The Aleph Blog – Page 118 – Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control

Redacted Version of the December 2012 FOMC Statement

Posted on 12 December 2012 by David Merkel

Comments

I really think the FOMC lives in a fantasy world.? The economy is not improving materially, and inflation is rising. Note that the CPI is over their 2.2% line in the sand.? TIPS-implied inflation 1X1 (one year ahead for one year) is 2.01%, and 5X5 is 2.97% annualized.? Both of these measures have continued to rise since the last meeting.
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 my opinion, I don?t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn?t work, what will they do?
Also, the investment in Agency MBS should have limited impact because so many owners are inverted, or ineligible for financing backed by the GSEs, and implicitly the government, even with the recently announced refinancing changes.
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 the unemployment rate improvement comes more from discouraged workers.

A Statement to Dr. Bernanke:

More debt will not get us out of this crisis.? The Great Depression ended when enough debts were compromised, paid off, or cancelled, which from my study is 1941, before World War two started.

Your policies further aid the growth of the budget deficit, and encourage malinvestment in housing and banking, two things in a high degree of oversupply.? The investments in MBS only help solvent borrowers on the low end of housing, who don?t really need the help.? Holding down longer-term rates on the highest-quality debt does not have any impact on lower quality debts, which is where most of the economy finances itself.

The problems with unemployment are structural, not cyclical.? Labor force participation rates continue to decline.? There is greater labor competition around the world, forcing down wages on the low end.? There is nothing that monetary policy can do to change this.? You can create stagflation through your policies, but not prosperity.

When inflation does arrive, the FOMC is going to find it very hard to raise Fed Funds or shrink its balance sheet.? The banks will not react well as you try to shrink, and the long rates that you have held down will react violently.

You haven?t thought through all of the ?second order? effects of your policy.? Even the ?first order? effects, which favor the rich over the poor, seem to elude you.? Assets rise, helping the rich.? Interest rates fall, helping the rich who can borrow.? Commodity prices rise, harming the poor.

Insanity is doing the same thing over and over, and expecting a different result.? When will you realize that the policies of the Fed aren?t helping, and need to be abandoned?

Post 2000

Posted on 12 December 2012 by David Merkel

This has been a lot of fun.? This has been a lot of work.? This has been a “labor of love.”

When I wrote for RealMoney, I would sometimes say to my editor Gretchen, “Here’s another labor of love piece,” to which she would give a hearty response, because she liked editing me.? She told me she always learned a lot from me.? I liked working with her a lot.

Unlike some writers at RealMoney, I would sometimes troll through the comments on Cramer’s blog.? Sometimes I would defend him, at minimum I would try to explain him.

At the time, there were some financial blogs that I liked a lot — Jeff Miller, Barry Ritholtz, Roger Nusbaum, Steven Randy Waldman, Eddy Elfenbein, Alea… I know there are more, but I can’t remember now.? I resisted starting a blog for 1-2 years, because I felt RealMoney was my blog.? I especially liked participating in the Columnist’s Conversation.? (Note: if RealMoney would like to invite me back, I am open to the idea.? That said, the CFA Institute has encouraged me to blog for them as well — just don’t know how much content I can produce, because everyone wants original content.)

But I realized that RealMoney and I had different goals, and in talking with some of those that commented at Cramer’s blog, I decided to launch Aleph Blog.? Why call it Aleph Blog?? Many reasons, as noted in the link, but part of the fun was getting to read Borges, who I had not previously read.

When I launched Aleph Blog, I had no idea what I was getting into, and I did not intend on leaving RealMoney.? I liked the editorial freedom, though, and liked the broader interaction with many voices across the internet, rather than only RealMoney columnists, good as they were.? I did research when I started, and so I created my own domain, signed up with Seeking Alpha, and launched just prior to the mini-crisis where the Chinese stock market crashed in Shanghai.? When that happened, I wrote a popular piece that Seeking Alpha picked up that my friend Cody Willard promoted as well.

And off we went!? A grand experiment, allowing me to spread my wings more wide than at RealMoney.? My goal was to do a brain dump of areas where I thought I had competence.? I didn’t want to be like many bloggers where over 50% of their post is quoting others — I wanted to write from my heart, expressing my views on a wide number of topics relating to economics, finance and investment, from my unusual framework, which is Evangelical Christian, mostly libertarian (but not for financials), actuarial, value investor, doubting neoclassical economics and modern portfolio theory.

I was recently at a Baltimore CFA Society meeting, when a few people came up to me telling me how much they liked my blog.? Some quoted to me recent pieces I had written.? This was new; I was surprised.? I have never had local people come to me and say that.? Yes, stats for Maryland on my blog are above average, but my work helping the local CFA Society always seemed to be detached from other things that I do.? My worlds are merging, maybe.

My worlds are also merging from the many evangelical Christians who write to me.? This is a blog written by a Christian, not a Christian blog.? I’m here to serve everyone, but my views on ethics will color all that I write.

At the beginning, I tried focused linkfests, where I drew together posts on a hot topic, and narrated them to give my thoughts.? Those were a lot of work.? Today, my linkfests occur through Twitter.

Twitter: it took me even more pain to decide to do Twitter.? Given that my blogging is more long-form than most — why should I do Twitter?!? My answer for today is simple: to have good conversations, and push good content to readers.? And, for those who don’t do Twitter, they can read my weekly sorted tweets.? I got the idea from History Squared, a newer blog that I like.? Sorting the tweets makes them more useful to readers, so if it takes half an hour to do so each week, it is worth it.

But now I have more followers on Twitter than on RSS.? 6000 vs 5300.? I prefer RSS because people see the whole post, but I understand how the lower bandwidth on Twitter allows people to choose what attracts them.? Twitter makes us all epigram writers in AOL-ese.? It is challenging to do, but I like a good challenge.

I’ve written a number of series that have been significant:

I’m sure there are more, but I can’t think of them now.? At the same Baltimore CFA Society meeting as mentioned before, one person asked me, “How do you write about the wide variety of topics that you do?”

Part of it is my varied career, and educational background.? I have worked in a large number of areas, and have not been afraid to branch out and try things slightly outside my grasp.? You only learn when you fail.? I’ve learned a lot. I’ve failed a lot.

