Tuesday, April 30, 2013

Bonds vs. stocks, March 2009 - April 2013

Shared this relative performance chart of bonds vs. equities on StockTwits this morning, and wanted to post it here for our readers.

Here is TLT (US Treasury bonds) vs. the returns of QQQ (Nasdaq 100 ETF) and SPY (S&P 500 ETF), from March 13, 2009 to April 30, 2013. 

As you can see from the chart above, TLT has gained about 20 percent (not including dividends) in this 4 year period. QQQ is up 144 percent and SPY is up 110 percent from the start of this recent bull market in equities. 

In terms of price (directional) correlation, you'll note that while the QQQ and SPY are very closely linked, the two stock index ETFs seem negatively correlated with TLT. When stocks are up, government bonds are lagging and vice versa, at least for the period in question.

Taylor on monetary policy

John Taylor has a lovely little blog post, encapsulating so much in a few sentences. An excerpt with comments (emphasis mine)
...there is a crucial issue which explains much of the enormous difference of opinion between critics and supporters of the Fed’s current policy. Critics such as me and Allan Meltzer ... argue that monetary policy should focus on a clear strategy for the instruments of policy. A goal for inflation or other measures of macro performance is not enough if it is simply part of a whatever-it-takes approach to the instruments. Such an approach results in highly discretionary and unpredictable changes in policy instruments with unintended adverse consequences, as we have been seeing in recent years.

Supporters such as Adam Posen... are just fine with the Fed using, even year after year, a whatever-it-takes approach to the instruments of policy as long as there is an overall goal. With such a goal in mind, so their argument goes, the central bank can and should always intervene in any market, by any amount, over any time frame, with any instrument or program (old or new), and with little concern for unintended consequences in the long run or collateral damage in the short run (say on certain groups of people or markets) as long as it furthers that goal.

Critics are very concerned about those unintended consequences and collateral damage; they are also concerned about an independent government agency wielding such a great deal of power as it carries out a year-after-year whatever-it-takes approach. Supporters are much less concerned.
I have always had this problem with nominal GDP targets, inflation targets, and so forth. Ok, the Fed adopts your target. Now what? If nominal GDP doesn't do what the Fed wants it to do, what should the Fed do about it? Talk more? (Monetary policy is starting to look more and more like foreign policy here).

Taylor points out a deeper danger. The Fed's "mandate," the list of its "goals," keeps expanding. Beyond just inflation and unemployment, now the Fed is in charge of "financial stability," managing "systemic risks," the health of specific markets (mortgages, exports), the health of specific institutions (too big to fail banks), the diagnosis and pricking of bubbles (when not the deliberate stoking of such bubbles), management of the details of every part of financial system (how swaps get traded, for example) and surely coming soon a federal anti-crabgrass mandate.  The list of things the Fed can do in pursuit of these goals is getting bigger and bigger too, while the power of its conventional instruments (setting short rates, quantiative easing) is diminishing.  If the Fed doesn't think banks are lending enough, and to the right people, in pursuit of one of its many goals, what stops them from using their regulatory power to just go tell the banks who they should lend to?

We have told the Fed to attain unattainable goals, and given it great power to do "whatever it takes" in their pursuit.  The Fed seems to go along. It's fun to be given so much power, in the short run at least.  But in a democracy, the price of great independence must be limited power, and the Fed will soon have to choose. Congress already limited some of the Fed's powers after some "whatever it takes" of the financial crisis.

Taylor, of course, would like the Fed limited to the instrument of short-term rates, and to follow the Taylor "rule" for setting them. But the principle is larger than that instance.

Monday, April 29, 2013

Life In The Fast Lane

Or would you like "Hotel California"?

Either way the thrill of going up and up and never to worry about coming down must be real giddy.
Didn't I say not to short yet.
Although all your indicators are screaming over bought most are throwing in the towel and joining the buy express.
Where do you think we are in the following curve?

My take is, we are right at the Euphoria stage.
And that was why I wrote don't short yet about 2 weeks back.
Although we went out of the long positions in Jan. end , we did not short the market. We gave up this 80-90 points on the upside because we want to catch all the ride down and not take any risk. And if any of you are still long, now may be the time to cash in for good.
After many months, we are now ready to take new positions and subscribers have been given the tip and trades for the coming week. 
And no, I am not looking to get rich by selling Newsletter Subscription.
Good luck trading all.

Friday, April 26, 2013

This Is As Good As It Gets

The GDP announcement this morning for the first quarter of 2013 was 2.5 percent, well below the 3 plus estimates that economists were expecting.    This will not be the first disappointment.  Folks like Jim Cramer on CNBC can't understand why businessmen are reluctant to expand capital equipment and hire employees.  That's because Cramer is a media celebrity not a businessman.

If Cramer were even remotely aware of the actual business climate that ordinary folks have to contend with, he would know what the problem is -- over regulation, absurd tax levels, Obamacare, EPA regulations, Dodd-Frank.  It is almost as if the Obama Administration has declared war on the US economy.  Anything that smacks of business success is viewed suspiciously by the Administration (and by Jim Cramer, I might note).

The talking heads can't figure it out, but the economics are simple.  If hiring an employee at a $ 35,000 salary means it costs you $ 75,000 per year, you are not going to make that hire.  End of subject.

Why the simple economics of hiring and firing eludes people like Jim Cramer is amazing.

There is no reason that health care costs should be borne by employers.  None....no reason at all.  But one thing is certain, if employer bears the cost of health care, they are going to be reluctant to make new hires and anxious to reduce their existing work force.  Why is that hard for the Obama fans like Jim Cramer to figure out?

Citizens should finance their own health care.  That would keep costs down and make the market efficient, as in the provision of anything else in a market economy.  The only way to get health care costs to spiral out of control is to get the government involved. 

There is so much double talk in an attempt to circumvent the obvious facts on the ground.  The economy is grinding to a halt in Europe and in the US.  The West is in deep, deep trouble.  They have drunk the nectar of socialism and wealth redistribution.  All of that feels good for a while until the economy begins to fall apart.  We are now witnessing the collapse of the West.

This is not going to get better.  It is going to get worse.  Economic policies in Europe and in the US are not designed to make economies grow.  They are designed to make economies fair, according to the fairness whims of the political elite.  That kills economic growth.

