What Caused the Financial Crisis?


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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?”

The Pips are Squeaking


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This should be a short post.  I just want to note the degree of stress that many emerging market countries are under.  The Fed raises rates, and something blows up.  That is often the class of debt that has grown the most in the bull phase of the cycle, or, the one that has financed with short-term debt.  This is the “volatility machine” that Michael Pettis wrote so well about.

The Brazilian stocks I own have been falling.  A little lower, and I will make them double-weight positions.  Five times earnings for utilities that cannot be done without?  Wave the shares in.

Look at Argentina, Indonesia, and Turkey.  Fundamentally misfinanced.  Maybe own assets there that have enduring demand.  I own IRSA [IRS].

Russia is fundamentally sound.  I own shares in RSXJ, which is Continue reading “The Pips are Squeaking”

Why I Watch the Thirty


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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


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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


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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”

Surprise! Return to RT Boom/Bust


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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”

Redacted Version of the September 2017 FOMC Statement


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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


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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


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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”

The Permanent Portfolio


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I will admit, when I first read about the Permanent Portfolio in the late-80s, I was somewhat skeptical, but not totally dismissive.  Here is the classic Permanent Portfolio, equal proportions of:

  • S&P 500 stocks
  • The longest Treasury Bonds
  • Spot Gold
  • Money market funds

Think about Inflation, how do these assets do?

  • S&P 500 stocks – mediocre to pretty good
  • The longest Treasury Bonds – craters
  • Spot Gold – soars
  • Money market funds – keeps value, earns income

Think about Deflation, how do these assets do?

  • S&P 500 stocks – pretty poor to pretty good
  • The longest Treasury Bonds – soars
  • Spot Gold – craters
  • Money market funds – makes a modest amount, loses nothing

Long bonds and gold are volatile, but they are definitely negatively correlated in the long run.  The Permanent Portfolio concept attempts to balance the effects of inflation and deflation, and capture returns from Continue reading “The Permanent Portfolio”

Redacted Version of the March 2017 FOMC Statement


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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”

Yield = Poison (3)


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Photo Credit: Brent Moore || Watch the piggies run after scarce yield!

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If you do remember the first time I wrote about yield being poison, you are unusual, because it was the first real post at Aleph Blog.  A very small post — kinda cute, I think when I look at it from almost ten years ago… and prescient for its time, because a lot of risky bonds were about to lose value (in 19 months), aside from the highest quality bonds.

I decided to write this article this night because I decided to run my bond momentum model — low and behold, it yelled at me that everyone is grabbing for yield through credit risk, predominantly corporate and emerging markets, with a special love for bank debt closed end funds.

I get the idea — short rates are going to rise because the Fed is tightening and inflation is Continue reading “Yield = Poison (3)”

Redacted Version of the February 2017 FOMC Statement


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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”

Redacted Version of the December 2016 FOMC Statement


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November 2016 December 2016 Comments
Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. 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. FOMC shades GDP up.
Although the unemployment rate is little changed in recent months, job gains have been solid. Job gains have been solid in recent months and the unemployment rate has declined. Shades up their view on labor.
Household spending has been rising moderately but business fixed investment has remained soft. Household spending has been rising moderately but business fixed investment has remained soft. No change.
Inflation Continue reading “Redacted Version of the December 2016 FOMC Statement”

When I was a Boy…


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Photo Credit: Jessica Lucia

Photo Credit: Jessica Lucia || That kid was like me… always carrying and reading a lot of books.

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If you knew me when I was young, you might not have liked me much.  I was the know-it-all who talked a lot in the classroom, but was quieter outside of it.  I loved learning.  I mostly liked my teachers.  I liked and I didn’t like my fellow students.  If the option of being home schooled had been offered to me, I would have jumped at it in an instant, because then I could learn with no one slowing me down, and no kids picking on me.

I read a lot. A LOT.  Even when young I spent my time on the adult side of the library.  The librarians typically liked me, and helped me find stuff.

I became curious about investing for two reasons. 1) my mother did it, and

😉
🙂

Continue reading “When I was a Boy…”

At the Cato Institute’s 34th Annual Monetary Conference (Epilogue)


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Well, I’m back in suburban Baltimore after the struggle of getting to the the center of DC and back.  It takes a lot of energy to write 4000 or so words, tweet 26 times, meet new people, old friends, etc.  Here are some thoughts after the sip from the firehose:

1) There was almost no media there this time.  Maybe it’s all the action associated with a new president being elected.  All the same, I see almost nothing on the web right now aside from the Twitter hashtag #CatoMC16 and my posts echoed at ValueWalk.

