Category: Real Estate and Mortgages

Classic: Know Your Debt Crises: This Too Shall Pass

Classic: Know Your Debt Crises: This Too Shall Pass

Posted on by David Merkel

The following was published at RealMoney on August 6th, 2007:

Editor?s Summary

The illiquid debt instruments at the heart of the current crisis are subject to regime shifts.

  • ?We?re in a periodic repricing of illiquid debt instruments.
  • Look for the time when the bulk of the losses will be reconciled.
  • Stick with the companies that have strong balance sheets.

I appreciated Cramer’s piece Friday morning, which picks up on many themes that I have articulated for the last four years here on RealMoney.? Here are a few:

  • Hedge fund-of-funds demand smooth returns that are higher than that which a moderate quality short-term fixed-income fund can deliver.
  • This leads to the creation of hedge funds that seek yield through arbitrage strategies.
  • And the creation of hedge funds that seek yield through buying risky debts, unlevered.
  • And the creation of hedge funds that seek yield through buying less risky debts, levered.
  • And the creation of hedge funds that seek yield through buying risky debts, levered.

In the short run, yield-seeking strategies work.? If a lot of players pursue them, they work extra-well for a time, as late entrants to the trade push up the returns for early entrants, with greater demand for scarce, illiquid securities with extra yield.? Pricing grids are a necessity for such securities, because the individual securities don’t have liquid secondary markets.? The pressure of demand raises the value not only of the securities being bought, but also of those securities that are like them.? (Smart managers begin to exit then.)

I’ve been through regime shifts in the markets for collateralized debt obligations (CDOs), asset-backed securities (ABS), residential-backed securities (RMBS) and commercial mortgage-backed securities (CMBS).? Something shifts at the back of the chain that forces everything to reprice.? For example:

1989-1994: After the real estate boom of the mid-1980s, many banks, savings & loans and insurance companies get loose in their lending standards and real estate investment, leading to a crisis when rent growth can?t keep up with financing terms; defaults ensue, killing off a great number of S&Ls, some major insurance companies and a passel of medium and small banks.

Late 1991-early 1993: The adjustable-rate mortgage market, fueled by demand from ARM funds, overbids for ARMs in an effort to provide a high floating rate yield.? As the FOMC loosens monetary policy, higher than expected prepayments force losses onto the ARM funds

Late 1993-late 1994: The FOMC threatens to, and does, start raising interest rates, which throws the residential mortgage-backed market into crisis.

Mid-1998-mid-1999: Long Term Capital Management blows up, forcing all manner of exotic ABS, CMBS and RMBS into the market for bids.? The bids back up, until the entire market reprices and then tightens in the space of one year.

1998-1999: Home equity ABS blow up, as defaults threaten to, and then do, emerge at levels far higher than anticipated.? Almost no originators survive.

1999-2001: Cruddy high-yield bonds reveal their true value as defaults threaten to, and then do, emerge.

2002-2003: The manufactured-housing ABS market blows up, as originators don?t take initial losses but roll borrowers over into new loans that reduce payments and extend payment terms, technically keeping the loans current.? The system collapses when the buildup of bad debts and repossessed homes becomes too great to roll over.

(Of the existing large securitization markets, only the CMBS market so far has not faced a real crisis, partly due to the influence of the B-piece buyers cartel: six or so firms that buy the junk-rated debt of deals and enforce credit quality standards on the individual loans by kicking out poorly underwritten loans.? But who knows?? Even that could be overwhelmed under the right circumstances.)

In each of these situations, there was a boom-bust cycle.? The markets did not adjust slowly and evenly to changing conditions; the transitions between ?boom? pricing, and ?bust? pricing were swift.? This is the nature of markets, particularly when enough debt is employed to amplify the process.

There is no conspiracy necessary to make the shift happen (though often the media will make it seem like there was one); the bubble pops when the financing proves insufficient to carry the assets.? After the bubble pops, it becomes a question of what the underlying assets can be liquidated for, allocating losses mercilessly according to the loan documents and bankruptcy priority.

Today the crises are nonprime lending, leveraged buyouts and other high-yield debt and over-leverage in the CDO market.? These will get worked out, as all other crises do, handing losses to those who speculated unwisely and allowing those who financed properly to prosper on the other side of the crisis.

As you invest, look for the time when more than half of the losses will be reconciled.? That will be near the bottom for homebuilders and housing finance.

That time may not come for another two years or so, but there will be money to be made once the crisis is mostly reconciled.? Just stick with the companies that have strong balance sheets.

Redacted Version of the March 2014 FOMC Statement

Redacted Version of the March 2014 FOMC Statement

Posted on by David Merkel
January 2014 March 2014 Comments
Information received since the Federal Open Market Committee met in December indicates that growth in economic activity picked up in recent quarters. Information received since the Federal Open Market Committee met in January indicates that growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions. Weather is always a weak reason for a bad result.? You almost never see anyone claim good weather boosted results.
Labor market indicators were mixed but on balance showed further improvement. The unemployment rate declined but remains elevated. Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. No significant change.
Household spending and business fixed investment advanced more quickly in recent months, while the recovery in the housing sector slowed somewhat. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. No significant 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 been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable. No change.? TIPS are showing slightly lower inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.56%, up 0.02% from January.
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 the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. 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. Unemploys the concept of the Unemployment rate as the sole measure of labor conditions.? Maybe aggregate wages would be better.
The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. No significant change.
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 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. No change.? CPI is at 1.1% now, yoy.
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. Drops the language on fiscal retrenchment.? Continued overestimate of economy and labor conditions.
In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 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 April, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $25 billion per month rather than $30 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $30 billion per month rather than $35 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 little 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 will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. 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.
The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.   Drops the contentious sentence locking themselves into a policy.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional 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. 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 well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. 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. Makes its standards for raising Fed funds more 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. New sentence.? Says loose policy will stay longer than needed.
  With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance. The change in the Committee’s guidance does not indicate any change in the Committee’s policy intentions as set forth in its recent statements. New sentence.? Says loose policy will stay longer than needed.? Also, disregard any change in policy that you might have seen here.? We still felt the need to change the statement, but really, nothing has changed.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Richard W. Fisher; Narayana Kocherlakota; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen.