If you don’t take reasonable chances, you won’t grow.? Look for opportunities to expand your abilities — who can tell where you will go?!? Opportunities go to those who are there, grab hold of them, and win.? If you don’t try, you won’t win.

I know that my blog is an acquired taste, and best for professionals and advanced amateurs.? If you are a beginner, best you should focus on my personal finance category.

My goal has been to give something back to my readers.? I’ve had an interesting career, with many unusual and entertaining experiences.? I don’t have to have more fame or clients.? I enjoy relating the truths of the markets to others, whether they are beautiful or ugly.

To my readers: I don’t know if I will last another thousand posts, but I appreciate that you read me, eclectic as I am.? The one thing I promise: I will do my best for you, poor as that may be.

Your Servant,

David

PS — I know that my views on Fed policy and economics will win me few friends, but someone has to point out that the paradigm is broken.? Same for Modern Portfolio Theory….

Of Servants and Robots

Posted on 11 December 2012 by David Merkel

When I read about some of the arguments regarding robots replacing people, and creating more unemployment, I shake my head and say to myself, “Nobody studies history.”

Most of human history has had a surfeit of people versus those that controlled capital and resources.? What did the excess people do (those that lacked resources and were unskilled)?? They became servants to those who were better off.

In such a situation, some servants would become critical to the success of the wealthy family.? They would become better paid as a result.

-=-=-===-=-=-=-=–=-=-=-=-=-=-==-==-=-=-=-=-=-=-

First, the needs of people are unlimited.? Wealthy people could use help managing their vast enterprises, and reducing their own efforts at home that take them away from their profitable endeavors.

Second, people are more flexible and clever than robots — they can deliver personal services to those that need them.? Also, robots cannot deliver the “human touch;” regardless of how clever the AI gets, people will feel better receiving services from people who show that they care.

I realize that language like this may be offensive to many — that is not my intent.? My view is one of mean-reversion.? Income inequality has been the norm throughout human history.? Attempts at creating “equal” societies fail, because people aren’t equal — some are more talented than others, and deserve more as a result.? We are reverting to the norm — inequality.

That is part of the problem with the Eurozone — different countries are varyingly productive, but many expect similar abilities to consume.? Accepting inequality would be wise — abandoning the Euro would be genius; let countries manage their own prosperity.? The Euro allowed weak countries to take on too much debt.

=-=–==-=-=-=-=-=-=-=-=-=-=-=-=-=-=–=-==–=-=-=-=-=-=-=-=-=-=-=-=-

I do not think that robots bring unemployment in the intermediate-term.? People will adjust, and wages will adjust.? Some unskilled people will serve the wealthy.? That will be a good thing, because service is not shameful, and people are happier when they are working.

The Beginning of the End of Money Market Funds

Posted on 8 December 20129 December 2012 by David Merkel

Say goodbye to money market funds, and hello to more volatility, whether in money market funds, or their substitutes.? As with all of the financial crisis, it would have been better if the Fed and Treasury had not intervened.? Most money market funds would have survived.? The market panicked less than the regulators did.

But now we have the capitulation of Luis Aguilar, perhaps giving in to the pressures of the banks that hate competition from the money market funds.? Who is more powerful? Banks.? Where are there more systemic losses?? Banks.

Money market funds are not the problem.? If there is a crisis, let them fail.? The losses will be ~2% of principal; banks will do far worse.

Publishing the net asset value of Money Market Funds will destabilize them; rising NAVs will attract more money, and falling NAVs will lead to a run on the MM funds.?? It is a recipe for disaster.

Far better is my proposal, which is an excellent compromise.

To those analyzing policy for money market funds at the SEC:

Greetings. My name is David Merkel, and I run Aleph Investments, LLC, a Maryland RIA. I manage stock and bond portfolios for upper middle class people, and for small institutions. I am a Chartered Financial Analyst, and in the past, I was a life actuary, where I developed stable value products for pension plans.

It is much harder to assure a stable share price with longer dated assets, but I was able to do so via a variety of strategies. Doing the same thing for money market funds is simple.

Before I continue, I want to make clear that I have no economic interest in money market funds, aside from being an investor in them. At present, the SEC is proposing a variety of changes to money market funds that practically render them uneconomic. No wonder the companies managing the MM funds oppose that.

But the companies managing the MM funds are unrealistic as well, they don?t see any reason for change. I have a proposal that splits the difference, and is trivial to carry out.

My proposal says this: Funds calculate their internal NAV, but do not disclose it to the public. They only disclose it in the rare case where the NAV drops below 0.995, and it would ?break the buck.?

When a fund ?breaks the buck,? it announces a credit event. It tells shareholders that they have lost money, and to protect the interests of all shareholders, all shareholders will suffer a small capital loss.

Whatever the fairly calculated NAV is when a capital loss is announced, the new NAV would be 1.0025, and the number of shares reduced to the level that supports that NAV. If the value of the assets has been accurately calculated, and there are withdrawals, the premium to NAV should rise, not fall, for the remaining shareholders.
As an example, imagine a fund makes bad decisions, and the internal NAV calculation reveals an NAV of 0.9825. The fund would announce a credit event, and roughly 2% of all units would be lost, and the new internal NAV would be 1.0025. Those leaving the next day would only strengthen the fund.

Few will like the concept of a credit event in money market funds. That said, the idea would have many salutary effects on money market funds:

It would eliminate runs on the funds.

It would get people used to the idea that there is some risk in money market funds, though limited.

It would eliminate the need for the government to intervene and insure money market funds.

It would allow some money market funds to take more risk, and offer more return. There would be less need to constrain maturity and credit quality of the investments in the MMFs so tightly.

The cost would be minimal, most of the time losses would be 1-2%, which would be paid for through interest in less than a year.

My proposal is better because it treats money market funds like ETFs ? they are pass-through vehicles, and as such, do not need capital buffers.

And, my proposal is better, because it recognizes that credit events should be rare but acceptable aspects of how money market funds work. Think about it: particularly when short term interest rates are so low, there is no way for interest to cover even the slightest discrepancies versus NAV.

Under my way of doing things, let there be stable net asset values, freedom in investment guidelines, but the possibility of credit events. The present set of restrictions in investing does no one any good, because the problem is not length of maturity or credit quality, but issuer concentration.

