Monday, December 15, 2014

A Bad Trade

The economy once ago sank
From abuses at many a bank,
Which Congress attacked
In a really big act
That went by the name of Dodd-Frank.

As Wall Street perceived a montrosity
Of Congressional excess verbosity
That was bound to constrain
Their potential for gain,
They resisted with extra ferocity.

An especially prominent section
That met with the bankers' objection
Expressly forbade
The derivatives trade
From counting on federal protection.

It's a problem the banks have endured
Since young J.P. Morgan matured:
How to keep the return
The good bets may earn,
While the bad are by others insured.

To safeguard their profits from harm
They launched an offensive of charm;
Contributions were made,
And lobbyists paid
To dazzle, dissuade and disarm.

But none of those flacks could compare
To the JPMorgan Chase chair;
His pockets well-lined,
His manner refined
And silver his tongue and his hair.

Mr. Dimon instinctively knows
How to lobby his friends and his foes
To attach what he will
To an omnibus bill
That few can afford to oppose.

A bill to keep government funded
Not many would like to see undid,
So you plant your revision
Where few can envision,
While quietly hoping that none did.

But for some, there was just no ignorin':
Moral hazard, once out, was once more in,
A setback so bitter
That Sen. Vitter
Admitted he felt just like Warrin'.

So once again Congress was played
To help the derivative trade;
The hazard is moral,
But no one would quarrel
That that's how the sausage is made.

***********


Wall Street has been trying to roll back provisions of the Dodd-Frank Act ever since it was passed in 2010. Now it has partially succeeded with the help of the sausage-making process in our dysfunctional Congress.

Buried in the $1.1 trillion omnibus spending bill passed by the House is a
repeal of the “push-out” regulation — a measure to ensure that banks trade their riskiest financial instruments without the protection of the Federal Deposit Insurance Corporation or backing of the Federal Reserve.   Such a repeal brings back some of the financial moral hazard that was removed - or at least reduced - by Dodd-Frank.  In other words, if financial enterprises make risky trades within the insured banking institutions that are part of their corporate groups, they get to keep all of the gains, but taxpayers could be on the hook for losses that exceed the banks' capacity to absorb.

As Senator Elizabeth Warren put it, though neither Democrats nor Republicans like bailouts, "here we are five years after Dodd-Frank with Congress on the verge of ramming through a provision that would do nothing... but raise the risk that taxpayers will have to bail out the biggest banks once again."  Sen. Warren pointed to the revolving door between Citigroup and the Obama Administration as one culprit.  The Guardian's finance and economics editor Heidi Moore asks a more personal question: "Why does Jamie Dimon always get his way?"  The well-connected JPMorgan Chase CEO made direct calls to key lawmakers to assure their support.  Mr. Dimon, whose way with Congress has previously been noted on this site, has the unique talent of persuading legislators that, as Ms. Moore puts it, "bank profits are something every American should fervently hope for."  

Perhaps that is because members of Congress have developed the talent of persuading Americans that more political contributions are something that every American should fervently hope for.

Tuesday, September 23, 2014

Consumption Be Done About It?

The US has always depended
On a rate of consumption that's splendid,
By consumers for whom
The means to consume 
May soon have them overextended. 

It's best if our various strata
Could recover their income pro rata
To grow GDP,
But as you can see,
It isn't borne out by the data.  

If there's anything that we have learned,
It's consumption that cannot be earned 
Will grow if we let it 
Be funded by credit,
A fact that should have us concerned. 

One may imagine that "the 1%" do not care about stagnating prospects of the other 99, but the Journal's Pedro da Costa has found a notable exception.  In his Real-Time Economics blog post, da Costa says that Wall Street Cares About Inequality. Of course, it's because the U.S. economy depends heavily on the rising tide of consumption to lift all the boats. If an economic recovery does not feature broadly shared rising personal income, then there is no sound basis for greater personal spending. 

Unfortunately, the data show that this sound basis is precisely lacking.  As depicted in the accompanying chart, wages for the average worker (a non-management employee in the private sector), which fell in the recession, have not quite gotten back up. 

In a report entitled “Inequality and Consumption," Morgan Stanley economists Ellen Zentner and Paula Campbell note: “It has taken more than five years for U.S. households to ‘feel’ like they are in recovery. Before the recession, the expansion of credit simply delayed the day of reckoning from declining incomes and rising inequality.”