So, get used to it.  This is as good as it gets.

Wednesday, April 24, 2013

Ignorance and the NY Times

Eduardo Porter, an "economics" columnist with the NY Times, has penned an article this morning in the NY Times that purports to address the lack of solutions to today's economic stagnation.  Porter reports on a recent IMF sponsored conference of economists that was supposed to address problems posed by the "financial crisis of 2008."

According to Porter, the 2008 collapse discredited policies of lower taxes and de-regulation.  You have to wonder what world Porter lives in.  Was Sarbanes-Oxley an example of the deregulation?  Were the Congressionally-imposed strengthening and rule-making for Fannie and Freddie examples of de-regulation?  Exactly what is Porter referring to?  Or do facts matter anymore when you have a convenient agenda ready?

Here is an example of the absurd conclusions that Porter draws in his article: "One lesson from the crisis -- first learned in the 1930s and corroborated in several contemporary analyses -- is that when interest rates lose their power to stimulate the economy, additional government spending can help generate real growth."  Really?  Could have fooled me! 

Government spending in the US has exploded since 2008, as well as the national debt.  And what have we gotten for this explosion in government spending?  Economic stagnation -- the worst economic recovery since?  Guess what -- the 1930s.  Yes, the last time government spending was tried as a solution was the last time the economy failed, for a genertion, to recover from an economic downturn.

The way out of our current quagmire is easy and historically established. Go back to the early 1980s.  Drastic tight money, high interest rates, major tax cuts and de-regulation spurred the most dramatic economic recovery in world history.  All of this took place in the US under President Reagan in the bad old 1980s.  The Clinton years benefitted from these policies, but Clinton couldn't handle prosperity.  He and a Republican Congress raised taxes which began to produce economic contraction by mid-2000.  Further regulatory nightmares, led by Sarbanes-Oxley, the dramatic push by Congress to expand Fannie and Freddie set the stage for the 2008 disaster.

What has been discredited is the idea that expansive monetary and fiscal policy can substitute for free market capitalism.  The facts have turned naive Keynesiasm on its head.  Free markets produce economic growth.  Governments produce economic stagnation.  The IMF wasted its time holding their conference last week.  They would have been better served reading some economic history and learning the facts.

Sunday, April 21, 2013

Even the WSJournal Doesn't Get It

David Wessel has a lengthy article in this morning's Wall Street Journal about the future direction of the world's economies.  He begins with Europe and then walks the reader through the US, Japan, China, and the rest of the world.  In every case, Wessel's discussion is about government policy.

The overall theme is that economic recovery depends upon government policy, discretionary policy at that.  He discusses the twists and turns of policymakers as they, according to his story line, attempt to guide their economies to the promised land.

But, that is exactly the problem.  Once government policy becomes the determinant of the economy's future, the economy no longer has a future.  The proper role of government in a free market is to lay down the rules of the road and then to get out of the way.  Increasingly, a government of rules is not to be found.

Instead we watch daily as policy makers, who frequently have a very limited knowledge of economics, move this way and that in a vain attempt to get economic growth going.  Such things cannot work.  They never have worked and they never will.

Economic growth occurs when businesses make capital expenditures and hire workers to create product.  They aren't going to do that if they have to spend their time wondering what the next move is going to be by their government.  Government action is detrimental to an economy's future.  Government inaction and consistent application of the rules of the road is the ticket to prosperity, not frenetic political activity and polarizing rhetoric.

If Obama had played more golf and forgotten about the stimulus, Obamacare and Dodd-Frank, we would probably be looking at 4 - 5 percent unemployment today and economic growth rates of 3 1/2 to 4 percent.  Unfortunately, Obama thought he had something to contribute.  So, we stagnate.  that's the price of a responsive government.

Wednesday, April 17, 2013

Taming the Beast

When an economy collapses, usually with the financial sector leading the way, everyone fears that it will not soon recover.  But, history tells us otherwise.  The numerous financial and economic collapses from the end of the civil war in the US up to the start of World War I took place during the fastest spurt of economic growth in US history.  The US economy had no central bank during this period and the government was so tiny that fiscal policy was largely non-existent.  Absent modern policy tools, what happened?

What happens, when government is not around to step in, is that economies recover on their own.  That's what the period from 1865 to 1914 teaches us.  It was during that period that the US overtook other economic power houses to become, by the end of the first World War, the most powerful economic engine in the world.  That is the outcome one can expect if the central bank is non-existent and if government fiscal policy is non-existent.

But what happens when government attempts to "tame the beast?" and "reform" the economy and the markets.  After the 2008 collapse, an unprecedented effort by central banks and governments took place throughout the Western economies.  Combined with aggressive "regulatory reform" to prevent future financial collapses, political actions by western economies have attempted to "tame the beast" of modern capitalism for the past 4 1/2 years.

And what is the outcome of all of this government action? -- economic stagnation and distress.  Economies that chugged along with 3 - 3 1/2 percent real GDP growth and 4 - 6 percent unemployment, now face zero real GDP growth and unemployment rates between 7 1/2 percent and 30 percent (Spain, Greece).

What next?  The beast has been tamed.  The furious fires of capitalism have been successfully tapped down by government policy.  Now, policy makers have abandoned any serious effort to get free markets going again and are focused on taxing rich folks.  That is the new agenda -- move more and more activities from the private to the public sector (think health care) and go after the wealth of anyone who played by the old rules.

We now have new rules.  Bond indentures (think GM, think Stockton) can be rewritten by the judiciary and by politicians.  Raiding government protected checking accounts are now policy tools for dealing with excessive sovereign debt (think IMF recommendations on Cyprus).  Nothing is safe from the wandering policy eyes of the Obama administrations and European politicans.  Even IRA accounts in the US have now become targets of the new political elite.

The beast has been tamed.  Look for the economies in Europe and the US to roll over.  In the US, the imposition of massive tax increases, major new hikes in employee costs (Obamacare), an onslaught of new EPA regulations, and blurring of the legal status of ordinary financial contracts (GM) is enough to snuff out the tepid recovery in the US.  Absurd policies designed to increase sovereign debt in heavily indebted Europe will put the nail in the coffin for Europe.  The future is not bright.