 

 Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Richard W. Fisher; Sandra Pianalto; Charles I. Plosser; Jerome H. Powell; Jeremy C. Stein; and Daniel K. Tarullo.

 

 Bernanke is gone.? Good.? Yellen is Chair. Bad.
  Voting against the action was Narayana Kocherlakota, who supported the sixth paragraph, but believed the fifth paragraph weakens the credibility of the Committee’s commitment to return inflation to the 2 percent target from below and fosters policy uncertainty that hinders economic activity. This is perhaps the lamest vote against an FOMC decision that I have ever seen.? The differences between the fifth and sixth paragraphs are minuscule.

?

Comments

  • Small $10 B/month taper.? Equities, commodities, and long bonds both fall.? The FOMC says that any future change to policy is contingent on almost everything.
  • They have an optimistic view of the economy, especially on labor.? At least they are abandoning the unemployment rate as their measure of labor conditions.
  • They missed a real opportunity to simplify the statement.? More words obfuscate, they do not clarify.
  • Current proposed policy is an exercise in wishful thinking.? Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • 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, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
  • GDP growth is not improving much if at all, and much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.
Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on by David Merkel

Bitcoin

 

  • Mt Gox: The brief reign of bitcoin’s top exchange?http://t.co/9jSwvxrzOJ?What happens when u neglect basic acctg & programming controls?Mar 01, 2014
  • Bitcoin Exchange Mt. Gox Files for Bankruptcy Protection?http://t.co/aobpHTmsYi?B wary of opaque transaction systems, clever may steal $$?Mar 01, 2014
  • Where Did the Bitcoins Go? The Mt. Gox Shutdown, Explained?http://t.co/0OkksL8TPG?Currencies can’t exist apart from legal systems $$ $BTCUSD?Feb 26, 2014
  • The Bitcoin Collective Delusion?http://t.co/t51GGmuWbw?Inevitable that gov’ts get involved in currencies & trade 4 punishment of fraud $$?Feb 26, 2014

 

Companies & Industries

 

  • Wall Street Hates JPMorgan Fee 4 $1T Junk Loans?http://t.co/laoAXelOIr?It is a private market; if the distortions r bad enuf, biz will leave?Mar 01, 2014
  • Line Builds $15B Value With Teddy Bears, Wicked Witches?http://t.co/ccGFjIVQsQ?Freemium model applied to Asian messaging, watch 4 IPO?Mar 01, 2014
  • Old Mutual Plans IPO of US Unit After Profit Increases?http://t.co/a28VUvS23r?The final reconciliation of a decade-plus of mis-investment $$?Feb 28, 2014
  • Oil Giants Sell Pipelines as Shale Strength Drives Deals?http://t.co/OBVZ66Tm5y?They expect oil prices 2rise as they c cheap oil scarcity $$?Feb 28, 2014
  • Dream of US Oil Independence Slams Against Shale Costs?http://t.co/eFRnOdt0aX?If debt funds a large part of drilling, time 2b nervous $$?Feb 28, 2014
  • $MSFT ‘s Culture Is Like ‘ $IBM Circa 1990,’ New Chairman Says?http://t.co/gzy5NzCaAX?Use MSFT Office/Windows Cash Cow 2build new biz $$?Feb 27, 2014
  • What is ‘Forbes’ worth??http://t.co/mHpDgpfkpi?The Internet chgs everything; formerly important publications get digitally hollowed out $$?Feb 26, 2014
  • Rolls-Royce Drone Ships Challenge $375B Industry?http://t.co/CCC9L0rynT?Problems here r considerable- control in bad weather, piracy, etc $$?Feb 26, 2014
  • US Issues Emergency Testing Order To Crude Oil Rail Shippers?http://t.co/bU5AuY7Ixd?Reasonable precautions 4 general safety $$ $UNP $CSX?Feb 26, 2014
  • Japan Post Prepares for IPO?http://t.co/yE7k137VjT?Lotsa assets, but the Q is what can be done w/them. Fuzzy situation w/no hurry $$ $EWJ?Feb 26, 2014
  • Zuckerberg Dines With Phone Frenemies Fretting Over Profits?http://t.co/NMga2US13J?Monet 2b made in solving mobile payments problem $$ $FB?Feb 26, 2014
  • Rising Premiums May Hit Small Firms?http://t.co/nBA1wjigHP?The lies told by the administration regarding cost control r astounding $$?Feb 26, 2014
  • Saudi?s Allure Undimmed for Bechtel to DaVita Amid Fallout?http://t.co/ikppxlukf3?Someone has 2 buy from the US; $DTA helps w/diabetes $$?Feb 26, 2014
  • $BAC Reaches Deal With Buffett on Preferred Stake?http://t.co/bLpgqOMJzT?Buffett gets better call protection, divs can b waived in crisis $$?Feb 26, 2014
  • Woes of Megacity Driving Signal Dawn of ?Peak Car? Era?http://t.co/npHTO6NtcJ?It may take ~10 yrs, this will right itself, w/fewer cars $$?Feb 26, 2014
  • Google Buses Fuel Inequality Debate as Boom Inflates Rents?http://t.co/CaQ4msqBnW?I f you can’t afford living in San Francisco, move out $$?Feb 26, 2014
  • How ARM Holdings Dominates the Chip World?http://t.co/CCFJDitgh1?$ARMH vs $INTC – 2 clever approaches that r utterly different. Who wins? $$?Feb 26, 2014
  • Health Law Already Has Impact on Bottom Lines?http://t.co/o4k5u6uWgB?Fitting that health insurers r getting hosed 4 cooperating w/Obama $$?Feb 26, 2014
  • Repsol Agrees to $5B Deal W/Argentina on $YPF?http://t.co/piwKwxqS70?$REP decides half a loaf is better than none, nondefaultable bonds $$?Feb 26, 2014

Rest of the World

?

