Friday, December 28, 2012

"Fiscal Cliff" Sanity

...from Bill McBride, here.

Wednesday, December 26, 2012

Interview with Andrew Smithers

I recently did a q-and-a with one of my favorite economists, Andrew Smithers, of Smithers & Co. in London. The topic is how much output goes to workers, and how much goes to owners of capital. Not the politics of this matter, but the economics. (Granted, these cannot be considered in every way separate.)

The interview went up at the PBS NewsHour website today, and the link is here.

What Smithers says is relevant to a recent post here about the width of profit margins.

Thursday, December 13, 2012

Kind of Fun

Any day on which I can get one of my rhymes quoted in the first paragraph of an article in The Economist, is a fun day.

("Merle Hazard" is the alter ego name I use when writing a song or lyric about finance and economics.)

Wednesday, December 12, 2012

QE4, QE4S, etc.

Very nice piece of satire by Ritholtz about today's "we're going to keep printing" announcement from the Fed.

Monday, December 3, 2012

Euthanasia of the Rentier

Worthwhile thoughts on financial repression from James Montier of GMO.

Monday, November 26, 2012

Reinhart & Rogoff in Barron's

The new Barron's interview with Carmen Reinhart and Ken Rogoff is well worth reading. No registration is required, at least for now.

The title is "Top Culprit in the Financial Crisis: Human Nature." They do their homework. Rogoff sees GDP growth being depressed by 1% for a decade or more (probably counting from the onset of the crisis), and advocates higher inflation.

Tuesday, November 20, 2012

There is Hope

A cluttered desk is not uncommon among money managers, even with digital formats reducing the need for everything to be on paper. There is a lot of material on public companies to try to keep up with.

So I was cheered to see this photo of Einstein's office, taken on the day he died.

Monday, November 19, 2012

Investment versus Speculation; Keynes

A good quote from J.M. Keynes: "Investing is an activity of forecasting the yield over the life of the asset; speculation is the activity of forecasting the psychology of the market."

Lots of good Keynes material at this site. This chronology of his life is particularly worthwhile.

Friday, November 16, 2012


Breaking news: TNInvestco was a bad idea.

It was basically a give-away by Tennessee's former governor, Phil Bredesen, to some politically-connected venture capital investors. It is awfully hard to take this program seriously, and I don't. In essence, it amounts to the government saying, to some very plugged-in investors, "Here's $20 million for each of you. See how you do investing for a few years, in Tennessee companies. At the end of it, give the taxpayers back half, and you keep the rest. But pay yourself a fee from the corpus in the meanwhile, of course."

Not only was the concept very poor, but the oversight is giving cause for some concern, too. This is according to a piece by Ken White in the Nashville Post, and another from Brian Reisinger at the Nashville Business Journal.

[Edited 12/10/12]

Thursday, November 15, 2012

An Athenian Dialogue

A conversation I had in Athens this past summer is posted online here by Paul Solman.

The dialogue was with a native of the city, Georgios Michalopoulos. He is a few months from finishing his Ph.D. in modern Greek history. Georgios gave me a little perspective on the culture and economy of Greece. You will need to click the link to see exactly how.

Wednesday, November 14, 2012

A Modest Proposal from Mr. May

My friend Josh May suggests that the capital gains tax rate on stocks be set at time of purchase, and that it vary according to the price-earnings ratio of what you buy.

His idea is that if you buy a very cheap stock, you get a low tax rate. A 5 P/E would get you a 5% long-term capital gains rate. If, on the other hand, you buy a nosebleed IPO stock at a 70 P/E, 70% of your profits (if you make any, which is not likely) would eventually go to the IRS. We should encourage sound investment and discourage speculation, and this is Josh's way of doing it.

I like this idea! Though it is not exactly practical -- and Josh is proposing it with tongue pretty firmly in cheek. One problem is that some companies are losing money, and their stocks have no meaningful P/E.

He has a point, though. Could the tax rate vary based on the 10-year Shiller P/E of the whole U.S. market on the day of purchase?

I have one other version, more workable, of the May Plan. It may catch the spirit even as it abandons details: simply have the capital gains rate go down over time. Current law does this, but only with a single bump down (from the ordinary income rate to the lower capital gain rate, at the one-year mark). We could do more. The longer you hold, the lower should be your rate. Pay a 40% tax on your gains at one year, 39% at two, 38% at three, and so on. We could stop the discounting with a rate of, say, 21% when an investment is held for 20 years. (Keep going, if you think that would be better policy.)

This would help get people to think with a longer time horizon.

I guess this is a variant of a Tobin tax -- tax as a way of dampening too-frequent trading, i.e. speculation.

[Edited 11/14/12.]

Monday, November 12, 2012

James Mackintosh on Stock Market Valuation

Good piece by Jame Mackintosh in the FT this weekend on the valuation of the U.S. stock market. (Registration required.)

Saturday, November 10, 2012

Fiscal Bluff

Calculated Risk has suggested that the fiscal cliff could more accurately be called a fiscal hillock, or, given the gamesmanship taking place, a fiscal bluff.

I mentioned this to my ever-insightful friend Josh May. He replied, "yeah, but you can still fall off a bluff."

Thursday, November 8, 2012

Vampires and Zombies

I think I know why vampires and zombies have been especially popular in fiction lately: bankers are vampires, and their bailed-out institutions are zombies.

In 1950s science fiction, a repeated theme was invasion by Martians. This likely reflected, to a degree, the public's fear of Soviet expansion during the Cold War.

OK, so, I am just joking, for the most part, about why zombies and vampires are popular, but when it comes to what is going on deep in our collective unconscious, you never really know. This piece by Yves Smith, on Japan's experience creating financial zombies, is what got me thinking about the businesses that walk dead among us.

Wednesday, November 7, 2012

And the Winner is...

...Nate Silver. Good piece by Barry Ritholtz on him. I recommend Silver's book, The Signal and the Noise, regardless of your politics.

Thursday, November 1, 2012

Trouble for the Fed?

I would imagine that articles like this recent one about dividend recapitalizations (registration at WSJ required) will give doves inside the Federal Reserve some pause. They have got to be worried about blowing air into yet another bubble. The market for leveraged loans is in the process of getting bubbly again; with yield on safer instruments held artificially low by the Fed, investors and banks seem to be getting sloppy again.

In my imagination, at least, the hawks within the Fed's walls, like Jeffrey Lacker of the Richmond Fed, are passing out copies of this article, saying "I told you so." Are the doves thinking twice, at least privately, and beginning to consider more seriously the idea that, as bad as doing less might be, it might be preferable to doing more?

The Fed will lose a lot of credibility if its fingerprints appear on another financial market debacle.

This is speculation on my part. I wish I could peek into those discussions now. Preventing another debt bubble is not the only thing that matters to the Fed's board members, but I'm sure they must be sensitive to signs of one growing.

Of course, part of the demand (not the supply) for dividend recap loans could stem from a desire to get ahead of tax increases on dividends that will hit at the start of the year. It will be interesting to see if the pace of dividend recaps changes next year.

Tuesday, October 30, 2012

Don't Know Much...

Two big, unanswerable questions are:

1. What is consciousness?

2. Is randomness is an essential feature of nature? Or, is it merely an expression of our lack of knowledge? 

The first question, about consciousness, boils down to asking how unthinking matter can think.