Monday, April 15, 2013

Don't Short Yet.

Just a quick note.

A 40 point drop in SPX in one day is  reason enough to say: "I told you, the risks are high".
 We went out at 1510 and today the market is around 1550. I have one question who were long in the last two months. Did you get out in time?

However, I think it is not yet time to short the market. We still need to give it some more time and the subscribers will know when to short.

Same goes with Gold. It is still not the right time to long gold because cycles did not bottom and there will be separate email to subscribers when the time is right.

Grains did not suffer much damage today because all weak hands were flashed out last week. And Oil has some more to drop but I am not shorting it.

All in all, we are in good shape and hope everyone is raising cash to take advantage of the coming Tsunami.

Note to the Troll: New subscription rate for the month of May and onward is $ 99 per month. Only the existing subscribers for April get to renew it at $ 49.

Good luck trading all.

Sunday, April 14, 2013

Alternative Maximum Tax

This is an Op-Ed for the Wall Street Journal, original here on April 15 2013

Source: Wall Street Jouirnal
They keep coming back, like the villains of a good zombie movie, chanting "more taxes, more taxes." Long ago, Congress passed the alternative minimum tax, or AMT—a simple flat rate to ensure that in an insanely complex tax code, no one escapes paying something. Now we need an alternative maximum tax as a simple, rough-and-ready way to limit the tax zombies' economic damage. Call it the AMaxT.

With Monday's deadline for filing tax returns looming, let's start a national conversation: How much is the most anyone should have to pay? When do taxes indisputably start to harm the economy and produce less revenue—when government takes 50% of people's income? 60%? 70%?

I like half, but the principle matters more than the number. Once the country settles on a number, each of us gets to add up everything we pay to government at every level: federal income taxes, yes, but also payroll (Social Security, Medicare, etc.) taxes, state, city and county taxes, estate taxes, property taxes, sales taxes, payroll taxes and unemployment insurance for nannies, household workers, or other employees, excise taxes, real-estate transfer taxes, and so on and on, right down to your vehicle stickers and those annoying extra taxes on your airline tickets.

On April 15, once this total hits the alternative maximum tax, you've done your bit and federal income taxes can take no more. You compute federal income taxes as usual, but then you get to reduce the "tax due" that the total is less than the alternative maximum.

The zombies howl that the top federal tax bracket is still "only" 40%. Surely "the rich" can contribute a bit more? They forget that the economic damage of taxes comes from the total tax bite, not just the federal income tax.

Marginal taxes are a purer measure of economic damage. If you earn one more dollar, how much do you get to keep? Marginal rates are higher than average rates in a progressive system: If the government takes 100% of income above $100,000, then somebody earning $150,000 pays a 33% average tax rate but has no incentive to work at all after he reaches $100,000. Ideally, we would limit marginal rates, but this is not practical in a simple backstop like the AMaxT.

American governments also like to hide taxing and spending by passing mandates and regulations, forcing people and businesses to spend on their behalf. Ideally, we would limit this economic damage as well, but this is also not practical in an alternative maximum tax.

However, both considerations mean that the true economic damage will be higher than the AMaxT rate, so we should leave some headroom in setting that rate.

Every cent of corporate taxes comes out of some person's pocket, in higher prices, lower wages, or lower returns to investors. For example, even the tax zombies don't dream that we stick it to the big oil companies by charging gas taxes. To limit this damage, every single cent of tax that government assesses, at all levels, should be assigned to somebody and count against that person's alternative maximum tax. It is easiest to assign all corporate taxes to shareholders. When corporations send you the annual 1099 dividend form, they also report all taxes paid by your shares, which count against your AMaxT. Some taxes could similarly be assigned to workers and reported on W2 forms.

Yes, there are details to work out. People get big tax bills in some years, such as when they pay estate taxes. Incomes fluctuate. Smart tax lawyers could game the system.

This isn't hard to fix. For example, we could use an average of several years' income or, better yet, scale the AMaxT limit to consumption rather than income.

Liberals might object to a maximum tax, since it leaves out all the benefits that we get from government. In setting the maximum level of taxation, shouldn't we consider the nice roads, free schooling, police, national defense, thoughtful regulation, and other benefits and services?

This is a valid consideration if one argues about what's "fair." But I propose the AMaxT entirely to limit the economic damage of taxation, a goal you must consider even if you think it's "fair" to take every cent of a rich person's income.

To limit economic damage, benefits are irrelevant. Suppose that the government levies a 100% income tax, but it is so good at providing services that each of us gets back twice the value of what we put in. Good deal? Yes. Functioning economy? No. Each person gets services whether they do or don't pay taxes. But with a 100% income tax, nobody works, nobody pays any taxes, and nobody actually gets any services.

How many people are really being taxed at outrageous rates? I don't know. The U.S. tax system is so complex, with so many layers of taxing authority, that nobody really knows. Still, an alternative maximum tax is a win-win bet.

If there really are few people who pay an extraordinarily high percentage of their income, then liberals shouldn't object. They won't lose any revenue and will enjoy snickering "I told you so." If it turns out that there are lots of people being so taxed, then we will sharply reduce the unintended, multiplicative effect of taxation, and we will measure that fact. A canary in the coal mine is as valuable chirping as choking.

The disincentive effects of heavy taxation settle in gradually. For the first year or two, all people can do is hire smarter lawyers and work a little less hard. It takes years for businesses to retrench, close, never get started or fail to expand; for people and companies to move abroad; for students to give up investing in an expensive M.B.A., medical school or engineering degree; for people to stay put rather than follow lucrative opportunities, or to retire early. All this shows up slowly and gradually drags down an economy and its tax revenues.

So the AMaxT is most important for the backstop promise it makes to young people and entrepreneurs. Yes, start a company, go to school, work hard, invest, hire people. We guarantee you that no matter what happens, no matter how loud the zombies chant, no matter what clever "revenue enhancers" they come up with, you will get to keep some reasonable fraction of what you earn. Go for it.

( One more point that got cut for length: With an alternative maximum tax, people might abandon complex tax dodges in favor of simply taking the alternative maximum.)

Updates: Several people have pointed out that this system advantages states with high income taxes. Good point. Since state and federal income taxes are both due April 15, let's amend the proposal to let you cut back proportionally on both federal and state income taxes. Oh, and credits against next year too.

