Search Results for: Unstable

The Butterfly Machine

The Butterfly Machine

Photo Credit: whologwhy || Danger: Butterfly at work!
Photo Credit: whologwhy || Danger: Butterfly at work!

There’s a phenomenon called the Butterfly Effect. ?One common quotation is “It has been said that something as small as the flutter of a butterfly’s wing can ultimately cause a typhoon halfway around the world.”

Today I am here to tell you that for that to be true, the entire world would have to be engineered to allow the butterfly to do that. ?The original insight regarding how small changes to complex systems occurred as a result of changing a parameter by a little less than one ten-thousandth. ?Well, the force of a butterfly and that of a large storm are different by a much larger margin, and the distances around the world contain many effects that dampen any action — even if the wind travels predominantly one direction for a time, there are often moments where it reverses. ?For the butterfly flapping its wings to accomplish so much, the system/machine would have to be perfectly designed to amplify the force and transmit it across very long distances without interruption.

I have three analogies for this: the first one is arrays of dominoes. ?Many of us have seen large arrays of dominoes set up for a show, and it only takes a tiny effort of knocking down the first one to knock down the rest. ?There is a big effect from a small initial?action. ?The only way that can happen, though, is if people spend a lot of time setting up an unstable system to amplify the initial action. ?For anyone that has ever set up arrays of dominoes, you know that you have to leave out dominoes regularly while you are building, because accidents will happen, and you don’t want the whole system to fall as a result. ?At the end, you come back and fill in the missing pieces before showtime.

The second example is a forest fire. ?Dry conditions and the buildup of lower level brush allow for a large fire to take place after some small action like a badly tended campfire, a cigarette, or a lightning strike starts the blaze. ?In this case, it can be human inaction (not creating firebreaks), or action (fighting fires allows the dry brush to build up) that helps encourage the accidentally started fire to be a huge one, not merely a big one.

My last example is markets. ?We have infrequently?seen volatile markets where the destruction?is huge. ?A person?with a modest knowledge of statistics will say something like, “We have just witnessed a 15-standard deviation event!” ?Trouble is, the economic world is more volatile than a normal distribution because of one complicating factor: people. ?Every now and then, we engineer crises that are astounding, where the beginning of the?disaster seems disproportionate to the end.

There are many actors that take there places on stage for the biggest economic disasters. ?Here is a partial list:

  • People need to pursue speculation-based and/or debt-based prosperity, and do it as a group. ?Collectively, they need to take action such that the prices of the assets that they pursue rise significantly above the equilibrium levels that ordinary cash flow could prudently finance.
  • Lenders have to be willing to make loans on inflated values, and ignore older limits on borrowing versus likely income.
  • Regulators have to turn a blind eye to the weakened lending processes, which isn’t hard to do, because who dares oppose a boom?? Politicians will?play a role, and label prudent regulations as “business killers.”
  • Central bankers have to act like hyperactive forest rangers, providing liquidity for the most trivial of financial crises, thus allowing the dry tinder of bad debts to build up as bankers use cheap funding to make loans they never dreamed that they could.
  • It helps if you have parties interested in perpetuating the situation, suggesting that the momentum is unstoppable, and that many people are fools to be passing up the “free money.” ?Don’t you know that “Everybody ought to be rich?” [DM: then who will deliver the pizza? ?Are you really rich if you can’t get a pizza delivered?] ?These parties can be salesmen, journalists, authors, etc. whipping up a frenzy of speculation. ?They also help marginalize as?”cranks” the wise critics who point out that the folly eventually will have to end.

Promises, promises. ?And all too good to be true, but it all looks reasonable in the short run, so the game continues. ?The speculation can take many forms: houses, speculative companies like dot-coms or railroads, even stocks themselves on sufficient margin debt. ?And, dare I say it, it can even apply to old age security schemes, but we haven’t seen the endgame for that one yet.

At the end, the disaster appears out of nowhere. ?The weak link in the chain breaks — vendor financing, repo financing, a run on bank deposits, margin loans, subprime loans — that which was relied on for financing becomes recognized as a short-term?obligation that must be met, and financing terms change dramatically, leading the entire system to recognize that many assets are overpriced, and many borrowers are inverted.

Congratulations, folks, we created a black swan. ?A very different event appears than what many were counting on, and a bad?self-reinforcing cycle ensues. ?And, the proximate cause is unclear, though the causes were many in society pursuing an asset boom, and borrowing and speculating as if there is no tomorrow. ?Every individual action might be justifiable, but the actions as a group lead to a crisis.

In closing, though I see some bad lending reappearing, and a variety of assets at modestly speculative prices, there is no obvious crisis facing us in the short-run, unless it stems from a foreign problem like Chinese banks. ?That said, the pension promises made to those older in most developed countries are not sustainable. ?That one will approach slowly, but it will eventually bite, and when it does, many will say, “No one could have predicted this disaster!”

Volatility Can Be Risk, At Rare Times

Volatility Can Be Risk, At Rare Times

Photo Credit: Matt Cavanagh
Photo Credit: Matt Cavanagh

There is a saying in the markets that volatility is not risk. In general this is true, and helps to explain why measures like beta and standard deviation of returns do not measure risk, and are not priced by the market. After all, risk is the probability of losing money, and the severity thereof.

It’s not all that different from the way that insurance underwriters think of risk, or any rational businessman for that matter. But just to keep things interesting, I’d like to give you one place where volatility is risk.

When overall economic conditions are serene, many people draw the conclusion that it will stay that way for a long time. That’s a mistake, but that’s human nature. As a result, those concluding that economic conditions will remain serene for a long time decide to take advantage of the situation and borrow money.

When volatility is low, typically credit spreads are low. Why not take advantage of cheap capital? Well, I would simply argue that interest rates are for a time, and if you don’t overdo it, paying interest can be managed. But what happens if you have to refinance the principal of the loan at an inopportune time?

When volatility and interest spreads are low for you, they are low for a lot of other people also. Debt builds up not just for you, but for society as a whole. This can have the impact of pushing up prices of the assets purchased using debt. In some cases, the rising asset prices can attract momentum buyers who also borrow money in order to own the rising assets.

This game can continue until the economic yield of the assets is less than the yield on the debt used to finance the assets. Asset bubbles reach their breaking point when people have to feed cash to the asset beyond the ordinary financing cost in order to hold onto it.

In a situation like this, volatility becomes risk. Too many people have entered into too many fixed commitments and paid too much for a group of assets. This is one reason why debt crises seem to appear out of the blue. The group of assets with too much debt looks like they are in good shape if one views it through the rearview mirror. The loan-to-value ratios on recent loans based on current asset values look healthy.

But with little volatility in some subsegment of the overly levered assets, all of a sudden a small group of the assets gets their solvency called into question. Because of the increasing level of cash flows necessary to service the debt relative to the economic yield on the assets, it doesn’t take much fluctuation to make the most marginal borrowers question whether they can hold onto the assets.

Using an example from the recent financial crisis, you might recall how many economists, Fed governors, etc. commented on how subprime lending was a trivial part of the market, was well-contained, and did not need to be worried about. Indeed, if subprime mortgages were the only weak financing in the market, it would’ve been self-contained. But many people borrowed too much chasing inflated values of residential housing. ?As asset values fell, more and more people?lost willingness to pay for the depreciating assets.

We’ve had other situations like this in our markets. Here are some examples:

  • Commercial mortgage loans went through a similar set of issues in the late 80s.
  • Lending to lesser developed countries went through similar set of issues in the early 80s.
  • The collateralized debt obligation markets seem to have their little panics every now and then. (late 90s, early 2000s, mid 2000s, late 2000s)
  • During the dot-com bubble, too much trade finance was extended to marginal companies that were burning cash rapidly.
  • The roaring 20s were that way in part due to increased debt finance for corporations and individuals.

At the peak some say, “Nobody rings a bell.” This is true. But think of the market peak as being like the place where the avalanche happened 10 minutes before it happened. What set off the avalanche? Was it the little kid at the bottom of the valley who decided to yodel? Maybe, but the result was disproportionate to the final cause. The far more amazing thing was the development of the snow into the configuration that could allow for the avalanche.

This is the way things are in a heavily indebted financial system. At its end, it is unstable, and at its initial unwinding the proximate cause of trouble seems incapable of doing much harm. But to give you another analogy ask yourself this: what is more amazing, the kid who knocks over the first domino, or the team of people spending all day lining up the huge field of dominoes? It is the latter, and so it is amazing to watch large groups of people engaging in synchronized speculation not realizing that they are heading for a significant disaster.