The economists go on to say that stronger wage growth would lift spending across the economic spectrum, and the lack of such a broad-based recovery means the Fed will continue its easy-money policies for the foreseeable future.  But, is monetary stimulus the best we can do? 

Wednesday, July 23, 2014

Fed's Letter to Deutsche Bank

"In reviewing your earnings per annum,
We're less than impressed, and we pan 'em.
The bank may have gains,
But this letter pertains
To the haphazard way that you ran 'em."

The Wall Street Journal reports that the Federal Reserve Bank of New York has vented its frustration with the sloppy reporting of Deutsche Bank's US branches and subsidiaries.  In a December 2013 letter to the bank, senior Fed supervisor Daniel Muccia complained  that the bank's reports "are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm's entire U.S. regulatory reporting structure requires wide-ranging remedial action."  It's a problem long in the making, wrote Mr. Muccia: "Since 2002, the FRBNY has highlighted significant weaknesses in the firm's regulatory reporting framework that have remained outstanding for a decade."

Of course, it's not only the Fed that should be concerned.  Investors too rely on firms' financial reports to value their securities and decide when to buy, sell or hold.  Lest we forget, the feeling that "you can't trust the numbers" was a factor in the global financial meltdown of not so long ago.

Friday, July 18, 2014

New Home Starts and Stops

Housing construction has had
A month that's exceedingly bad
And the drop may be due
To Millenials who
Live at home with their Mother and Dad. 

The trouble of this generation
Finding jobs after their graduation
Has certainly stalled 
The stat that is called
The rate of new household formation. 

It's up to America's young
To climb on the opening rung;
From the nest you must fly
So the housing supply
Will not be so much overhung. 

Two loosely related statistics came out on Thursday: first, that the number of US multigenerational households had climbed to a new high; and second, that the number of housing starts had fallen off dramatically in June.  The first datapoint indicates less demand for homes and the second, less supply.

The Pew Research Center, in an analysis of US census data, determined that 57 million Americans, or 18.1% of the population, are living in households that combine young adults and their parents or even grandparents.  This is the largest proportion of such households since the '50s.  Pew sees the trend thusly: "The declining employment and wages of less-educated young adults may be undercutting their capacity to live independently of their parents."   While such arrangements may serve a few purposes, they do directly reduce the demand for housing.

Meanwhile, the Commerce Department announced that housing starts across the USA had fallen by 9.3% in June; in the South, they fell by 30%.  In spite of my poetic license above, most industry people interview by the Wall Street Journal did not blame stay-at-home Millenials for this development, which actually flies in the face of a more broadly upward trend over the last few years.  Many factors were cited, including the lingering effects of wet winter and spring weather; lack of skilled construction labor in some markets; and persistently weak consumer confidence.

However, the multigenerational household trend is not a flash in the pan; it has been building since the '80s, and over the long term it must impact the housing market in a fundamental way.

Monday, June 23, 2014

High-Frequency Trade-Off

An HFT trader named Cunningham
Remarked on the skeptics confron'ing 'im:
"The spreads I've compressed
Make it cheap to invest,
So it's okay that I am front-running 'em."

The issue of high-frequency trading won't go away, and positions are hardening like the western front in the 1st World War. On the one side are journalists and many investment managers who say that these ultra-fast trades simply skim income off the top of the market; on the other, HFT firms and other market participants who say that such lightning-fast activity is benign and makes markets cheaper and more liquid. Sure, says the first group; HFTs supply all the liquidity you want until you actually need it. 

In the latest salvo, The New York Times and the Guardian's Heidi Moore editorialized yesterday that HFTs have rigged the market, as the exchanges and policy makers have allowed them to do over the last several years. This provoked a furious counterattack, adding a number of industry participants to Ms. Moore's already-formidable list of blocked Twitterers. 

Meanwhile, the US Senate has held inconclusive hearings on the issue, evidently deciding to leave it to the SEC.  The Commission, for its part, is looking into the issue but playing its cards close to the vest. One can only hope that the commissioners keep investor protection uppermost in their minds, even if the harm to investors from HFT is not blindingly obvious. 

***********************

Thursday, June 12, 2014

A Cupful of Troubles

As the World Cup begins there are millions
Of poor and disgruntled Brazilians,
Whose new soccer venues
Have certainly been used
In misallocation of billions. 