A colleague writes: Perhaps you know this, (I didn't) but the corporate system you describe is close to the franking credits used in Australia, New Zealand, Malta and maybe other countries. In essence, rather than declare the dividends they receive on their income taxes, shareholders report the corporation’s before-tax earnings that supported the dividends (the grossed-up dividend) and include the taxes the corporation paid as a credit against their taxes. For your purposes, this system already assigns the corporate taxes to the shareholders. (If your tax rate is 0, you actually get a check back from the government for the amount of taxes the corporation paid on your behalf.)

On the issue, how many people are there who pay more than half. Total, on budget, federal state and local spending is about 42% of GDP. Tax expenditures bring that up to 46%. Off budget, mandates, etc. bring us easily over 50%. The average person is already paying something like his income in taxes, either now or later (when the debt comes due). Europe's numbers only look bigger because they collect it all in one place.

Allen Sanderson has a nice related Op-Ed adding up some state and local taxes in Illinois

What the IMF consideres macro

Via Greg Mankiw's blog, I learned about the IMF conference on "Rethinking Macro Policy." See the announcement and program here. I reproduce the program below.

I find this most striking as a reflection on what the IMF considers "macro." Yes, they have the whole spectrum, indeed, all the way from  Geroge Akerlof and Joe Stiglitz on the far left end of traditional Keynesian economics, to... Olivier Blanchard and David Romer on the pretty-far left end of somewhat new-Keynesian economics?

Don't get me wrong, these are all very smart people, in the whole program and the final panel. Akerlof was one of my thesis advisers, and a lot of what I learned from him sticks with me today. But really, this is the entire spectrum of macro? Has anyone heard of, oh, Lucas, Sargent, Sims, Prescott and all their many descendants?  Especially if the project is to "rethink," would not some slight broadening of a spectrum have made sense?

It is a sharp lesson in the range of ideas that the IMF will bring to anything they do.


IMF Headquarters 2
Conference Hall 1
Tuesday, April 16, 2013 

2:45–3:00pmOpening remarks: Christine Lagarde
3:00–4:30pmSESSION I: Monetary Policy 
Janet Yellen


Lorenzo Bini-Smaghi
Mervyn King
Mike Woodford
4:30–5:00pmCoffee break
5:00–6:30pmSESSION II: Macroprudential Policies 
Andy Haldane


Claudio Borio
Stanley Fischer
Choongsoo Kim

IMF Headquarters 2
Conference Hall 1
Wednesday, April 17, 2013

8:15–9:00amRegistration/Continental Breakfast
9:00–10:30amSESSION III: Financial Regulation
Sheila Bair


Jeremy Stein
Jean Tirole
John Vickers
10:30–11:00amCoffee Break
11:00–12:30pmSESSION IV: Fiscal Policy
Janice Eberly


Anders Borg
Roberto Perotti
Nouriel Roubini
2:00–3:30pmSESSION V: Exchange Rate Arrangements 
Agustín Carstens


Jay Shambaugh
Martin Wolf
Gang Yi
3:30–4:00pm***Coffee Break***
4:00–5:30pmSESSION VI: Capital Account Management
Duvvuri Subbarao


Philipp Hildebrand
Márcio Holland de Brito
Hélène Rey
George Akerlof
Olivier Blanchard
David Romer
Joseph Stiglitz
6:30–8:30pm***Cocktail Reception ***
(Venue: HQ2 Second Floor)

Troll Attack

Last week one Troll send some abusive email because of my call of long grain. As always with the Trolls with origin from unknown fathers, they are afraid to give their name or email or engage in any conversation about their point of view. This one was no exception.
What the Troll does not understand that my time horizon could be different from his. (I assume it is a he). I am looking out 6-9 months out and may be some more. And Wheat sold off 6.5% from around $700 only to come back to that level in few days. I think the Troll saw a paper loss and panicked. But if you have a heart of a chicken and no conviction in long term trend, why bother with investing in stock market. Buy a lottery ticket from your neighbourhood convenience store.
I have successfully called for :

  • Start of the up-trend from beginning of 2013.
  • Gone out of long gold position at the correct time and despite intermittent bounces, advised everyone to stay out of gold and silver.
  • Advised not to short the market till price confirmation is obtained.
I would think anyone of the above would be sufficient for some gratitude but that is asking too much as I see it now.
You may ask, if I know that it is not yet time to short the market, why did I get out of equities and gave up 60-80 points rally? My answer is I am not a market timer. From experience I know that it is impossible to get out at the exact top or enter at the exact bottom. I also know that risks are high and risk reward ratio is not favourable. I am not trying to score a hit with every 10-20 point up or down, rather looking for very long term trends and ride with it. 

But I have come to realize that financial blogging a futile exercise. These days I am lucky if I get any time during the week to write anything. And I am working on setting up an offshore hedge fund and work with high net-worth clients. Folks who don't crap in their pants with short term loss but look for longer term trend and profit. Who can hold their drinks so to day.

So my dear Troll, all the power to you. I am off to something bigger and better. 

Debt and growth in 10 minutes

This is a short video from last year. I only just found out it exists. It still seems pretty topical, and (for once) condensed because Lars Hansen really forced me to obey the 10 minute time limit!

There is a better link here from the BFI page here that covers the whole event, but I couldn't figure out how to embed those.

Saturday, April 13, 2013

Once Upon A Time

The American dream was, once upon a time, the idea that if you worked hard, postponed consumption, saved your money and invested it, you could live whatever lifestyle that you wanted.  The flip side was that if you failed, you paid the price for that failure.  That idea fueled the economic engine that made American the wealthiest country in the world.  Millions of people came to America, because of the freedom that the American dream represented -- the freedom to be who you wanted to be without the heavy hand of the government telling you what you could or could not dream.

We are now embarked, along with our friends in Europe, upon the journey to the American nightmare.  Political struggles, both in Europe and the US, are degenerating into class warfare, pitting higher incomes against lower incomes, and producing economies that no longer grow.  Massive unemployment is becoming accepted and commonplace.  The Eurozone unemployment rate exceeds 12 percent and American workers are leaving the work force to enjoy that leisure that an over-abundant "safety net" provides.