2) I came out of the conference thinking that I need to read three of the papers, the ones by:

At the Cato Institute’s 34th Annual Monetary Conference (Panel 4 & Closing)


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PANEL 4: RETHINKING THE MONETARY TRANSMISSION MECHANISM

Moderator: George Selgin – Director, Center for Monetary and Financial Alternatives, Cato Institute

Jerry L. Jordan – Former President, Federal Reserve Bank of Cleveland

Steve Hanke – Professor of Applied Economics, Johns Hopkins University

Walker F. Todd – Trustee, American Institute for Economic Research

Selgin introduces the topic arguing how difficult it is to analyze things today

Jordan (get his paper)

Rules vs discretion — what are useful targets or indicators?

Buying/selling Treasuries; Fed funds targeting

Large balance sheets — no need for excess reserves.  Large foreign banks buy deposits of FHLBs — positive fed funds rate.

Borrowing from the banking system — IOR, reverse repos.

Monetary base — currency plus reserves.  Was close to accurate at the beginning, but not so now.  When rates go up, it is a form of fiscal stimulus.

Monetary base has grown

Basel Continue reading “At the Cato Institute’s 34th Annual Monetary Conference (Panel 4 & Closing)”

At the Cato Institute’s 34th Annual Monetary Conference (Panel 3)


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Photo Credit: Frank N. Foode

Photo Credit: Frank N. Foode

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Moderator: Judy Shelton – Co-Director, Sound Money Project, Atlas Network

Gerald P. O’Driscoll Jr. – Senior Fellow, Cato Institute

Kevin Dowd – Professor of Finance and Economics, Durham University

Tyler Goodspeed – Junior Fellow in Economics, University of Oxford

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O’Driscoll — What CBs can’t do? They aren’t prescient.  Policy discretion — results aren’t measured, and politicians blame the Fed when things go wrong, and take credit when things go right.

Politicians and Central bankers engage in “symbiotic rent-seeking.”

Fed reform would involve reducing the Fed’s scope, improving its performance and enhance its accountability.

Fed should let assets roll off the balance sheet and even sell off securities on the long.

Eliminate Fed 13.3 powers to eliminate lender of last resort powers.  Can’t implement a policy rule without that.

Wants to keep the regional Fed banks.

Dowd: “Money often costs too much” Continue reading “At the Cato Institute’s 34th Annual Monetary Conference (Panel 3)”

At the Cato Institute’s 34th Annual Monetary Conference (Lunch)


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LUNCHEON ADDRESS

Hon. Phil Gramm – Former Chairman, Senate Banking Committee

Mark Calabria introduces him, maybe a little over the top — some clever comments and insightful, though.  Gramm didn’t come to Congress to be loved.  What does Mother think of your ideas, Gramm would often ask.

Gramm: A few key points, try to be brief…

1) Most of what you know is not so — echoing Twain

Quotes a book on Monetary Policy from the 19th century.  Crisis: Obama: Greedy bankers took advantage of deregulation.

Insured commercial banks had high capital levels at the time of the crisis — 10% (DM: but look at the tangible capital ratios)

Government incented aggressive policies — highly levered with lots of Subprime mortgages as a result of CRA lending.  (DM: note, I saw this in the low income tax credit business.)

2) Banks have Continue reading “At the Cato Institute’s 34th Annual Monetary Conference (Lunch)”

At the Cato Institute’s 34th Annual Monetary Conference (Panel 2)


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Photo Credit: Jeff Upson

Photo Credit: Jeff Upson

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PANEL 2: MONETARY MISCHIEF AND THE “DEBT TRAP”

Moderator: Josh Zumbrun – National Economics Correspondent, Wall Street Journal

Athanasios Orphanides – Professor of the Practice of Global Economics and Management, MIT Sloan School of Management

H. Robert Heller – Former Member, Federal Reserve Board of Governors

Daniel L. Thornton – Former Vice President and Economic Advisor, Federal Reserve Bank of St. Louis

Zumbrun introduces the panel, saying they are monetary policy practitioners.

Athanasios Orphanides begins by praising Friedman, mentioning the book Monetary Mischief. (Note: Amazon Commission)

Limited space for fiscal policy given high debt levels.  Monetary and fiscal are always linked, though central bankers are loath to discuss it.  Puts up a graph of rising government debt 1998-present.  Also graphs Italy, Germany, Japan.  Is there a debt trap now?  Is there monetary mischief, inflation, now?

(DM: Phil Gramm just sat down next to me.)

Continue reading “At the Cato Institute’s 34th Annual Monetary Conference (Panel 2)”