What you seek
What we read
- UPDATE 2-Zimmer to buy Biomet in $13.35 bln deal
- UPDATE 2-Brazil's Bradesco beats profit estimates in mixed quarter
- UPDATE 1-T. Rowe Price's profit rises 25 pct as funds flow in
- Private equity firm KKR's Q1 earnings drop 3 percent on fund values
- UPDATE 2-Hungary central bank seeks to force banks into forint government debt
What’s it worth?
Apart from being on the cusp of Christmas & New Year jollities, today has considerable significance. 100 years ago this week, Congress passed the Federal Reserve Act, thereby establishing a central bank to provide a monetary backstop and liquidity, for a nation just starting to find its feet on the international stage.
You can (and should) buy it from the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money“. Oh wait, that’s Matt Taibbi’s description of Goldman, I meant the other one…the house that Bezos built.
Neil Irwin’s The Alchemists is a gripping account of the most intense exercise in economic crisis management we’ve ever seen, a poker game in which the stakes have run into the trillions of dollars. The book begins in, of all places, Stockholm, Sweden, in the seventeenth century, where central banking had its rocky birth, and then progresses through a brisk but dazzling tutorial on how the central banker came to exert such vast influence over our world, from its troubled beginnings to the Age of Greenspan, bringing the reader into the present with a marvelous handle on how these figures and institutions became what they are – the possessors of extraordinary power over our collective fate. What they chose to do with those powers is the heart of the story Irwin tells.
Irwin covered the Fed and other central banks from the earliest days of the crisis for the Washington Post, enjoying privileged access to leading central bankers and people close to them. His account, based on reporting that took place in 27 cities in 11 countries, is the holistic, truly global story of the central bankers’ role in the world economy we have been missing. It is a landmark reckoning with central bankers and their power, with the great financial crisis of our time, and with the history of the relationship between capitalism and the state. Definitive, revelatory, and riveting, The Alchemists shows us where money comes from—and where it may well be going.
Meanwhile, no matter which side of the Great Policy Divide you sit on, the Federal Reserve Act established a the Federal Reserve System (and – arguably – monetary stability) where there had been none. Two prior, ineffectual attempts to create a central bank failed, and the crisis of 1907 was fresh in the minds of bankers and lawmakers alike. Jekyll Island Georgia was the venue of choice for men of both power and vision to congregate and “fix” what was broken…in creating something which didn’t exist yet, and once signed into law 100 years ago this week, has been subjected to continuous criticism and bitter opposition ever since. Go figure…we all fundamentally take the fact for granted that a central bank must exist, yet no country in the world has an institution so viscerally opposed by its political class as ours. To me, that’s a sign that the institution is working.
Here are the architects of yesteryear. The seven men who met on a small island off the coast of Georgia in complete secrecy to craft a monetary and political solution to the growing pains of still-young Republic. What they built has endured.
With grateful thanks to our friends over at Joy of Tech
But did you also know that today is a “big”, nope, doesn’t cut it – “huge” – still not good enough – “COSMICALLY GIGANTIC” day for prime numbers? You didn’t? OK no worries, permit me to elucidate…
When the clock ticks over to 2:03:05 on November 7th, 2013, the universe will experience an unusual alignment of prime numbers as the time becomes 02:03:05:07:11:13.
Before you complain: yes, I AM abbreviating 2013 to 13, yes: I AM switching mm:dd:yyyy (conveniently) to the British way1 dd:mm:yy, and lastly yes; human measurements of time are entirely arbitrary. Keep telling yourself that when the sky darkens, steam gushes from the ground2, and angels appear3 - OK?
If you slept through those dark portents during the day’s first 02:03:05:07:11:134, remember to ignore 24 hour time and glance skywards again just after lunchtime. If nothing happens then, stay tuned for more news of a revised Mayan calendar.
2. In Manhattan it’s a common occurrence, but this only serves to confirm what the rest of the country already knows, that people in the City live in a separate universe.