As for today, I don’t see the same debt buildup has we had growing from 2003 to 2007. The exceptions maybe student loans, parts of the energy sector, parts of the financial sector, and governments. That doesn’t mean that there is a debt crisis forming, but it does mean we should keep our eyes open.

Sorted Weekly Tweets

Sorted Weekly Tweets

China

  • China Slowdown Deepens?http://t.co/sKueyT7Dhz?This isn’t a bad thing if China is giving up on forced industrialization through borrowing $$?May 17, 2014
  • Carnage on China Roads Shows Dark Side of Electric Bikes?http://t.co/HT3l0WKCzl?Going 25MPH in crowded conditions w/limited control, ouch $$?May 17, 2014
  • The Golf Boom in China?http://t.co/PcsnaFPFwy?Illegal 2build new courses, so they start as health clubs that have golf as a therapy $$ $FXI?May 17, 2014
  • Chinese Bad Loans Rise Most Since 2005 as Economy Slows?http://t.co/9x7XqlTqfh?Will the Chinese Govt allow failure or do large bailouts? $$?May 17, 2014
  • China Central Bank Calls for Faster Home Lending in Slump?http://t.co/Eo8SE2NnTi?China asks their banks 2b more aggressive in lending $$ :(?May 15, 2014
  • US Is No. 1, China Is So Yesterday?http://t.co/afQ16kIxBT?A little over the top, but correct, the US has many strengths that PPP can’t c $$?May 14, 2014
  • Xi Says China Must Adapt to ?New Normal? of Slower Growth?http://t.co/NN6gCTZzKV?Maybe, just maybe, China is serious raising consumption $$?May 12, 2014
  • Goldman to Citigroup Miss World?s Worst Selloff in China?http://t.co/KhZyggswLK?Long-term, this is a good thing. Short-term will b bumpy $$?May 14, 2014

?

Market Dynamics

  • Fooled by IRRs (Yale, Schwarzman?s Cases)?http://t.co/i8mrHR2RGD?With private equity, IRRs overstate returns received $$?May 17, 2014
  • Miller Wagers Gundlach?s Bearish Housing Position Loses?http://t.co/hAn8cFrC6F?Y Miller lost so badly during the crisis, no debt fear $$?May 17, 2014
  • Young, tech-savvy investors entrusting their portfolios 2 ‘robo advisors’ |http://t.co/yzeLARhbdy?Depends on how good underlying model is $$?May 17, 2014
  • From two secondaries, Cramer sees only one opportunity?http://t.co/URF5B1zjsy?Secondary IPOs validate levels & show real demand 4an asset $$?May 17, 2014
  • Do Alternative Investments Belong in Most Individuals’ Portfolios??http://t.co/cyZlROoxVe?No. 2 much illiquidity, opaqueness & high fees $$?May 17, 2014
  • US Stocks Decline as Russell 2000 Nears Correction?http://t.co/gG4tJF62UT?R2K down ~10% now from 3/18 high close $IWM $SPY $$ $IWN $IWO?May 15, 2014
  • Why retail investors almost always get burned?http://t.co/4lOEilO7Da?Retail $$ chases performance, and institutions aren’t much better $$?May 14, 2014
  • The Retirement Fund That People Set, Forget and Regret?http://t.co/HeIlJ84g8z?Target date funds usually ignore mkt over- & under-pricing $$?May 13, 2014
  • A New Ruling on IRA Rollovers?http://t.co/ldVnH4kpXm?Abuse of IRA rollovers leads to a tougher interpretation of regs; transfers r fine $$?May 13, 2014
  • The Problem with AAII Screens?http://t.co/2LH26F8MU5?Explaining the seemingly high returns from the Piotroski screen –> 2few stock pass $$?May 13, 2014
  • Low Yields, The Same Risks, and Rising Leverage?http://t.co/dsnoJpEg3L?listen to @DavidSchawel he is intelligent. Low yields r a warning $$?May 13, 2014
  • Hated Stocks Unlock Market as Analysts Prove No Guide to Gains?http://t.co/i03EjQPyUv?Choppy, trendless, themeless, wandering, not so bad $$?May 12, 2014
  • In Gundlach’s `No Normal’ World, U.S. Treasuries Just Can’t Lose?http://t.co/NnaCuthQTi?Long liabilities need income in a low rate world $$?May 12, 2014
  • America’s Retirement Delusion?http://t.co/jwCcJSz29Y?@Ritholtz explains y most people r deluded over retirement; the math is inexorable $$?May 12, 2014

 

Rest of the World

  • Portugal Laden With $293B Debt Exits Bailout Plan?http://t.co/CROhSi5zF2?Third-highest level of Debt/GDP in the EU; what if trouble comes $$?May 17, 2014
  • Japanese Hotshots Become Moms, Hit Dead End; Abe Weighs Foreign Maids to Help?http://t.co/ssozzyOXxe?Cheat kids of high-quality attention $$?May 17, 2014
  • NASA Asked How to Keep Space Station Going Without Russia?http://t.co/TYt9TOb9a0?A cost of a world that stops co-operating $$ #peacedividend?May 17, 2014
  • Modi-Led Bloc Wins Biggest India Mandate in Three Decades?http://t.co/szukEcJgKz?Deregulate, deregulate, & after that, deregulate $$ $SPY?May 17, 2014
  • Today’s Good News From Japan Is Terrible?http://t.co/CN61HuZB98?New taxes will slow economy, while inflation squeezes real incomes $$ $FXY?May 17, 2014
  • Global Growth Worries Climb?http://t.co/YuC9Vn1JdQ?Once deleveraging is complete, growth will resume, but govts would rather lever more $$?May 17, 2014
  • Goodbye, Crisis, as Bankers Start Lending in Portugal?http://t.co/FxGJccXsTy?What has survived is in better shape, way to go $$?May 15, 2014
  • Putin Emboldened on Instability Arc by EU Defense Divide?http://t.co/2koad3VT1A?What does the EU want 2b if it grows up? $$ $MACRO $FXE?May 15, 2014
  • Asian Junk Left Behind as Defaults Expose Cracks?http://t.co/O9b0R0oEBg?Hi debt levels, falling real estate prices, defaults -> yields up $$?May 14, 2014
  • Scots Seen Slipping Away Makes U.K. Seek Silver Bullet?http://t.co/5iSf5H3Ekg?How much UK debt will Scotland take & how large a tax rise $$?May 14, 2014
  • Former BOJ Policy Maker Sees Japan Inflation Dilemma?http://t.co/KhDKbDKxbz?Japan is a bug in search of a windshield; inflation no friend $$?May 14, 2014
  • Wives Revolt as India Election Booze Leaves Trail of Widows?http://t.co/iltIzfmUiF?Males get bribed w/alcohol 2 sell their votes. Some OD $$?May 12, 2014
  • Will The Last Businessman To Leave France Turn Out The Lights??http://t.co/0V71b3DWCJ?W/French businesses being acquired, what’s left? $$?May 13, 2014

 

Companies & Industries

  • Jill Abramson, Arthur Sulzberger, and the New York Times: What Went Wrong??http://t.co/vsOPjL4nGF?She goofed through poor salary research $$?May 17, 2014
  • New York Times Internal Report Painted Dire Digital Picture?http://t.co/qn3SEx8Zkw?$NYT figures out they r becoming less relevant $$ #doh?May 17, 2014
  • Bakken Crude Is Highly Volatile, Oil Study Shows?http://t.co/VNDvhdEeV5?Should b a way 2 extract & sell valuable ethane, propane & butane $$?May 15, 2014
  • Lehman a Gift That Keeps Giving for Paulson to King Street?http://t.co/lWxpljSkvI?A rising tide lifts all boats, flotsam and jetsam too $$?May 14, 2014
  • Yes, we’re in a tech bubble. Here’s how I know it?http://t.co/pESveWuIE3?Adam Lashinsky shares his qualitative signs for concern $$ $XLK?May 14, 2014
  • Where’s the Fertilizer? Farmers Grow Worried?http://t.co/qFNbHCidhd?Increased us of rail 2deliver oil snarls grain & fertilizer shipments $$?May 14, 2014

 

Finance

  • Congratulations to Class of 2014, Most Indebted Ever?http://t.co/tN3r70qKlO?Student debts r growing, but not the salaries of graduates $$?May 17, 2014
  • Why America’s Middle-Class Housing Crunch Is Here 2 Stay?http://t.co/gjGhVcvqd7?Affordability has fallen in almost every major metro area $$?May 17, 2014
  • Big Banks Said to Improve Loan Servicing Under Mortgage Accord?http://t.co/WFvD7yhP1u?Interesting 2c some better debtor treatment emerge $$?May 15, 2014

?

