sensitivity states tend to have a large amount agriculture, resource extraction, financial sector concentration, or Federal government work.

Note that the recent boom and bust would argue that financials are more cyclical than previously believed, but that was during a small period during the study period.? The same applies in reverse to agriculture and resource extraction, which benefited from increased demand for raw materials from the developing world, making these industries appear less cyclical than previously believed.

Betas reflect the overall sensitivity to moves in US unemployment rates from 1976 to 2013, but the correlation of the residuals of the states highlight hidden factors that were influential in unemployment rate movements.

Typically, the factors stemmed from the economic sectors prominent in each group of states, as their profitability waxed and waned.

Starting with ten groups of states randomly divided, the groups were iteratively adjusted, combining groups that were highly correlated with each other until there were no more improvements possible, ending with six groups. Here is the average correlation matrix:

Avg Corr	1	2	3	4	5	6
Group 1	40%
Group 2	-4%	43%
Group 3	-34%	-15%	43%
Group 4	-37%	12%	24%	36%
Group 5	41%	26%	-51%	-22%	61%
Group 6	-14%	-43%	30%	-5%	-46%	50%

And here is the map identifying the groups:

Groups 1, 2 and 5 correlate strongly internally and moderately among each other. The same is true for 3, 4 and 6. The rest of the group correlations are weak if not negative.

Groups 3, 4, and 6 cover the center of the US. They have proportionately more economic sectors in agriculture, energy, consumer cyclicals, and basic materials.? Much of the area is rural. Groups 1, 2 and 5 cover the coasts of the US and are more heavily urbanized. Their economic sectors have a greater proportion of finance, healthcare, and technology.? Post-2007 unemployment was relatively worse in groups 1, 2 and 5 versus the other groups, because they were part of the hot housing markets, and lost more construction jobs as a result.

Here is a graph of the average unemployment residuals for the six correlation groups over the 36-year study period:

Description of the Correlation Groups

Group 1 ? composed of Maryland, other Mid-Atlantic States, New England and Hawaii, this ? had high unemployment relative to the rest of the US in 1976 and 1997, and low unemployment in 1987. It has high relative exposure to the consumer noncyclicals and financials sectors, and low relative exposure to energy and technology. The high weight in financials helps explain the employment gains from 1976 to 1987, as financial companies benefited from falling interest rates, rising equity markets, and expanding product offerings.

Group 2 ? composed of the Carolinas, Georgia, Arizona and Nevada ? had high unemployment relative to the rest of the US in 2011, and low unemployment in 1984 and 1991. It has a lot of relative exposure to the consumer noncyclicals and utilities sectors, and low relative exposure to energy, financials, and technology.? During the mid-1980s to early 1990s, this group benefited from the growth in demand for noncyclical goods from the Baby Boomers. After the popping of the financial bubble in 2008, weakness in construction and gambling in Arizona and Nevada led to higher levels of unemployment.

Group 3 ? composed of the Midwest, parts of the South, Utah and Oregon ? had high unemployment relative to the rest of the US in 1976 and 1992, and low unemployment in 1986. It has high relative exposure to the consumer cyclicals and noncyclicals and basic materials sectors, and low relative exposure to energy and technology. The US economy as a whole peaked and troughed along with group 3, which makes sense given their relatively large exposure to cyclical sectors.

Group 4 ? composed of Texas, Missouri, Kansas and Colorado ? had high unemployment relative to the rest of the rest of the US in 1987 and 2003, and low unemployment in 1976. It has a lot of relative exposure to the energy and utilities sectors, and low relative exposure to financials and technology. Performance of the energy sector is the critical factor here ? it was relatively strong in the mid-to late 1970s, but weak after oil prices bottomed out in the mid-1980s and late 1990s.

Group 5 ? composed of the densely populated coastal states of California, Florida, New Jersey, Massachusetts, Connecticut and Rhode Island ? had high unemployment relative to the rest of the rest of the US in 1976, 1992 and 2012, and low unemployment in 1986. It has a lot of relative exposure to the healthcare and technology sectors, and low relative exposure to energy and consumer noncyclicals. In the early 1990s, the aerospace industry in California went bust while the commercial property markets were at the deepest point of their slump. Most of the rest of the unemployment cyclicality can be attributed to the more cyclical nature of the industries in this group ? an amplified version of the US economy.

Group 6 looks like a bunch of leftovers, but it is not.? Composed of states in the Northwest and Alaska, New Mexico, Louisiana, Arkansas and Alabama, West Virginia and Pennsylvania, this group had high unemployment relative to the rest of the rest of the US in 1987, and low unemployment in 1976 and 2009.? It has a lot of relative exposure to the agriculture and basic materials sectors, and low relative exposure to financials. The stagflation of the mid-1970s benefited agriculture and basic materials, as did growth in demand from emerging markets in 2009. Those factors were
absent in 1987, as financial firms were booming.

Maryland?s unemployment rates have held down well being next to Washington, DC. The growth in the US government during the last 10 years has supported employment in Maryland. The grand question to ponder is what would ever happen to Maryland, Washington, DC and Virginia if significant cuts were made to Federal payrolls?

Conclusion

There are two main conclusions:

1) State level unemployment is a result of sensitivity to US unemployment levels and the mix of local industries. Policymakers should know how sensitive their state is to the national economy, and what industries are doing well or poorly before taking credit for low unemployment rates. More often than not, the employment rates are low or high due to factors beyond the control of policymakers.

2) In general, greater employment stability exists when that industry mix is more diversified. This is something policymakers can limitedly affect. Most states have efforts to attract businesses to their states. If you want unemployment levels to be more stable, aim your efforts at attracting businesses that diversify your existing mix.