What I mean by the second, which is about randomness, is this. When, for example, we lay odds that it will rain 30 days from now, do the odds reflect our lack of knowledge about what is already destined to happen? Or, rather, is the future weather not known yet even "in the mind of God," so to speak?

Given that we don't have a solution to either of those two, essential questions, how well-grounded can any of our knowledge of other things be? Obviously, I mean philosophically. (As a practical matter, I am not too worried that my chair is about to collapse through the floor.)

The most useful thing I have read about consciousness comes from Erwin Schrodinger, the physicist. Trying, I think, to get us comfortable with the idea that we will never figure out what consciousness is, he likens consciousness to, essentially, a camera that can take pictures of anything around it, but not of itself. (Even with a mirror, you cannot get a picture of the chamber inside, where the action is.) But being unable to see the inside of the camera is a pretty small price to pay for all the great things you can do with it, so, we should just enjoy using it, and stop complaining about the one thing it cannot render. Put a bit differently: to be able to look at matter, you have to write yourself (your mind) out of the picture.

Consciousness-as-camera may be either Schrodinger's metaphor, or my own attempt to summarize what he was saying in other ways. I can't recall (and do not have time to research it). The insight is his, however, not mine. There are passages of this kind in his book, Science and Humanism, which I recommend, and would take with me to a desert island. I also recommend the Entitled Opinions episode on Schrodinger, which you can find elsewhere online.

[Edited 10/30/12.]

Monday, October 22, 2012

The U.S. Stock Market

Good piece by Brett Arends in The Wall Street Journal about the expensiveness of U.S. stocks, on average, as measured by Tobin's q and the 10-year P/E. Link is here (I think it will work without registration). Ignore his piece's headline, which I am sure an editor wrote.

The piece Arends wrote is not dissimilar to a post I put up last week.

[Edited 10/22/12.]

Thursday, October 18, 2012

Arbitraging the Political Futures Markets

A nice post by Paul Solman, economics reporter for the PBS NewsHour, and all-around good human being, on how to arbitrage the political futures markets.

One thing I really like are the warnings at the top of the piece from Doug Dachille. Dachille used to trade for JP Morgan. He does a good job of laying out the risks that arbitrage of this kind entails, such as basis risk and counterparty risk. One might decide to run these knowingly, but they cannot be ignored. There is much of intellectual interest here, but, being of like mind with Dachille here, I present this as a window into an interesting market rather than as a recommendation for a trade.

Tuesday, October 16, 2012

Are Profit Margins Too Wide?

This piece in the NYT from the weekend contrasts two views of the U.S. stock market. In one corner is Yale professor Robert Shiller, who says that the market is valued meaningfully higher than it normally would be, i.e., higher than it should be. In the other, Wharton professor Jeremy Siegel, saying that it is fairly valued.

These guys are both smart. Who's right? Probably Shiller has the better argument; the market is high.

As the NYT piece suggests, it is hard to resolve the argument using only the Shiller 10-year P/E (also known as the cyclically-adjusted price-to-earnings ratio or "CAPE"). The market looks high on Shiller's number, but it looks fairly valued based on a trailing 12-month P/E ratio. Plausibly, this is because the two recessions of the past decade have made average 10-year earnings figure too low. I mean, that's the argument the bulls make. On its face, it seems like it might be right.

The bears, in Shiller's camp, argue that the current earnings number is above trend, and at risk of reverting. In the end, that seems to be the stronger case. Shiller's 10-year P/E number looks about right, even with the recessionary earnings in as part of the history. I think the easiest way to get a sense of this is to use the "q" ratio from Andrew Smithers (Tobin's q, basically) that I blogged about yesterday. When you click through to the data in yesterday's post, be sure to look at how very well correlated q and "CAPE" are over time. The fact that they say the same thing is a pretty decent indicator that the "high market, high profit margin" camp, represented by Shiller, has the stronger argument.

As Bob Arnott says in the same NYT piece, there are other bits of evidence that help Shiller's case, like the fact that wages as a share of GDP are depressed. But I think you may find that using the q chart I linked to yesterday is a particularly intuitive way to see it.

Shiller opines in the linked article that stocks are high, but not crazily high. Long-term returns from these levels will have to be lower than they have been historically.

[Edited 10/16/12 and 10/17/12.]

Monday, October 15, 2012

Andrew Smithers, on U.S. Stock Market Valuation

Andrew Smithers does thoughtful work on the Shiller 10-year P/E ratio, and Tobin's q.

Here is his (bearish) view on U.S. stock market valuation, as of a little bit earlier this year.

Thursday, October 11, 2012

Beware the "Central Bank Put" Bubble

Good piece (registration required) by Mohamed El-Erian in the FT.

A few choice sentences:
Central banks are neck deep in extreme policy experimentation mode, and getting inadequate support from other government entities. The longer this persists, the higher the risk that policy benefits will be offset by collateral damage and unintended consequences; and the greater the political heat on central banks. If the critical hand-off to fundamentals does not materialise, the reaction of markets will not be pleasant.

Thursday, October 4, 2012

Insider's Account of the AIG-Goldman Swaps

Very interesting article about the housing-related swaps that essentially cratered AIG back in 2008, and nearly cratered the world.

The author is an anonymous bond trader from Goldman Sachs, with an insider's perspective on these transactions. Goldman was AIG's counterparty.

Wednesday, September 26, 2012

"The Next Panic" by Boone & Johnson

Very worthwhile piece in the Atlantic by Peter Boone and Simon Johnson. Don't miss it. Johnson is former chief economist of the IMF; currently, he is at MIT. Boone is an economist and money manager.

The nub of their position is that the natural order of things, economically, is a series of booms and busts. These periodically wipe out financial institutions and creditors. We have been spared most of this since the Great Depression, but the tools used to moderate the cycle have run their course. The financial bacteria are, one could say, increasingly immune to antibiotics.

Here are some key sentences, lightly re-ordered, to bring out the thrust of their article:
The on-again, off-again euro turmoil has already proved immensely damaging to nearly all Europeans, and its negative impact is now being felt around the world. Most likely there is worse to come -- and soon.
[O]ur financial systems appear to be returning to their inherently unstable nature, which plagued the 19th and early 20th centuries. Financial institutions back then were not too big to fail -- they were too big to save. 
Devastating crises characterized the pre-war global financial system; these would typically raze banks and other institutions to the ground. 
Through the development of central banks and active fiscal and monetary policy, the rich world has managed to avoid serious depression for seven decades. Yet big finance -- which tends to grow ever larger when crises are rare and credit risks seem muted -- hides deep political flaws.... 
Bankers and politicians seem to enable the worst characteristics and behaviors of the other. The past few years have led us to focus on half of that phenomenon: the degree to which government guarantees have facilitated irresponsible risk-taking on Wall Street.
[J]apan illustrates the other half of the phenomenon -- the extent to which finance has allowed and encouraged politicians to make attractive short-term decisions that are eventually damaging. 
Those whom the gods would destroy, they first encourage to borrow cheaply. 
In recent decades, financial sectors throughout the rich world grew at historically unprecedented rates; now they are dangerously outsize relative to the rest of the economy. Changing that dynamic in any orderly way looks extraordinarily difficult. Yet history suggests it will change, and soon. The era of large-scale, uncontrolled financial booms and busts -- last seen in the 1930s -- is back.
I advise reading, sleeping on, and re-reading their whole piece.