US Politics & Policy

  • Detroit Creditors Seek to Defend Pension Debt in Lawsuit?http://t.co/PZHRjsDrGf?Detroit attempts 2cheat pensioners & FGIC, & not sell art $$?May 17, 2014
  • More Detroits Are on the Way?http://t.co/f53SjxDxLh?Even as pension bombs tick, cities and states still borrow far beyond their means. $$?May 17, 2014
  • Huszar: Geithner Drove Me From NY Fed?http://t.co/i8R1zqenvY?Nuanced thought on Geithner’s strengths &weaknesses; my thoughts in comments $$?May 15, 2014
  • FCC Net-Neutrality Plan Sparks Response Before Release?http://t.co/nGXZjaSXs5?Paid deals, few paid deals, or no favoritism of web traffic $$?May 15, 2014
  • Income Tax Yo-Yo Hits US States?http://t.co/ipMtG8FyRF?Budgets should b set assuming zero taxes from capital gains and housing sales $$ TLT?May 15, 2014
  • How Hoenig, Norton Wield Influence on FDIC Board?http://t.co/ZIbcn5X46X?They hold intelligent positions & try 2 get most of them accepted $$?May 14, 2014
  • Fannie, Freddie Regulator Signals Broad Shift in Housing Policy?http://t.co/GS4ZNhVxqL?& http://t.co/fsVs5Ev2Ta A bad idea that won’t die $$?May 13, 2014
  • Book Review: ‘Stress Test’ by Timothy Geithner?http://t.co/zv8uHW9ilQ?Didn’t foresee mortgage crisis coming or its severity $$ $TLT $IEF?May 12, 2014
  • Rahm Emanuel Faces New Test With Chicago Pension Crisis?http://t.co/29uvyvAs5z?Inexorable pension math forces hard decisions & fights $$?May 12, 2014

 

US Economy

  • Why It’s So Hard to Get a Job?http://t.co/yZkgxZ9gaZ?@vpostrel provides some analysis on the skills mismatch. Employers would rather wait $$?May 15, 2014
  • Producer price gain offers cautionary note on inflation?http://t.co/9QVZ9Y8Ly3?Remember, inflation expectations r “well contained” $$ $TLT?May 15, 2014
  • US Consumer Prices Rise at Strongest Rate in Nearly a Year?http://t.co/TrPrAirLiE?Remember, inflation expectations are “well contained” $$?May 15, 2014
  • Income Inequality Is Higher In Democratic Districts Than Republican Ones?http://t.co/6T7SOBZlHU?Wealthier districts tend 2b more unequal $$?May 13, 2014
  • America on the Move Becomes Stay-Home Nation for Young?http://t.co/QEwbemllyW?Millennials move < , delay HH formation, buying homes, jobs $$?May 12, 2014

 

Other

  • Meet the Italian Who Beat Google to Web Search — and Gave It Away??http://t.co/A8ZuICxjwe?Meet man who inspired Larry Page &Google $$ $GOOG?May 17, 2014
  • The Problem for Sports Parents: Overspending?http://t.co/uhyMC0Tr0D?Note to parents: Sunk costs are sunk. Think it through b4 u spend $$?May 14, 2014
  • Inside Google’s Driverless Car: The Unused Kill Button?http://t.co/3AqBaTvXug?What it’s like to ride in one of the driverless cars $$ $GOOG?May 14, 2014

 

Wrong

  • Wrong: Bring Back the Girls?Quietly?http://t.co/dulFTAnUfp?In foreign conflicts, let the rest of the world grow up & handle it themselves $$?May 17, 2014
  • Wrong:Mortgages Should Be Easier to Get?http://t.co/OefAVCc1s7?Didn’t learn from the last crisis; 2 much mtge debt makes housing unstable $$?May 15, 2014
  • Wrong: Yes, the World Needs More MBAs. Here?s Why?http://t.co/MFHnBn7cc7?We would get more improvement by fixing elementary schools $$ $TLT?May 14, 2014

 

?Retweets, Replies & Comments

  • RT @DavidSchawel: “Average yields on CCC & below debt worldwide fell to 8.58% this week, the same investors were getting 3 years ago on BB ??May 17, 2014
  • RT @matt_levine: I know it’s journalism and stuff, but I’m really glad my job isn’t doxxing smart helpful anonymous working finance people ??May 15, 2014
  • “A better article would provide enough analysis 2say what the ETFs were doing w/the derivatives.” ? David_Merkel?http://t.co/qy0PdPz5Ap?$$?May 14, 2014
  • @felixsalmon I really doubt this, as does Charlie Munger.?May 13, 2014

?

On Emergent Phenomena

On Emergent Phenomena

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.

 

Sorted Weekly Tweets

Sorted Weekly Tweets

Rest of the World

 

  • Crunch Escalates as Money Funds Rival Shadow Banks http://t.co/JVU1w5ipZc Money funds in China suck liquidity away from wealth mgmt prods $$ Jan 20, 2014
  • Spain?s Worst Year for Work Leaves Rajoy Counting Cost http://t.co/KlaAGab4kY Private debts r not economically neutral. Large -> unstable $$ Jan 20, 2014
  • Richest Scandinavian Nation Extends Its Junk Boom http://t.co/ZVwwxEAdIa Norwegian financial institutions have hunger for yield in kronor $$ Jan 20, 2014
  • Bird Flu Kills Health Worker, Stokes Transmission Concern http://t.co/FVcxVhaH4L Would not b concerned, seems difficult to transmit virus $$ Jan 20, 2014
  • Rise of ‘Common Man’ in India Threatens Stability of Government Coalition http://t.co/vke6lnqM3s Things get squishy if no majority win $$ Jan 20, 2014
  • German Economic Growth Fails to Gain Impetus http://t.co/g9EQLN5HNg Depends on on the strength of those that import German goods $$ $SPY Jan 20, 2014
  • French First Lady Leaves Hospital http://t.co/hnnrYJwE2q At least *one* person cared about the behavior of Francois Hollande $$ #sad Jan 20, 2014
  • Solar Beats Gas Unlocking Middle East?s Heavy Oil, Report Says http://t.co/dmyDla2t7R Fascinating, using cheap solar energy 2 produce oil $$ Jan 20, 2014
  • Hot Demand for Emerging-Market Bonds http://t.co/LLZPDt4iyT This is puzzling , I don’t get how emerging markets r well financed $$ Jan 19, 2014
  • China encroaching on U.S. military dominance in Pacific, says top admiral http://t.co/h152VrhcEg So we can’t be global cop, good thing $$ Jan 19, 2014
  • Mobius Placing Biggest Wagers on Nigeria for Frontier Rally http://t.co/dsxt8Fft6e It is difficult to make $$ when there is a quiet war Jan 19, 2014
  • BENGHAZI WAS PREVENTABLE: Hillary Clinton cited for major security lapses http://t.co/5oCpBVlbdK Hillary will have a lot to answer for $$ Jan 19, 2014
  • Saudi King Sees Egypt Too Big to Fail Under Friendly General http://t.co/oIHo5fae5s Saudi Arabia gets pragmatic, supports Egyptian Army $$ Jan 19, 2014
  • The West Is Losing Ukraine http://t.co/GWCNb322Ss Ukraine is losing the West, as its leader strips freedoms, & fights protesters $$ $SPY Jan 19, 2014
  • Hollande?s Tryst and the End of Marriage http://t.co/EUGztMAKnq Secretly, even the French care about the stability of their leaders $$ $FXE Jan 19, 2014
  • Baltic Homes That Singed Scandinavia Banks Heating Up: Mortgages http://t.co/3KHcPllcKZ Beware large increases in indebtedness $$ $TLT $SPY Jan 19, 2014
  • China’s Indie Rockers Get Boost From Online Music Platforms http://t.co/MSbdnGFzRI Note the prominence of our friend Michael Pettis $$ $FXI Jan 19, 2014
  • Venezuela Post-Ch?vez: Hustlers’ Paradise http://t.co/ROstARpBkc Thugs run govt. Some people get cheap goods, while others get shortages $$ Jan 19, 2014

 

US Politics & Policy

 