Freedom includes the freedom to fail, the freedom to make mistakes, the freedom to pay the price of your failure and your mistakes.  Once upon a time the discipline that was imposed by the freedom to fail provided the necessary incentives to succeed.  Taking away the freedom to fail with the heavy hand of government takes away the freedom to succeed.  It is not only the "too big to fail" that is the problem, it is the "too politically correct to fail" as well that eliminates the freedom necessary to make an economy successful.

Friday, April 12, 2013

Futures and stocks: YTD performance charts

A quick look at the year-to-date performance of futures and stocks on Finviz

Natural gas tops the futures list for relative performance. Nat gas is up 27% YTD. 

Right behind it is the Nikkei 225 index, up 27%, getting a boost from the latest BOJ monetary easing efforts (note: Yen is down 12% YTD). The Dow Industrials are up 13.5% YTD and the S&P 500 is up 11%. Remember what we learned from Ray Dalio: currency depreciation and money printing are good for stocks (at least in nominal terms). 

Gold and silver have been selling off in recent weeks. The precious metals took a hard spill today as the markets mulled a possible winding down of the Fed's QE program. It seems, in this instance, simply scaling back "money printing" efforts is enough to push gold and silver into free fall mode. 

Individual stocks have done pretty well year-to-date. Of all US-listed stocks, Finviz shows 4,713 are up (show a positive return) YTD vs. 1,744 down YTD. A simple screen of liquid stocks (greater than 100k avg. volume) shows 443 stocks up 30 percent or more year-to-date. 

The best performing industries YTD are: Credit Services (96%), Music and Video Stores (85%), Electronic Stores (69%) and Memory Chips (48%). 

The worst performing industries YTD include: Gold (-30%), Silver (-29%), Personal Computers (-17%), and Industrial Metals (-14%). 

You can follow me on Twitter and StockTwits for more real-time market updates and trading info.

Energy Idiocy

What is it about energy that send all sides of the political spectrum into spasms of babbling idiocy? Here are two items heard on my jog yesterday, courtesy of NPR, one from the right, one from the left, with the NPR interviewers mindlessly accepting idiocy in the middle.

Start with NPR's coverage of Gina McCarthy's Senate confirmation hearings. The issue is the EPAs efforts to close down coal-fired power plants to reduce carbon emissions

ELIZABETH SHOGREN, BYLINE: For four years, Gina McCarthy has been heading up the EPA's office in charge of air quality. She's crafted rules that are cleaning up exhausts from old coal-fired power plants. Some of those plants are opting to shut down instead of installing expensive pollution controls. Republican Senator John Barrasso from Wyoming says those rules have cost jobs.

SENATOR JOHN BARRASSO: Since you've taken office, 10 percent of coal-fired generated power in the United States has been taken offline. Do you see the EPA having any responsibility for the thousands of folks who are out of work for these plant closures?

GINA MCCARTHY: Senator, I take my job seriously when I'm developing standards for protecting public health to take a look at the economic consequences of those and do my best to provide flexibility in the rules.

SHOGREN: Senator Barrasso continues his barrage, naming coal miners he's met who are out of work for the first time in their lives.

BARRASSO: How many more times, if confirmed, will this EPA director pull the regulatory lever and allow another mining family to fall through the EPA's trapdoor to joblessness, to poverty and to poor health?
So, quick question: What is the ideal number of jobs in the electricity production industry? Answer: zero.

Really. If you want "jobs," the right answer is to shut down all the coal-fired plants, and let all those workers move to installing very inefficient windmills. No, better, hook them all up to stationary bicycles, producing 50 watts each; and then hire a bunch more people to grow food for them on locally-sourced sustainable organic farms. And, as Milton Friedman famously quipped, have them plow the fields with spoons so more people still can have jobs. (Coal mining itself has lost almost all of its "jobs" due to mechanization. Perhaps the senator would like to reverse that.)

Ms. McCarthy could easily have answered: "No, Senator. Industries will still need electricity, and that demand will move to renewables. Look at all the green jobs we will create."  Having started down the coal miner job route, the senator would surely not have had the wit to point out that the real "jobs" cost is in downstream industries that have to pay more for electricity.

Now from the left. The cost-benefit calculation prize of the year goes to NPRs next story, covering a scientific paper that predicts that climate change will cause more clear-air turbulence for flights near the jet stream over the North Atlantic.
BLOCK: Your study finds that by 2050, we might see the frequency of turbulence on flights across the Atlantic doubling and also getting stronger. This has to do with the jet stream. Can you explain why?

WILLIAMS: Well, climate change is accelerating the jet stream, making the wind speeds faster. And this is making the atmosphere more susceptible to the particular instability that causes clear air turbulence to break out. ... The conditions seem to be smooth and all of a sudden, you can hit turbulence unexpectedly ...

BLOCK: Well, do you figure that airlines will have to reconfigure their flight patterns, will have to change how they fly, where they fly?

WILLIAMS: Well, a pilot taking off from perhaps New York in the middle of this century to come across the Atlantic to somewhere in Europe will be looking at twice as much airspace containing turbulence. Now, they're going to face a choice that they could just grit their teeth and decide to fly right through those extra patches of turbulence or if the turbulence is particularly strong, they might instead decide to try to fly around it or above it or below it.

All of this, of course, means that journey times could lengthen if flight paths have to become more wiggly and less of a straight line. This is an increase in journey times, maybe more delays at airports and also, perhaps more importantly, an increase in fuel consumption. And I should mention that fuel is the number one cost to airlines. So any increase in fuel consumption will, of course, imply increased costs to the airlines.

And ultimately, of course, it could be passengers who see the ticket prices going up to pay for that.

BLOCK: Well, the irony there, too, I suppose would be that if you're increasing fuel consumption, you're also increasing the contribution to global warming which will be causing the turbulence in the first place, right?

WILLIAMS: Right. There's a sort of feedback there and it's a bit like poetic justice that maybe the atmosphere is somehow seeking its revenge on planes for causing this problem in the first place.
So much low-hanging fruit here. There have been a lot of attempts to add up the economic costs of global warming. Just how big is this effect? Should Gina McCarthy have answered Senator Barrasso with, "Yes, some miners will lose their jobs. But think how much cheaper airline tickets to Paris will be in 2050 because pilots won't have to fly longer routes to avoid clear-air turbulence?"