  • China’s Yuan Slides Against US Dollar?http://t.co/VLBVTrLPEf?The Yuan is still a rigged market, we need 2c it float to ascertain value $$?Mar 01, 2014
  • Bulgaria?s Currency Board versus Ukraine?s Chaos?http://t.co/w1lAYExWuF?A currency that is anchored leads 2 better results in many ways $$?Feb 28, 2014
  • China’s Central Bank Engineered Yuan’s Decline?http://t.co/WmwpCa0H4L?It remains 2b seen where the yuan will trade when it freely floats $$?Feb 28, 2014
  • War Crimes Evident in South Sudan, Human Rights Watch Says?http://t.co/1AfsvPMYmG?Easiest way 2 call off dogs of war is not 2 loose them $$?Feb 27, 2014
  • Abe?s Southeast Asia Push Adds to US Ties Amid China Rift?http://t.co/3BDgdNznN4?Example of entangling alliances: Will US defend Asia? $$?Feb 26, 2014
  • Ortega?s Zara Fashions Tax Avoidance by Shifting Profits to Alps?http://t.co/RGBMJ4Xmzc?Govts have an interest in unifying tax policy $$?Feb 26, 2014
  • Crisis Gauge Rises to Record High as Swaps Avoided?http://t.co/hLKrltiEVk?Chinese corp spreads widening, same for their TED spread $$ $FXI?Feb 26, 2014
  • Investors Mount Attack on Norway in $20B Oil, Gas Row?http://t.co/VOPMQgMZKE?Norway becomes less predictable, may chase developers away $$?Feb 26, 2014
  • Ukraine Pledges to Protect Deposits as Kiev Rally Called?http://t.co/iMGsdLODA2?Must ring hollow in Cyprus as EU moves 2 support Ukraine $$?Feb 26, 2014

?

US Politics & Policy

 

  • How ADA, a Chemical Used in Rubber, Got Into 500 Food Products?http://t.co/moZqNNco85?Just because it’s not natural doesn’t mean it’s bad $$?Mar 01, 2014
  • Federal audit calls new school lunch rules a failure?http://t.co/RyEd0JpP7j?Missing middle ground where kids get yummy nutritious food $$?Mar 01, 2014
  • Study Finds SEC Staff Sold Shares B4 Cases Made Public?http://t.co/8xRzyCfIgx?SEC staffers don’t know what 2 buy, they know what 2 sell $$?Feb 28, 2014
  • GOP Targets Hillary Clinton With Obamacare Attacks?http://t.co/QKlHYwHUeG?It is fair to ask her what she would do differently than Obama $$?Feb 27, 2014
  • Here’s How Much People Are Actually Paying for Health Insurance?http://t.co/AeC4xs3y2d?Interesting, not sure what to make of it $$?Feb 27, 2014
  • Busted State Obamacare Websites Haven?t Caught Up to Healthcare gov?http://t.co/LLee1ovP2y?OR, MA & OR r worse than Fed’l website 4 PPACA $$?Feb 27, 2014
  • What Does Eric Schneiderman Know That the Rest of Us Don’t??http://t.co/aI4Crec3EZ?Oversteps his bounds, but gets sellside firms 2 stop $$?Feb 27, 2014
  • Dave Camp: How to Fix Our Appalling Tax Code?http://t.co/lx4VM2kHNz?Complex tax codes allow the wealthy 2 eliminate taxes that poor can’t $$?Feb 26, 2014
  • When the Minimum Wage Goes Up, the Menu Price Also Rises?http://t.co/ukEWzIjoje?The pain has 2go somewhere, including reducing employment $$?Feb 26, 2014
  • America’s 10-Year Experiment in Broadband Investment Has Failed?http://t.co/hjGuuu7JA0?We need to free up competition in the “last mile” $$?Feb 26, 2014
  • How Dodd-Frank Might Kill the CLO Market?http://t.co/ztV9PMdums?& we won’t miss it, b/c securitized credit is not accounted 4 properly $$?Feb 26, 2014
  • High-Priced Hydrogen Cars to Challenge Electrics?http://t.co/3akLFwjJuG?Hydrogen is not the solution, it is just fossil fuels in disguise $$?Feb 26, 2014
  • Truth About Hydrogen Power?http://t.co/McG32mWHyT?Old article, explains y hydrogen is no panacea b/c it takes fossil energy 2 produce it $$?Feb 26, 2014
  • The same is true of fusion power. The costs of creating Tritium at a scale needed to power a city would be astounding. $$?Feb 26, 2014
  • A Surprise Guest at the SEC’s Annual Gathering?http://t.co/R15fMul7CU?@mcuban shows what a measured & classy guy he can b @ SEC meeting $$?Feb 22, 2014

 

US Economics & Monetary Policy

?

  • Foreclosures Climaxing in New York-New Jersey Market: Mortgages?http://t.co/NPQeYY7Rc3?Judicial foreclosure states catching up rest of US $$?Feb 26, 2014
  • Home Prices in 2013 Notch Biggest Annual Gain Since 2005?http://t.co/FjTjdA7YcU?Demand from investors pads purchases, rates higher now $$?Feb 26, 2014
  • America?s Hottest Housing Market Has Suddenly Cooled Down?http://t.co/00uIJ4gSo3?Phoenix RE rises out of ashes on speculative demand $$ $Z?Feb 26, 2014
  • March 4 Hearing for Three Fed Nominees?http://t.co/McV2Tt7p29?One bullet & 2 blanks in the gun. Stanley Fischer will bring some wisdom $$?Feb 26, 2014
  • Fed Crisis Transcripts Highlight Futility of FSOC Crystal Balls?http://t.co/XComU1xA5K?Bureaucrats can’t/won’t predict disaster coming $$?Feb 26, 2014
  • The Fed knows less than average?http://t.co/cnA4nBBwU0?& http://t.co/5wG84hxPGi & http://t.co/C5y3re8ajV 2008 Transcripts show clueless $$?Feb 26, 2014
  • How to Profit from the Yellen Fed?http://t.co/4oAiBUdXDr?Yellen is core 2 the M.O. of the Fed, it’s like jazz, they make it up as they go $$?Feb 26, 2014

?

?