But let money market fundholders analyze the tradeoff between yield and risk. Guess what? Short-term bond fund holders have to do the same thing.

But why are we going after money market funds? When they fail, the cost is pennies on the dollar, and it rarely happens. Why not go after banks? They fail far more frequently, with much larger losses. I say let money market funds fail, and do not increase regulations on them. Rather, let them be like ETFs, and let them be constrained by the prudence of the free markets. What? You can have investment without the possibility of loss? Ridiculous.

Regulate the banks tightly, but let money market funds go free, but advertise that losses are more than possible.
I strongly urge that you adopt my proposal. The money market funds will not like it, but they can live with it. The SEC may not like it entirely, but it accomplishes all of goals that you care about. This is a compromise proposal where everyone can win.

Sincerely,

David J. Merkel, CFA, MA

To my readers, I only ask one thing — do you have contacts at Fidelity, Vanguard, Federated, ICI, etc., who care about this?? I wa able to put my proposal before the SEC through Commissioner Luis Aguilar.? I talked with two senior attorneys at the SEC in August.

But I am a political nobody.? I may have a bright idea, and many have told me that, but I need an entity with political clout to absorb my idea, and use it.? I don’t care if I get credit; I just want to do something good to minimize regulation, but deliver bad results to those who choose bad managers.

All that said, if the SEC acts as it is indicating, they will destroy money market funds, and we will all be the poorer for it.

Focus on what you can Control

Posted on 8 December 20129 December 2012 by David Merkel

In investing, focus is important.? We have to divide the world into what we can and can’t control.

Will North Korea (snicker) or Iran (no snicker) get nuclear arms?? I can’t control that, an I am not sure what I would do if I knew what would happen.

Will the Fed move to inflate goods prices, as opposed to their quantitative easing which mostly affects asset prices?? Or will they look to protect nominal values of debt, and deflate?

There are many things that I don’t know; if I did know the future with certainty, I am sure that most other people would know it at at least a lesser level of certainty.

So focus on what you can control, rather than what you can’t.

You can control your own behavior.? You can’t control the behavior of others, whether it is those who invest alongside you, or manager behavior, or that of clients who invest more and less at the wrong times.? Optimal behavior might mean buying things out-of-favor after the fury of selling has gone cold.
If you are a manager, you can guide, but not control client expectations.? You can educate them on your willingness to take risk, but you can’t control their emotions.
As a manager, you can tell investors the mandate toward which you are managing — and then you must manage within it, because your investors expect it.
You must match the liquidity of investments to the need for liquidity.? Value investors must stress patience.? Hot money investors must keep things liquid.? The same applies to time horizon.
Market conditions may be depressed or ecstatic.? You can’t control movements in the mood of the market, but you can adjust your position so that you can benefit from likely future change, if valuation measures are extreme.

This is one reason why I try to limit the number of decisions that I make, for myself and clients, while trying to make better decisions for all of us.

In general, I think better investment decision-making stems from diversification where you don’t know more than the market, and concentration where you do know better.

Sorted Weekly Tweets

Posted on 8 December 2012 by David Merkel

Eurozone

Depression Deepens Greek Middle Class Despair With Crime http://t.co/PlMwTLpw They need to leave the euro & end early retirement $$ Dec 07, 2012
Global Shipping Industry?s Troubles R Threat for Biggest German Banks http://t.co/ZKojm5iZ During good times bankers forget cyclicality $$ Dec 06, 2012
All recent French Presidents are good examples of why the power of the office should be weakened & term shortened http://t.co/NbtxCyJY $$ Dec 06, 2012
Don?t Tax Our Wine Irish Cry as Austerity Finds Threshold http://t.co/HdL8bkLI Alcohol exists 2 prevent the Irish from ruling the world $$ Dec 06, 2012
Paris Faces Darkness as City Set for Illumination Ban http://t.co/sbmoaBEv French politicians r the worst enemies France has $$ #inthedark Dec 05, 2012
Paulson Said to Blame Bet Against Europe4 Most of Loss http://t.co/AHDHtUNK Betting on disaster is tough; getting timing right tougher $$ Dec 05, 2012
Merkel’s euro push leaves E. Germany out in the cold http://t.co/3T9Yw6Uu Angela faces weakness in E. Germany politically & economically $$ Dec 03, 2012
France Sexy No More for Entrepreneurs Escaping Hollande http://t.co/S8OVxgRu The “invisible foot” opposes increasing taxes in France $$ Dec 03, 2012

Central Banking

Fed Exit Plan May Be Redrawn as Assets Near $3 Trillion http://t.co/u4Ek0vbc The Fed will never significantly shrink its balance sheet $$ Dec 07, 2012
Bernanke Cliff Analogy Overstates Immediate Economic Harm http://t.co/dSQxcMtP After the cliff, 2014 will be a good year, &2015 better $$ Dec 07, 2012
At Press Conference After ECB Interest Rate Decision, Draghi Faces Frustrations & Mistrust http://t.co/nzpJhUE3 No magic, only illusions $$ Dec 07, 2012
How canceling central banks? holdings of government debt could be a useful thing http://t.co/mOdKposd I don’t agree, but worth reading $$ Dec 06, 2012
Fed holds lenders’ feet to the fire on mortgages http://t.co/PpeKIjQm Simple: absence of competition w/the lack of shadow banking $$ Dec 04, 2012