Are they right about the return to old-style cycles? I don't know, but they are raising the right issue. The older I get, the more I appreciate a well-formed question. Often, that is the answer. If capital-N Nature is, at some level, chaotic, then a well-defined set of possibilities may be the most we can actually know.

It is difficult to manage financial assets in a world in which people seem, almost continually, to use overly-optimistic assumptions. My tool kit would work better in the world they say we are heading into. And occasional forest fires are better for all than decades with no fire, and then a huge one that burns completely out of control. So, in a sense, I actually like the gloomy things they are saying.

My guess is that we will have more volatility than we got used to before 2007. Sovereign balance sheets are weaker. I doubt it will be as wild as the booms and busts of the 19th Century, however. I suspect that, in the long run, fiat currencies drain off some of the boom-and-bust energy into slower growth, bouts of inflation, and, in weakened countries, currency crises. Some of the energy; not all.

[Reflects a few edits on 9/28/12]

Tuesday, September 25, 2012

An Economics Bestiary

Link here. Not to be missed. From Noah Smith, an economist whose blog I had not read before. HT Paul Krugman's blog.

There is a bit of political spin embedded in Smith's post, some of which is subtle, and some of which is obvious. I care not, it's smart stuff.

Friday, September 21, 2012

Nice Graphic Showing the Fed's Balance Sheet Expansion

Via the Cleveland Fed, here.

It brings to mind pictures of odd creatures at the bottom of the sea, where the pressure is many times that of the air on earth. Beautiful to the eye, and also, a bit scary.

Richard Fisher, the head of Dallas branch of the Fed, voiced his concerns in a speech two days ago at the Harvard Club in New York.

Wednesday, September 19, 2012

Simplicity is Good

Good piece in The Economist about the importance of simplicity and clarity in banking regulation. It summarizes a speech that Andrew Haldane, who is in charge of bank stability at the Bank of England, gave at Jackson Hole a few weeks ago. The title of the speech is, "The Dog and the Frisbee."

The basic idea is to use leverage ratios, rather than to risk-weight assets. I agree. After all, how risk-free were those zero-risk-weight bonds issued by European sovereigns?

From The Economist:
Mr Haldane uses the analogy of dogs, such as border collies, which are very reliable catchers of Frisbees without being aware of the complex calculations (wind speed, air resistance, etc) that might be involved. The rule which the dog’s brain has subliminally worked out is to run at a speed so that the angle of gaze to the Frisbee remains constant. 
A dog can catch a Frisbee because it uses a simple rule. If it tried to do the math -- obviously, it can't -- it would fail.

Haldane's bio is here.

Tuesday, September 18, 2012

David Layzer

I never had a better teacher than David Lazyer. He is a cosmologist and taught a seminar I took in college, "Chance, Necessity and Order," about three decades ago.

Humane, brilliant, and generous with his time and spirit. What more do you want? It is all in this profile, which is from a 1991 newspaper article. It is completely accurate and true to my recollections (including his taking walks with undergrads, like me, who did not know how to dress for the cold). I took the course my freshman year, and I was one of his course assistants when he offered it again in my junior year.

I actually started to write this post about banking regulation, and the idea that simple regulation is better than complex. Simplicity being a hallmark of truth is an idea I first heard from Prof. Layzer. He attributed it to Einstein, and maybe to earlier thinkers as well.

I cannot bring myself to making Professor Layzer a mere footnote in a piece about banking! That would be awful. He deserves his own post, and much more. I will make my point about banking regulation in an upcoming post.

Monday, September 17, 2012

Robert Rodriguez on QE3: "All in!"

Rodriguez is a very interesting money manager, and his candid opinion pieces are always worth reading. Here, he reacts to last week's aggressive quantitative easing announcement by the Federal Reserve. He mixes a little of his politics with his analysis. Depending on your own views, you may wish to filter that part out. His main point: the Fed is, at some level, trying to force investors to take risk. Investors will need to remain disciplined, and this will be difficult.

I would add that one tough question is, to what extent does discipline mean holding fixed-income like U.S. Treasury bills, when the currency is at risk of depreciating if the printing keeps going? What makes this question so difficult is that it is hard to know at what point the huge expansion of the monetary base that has taken place since the 2008 crisis will actually show up as serious inflation. On this matter, it is a lot easier to pose the questions, like Socrates, than it is to give an answer.

Thursday, September 13, 2012

El-Arian Nuggets on the QE Announcement

Good FT piece by PIMCO's Mohamed El-Arian (registration required) on the Fed's announcement today of yet another round of quantitative easing. Key sentences from El-Arian:
Through both its actions and what it refrained from doing, the Federal Reserve confirmed on Thursday that it is operating in policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences.
...Like the ECB, its Frankfurt-based European counterpart, the Fed cannot by itself secure the results that so many desire – high growth, robust job creation and financial stability. At best, it can keep buying time in the hope that other government entities will get their act together....

Wednesday, September 12, 2012

AIG, Yves Smith, Sorkin, Barofsky

Yves Smith correctly points out an uncharacteristically weak piece of reasoning by the usually-insightful NYT reporter Andrew Ross Sorkin.

In question: how much the bailout of AIG did, or did not, cost the U.S. Sorkin busts on the claim by former TARP plan inspector general, Neil Barofsky, that AIG will prove a big loss, if properly accounted for.

In a nutshell, the bailout of AIG cost more than Sorkin says it did. It is unclear why Sorkin chose to try to discredit Barofsky on the matter. Smith is right to point out Sorkin's mistake here.

I read Barofksy's book, Bailout, eagerly this summer, and enjoyed it. Barofsky has an abrasive personality, which comes through in almost everything he does. People may not like him. It is only because he is telling the truth!

I like Sorkin's reporting. He happened to make a mistake here. I wish we had more prosecutors and inspectors willing to take on the kind of thankless tasks that Barofsky did. There is a wiff of politics in this matter, but I think Sorkin, Barofsky, and Smith are all Democrats, or at least, more supportive of Democrats than Republicans. My point is only about the math.

Tuesday, September 4, 2012


Real estate is getting hotter. One recent article in the Nashville press speaks of bidding wars in Green Hills, where I live. The other is about a shortage of houses here for rent (even though the end of that piece suggests that some houses are not selling as fast the first article says). Bottom line, supply appears to have gone down, while demand has gone up.

What happens with the real estate in a city Nashville's size does not mean much (even if it is home to one of the the coolest musical communities in the world). However, I sent these links to a friend of mine who studies real estate markets very closely, nationally, and he tells me that these Nashville stories are typical of the pickup that he is seeing in most areas of the country.

I expressed some "Here we go again" concern to him. He said he is not worried about a new bubble because lending standards have stayed strong. Buyers are putting 20% down again. I am partially (though not wholly) reassured.

Friday, August 31, 2012

Quote of the Day

"Here's how crazy defense is. Just think about this. The U.S. has a treaty with Taiwan that we'll protect Taiwan if they're invaded by the Chinese. There's only one problem with that. We gotta borrow the money from China to do it."
Erskine Bowles, speaking of the defense budget, in July. This is from a CNBC interview of him, Alan Simpson and Warren Buffett. (The quote is from page four of the transcript.)

The discussion was about how to bring down the federal deficit, and, of course, the work of the commission that Bowles and Simpson co-chaired. On page one, Bowles points out that federal revenues equal only our "mandatory" spending -- entitlements. All the other spending, including defense, comes from borrowing.