Market Impact

 

  • Banks Averting Bond Losses With Accounting Twist?http://t.co/VC83ByMGNC?Switching bonds from available 4 sale 2 held 2 maturity $$?Feb 26, 2014
  • The switch limits flexibility b/c u can’t change back w/o poss changing all back; also doesn’t change economics, moves losses 2 future $$?Feb 26, 2014
  • Greed Turning Losers to Leaders in Russell 1000 Index?http://t.co/vpGTVXkD9t?Could this b a harbinger of a change in the markets? $$ $SPY?Feb 26, 2014
  • Outcome or process ? what investment focus succeeds over time??http://t.co/edXLqAX9pg?@Ritholtz tells us to focus on process not results $$?Feb 26, 2014
  • Social psychology: Market madness?http://t.co/BtaVXAYWYZ?This is y the 1st priority of investment is risk control; can’t sleep @ night $$?Feb 26, 2014
  • 10 Value Investing Blogs You’d Be Crazy Not To Follow?http://t.co/mt8tZkGRAq?Happy 2b featured among this great group of blogs $$ Thanks!?Feb 26, 2014

 

Other Business

 

  • Harvard Brainpower Joins MIT Fueling Boston Sports Teams?

Titles?http://t.co/OZNC8wCIJi?Bright guys using math2analyze sports in Beantown $$?Feb 28, 2014

  • Big Data Comes to the Farm, Sowing Mistrust?http://t.co/ayBsxp8qAt?Farmers worry that data used to help them will b used against them too $$?Feb 28, 2014
  • Corporate Economists Are Hot Again?http://t.co/DUn5O7Idjz?An alternative would b actuaries, they r usually better at practical models $$?Feb 27, 2014
  • Dwindling Midwest High School Grads Spur College Hunt?http://t.co/iVURNV69EU?Demographics now fight against colleges, many weak will die $$?Feb 26, 2014
  • The Joy and Freedom of Working Until Death?http://t.co/wkGRoRSJIg?Find something that u enjoy doing that supports u & yours well forever $$?Feb 26, 2014

 

Medical

 

  • Dad May Join Two Moms for Disease-Free Designer Babies?http://t.co/yiXUO0sLok?Designer babies:many embryos die in order 2 produce 1 child $$?Feb 26, 2014
  • Your Heart May Be Older Than You Are?http://t.co/46PbtkWQ7h?Cute way 2 get people to take care of themselves; may have false negatives $$?Feb 26, 2014
  • Mystery Medical Symptoms Hit a Surprising Number of Patients?http://t.co/6DoJnAjt6w?Stress can trigger pains; this teaches stress control $$?Feb 26, 2014

?

Pimco & Bill Gross

  • Pimco’s Gross: ‘U don’t always produce productive family by sweet talking&always being inclusive’?http://t.co/sjKnhN76jh?Allianz happy w/him?Mar 01, 2014
  • Counterpoint: It?s time for Bill Gross 2 retire?http://t.co/UB1ikZhTlI?Everybody Should Get Off Bill Gross’s Back http://t.co/hbbAYRXuBN $$?Feb 26, 2014
  • Inside the Showdown Atop Pimco, the World’s Biggest Bond Firm?http://t.co/kVtk8Zf5d8?Gross developed the theories guide Pimco & he stays $$?Feb 26, 2014

 

Wrong

  • Wrong: Templeton Braving China?s Housing Bubble?http://t.co/rjVSQUXoAe?China looks like Japan in 1989, or the developed world in 2007 #avoid?Mar 01, 2014
  • Wrong: NASA Scientists Discover 715 New Planets?http://t.co/6KhRpp2Y5A?Life is finely tuned on Earth +/- 10% in size of Earth -> no life $$?Feb 27, 2014
  • Wrong: Fed s Tarullo Eyes New Tools to Limit Interest Rate Risk?http://t.co/fA4l6omDVi?Dreams 2 undo effects of bad policy w/o undoing it $$?Feb 26, 2014
  • Wrong: It Takes How Much Water to Grow an Almond?!?http://t.co/u8kpW7kJFj?Misses the idea that water does get reused many times: rain $$?Feb 26, 2014
  • Wrong: Can Amazon Dominate in Insurance, Too??http://t.co/zAP8GkunSx?Except 4 simple products, Insurance is too complex 4 people to pull $$?Feb 24, 2014

?

Comments, Replies & Retweets

  • @jasonzweigwsj @AlexRubalcava I wrote an article on the problems w/zero cost investing recently?http://t.co/ALu1ijgVev?”sand in the gears”?Mar 01, 2014
  • RT @AlexRubalcava: Zero commission stock trading sounds like a product tailor made to amplify investors? behavioral finance mistakes.?Mar 01, 2014
  • “Currencies & trade cannot exist in a vacuum apart from legal systems, because fraud is a crime?” ? David_Merkel?http://t.co/7fJX26SEyP?$$?Feb 26, 2014
  • ‘ @GSElevator Tattletale Exposed (He Was Not in the Goldman Elevator)?http://t.co/S1NVy13sZn?I don’t get out much, 1st I’ve heard of this $$?Feb 26, 2014
  • “Regarding First Data, many might think it quite desirable to step out of the spotlight @ $JPM &?” ? David_Merkel?http://t.co/COHGctym2A?$$?Feb 26, 2014
  • . @dpinsen The ancient retirement tripod of course?http://t.co/k06EUCbHa1?unless the modern one works. $$?Feb 26, 2014
  • @dpinsen That was icky, and more… gotta go wash my brain out… brrr.?Feb 22, 2014
Sorted Weekly Tweets

Sorted Weekly Tweets

Posted on 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

?

On Emergent Phenomena

On Emergent Phenomena

Posted on 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.

 

Book Review: “The Up Side of Down”

Book Review: “The Up Side of Down”

Posted on 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.

 

Classic: The Fundamentals of Real Estate Market Tops

Classic: The Fundamentals of Real Estate Market Tops

Posted on by David Merkel

I’ve mentioned before how all of my old articles at RealMoney were lost.? This was the draft version of Real Estate’s Top Looms published on 05/20/05.? I followed it up with? Housing Bubblettes, Redux on 10/27/05 and? September 2005 — The Residential Real Estate Inflection Point on 02/14/06.? Also, there was Wrecking Ball Looms for Big Housing Spec on 11/27/06, where I explained why it was likely that the subprime residential mortgage market was likely to blow up (can’t find the draft of that one).

But those links above no longer work — a real pity, and the one link below is corrected to point to the republished article at my blog.? Anyway, enjoy this if you want, because it outlines my thinking on how to recognize whether you are getting near the end of the bull phase of a market.

