Category Archives: Blog

The Slow Growth Meme

The pre-determination of slow growth for the US and other developed nations took another step forward with a WSJ cover story on "Learning to Live with Slow Growth." The finger-pointing centered on productivity, or it lack there of. Even the chart posted shows a sideways path from the 80s to the crash, damaging the base premise.

In reality, the productivity miracle, heralded by the Greenspan Fed, never really took place. Innovation (computerization) in a service economy was exciting but hardly the Holy Grail. Consider Lawyer X, cheap computing power and innovative software boosted his and the firm's efficiency. Labor intensive work became easier and more streamlined. The quicker he embraced and implemented the tools, the potential profit margin of his work increased. But what about his work relative to other lawyers? Weren't they rolling into these new technologies also? Once all firms had updated their systems, was Lawyer X, or the entire Law community any more productive from an economic standpoint?

The financial system is a perfect example of the productivity meme myth. Everyone chased technological innovations right down to suing each other over lines of code. It is too easy to call this chase productivity increases. If one used to take 10 seconds to buy 10000 shares and now it takes 400 the trader more productive? Once everyone has the same platforms, is the system? Essentially, 17% of the economy became quicker, not "better" and certainly not more productive. (Who had time to read Twitter?)

The production, availability and use of credit has a much more accurate effect on growth than the always cited productivity. Since the Industrial Revolution, and even centuries earlier in the Mediterranean, individuals, groups and societies that rejected the Puritanical notions equating austerity with morality, grew faster and out prospered their neighbors. Big government, small government, balanced budgets, raising taxes, lowering taxes, privatization, regulation, reform or deregulation all failed to deliver the productivity nirvana. Credit, however, made the multitude of Crusades for the cause possible.

But don't take my word for it, take James Burke's:

Enter Voldemort

In the early days of the Bill Clinton administration, James Carville had a melt down about the new POTUS' quick abandonment of his campaign agenda. As outlined in Bob Woodward's outstanding The Agenda, the "Ragin' Cagun" was pointing to a napkin with 4 top issues, all tossed aside because Treasury Secretary Bob Rubin had convinced the new President that "the bond market would not permit it." To which Carville famously replied, "I used to think if there was reincarnation,  I wanted to come back as the president, or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody."

Now is the time to start imagining what a Clinton 2.0 agenda might look like. Central bank bond purchases were considered desperation 3rd world Hail Mary's as recently as POTUS 42. The deficit was public enemy No. 1, as it was with Obama and the "sequester." The destructive force of inflation remains a feared ghost, the Valdemort of economic old timers. I do not get the sense that Hillary will be so quick, or politically able, to throw her agenda aside for the now 1.75% 10 year. Compare to the ankle shackling 6.50% that so constrained Bill and Bob. (interesting sidebar- the 2/10 curve is about 40bp steeper today than 1997 !)

I think a change is coming. I don't think the bond market, having been tamed for so long, scares Mrs. Clinton. I don't think, even with her many Wall St. lectures, she seeks the council of FI grey- hairs who recall the power of falling bond prices. I think the re-incarnation is beginning.

We’re All Rooting For You

My dog opined about the TLT back on Sept 15. after 10 points of downside in the Ultra Bond contract. As markets tend to do, the bond then rallied into the end of the quarter aided by some D-Bank FTQ. But, low and behold, despite moderate data and continued international issues...The UB is back to making new lows and hasn't had an up day in Oct.

We are just glad no one is getting hurt, as always.

The Dog Weighs In

Issue #1: D-Bank

And so it goes, as Kilgore Trout may have summed it up. A story, a punishment, a trial balloon is "leaked" to the WSJ about a $14 B fine for Deutsche's now nearly decade old mortgage backed shenanigans and a "panic" quakes up in the bank's credit default swaps. Despite negative interest rates and heavy ECB bond buying the ancient institution continues to hemorrhage billions in losses annually. As said trial balloon melted more  capital away from the bank - already nearly halved for the year  - a more "palatable" $4 or 5 B number circulated through the water carrying press.