  • Stop Obamacare?s Outrageous Bailouts http://t.co/uHYJvyRcM7 Once losses exceed 8% of premiums, taxpayers pay for 75% of excess losses $$ Jan 20, 2014
  • Questionable: Robert Gates?s Dishonorable Act http://t.co/bIEGf7o57k There r too many bad secrets in DC that we ought to know about $$ $SPY Jan 20, 2014
  • Which Fed Guidance Should We Believe? http://t.co/yqjOZX5AX6 As FOMC uses more & more words 2explain what they r doing we understand less $$ Jan 20, 2014
  • When Low Unemployment Is Bad News http://t.co/QLiWV8ocV5 Labor force participation rate continues 2 fall as punk economy creates few jobs $$ Jan 20, 2014
  • NSA Data Have No Impact on Terrorism: Report http://t.co/ug8GtnLjqz NSA is not worth the privacy risk, nor what we pay to employ them $$ Jan 20, 2014
  • Ari Fleischer: How to Fight Income Inequality: Get Married http://t.co/zz6lbDWiku Poverty rate falls 4 those who can make a marriage work $$ Jan 20, 2014
  • Obama’s Constitutional Education http://t.co/bH4jfr1rro & http://t.co/hdzNe1Blo4 Should consider unilateral actions modifying PPACA also $$ Jan 20, 2014
  • How the crash of safe assets fueled the financial crisis http://t.co/4Vlfxp7PUj When “safe” assets r found to have credit risk -> bust $$ Jan 20, 2014
  • Congress split over NSA’s domestic spying program, could just let laws expire http://t.co/mCD2pIbSl1 Divisive: left & right vs center $$ Jan 20, 2014
  • Young enrollees of Obamacare fall well short of goal http://t.co/VokUg0XFP6 When premiums rise as a result, people will b unhappy $$ $SPY Jan 20, 2014
  • Spy court judge slams proposed privacy advocate http://t.co/vkz4SyY5li We need someone arguing against spying on average people $$ $SPY $TLT Jan 19, 2014
  • What?s Net Neutrality? What Happened to Net Neutrality Yesterday? What Happens Next? A Q&A for the Rest of Us. http://t.co/xQACJvW8UC Read Jan 19, 2014
  • Volcker Rule Fix Will Aid Large and Small Banks http://t.co/nGv1TXtLT5 This is a lousy rule that allows banks to bury Trup CDO losses $$ Jan 19, 2014
  • Hillary Clinton’s political hit list of top betrayers includes Kerry, Kennedy http://t.co/33RFv63nKz This reminds me of the Nixon enemies $$ Jan 19, 2014
  • Judge Disallows Plan by Detroit to Pay Off Banks http://t.co/XQ6f1E2EZM Detroit should aim for the bast long-run outcome $$ $MUB $SPY $TLT Jan 19, 2014
  • Is Your Abortion My Free Speech?? http://t.co/kUA2XLRPB9 This is where constitutions fall apart, b/c they are limited documents $$ Jan 19, 2014
  • Reid Gives Landrieu VIP Treatment to Tip Election Odds http://t.co/UhQFIcPVt9 Democrats desperate to retain power, aid marginal members $$ Jan 19, 2014
  • Where Are the U.S.?s Millionaires? http://t.co/c8fXDEPD5S Alas, but Maryland sucks the blood of America, & creates millionaires $$ $SPY $TLT Jan 19, 2014
  • I Spent Two Hours Talking With the NSA’s Bigwigs. Here’s What Has Them Mad http://t.co/UrXexYR07k They hate Snowden’s guts $$ $thatsimple Jan 19, 2014
  • How the NSA Almost Killed the Internet | Threat Level http://t.co/1SLDuNq93O Sowing distrust in major internet utilities on privacy $$ $GOOG Jan 19, 2014
  • To enforce net neutrality, the FCC has to decide that Verizon is a common carrier http://t.co/WRb6VestAF Simple idea, simple solution $$ $VZ Jan 19, 2014
  • Student Loans, the Next Big Threat to the US Economy? http://t.co/5hXsK5SIFn Rule of Thumb: avoid lending in area w/greatest debt growth $$ Jan 19, 2014
  • ISS Open to Activists Paying Bonuses to Directors http://t.co/R1nNEkokg4 Carl Icahn wins a small victory; broader implications unclear $$ Jan 19, 2014
  • ?Wolf of Wall Street? Offspring Never Quite Die http://t.co/oXkGDZQ1Ml It’s a revolving door & FINRA doesn’t provide real access 2 data $$ Jan 19, 2014

 

Market Impact

 

  • Investor Animal Spirits Spread to Companies Worldwide http://t.co/e8pKcudzhR No such thing as animal spirits, only pursuing opportunity $$ Jan 20, 2014
  • JPMorgan Says BVG Owes $200 Million Over ?Unfortunate? CDS http://t.co/coJQm6dpD5 What’s worse is trifling yield prompting BVG’s greed $$ Jan 20, 2014
  • Hedge Funds Raise Gold Wagers as Goldman Sees Drop http://t.co/7dc9dGCUCA Hedge funds 2short-term could b forced sellers on weakness $$ $GLD Jan 20, 2014
  • Even money market funds in a crisis would have a hard time delivering a >2% loss, which would b borne by investors, & not systemic $$ Jan 20, 2014
  • How You Can Survive a New Era in the Bond Market http://t.co/BvSkibWANR Too many people banging the drum 4 higher interest rates $$ $IEF Jan 20, 2014
  • From the prior tweet, Central Bankers have drawn wrong conclusion: You can fix a bust by issuing lots of credit. $$ Jan 20, 2014
  • The correct answer is that you can avoid a bust by not running loose monetary policy as in the ’20s & ’00s. We still have pain to come $$ Jan 20, 2014
  • Where Have All the Star Fund Managers Gone? http://t.co/qwbpDyDlkU Focus on low fees, long track record, low assets & not index-like $$ $SPY Jan 20, 2014
  • Reinsurers face ratings cuts, S&P warns http://t.co/70dK590OCG Too much surplus chasing reinsurance biz; I’ve been lightening the boat $$ Jan 20, 2014
  • Interest rates don’t matter? Federal Reserve paper says so http://t.co/guAPSQ05II Sad but true, monetary policy is weaker than most think $$ Jan 19, 2014
  • Professor Puts Ideas in Practice as Reverse-Mortgage CEO http://t.co/T3Kt0cNQtc As w/most complex financial agreements, this will fail $$ Jan 19, 2014
  • Metals, Currency Rigging Is Worse Than Libor, Bafin Says http://t.co/KjDNrRVR7m Impossible 2 create benchmarks free of human gaming $$ $SPY Jan 19, 2014
  • Nobody Likes Bonds!: by @ritholtz http://t.co/FuYachZ58I But *I* like bonds, particularly short corporates, loans, & $TLT FD: + $TLT $$ Jan 18, 2014

 

Other

 

  • Comet-Chasing Spacecraft Sends First Signal in 31 Months http://t.co/mZB62QnIYm Satellite to hitch ride on Churyumov-Gerasimenko comet $$ Jan 20, 2014
  • The ‘Sharing Economy’ and Its Enemies http://t.co/Qnc4YyZrOh How Airbnb steps on the toes of hoteliers, regulators & the tax man $$ $SPY Jan 20, 2014
  • Device Thefts Fueling Rise In Larcenies http://t.co/ohZZt8q2Qh NYC larcenies fall if you exclude theft of Apple-branded devices $$ $AAPL Jan 20, 2014
  • The Right Way to Go After Big Clients http://t.co/J6hoSbcHVX Can waste a lot of time & find margins squeezed in the end $$ Jan 20, 2014
  • What Secrets Your Phone Is Sharing About You http://t.co/u7wv29tyMG Many hack your phone datato get insights into how you shop $$ $SPY $TLT Jan 19, 2014
  • Moms in ?Survival Mode? as US Trails World on Benefits http://t.co/uSPuVZztqV We can argue over any benefit, but what when US is broke $$ Jan 19, 2014
  • Tennis Quant?s System Doubles Money Without Knowing Players http://t.co/sAS5Xug7DN Small markets r often inefficient, allow 4 small wins $$ Jan 19, 2014
  • Miners Chopping $10B Search Bodes Next Price Boom http://t.co/6X7H0KAivX Miners cut exploration budgets, should lead to higher prices $$ Jan 19, 2014
  • How the Target Hackers Did It http://t.co/Z8Jc5WuBQQ Scraped RAM in POS machines grabbing all manner of data on card users $$ $TGT $SPY $TLT Jan 19, 2014
  • Another Bad Year for Religious Freedom http://t.co/3C3C5lrjCo Religion by its nature tends to invite constraint as it is a threat 2 govts $$ Jan 19, 2014
  • If Google Is a Guy, DuckDuckGo Is a Ghost http://t.co/rk9o0I3Uwx Want privacy for your searches? Consider DuckDuckGo $$ Jan 19, 2014
  • http://t.co/uPsFzsm1Tn How an intelligent lady managed to wrongfoot & destroy a website engaged in “revenge porn.” $$ Jan 19, 2014

 

Wrong

?