(Note: the italicized, indented portions, quote the original article The Fundamentals of Market Tops.? Much of what I write compares how residential real estate is similar to and different from stocks.)

-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=–=

About a year and a half ago, I wrote a piece called The Fundamentals of Market Tops.? It was an important piece for me because I received a lot of positive feedback from readers.? It was also important because it disagreed with the view of the firm that I worked for, and nearly led to my termination there, because they encouraged me to stop writing for RealMoney.? Neither termination happened, but it was touch-and-go for a while.

This piece unofficially represents the views of the firm that I work for, because my views of macroeconomics have become the firm?s views, but I don?t directly control our investment actions.? What I will try to accomplish here is to try to apply the logic of my prior article to the residential real estate market.? As opposed to my earlier article, I will try to show why I think we are close to a market top in residential real estate.? There is reason for pessimism.

The Investor Base Becomes Momentum-Driven

Valuation is rarely a sufficient reason to be long or short a market. Absurdity is like infinity. Twice infinity is still infinity. Twice absurd is still absurd. Absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down.

This is what I see in many residential real estate markets now: panicked buyers are saying ?this is my last chance,? and buying houses using risky forms of financing.? At the same time, I read stories of despair as some potential buyers give up and say that a house is out of their reach for now; they waited too long.? Occasionally, I see a few articles or e-mails regarding people who seem to be bright selling their homes and renting, but this is a minority behavior.

In the face of this, residential real estate prices continue to rise, particularly in the hot coastal markets, which tells me that the price momentum can continue a little while longer until it fails because there is no incremental liquidity available to expand the bubbles.

You’ll know a market top is probably coming when:

  1. The shorts already have been killed. You don’t hear about them anymore. There is general embarrassment over investments in short-only funds.

  2. Long-only managers are getting butchered for conservatism. In early 2000, we saw many eminent value investors give up around the same time. Julian Robertson, George Vanderheiden, Robert Sanborn, Gary Brinson and Stanley Druckenmiller all stepped down shortly before the market top.

  3. Valuation-sensitive investors who aren’t total-return driven because of a need to justify fees to outside investors accumulate cash. Warren Buffett is an example of this. When Buffett said that he “didn’t get tech,” he did not mean that he didn’t understand technology; he just couldn’t understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.

  4. The recent past performance of growth managers tends to beat that of value managers. (I am using the terms growth and value in a classic sense here. Growth managers attempt to ascertain the future prospects of firms with little focus on valuation. Value managers attempt to calculate the value of a firm with less credit for future prospects.) In short, the future prospects of firms become the dominant means of setting market prices.

  5. Momentum strategies are self-reinforcing due to an abundance of momentum investors. Once momentum strategies become dominant in a market, the market behaves differently. Actual price volatility increases. Trends tend to maintain themselves over longer periods. Selloffs tend to be short and sharp.

  6. Markets driven by momentum favor inexperienced investors. My favorite way that this plays out is on CNBC. I gauge the age, experience and reasoning of the pundits. Near market tops, the pundits tend to be younger, newer and less rigorous. Experienced investors tend to have a greater regard for risk control, and believe in mean-reversion to a degree. Inexperienced investors tend to follow trends. They like to buy stocks that look like they are succeeding and sell those that look like they are failing.

  7. Defined benefit pension plans tend to be net sellers of stock. This happens as they rebalance their funds to their target weights.

Houses aren?t like stocks for several reasons:

  1. Unlike stocks, houses are used by their owners every day.
  2. We can short stocks, but we can?t short houses.? (Personally, I hope no one comes up with a clever way to do so.? We have enough volatility already.)? The most someone can do is sell his home and rent.
  3. Perhaps the equivalent of a long-only manager is someone who owns his property debt-free, like me, and doesn?t see the need to lever up by moving up to a larger home.? Measured against the standard of ?what might have been? is a terrifying taskmaster from an investment standpoint.? I avoid it in equity investing, and in home ownership.
  4. I am aware of a number of people (I have been assured that they are not mentally incompetent) who have sold their homes and started renting.? This to me is the equivalent of going totally flat in equities, or other risky assets.? Not that one faces negative carry, because the ratio of rent to in the hot markets is pretty low.? In many markets, you can earn more off the proceeds than you pay in rent (leaving tax consequences aside).? This leaves aside the issue of appreciation/depreciation of housing values, but when one can rent more cheaply than buying, it is a negative for the housing market.
  5. My point about momentum strategies is definitely pertinent here.? With the existence of contract-flipping, a high level of amateur investment (seemingly under the guise of ?buy what you know?), and a high level of investor interest (10%+), there is a lot of momentum in real estate investment.? People buy because prices are going up.? Some buy because it is ?the last train out,? and they have to jump rather than be stranded.? Nonetheless, momentum tends to maintain in the short run, and the slowdown posited last fall definitely has not occurred.
  6. Value vs. Growth does not exactly apply here, but in the housing market, people are paying up for future prospects more than they used to, which is akin to growth investing.
  7. This is just an opinion, but those who are making money in residential real estate today are inexperienced and less rigorous than most good businessmen.? They see the potential for profit, but not the possibility of loss.
  8. Unfortunately, it is difficult to partially own a home.? Home ownership is largely a discrete phenomenon.
  9. Using a concept from value investing we can look at the earnings yield that residential real estate is throwing off.? Compare the rents one could receive from a property versus the cost that it would take to finance the property on a floating rate basis.? What I am seeing is that more and more hot coastal markets earn less from rents than they require in mortgage payments.? Property price appreciation is no longer a nice thing; it is required to bail out inverted investors.? Contrast this with those that invested in tech stocks on a levered basis in early 2000; they paid cash out to hold appreciating positions, before they paid cash to hold depreciating positions, before they blew the positions out in panic.