Savor the irony. One of the highest items on the global warming agenda is to deliberately raise ticket prices by carbon taxes.

"Feedback." About 2% of carbon emissions are from all aircraft. So how much do carbon emissions rise from slightly longer jet routes? Are we out of the fifth decimal point?

This is all so sad. I don't mind liberals who don't profess to believe in free markets getting it all wrong. But "free market" conservatives shouldn't quickly revert to Keynesian pump priming and public works arguments.  I don't mind conservative bible-thumpers who get science wrong. But bien-pensant "scientific" global warming nannies shouldn't be off by, oh, let's say 10^6 or more on cost-benefit analyses and feedback effects. Each makes their causes ludicrous. And just how incredulous should journalists be not to catch any of this?

Economists Who Think Incentives Don't Matter

I nominate Simon Johnson for an award as an economist who has managed to reach the remarkable conclusion that economic incentives do not matter.  He joins a long list of politicians who seem to think that government policies that take money from one group of Americans to give it to another have no effect on behavior.

Save and save and save and then find out that the government will take the proceeds of your savings away from you.  That's the message of the recent Obama message and Simon Johnson's column today in the New York Times.  Obama's new war on the IRA promises to slap the hands of any American who decided to forego that extra TV or car or who bought a house that they could afford, putting the money into an IRA account instead.

The new crime is saving, investing and accumulating assets.  According to Obama, that is un-American and he proposes bringing it to an end.  Somehow eliminating what paltry private savings the American economy generates doesn't seem to bother Obama and his economic advisers.  After all, I suppose, China can continue to supply whatever savings we need as the Chinese own an increasing share of American assets and Americans own less and less of their own country.

Meanwhile those who don't save and who splurge on consumer goods and purchase homes they cannot afford will continue to receive bailouts, special new program proposals from the Obama-led White House, and higher levels of dependency on government.  Already the number of Americans even remotely interested in working for a living is at a forty year low and the number of Americans collecting disability checks is at a record and a new record is achieved every day.

Reward the indolent and punish the thrifty and those with a work ethic -- that is the Obama mantra, ringingly endorsed by his adoring economists.  Simon Johnson thinks he hasn't gone far enough.  I suppose Johnson would like to raise the minimum wage to $ 100 an hour as well.  That should go far to eliminate poverty (at least for the handful of Americans who would still have jobs).

Thursday, April 11, 2013

Sanofi and the Future of France

Sanofi is a drug company with a research facility in Toulouse, France.  The facility needs to be closed.  It is a research facility that hasn't produced a new drug in twenty years and costs are prohibitively high in any event.  600 workers are employed there.

So, what happens when Sanofi decides to close the plant?  Mass demonstrations and a protracted legal battle.  In the end, Sanofi will be refused by the government and the plant will stay open, regardless of what Sanofi shareholders want.

So, what happens when another company is considering opening a plant anywhere in France?  They will think about Sanofi's troubles and look elsewhere.  Markets work and learn -- which is bad news for France, a country with a declining GDP and absurd economic programs.

Obama thinks that they are on the right track.  I guess it depends on what destination you are shooting for.

Wednesday, April 10, 2013

Krugman and I agree on one thing

Austerity is not the answer.  Austerity just means lower standards of living in the future and political chaos.  Does anyone think things look bright for Cyprus, Greece, Portugal, Spain or Italy?  These unpayable debts should have been moved into default negotiations.  That is the only answer.  Increasing sovereign debt in all of these countries is madness and brings Germany and France into the same boat.

Bureaucrats and naive politicians (think Obama) always believe that there is some simple "political" solution to every problem.  There isn't.  They are wrong.  The only way to deal with too much debt is to reduce it.  Period.  Nothing else helps.

The ECB is on the wrong track.  It is long past time for "workouts," but better late than never.

Otherwise the center-right and center-left political parties will be completely discredited and radical alternatives, already emerging, will move into prominence.

Politicians never learn.  The only way to a higher standard living is free enterprise.  Having the government responsible for old age security and health is a huge mistake.  Government can play a role as a backstop, but if government is the major provider, the only outcome will be waste and mismanagement and improper funding, which is what we are observing.

Obama's biggest problem is that he thinks of everything in terms of "justice," which, to him, means equalizing the outcomes of the economic process.  If you do that, the economy will grind to a halt.  That was the experiment in Russia, China and Cuba.  It doesn't work.  The sluggish and stagnant growth of the American economy is living testament to the outcomes that the Obama economic policies will lead to.  Things will get worse.

What is needed is an economic environment where individuals are free to pursue their dreams and achieve success or failure on their own terms.  You can't guarantee everyone success.  That just means that everyone fails.

Interest rate graphs

Where are interest rates going? Here are two fun graphs I made, for a talk I gave Tuesday at Grant's spring conference, on this question. (Full slide deck here or from link on my webpage here)

Here is a graph of the recent history of interest rates. (These are constant maturity Treasury yields from the Fed)  You can see the pattern:

Early in a recession, interest rates fall, but long rates stay above short rates. These are great times for holders of long-term bonds. They get higher yields, but prices also rise as rates fall, so they make money both ways. But you also see the see-saws. Interpretation: long-term bond holders are getting a premium for holding interest rate risk at a time that nobody wants to hold risks.

Then there is the flat part at the bottom of the recession. Now long-term bond holders get the yield, but interest rates don't change. Still, they're making money.

Then comes the interest rate rise, when long-term bond holders lose money. Obviously, you want to get out before interest rates start rising. But it's not easy. Nobody knows for sure how long recessions will last. (That seems to be the lesson of  more serious work too.) Look at all the fits and starts, all the zig zags in long interest rates. You don't want to be caught napping like in 1994. But if you, like me, thought last year or the year before looked like 1994, you got out too early. Welcome to risk and return. Notice in 2003 that long rates started rising long before the Fed did anything.