Thursday, August 30, 2012

Bill White, Skeptic

Bill White has a new paper out. He is formerly the chief economist of the Bank for International Settlements in Basel, and, perhaps because he is soft-spoken, an effective critic of central banking orthodoxy.

One passage in his paper emphasizes that central banks caused, in part, the problems they are busy trying to correct:
By mitigating the purging of malinvestments in successive cycles, monetary easing thus raised the likelihood of an eventual downturn that would be much more severe than a normal one. Moreover, the bursting of each of these successive bubbles led to an ever more aggressive monetary policy response. From a Keynesian perspective, this response seemed required to offset the effects of the ever growing “headwinds” associated with all the malinvestments noted above. In short, monetary policy has itself, over time, generated the set of circumstances in which aggressive monetary easing would be both more needed and also less effective. This conclusion seems even more justified when we turn to the implications of easy money for the financial sector. (p25)
He expresses some skepticism about economics generally. I love this:
The unexpected beginning of the financial and economic crisis, and its unexpected resistance to policy measures taken to date, leads to a simple conclusion. The variety of economic models used by modern academics and by policymakers give few insights as to how the economy really works. If we accept this ignorance as an undesirable reality, then it would also seem hard to deny the possibility that the policy actions taken in recent years might also have unintended consequences. Indeed, it must be noted that many pre War business cycle theorists focused their attention on precisely this possibility. (p14)
Too, I found it interesting that he thinks that the odds of rising inflation in the advanced economies are fairly low now. (p16)  [POSTSCRIPT: Re-reading this passage in White's paper, I think he is saying that the odds seem low, but may be higher than they appear.]

He is skeptical of the so-called "wealth effect":
Lower interest rates cannot generate "wealth," if an increase in wealth is appropriately defined as the capacity to have a higher future standard of living. (p12)
And then there is this barb, from John Kenneth Galbraith, whom White quotes:
Politics is not the art of the possible. It is choosing between the unpalatable and the disastrous. (p6)
White is one of the few people whose work you can read, or whose talks you can watch, and always be assured of learning something. He gave a talk on the roots of the Great Contraction that I posted last year.

Friday, July 20, 2012

On Bezzle

In his 1954 book, The Great Crash: 1929, John Kenneth Galbraith observes that commercial morality gets lax during a boom, and tightens up during the bust that follows. This cycle actually exacerbates the bust, because money or wealth that people thought they had turns out not to be there, once auditors and regulators get strict. (Think of Bernie Madoff's investors, or of the fake bank statements and bankruptcy at Peregrine Financial earlier this month.) I like how analysts at Credit Suisse, quoted in this FT Alphaville postrelate the Libor rate-rigging scandal to the cyclical expansion and contraction of what Galbraith called "bezzle."

Thursday, July 19, 2012

Quote of the Day

"This is a problem of vast, nontransparent and dangerous government subsidies; the market cannot take care of this by itself." -- Simon Johnson, of MIT, in the last sentence of this piece on the Libor rate-rigging scandal.

Sunday, July 15, 2012


I found a nice collection of quotes from Albert Einstein online. Things like this:
Any intelligent fool can make things bigger and more complex... It takes a touch of genius --- and a lot of courage to move in the opposite direction.
Another one of his I like a lot is:
I want to know God's thoughts...the rest are details.
This may help explain why, in his personal life, he was so detached from his family, and, in general, so skeptical of anyone in authority.

There are many more good ones at the link above. If you like them even half as much as I do, then you would also enjoy Ideas and Opinions. It is a collection of many of his essays, speeches and letters. At least one piece was for the Sunday New York Times. Some are on science, but more, I believe, are on education, religion and politics. It is mostly very accessible stuff, believe it or not. Two-thirds of the book can be understood by anyone who went to high school.

Some of his thinking on politics will seem too idealistic to almost everyone, and does to me. I still like seeing how he thinks things through. This is literally the book I would take with me to a desert island, if I could take only one.

Sunday, July 8, 2012

The Recession / Depression, in a Graph

Click it to zoom in.

HT: Greg Mankiw.

E.O. Wilson and Multi-Level Selection

     My philosophically-inclined friend Jamie Kyne sent this piece by the biologist E.O. Wilson. It is one of the most thought-provoking things I have read in years. It seeks to explain good and evil by looking at natural selection.
     The idea is that natural selection is happening at both the individual and tribal levels, simultaneously. Individual selection promotes selfishness, which we think of as evil. On the other hand, selection at the tribal level promotes altruism within the group, which we think of as good. Somewhat controversial, I know, but it seems logical to me that, when resources are scarce, a group whose members cooperate has improved chances of beating out a group whose members are fighting among themselves. And both groups would tend to beat individuals who are not in a group.

     I would like to have more insight into the the multi-level-ness of things, not just biology, in time.  I tend to think reductionistically, so, it is helpful to get this prod from Wilson.

Friday, July 6, 2012

Gillian Tett's Concerns

     I tend to be one of those guys who thinks about the downside more than the upside. It may be visceral, or it may be rational. I don't know. Maybe it is that good news can always take care of itself.
     In that spirit, or lack of spirit, I recommend this piece in the FT (registration required) by the ever-incisive Gillian Tett. The title is, "Five reasons the summer curse may strike." No prediction intended on my part, but this is a good list of the downside risks, and it made me think.
     I found it interesting that Tett includes the Libor scandal as a risk for the markets more broadly; I had not thought of that, but it does undermine confidence.
     She leaves out profit margins being wide, and therefore at risk of reverting downward. But that is a longer-term matter, and her piece is focused on the here and now.

Wednesday, July 4, 2012

Lord's Prayer, Spanish Edition

Our European Bank, which art in Germany, hallowed be Thy Name.
Thy Kingdom come, Thy will be done, in Spain as it is in Germany.
Give us this day, our daily bailout,
And forgive us our debts, as we forgive our tax defrauders.
For Thine [ECB's] is the Kingdom and the Power and the Glory forever and ever.

HT:  Paul Solman and Elizabeth Shell

Friday, June 29, 2012

Generalisimo Francisco Franco, Redux

     There are two big, unsustainable boosts flowing through to corporate profits these days. Both are measured in trillions of dollars. The first is the federal budget deficit, which has been over a trillion dollars for each of the past three years. The second is extraordinary central bank stimulus in the U.S. and Europe, including short-term interest rates at, essentially, zero.
     There are other lurking problems, like the underfunding of pension plans, particularly at the state and local level. And Washington has yet to figure out what to do with Fannie Mae and Freddie Mac, which really are the U.S. mortgage market, and which are still reliant on support by the U.S. Treasury.
     For a fundamentally-oriented investor like me, this feels odd. I lately have been wondering what the editor of a left-of-center newspaper in Spain must have felt at the time Francisco Franco took power in 1936. “Spain, led by a dictator? This is not Spain! Spain is a western democracy, not a dictatorship!”  That would have been right…long-term. But Franco was in power for nearly four decades, and there was no way to put out a newspaper like that during his reign. 
     One of the great challenges for investors is figuring how to deal with something that is not sustainable long-term, but that may not be going away any time soon.

ADDENDUM, in response to a comment from a friend:
     When I mention the "past three years" above, I do so only because it corresponds to the period of huge budget deficits incurred by the U.S. federal government. We have run these to try to to deal with the aftermath of the 2008 financial crisis. Spending went up, and tax revenue went down. It has nothing to do with who was president, in my mind, because I believe that any president, regardless of party or politics, would have presided over huge deficits.
     I try not to be partisan on this blog, or, really, anywhere, any more.