3. OK, maybe “angel” is a bit of an extreme description for mayor-elect Bill de Blasio but whatever…
4. If you didn’t sleep through it, might I ask what you were doing at that hour of the morning?
From the “this-is-fucking-hysterical” department: Goldman encourages junior bankers to take weekends off” [BBN]
Rabobank Boardroom Japes
CEO quits in the wake of Li(e)bor manipulation fines [WSJ]
The last name of his successor, Rinus Minderhoud, translates to “less love”
A strong currency is good – yes? No! – not if you’re a European manufacturer [Neil Irwin]
Apple Q3 results [SEC]
The market responds to the earnings report release “Meh“
A roundup (takeaway: “generally pleased”) of analyst recommendations [Fortune]
The next revolutionary product? Don’t hold your breath! [Will Oremus]
Apple should be like Bloomberg [Felix] “Employer bias” aside (Felix doesn’t do that) this is a splendidly reasoned piece
Icahn is full of shit [Farhad Manjoo]
No he’s not! [Dennis Berman]
I agree with Manjuice on this one.
Apple will have a MONSTER Christmas season [Quartz]
McDonald’s ditches Heinz ketchup, to keep Burger King out of its business [Daily Beast]
Gripping Tom Clancy type stuff. Industrial espionage prevention, fast-food style
Institutional landlords aren’t necessarily a bad thing – eventually [BBV]
Speaking of institutionalizing…
Peer-to-Peer lending is becoming institutional, as large banks jump in [FT Capital Markets]
Abenomics one year on [Gavyn Davies]
Alan Greenspan rediscovers Keynes – sort of [New Yorker]
The beginning of the end — of the financial crisis [Phillip Swagel - NYT Economix]
OK, your coffee reading is finished so go do some work already! Before you go, don’t forget…
Good luck out there today!
Puerto Rico Update
October 29, 2013
There has been a recent flurry of activity regarding Puerto Rico, involving their debt, rating agency views of that debt, the bond insurers that have been insuring their debt, the state-specific mutual funds that are holding Puerto Rico debt, and the projected plans of the Puerto Rican government to improve their deteriorating credit picture and economic situation. We have new (August) economic information from Puerto Rico; see http://www.cumber.com/content/
In this commentary we wish to add a few additional points to what is already an intense and public debate. At the end of this note we will offer our firm’s position on Puerto Rico’s debt. Many of the professional folks we spoke to about Puerto Rico’s debt situation asked for anonymity. They are under constraints from their firms, and we respect those restrictions. So our citations here will be from publicly available resources or our own computations.
We cannot say that Puerto Rico will default on all or some of its debt. Nor are we saying that it will pay all or some of its debt. We are saying the risk of default is high. As a skilled Washington-based expert said to me, “Puerto Rico might become an Argentina; and it might be able to turn itself around like Brazil.” Right now the best guess is that we do not know which outcome will prevail. However, we must add that the pressure to roll existing debt maturities and pay liabilities is nearing a critical point.
We’ve heard from debt holders who point out that hedge funds are buyers of Puerto Rico’s debt. They take that information as a positive indicator. We agree with the hedge fund purchase information. We disagree that it is a positive indicator. UBS’s Mike Ryan sums it well. ”I would be really careful to play Puerto Rico or trade it” he said. ”Hedge funds don’t own Puerto Rico. They rent.” (Barron’s, October 28)
My colleagues Michael Comes, John Mousseau, and I took apart a hedge fund trade. We reconstructed ways in which hedge funds can buy Puerto Rico and also hedge the other side of the trade for their profit. They can take long positions in Puerto Rico debt. They offset the risk through either a short position or put option on Assured Guarantee stock. Assured Guarantee is the major bond insurer of some Puerto Rico debt. Alternatively, the hedge fund can use a credit default swap on Assured Guarantee. In either case they try to neutralize their Puerto Rico default risk by using Assured as a proxy.
The theory behind this is that Assured Guarantee would be hurt if Puerto Rico defaults. So, the hedge fund’s long position would lose from a Puerto Rico debt downgrade or default, but it would have an offsetting gain from the credit default swap position or short position on Assured Guarantee stock. The offsetting neutralized position could result in a profit to the hedge fund. In fact, my colleagues and I calculated that the hedge fund could assume a neutral duration position and thereby create about 350 basis points in an annualized tax-free yield. That yield would also be a tax-free yield to the hedge fund’s investors. So the typical hedge fund investor can derive a taxable-equivalent yield of about double the tax-free yield, or about 7% on a maturity structure that can be unwound in only a few days. That is without leverage. My colleague John Mousseau noted that some hedge funds may be able to lever this up to 20 times.