US Politics

Fannie and Freddie Are Not Piggy Banks http://t.co/8H5VVXg2 Tosh, Congress loves a slush fund, Fed’l Financing Bank, FHA, Ag credit sys $$ Dec 07, 2012
Obama?s Tax Increases Will Find the Middle Class http://t.co/8ai0z1ID @cabaum1 After all, that is where most of the income 2 tax is $$ Dec 07, 2012
Push to Curb Union Power Advances in Michigan http://t.co/Qiw3HyyU No one should be forced to join a union, or pay dues 2 get any job $$ Dec 07, 2012
The Real Reason Warren Buffett Should Pay More Taxes http://t.co/UOWtRvA9 Labor & Capital should b taxed @ same rate, w/no deferral $$ Dec 07, 2012
Obama?s Tax Plan Would Spare Many Affluent Families http://t.co/C33CRpGi Why the definition of income is more important than tax rates $$ Dec 07, 2012
Defense Industry Cuts Exceed 500,000 Workers Over Cliff http://t.co/065xIlv2 Living on the DC side of Baltimore, the effect will be big $$ Dec 06, 2012
Greenspan Says Painless Solution to US Debt is Fantasy http://t.co/fO15WZ1P This is one of the two times per day for this stopped clock $$ Dec 06, 2012
Medicare is unsustainable in current form http://t.co/WNoFEsKo “As it stands now, Medicare cannot keep its promises 2future seniors” $$ Dec 06, 2012
Deck the Halls with Macro Follies http://t.co/7gGKMN4R A new video from the guy who brought you Keynes vs. Hayek at EconStories.tv $$ Dec 06, 2012
Sallie Krawcheck should not run the SEC http://t.co/AECw2pun Her prior career does not suggest that she would be a good regulator $$ Dec 05, 2012
Elizabeth Warren would bring real smarts to the position. Now if we can find spots for Barofsky and Kauffman. http://t.co/sTf2Piy8 Dec 05, 2012
Wrong: Five States 2Increase Class Time in Some Schools http://t.co/BNY4Twj4 Little correlation btw class time & educational progress $$ Dec 04, 2012
Republicans Reprise 2011 Debt-Limit Threat in Cliff Talks http://t.co/njnFXhVO This is not a 2-player game but a 3-player game: t-party $$ Dec 03, 2012
Obama Bets Re-Election Gave Him Power to Win Fiscal Cliff http://t.co/1hA1Xn4j Think this idea is overplayed; players same now as b4 $$ Dec 03, 2012
+1 We need genuine capitalists, & not defenders of Wall Street & big business @ the SEC $$ @davidgaffen @footnoted @nminow @Reuters Dec 03, 2012

Pensions

Benefits Leader Reins In 401(k)s http://t.co/Z8foHZLK $IBM defers 401(k) match 2 yearend; if u leave early, except retiring, u lose $$ Dec 07, 2012
Baby boomers need annuity simplicity http://t.co/34gJlJKA SPIAs r good annuities don’t sell b/c agents never earn another commission $$ Dec 06, 2012
Milwaukee task force studies changes to pension system http://t.co/GHBuGNGf Will raise retirement ages & lower the multipliers 4 svc yrs $$ Dec 03, 2012
Officials call pension reforms a must http://t.co/64PzD8UI Kentucky reduces future pension benefits; good 4 taxpayers, bad 4 employees $$ Dec 03, 2012

Other

#FF @Fullcarry @KidDynamiteBlog @Convertbond @foxjust @EconOfContempt @GregorMacdonald @edwardnh @MatthewPhillips @srussolillo $$ Dec 08, 2012
To Quote Thomas Jefferson, ‘I Never Actually Said That’ http://t.co/mA9MzDbb Yogi Berra, “I never said most of the things I said.” $$ Dec 07, 2012
Big Test at Johns Hopkins (biz school) http://t.co/fbf5FeKP Scuttlebutt is that it is not doing so well w/their Int’l student focus $$ Dec 06, 2012
http://t.co/0fOBmunB “[Ransomware] is the new Nigerian email scam,? Mr Haley said. ?We?ll be talking about this for the next two years.? $$ Dec 06, 2012
The Insourcing Boom http://t.co/h67gWIA3 Can improve labor costs, morale, R&D, product quality, time to market. Wave of the future $$ Dec 06, 2012
My week on twitter: 42 retweets received, 3 new listings, 26 new followers, 65 mentions. Via: http://t.co/SPrAWil0 Dec 06, 2012
Dial-a-maid, get-a-slave in middle class India http://t.co/LRlkfbTg No, slavery is not dead yet & women bear the brunt of it $$ Dec 05, 2012
Hospital Incentives Help Babies Determine Own Birth Dates http://t.co/rAKVBv4X Washington State finds a way 2reduce caesarean-sections $$ Dec 05, 2012
While at RealMoney, Steve Smith & I tried 2 get Lenny Dykstra 2 explain the risks of his strategies; he never responded http://t.co/ynHZJgoa Dec 05, 2012
Deere Gets the Wright Stuff http://t.co/88RdyGkb My friend Bill Wright is now making standing lawn mowers 4 $DE ; both firms benefit $$ Dec 04, 2012
Warren?s Way http://t.co/cW8OQQq4 I respect Buffett a lot, but he is a hypocrite on taxes. Pay off the DTL, Sell $BRK shares, pay a div $$ Dec 05, 2012
Online Classes Mean No Dorm, Gym or Debt http://t.co/gPttIwpJ My wife thinks there is room 4a quality college w/o the frills $$ #worthatry Dec 03, 2012
Not news: Burying the “Fed model” http://t.co/BTCVsigi Have 2 decompose in2 real rates & inflation expectations. Result known since 1994 $$ Dec 03, 2012
Wall Street finds a foreign detour around U.S. derivatives rules http://t.co/4Ypf0atI Do foreign biz through their London subs $$ Dec 03, 2012
A Free-Market Fix for the Copyright Racket http://t.co/RDPofMPk Keep copyright protections, but limit them to 28 years $$ Dec 03, 2012

Fixed Income

Despite Risks, Investors Just Can’t Quit US Treasurys [sic] http://t.co/AefCG5rw One of the better deflation hedges out there $$ Dec 04, 2012
Talking Macro, Fixed Income, & the Strategic Alpha Bond Fund w/Loomis Sayles? Matt Eagan http://t.co/PTWJKX22 w/ @DavidSchawel Well done $$ Dec 07, 2012
California moves toward open source ratings for city bonds http://t.co/hn8GCnMa Researcher makes case here: http://t.co/r04PVuWA $$ Dec 06, 2012
Yield-Starved Investors Hoarding EM Bonds http://t.co/kvShvcx5 There is yield & their govts r running finances more orthodox way $$ Dec 06, 2012
We Were Stunned By The Brand New Patent That’s Been Awarded To Bill Gross http://t.co/zYuLDREM Easy ideas should not be patentable $$ Dec 06, 2012
Women analysts dominate muniland http://t.co/dQwgDg5U Funny, but when I was a corporate bond mgr, most of my analysts were bright ladies $$ Dec 06, 2012
BlackRock’s new bond plan http://t.co/rdUd5zmG $BLK does a kind of structuring of covenants (buyer’s due diligence) & coinvests in volume $$ Dec 05, 2012
Scrounging for Income http://t.co/hfFtkhm4 Okay advice, but if you can reduce need 4 income or harvest capital gains would b better $$ Dec 03, 2012
Leveraged loans return 0.31% in November; YTD return is 8.8% http://t.co/loDwDKW9 Interesting part of article is strength of CLO bid $$ Dec 03, 2012
The Great Yield Gamble http://t.co/fRspStAj When risk-free rate is being used as a policy tool, it is harder 2 make rational choices $$ Dec 03, 2012
Panasonic Swings Ruin Funds? Appetite for BBB Debt http://t.co/w36bv9nQ No notes rated <BBB+ by Japanese assessors offered in November $$ Dec 03, 2012
High Yield Exhaustion http://t.co/zLSy4GaC High yield feels tired between high supply, and potentially weakening demand $$ Dec 03, 2012