Wednesday, June 27, 2012

Nashville's Genius Real Estate Broker

If there's a nicer, more effective, and more intellectually gifted commercial real estate broker in this part of the world than Stephen Prather, I would be very surprised. Take a look at this article Stephen wrote, with Tee Patterson, for the Nashville Business Journal recently.  How many articles on real estate quote mathematicians, in German no less, on their way to giving sound, straightforward business advice? In a local paper, too. This is par for the course for Stephen.

Stephen helped me with a lease recently, so I speak not just as a reader, but also as a happy client.

Monday, June 25, 2012

Implications of a Euro Breakup

A superb Bloomberg article by Simon Johnson on how the demise of the euro currency would affect big banks. Don't miss it. Johnson is a professor at MIT, and former chief economist of the IMF. It has long been reasonably obvious that if the euro breaks up, it will be messy to figure out how to settle contracts that were denominated in it. But this article points out that as you game the scenario through and imagine how it affects big banks, the situation is even stickier than it might have, at first, seemed.

Johnson may be trying to say that a euro breakup will likely be avoided, simply because a breakup would be so messy.

Thursday, June 21, 2012

Buying Time, at a Price

I like this post (registration required) at an FT blog by Mohamed El-Erian of PIMCO. Commenting on the Federal Reserve's extension of "Operation Twist" yesterday, he writes, "[I]n continuing to act on its own, all the Fed will do is buy some time that will again be wasted by the country's politicians. Meanwhile, collateral damage will mount, making the next policy steps even more excruciating."

He continues later in the post, "Whether you are worried about insufficient demand or the economy's sluggish supply response, it is hard to argue that what ails the US is in the domain of Fed tools."

To use another metaphor, large doses of financial medicine have side effects, and make the body politic feel queasy.

The whole piece is worth reading.

Wednesday, June 13, 2012

Robert Rodriguez Interview

Robert Rodriguez, of FPA Capital in Los Angeles, is an unusually uncensored money manager. As I have mentioned before, his logical thought and surprising candor reminds me of the late, great physicist Richard Feynman. There is a new interview of Rodriguez by Kathryn Welling that is long, but worth reading. The first part is largely on politics and maybe a little bit too much so. I recommend especially the last few pages, which are about the markets, valuation, and money management. His accounts of conversations with clients and other money managers start on page 12 and ring true. They are not something you would hear many (probably any) other money managers say.

Thursday, June 7, 2012


Good piece about the need for change, and resistance to it, in Spain.

Tuesday, June 5, 2012


...this spoof is about where things are, for Europe right now.

Thursday, May 31, 2012

Bank Runs

I would not read too much into this, but it is interesting in a grim way: here is a link to a Google Trends search on the term "bank run."

Note that you can see the languages in which the searches happen most often. Greek is first on the list! However, Spanish and Italian give a very low result, suggesting that the methods Google uses here are not fool-proof.

HT Zero Hedge.

UPDATE: O.K., this is amusing. A friend of mind has pointed out that the heavy search activity in and around Holland, Michigan (as of right will update over time) is likely because of the 35th Anniversary Fifth Third River Bank Run there. This may not be the best choice of event for a bank to sponsor, from a p.r. point of view.

Wednesday, May 9, 2012

Klarman Profile

I am late linking to this, but I just noticed that there was a good profile of investor Seth Klarman earlier this year in Fortune. There is not enough to tell, from the article, whether or not Klarman correctly judged the community impact of the Ontario quarry investment. But, big picture, he is a smart guy who has done very well for his clients over a long period of time.

I posted a good quote of his last month, on our "Worst Generation" mentality.

Monday, May 7, 2012

Thursday, April 26, 2012


"Education is the path from cocky ignorance to miserable uncertainty." -- attributed to Mark Twain (HT Jack Ciesielski)

Thursday, April 19, 2012

Choice Quotes from Leucadia

The annual shareholder letter from Leucadia National Corporation is always stimulating. A few passages I liked from the latest one, which I just got in the mail:

It is ironic that the financial shenanigans that begat the financial crisis in the first place are being treated and ostensibly cured by financial shenanigans of our own government.

We have read a lot about the ongoing deleveraging of America. In case you don't start and end your day with your nose in the Wall Street Journal, deleveraging is the newly rediscovered concept of paying your debts without reborrowing.

Jon here: I think they are correct. People seem to have come to see refinancing their debts as something almost like a political right attached to being a citizen. The idea that you actually have to pay them off is...un-American!

The debt elephants in the room are national and state governments. 

The Federal Reserve has said it will continue to suppress interest rates for the foreseeable future, postponing the pain for the overleveraged as well as postponing the inevitable witching hour when governments are forced to take the bitter medicine of raising taxes, cutting expenditures, or both. 

The full letter is in the new annual report, which is here. To be clear, I make no recommendation on the stock either way. The guys who write the letter -- Ian Cumming, Chairman, and Joseph Steinberg, President -- are very smart and there is much to be learned from their point of view and their business history.

By the way, I do think that if we tried to bring our budget into balance or near-balance immediately, either through raising taxes or cutting spending, it would cause more political pain than our system can handle. But we do need a clear and credible path to doing that, else we risk losing the faith of the creditors who buy our bonds.

Wednesday, April 18, 2012

Generational Shift, as seen by Seth Klarman

Much wisdom in this passage from last year by Seth Klarman, a money manager:
Most of us learned about the Great Depression from our parents or grandparents who developed a "Depression mentality," by which for decades people shunned leverage, embraced thrift, and thought twice before quitting their secure jobs to join risky ventures. By bailing out the economy rather than allowing the pain of the economic and market collapses to be felt, the government has endowed our generation with a "really-bad-couple-of-weeks-mentality": no lasting lessons are learned; the government endlessly intervenes in the economy, and, ironically, the first thing to strongly rebound from the 2008 collapse isn't jobs or economic activity but speculation.
This quote is from an annual letter of his that came out about a year ago. Klarman manages money in Boston, through Baupost Group, which he founded.

During the crisis, facing the very real threat of the payment system collapsing, the federal government had little choice but to do big bailouts of one kind or another. That said, side effects have to follow when risk-taking gets subsidized so heavily. More could have been done to minimize them. For example, managers and directors of banks who needed TARP money should have been sent forcibly into retirement, to vindicate the principle that public funds are not supposed to be used to support under-capitalized private businesses. Politically, this is easier said than done, of course, but it should have happened.

And while we are on the topic of financial culture: a client of mine commented yesterday that her children are learning that putting money away in the bank earns you only pennies per year. That is not a good for the culture, either.

Wednesday, April 4, 2012

Inflation is a Risk, Even if Not Inevitable

Latest from Martin Feldstein, here. A well-balanced view of the possible outcomes that will flow from quantitative easing in the U.S.

Monday, April 2, 2012

Profit Margins and Wages (Email to a Friend)

A friend emailed last week, asking for updated figures on U.S. corporate profit margins and wages. This is an edited and modestly improved version of what I sent him:

With the caveat that I’m crunching numbers that other people who work regularly with these stats know more about than I do, my observation is that based on Dept. of Commerce data (NIPA table 1.14), corporate profits remain well above the long-term average, and employee comp is well below.

Specifically, in 2011, compared to the total gross value added by corporate businesses, total compensation to employees was 58.7%. This was well below the long-term average (1929 – 2011) of 64.2%.