There is still counterparty risk when putting such a trade together. And the position needs continuous rebalancing, since it has three or more moving parts and constantly adjusting weights. But that is exactly what a hedge fund is supposed to do. What we want to show is that there are ways to do it. Furthermore, note that the starting point of the trade is buying Puerto Rico debt, not because you like it but because it offers a hedging opportunity in a distressed market.
We want to demonstrate this with a chart that we have posted on our website for all to see (http://www.cumber.com/
Readers can now make their own determinations about this so-called “bullish” hedge-fund trade. We will move on to the issue of credit risk.
At www.cumber.com, underneath the chart of the hedge-fund trade, readers may find the “Commonwealth Of Puerto Rico Financial Information and Operating Data Report,” dated October 18, 2013. Here is a direct link: http://cumber.com/content/
Read the details about the pension systems, which are in horrible straits. Various retirement funding liabilities of Puerto Rico are estimated at $37 billion by methodologies that include a 6% discounting rate to get to present value. The reports show that the pension system is only 8% funded, meaning it is 92% unfunded. On digging deeper, one can find that a substantial amount of the funded portion is in the form of assets consisting of small loans, mortgages, and certain cultural loans to participants. Those “assets” substituted for what otherwise would be cash or investments in the pension system.
We excerpt this quote from the report:
“Another cause for the current situation of the Employees Retirement Systems is its personal loan program. The Employees Retirement System offers and manages a program that offers personal loans, mortgage loans and loans for cultural travels for retirement plan participants. Participants may obtain up to $5,000 in personal loans for any use. In 2007, the System increased this amount to $15,000, which reduced the cash in the System by approximately $600 million between 2007 and 2010. This deficit has been covered by funds from the System itself and has required the liquidation of assets that would have otherwise been available to make pension payments. Due to the amount of personal loans originated during recent years, the System’s loan portfolio now has a significant amount of illiquid assets. In an effort to improve the situation, in 2011, the Board of Trustees of the Employees Retirement System lowered the maximum loan amount back to $5,000 and, in 2012, it approved the sale of approximately $315 million in loans. With a balance of $539 million as of June 30, 2013, personal loans are equivalent to approximately 76% of the Employees Retirement System’s net assets.
“Finally, in 2008, the Employees Retirement System issued $2.9 billion in pension obligation bonds (“POBs”). The purpose of this offering was to increase the assets of the System available to invest and pay benefits. Unlike some other U.S. jurisdictions that have used this strategy, POBs are obligations of the Employees Retirement System itself and government employer contributions constitute the repayment source for the bonds.
The Commonwealth and other participating employers are ultimately responsible for any funding deficiency in the Retirement Systems. The depletion of the assets available to cover retirement benefits would require the Commonwealth and other participating employers to cover such funding deficiency. Due to its multi-year fiscal imbalances previously mentioned, however, the Commonwealth has been unable to make the actuarially recommended contributions to the Retirement Systems. If the measures taken or expected to be taken by the current Commonwealth administration fail to address the Retirement Systems’ funding deficiency, the continued use of investment assets to pay benefits as a result of funding shortfalls and the resulting depletion of assets could adversely affect the ability of the Retirement Systems to meet the rates of return assumed in the actuarial valuations, which could in turn result in an earlier depletion of the Retirement Systems’ assets and a significant increase in the unfunded actuarial accrued liability. Ultimately, since the Commonwealth’s General Fund is required to cover a significant amount of the funding deficiency, the Commonwealth could have difficulty funding the annual required contributions if the measures taken or expected to be taken to reform the retirement systems do not have the expected effect. There may also be limitations on the Commonwealth’s ability to change certain pension rights afforded to participants in the Retirement Systems.”