Rest of the World

China listings may soon flee US, expert says http://t.co/0EuxyoAC I usually don’t like when foreign listings leave; exception: China $$ Dec 06, 2012
Sellers in Toronto, Vancouver just say no as housing markets sink http://t.co/HUTgOVnh Feels like the US in late 2006 $$ Dec 06, 2012
Russia’s problem is not a petrified Soviet economics but corrupt politics impeding growth w/o fully blocking it $$ http://t.co/YL7QGR9j Dec 05, 2012
Top US Firms Are Cash-Rich Abroad, Cash-Poor at Home http://t.co/EZcwLITM Buy foreign businesses & hire clever transfer pricing accts $$ Dec 04, 2012
Are We Watching Another North American Financial Crisis Unfold? http://t.co/BmwRzIPp Canadian taxpayers r on the hook for >C$1T in mtges $$ Dec 04, 2012
Shangai broken dreams – changing gear? http://t.co/nWX3jIuz Argues Chinese mkt has broken support, but might have value 2 locals that dig $$ Dec 03, 2012

Companies

Cook Says Lives Enriched Matters More Than Money Made http://t.co/cJ7XWQkM Summary & Manufacturing Macs in US http://t.co/hyvQAdRB $$ Dec 06, 2012
Apple?s Halo Cracked http://t.co/EHrFjZGG $AAPL ‘s valuation requires that their products remain competitive for a long time to come $$ Dec 06, 2012
Banks book record profits off Fannie and Freddie http://t.co/Z4Ej4Zlu It’s more that much origination capacity is gone -> wide spreads $$ Dec 06, 2012
Freeport to Buy Plains, McMoRan for $9 Billion http://t.co/avB6cIII I prefer resource extraction firms to be focused, not diversified $$ Dec 05, 2012
Steak Price Rising as Cattle Seen 20% Higher at JBS http://t.co/58h0CsHp Combination of loose $$ policy & high feed prices from weather Dec 05, 2012
That fiscal cliff? $DOW Chemical says China’s a bigger worry http://t.co/H1viDTWR Not a good sign for commodity chemical producers $$ Dec 04, 2012
Trucks — Boats – Planes – Trains http://t.co/vFirg2PB Transports are hinting at more economic weakness $$ Dec 04, 2012
Diamonds Dug in Gusty Arctic Too Remote for Diesel Fuel http://t.co/AZiGApP4 How mining companies generate power in remote areas $$ #wow Dec 03, 2012

Insurers

Insurers’ Sandy Claims Estimates Show No Long-Term Damage http://t.co/HJq6Ufmk Prudent insurance underwriters & investors bounce back $$ Dec 06, 2012
Re: Principles based stat reserving. As a life actuary, I wonder what will happen to old blocks of biz that get reinsured 2 get new acctg $$ Dec 03, 2012
Insurers Add Reserve Power http://t.co/5X4htlOh Move 2 principles-based reserving 4 Stat acctg is a mistake; lower margin of safety $$ Dec 03, 2012

Retweets

Kind of fitting that $UBS discovered it $$ RT @graemehein: Swiss counter-intel is making Canada look good! http://t.co/394i35mW Dec 04, 2012
OTOH, many other schools r athletic progs glued2 educ charity $$ RT @carney: Is Harvard really just a giant hedge fund? http://t.co/9AgVniPZ Dec 07, 2012
I believe it has a small educational charity attached $$ RT @carney: Is Harvard really just a giant hedge fund? http://t.co/9AgVniPZ Dec 07, 2012
I think Andrea encourages him to get fresh air now & then $$ RT @ecchymosis2009: Who let him out of his crypt? Dec 06, 2012
Barofsky 4 SEC Chair RT @matthewstoller: Important statements from @neilbarofsky on how to reform the SEC. http://t.co/Tty50eQi $$ Dec 06, 2012
+1 Good news $$ RT @cate_long: .@matthewstoller reporting that Sallie Krawcheck seems to have been knocked out of the running as head of SEC Dec 06, 2012
Probably correct $$ RT @munilass: CalPERS likely 2 lose next court battle, San Bernardino bankruptcy observers predict http://t.co/QxsiiNUD Dec 05, 2012
You got it RT @James_Karn: @AlephBlog Don’t forget ethanol policy as a factor in high feed prices. Dec 05, 2012
UN = Useless Nations $$ RT @marykissel: Debacle-in-the-making: @UN takes a step toward regulating the #Internet http://t.co/tngedHds Dec 05, 2012
+1 true $$ RT @LorcanRK: congrats to whoever is running the @euromoney account these days. Has completely transformed a semi-dormant feed. Dec 04, 2012
RT @ritholtz: ENOUGH ALREADY! I propose the hashmark #CLIFFHYPE to mark conversations about the excess hype regarding the so called Fis … Dec 04, 2012
Incongruous, huh? Or maybe it takes a thief… $$ RT @felixsalmon: Bob Merton on a financial stability committee??? http://t.co/tnJvIOIJ Dec 03, 2012
Yes, & I lost some $$ on it last year RT @GaelicTorus: @AlephBlog panasonic is a value trap, imo $PC Dec 03, 2012
+1 For sure RT @footnoted: @joshuademasi @AlephBlog Well, nobody would accuse me of being a defender. That’s for sure. Dec 03, 2012
+1 RT @neilbarofsky: The more things change…Good for @benlawsky for voting no: New Rules for Life Insurers http://t.co/gVW1Zl80 $$ Dec 03, 2012
Had good ideas in 2001 now jumps shark $$ RT @LDrogen: Taleb should have quit while he was ahead, this is just nonsense http://t.co/rRPrCLLT Dec 02, 2012