Corporate Behavior

Corporations respond to signals that market participants give. Near market tops, capital is inexpensive, so companies take the opportunity to raise capital.? Here are ways that corporate behaviors change near a market top:

  1. The quality of IPOs declines, and the dollar amount increases. By quality, I mean companies that have a sustainable competitive advantage, and that can generate ROE in excess of cost of capital within a reasonable period.
  2. Venture capitalists can do no wrong, so lots of money is attracted to venture capital.
  3. Meeting the earnings number becomes paramount. What is ignored is balance sheet quality, cash flow from operations, etc.
  4. There is a high degree of visible and/or hidden leverage. Unusual securitization and financing techniques proliferate. Off balance sheet liabilities become very common.
  5. Cash flow proves insufficient to finance some speculative enterprises and some financial speculators. This occurs late in the game. When some speculative enterprises begin to run out of cash and can’t find anyone to finance them, they become insolvent. This leads to greater scrutiny and a sea change in attitudes for financing of speculative companies.
  6. Elements of accounting seem compromised. Large amounts of earnings stem from accruals rather than cash flow from operations.
  7. Dividends become less common. Fewer companies pay dividends, and dividends make up a smaller fraction of earnings or free cash flow.

In short, cash is the lifeblood of business. During speculative times, watch it like a hawk. No array of accrual entries can ever provide quite the same certainty as cash and other highly liquid assets in a crisis.

  1. Every time a new home is sold, a privately placed IPO is held, with one buyer.
  2. When rates are low, it is no surprise that the homebuilders try to take advantage of the situation, and provide supply to meet the demand.? But if it is only rate-driven, rather than from growth in real incomes in the economy, the quality of the new buyers will be low, because now they can just barely finance the house they could not previously.? If their income level falters, they will not have any safety margin allowing them to hold onto the house.
  3. Private investors in residential real estate have multiplied at present.? This is akin to an increase in venture capital.
  4. Leverage for new buyers has never been higher.? This occurs through second and third mortgages, as well as subprime mortgages.? Interest only mortgages are commonplace among new mortgages.? Beyond this, investors hide themselves so that they can get the cheap rates associated with owner-occupied housing.
  5. With housing, making the earnings estimate means being able to pay the mortgage payment each month.? The degree of slack here is less than in the past.

Other Gauges

These two factors are more macro than the investor base or corporate behavior but are just as important.? Near a top, the following tends to happen:

  1. Implied volatility is low and actual volatility is high. When there are many momentum investors in a market, prices get more volatile. At the same time, there can be less demand for hedging via put options, because the market has an aura of inevitability.
  2. The Federal Reserve withdraws liquidity from the system. The rate of expansion of the Fed’s balance sheet slows. This causes short interest rates to rise, making financing more expensive. As this slows down the economy, speculative ventures get hit hardest. Remember that monetary policy works with a six- to 18-month lag; also, this indicator works in reverse when the Fed adds liquidity to the system.

One final note about my indicators: I have found that different indicators work for market bottoms and tops, so don’t blindly apply these in reverse to try to gauge bottoms.

?There is no options market for residential housing, but the Federal Reserve is still a major influence in the housing market.? When the Fed is withdrawing liquidity from the system, the price of housing tends to slow down, if not reverse.? Like the equity market, this is not immediate but follows a six- to 18-month lag.? This is another case of ?Don?t fight the Fed.?

No Top Now

There are reasons for concern in the present environment. Valuations are getting stretched in some parts of the market. Debt capital is cheap today. There are an increasing number of momentum investors in the market. Making the earnings estimate is once again of high importance. Nonetheless, a top in the market is not imminent, for these reasons:

  • The Fed is on hold for now. Liquidity is ample, perhaps too much so.
  • Actual price volatility is muted.
  • Since all of the accounting scandals of the last few years, many corporations have cleaned up their accounting and become more conservative.
  • Cash flow from operations comprises a high proportion of current earnings. More dividends are getting paid.
  • Leverage has not declined, but most corporations have succeeded in refinancing themselves in a low interest rate environment.
  • Conservative asset managers have not been fired yet.
  • Most IPOs don’t seem outlandish.

Not all of the indicators that I put forth have to appear for there to be a market top. A preponderance of them appearing would make me concerned, and that is not the case now.

?Some of my indicators are vague and require subjective judgment. But they’re better than nothing, and kept me out of the trouble in 1999 and 2000. I hope that I — and you — can achieve the same with them as we near the next top.

The current market environment is not as favorable as it was a year ago, but there are still some reasonably valued companies with seemingly clean accounting to buy at present. Right now, being long the market is more compelling to me than being flat, much less short.

I would retitle this the ?The Top is Coming Soon.?? The reasons that I mentioned to be worrisome remain:

  • Valuations are getting stretched in some parts of the market.
  • Debt capital is cheap today.
  • There are an increasing number of momentum investors in the market.
  • Making the earnings estimate is once again of high importance. (Gotta pay my mortgage!)

But there is more that makes me even more bearish:

  • The Fed is on the warpath, and liquidity is scarce.
  • Appraisals overstate the value of property that financial institutions lend against.
  • Homeowners have a smaller margin of safety than they have had in the past.
  • Leverage has increased for the average homebuyer.
  • People are paying more than they ought to for new and existing homes.

I am decidedly a bear on housing prices (at least in the hot coastal markets) at present, but I recognize that momentum can carry prices far beyond sustainable levels.? That?s the way markets work.

Nonetheless, I am still a bear on those who build homes, and those who finance them.? We are at an unsustainable place in the ability to finance the residential hosing market.? Either an increase in interest rates or a decrease in ability to pay for housing can derail the market.? This is the inflection point that we are at over the next year.

Movie Review: Money for Nothing

Movie Review: Money for Nothing

Posted on by David Merkel

Movie Review: Money for Nothing

Why will you like this film?

You get to meet clever traders, investors, and business thinkers, policymakers, historians, and Fed Governors ? some who have doubts, and many that are still true believers.? The contrasts are considerable.