There is no way we can predict when a pension system will fail to pay its pensioners. We can say that this is a terrible funding situation for promised retirement benefits. Puerto Rico is essentially operating on close to a pay-as-you-go basis. It has far worse pension funding than any of the 50 states in the US. We have not included the promise of post-retirement health benefits, which only make the funding ratios worse. These are among the reasons why The Economist calls Puerto Rico a “Greek-like crisis on America’s southern doorstep.” (The Economist, October 26)
There is a second derivative at work now in dealing with state-specific mutual funds. Remember that Puerto Rico debt is tax-free in the various states and cities. State-specific funds can and do hold Puerto Rico debt as part of their composition. We think the involvement by states makes the exposure to Puerto Rico debt a nationwide issue, as opposed to the narrowness of exposure to the debt of Detroit, Stockton, or Harrisburg. A person in Arizona is not likely to own a tax-free bond from Detroit. Such a bond would be subject to taxation by Arizona. But a Puerto Rico bond could be held by any state-specific investor, because it would be tax-free. Mutual fund investors in state-specific funds may not know the exposure their fund has to Puerto Rico. The Oppenheimer Rochester funds have been mentioned by Lipper as having “the highest concentration of Puerto Rico bonds in the industry.” (Reuters, October 16)
Rating agencies have Puerto Rico debt on negative watch and have it rated at the lowest level of investment grade. The ratings story is in the report and is available to those who subscribe to the rating agencies. There is not much we will add to it. But in our internal rating work at Cumberland we also consider population shifts and crime rates. This data is not positive for Puerto Rico.
Puerto Rico has a financing plan that it is trying to advance in order to raise between $500 million and $1.2 billion in the next round of bond issuance. The subject of Puerto Rico has been explored by a number of Wall Street firms and research houses and has been a topic at several conferences. We cannot say whether Puerto Rico will successfully be able to roll its debt. We can project that any financing will be at a high cost, imposed upon an economy beset by questionable growth, a history of chronic deficits, a huge per-capita debt load, and a nearly exhausted pension fund.
Since we have written about Puerto Rico and taken a hard-line negative position on its debt, naturally we have received emails regarding our position on Puerto Rico. We wish investors well. And we certainly hope that the Commonwealth of Puerto Rico finds a way to avoid any defaults and to keep its promises to pensioners. We are not cheering for the demise of this beautiful island, where 45% of its 3.5 million inhabitants live below the poverty line and where the debt-to-GNP ratio is estimated at about 140%, if the pension liability is included.
That said, we think there is additional headline risk of trouble in Puerto Rico; there is risk of a debt-service-payment miss in the event that Puerto Rico finds itself with insufficient cash flow to meet debt-service payment; and there is market risk if the Commonwealth fails to obtain sufficient market access so that it can roll the debt. At Cumberland, we are not holding Puerto Rico debt — we do not own it, and we would not buy it today. The same is true for any mutual fund with exposure to Puerto Rico.
David R. Kotok, Chairman and Chief Investment Officer
To sign-up for Market Commentaries from Cumberland Advisors: http://www.cumber.com/signup.
For Cumberland Advisors Investment Portfolio Styles: http://www.cumber.com/styles.
Copyright 2013, Cumberland Advisors. All rights reserved.
Moving Chess Pieces
October 7, 2013
“As the political strategists move their chess pieces, the government shutdown is morphing into the bigger long expected fight about the debt ceiling. The agreement to pay government workers back pay, and the recall of most defense workers next week, basically means the impact of the shutdown is quite limited and no longer a political issue of great importance. The real fight is now focused on what concessions can be extracted for raising the debt ceiling and avoiding default – supposedly on October 17th, but certainly by November 1st when the next large social security payment is due.”
– Michael Drury, Chief Economist, McVean Trading, October 6, 2013
Fishing Pal and Global Interdependence Center colleague Mike Drury has correctly identified the change in pressure points. Having suffered political heat, Republicans and Democrats have found ways to shift the intensity of the budget fight. The non-game game continues as we are moving to the debt limit fight where the Republicans perceive themselves as holding a stronger advantage. They’re wrong. Obama does not run for re-election. They do. So do the Democrats, and this is all a game of finger-pointing in order to have the voters find fault with the other guy in next year’s elections. “What a country!” said the comedian Yakov Smirnoff. Talk about an understatement.