Replies

@Ryknow16 Not yet.. I expect the Fed to overdo it until it is obvious that they have to shift & then some; when shift comes it will b brutal Dec 08, 2012
“Thanks for writing this… this will be an important signal when the Fed finally hints at tightening,” David_Merkel http://t.co/AXbhvTBv $$ Dec 08, 2012
@DividendMaster Granted, but I have a rule of thumb: Removal of policy accommodation always is tougher than the Fed claims & imagines $$ Dec 07, 2012
@DavidSchawel You are welcome. Excellent interview & ideas. I also follow Pettis & Lacy Hunt — I’m an information hound $$ Dec 07, 2012
@EddyElfenbein It was a good indicator, but now it is used for policy purposes in Operation Twist, making it useless as an indicator now. $$ Dec 07, 2012
“Challenge for Apple is perpetuating successful innovation. Difficult to continually get high ROEs?” ? David_Merkel http://t.co/WfTxOVbJ $$ Dec 06, 2012
@neilbarofsky I have a compromise proposal on MMFs that gives everyone 90% of what they want. Can I show it to you? http://t.co/uTaSQoIv Dec 07, 2012
@DoubleDeuce Women I was speaking of were investment analysts, not actuaries, but u r right there also; famale actuaries tend 2b junior $$ Dec 06, 2012
@USTreasury Don’t care if this came from McConnell or Paul Krugman. The executive is *not* supposed to have any power over spending. Dumb $$ Dec 06, 2012
@DoubleDeuce Yo, friend. Men tend to be better at the risk-return tradeoff. Women tend to be better at estimating risk. Dec 06, 2012
@ivorroy I won’t live longer; eating meat in moderation is good 4u, &enjoying your life prolongs life far more than avoiding a few toxins $$ Dec 05, 2012
@Dan_Dicker Wrote a piece similar 2your “Embrace the Cliff” http://t.co/pseXvwlP last June. “Might not be so Bad” http://t.co/pYICXUOq $$ Dec 05, 2012
@cate_long I have a compromise proposal b4 the SEC on MMFs. Talked w/senior lawyers there: http://t.co/OG4zyTQy Really tough 2do good $$ Dec 05, 2012
@cate_long Personally, I think running the SEC is beyond everyone. The $$, the politics, can’t easily fire/hire people, etc. Dec 05, 2012
@cate_long Only be Chairman of the SEC. Only difficulties r managing the politics & incompetence. I would be willing 2 help. Dec 05, 2012
@rszbt Maybe we should nominate Cate Long. never reada bad article from her. Dec 05, 2012
@CondorOptions Ted Kauffman, Sheila Bair, Neil Barofsky, (giggle) Harry Markopolous, David Merkel (who?), Jack Ciesielski, I have more $$ Dec 05, 2012
@nelson3748 I expect nonsense from academics. Dec 05, 2012
@nelson3748 How has she been a disaster for consumer banking, and local and regional banks? Many of her proposal seem reasonable. Dec 05, 2012
@AppFlyer Yes, I heard about that… thought it was more dumb than lying… it was lying, but I didn’t see how she would gain from it. Dec 05, 2012
@AppFlyer Maybe I’m out of it. How is she a liar & a cheat? Links welcome. Dec 05, 2012
‘ @StockRealist Hello from another member of the penny stock truth squad. Article of mine: http://t.co/jJ79L4Ac Got $IMNG today #spitspit $$ Dec 04, 2012
.@drVTC It’s more what u do w/whatever time u spend w/kids, than the amount of time. I agree, tho; character is the most important factor $$ Dec 04, 2012
@paulvieira Typically u hear a few pops b4 the tree falls; inn the US that was mid-2007 $$ Dec 04, 2012
@EddyElfenbein Makes sense, thanks Dec 04, 2012
@buzzfeedben What r u looking for from someone to run your possible business vertical? I know of a lot of talent in financial writing… Dec 04, 2012
@EddyElfenbein your latest piece deals w/correlations — how well do the betas match up? Dec 04, 2012
@Fechtmeyer Thanks, I get it now. But technology is creative destruction, while Wall Street’s risk control methods were just wrong. $$ Dec 03, 2012
@Fechtmeyer SV? WS? Dec 03, 2012
@LDrogen “They that can give up essential liberty to obtain a little temporary safety deserve neither safety nor liberty.” Ben Franklin $$ Dec 02, 2012
@kyles09 That is, how much profit there is in the deal 4 the originator, whether in % upfront, or in the excess interest strip Dec 02, 2012

Behind the Curve

Posted on 6 December 2012 by David Merkel

If you were an actuary working for a Defined Benefit pension plan, or Social Security, you would develop an estimate of the stream of cash flows that you expect the plan to pay.? The expected cash flows are ultimately what matters.?? Estimates of what the cash flows are worth in the present are a sideshow, because the estimates of what the assets of the plan will earn are far less stable than the estimates of what will get paid, even over the long term.

Unless we get significant and prolonged inflation, the discount rates applied to the liabilities are unrealistic, even in Indiana, which has the lowest rates that I have heard of for major plans at 6.75%.? Discount rates should be in the 3.5-5.0% area.? It is very difficult to earn more than 1-2% over the long Treasury, or more than can be earned from long Baa/BBB bonds.

Thus, in my opinion,virtually every underfunded pension plan is behind the curve, and their underfunded status is underestimated.

So here’s the scandal.? As funds don’t earn enough to pay the benefits, their funded status worsens.? As their asset levels drop to Puerto Rican levels, they become forced to raise taxes to keep pace with the rising payments as Baby Boomers retire.? That’s the curve that they are behind: the curve of increasing retirement benefits.

Now, there are other strategies.? Reduce benefits to active employees.? Eliminate COLAs.? New hires only get a DC plan.? Play hardball with retirees, and get them to reduce vested benefits in exchange for greater certainty of payment.