It's not that there is any shame
In hosting The Beautiful Game,
But if chances were lost
To gain from the cost,
The political class is to blame. 

For fans there is some consolation,
Amidst economic frustration,
That statistics predict -
When the last ball is kicked - 
A victory for the host nation. 

What's more, you should not find it strange
How the World Cup makes sentiment change,
That a home-country win
Makes an up-trend begin
On the Bolsa, the Bourse or Exchange. 

But investors more seasoned than callow
In London, New York or São Paulo 
Never try to fill up
All their hopes in a Cup;
For that, it's a little too shallow. 

Every four years, I join with most of the world in a bout of football fever. Even the hard-working economists at Goldman Sachs get the bug, and publish their statistical analysis predicting the outcome of the World Cup.  As you probably know, Goldman predicts a home-country win this year. They also show how World Cup victory is also correlated with positive investor sentiment and a bullish stock market in the winning country, at least for a few weeks. After that, it's back to the grind. 

Unfortunately, the hosting experience this year is marred by the disappointment felt by many Brazilians that the billions of reais spent on new stadiums and related World Cup infrastructure are over budget, overly late and under-delivering on promised general economic benefits. 

Oh, well. Good luck to the Seleção today in their home opener against Croatia!

[Here is the link to the Goldman Sachs economic report on the 2014 World Cup: http://www.goldmansachs.com/our-thinking/outlook/world-cup-and-economics-2014-folder/world-cup-economics-report.pdf ]

Thursday, May 29, 2014

Dreaming of Streaming

Said Timmy to Jimmy & Dre:
"Whether Apples keep Dr.s away,
It sweetens the tones
On iPods & -Phones
If revenue streams when they play."

Said the Dr. & Jimmy to Tim,
On the music they're making with him:
"Without some new Beats,
One's coolness depletes
And the revenue outlook is dim."

Said Timmy: "A streaming solution
May not be the next evolution,
But it's better I blew
3 billion on you
Than a shareholder cash distribution."


In a move that was so long anticipated, many investors forgot about Dre, Apple yesterday confirmed its intention to buy Beats Electronics LLC.  The $3 billion acquisition brings with it Beats co-founders Dr. Dre and Jimmy Iovine.  Though best known for its high-end, sexy headphones, Beats is thought to be more valuable to the provider of iTunes, the leading online music store, for its nascent music streaming service.  As Heidi Moore reports in the Guardian, music downloads have peaked, and actually declined 2% to $3.9 billion last year, while subscription-based revenues rocketed up by 50% to $1.1 billion.

Mr. Iovine, a long-time record industry leader, "was one of the first industry executives to anticipate the download business's decline and advocate for subscription and streaming services as music's future," according to one analyst.  Mr. Iovine has also maintained a long and friendly relationship with Apple and iTunes, going back to the origins of online music sales under Steve Jobs.

Apple CEO Tim Cook must certainly hope that the combination with Beats will once again put the company in the position of knowing what the consumer wants before the consumers themselves do. 

Tuesday, May 13, 2014

Central Bankers Respond to the Employment Crisis

"Our house is foreclosed on in days,
And we can't find employment that pays; 
Pray what can you do
To carry us through
Our long economic malaise?"

"Central bankers are touched by your trouble,
So our efforts we'll boldly redouble
To keep money soft
And hold you aloft
On a frothier stock-market bubble."

These were my thoughts on reading yet another article on the likelihood of more ECB stimulus to address that continent's deflationary dangers.  Not that I have anything against ECB (or Fed) stimulus  per se; it's just that I'm skeptical that the management of inflation and deflation will do very much to address the serious long-term unemployment problems in the Old World and the New, and I'm not sure that the risk of frothier markets is worth it.

Thursday, May 1, 2014

Nothing Is Better Than Something

The Fed stirred up market festivity,
In spite of low business activity,
From the joy that relates
To their keeping the rates
At zero, as is their proclivity.

With rates so depressingly low,
Fixed income has nowhere to go
So the stock market beckons
To each one who reckons
The chance that their nest egg may grow. 

It highlights how hard to discern it is
To know when the bond market's turn it is,
But with rates to be found
At the null lower bound,
The Dow lacks investment alternatives.

Popular Posts