  • Likely Wrong: A New Asset-Allocation Strategy for Investing in Retirement http://t.co/eDqaDxhFuH Stocks r risky over intermediate periods $$ Jan 20, 2014
  • Wrong: Bonds Captivate $16T of Pensions http://t.co/NEpJSjCD7p Bonds have 2 go somewhere & defined benefit pensions have long liabilities $$ Jan 20, 2014
  • Wrong: Bailout Risk, Far Beyond the Banks http://t.co/iv5eT6lhea! Asset mgmt companies can go bust, & they pose no systemic risk $$ Jan 20, 2014
  • Wrong: Stanley Fischer saved Israel from the Great Recession. Now Janet Yellen wants him to help save the US http://t.co/CPMUggr3CA $$ $TLT Jan 20, 2014
  • Wrong: Ten quotes on the question of financial bubbles http://t.co/MNwr543Vsf No one focuses on the effect of borrowing money in bubbles $$ Jan 19, 2014
  • Wrong: Wealthy CEO Is Deeply Concerned About Budget Deficits http://t.co/gTGUwSF3hS Biased article doesn’t factor in entitlements $$ $TLT Jan 19, 2014

?

 

Replies, Retweets, and Comments

 

  • @DavidBCollum Look here: http://t.co/VaqQESCdCu Value Line has a chart that goes back to the 20s though… Jan 17, 2014
  • RT @cate_long: Please add http://t.co/QHQiCxYopc RT @researchpuzzler: a guide to finding data on the cheap from @AlephBlog http://t.co/mb? Jan 15, 2014
  • RT @Pawelmorski: Great spot @toby_n : DB’s Slok quantifies how difficult the Fed finds explaining itself. http://t.co/1quahXrnJD Jan 14, 2014
A Preview of the Future in Local Government Financing

A Preview of the Future in Local Government Financing

There are several bad examples in municipal finance — Illinois & Kentucky for example, but the worst is Puerto Rico.? What is one way that you can tell that things are bad?? People are leaving Puerto Rico, and generally they are those that are better off.

Quoting from the article:

Seven years into a grinding downturn, Puerto Rico is experiencing a historic exodus of residents fleeing the island’s battered economy and rampant crime. From 2000 to 2010, a net 288,000 people left for the U.S. mainland, according to the Puerto Rico Institute of Statistics. The pace has accelerated in the past few years as the economic situation has worsened, with a net loss of 54,000 migrants a year in 2011 and 2012 on an island of just over 3.6 million people. Preliminary data for early 2013 suggest the outflow is still strong.

The U.S. territory also is grappling with $70 billion in debt, ratings firms have downgraded its bonds to one notch above junk and investors fear it could default on its obligations.

When more than 1% of your population is leaving annually, you know something is wrong.? My main point here is not criticizing Puerto Rico, though.? It is part of a broader paradigm.? Badly managed states and municipalities will lose businesses and population, making them even less able to service debts.? It is akin to Matthew 25:29:

For to everyone who has, more will be given, and he will have abundance; but from him who does not have, even what he has will be taken away.

Jesus was not speaking about municipal financing, but the similarity is that those who do well will get more, and those that do badly will get less.

Several years ago, I was driving to visit my parents in Wisconsin.? As I headed into Illinois, I saw billboards encouraging businesses to move to Indiana or Wisconsin.? Municipal finance is unstable, because there is the incentive for people and businesses to move to municipalities where taxes are lower, and finances are better-managed.

We will see some states and municipalities fail financially over the next 25 years.? I can’t see how it could be otherwise.? And in the process, municipal bondholders, and pensioners will take losses.

So watch over your municipal bond portfolio, and avoid areas of the US where finances are badly managed.

Risks, not Risk, Again

Risks, not Risk, Again

One of the most important things I am here to teach readers is that there is no such generic concept as risk. ?There are risks, and they must be handled separately. ?Generic measures of risk such as standard deviation of returns, beta, etc. are unstable. ?This was driven home to me when I heard a presentation from endowment investment advisors, where they talked about their models, and how the models translated current economic statistics into investment decisions.

I’m sorry, but the models can not be that good. ?The financial markets are only weakly related to the real economy in the short-run, though the tie gets strong in the long-run.

Economies are unstable; get used to it. ?The concept of equilibrium is also not useful, and it holds economics in thrall, because it makes the math work, even though equilibrium never occurs.

It is far better to look at your investment in an oil refiner and ask “What are the possibilities for where crack spreads will be a year from now,” than to look at the beta, correlations to anything, standard deviations, etc. ?The coefficients aren’t stable.

Many advisors would rather follow a false certainty, than have to think for themselves, and have to deal with the complexity of the markets.

I am a quantitative analyst, and a very good one. ?That is why I pay attention to the limitations of models, and the possibility that past data might be special, and not so relevant to the present. ?It is far better that you pick over your portfolios, and ask what risks they are subject to, than to look at standardized risk measurements that describe the past or present.

Be forward looking. ?What can go wrong? ?Analyze each company. ?Find the three most pertinent risks — read the 10-K if you are having a hard time. ?See if you think the risks are worth taking.

But be assured of this. ?Merely by looking at market price derived variables for stocks, you won’t learn anything valuable about the risks of what you own, or might own. ?You need to think like a businessman, a sole owner, and ask whether the risks can be ably faced.

To the Consultants

Your models are garbage. ?You need to review your managers at the holdings level, or you are doing no good at all. ?All of the aggregate statistics hide the instability. ?Far better to understand the qualitative methods of managers, and analyze whether they have a durable competitive advantage or not.

That may not seem so scientific, but science is put to bad ends in areas where there is no good science.

If I were hiring managers, I would spend a lot of time on process and people, and ignore a lot of other items.

Summary

Mathematics is of limited use in analyzing investments and investment managers. ?It is far better to look for those that have good business sense, and invest with them.

Sorted Weekly Tweets

Sorted Weekly Tweets

Rest of the World

?

  • Morgan Stanley Leads Japan M&A for 1st Time Since 1997 http://t.co/QnzC26Wj7a Global expertise is @ a premium w/many deals across borders $$ Nov 30, 2013
  • Can Phone-Charging Stove Cut Wood Pollution and Save Lives? http://t.co/XY66nqo3xO Cook food w/less fuel & pollution; make electricity $$ Nov 30, 2013
  • Carney?s Housing Alarm Bell Nudges BOE Toward Stimulus Exit http://t.co/001OJ0Nj4o But will he really do it? Economic growth isn’t fast $$ Nov 30, 2013
  • In Thailand, It’s Crippling D?j? vu All Over Again http://t.co/wKMJIarSij Democracy does not fit the cultures of some nations well $$ Nov 29, 2013
  • OPEC Rift Emerging Over Iraq Output, Possible Return of Iran http://t.co/o329Mykhxa OPEC? Forgot about them. Iraq oil production grows $$ Nov 29, 2013
  • Aussie Set for Longest Drop Since 1997 After Takeover Rejected http://t.co/H2NqgiyDbP A currency is less valuable when use is restricted $$ Nov 29, 2013
  • Rice Bond Flop Adds to Yingluck Protest Misfortune http://t.co/3IFN70XXof Feels a little like 1997, could b messy in emerging markets $$ Nov 29, 2013
  • How Poland Became Europe’s Most Dynamic Economy http://t.co/mZCypvUwd8 Great, but just watch the outsized entitlement liabilities $$ $SPY Nov 29, 2013
  • Paul Krugman’s Blind Spot http://t.co/CsdsuCEMLb The countries that did not increase their deficits have done better than those that did $$ Nov 29, 2013
  • Zeppelins Seen Hauling Caterpillars to Mine Siberia http://t.co/u6gK2dcwMv Fascinating way 2 move heavy machines 2 mines in Siberia $$ Nov 27, 2013
  • Rich Russians Sparring With Putin Over $48B Olympics Bet http://t.co/oZYB1yjLc7 Cloudy view of who pays 4 & benefits from building Sochi $$ Nov 27, 2013
  • Pope Urges Countries Regulate Markets in Poverty Battle http://t.co/3IBNhhdqaV Jorge Bergoglio doesn’t understand the Bible; thus he errs $$ Nov 27, 2013
  • In Iran, Obama Achieves 50% of His Goals http://t.co/sOrvEn0zPK If everyone is unhappy, it might be a good deal; looks like Iran is happy $$ Nov 25, 2013
  • Europe’s Easy-Money Policy Snubs German Savers http://t.co/4Dx9vNk2nd Germans should take vacations in Portugal, Italy, Greece, & Spain $$ Nov 25, 2013
  • Islamists Settle on Turkey-Syria Border as War Blurs Lines http://t.co/cytuvPcIg8 Multiple player wars r inherently unstable & risky $$ Nov 25, 2013
  • Extremist Tide Poses Growing Threat to Europe, Katainen Says http://t.co/oZpeYEvTpi Euro puts nations in a straitjacket, fuels extremists $$ Nov 25, 2013
  • All for One: Xi Jinping and China’s New Deal http://t.co/ZReOpUO5ro Argues that the Chinese govt continues to centralize, not so sure $$ Nov 24, 2013
  • The Weekend Interview with Saudi Prince Alwaleed bin Talal http://t.co/pMd7xoDxjr Policies that favor Israel & Saudi Arabia r the same $$ Nov 24, 2013

