What Caused the Financial Crisis?


This post is by David Merkel from The Aleph Blog


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Photo Credit: Alane Golden || Sad but true — the crisis was all about bad monetary policy, a housing bubble, and poor bank risk management======================

There are a lot of opinions being trotted around ten years after the financial crisis.  A lot of them are self-serving, to deflect blame from areas that they want to protect.  What you are going to read here are my opinions.  You can fault me for this: I will defend my opinions here, which haven’t changed much since the financial crisis.  That said, I will simplify my opinions down to a few categories to make it simpler to remember, because there were a LOT of causes for the crisis.

Thus, here are the causes:

1) The Federal Reserve and the People’s Bank of China

For different reasons, these two central banks kept interest rates too low, touching off a boom Continue reading “What Caused the Financial Crisis?”

Why I Watch the Thirty


This post is by David Merkel from The Aleph Blog


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I like long bonds.  I am not saying that I like them as an investment.  I like them because they tell me about the economy.

Though I argued to the Obama Administration that they should issue Fifties, Centuries and Perpetuals, the Thirty-year bond remains the longest bond issued.  I think its yield tells us a lot about the economy.

How fast is nominal growth?  Look at the Thirty; it is highly correlated with that.

What should the Fed use for its monetary policy?  Look at the Thirty, and don’t let the Five-year note get a higher yield than it.  Also, don’t let the spread of the Two-year versus the Thirty get higher than 1.5%.  When things are bad, stimulus is fine, but it is better to wait at a high spread than goose the spread higher. Excesses Continue reading “Why I Watch the Thirty”

Notes on the Fed Announcements


This post is by David Merkel from The Aleph Blog


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Photo Credit: City of Boston Archives

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Listening to the Fed Chair’s press conference, there was one thing where I disagreed with what Powell was saying.  He said a few times that they only made one decision at the FOMC meeting, that of raising the Fed Funds rate and the reverse repo rate by 0.25%.  They made another decision as well. The decided to raise the rate of quantitative tightening [QT] by increasing the rate of Treasury, MBS and agency bonds rolloff by $10B/month starting in April. They did that by increasing the rate of reduction of MBS and agency bonds from $8B to $12B/month, and Treasuries from $12B to $18B/month. The total rate of QT goes from $20B to $30B/month.  This may raise rates on the longer end, because the Fed will no longer buy so much debt.

There was also a little concern over

Continue reading “Notes on the Fed Announcements”

Just Don’t Invert the Yield Curve


This post is by David Merkel from The Aleph Blog


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Photo Credit: Brookings Institution

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Jerome Powell is not an economist, and as such, has the potential to try to remake the way the Fed does monetary policy.  Rather than hold onto outmoded ideas ideas like the Phillips Curve, which may have made sense when the US was a more insular economy, there are better ways to think of monetary policy from a structural standpoint of how financial firms work.

(Note: the Phillips Curve relies on a very simple assumption that goods and services price inflation stems from wage inflation, and that wage inflation occurs when domestic unemployment is low.  In a global economy, those relationships are broken when labor can be easily added from sources outside of the US.)

Financial firms tend to grow rapidly when the yield curve is steeply sloped.  Borrowing short and lending long is profitable, at least in the short-run.  Continue reading “Just Don’t Invert the Yield Curve”

Autonmous vehicles, accidents, liability and fault


This post is by Jeff from Venture Chronicles


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This week opened with a tragic story of a woman in Arizona who was killed by an Uber autonomous vehicle. The Tempe police chief made comments that have grabbed the headlines, well half of the quote grabbed headlines…

“I suspect preliminarily it appears that the Uber would likely not be at fault in this accident,” Moir told the Chronicle, adding,

the other part of the quote that is absolutely fascinating and more headline worthy than the first part is:

“I won’t rule out the potential to file charges against the [backup driver] in the Uber vehicle.”

Think about this for a second, the car is not at fault but the backup driver could still be charged. A third party in this scenario is Uber itself, who owns and operates the vehicle, while employing the backup driver. Here’s the thing about vehicle accidents, it not just a matter of who’s Continue reading “Autonmous vehicles, accidents, liability and fault”

Surprise! Return to RT Boom/Bust


This post is by David Merkel from The Aleph Blog


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After almost three years, I returned to RT Boom/Bust on Tuesday.  There are many changes at RT.  Many new people, and a growing effort to put together an alternative channel that covers the world rather than just the US or just the developed world.  They are bursting at the seams, and their funding has doubled, so I was told.

I get surprised by who watches RT and sees me.  My  congregation is pretty conservative in every way, but I have some friends working in intelligence come up to me and say, “Hey, saw you on RT Boom/Bust.”  And then there is my friend from Central Africa who says, “The CIA has you on their list.  Watch out!”  He’s funny, hard-working, but very earnest.