The United States is the world’s largest debtor (almost $17 trillion), and the US dollar is the world’s reserve currency. Actual default on the payment of interest and principal is an unthinkable course of action. Tom Donlan of Barron’s writes that the US must borrow about $700 billion over the next year just to keep ”doing everything it did last year.” He then adds that it “must borrow more than $5 trillion in the next 10 years” and “more than $14 trillion over the next 25 years.” These projections do not include rising “inflation, higher interest rates, slower GDP growth, longer life expectancy, and new spending programs.” Default and cascading consequences are not factored into the Donlan estimate. If we actually do fail to pay on our Treasury debt, those future year’s borrowing numbers will become much larger.
US market agents focus on the US Treasury interest rates and see them trending lower since the crisis evolved. They do not often consider how the market is pricing US default risk. Most of us are US-centric and focused only on the yield.
Global investors think differently. We can gauge their view by examining the pricing of the credit default swap (CDS) of the US. It is denominated in euros and trades outside the US, with major market making in London. Foreigners view the US interest rate as the yield they will receive, less the cost they incur by insuring that the US does not default. That is what the CDS is about. Its price is rising and has surged up sharply over the last two weeks. It spiked again today. Foreigners do not like what they see in Washington any more than we do. That is why they use insurance and hope they do not need it. Note that the US CDS market is not as liquid as other CDS markets, so reference prices have to be taken with a grain of salt. That said, they are certainly up from where they were before these political shenanigans started. They are a warning sign. Will Washington even take notice?
Another indicator of default risk is the spike in yields on the very short-term Treasury bill. It was trading to yield a pittance of 3 or 4 basis points. It spiked as high as 20 basis points before falling back to a trading range in the 12-13 level. That was last week. Assurances by politicians that they will not let the US default have had only limited effect.
So what is an investor to do?
If you actually believe that the US will default, then you need to prepare for a catastrophic event. Markets could experience another TARP moment like they did about 5 years ago.
In our view the US will not default. It has an absolute ability to pay. This is a political fight, not an economic one. The credit of the US is not the same as Detroit’s or economically risky like Puerto Rico’s. The country is not dismembering like Argentina or unable to support budgets like Greece. Comparisons between the US and these others are not valid.
That said, the US could run out of cash by November if it cannot legally borrow. We do not fully understand the October 17 date. But we do see November 1 looming as a massive entitlement payment date and we do have November 15 as a key date for substantial payments on US Treasury bonds and notes. No increased debt limit means the government would have to choose who gets paid and who is deferred.
The failure to authorize borrowing would cause an immediate budgetary reduction of roughly 4% of GDP. That is an annualized rate. That is also a massive and abrupt shift. Our citizens will not like the fallout. We would encounter a replay of the recent airport-slowdown reaction with much greater intensity. Our politicians know this, so they may play the brinkmanship game, but in the end they will not permit default. That’s our view. They never have defaulted in more than two centuries of American history.
That said; the risk is higher than zero even though it is quite small. We do not expect default. But we recognize that some lunatics are driving the nations’ policy decisions and some of them are willing to experience a default. We elected them. Let’s not forget that.
So what are we doing at Cumberland? We are a manager of separate accounts. If a client says, “Take me out of the markets,” we do it. If a client asks us today what we think is best for them, we suggest that they be in the markets, not out. So we may be sellers when a client determines to leave the markets and overrides our discretion, changes a strategic view, and orders liquidation. That has happened to us a few times in the last two weeks, and it usually indicates that selling pressure is actually peaking.
We are on the other side. We think the US does not default. We believe that any rocky period in markets will be temporary. So we want to take advantage of this period of weakness in order to reposition portfolios.
At this time, we are targeting being invested in the US stock market. We are not there today but are heading that way. We want to see all equity-allocated cash deployed in exchange-traded funds (ETFs). Furthermore, those ETFs have been selected for a recovery rally that will take the market to new highs. We believe that the S&P 500 Index will cross $1,800 by next spring. We expect earnings on the S&P 500 to exceed $110 in 2014.
In economic terms, the budget battle and debt-limit showdown, with all the political shenanigans either side can muster, will be a setback in broad-based GDP (gross domestic product) accounting terms. Since this setback takes place in the middle of a quarter, there will likely be a recovery once matters are resolved. And we know that the clock is ticking, so they must be resolved. By the middle of next year, a historian might look back at data for the fourth quarter of 2013 and conclude that very little happened.