I’m not optimistic here.? There will be cuts.? The only question is on whom the cuts will fall.

Investing In P&C Insurers

Posted on 6 December 2012 by David Merkel

When I was half my current age, an actuary in my life insurance firm said to me, “Property-Casualty insurance is not real insurance.? When they lose money, they just raise rates, and they make the money back.”? Today, with greater knowledge, I know that he was half-right.? Here is where he was wrong:

If a P&C insurer risks a significant fraction of its surplus, such that if they could lose enough in a single year that they would not be able to write more business, that is an insurer to avoid.? Good P&C insurers do not bet the farm.? They manage such that they will always stay in the game, allowing themselves to write good business at good rates after a disaster.
If a few badly-run insurers die after a disaster, that is all the better for those that remain.? Capacity exits, and those left standing raise rates and earn strong profits.? P&C insurers and reinsurers that “swing for the fences” tend to die.
As with most things in life, it is those that take moderate risks that do best.? Invest in those P&C insurers.
P&C insurance is insurance on a micro level.? It is not as if losses are directly rated back to insureds.? On a macro level, conservative P&C insurers and reinsurers are toll-takers.
This applies more closely to short-tail and mid-tail insurers.? Long-tail insurers take a long time to validate their underwriting, and in certain environments, can go broke more easily than other P&C insurers.

That said, P&C insurers and reinsurers that underwrite and invest carefully tend to make money regularly, and with a better return on equity than most industries.? It is one big reason why Warren Buffett has done so well over the years.? Small underwriting gains combined with small investing gains can compound quite well, leading to a very nice overall return.

There is one more advantage here.? Insurance fuses the twin problems of uncertainty and time [accruals].? This is difficult enough, but the accounting treatment discourages many from analyzing the insurers.? Complexity in business begets accounting complexity.

That is why I think that my main job with insurers is analyzing the management team. Good management teams think like owners, and reduce exposure when times are aggressive.

That’s why 15% of my portfolios for clients & me are in P&C insurers.? They have done well in the past, and there are no changes indicating why they won’t do well in the long run if they are conservative.

Another Penny Stock to Avoid

Posted on 5 December 2012 by David Merkel

I received a “newsletter” today from Legendary Stocks.? Now with a name like “Legendary Stocks,” you would think the companies would have a long prior existence.? But the stock mentioned I can’t even find on EDGAR, which is different from all the other penny stocks I have analyzed.

As with all the rest, this doesn’t smell good.? This is a company with small revenues, negative earnings, and negative book value.? Though it trades in the US under the ticker IMNG, I can’t find much data on it.? Even their website has no investor data.? That is abnormal.

Oh, this was a part of Legendary Stocks, 5-point type size? disclaimer:

Legendary stocks has been contracted to receive and manage budget of eight hundred thousand dollars by a third party prime star communications agency for coverage of iMing. In addition, The Legendary stocks expects to receive new subscriber revenue as a result of this advertising effort. [Emphasis mine]

Leaving aside the concept that many Chinese stocks listed in the US are scams, where assets and earnings are misrepresented, there is little independent data to work with here.

But given the 93% decay rate on promoted penny stocks, I predict that by my next birthday, 12/5/2013, IMNG will trade for less than 10 cents a share, adjusted for reverse splits from the present.

I say to all who hear me: avoid promoted stocks.? Buy what you have analyzed: don’t trust what others think, even me.

Problems in Life Insurance

Posted on 4 December 2012 by David Merkel

I am not an FSA, but I am an actuary.? That said, I am not presently practicing inside a life insurance company, so as I write this, there may be some things that I get wrong.

There are two areas that concern me in life insurance accounting at present.? The first is that there is no good way to estimate the reserves for products that have secondary guarantees.? Yes, many actuaries can create models to try to estimate what the reserves should be.? But when you are dealing with variables that are less than predictable ? withdrawal assumptions, investment performance, etc., the results are often less good than desirable.

As a result, there have been reinsurance deals done to eliminate or reduce the formulaic reserves on secondary guarantees.? As a former boss of mine at AIG liked to say, ?I drop my deficiency reserves in the Atlantic Ocean.?? In other words, a Bermuda reinsurer with weaker reserving standards would absorb the secondary guarantee risk, even if it was another AIG subsidiary.? The same can be done through securitization and Special Purpose Vehicles.

Two articles on the topic:

But here is the more recent problem: allowing insurance companies to use their own models for reserving.? If the results of banks using the Basel Standards were bad, this has the potential to be worse.

You want all setting of reserves/accruals in financial companies to be conservative, and not manipulable by the companies, lest solvency be compromised.

When I was active in pricing, reserving, and cash flow modeling, I felt I had some of the best modeling out there, because most actuaries don?t understand complex regression models, and the components of investment return.

But I would never use my models to set the reserves.? That goes too far.

You don?t want to hand over reserving rules to one hired by the company, no matter how ethical he might be.? That way lies disaster.? There are always subtle pressures put on actuaries to be less conservative, because companies face pressure to show good earnings in the short-run.

Think of the mostly European quants, accountants and actuaries using the Basel standards.? Giving them the authority to set their own reserves for credit using internal models led to setting the reserves too low.? You want to have checks and balances.? You don?t want to have players serving as their own umpires.? So what if the statutory standards are too tight?? That just means earnings will be delayed, not eliminated.? Risk margins should be received as earned, and never capitalized.? Besides, the current crisis shows us that we never truly understand the parameters of the distribution.

Now, the rules in question are Statutory rules, affecting solvency, but not earnings, which come from GAAP.? What Statutory affects is the degree of solvency for subsidiaries, and the amount of free cash flow available to the holding company in the short-run.

This gives a lot of flexibility to management teams, and there is a lot more room to be liberal or conservative in terms of overall leverage policy.? In the short run, there could be a self-reinforcing cycle driving up the prices of life insurers as the less conservative buys the more conservative, resets their reserves, and uses the excess cash flow in the short run to acquire more companies.

Now for three quotations from this Wall Street Journal article on the topic:

Critics of the plan say they fear insurers will go overboard in their effort to placate investors who have grumbled for several years about subpar returns, draining the industry of reserves that could be needed in future financial crises. Many publicly traded life insurers are struggling to post the midteens returns on equity that shareholders want. Analysts say it is too soon to calculate how the new method will filter through to returns.