This game of governmental support and flogging has allowed for outrage on both the left and the right. A week ago we were enthralled with the public dressing down of John Stumpf for Wells Fargo's low brow fleecing of its customers. Others will argue that it is government oversight and regulations that are pushing banks into these unsavory activities. The truth is banking is and always has been a boring little business. National support for the industry was followed by massive fines for illegal and unethical behavior of systemic scale, paid for with electronically generated balances. (This international reach out, some believe, is tit-for-tat slapping after Apple. )  It's a self-perpetuating "There ALL Twix" ,circle jerk ,incestuous waste of time. Which leads us to

Issue #2

The Shallows. If you haven't read the WSJ Weekend page A11 opinion by Peggy Noonan, take 5 and do so. You don't have to subscribe to Noonan's world view to appreciate the truth behind "life in the shallows." The term comes from Nicholas Carr's book of same name. The notion comes close to one I've promulgated here, long ago, the internet makes us all dumber. Noonan and Carr see a direct link between the internet and media news cycle reporting. It's not just the election that has us wading in the shallows. The ability to deal with complex structural issues like the one described above is impaired by the thin emotional responses that are passed off as intelligent discourse. Which leads us to

Issue #3

Who is this Paul Volcker Senior Fellow for International Economics at the Council on Foreign Relations Sabastian Mallaby ? Mr. Mallaby has penned a new bird cage liner on Alan Greenspan called, are you sitting down?, The Man Who Knew.! Trotting out the usual genuflections to Ayn Rand and mysterious missing doctoral thesis, Mallaby constructs a revisionist history glowing portrait of the "Maestro." Reading this amazingly distorted view of recent history caused my soul to throw up in its mouth a little more than a few times. The sub-title is the "Life and Times of Alan Greenspan" but could easily be " Because He Made It Happen." From quid pro quo rate cuts for deficit reduction, GSE balance sheet pump ups to supply "AAA" debt , to self regulating financial innovations, Greenspan oversaw the mudslide. An ex-Randian leaving a decades long trail of activist tinkering that germinated the 3T monetary pornography we now call modern central banking. Long live Lincoln Savings #GIK.

And so it goes, indeed.

Rosie O’Donnell Stock Market Bubble

Last night the would-be Republican nominee for President referred to the economy with the same adjectives he used to describe entertainment footnote Rosie O'Donnell. "Big, fat, ugly bubble, " was how Mr. Trump analyzed the state of the US economy, throwing in a few innuendo laden half sentences about Fed Chair Janet Yellen. Nothing unifies the populist movement like Fed bashing.

Always short on details, Mr. Trump then let the armchair conspiracy theorists (having already outed the obese, bedridden, hacker crowd) fill in the gaps by chastising both low interest rates and the consequences of raising them. Surprisingly, neither candidate laid out even a HS sophomore's argument on the optically creepy and monetarily sketchy practices of IOER and QE bond buying regimes.

I think campaigns are good times to press candidates about both Federal Reserve mandates and monetary policy execution. Pat answers protecting Fed independence were all the rage not long ago when Alan Greenspan graced the cover of Time as "World Savior." Today, the long successful career of Dr. (multiple ) Yellen is called into question by the possibility of something yet to occur. Truth be told, we do not know Mrs. Clinton's philosophy of central banking, but her husband took a fortuitous pragmatic approach (cut the deficit and Greenspan cuts rates quid pro quo). The financial tinder of a balanced budget and good intentions on housing would play out terribly later. Trump, however, shows the dangerous populist bluster of CB neanderthals.

The Fed has a long history of pumping up and wrecking economic expansions. The "soft landing" is as rare and mysterious as a Loch Ness sighting. Someday, I'd like to be able to vote for a candidate that actually understands the way the financial system works.

Post Script: Who would be Treasury Secretary in either administration. Considering Jack Lew's ticket was punched for being COO at Citi from 2006-2008 overseeing an historic mudslide into insolvency for an institution founded in 1812 !

Sep 2012

Four long years ago the 10 year yielded a whopping 1.63%. It would be 6 more months before the Taper Tantrum exposed the illiquidity in government bonds. The Federal Reserve elected to stand pat on the funding rate again yesterday. Put in the context of the yield on "dimes", one can wonder how a hike was even a topic.

Debates about QE re-investment, normal, natural and historic must all deal with the reality that -for whatever malenge of reasons - benchmark Treasury yields have gone nowhere since Carly Rae Jepsen topped the charts with Call Me Maybe. Shake ups in other sections of the rate universe have been covered in more respected outlets than here but the mighty 10 year has taken a 4 year dirt nap.