The flip side of this is that corporate profits, as a percentage of gross value added, were 9.6% in 2011. This was well above the long-term (1929-2011) average of 7.1%.  (The profits are after interest payments and taxes, and include adjustments this series makes for inventory valuation and consumption of capital, i.e. depreciation.)

The cause of this higher profitability and lower comp to workers? Up for debate. Things I suspect are reduced bargaining power of workers (weaker unions, greater global competition); deficit governmental spending (spending must go down from here, or taxes up, or both); low interest rates; and less competition by businesses (weaker antitrust enforcement). These aren’t mutually exclusive. The last factor, less competition and weaker antitrust enforcement, might be hard to quantify. Also, are there governmental benefits that act as compensation to workers, but are not captured by these stats? I don’t know, but that’s a question it would be nice to have insight into.

Increasing financialization of the economy might also be a factor. You could think of that as a somewhat unproductive finance sector siphoning off profit, and I think that is true to a degree, or, less polemically and more accurately I think, the fact that more and more work is done by machines and the owners of those machines get paid something for their capital. However, labor's share dropped sharply over the past decade, and that is in part what makes me suspect that it may well head back up. Even in 2003, for example, the percentage was 64.5%, which was entirely in line with the multi-decade average, and well above the current 58.7% figure.

Tuesday, March 27, 2012

New Shiller Interview on Housing

There's a new interview with Yale economist Robert Shiller here. Worthwhile and thought-provoking, as always. Among other things, he is co-creator of the Case-Shiller housing price index. Is he too gloomy in this interview? I do not know. I appreciate the way he thinks, whether or not he is exactly right in his worries here.

Saturday, March 24, 2012

Self-Proving Ideas

Since high school, I have found myself interested in ideas that illustrate or prove themselves.

An easy example of this is the word "subtle." It is self-illustrating because the letter "b" is barely there. You don't have to look outside the word itself to see something subtle.

I recently noticed that the Harold Arlen song, "It's Only a Paper Moon," does the same thing. Yes, the song says, it's only a canvas sky, hanging over a muslin tree, but it wouldn't be make-believe if you believed in me. The world is phony and meaningless until love transforms it. The song seems a bit corny and trite at first, just "a melody played in a penny arcade." Yet, if you give it the benefit of the doubt and listen for a while, it grows on you. The song has to come off as a little tawdry and cheap in order to make its point. Subtle.

Wednesday, March 21, 2012

Montier on Profit Margins

Corporate profit margins in the U.S. continue to be very high. Will they revert back to the mean? James Montier of GMO has a new piece out on this topic, titled "What Goes Up Must Come Down!" It is worth reading.

There is also a good Reuters piece on this that I linked to earlier this month.

In my experience, when serious, numerate, detail-oriented analysts find something that makes them say, "This doesn't make sense," but runs counter to what people want to hear, they are often ignored. (O.K., that sounds a little petulant, sorry.) I am only seeing a few people really wring their hands over high profit margins -- but they are the smart guys.

Perhaps there is something to the other side here. There may be some reason for corporate profit margins to remain above the long-term level in the medium term. For example, maybe global competition will continue to diminish the bargaining power of labor for the next decade or more. Because businesses are not perfectly competitive with each other, this would tend to raise profit margins, at the expense of compensation to employees.

But such semi-permanent effects seem relatively small; most of the increased margin seems to be from federal spending that is much in excess of tax revenues, as Montier lays out, and very low interest rates, which the Reuters piece mentions. These conditions will return to normal, over time, and cannot be considered permanent or semi-permanent.

Tuesday, March 20, 2012

The Cinderella Problem

How long will foreign central banks keep buying so much of our debt? James Kwak has a good piece on this, with a nice graphic showing how much more aggressive buying by foreign central banks has gotten over the past decade-plus.

In the past three years, the federal budget deficit has been more than $1 trillion annually. We can do this only with heavy borrowing. In that sense, we are like Cinderella at the ball. Our carriage will turn into a pumpkin at midnight, but as Warren Buffett once put it, there is no clock on the wall.

I am not predicting doom; we may have a lot more time. I think it is not smart to assume that we do, however. In just about all areas of life, borrowing power should generally be used as a back-up plan, not as a primary strategy. In other words, even assuming we do have a lot more time, we will be better off taking the attitude that we don't.

Monday, March 19, 2012

Bernanke, Inflation Hawk?

Roger Lowenstein has written a new profile of Fed Chairman Ben Bernanke for The Atlantic. It is deep and very much worth reading, even though, as Yves Smith has written, it is a bit hagiographic. The title, "The Villain," is tongue-in-cheek.

There is much to like here, but the following passage is the most interesting one. It suggests that, despite all the dovish moves Bernanke has led the Fed in making in recent years, he nevertheless has only a modest appetite for inflation.

...[A]fter talking with the chairman at length (he was generally not willing to be quoted on this issue), I think that, although Bernanke appreciates the intellectual argument in favor of raising inflation, he finds more compelling reasons for not doing so. First is the fear that inflation, once raised, could not be contained. The Fed creates inflation by adding reserves to the banking system (falling interest rates are the market’s way of registering the increasing plenitude of money). If so much money enters the system that wages and prices start ratcheting upward, the momentum can be self-perpetuating. “The notion that we can antiseptically raise the target and control it is highly questionable,” Bernanke told me. 

This is truly interesting, and important.

Of course, we need to be a little skeptical of the tendency Fed chairs have to proclaim what everyone wants to hear. The position almost requires it. Chairman Bernanke, in May of 2007, said as part of a speech at central banking conference, "All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Incidentally, I love the careful way Lowenstein refers to his off-the-record conversations with Bernanke. I do not agree with him on every point, but his work is always thoughtful and balanced. In the end, Lowenstein is a reporter who cares deeply about truth. A few months ago, I mentioned other work of his.

Monday, March 12, 2012

Profit Margins

I tend to worry more about the downside than the upside.

This may be genetic. Or, it might be a continuing after-effect of advice that a kind stranger once gave me at a bowling alley, when I was a boy: "Focus on getting spares, and the strikes will take care of themselves."

Here is a good piece from Reuters that lays out some of the downside risks to corporate profitability in the U.S. This is one of those pieces that I think is, at least, asking the right questions. Profit margins are very wide now, and if they revert to the long-term historical levels, the stock market should go down.

Is it crystal-clear that profit margins should revert to their historical levels? No, but that's the correct concern, and if they are not going to, there needs to be a reason.

Tuesday, February 28, 2012

Budget Conflicts to Come

Another informed and informative piece from Donald Marron on tough budgetary conflicts between Congressional Democrats and Republicans that appear likely to re-emerge before year-end. Marron directs the Urban-Brookings Tax Policy Center, and formerly was the acting director of the Congressional Budget Office.

Sunday, February 26, 2012


Recommended reading:

Warren Buffett's latest annual shareholder letter for Berkshire Hathaway, out yesterday.

Jeremy Grantham's latest quarterly letter.

Wednesday, February 22, 2012

Rodriguez: Caution, Danger Ahead

Robert Rodriguez, of First Pacific Advisors in Los Angeles, is one of those guys with a talent for spotting downside possibilities early. He has released a recent talk, titled "Caution: Danger Ahead." In a nutshell he is saying that the recent relatively good times we are having, as we emerge from the funk of 2008 and 2009, represent remission rather than cure of financial disease.