I’ve never seen anything in what I have done where there is any hint of editorial control.  Maybe it Continue reading “Surprise! Return to RT Boom/Bust”

On Finding a Job in Finance


This post is by David Merkel from The Aleph Blog


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I was approached by a younger friend for advice.  This is my response to his questions below:

Thank you for agreeing to do this for me. I would love to have an actual conversation with you but unfortunately, I think that between all of the classes, exams, and group project meetings I have this week it would prove to be too much of a hassle for both of us to try to set up a time.

1. What professional and soft skills do you need to be successful in this career and why?
2. What advice would you give to someone considering working in this field?
3. What are some values/ethics that have been important to you throughout your career?
4. I understand that you currently run a solo operation, but are there any leadership skills you have needed previously in your career? Any examples?
Continue reading “On Finding a Job in Finance”

Notes from an Unwelcome Future, Part 1


This post is by David Merkel from The Aleph Blog


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Dear Readers, this is another one of my occasional experiments, so please be measured in your comments.  The following was written as a ten-year retrospective article in 2042.

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It was indeed an ugly surprise to many when the payments from Social Security in February 2032 did not come.  Indeed, the phones in Congress rang off the hook, and the scroll rate on incoming emails broke all records.  But as with most things in DC in the 21st century, there was no stomach to deal with the problem, as gridlock continued to make Congress a internally hostile but essentially passive institution.

Part of that gridlock stemmed from earlier Congressional reforms that looked good at the time, but reduced the power of parties to discipline members who would not go along with the leadership.  Part also stemmed from changes in media, which Continue reading “Notes from an Unwelcome Future, Part 1”

The Crisis Lending Fund


This post is by David Merkel from The Aleph Blog


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Last week, there was an article in Barron’s describing how many mutual fund families take advantage of a provision in the law allowing them to have funds lend to one another.  Quoting from the article:

Under normal circumstances the Securities and Exchange Commission bars funds from making “affiliated transactions,” but there’s a loophole in the Investment Company Act of 1940 for funds to apply for an exemption to make such “interfund loans.” Until recently, few fund families applied for this exemption. None had before 1990. From 2006 to 2016, the SEC approved just 18 interfund lending applications. But since January 2016, the agency has approved 26. Most major fund families—BlackRock, Vanguard, Fidelity, Allianz—now can make such loans. Stiffer regulations of banks, which are now less willing to offer funds credit lines, partly explain the application surge.

I’m here tonight to suggest making a virtue Continue reading “The Crisis Lending Fund”

Redacted Version of the September 2017 FOMC Statement


This post is by David Merkel from The Aleph Blog


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July 2017 September 2017 Comments
Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. No change.  Feels like GDP is slowing, though.
Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Job gains have remained solid in recent months, and the unemployment rate has stayed low. Shades labor conditions down, as improvement has seemingly stopped.
Household spending and business fixed investment have continued to expand. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked Continue reading “Redacted Version of the September 2017 FOMC Statement”

Redacted Version of the July 2017 FOMC Statement


This post is by David Merkel from The Aleph Blog


Click here to view on the original site: Original Post




Photo Credit: Leo Newball, Jr. || I visited that building when I was 24.

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June 2017 July 2017 Comments
Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. No change.  Feels like GDP is slowing, though.
Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Shades labor conditions up
Household spending has picked up in recent months, and business fixed investment Continue reading “Redacted Version of the July 2017 FOMC Statement”

Redacted Version of the June 2017 FOMC Statement


This post is by David Merkel from The Aleph Blog


Click here to view on the original site: Original Post




 

May 2017 June 2017 Comments
Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed. Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Shades GDP up
Job gains were solid, on average, in recent months, and the unemployment rate declined. Job gains have moderated but have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Shades labor conditions down
Household spending rose only modestly, but the fundamentals underpinning the continued growth of consumption remained solid.  Business fixed investment firmed. Household spending has picked up in recent months, and business fixed investment has continued to expand. Shades Continue reading “Redacted Version of the June 2017 FOMC Statement”

Why Social Security Should not be Invested in the Stock Market


This post is by David Merkel from The Aleph Blog


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Stocks always return more than Treasury Bonds.  So why doesn’t Social Security invest the trust funds in stocks rather than Treasury bonds?

The first reason is simple.  The government wanted Social Security to be free from accusations of favoritism.  Why should public businesses have access to government capital, when private capital doesn’t have that same advantage?  The second reason is also simple: do we want the government to be an owner of a large percentage of the businesses of the country?  Do you want the government to have even more influence on businesses than activist investors do?

The third reason is complex.  Do you want to mess up the stock market?  A large dedicated buyer would drive the market up to levels where future returns would be very low, much lower than at present.  Very marginal businesses would go public to take advantage of the Continue reading “Why Social Security Should not be Invested in the Stock Market”

Redacted Version of the March 2017 FOMC Statement


This post is by David Merkel from The Aleph Blog


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Photo Credit: Norman Maddeaux

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February 2017 March 2017 Comments
Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. No real change.
Job gains remained solid and the unemployment rate stayed near its recent low. Job gains remained solid and the unemployment rate was little changed in recent months. No real change.
Household spending has continued to rise moderately while business fixed investment has remained soft. Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Shades up business fixed investment.
Measures of consumer and business sentiment have improved Continue reading “Redacted Version of the March 2017 FOMC Statement”

On the Pursuit of Economic Growth


This post is by David Merkel from The Aleph Blog


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I wrote this to summarize my thoughts from a chat session that I was able to participate in at Thompson Reuters Global Markets Forum yesterday.  It was wider ranging than this, but was a very enjoyable time.  Thanks to Manoj Rawal for inviting me.