It may be the election, or the disturbing civil unrest (violence Art Cashin and I both predicted btw) but something tells us that - like David in Vanilla Sky - the 10 Year is being told to, "Wake Up."



The Bond Market  has now been officially dumbed down into a $7.5B ETF affectionately tagged the TLT. It holds 96.5% of it money in 33 US Government obligations with a duration of 18 years and an average yield of 2.37%. Peeps love it ! Its done exceptionally well since its inception in 2002.

As of late, as in this month, the TLT has begun to wobble. Interestingly, the damage has been in a "follower" mode. The JGB and the Bund lost their luster before the TLT fan base even considered a sell order. Money Funds, on the other hand, have been repulsed. As we have been tracking here, Prime Funds have seen roughly $700B head for the exit over the last year. According to Bloomberg's reporting : Northern Trust is prepping for another $200B out and TD estimates as high as $300B. All of this over the next 30 days as the well documented Oct 14 deadline hits.

In a world of government mandated low volatility, negative yields outside the US, and long duration  US funds delivering money market like returns; How much of Ma and Pa's "cash" has been transformed into wonderful financial innovations like TLT ? The fear of "breaking the buck" is promulgated yet, a break now is any price lower than purchased. We believe many Bond Market holders (renters) actually do not know or understand what they've been pushed into. Often, the credit worthiness is called into question for these IOUs. We have scoffed at the critique. We do think a more basic problem could develop. The price of the TLT could fall.

Grant v Rogoff

In the history book of great debate face-offs, this one will barely get a mention but the WSJ Weekend Review of Rogoff's new book by Jim Grant is a fun "must see."  Rogoff's case against cash was outlined a couple of weeks ago in a WSJ op-ed. For some time, paper money haters have hidden behind the "almost all large denomination bills circulate in grey and illegal markets" premise. The cocktail party dollar amount per capita now hovers at about $4200.00 . The sounds right economics has not stood up to deeper investigations into the truth, however.

On the other side of the argument lies the verbal wizardry of the bow tie wearing Grant. (If he had an English accent he'd be infallible !) Oddly, the pure bred Bear with the strong affinity for yellow metal finds himself defending the cotton fiber fiat he became famous for bashing. Perhaps, Grant is putting Rogoff's idea to the fire because if followed Mr. Grant would lose his arch-villain. Like Mr. Glass and the Security Officer in Unbreakable #GIK. Thus, Grant's entertaining destruction of Rogoff's cashless society is couched on the sinister powers a CB would gain in such a system.

Our view is Rogoff is falling prey to the silliness of the Modern Monetarists. Since the collapse, these advocates have promulgated a simple counter factual -If it's not working, you need to do more. Living in the UpsideDown of negative rates lends no precedent of success. As Grant points out, Homer/Sylla show no prior time period for the phenomenon. Conversely, Grant fears any CB playbook that extends beyond the shackles of the gold standard - or silver, or zinc or Beany Baby. Are we to believe that Central Bank policy makers are conspiring to gain Dark Side powers with no pedigree of efficacy?

Monetary policy tends to work when performed in a fertile fiscal agar. The Negative Yielders have failed on multiple fiscal/macro platforms that could have provided traction. Deeper negative numbers are not the answer because the price of money is not the question. Electronic fiat is a higher Sacrament in the Order of Faith Based Financial Systems. Currency has its place. My suggestion to both men is this: How about we just get rid of the Penny?

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Wells is Hiring

In a display of post mortgage fraud brilliance, Wells Fargo dove into the gutter of opening 2 million fake checking accounts. CHECKING ACCOUNTS for chrissake ! 5300 Main St branch bankers are being fired and polishing their resumes for Wall St. Since checking accounts don't really make any money, the fraud involved transferring existing money into the ghost account then charging NSF fees when the original account became overdrawn. Warren Buffet's favorite bank. Out here in Ca, the long lines at Wells are loaded with newly banked Latinos, marketing to a huge demographic. So of course, they trained staff how to rip them off. Mamas don't let your babies grow up to be bankers.

Federal Reserve charity will cover the 185 million dollar fine many times over. Think about that for a second: the Fed pays interest on reserves by electronically marking up the balance of Wells Fargo's account while Wells is ripping off the checking accounts of their customers, only to return the IOER back to the government in the form of a fine ! The Fed needs to consider raising IOER in case more widespread scumbaggery is uncovered.

Our prescription for a steeper curve could have avoided the need for this.