I pass this along not exactly to endorse the viewpoint, because I think there is more than one possible outcome here. What I like is that Rodriguez is worrying intelligently.

Let me put this another way: if policymakers were as worried as Rodriguez is, then the sovereign debt problems he is concerned about, and he includes the U.S. in his sovereign worries, would not come to fruition. But they are not, so there is a chance they will.

One of several reasons I take Rodriguez seriously is a prescient speech, titled "Absence of Fear," that he gave before the CFA Society of Chicago in June, 2007. The section titled "Securitization Contamination" is impressive.

I love guys like this. From what I read of him, he has a personality like that of Richard Feynman, the physicist. Frank in the extreme, and more comfortable than most in calling things as he sees them, regardless of how little company he may have in doing so. That type of personality is valuable to society, and all too rare.

Tuesday, February 21, 2012

Requiem for Walter Schloss

The life of a typical money manager or financier does not appeal to me. The late Walter Schloss, on the other hand, is someone whose life appeals to me a lot. He died this weekend at age 95. Bloomberg has a nice piece out today, remembering  him. Warren Buffett once joked that Schloss beat the S&P 500 since before there was an S&P 500. As you'll see from the article, that appears to be the case. In a profile he wrote of Schloss, John Train wrote that Schloss's office in New York was unglamorous in the extreme, and overlooked an air shaft. Schloss would not visit a company he invested in unless it was within walking distance of his office. I also recall Train describing the phone on Schloss's desk that sat, "unringing," during their multi-hour interview. All of this seemed to help, not hurt, the results he got for his investors.

ADDENDUM: Actually, now that I check my files, I see that my memory of who wrote the old profile of Schloss was wrong. The profile, while worthy of Train, was in Fortune in 1995, and is by Terence Pare. The title is "Yes, You Can Beat the Market." I hate the title, which is too glib, but it's a very good article. Googling around, I see that some folks have uploaded it to the web, probably without permission. It is worth reading for the information on Schloss and some other great investors. Also, The Economist has a great obit on Schloss, too (HT Ted).

Thursday, February 16, 2012

On the Validity of the Shiller P/E

Yesterday, I posted some information on the 10-year, inflation-adjusted price/earnings ratio of the U.S. stock market. Here is the best, quick way to get a sense of how valid, or invalid, the 10-year inflation-adjusted P/E ratio. Bottom line: it looks pretty valid as an indicator of future returns. Plenty of noise, but some signal in there, too.

You can also get similar statistics in a book by Robert Shiller, Irrational Exuberance.  (Go to figure 10.2 in the 2005 paperback edition.) Shiller looks ahead to how the predictor worked over the next 10 years. In contrast, the 2008 article I linked to above, by Christopher D. Carroll, uses a slightly longer period, 12 years, on the theory that it is the smallest common multiple of the Congressional and Presidential election cycles.

POSTSCRIPT:  I found a graph of Shiller's future return data online, in a 2001 paper, "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," which he co-wrote with John Y. Campbell. It is as this link, and the most useful part would be the bottom panel of figure 6.

Tuesday, February 14, 2012

Shiller on Shiller

Here is a graph we do in my office of the Shiller 10-year normalized price/earnings ratio. Remember that this is an aggregate valuation; there is a lot of variation within the market. But stocks are not cheap. (That doesn't mean they won't beat bonds over the next decade.) You'll need to click on the image to get a good look.

And here's Robert Shiller  himself, talking about the data series, bringing the numbers to life. Note that the date of the Shiller interview is from Sept. 27 of last year, when the S&P 500 closed at 1,175. It closed today at 1,351.

To be clear, this is my own graph, not his, but we use his numbers.

Monday, February 13, 2012

Soccer is More Interesting than Stocks

Fascinating to see an ECB working paper reporting that trading declines by about half when an important international soccer match is on TV, at least in a country whose team is playing. And the correlation between that country's markets and other world markets drops as well.

Which reminds me of the old joke that Dan May, a 20th century Nashville industrialist, used to tell.  A surveyor called him and asked, "Mr. May, how many people work at your factory?" He thought for a moment and replied, "About half."

The more serious academic point, which the ECB paper (I have only glanced at it) touches on, and which Robert Shiller has mentioned, is that attention is a scarce resource.

Thursday, February 9, 2012

Way-Back Machine: Robert Rubin, on Jon Corzine, in 2003

Recently, I looked again at Robert Rubin's 2003 book, In an Uncertain World. I remember recommending it to friends when it came out. My goal now, as I glanced at passages I had underlined years ago, was to see how the meaning had changed since the Great Unpleasantness of 2007-to-present. I was also wondering how Rubin, a guy who wrote so intelligently on how to think about risk, could have missed the big problems that developed while he was at Citigroup.

One passage amazes me. In it, Rubin raises a red flag about Jon Corzine's risk appetite, years before l'affaire MF Global. Quoting the book (and remember, this was 2003):
...The list of firms and individuals who have gone broke by failing to focus on remote risks is a long one. Even people who think probabilistically, and are highly analytical and systematic, often dismiss remote contingencies as irrelevant.
In this regard, I often think of an example from Goldman Sachs when Jon Corzine, then the firm's exceedingly successful head of fixed-income activities, wanted to take a large position in farm credit bonds. The expectation was of a high return, and because the bonds were backed by the "moral obligation" of the U.S. government through a new agency known as Farmer Mac, the probability of their defaulting seemed close to zero. But what Steve Friedman and I asked Jon was "What if a problem develops in farm credit and as extremely unlikely as it might be, the government declines to stand by its so-called moral obligation?" 
"That's silly," Corzine replied. It was inconceivable to him that the government would not honor its moral obligation, and in a sense he was right. 
But Steve and I didn't want Goldman Sachs to cease to exist after 130 years because something that we agreed was virtually inconceivable actually happened....Too often, risks that seem remote are treated as essentially nonexistent. In this case, the remote contingency never occurred, but the decision to limit the risk was right.
The passage I just quoted is on pages 342-343 of the paperback edition of In an Uncertain World. I added the bolding. Upshot for me? Rubin was bugged enough by this encounter with Corzine to put it in print. Note the bold text where Rubin says the he "often think[s]" of this episode. It really got to him.

It was politic of Rubin to admit that the risk (Farmer Mac default) never actually materialized. I guess that is how one becomes a Robert Rubin. Yet he does, in the end, make clear his view that the decision to overrule Jon Corzine was right. Which, of course, it was.

We have now seen, with the bankruptcy of MF Global, a certain vindication of Rubin's instinct that this episode at Goldman was disturbing and worth recording.

Worth Reading

In the Financial Times (registration required), Gillian Tett on the Libor probe and other trouble that lives on in the dank, dark recesses of the financial world. She is one of the smartest, most effective, and most principled financial reporters out there right now.

In Fortune, Warren Buffett on bonds, stocks, and gold.

Monday, February 6, 2012

Investment Samsara

Any piece of investment writing that can work in a little Hindu philosophy is worth noting. "Life - and Death Proposition" is the latest monthly newsletter from Bill Gross of Pimco. I guess he sees deleverage and austerity as karma for the bubble. I can't disagree. A delight to see such a philosophical piece from a guy who manages hundreds of billions of dollars. Hope that the flame of intellectual life sometimes flickers reasonably brightly, even on the trading floor.