?

Financial Sector

 

  • San Jose Pension Crush Spurs Bid to Ease California Pacts http://t.co/rLYJrZE3OT State laws will change 2allow cuts 2 nonaccrued benefits $$ Nov 30, 2013
  • Foreclosed Sales at US Auctions Double as Prices Gain http://t.co/AG75jENQ14 This is a good sign; B careful 2get a clean title if buying $$ Nov 27, 2013
  • Wall Street Props CLO Boom as Rules Lift Costs http://t.co/BZPdxJePL2 Get them out the door b4 new regulations require risk retention $$ Nov 27, 2013
  • Banks may pay $105B more to settle mortgage tab http://t.co/BhJdAHIwpR Did the banks even *make* $150B from 2005-8? Who gets the fine $$ ? Nov 27, 2013
  • Could banks charge fees for deposits? http://t.co/six4Q4UG8U Yes they could if the Fed tries to loosen policy further $$ Nov 27, 2013
  • How Regulators Will Toughen the Volcker Rule http://t.co/j5N620NF7P This is an impossible task & will result in lawsuits galore $$ #fail Nov 27, 2013
  • Speed Traders Meet Nightmare on Elm Street With Nanex http://t.co/k6ZUSSIprs Slanted article downplays Nanex’s insights on the markets $$ Nov 27, 2013
  • London Gold Fix Calls Draw Scrutiny Amid Heavy Trading http://t.co/cVB0xib8bZ Very difficult to eliminate all unfairness in benchmarks $$ Nov 27, 2013
  • Wall Street May Take Derivatives Regulator to Court http://t.co/R9KrxGlPn6 Arbitrariness in issuing regulations leads 2 pushback $$ $SPY Nov 25, 2013
  • Tackling The Fed: Jeb Hensarling’s Promise At Cato http://t.co/z2JqO2fAfQ After 100 yrs, it is time to review our $$ state of affairs Nov 25, 2013
  • Nonprofit that flipped homes to investors faces scrutiny http://t.co/tIBCJ9hfYC Not necessarily illegal, perhaps unethical, sneaky $$ Nov 25, 2013

 

Companies? & Industries

 

  • Repsol Deal With Argentina Was Propelled by Pemex http://t.co/trdr6hL6Oe Pemex mediates/wins, $REP loses, gets $$, $YPF free, Argent wins Nov 29, 2013
  • How Alyssa Milano Created a Fan-Gear Fashion Empire for Women http://t.co/XhCMON9WC8 Create clothes women like in team colors, not pink $$ Nov 29, 2013
  • Judge Approves ResCap Settlement W/Housing Regulator http://t.co/5sVjJyEIkw Unsec debt recovers 35%; I remember when they were hot stuff $$ Nov 29, 2013
  • Maker of Nutella and Tic Tacs Confident in Family Hands http://t.co/SmFZnx3YUT Profitable organic growth &staying private. Smart strategy $$ Nov 29, 2013
  • Clean Wind Farms Catch Up to Dirty Big Oil http://t.co/flu7fSKHXb The comments section is replete w/replies on the many ways birds die $$ Nov 27, 2013
  • Kobe Bryant’s $50M Shows Salary Cap Is Ruining NBA http://t.co/LPGUIX4vH2 Easiest way 2ruin a professional sports team is pay star 2much $$ Nov 27, 2013
  • For-Profit Colleges Face Consumer Bureau Probe on Lending Roles http://t.co/6EwvbpIYKf Student debt is a lousy deal avoid it if u can $$ Nov 25, 2013
  • Western Digital unwraps hybrid-data-storage system http://t.co/yiz1SR1HE1 Best of both worlds @ reasonable cost SSD&HDD $$ FD: + $WDC Nov 25, 2013
  • Monsanto vs. Mutant Crop Developers in Global Seed Market http://t.co/rYzs7109QS There r multiple ways of creating new strains, y fight? $$ Nov 24, 2013

 

Politics & Policy

 

  • Obama?s call to close Vatican embassy is ‘slap in the face’ to Roman Catholics http://t.co/BcN3f8za2s True enough, but I don’t c the need $$ Nov 29, 2013
  • Stay Home, America http://t.co/r11xLhn31Y Commentary on trying to turn Thanksgiving into a shopping day & what it costs us as a culture $$ Nov 29, 2013
  • What a Higher Minimum Wage Does for Workers and the Economy http://t.co/zawtVXr35p Democracy doomed if people vote 4 $$ from Treasury->them Nov 27, 2013
  • Should We Bail Out Cities? http://t.co/k64XxNAiR5 Answer: no, we shouldn’t. Most bailout r in areas we knew were high risk already $$ Nov 27, 2013
  • Not so sure: Democrats Give Up 2014 With the Filibuster http://t.co/AV5HU94NLH It’s a long way to the 2014 & 2016 elections $$ $SPY $TLT Nov 25, 2013
  • Rebirth Eludes Baltimore as Camden Reality Lags Promises http://t.co/e8NKriEsWV Professional sports arenas r economic idol 4 destruction $$ Nov 25, 2013
  • The Senate Goes Nuclear, Fallout to Come http://t.co/GBifaO09X8 A discourse on protecting the rights of the minority, a la the Founders $$ Nov 24, 2013

 

Market Impact

 

  • Warren Buffett and Time-Horizon Arbitrage http://t.co/92rVk5rbYF Buffett as a quality GARP manager; challenge is finding durable moats $$ Nov 27, 2013
  • Why Are Takeover Prices Plummeting? http://t.co/23tjJCDIkl Interesting 2c a lack of fervor among acquirers during high valuations $$ Nov 27, 2013
  • Madness & Sanity http://t.co/4HJTIUOLi8 It is flattering to be quoted at such great length; Good thing that I do not enforce copyright $$ Nov 27, 2013
  • Stock Market Trading: The 20 Rules Of Engagement http://t.co/Hnm2anKYVx Useful rules 4short-term traders from the estimable Todd Harrison $$ Nov 27, 2013

 

PPACA / Obamacare

 

  • Hit-and-Miss Obamacare Site Still Frustrating at Deadline http://t.co/Urchj3yyQc It could never have been fully fixed by 11/30 $$ $TLT $SPY Nov 29, 2013
  • A Fight Over Contraception Won’t Help Obamacare http://t.co/Wv0iQ10e2c Tie PPACA 2 abortion & the fight is unlikely 2 ever end $$ Nov 29, 2013
  • Even Subsidized Obamacare Plans Haven’t Found Takers Yet http://t.co/ERjKs9etHm Particularly among the young & healthy it doesn’t help $$ Nov 27, 2013
  • Is Obamacare Challenging Enough for Obama? http://t.co/8ICoSBbtT1 Astounding to hear an ideologue like Margaret Carlson criticize Obama $$ Nov 27, 2013
  • Manias, Panics and ObamaCare Crashes http://t.co/2xklhLaW8p PPACA was fatally flawed, the work of ideologues who don’t get healthcare $$ Nov 24, 2013

Other

 