Meanwhile, the profit share out of the US GDP remains very high. That profit share translates into earnings momentum and reflects itself in the valuation of stocks. Stocks are neither cheap nor rich. They are sort of in the middle ground.
The Fed (Federal Reserve) is more worried about the real economy than it is about the price of the stock market. It knows that the real economy has suffered a setback because of the political brinksmanship of Congress and the White House. That means any tapering will come slowly and tepidly.
We expect the tapering issue to continue to surface at the Fed. Tapering, when it takes place, will be staged in incremental steps over a period of 1 year, 18 months, or even 2 years. Tapering from $80 billion to zero at a pace of $5 billion per meeting would take 2 years, given the Fed’s schedule of 8 meetings a year. Such an announcement would be well received by market agents. The Fed could reserve the ability to change the path at any time and would likely do so, but it would also start on a path of gradualism that would be calming to markets. Will they? “Only the Shadow knows.”
The Shadow may know the outcome of the debt limit and budget fight, too, but he ain’t tellin’. It is this simple: We either default, and our politicians do lasting damage to our country. Or we don’t, and markets resume a trend higher, and we go on in our unique American political way. We will know soon. I’m betting on the latter. Right now we are holding a cash reserve and deploying it in periods of weakness.
David R. Kotok, Chairman and Chief Investment Officer
To sign-up for Market Commentaries from Cumberland Advisors: http://www.cumber.com/signup.
For Cumberland Advisors Investment Portfolio Styles: http://www.cumber.com/styles.
Copyright 2013, Cumberland Advisors. All rights reserved.
The addition of MasterCard will help FIDO expand its standard to more types of transactions. The company’s experience handling the multitude of existing payments industry standards will also be valuable.
No, it won’t be valuable. Not even slightly. In this particular context Mastercard is – to quote Matt Taibbi, who in 2009, unforgettably referred to Goldman Sachs, the world’s most powerful investment bank;
“a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
Well, Mastercard lives fairly and squarely in the same aquarium. Before this becomes a rant, I don’t want to discuss multi-factor authentication, public key cryptography, or any of those eye-wateringly fascinating subjects. That’s a technogeek issue which better belongs elsewhere (oh and yes, the comments DO flesh out the story on this of all forums) so back to our USA Today masterpiece…here’s the rest of the merde…
MasterCard will be the first major payment network to join FIDO. The Alliance is developing an open industry standard for biometric data such as fingerprints to be used for identification online. The goal is to replace clunky passwords and take friction out of logging on and purchasing using mobile devices.
Might I also point out the small yet irritating fact that such efforts also help (and I mean REALLY help) nefarious individuals who want to separate you and your money, sans an actual transaction. Yes, that means steal your money. For reasons which will soon become obvious, Mastercard would like to make that process easier…
Apple’s new iPhone 5s smartphone has a fingerprint sensor, but the tech giant is not part of FIDO. However, Google is part of the Alliance, and devices running Google’s Android operating system will have fingerprint sensors by next year.
Ugh. A mandatory personal disclosure at this juncture is in order; I’ve set my goal calendar to be – other than search engine usage – Google-Free by no later than February 2014. Why February? Umm, something to do with being busy adjusting to a new fiscal/physical/planetary year occupying most of January.
The addition of MasterCard will help FIDO expand its standard to more types of transactions. The company’s experience handling the multitude of existing payments-industry standards will also be valuable.
No it fucking won’t. See above.
“Our involvement with the FIDO Alliance, as well as other activities across the industry, will help deliver strong security for consumers, merchants and issuers, as well as a great consumer experience,” said Ed McLaughlin, chief emerging payments officer at MasterCard.
Holy shit..”chief emerging payments officer” is a job title? I’d like to expand on that one just a little, but this is (sort of) a family-friendly platform and time is short, so some self-censorship is in order. Onwards…
Joining FIDO will give MasterCard different ways of identifying people and help it decide when to use those techniques, depending on the situation.
I’d have phrased that differently, and it might have gone something like this;
“Joining FIDO will give the Mastercard legal technicians more choices when nailing you, the cardholder, for fraudulent transactions made in your name, because to be honest they’re sick and tired of these fraud waivers. It costs money. They’re probably soiling their shorts in anticipation of all the recovered revenue which is currently lost when someone successfully registers a claim for reimbursement – owing to a fraudulent purchase by unknown, unauthorized persons.”