On the Pursuit of Economic Growth

I think one of the conceits of the modern era is the degree of trust we place in governments.  We want them to do everything for us.  The truth is that their power is limited.  Even if we delegate more power to them, that doesn’t mean the power can/will be used by the government for the purposes intended.

The government is composed of people with their own goals.  It’s not much different than shareholders delegating power of the corporation to a board of directors, who collectively oversee management, Continue reading “On the Pursuit of Economic Growth”

The Rules, Part LXIII


This post is by David Merkel from The Aleph Blog


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Onto the next rule:

“We pay disclosed compensation.  We pay undisclosed compensation.  We don’t pay both disclosed compensation and undisclosed compensation.”

I didn’t originate this rule, and I am not sure who did.  I learned it at Provident Mutual from the Senior Executives of Pension Division when I worked there in the mid-’90s.  There is a broader rule behind it that I will get to in a moment, but first I want to explain this.

There are many efforts in business, particularly in sales, where some want to hide what they are truly making, so that they can make an above average income off of the unsuspecting.  At the Pension Division of Provident Mutual, the sales chain worked like this: our representatives would try to sell our investment products to pension plans, both municipal and corporate.  We preferred going direct if we could, but often there would Continue reading “The Rules, Part LXIII”

Two Questions on Returns


This post is by David Merkel from The Aleph Blog


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I recently received two sets of questions from readers. Here we go:

David,

I am a one-time financial professional now running a modest “home office” operation in the GHI area.  I have been reading your blog posts for a couple years now, and genuinely appreciate your efforts to bring accessible, thoughtful, and modestly stated insights to a space too often lacking all three characteristics.  If I didn’t enjoy your financial posts so much, I’d request that you bring your approach to the political arena – but that’s a different discussion altogether…

I am writing today with two questions about your work on the elegant market valuation approach you’ve credited to @Jesse_Livermore.   I apologize in advance for any naivety evidenced by my lack of statistical background…

  1. I noticed that you constructed a “homemade” total return index – perhaps to get you data back to
    😉

    Continue reading “Two Questions on Returns”

The Financial Report of the United States Government 2016


This post is by David Merkel from The Aleph Blog


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Composition of Liabilities 1994-2016

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The last time I wrote about this was four years ago.  I have covered this topic off and on for the last 25 years.  As usual, the report got released during a relatively dead time, January 12th, where most people were listening to the preparations for the inauguration.  I’ll give them some credit though — not as much of a dead time as usual; it was in the middle of a work week, AND earlier than usual.  (It would be nice to know when it’s coming, though.)

I have two main messages to go with my two graphs.  The first message is one I have been saying before — beware some of the estimates that you hear, should you hear them at all.  No one wants to talk about this, but what few that do will look at a few headline numbers and leave

Graph Credit: The Boards of Trustees of the Federal Hospital Insurance Trust Fund

Continue reading “The Financial Report of the United States Government 2016”

Steeling Themselves For Pension Benefit Cuts


This post is by David Merkel from The Aleph Blog


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Photo Credit: Tony Hisgett || Only 20 years more and I can retire with a full pension!

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Aside from the bankruptcy of a plan sponsor, the benefits of someone being paid their pension can’t be cut.  Right?

Well, mostly true.  With governments in trouble, benefits have been cut, as in Rhode Island, Detroit, and a variety of other places with badly managed finances.  Usually that’s a big political fight.  Concessions come partly as a result that you could end up with less if you fight it, and don’t take the deal.

With corporations, the protection of the Pension Benefits Guarantee Corporation [PBGC] has kept pensions safe up to a limit — as of 2016, up to roughly $60K/year for those retiring at age 65 (less for younger retirees) from single-employer plans, and $12,870/year at most for those in multiemployer plans.  (For some complexities, read more here.  Also Continue reading “Steeling Themselves For Pension Benefit Cuts”

Redacted Version of the February 2017 FOMC Statement


This post is by David Merkel from The Aleph Blog


Click here to view on the original site: Original Post




Photo Credit: eflon || Ask to visit the Medieval dining hall!  Really!

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December 2016 February 2017 Comments
Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. No real change.
Job gains have been solid in recent months and the unemployment rate has declined. Job gains remained solid and the unemployment rate stayed near its recent low. No real change.
Household spending has been rising moderately but business fixed investment has remained soft. Household spending has continued to rise moderately while business fixed investment has remained soft. No real change.
  Measures of consumer Continue reading “Redacted Version of the February 2017 FOMC Statement”