  • Startup Scrambles to Replace the Egg http://t.co/h2RU6UXGuY Intriguing idea 2try 2replace eggs w/ingredients commonly fed 2 chickens $$ $TSN Nov 25, 2013
  • When Marketing Is Strategy http://t.co/aiUTS3C3O5 Adapt your products & services 2 meet needs of consumers 4 convenience & effectiveness $$ Nov 25, 2013
  • Magnus Carlsen’s Win in Chess Championship Shows Powerful Role of Computers http://t.co/pyG2He9iz9 Computers improve the abilities of men $$ Nov 24, 2013
Sorted Weekly Tweets

Sorted Weekly Tweets

China

 

  • Pettis: I would argue that until Beijing has cleaned up its debt problems and its very unstable balance sheets, it cannot move quickly. $$
  • Pettis: Reducing the [interest] subsidy by raising rates would cause them all to bleed money. (DM: thus fin’l liberalization difficult) $$
  • Pettis: Far more than 100% of total SOE profits come from the interest rate subsidy (not to mention other subsidies…) $$
  • Target loopholes in pension system firststks.co/fVB7?China pensions exceeds the stupidity of US but not Greece: ret ages 2 low $$
  • Chinese steel association seeks to tackle ‘vicious competition’?stks.co/pBzz?A lot of words trying to explain away 2 much steel $$
  • China Slowing Reserves – A reverse QE?stks.co/hUjH?Hu Jintao ate sour grapes & Xi Jinping’s teeth r set on edge $$#dealtabadhand
  • Policy battle rages in China as slowdown feeds ‘sense of crisis’?stks.co/qBXa?Hard to overcome bureaucracy stifling the economy $$

 

Europe

 

  • Germans Splurge on Italian Homes Locals Can?t Afford?stks.co/iUpP?Pushes $$ into Italian economy, don’t kvetch
  • German euro founder calls for ‘catastrophic’ currency 2b broken upstks.co/tBWC?The political experiment should end; harm>good $$
  • Eurozone crisis deepens as German ‘sado-monetarists’ refuse to back QEstks.co/gUXD?Either centralize or dissolve the Eurozone $$
  • Southern Europeans Flock to Germanystks.co/cTEw?Cheaper labor emigrates to Germany to benefit from their capital invested $$
  • Sweden a Crisis Casualty No More Shows How to Get Haven Glowstks.co/bTBH?Which inflates asset values in their economy, great $$

 

Rest of the World

 

  • Egypt?s Wheat Farmers Hobbled by Fuel Shortages as Silos Run Lowstks.co/pCGK?Who would have the courage 2free Egypt’s economy? $$
  • Dollar Buying Continues Apace After ?100 Break?stks.co/iVEm?&?stks.co/jV1m&?stks.co/fVAg?Three on?#Japan?$$
  • Iran Cracks Down Ahead of Electionstks.co/gV0Q?The Ghanoon newspaper says. “Only in Iran: Election comes and Internet goes.” $$
  • SAT Scandal Shines Harsh Light on South Korean Academics?stks.co/qC0LSAT exams cancelled in S. Korea, a first for any country $$
  • Egypt Investment Collapsing as Citizens Turn Into Vigilantes?stks.co/eTds?It was smart 2 topple Hosni Mubarak & Saddam Hussein $$
  • In India, a Quixotic Fight Against Car Honks?stks.co/sBQj?Makes me want 2 create a bumper sticker, “Honk if you love India!” $$ 😉

 

Companies & Industries

 

  • Blackstone Targets Bulging Corporate Coffers Via New Unit?stks.co/sC9w?W/ MMFs under threat, alternative S-T income funds arise $$
  • Temporary Workers Near US Record Makes Kelly a Winner?stks.co/rC9qStaffing firms benefit from need 4 fewer full-time workers $$
  • And, as an aside, once PPACA [Obamacare] really kicks in, part-time work may become even bigger; very ill-thought out law, unforced error $$
  • Delta Capital-Return Plan Puts Focus on Cash Flow?stks.co/cThy?Airlines r2 capital intensive 2b run 4 free cash flow; dubious $$
  • Scor lead bidder for Generali USA in $800m deal?stks.co/qC1o?Not surprising 2c Scor overpay;?$RGA?is conservative $$ | FD: +?$RGA
  • Some Insurers Turn Away Variable-Annuity Money?stks.co/eTaG?When a life company does this, fund it, & don’t surrender; you won $$
  • Merged Bonds May Spur Fannie, Freddie Revamp?stks.co/dT4a?Offer the equity interests a kiss goodbye & merge them into GNMA $$
  • Cheapest Way to Rob Bank Seen in Cyber Attack Like Hustle?stks.co/tBQ6Start Denial of Service attack, raid $$ during distraction
  • New technology propels ‘old energy’ boom?stks.co/rBPp?Alternative energy will make sense when conventional energy gets scarce $$
  • Amazon?s growing threat 2 H-P, Dell and Oracle?stks.co/qBQR?It’s amazing how you can beat your competitors w/no profit FD: +?$ORCL
  • Some Verizon Investors OK With Paying Premium 4 Vodafone Stake?stks.co/bTAjSome large?$VZ?shareholders ok paying $130B FD: +?$VOD

 

US Politics & Economics

 

  • Deficit Reduction Is Seen by Economists as Impeding Recovery?stks.co/eTyxEconomists have not been right, y listen 2 them? $$
  • ??Big banks get a great deal when they borrow from the Fed,? Warren said on the Senate floor. ?In effect, the American taxpayer… (1/2)
  • …is investing in those banks. We should make the same kind of investment in our young people who are trying to get an education.? (2/2) $$
  • Private Student Debt Refinancing Could Help Economy, CFPB Says?stks.co/fV03Elizabeth Warren is a dangerous loony in this case $$
  • @AllenSammey?When a politician lobbies to use the borrowing power of the Fed for narrow political ends, that is dangerous, no?
  • @AllenSammey?Also, read the two prior tweets. They were meant as a group. I like a lot about Warren, but there is a lot 2 worry about also
  • @AllenSammey?That’s y I lend to my own children @ 0% in place of student loans; that they r not dischargeable in BK is another neg feature
  • Blacks Surpass Whites in Voter Turnout, Census Data Show?stks.co/hVAA?Helps explain the last election’s results $$
  • Colleges Soak Poor US Students While Funneling Aid to Rich?stks.co/bTURColleges r funded by donations. Poor people can’t donate.
  • What was Gallagher thinking?stks.co/dTHw?Difficult 2harm muni bonds w/strong economic purpose/pledges behind them $$ by?@munilass
  • Time for Americans to Rethink Retirement??stks.co/rBX4?If u have not concluded that u won’t retire, u r not paying attention $$
  • Federal Reserve Blows More Bubblesstks.co/eTLo?Ron Paul minces no words about the foolishness of current Fed policy $$
  • If this was a pill, you?d do anything to get it?stks.co/jUPk?Simple: have a nurse check on sick elderly at home once a week $$
  • Gore Is Romney-Rich With $200 Million After Bush Defeat?stks.co/pBWE?An utter hypocrite, pursuing his politics 4 financial gain $$
  • US Non-Farm Payrolls – The Hidden Weaknesses – not +165k but -376k?stks.co/rBPu?A pessimistic alternative view of jobs report $$
  • Too Much Asset Inflation?stks.co/eTGDTakes on Paul Krugman’s blather about there not being enough inflation, given asset bubble $$
  • Everything You Think You Know About the Fed’s Exit Plan May Be Wrongstks.co/rBOX?Fed may try 2 tighten &hold down long yields $$
  • Reverse Revolving Door: How Corporate Insiders r Rewarded, Leaving Firms For Congress?stks.co/gUMN?Y the Purple Party rules DC $$

 

Market Dynamics

 