Here is the cast list, shamelessly copied from Wikipedia:

Federal Reserve Officials

  • Paul Volcker – Chairman of the Federal Reserve (1979?1987)
  • Janet Yellen – Vice Chair of the Federal Reserve (2010?Present), President, Federal Reserve Bank of San Francisco (2004?2010)
  • Alice Rivlin – Vice Chair of the Federal Reserve (1996?1999)
  • Alan Blinder – Vice Chairman of the Federal Reserve (1994?1996)
  • Peter Fisher – Undersecretary of the Treasury (2001?2003), Executive V.P. of the New York Fed (1994?2001)
  • Richard Fisher – President, Federal Reserve Bank of Dallas (2005?Present)
  • Thomas Hoenig – President, Federal Reserve Bank of Kansas City (1991?2011)
  • Jeffrey Lacker – President, Federal Reserve Bank of Richmond (2004?Present)
  • Charles Plosser – President, Federal Reserve Bank of Philadelphia (2006?Present)
  • William Poole – Economist, President, Federal Reserve Bank of St. Louis (1998?2008)
  • Laurence Meyer – Economist, Governor of the Federal Reserve Board (1996?2002)
  • Marvin Goodfriend – Senior V.P., Federal Reserve Bank of Richmond (1993?2005)

Economists and Financial Historians

  • Michael Bordo – Economist, Rutgers University Professor, Director, Center for Monetary and Financial History
  • David Colander – Economist, Middlebury College Professor
  • James Grant – Economist, Editor – Grant’s Interest Rate Observer
  • Martin Mayer – Scholar – The Brookings Institution, Author – The Fed
  • Allan Meltzer – Economist, Author of “A History of the Federal Reserve”, Carnegie-Mellon University Professor
  • Raghuram Rajan – Chief Economist – International Monetary Fund(2003 ? 2007), University of Chicago Professor
  • Richard Sylla – Economist, New York University Professor, Chairman – Museum of American Finance
  • Bill White – Chief Economist, Bank for International Settlements, (B.I.S.) (1995 ? 2008)

Traders and Investors

  • Peter Atwater – President and CEO – Financial Insyghts, LLC, Former Head of Asset Finance – J.P. Morgan
  • Tony Boeckh – Economist, Chairman – B.C.A. Research (1968?2002), Founder – The Boeckh Investment Letter
  • Jeremy Grantham – Investor, Financial Historian, Chairman – Grantham, Mayo Van Otterloo
  • Todd Harrison – Derivatives Trader, Hedge Fund Manager, Founder and CEO – Minyanville.com
  • John Mauldin – President – Millennium Wave Advisors, Author ? Endgame
  • Barry Ritholtz – Washington Post columnist, Author – Bailout Nation, CEO – Fusion IQ
  • Gary Shilling – Economist, Forbes columnist, Author, President – A. Gary Shilling & Co.
  • John Succo – Derivatives Expert, Hedge Fund Manager

A Rough Outline of the Film

Why is the Fed controversial?

It?s controversial because those who run it are appointed rather than elected, and so their actions are shielded from direct action by voters.? It is also a secretive institution, which does not reveal its actions/discussions rapidly.

Why was the Fed created?

The Panic of 1907 unnerved people, and led politicians to argue for a central bank.? It would have been smarter to tighten regulation of banks, but that is water under the bridge.? Most crises are due to misregulation of banks ? too much leverage, bad credit risks, and borrowing short to lend long.

What was the initial impact of the Fed?

Not much impact in WWI. When the Roaring ?20s came into existence, it was driven by loose monetary policy from the Fed, which led to?

The Great Depression

When debt grows rapidly, an eventual correction will come ? this one was sharp.? Like today, not sure the Fed could do anything to make things better, aside from not having been loose previously.

WWII to the End of the Gold Standard

The Bretton Woods conference linked the currencies of the developed world to the Dollar, which in turn was linked to gold.? Sadly, the Fed adopted a dual mandate, which said it must focus on consumer price inflation, and labor unemployment.? It didn?t work well then, and it works less well now ? the link between goods price and wage inflation is a weak one.

The link of the US Dollar to Gold worked will until the mid-?60s, when the pressures from fighting in Vietnam plus trying to create the Great Society stretched resources too thin.? William McChesney Martin caved when LBJ pushed him (perhaps beat him physically), and lowered rates in 1965, leading to inflation.

Over the ?60s and into the very early ?70s, as inflation in the US rose, foreign central banks, particularly the French, began to request gold rather than dollars.? Eventually in 1971 Nixon ended Bretton Woods, ceasing redemption of US Dollars for gold internationally.? And all of this led to?

The Great Inflation

Nixon leaned on the Fed to be loose, and Arthur Burns facilitated it.? William Miller continued it in the Carter Administration, leading to higher inflation.? Volcker was appointed by Carter, and as he pointed out in the movie, what he would do would be painful.? He resisted pressures to be easy and started inflation on a downward course by reducing growth of the money supply.? (Do you remember the news networks flashing the M-numbers on the screen each week, and the newspapers featuring them near the top of the business section?? You are old, like me.)? Volcker was not reappointed by Reagan in 1986 because he was viewed as an independent player (good), and not submissive to the administration.? Thus we got the toady Greenspan, who led to?

The Great Moderation

No one could have predicted that Greenspan would be such a political compromiser. But in 1987, after the crash, he assured liquidity to financial firms that might have been impaired from a 22% drop in the Dow.? This led to the concept of the Greenspan put.? Bad news?? Greenspan has your back, willing to inject liquidity when times are bad.

You can look at the pattern of interest rates over the period of his chairmanship.? Rates kept making lower lows, amid rapidly growing private debts.

Then we had a series of crises: Long Term Capital Management, where Lehman also almost went under.? The NASDAQ soared and fell hard 1998-2002.? Low interest/mortgage rates from 2002-2007 further encouraged a Debt/Housing Bubble.? ?The Fed was never a great regulator of the banks or mortgages.? They assumed the lesser regulators would do the job. But deregulation gutted the regulators, particularly because banks could choose their own regulators.? Hubris permeated the Fed, and Mortgage Equity Withdrawal fueled consumers, until there was nothing more to borrow against, leading to?

The Great Recession

Why did the Fed act as they did once the crisis broke?? Part of it was due to the dual mandate.? Another part was that Fed models were weak because they did not model the financial sector.? As James Grant would point out they were fixing prices via interest rates.? Once they started QE the Fed pushed the private sector to take risk because of a lack of safe assets with decent yield.? Other points:

  • Inflation is difficult to measure
  • Hubris
  • Insufficient skepticism, according to Hoenig

Hoenig comes off as an honest dealer versus the rest of the Fed, suggesting that many errors were made under pressure.