As I look at the fundamentals, current rates look pretty low. Will inflation really average less than 3% for the next 30 years, so you just break even on 30 year bonds?  But the criticism, "if we're in such trouble, why don't markets see it coming?" is still troublesome. So let's look at the actual market forecast

The solid blue line and red line are today's yield curve and forward curve. (This is the Gürkaynak, Sack, and Wright data). The blue forward curve is the market expectation of where interest rates will go in the future. You can lock in these rates today, so if you really know something different is going to happen, you can make a fortune. (This is why I'm not persuaded by arguments that the Fed is driving down rates below market expectations.) We can interpret this blue forward curve by the "consensus forecast." The economy slowly recovers, interest rates slowly rise back to normal levels (4%) consistent with 2% inflation and 2% real rates. The fall back to 3% rates at the long end of the curve seems a bit low, but that's the market forecast and always a good place to start prognosticating.

If the path of future interest rates follows the blue forward curve, there is no bloodbath in long term bonds: you earn this rate of return on bonds of all maturity at every date going forward. (Proving this is a good finance class problem.)

How good are market forecasts though? This may be the market's best guess, but a lot of the future is simply unknowable.  The thin blue and red lines show the forward curve and yield curve in April 2010. You can see that at the time, the consensus market forecast was for interest rates to rise starting sooner, and to rise more quickly. We all expected the recession to end quickly, as recessions usually do.

In 2010, the market forecast that today's interest rate would be 3.5%, not zero. I graphed that forecast and realization by the leftmost vertical arrow. Furthermore, the entire forward curve forecasts the entire forward curve. So, second point from the left, in 2010 the market forecast that today's one-year forward rate would be about 4.2%, not the tenth of a percent or so that we see. If the forward rate forecast is correct, today's forward rate curve should lie exactly on the 2010 forward curve. (Proving that is another nice problem set question for finance classes.)

So, from the perspective of 2010, we have seen quite a large, surprise, downward shift of the "market expectations" in the forward curve.  It has been a great few years for holders of long term bonds.

However, beware: What goes down can come up again. To those who say "interest rates are low, the market doesn't see trouble coming, why worry?" I think the graph shows the magnitude of interest rate risk. And risk goes in both directions.

So, I'm still doom and gloomy. But the danger we face is unpredictable. Large debts mean that the government is out of ammunition, didn't pay the insurance bill, the fire extinguishers are empty, we are prone to a run or a sovereign debt "bubble" bursting (I hate that word, but I think it conveys the spirit), choose your anecdote. We could have a Japanese decade. It could be February 1994, when spreads and recent history looked a lot like today's. Or we could be on the edge of Greece, whose interest rates were pretty low once upon a time as well. The market forecast interpolates between these options.

The first principle of portfolio maximization is risk management, not prognostication. There remains a lot of risk.

Sunday, April 7, 2013

The President's Budget Proposal -- More of the Same

If you want people to save less, increase the tax on their savings.  So, the President now threatens to pull the rug out from under IRAs.  The President's defenders say that he is only going after very wealthy IRA users, but we know where it ends -- the average American will find his savings threatened by this increasingly autocratic regime in Washington.

How do you help poor people?  Increase their taxes.  So, the President proposes to increase the tax on cigarettes.  Who are the smokers amongst us?  The country club set?  Or those without jobs and working at the lowest paid jobs in the country?  Everyone knows the answer to that, including the President.  He knows that smoking is mainly a habit indulged in by the poor, so he wacks the poor with one more tax hike.  Smoking is almost unheard of among upper middle income folks.  Obama has his sights set on socking it to the poorest demographic in the country.

What about entitlements?  The President proposes cutting medicare reimbursements.  He seems to think this will mean that medicare services will simply cost less with no reduction in services.  Why not simply eliminate reimbursements entirely.  Then everyone could get health care free!  This is the logic of the President's medicare savings.  We've seen it all before.  There are now several states where a majority of doctors will not take medicare patients and that chorus of opt-outers is growing everyday.  The President's plan is that health care will ultimately be free, unless you need a doctor or a hospital, in which case it will be unavailable.

As for cost-of-living adjustments on social security, that is merely a technical adjustment of limited significance in a world where people increasing live on social security far beyond our society's ability to provide the resources to support it.

Meanwhile the new budget continues to subsidize Obama's cronies where the losses continue to pile up in failed "green industry" activities, though Obama's cronies never seem to lose any of their own money in these ventures -- just taxpayer money.

So, tax thrift, reward those with uneconomic schemes and dreams that cannot make it in the market place, let the entitlements grow on to infinity, and sock it to the poor.  Continue the same economic policies that have produced the worst economic recovery since the 1930s (the last time these kinds of policies were tried).  Meanwhile, let the national debt soar on to infinity.

That's the President's new proposal.  Not much of a surprise, given the last five years.

Saturday, April 6, 2013

Portugal Waffles on Austerity

Promised 78 billion Euros by the ECB, Portugal had agreed to limit it's budget deficit to 3 percent of GDP.  Forget that promise.  It won't happen.

The high court in Portugal said "no" yesterday to a plan to trim government employees compensation and that is the end of the 3 percent plan.  Back to plan B.  Portugal now says 5 percent is doable.  Not that it matters.

Portugal's debt was 124 percent of GDP before the ECB stepped in.  It will be 150 percent within two more years on its way, no doubt, to over 200 percent within a decade.  This, of course, assumes there is someone out there willing to buy this worthless stuff.

All the other Eurozone countries are on a similar trajectory, including France and Germany.  The US is on a similar path, perhaps as a sympathetic show of unity.

The ECB magic elixir is that the cure for too much debt is more debt.  Austerity is thrown into the mix, one supposes, for comic relief.

Ridiculous economic policies in the US and in the Eurozone are bearing fruit.  Their economies are stagnant at best and collapsing at worst, while their sovereign debt levels continue to explode.

The Obama Hunt for Revenues

The Wall Street Journal reports today that the Obama Administration is now planning on major new taxes on: 1) cigarettes; and 2) IRA accounts.

Increasing the taxes on cigarettes goes after the poorest demographic in America.  In his continuing war on the lower middle income Americans, Obama plans to raise what is probably the most regressive tax in existence -- the cigarette tax.

For balance, one supposes, Obama intends to break the long standing promises of IRA accounts.  IRA accounts are a special target of the Obama Administration, because IRA's are the main avenue that individuals use to provide savings for their retirement.  Not content to let social security run out of money in the next generation, Obama now plans to steal the private savings that individuals have accumulated by abstaining from consumption and saving for their future.