“This a significant and historic vote for the NAIC, moving forward on a substantive change in policy,” said Thomas Sullivan, a partner with PwC’s regulatory advisory business, and a former Connecticut insurance commissioner.

Once insurers can free up capital, “you could see more competitively priced products to consumers and/or improved financial flexibility for insurers,” Mr. Sullivan said.

Others are less optimistic. The move to principles-based reserving “is one of the most important developments in the history of life insurance,” said Joseph Belth, a professor emeritus of insurance at Indiana University and editor of the Insurance Forum. “Future generations of executives, regulators and consumers will have to deal with the financial carnage.”

Benjamin Lawsky, superintendent of the New York Department of Financial Services, had urged fellow regulators to vote no in a letter dispatched last week.

“The insurance industry weathered the financial crisis well precisely because of the careful reserving state regulators have historically required,” Mr. Lawsky said Sunday. “To ignore the lessons of the financial crisis and deregulate the industry, allowing them to keep less in reserves, is unwise.”

Listen to the New York Department of Insurance, which is the giant among pygmies.? They understand insurance regulation, versus most of the others states that don’t, who don’t deserve? a vote.? Listen to Joe Belth, who has fought against all manner of insurance frauds.? He deserves to be listened to as an elder statesman, unlike many others who think loosening up standards will produce some great outcome.

Principles based reserving will be less transparent than current standards.? Think of it this way.? Under the old rules, everyone was using the same algorithm.? You could ask questions about the inputs to it, and whether they were reasonable.? Under the new rules, regulators not only have to ask questions about inputs, but about the algorithms.? I can tell you from my experience, New York and the large states will be challenged trying to regulate that.? The small states?? They can’t even handle the present standards.

Now, it is not a done deal that these standards will come into existence.? Note from this article:

With the adoption of the Valuation Manual and prior approval of revisions to the Standard Valuation Law, the NAIC and Academy can present this as a package to state legislatures for consideration in early 2013. This package must be approved by 42 jurisdictions that represent states in which at least 75 percent of direct premiums are written before PBR takes effect. ?

Both New York and California are against this, and they have 18% of the market.? 8% more against, and this is dead.? Also, I know from my own forays back in 2000, when I led the effort to modernize Maryland’s life insurance investing code that it is very difficult to convince legislators to adopt new standards that they don’t understand.? I succeeded, and mainly because I was able to explain how excesses would be curbed.? With this legislation, I have no idea how you pitch it, aside from the braindead “More flexibility is good for the life insurance industry,” pitch.

I do not stand behind the American Academy of Actuaries.? I was a member of that for years, but I do not see them as promoting the good of all, but only that of the insurance/benefits industries.

Two more articles:

And to put my money where my mouth is, I am willing to testify against this legislation in state capitols as needed.? Maybe I get the fun of going back to Annapolis, but where else might I go?

October 2012	December 2012	Comments
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to expand at a moderate pace in recent months.	Information received since the Federal Open Market Committee met in October suggests that economic activity and employment have continued to expand at a moderate pace in recent months, apart from weather-related disruptions.	Remember when the FOMC cited the Tsunami in Japan for economic weakness that would soon go away?? More grasping at straws.
Growth in employment has been slow, and the unemployment rate remains elevated.	Although the unemployment rate has declined somewhat since the summer, it remains elevated.	So long as discouraged workers increase, this is a meaningless statement.
Household spending has advanced a bit more quickly, but growth in business fixed investment has slowed.? The housing sector has shown some further signs of improvement, albeit from a depressed level.	Household spending has continued to advance, and the housing sector has shown further signs of improvement, but growth in business fixed investment has slowed.	No real change ? just word order differences
Inflation recently picked up somewhat, reflecting higher energy prices.? Longer-term inflation expectations have remained stable.	Inflation has been running somewhat below the Committee?s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.	Shades down their view of inflation, blaming energy prices. TIPS are showing rising inflation expectations since the last meeting. 5y forward 5y inflation implied from TIPS is now at 2.97%.? The FOMC is wrong on inflation.
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 remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.	The Committee remains concerned that, without sufficient policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.	Emphasizes that the FOMC will keep doing the same thing and expect a different result than before. Monetary policy is omnipotent on the asset side, right?
Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.	Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.	No change.
The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.	The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.	No change. CPI is at 2.2% now, yoy, so that is quite a statement.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.	To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.	No change. Does not mention how the twist will affect those that have to fund long-dated liabilities. Wonder how long it will take them to saturate agency RMBS market?
The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it 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.	The Committee also will purchase longer-term Treasury securities after its program to extend the average maturity of its holdings of Treasury securities is completed at the end of the year, initially at a pace of $45 billion per month. 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, in January, will resume rolling over maturing Treasury securities at auction.	Operation Twist continues.? Additional absorption of long Treasuries commences.? Fed will make the empty ?monetary base? move from $3 to 4 Trillion by the end of 2013.
These actions, which together will increase the Committee?s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.	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.	No real change.
The Committee will closely monitor incoming information on economic and financial developments in coming months.	The Committee will closely monitor incoming information on economic and financial developments in coming months.	No change. Useless comment.
If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.	If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability.	Explicitly says that they will buy more long Treasuries.
In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.	In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.	The FOMC promises what it cannot know or deliver.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.	To support continued progress toward maximum employment and price stability, the Committee expects 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 also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.	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.	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 2014, is currently 2.01%.? The FOMC has only 0.49% of margin in their calculation if they are being honest, which I doubt. Next time, I will provide a graph.
	The Committee views these thresholds as consistent with its earlier date-based guidance.	New sentence, and it is not accurate.
	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.	New sentence.? Giving yourself an out clause on the hard-and-fast promises made above?
	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.	New sentence. So what?
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.	Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.	No change
Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.	Voting against the action was Jeffrey M. Lacker, who opposed the asset purchase program and the characterization of the conditions under which an exceptionally low range for the federal funds rate will be appropriate.	Lacker sharpens his hopeless dissent against a flock of doves.? I like that he is opposing the QE, as well as the foolish promises regarding Fed funds. Unlike the rest, he cares about the institutional reputation of the Fed, and thus opposes asset-side policies.