Friday, February 3, 2012

Jobs Report Optimism from Greg Ip

Good discussion of the increasingly optimistic tone in the U.S. economy by Greg Ip, at the blog of The Economist. He keys off of today's strong jobs report. I think he's more or less right here. My only quibble is that Europe is OK for now because of heavy intervention by the European Central Bank, but it's not actually healthy (the banks there need more capital). And I remain a little concerned with how far the U.S. economy is from an equilibrium state, with the equilibrium bringing, when it comes, higher taxes and higher interest rates. Still, though, he's right that things are improving and gives a balanced reading of the data and trends.

Wednesday, February 1, 2012

Tallulah Bank-Head

Nice quote this week from derivatives expert Satyajit Das, in the Financial Times:  "For the moment, policymakers are relying on the advice of actress Tallulah Bankhead: 'Cocaine isn't habit forming. I should know - I've been using it for years.' But reliance on low interest rates, like all addictions, is dangerous. It is also ineffective in addressing the real economic issues."

The full column by Das, "Low rates: the drug we can all do without," is here, but the link requires registration.

Hmmm...I see that this is my third post in the past several days that likens central bank policy to a drug. And it is the second involving a celebrity who is partaking (Elvis was the other star, in a cartoon I posted). Odd.

Sunday, January 29, 2012

Should We be Concerned...

...that anarchy has become super-sexy?

"Super-sexy?" you may ask. "How so?"

Well, personally, I don't know. But if it weren't, why would Axe body spray name a new fragrance after it?

Saturday, January 28, 2012

For the Lintel

I would like to get some words painted over the entrance to my office: "Let no one enter who is ignorant of geometry."

This was the inscription over the entrance to Plato's Academy. Today it would be more about algebra than geometry, but the point is clear enough.

Friday, January 27, 2012

My Favorite Quote about Banking

"There are more banks than bankers."

Brilliant. This observation comes from the king of over-the-counter bank stock market makers, Morris Schapiro, who died at age 93 in 1996. I know little about Schapiro, but loved him instantly when I heard this quote. I was, therefore, delighted to spot his name on a dormitory some years ago at Columbia University. Apparently, Marty Sosnoff likes the quote, too.

Caffeine, Soy Milk, and Central Banking

Coffee is no long-term replacement for sleep. It's not even a very good short-term replacement, although, in a pinch, it helps.

Likewise, we should not be relying nearly as much on central banking as we are, when we need fundamental reform. Mainly, we need to shrink the size of the financial sector and give the biggest banks an incentive to break themselves up. Capital requirements should increase steeply with size.

Such were the thoughts that ran through my mind as I ordered, a little self-righteously, a tasty Indian Spice soy milk hot chocolate, after lunch, at Whole Foods.

Tuesday, January 24, 2012

We Can't Go On Together...

Click on the cartoon to see it bigger and better. 

This is a new cartoon conceived by me that nutty financial country singer, Merle Hazard. The very talented artist and illustrator Grey Blackwell drew it.

You download it in a high-resolution 3.6 meg PDF.

The original Elvis song is here. A little history of it is here at Wikipedia, and the earlier, non-hit version by the songwriter Mark James, is here.


Saturday, January 21, 2012

Chicken and Egg

A pattern: policymakers in Europe and the U.S. do not make hard decisions unless the markets force them to do it. A crashing stock or bond market really gets their attention and forces them to make political compromises and act.

The plot continues: once the officials act, markets rally. Now, if the markets knew the policy response in advance, there would not be a crash to begin with. So there never really needs to be a crash, does there? But, on the other hand, if markets didn't crash, then policymakers would never act. So then, yeah, there does need to be a crash, even though it will be followed by a recovery.

The equilibrium state seems to be dynamic rather than static: a crash, followed by policy response, followed by a recovery in the markets, followed by new problems, another crash, a new policy response, another recovery, and so on. Sort of like the propagation of a wave, with peak causing trough, and vice versa.

I am, of course, over-simplifying massively and almost comically. For one thing, there are problems too big for any economic policy response to patch over (e.g. a big war, or, here's a depressing thought, a famine that wipes out a significant part of a country's population). And there is a mix of things making securities prices change, with sheer randomness being among them. My hypothesized cycle is only one of the things going on.

Still, the crash-response cycle is, I suspect, a part of the mix. It seems too dilute to have direct usefulness for investing, but I find it interesting intellectually. It may be good to be aware of simply for the purpose of keeping one's self from getting caught up in the emotional swings.

Wednesday, January 18, 2012

On Regulation

"[G]ood regulation should take account of our rather extreme ignorance. That means emphasizing the more general protections, as embodied in a ready supply of safe liquid assets, rather than obsessing over the regulatory micromanagement of particular bank activities."

-- Tyler Cowen, in The New York Times ("From the Fed, a Shield Against Europe," Dec. 24, 2011)

Tuesday, January 10, 2012

The Ultimate Moral Hazard Trade

Nice article by Charles P. Wallace in the current Fortune about moral hazard in derivatives, involving European banks.

European banks have written credit default swaps on their host government's bonds. It looks like American banks are counterparties to a significant degree: "Overall, U.S. banks may hold two-thirds of the total euro-debt CDS outstanding," according to the article. The U.S. positions are probably largely hedges, but still, even hedged exposure can be devastating, if your counterparty fails when you were counting on them to offset a loss somewhere else in the portfolio.

"French Bank BNP Paribas has sold $4 billion in protection on French government debt, 12% of the global total," the article continues. "Similarly, Italy's Banca Monte dei Paschi di Siena has sold $3 billion worth of protection on Italian government debt. If Italy, say, defaults on its debt, these banks might not be able to pay their American trading partners. 'It's the ultimate moral-hazard trade,' says Peter Tchir, CEO of hedge fund TF Market Advisors. 'If a country defaults on its debts, these European banks domiciled in the same country will also default on their debts and won't pay out, so why not write the protection now and make lots of money?'"

It's logical for the banks to write these contracts, whether or not they expect to make money on them in the long run. After all, the highly-leveraged banks of Europe will generally not be solvent no matter what they do, if their host countries default on their own debt.

Sunday, January 8, 2012

On False Certainty

The best lack all conviction, while the worst
Are full of passionate intensity.

-- William Butler Yeats, "The Second Coming," 1919.

Wednesday, January 4, 2012

Why go anywhere...

...when you are already there?

Per this CR post, teenage kids today are not as interested in driving cars as my friends and I were in the 1970s. The virtual world seems to be eating up the real world, to some degree. My anecdotal observations match what CR says.

Obviously, the weak economy and restricted licenses, which the post touches on, are part of it...but not all.

The New Normal, and the Para-Normal

Thought-provoking new piece by Bill Gross, of PIMCO.  Download the PDF here.

The multi-decade, debt-financed party is over, or at least, in a very different phase. Obviously the natural tendency from here is deleveraging and deflation, but because of that, central banks are printing a lot of money. So we have two possibilities: deflation caused by the "real" economy, and, at the other end of the bimodal distribution, inflation caused by the response of central bankers (if the medicine works, and the dose is too big, inflation will be the result of the otherwise-deflationary illness).

Keep in mind when you read Mr. Gross that he has a distinct point of view. He runs a bond fund, and tends more than most to see a world of low inflation (i.e., a world not too scary to bondholders). Many would say that he thinks that way because he runs a bond fund. Maybe. But it is also possible that he runs a bond fund because he already thought that way before he started. Doesn't matter too much which, as long as you keep in mind that he has a particular point of view.