There are no limits to the duplicity and meanness that characterizes the Obama Administration.  These proposals are just more of the same.  Just as the minimum wage laws make it a criminal offense to provide jobs for the poorest amongst us, the cigarette tax punishes the poorest Americans and the attack on IRA's is an assault on individual thrift.

Meanwhile another "green jobs" project funded with $ 200 million in Obama Administration funds is going belly up.  Fisker, a maker of electric cars, with a huge credit line from the US Government, is laying off 150 of its employees (60 percent of its workforce) in order to conserve cash for Obama-friendly wealthy shareholders.  The company still has the ability to draw another $370 million from government coffers as it slides into bankruptcy.  Another transfer from the poor and from the savers to Obama's wealthy friends.

Friday, April 5, 2013

Half a Million Americans Give Up Looking

This morning's job report was notable mainly for the number of Americans who have simply given up any hope of employment and have exited from the workforce.  Another half a million Americans quit looking for work in March.  The percentage of American adults that now make any effort at all to find work is at the lowest point since 1979 (when Jimmy Carter was president).

If more people continue to quit looking for work, the unemployment rate will continue to fall.  Eventually, if everyone out of work just gives up looking, America's unemployment rate can fall to zero.  That seems to be the only way to get the unemployment rate down in the new Obama world.

In a culture that is becoming increasingly a "where's mine?" culture, it is hard to see how the American economy that we used to know (in the bad old days) is ever going to return.

How many private sector jobs were created in March?  A laughable 85,000.  That's almost a rounding error to the Reagan era 1.2 million jobs that were created in September of 1982.

Watching the pundits was interesting this morning?  They seemed puzzled.  Was it the sequester, they pondered?  They ignored the implementation of Obamacare, the $ 600 billion tax increase imposed at the beginning of 2013, the ceaseless barrage of new regulations designed mainly to strangle American business and the continued war against free enterprise that is waged daily by the White House.

The American culture is changing.  We are becoming more like Greece every day in every way.   There is a sense of entitlement in the air and in every part of life.  McDonald employees in NYC demanding a 107 percent immediate wage increase in the midst of a sea of unemployed Americans is a great example of the modern cultural disconnect.

The idea that you have to work and save to provide for yourself is so Reagan-like.  Why do that when government can generously provide everything?

Well now we know one thing that the government cannot provide -- private sectors jobs.  Stay tuned.  There is more coming.  Wait until you experience the implementation of Obamacare.  You haven't seen anything yet.  You might read up on pre-1990 Soviet Russia to get a good glimpse of where we are headed.

Thursday, April 4, 2013

Obama Calls for the Return of Predatory Lending

After excoriating the banking community for the past five years for making loans to Americans with less than stellar credit, Obama has now reversed course.  This week, Obama has now called for banks to return to the bad old days -- lending to people of modest means.

What has been considered a crime by the Obama folks for the last five years is now their latest policy initiative.  With the taxpayer, of course and as usual, as the guarantor.

Instead of letting the free market decide who gets to borrow and at what rates, which would avoid the booms and busts of the past, Obama is following his tried and true instincts.  Only he knows what is best -- not the markets.

But banks have learned their lesson.  Why loan to folks that might not pay you back, regardless of who the guarantor is?  The banks now know that they will be accused of predatory lending when these loans go sour.  By that time, Obama will be resting comfortably with his millions in Hawaii.  What does he care?

Once again, an administration with nothing but contempt for free markets, has demonstrated their ignorance and their duplicity.  At least, finally, they appear to realize that strangling the financial community has consequences.  Witness the stagnant economy of the Obama years.

Don't expect banks to rush forward to put their neck in the noose once more.

Tuesday, April 2, 2013

Bitcoin crosses $100 mark in latest surge

Bitcoin, the virtual currency on everyone's lips, surged through the $100 mark this week. 

Bitcoin is currently trading at $117.2 on Mt. Gox (click through for current quotes and market depth), one of the most liquid bitcoin exchanges. Having traded near $15 in early January, bitcoins are now up over 750 percent in US dollar terms year to date. 

Here's a chart of the bitcoin/Euro price, currently at 92.18 on Mt. Gox. Interest in the bitcoin market recently exploded across Europe as Cyprus' banking crisis led savers to wonder if their bank deposits would be seized to help bail out ailing banks. 

As the New Yorker explains in their piece on, "The Bitcoin Boom": 

"...That a number of panicked Europeans appear to have reckoned the wildly volatile, vulnerable, and tiny bitcoin market a preferable alternative to their own banking system, even temporarily, signals a serious widening of the cracks between the northern and southern E.U. countries in the wake of the euro-zone debt crisis. 

It also illustrates the broader collapse of trust that is threatening the world of global banking and fiat money. The weakness in existing currencies stems from lack of faith in institutions—particularly central banks, which are often in league with commercial and investment banks. 

When a government bails out a failed bank or insurance company—in essence, by printing money—the net effect is that the currency as a whole is debased, in favor of a few and at the literal expense of everyone else, which amounts to a fair description of today’s global financial system. Hence the sudden appeal of bitcoins, which appear, for the moment, at least, to be immune to the machinations of inept or crooked bankers and politicians." 

I've been reading and tweeting about bitcoins and the future of virtual currencies quite a bit in recent months. Recent events seem to have sparked a great deal of interest in this area, even for those (like myself) who have yet to transact in the virtual currency market. 

We've seen a previous boom and bust cycle in Bitcoin prices, with a passing media frenzy ("it's a bubble!", "an unregulated ponzi scheme!") to match. The last peak in Google web search interest came in June 2011, amidst official alarm over the "untraceable peer-to-peer currency's" alleged role in online money laundering and the drug trade. 

Now that we're seeing a near-parabolic rise in bitcoin prices across the globe, we can probably expect another new peak and cyclical crash (or maybe a slightly calmer consolidation period) to follow soon.

However, if the decentralized issuance of bitcoins remains steady over time, we could see a flourishing market for virtual currencies develop longer-term. Whether it's Bitcoin or some other innovation that stands the test of time, we'll be watching this trend with interest. On that note, I'll leave with you with the following quotes.