My Disagreements with the Movie

1) Bailouts were not needed in the way they were done

We could have rescued the operating subsidiaries that matter to average people, and let the holding companies fail.? Instead, we did the worst thing, and bought the equity of firms that were bankrupt.

2) Derivatives played no role in 1987

Unless you are willing to call futures derivatives, then derivatives played no role in the 1987 crash.

3) The net capital rule really wasn?t an issue.

4) Yes, the Fed has been monetizing the debt, and it will bite us eventually, when the demographics shift from saving to spending.? It will come in the next ten years.

Would you like the Movie?

I think most people would like the movie.? It gives the establishment sorts enough room to defend their actions, while offering wiser men the ability to say that the Fed was utterly wrong, and obviously so.

Twice before in our republic, we have eliminated a central bank.? Let us have the courage of our predecessors and eliminate the Fed.? It would be hard to do worse than the Fed did; they amplified economic shocks ? they did not mute them.

Redacted Version of the December 2013 FOMC Statement

Redacted Version of the December 2013 FOMC Statement

Posted on by David Merkel
October 2013 December 2013 Comments
Information received since the Federal Open Market Committee met in September generally suggests that economic activity has continued to expand at a moderate pace. Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Shades their view up, but I don?t see much to support it.
Indicators of labor market conditions have shown some further improvement, but the unemployment rate remains elevated. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Weasel words because the participation rate is falling, and wages are stagnant.
Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. No real change.? Language clearer.
Fiscal policy is restraining economic growth. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Shades fiscal drag down, but the deficit is shrinking, so where do they get this?
Apart from fluctuations due to changes in energy prices, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable. Calls energy special, but it plays into all we do.? TIPS are showing slightly higher inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is near 2.65%, up 0.08% from September.
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 growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. No change. ?Monetary policy is omnipotent on the asset side, right?
The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. Financial conditions are looser.? That?s largely due to the loose monetary policy globally.
The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term. 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. Shades their view on inflation down.? CPI is at 1.2% now, yoy.
Taking into account the extent of federal fiscal retrenchment over the past year, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program as consistent with growing underlying strength in the broader economy. Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. No significant change, but switches the spotlight to the asset purchase program, suggesting that it has helped.
However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Worthless sentence eliminated.
Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. Reduces the purchase rate by $5 billion each on Treasuries and MBS 
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
Taken together, these actions 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 real change.
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.
In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. 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. Says that purchases will likely continue to decline if the economy continues to improve.
Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook 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 will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. No change.Promises that they won?t change until the economy strengthens.? Good luck with that.
In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. Not a time limit but economic limits from inflation and employment.Just ran the calculation ? TIPS implied forward inflation one year forward for one year ? i.e., a rough forecast for 2015, is currently 1.72%, down 6 bps since the last meeting.? Here?s the graph.? The FOMC has only ~1% of margin in their calculation.
In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. No change.
The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. New sentence.? Repetitive.
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.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Jerome H. Powell; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. No change
Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate. George in, Rosengren out.? Rosengren thinks any tapering is premature.

?

Comments

  • Small $10 B/month taper.? Equities rise, and long bonds fall.? Commodities do nothing.? The FOMC says that any future change to policy is contingent on almost everything.
  • Shades their views of GDP up and Inflation and fiscal drag down.
  • They think that if they use more words, they will be clearer.? Longer statements are harder to parse and understand.
  • Current proposed policy is an exercise in wishful thinking.? Monetary policy does not work in reducing unemployment, and I think we should end the charade.
  • 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 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, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
  • GDP growth is not improving much if at all, and much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.
When to Worry — An Asset-Liability Management Perspective on Financial Macroeconomics

When to Worry — An Asset-Liability Management Perspective on Financial Macroeconomics

Posted on by David Merkel

At the end of the day, the world is net flat.? Every asset is owned 100%; every liability is someone else’s asset.

If everything is 100% owned, why are there ever crises?? Financial companies owning illiquid assets financed by short, liquid liabilities.? Liquidity crises are credit crises; a company going through a liquidity crisis did not do sufficient stress testing to realize that they were weakly financed.

Crises are never accidents, aside from things like Hurricane Katrina and Superstorm Sandy.? And guess what?? How many insurers failed from those two events?? None.

Crises happen because things are inverted.? Under ordinary circumstances, prudence dictates that long-term assets be financed by equity or long-term debt.? Before a crisis, long-term assets are owned with short-term debt, and wealthy guys like Buffett and Klarman hold cash and shun long-term assets.? That’s inverted.? Those that should not be bearing risk are bearing risk, and those the could bear risk aren’t.? Why?? Because the prices on risk assets are high, and smart investors lighten the boat as the envious buy into momentum at the end of a doomed rally.? Ben Graham’s weighing machine takes over from the voting machine.

So what are reasons to worry?? Here are a dozen, not in any order:

  • The combined balance sheets of investment banks grow, and the complexity of their assets rises.
  • The repo market grows, as less liquid assets are financed by very liquid liabilities.
  • Poor-to-middle class people begin taking risk by buying homes, or speculating in stocks.? These people have weak liability structures, because they live paycheck to paycheck.
  • Mortgage finance moves to ARMs or even more exotic loans.
  • Downpayments on homes get low.
  • Rich hold more cash while the poor and middle-class borrow.? The rich can take losses — they have long time horizons.? When they play defense, it is a time to be concerned.
  • In a given sector there has been a large increase in debt, and there are concerns over ability to repay.
  • Shadow banking has increased dramatically.
  • Financial commercial paper issuance has increased dramatically.
  • People rely on certain large financial firms to not default, even if they have taken on too much credit risk relative to their capital.? (Think of Fannie and Freddie.)
  • Increased financial complexity makes everything opaque.? Bad things happen in the dark.
  • The credit cycle gets long in the tooth, and credit spreads/yields tighten to levels that are far too low for the risk taken on.

Now, I leave aside pure macroeconomic concerns like the possibility that the Fed might face a greater problem with stagflation than it did in the ’70s.? When long illiquid assets are financed by short liabilities, all sorts of bad things can happen.? Keep your eyes open.? Hey, aren’t Buffett and Klarman letting cash levels rise?

Theme: Overlay by Kaira.