  • Seth Klarman Warns of False Calm in the US?stks.co/jUu8?It is far easier 2b lax in $$ policy than it is to remove laxity#klarman
  • Investor Demand Propels Cheap Corporate Debt?stks.co/dTcm?Note that borrowing is not going on to fund organic growth, generally $$
  • Yields on Junk Bonds Reach New Lowonline.wsj.com/article/SB1000??When the average yield on junk bonds drops below 5%, we should run away $$
  • Listening to Harry Markowitz drone on about MPT, while I have 2 questions pending.?stks.co/aTco?Webinar:Arizona CFA socieities $$
  • As Sohn gears up, is it open season on Paulson and other hedge funds?stks.co/qBls?Hedge funds have a weak liability structure $$
  • This graph is 1 of many reasons y I follow the credit cycle:?stks.co/iUiM?Not perfect, but credit is the heartbeat of commerce $$
  • ?Putting Dow 15,000 in Perspective? by@ReformedBroker?stks.co/qBe9?Round numbers fascinate us; processes behind them r unclear $$
  • Spinning single-family home investments into mortgage-backed securities?stks.co/iUe9?Better idea than securitizing rents $$
  • Current Account: Cheap Junk Leads to Expensive Mistakes?stks.co/aTNl?A lower coupon on a junk bond means more refinancing risk $$
  • Wall Street?s trading businesses turn to survival of the least dead?stks.co/gUR6You want 2b the last man standing: monopoly $$
  • Rush for gold coins, jewels peters outstks.co/hUcf?Looks like the drive to own physical precious metals has finished 4 now $$
  • Speedy Robots Still a Wall Street Perilstks.co/gUQe?Anytime a strategy gets too large, the non-linearities kick in, w/crisis $$
  • Chart of the Day: NYSE Margin Debt Raises Eyebrows?stks.co/hUcAAsset/Liability mismatch invites trouble; margin debt goes up $$

 

Other

 

  • Better Than Buffett, This Investor Made Me Rich for Life?stks.co/bTj3@davidweidner?’s tribute to his late mother $$ Love > Money
  • If Spending Is the Goal, Try Use-It-Or-Lose-It Gift Cards?stks.co/iUpXSeiniorage should b distributed to the people per capita $$
  • The Internet Kills More Jobs Than It Creates?stks.co/fUm6?It is shrinking the cash/taxable economy, but not the economy. $$
  • Today?s CEOs Are Too Timid for the Times?stks.co/aTbG?The marginal productivity of capital is falling b/c of debt deflation. $$
  • David Ferrucci: Life After Watsonstks.co/dTER?Creator of IBM’s Watson goes 2Bridgewater 2apply Big Data & AI 2forecasting econ $$

 

 

Berkshire Hathaway

 

  • $BRK.A?CEOs Spend Quietly, Match Buffett on Heinz Deal?stks.co/dTmE?FD: +$BRK.B?| Clever subsidiary CEOs grow BRK organically $$
  • New book teaches children ABCs of Buffett’s Company?stks.co/iUpW?There would b a Hebrew version, but the Gecko isn’t kosher $$ 😉
  • I think reinsuring Long Term Care is stupid almost always. Insureds know more than insurer, who know more than reinsurer cc?@retheauditors
  • BRK knew *far* less than SwissRe about the policies they were reinsuring. On life re, meh, but 2 reinsure LTC takes real knowledge $$ +?$BRK
  • Buffett’s Ribbing About Swiss Re Dispute Is Fibbing?stks.co/bTGH?SwissRe took BRK 2 the cleaners FD: +?$BRK/B cc@retheauditors?$$
  • Warren Buffett worries about Fed’s ‘huge experiment’?stks.co/eTFv?Reliable: removing accommodation is harder than providing it $$
  • Munger: It’s time to break up the banksstks.co/hUcC?Munger knows that you should mix deposit insurance w/investment banking $$
  • A Lesson From Warren Buffett: Doubt Yourself?stks.co/sBPW?Many great investment teams encourage disagreement 2 test theses hard $$
  • ?We Want to Win?:Berkshire Hathaway Ann’l Meeting, 2013 Edition?stks.co/gUPpBuffett could help?$VZ?buy VZ Wireless FD: +$BRK?$VOD

 

 

Wrong

 

  • @creditplumber?My article is about insurance companies; u r taking my words out of context
  • Wrong: Fed in 2008 Showed Panic of 1907 Was Excessive?stks.co/jV1r?If/when the tightening cycle ends & things r fine, then crow $$
  • Wrong: Earnings Seen Lifting S&P 500 to Real Record?stks.co/bTjd?Profit margins would have 2 rise from record highs 2 do this $$
  • Wrong: Y I Have Never Said 2Invest With Warren Buffett?stks.co/qC02?U don’t tug on Superman’s cape, u don’t spit in the wind… $$
  • Unsure: Chanos sees downturn in hard disk drive industry?stks.co/iV3L?Will b hard to fight all of the free cash flow $$
  • Wrong: Larry Fink’s radical retirement recommendation?stks.co/fUaf?Please do *not* constrain people 2save; failure is an option $$
  • @AllenSammey?I mean that people should be free 2 take care of current needs rather than being forced to save, even if it means poor when old
  • Wrong: House Democrats Seeking Control Eye 17 Split-Ticket Seatsstks.co/gURH?This article asserts, it does not prove $$
  • Wrong: Bond Buyers See No 1994 Rout Helped by Bernanke Clarity?stks.co/qBQsNo one saw 1994 coming either; we r flying blind $$
  • Wrong: Crises Before and After the Creation of the Fed (2013-13, 5/6/2013)stks.co/gULU?Very premature 2 run a victory lap $$

 

Replies, Retweets & Comments

 

  • @SarcasticBull?I agree.
  • That is funny & weird. Very, very weird $$ RT?@izakaminska: Meme time:Hitler finds out about negative interest ratesstks.co/fUfN
  • @munilass?The danger 4 those that seek notable media coverage: media likes bold predictions, b/c they are “newsy.” Kind of a trap $$
  • @ScrollnKey?6x prior premium? Thanks. Post-Cyprus I think many people are analyzing how they can preserve their wealth.
  • Building a bigger, badder, bubble RT@kmac: RBA statement herebit.ly/12cL7Kk
  • @ScrollnKey?How is it compared to six months ago?
  • +1 Houses r expenses RT@cullenroche: Rarely do I disagree with Rick Ferri, but I do here.rickferri.com/blog/investmen?
  • @OffRoadFinance?I will accept the premise of the paper once we get through the ultimate tightening cycle, which may not b 4 decades
  • Van Hoisington, Lacy Hunt & Gary Shilling would agree RT?@carney: …a lot of people making bets on rates rising could get burned badly …
  • @ReformedBroker?thanks
  • @The_Analyst?@ReformedBroker?There are levels of trust; this one ain’t so high, but it’s a straw blowing in the wind
  • @ReformedBroker?What was the forward PE on the cyclicals?
  • @gmacd18?Too early to say. Japan has been given a temporary free pass from the G20. When more nations try2 weaken their currencies, we’ll c
  • RT?@volatilitysmile: “The tax deductibility of interest played its part in creating this mess, both in the corporate and mortgage markets.”

 

FYI

?

  • My week on twitter: 51 retweets received, 1 new listings, 87 new followers, 61 mentions. Via:?20ft.net/p

?

Stable Value Versus Rising Rates

Stable Value Versus Rising Rates

If you own a short-to-intermediate term bond portfolio, and you did not need to tap the cash for a few years, would you prefer rising short interest rates, or falling rates?? The correct answer is rising rates, because you will be able to reinvest interest payments paid in higher yielding securities.

That’s why I take issue with the following article on stable value funds from the Wall Street Journal.? Some might remember my “Unstable Value Funds” series.? Though the worst never happened, many funds came close to “breaking the buck.”

I once designed a substitute for Stable Value Funds, one that could trade on Schwab’s platform.? But the math of the product meant that it could be blown apart by a very rapid rise in short rates.? To try to remedy that, I rewrote the pension services contract to put in? a Force Majeure clause that would allow? the insurance company to alter many terms of the contract to avoid “breaking the buck.”?? (In 1997-8, I thought ahead, and designed a contract that had modes for normal and abnormal environments. Hey, Nationwide Insurance, it’s your intellectual property now. Use it.)

My main point is that stable value funds will lag in a rising rate environment.? Yes, it will not appear that you are losing money in the short run. but the credited rate will lag for 2-3 years, while returns to the short-to-intermediate term bond portfolio will be hurt in the short-run, but do well in the intermediate-term.

Be wary.? Even though Stable Value funds do not face credit risk problems now, rising rates would invite anti-selection by making short-to-intermediate term bond funds look attractive, even with the 90-day switch into equities or longer bonds.

Remember, Stable Value funds are bond funds that pay a little extra to guarantors, so that payments for death, disability, fund switching, etc., go out at book value.? They have to pay the fund management fees and the small guarantor fees.? The short-to-intermediate term bond fund can invest a little more aggressively, and only has to pay out the management fees.? Over the long haul, the short-to-intermediate term bond fund will beat most Stable Value funds, but the ride will seem more bumpy, because except in the worst scenarios, the Stable Value fund acts like a savings account, slowly accruing value, while the underlying investments actually behave like a short-to-intermediate term bond portfolio, with all of the volatility.

Theme: Overlay by Kaira