Their schtick will be; “It had your fingerprint on it, therefore you did it no matter what you say to the contrary. Claim denied”
FIDO is trying to standardize lots of different ways of identifying people online, not just through biometric methods.
FIDO itself – namely the organization – is doing a creditable job of assembling smart people and companies to address the issue of providing proof that in any transaction where the two parties are not necessarily residing in the same physical space (“online” in other words) are who they claim to be. For the reasons stated above, Mastercard will not enhance this process. Period.
Michael Lewitt has long been one of my favorite thinkers and writers on matters economic. He’s incisive, thorough, and, well, pithy. No holds barred. Today’s Outside the Box features an extended excerpt from the October issue of Michael’s The Credit Strategist, which he has kindly allowed me to pass on to you.
Michael leads off this month with some useful thoughts on “the art of learning to live with intellectual and emotional discomfort,” which he says is a key requirement for successful investing. Then he extends these thoughts in order to give us a critique of recent Federal Reserve behavior that is different from any I’ve seen. The FOMC (Federal Reserve Open Market Committee), he says, has been seized by intellectual rigidity:
The fact that central bankers are agonizing over whether to begin reducing bond monthly purchases by $10-15 billion within the context of a $3.5 trillion balance sheet suggests that they have lost the forest for the trees….
The FOMC now seems to consider quantitative easing as virtually a status quo policy tool. No doubt employment growth and inflation are not where the central bank would like them to be, but monetary policy is not going to solve those problems – and economists of sufficient stature to serve as governors of the Federal Reserve are supposed to know that.
Michael goes on to examine the FOMC’s continued focus on employment and housing:
With grateful thanks to our friends over at Joy of Tech
Rolling down the yield curve [Inside Investing] Read this, it’s wonderfully explained!
Will it fly? the over-budget, behind schedule, but beautiful creature, known as the F35 or JSF [Vanity Fair]
A victory in the battle to make banks boring [Matt]
Who is Janet Yellen? [Real Time Economics]
JPMorgan to issue “a groundbreaking admission of wrongdoing” in London Whale case [DealBook]
JPMorgan has decided it’s time to make an “unprecedented effort” to comply with regulations [BBN]
Civil settlement does not end JPMorgan’s “Whale” troubles [Flitter & Goldstein]
Why JPMorgan should be split into three parts [Fortune]
The “secret financial market” that only robots can see [Quartz]
Twitter’s IPO will reveal how many fake or inactive users it has, and it may not be pretty [BusinessInsider]
Mr. Keynes and the Austrians: a battle over a suggested interpretation of unemployment [Miles Corak]
OK, that’s coffee reading done, so go do some work already! Oh, just one more thing…
Good luck out there today!
The Need for a New Economics
John Mauldin | Sep 17, 2013
In today’s Outside the Box, my good friend George Gilder, the well-known techno-utopian, attempts with some success to turn economics on its ear. “The economy is not chiefly an incentive system,” he asserts, “it is an information system.” And information, truly understood, is about the introduction of novelty, or “surprise,” into a system. In the case of the economy, it’s about invention and entrepreneurship. The new information that is injected gets converted into knowledge; and thus, says George, it is accumulated knowledge, rather than money or material, that constitutes true wealth.
And thus the economy is driven not so much by powerful people and institutions wielding the levers of the economic machine as it is by the ever-increasing power of information and knowledge. Economists and the governments they work for often appear to prefer a deterministic, no-surprises (and too-big-to-fail) economy, but that way lies economic stagnation. If determinism worked, socialism would have thrived.
Knowledge is centrifugal: it’s dispersed in people’s heads, and that has never been more true than in the Age of the Internet. And it is this universal distribution of knowledge which feeds back to the economy through the creative insights and entrepreneurial efforts of people worldwide that constitutes our chief hope for economic growth in the era opening up before us, where the limits of monetary manipulation and material extraction are becoming painfully apparent.
Here is a telling sentence from George:
Whether fueled by debt or seized by taxation, government spending in economic “stimulus” packages necessarily substitutes state power for knowledge and thus destroys information and slows economic growth.
The writing is on the wall: either we reinvent ourselves and our global economy, or the noise that is obviously building in the system will overwhelm the creation and transmission of knowledge, and the great human quest for the democratization of wealth will fail. But, as George says, “[C]apitalism is not a system of equilibrium; it is an engine of disruption and invention…. A capitalist economy can be transformed as rapidly as human minds and knowledge can change.” So we do have plenty of grounds for hope.
For the young among my readers, George Gilder wrote the seminal work Wealth and Poverty (which has been recently updated) back in the early ’80s, selling over 1 million copies and influencing a generation. He was Ronald Reagan’s most-quoted living author. He has written many books since then, but his latest book, Knowledge and Power, is in my opinion even more important.
When you combine Gilder’s work with Nassim Taleb’s Antifragility, along with the ideas that appeared in the recent Outside the Box piece by Charles Gave on the natural rate of interest, you can begin to get a real sense of why the design of the current monetary system is so flawed. Gilder’s work is foundational to that understanding. We have given our central banks a mandate far outside their actual capabilities: we’ve made them responsible for employment. With their limited tools, they have set about to improve employment but are disseminating corruption in their communications to the markets, in ways they neither intend nor understand. The framework that dominates the thinking of current central bankers simply does not encompass the new paradigm being advanced by Gilder, Taleb, Gave, and others.
Larry Summers withdraws from consideration for Fed Chair post [WSJ & about 1,739 others]
Alrighty then, let’s do our own brief rundown, we owe y’all that, at least…
The article landing on DC insiders desks which probably did him in [National Journal]
Towards a climax [Economic Principals] Enticing title, no?
Coincidental but “Summers over” on Lehman’s exact 5 year anniversary [Free Exchange]
OK, who else then?
Jared Bernstein looks ahead [Economix]
Neil Irwin touches briefly on “other alternatives” to Ms. Yellen [Wonkblog]
Who was thesis adviser to almost every top-ranked economist around, & best qualified candidate of all? Stan Fischer! [Dylan Matthews] Written back in February
Expect some action in the Bond market today on heels of Summers’ withdrawal [Mohamed El-Arian]
How the bank lobby loosened U.S. reins on derivatives [BBN] Long read BTW
More money than Thor: changes to Norway’s gigantic sovereign-wealth fund will be felt around the world [Economist]
Matt Levine on the Twitter IPO [BBV]
How Twitter makes money [Slate]
What exactly IS a “confidential S-1 filing” anyway? [DealBook]
Insiders view on what Twitter stock is (or should be, or might be, or they hope will be) worth [Jim Edwards/BI]
aaannnd finally, the most overdue article ever written…
How to fall in love with Math [Manil Suri/NYT Op-Ed]
Hey it’s Monday, the best day of the week. Go make some money already! Oh, just one more thing…
Good luck out there today!
Ethanol: Another Chapter in Scamnation
September 15, 2013
Dear readers, this Sunday afternoon I urge you to take a ten minutes to read Gretchen Morgenson and Robert Gebeloff’s front-page piece in today’s New York Times, ”Wall St. Exploits Ethanol Credits, and Prices Spike” (http://www.nytimes.com/2013/
Morgenson and Gebeloff expose the latest incarnation of the ethanol ripoff and the status of this government-created mess.
Please permit a personal polemic. I’ve pounded tables for years about ethanol as a massive scam. Our national policy diverts 40% of the U.S. corn crop (14% of the global corn crop) in order to produce a fuel that requires almost as much energy to produce as it supplies. Our ethanol mandate has starved millions of people; I’ve watched it with my own eyes in many countries in my travels. A 2011 study by the National Academy of Sciences estimates that, since 2007, the expanding U.S. biofuels subsidy has fueled 20%-40% of the increase the world has seen in the prices for agricultural commodities. In a country like Guatemala, that means that tortilla prices double and egg prices triple. (Source: http://www.nytimes.com/2013/
Ethanol damages engines, too — ask any user; I’ve seen it myself throughout the US, and Popular Mechanics concurs: http://www.popularmechanics.
Corn ethanol has poisoned our planet while it has lined certain private and politically connected pockets with billions. It has succeeded in raising our costs, for minimal net energy gains.
Morgenson and Gebeloff focus on just one aspect of the ethanol boondoggle, but it’s a crucial one: