Monday, December 31, 2012

Lesson of the Year

In 2012 I concluded
That my vote for the House is deluded,
Since the shape of my district
Regrettably IS tricked
To keep the opponent excluded.

As we count down the hours of 2012 with no deal reached in Washington on the basic questions of government revenues and expenditures, many wonder how it is possible for the Congress to remain so deadlocked in the face of a clear electoral outcome for the nation as a whole. The answer is, in part, that members of the House of Representatives do not answer to the nation as a whole, or even to the whole of their own districts. Rather, because most Congressional districts are gerrymandered to ensure the continued representation of the incumbent party, the typical house member feels most beholden to the extreme elements in that party who participate most intensely in the primary election.

In 2013, we must resolve to undo this gerrymandering, as a first step toward truly representative government.

Thursday, December 27, 2012

Cliff Looms, Consumer Consumes

Said a retail consumption authority:
"Consumers now have the priority
Of avoiding the "Cliff",
Regardless of if
It's mystery to the majority."

As the days and hours before the fiscal cliff dwindle, and the year-end economic data accumulate, opinions differ sharply regarding the influence of the former over the latter. According to perpetually hyperventilating Business Insider, "everyone is talking about how the fiscal cliff is crushing the consumer." The Insider's sleepless economics editor Joe Weisenthal cites recent, weak data from MasterCard and the Consumer Confidence survey in support of his point.

"Total BS," replies the Guardian's Heidi Moore. Digging deeper into the data, Moore cites a litany of reasons for recent slowdowns in consumer spending. Seasonal factors, and the fact that Black Friday and Cyber Monday spending broke records, loom larger than the Fiscal Cliff, though the latter may still be a secondary concern.

Monday, December 24, 2012

Noël Greetings

Merry Christmas to friends far and near,
And retailing holiday cheer,
With a dovish Fed rule
To stimulate Yule,
And a fiscally balanced New Year!

 - Dr. Goose

Friday, December 21, 2012

This Is The End

An ancient foretelling of verity
Said the world with go out with severity,
But may really impend
The recovery's end
In Washington's leap to austerity.

The Republicans' fiscal cliff diver
Advanced a proposal that neither
The White House or Senate
Would ratify when it
Was passed, which it never was, either.

One shouldn't put too much reliance
On the art of political science,
Which tends to foretell
The future as well
As the calendar made by the Mayans.

If you are reading this, then the world did not end on December 21, 2012, as predicted by the Mayan calendar. The negotiations to avoid the "fiscal cliff", however, are another story. Earlier in the week, optimism ran high as proposals advanced by House Speaker John Boehner and President Barack Obama were "only" $200 billion apart in long-term revenue raising.

Seemingly at the last minute, the Speaker shifted gears and announced a "Plan B" that, although rejected in advance by the White House and the Democratic-controlled Senate, had placed enough constraints on tax hikes to garner the needed support of House Republicans. In the event, the legislation was pulled due to many many of those Republicans' resistance to even modest tax increases on the very wealthy. With legislators now heading home for the holidays, it appears that Mr. Boehner's reputation as a negotiator is preceding the federal budget over the cliff.

Mayan Hashtag Hijinx

With the approach of the end of time (as predicted by the Mayan calendar), the Twittersphere has teemed with end-of-the-world confessions by those wishing to go out with a clean conscience. Believing that confession is good for the soul of even the Dismal Science, Dr. Goose - who tweets under the name of @DrGooseEcon - created a hashtag to facilitate economists' unburdening:
Thanks to noted economist Justin Wolfers, #EndOfTheWorldEconFessions became a trending topic among the global society of Twitter econ nerds. Here then are some of the top econ-fessions on Twitter: ...and the number one econ-fession:

Thursday, December 20, 2012

GDP, or GDI?

Though GDP seems to be surging,
Economists' views are diverging,
For if growth is discerned
By what's made (vs. earned)
May foretell if it's flat or encour'ging.

There are many ways of measuring an economy, among which are gross domestic product (GDP) - the value of all goods and services produced - and gross domestic income (GDI), the earnings of all economic actors. Theoretically, GDP should equal GDI, since the product I buy is equal to the income you earn. However, sometimes they diverge, and rarely more so than today.

This morning the Bureau of Economic Analysis released the third revision of 3rd quarter GDP.  As Matt Yglesias blogged in Slate: "the news is good. What was initially reported as growth at a 2 percent annual rate and then revised up to a 2.7 percent annual rate now stands at a very respectable 3.1 percent annual rate. In nominal terms, we now have Q3 clocking in at 5.9 percent growth which is the kind of thing that's consistent with catchup." So, all's well? Not quite: GDI grew by only 1.4%. Now, ours is a big economy and certainly not easily measured, but that's a big divergence. Yglesias suspects that the more optimistic GDP number is closer to the truth, on the evidence of President Obama's decisive electoral victory. After all: in politics, "it's the economy, stupid."

Wednesday, December 19, 2012

The Futility of Liquidity

Though the Fed may be funding us cheaply,
Recovery's not rising steeply,
Until and unless
We consumers express
More demand again, broadly and deeply.

This was the message conveyed by Federal Reserve Bank of Dallas President Richard Fisher in a speech in Gainsville, Texas on Tuesday. While "quantitative easing is a necessary but insufficient tool to spark job creation," said Mr. Fisher, "employers will not deploy the cheap and abundant capital on hand toward job creation while there is so much uncertainty surrounding final demand for the goods and services they sell." This is actually a mild statement for the Dallas Fed president, who, while not a member of the Fed Open Market Committee, has consistently opposed its stimulative measures, arguing that quantitative easing and Operation Twist would have little impact against the resistance of regulatory burdens and tax uncertainty. In his latest remarks, he sounds almost Krugmanesque.

Tuesday, December 18, 2012

The End (Of the Fiscal Cliff) Is Near

Said the President: "Well, We are possibly
Confounding the ominous prophecy.
If I may be concise,
We differ on price,
And not fundamental philosophy."

Reports are that President Barack Obama and Speaker of the House John Boehner are close to a deal that may avert the "fiscal cliff." The New York Times reports that the President has offered a deal that would raise revenues by $1.2 trillion over the next decade but keep in place the Bush-era tax rates for any household with earnings below $400,000. This offer is not very far from that which the Speaker proposed on Friday, suggesting that the two sides are dickering on price rather than looking out over an unbridgable gulf.

At this rate, a solution to the Federal deficit standoff may be found before the December 21 end of the world predicted by the Mayan calendar.

Friday, December 14, 2012

More QE, Please

Said Bernanke: "More QE is planned
To give job creation a hand"
(Though it's tricky to know
How banks full of dough
In the aggregate, pump up demand).

Ben Bernanke's announcement of a shift in Fed policy has baffled many in the markets, as Heidi Moore writes in the Guardian. Having moved from a regimen in which rate-setting was linked to both unemployment and inflation, to one in which low inflation is simply assumed while a jobless rate cap of 6.5% is targeted, has raised a number of questions as to implementation and projected timing of eventual interest rate hikes.

More broadly though is the question of how, when US banks already have over $1 trillion in reserves, flooding the system with even more cash will make a difference in the pace of hiring. Most economists agree that the proximate cause of our unemployment level is the lack of aggregate demand. The Fed's purchasing of more billions of Treasury and mortgage bonds may lower yields and therefore move investors into riskier assets such as equities. However, with regard to job creation, quantitative easing is more of a desperation play by a central bank that wishes that the Federal government would hire people to fix the damn infrastructure, already, but expects that they won't.

Thursday, December 13, 2012

Monetary Policy Shift

The Fed made a policy shift
To render employment a lift
By buying more bonds,
As liberals and cons
In Congress are "fiscally cliffed."

Said Bernanke: "This monetization,
Which we do without sparking inflation,
Will terminate when
I'm happy again
With the pace of employment creation."

He continued, dispensing liquidity
To the bankers within his vicinity:
"Let the buying commence
Without the pretense
Of an end-date to QE Infinity."

The Federal Reserve Open Market Committee ended its latest two-day meeting with a blockbuster announcement: Chairman Ben Bernanke and colleagues will keep interest rates super-low until the unemployment rate falls below 6.5%. It's the first time that an explicitly quantitative criterion has been publicly articulated for the setting of interest rates. According to the Fed's own labor market projections, we can therefore expect near-zero short-term rates until 2015. Mr. Bernanke expressed frustration with the slow pace of the recovery, as well as the additional roadblock created by the fiscal cliff. "If we could wave a magic wand and get unemployment down to 5% tomorrow, obviously we would do that," he said.

Wednesday, December 12, 2012

The Investment Pitch Before Christmas

'Twas the month before Christmas, and all through the land,
Marketers hoped for consumer demand.
Investment promoters accordingly yearned
For a Holiday boost to the fees that they earned.

"At this time of year, there exists such a clutter,
We'll never break through!" the marketers mutter.
But the folks at Fidelity had a bright flash:
"Use verses to gather new customers' cash!"

"It's a Yuletide maneuver whose fire is sure:
A poem in the style of old Clement C. Moore."
So what in my e-mail inbox should appear
But Fidelity's version of Holiday cheer.

Inside was a message, official and sleek,
From a 529 plan entitled "UNIQUE"
(It's the school savings plan of the State of New Hampshire).
They started their pitch like an eager, young Prancer:

"Dear Dr. Goose," I was greeted by name,
But I didn't much care for what thereafter came.
The language - how trite! How the rhyming would wobble,
With emphasis placed on the awkward syl-LA-ble.

The sentiment - fulsome!  The meter - how sloppy!
Did interns get wasted and scribble some copy?
Even eight tiny reindeer could easily see
That "Fidelity" isn't a rhyme for "tax-free."

As I drew back my gaze, and was turning around,
I wondered: what more on UNIQUE could be found?
Investment expenses constrain NAVs;
How would this plan compare in expenses and fees?

I went to the internet, flush with designs
To evaluate all of the 529s.
I googled a website and rapidly came
To a listing of plans, by expenses and name.

On Michigan, Iowa, Carolina(*), New York!
Your plans are not laden with very much pork.
Now DC, Nebraska! Now Kansas, New Hampshire!
Your costs are consuming returns like a cancer.

In Fidelity's plans, up to 16%
Is charged in a decade - a ruinous rent.
More moderate plans may only charge you
Just 5% (maybe as little as 2).

This confirms the suspicion right under my nose:
Fidelity's poets are plumly paid pros.
In college investments, keep fees in your sight;
Happy Christmas you'll have, and sleep soundly at night!

The foregoing liberties taken with The Night Before Christmas (with apologies to the descendants of Clement Moore) were inspired by the following, actual e-mail sent by Fidelity Investments to current and potential clients:

   'Tis the holiday season, a great time for cheer,
   When special traditions bring loved ones near.
   A time to give gifts that can give on and on,
   Gifts that can give after the season is gone.
   For your daughter, your grandson, your niece or your neighbor,
   A special child in your life that deserves such a favor.
   Give the gift of an education while there's time on their side,
   They can later use the savings toward accredited schools nationwide.
   Qualified withdrawals are federal income tax free,
   Open a UNIQUE account today with Fidelity.

Fidelity manages the 529 college savings plans of several states, including New Hampshire, whose UNIQUE College Investing Plan is among the costliest of all fifty states.  That's according to, which ranks the Fidelity-managed 529 plans of Arizona, Delaware, Massachusetts and New Hampshire as tied for the distinction of 4th most expensive in the nation.  For more information, see the Journal's guide to How to Find a 529 Plan.
(*) Note: ranks the North and South Carolina 529 plans as 7th and 2nd least expensive, respectively; top (or bottom) honors go to New York.

The poem in this post was originally published in the Wall Street Journal's Total Return Blog.

Tuesday, December 11, 2012

Pull Yer SOX Up

Said a watchdog: "We find it egregious
That the auditing world's most prestigious
Less frequently prod
The avoidance of fraud
By checking controls and procedures."

"An auditor ought to endeavor to
Ensure that malfeasance would never do;
By checking receipts,
You'll foil deceits
In booking expenses and revenue."

America's accounting watchdog says that the quality of auditors' checks of their clients' accurate bookkeeping is heading in the wrong direction. According to the Public Company Accounting Oversight Board, problems are numerous and growing in audits of companies' internal controls. Inspection reports of 2011 audits (not all of which are yet completed) found that 22% of them had deficient internal control checks, up from 15% in 2010. Reuters reports:
"Audit firms are required to test controls that could have an impact on financial statements and attest that the safeguards are adequate, but in many cases the companies in which the auditors gave passing grades, the PCAOB found there was insufficient evidence to support that opinion."
The culprit may be understaffing; in many of the deficient cases, the auditing firms had made headcount reductions. The PCAOB looked at internal control checks by the "Big Four" audit firms - Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers - plus second-tier firms BDO Seidman, Grant Thornton, Crowe Horwath and McGladrey.

Monday, December 10, 2012

Overheard at the White House Last Weekend

"Mr. Speaker, I surely desire
That the deadline will not just expire,
But I get my way if
We fall off the cliff
And rates on the rich revert higher."

In the continuing effort to reach a long-term deal to restrain Federal budget deficits and avoid the looming fiscal cliff, President Barack Obama and House Speaker John Boehner met at the White House this past weekend. At the same time, pundits on the Sunday morning talk shows pointed out the President's negotiating advantage: Although the fiscal cliff represents a package of tax hikes and spending cuts that supposedly nobody wants, the Republicans want them less then he does. That's because the reversion to the higher marginal tax rates paid by the rich during the Clinton administration, against which Congressional Republicans have attempted to hold the line, will happen automatically if no deal is reached. This dawning realization may portend a higher likelihood of both a dive over the "cliff" and a resolution more to the President's liking.

Friday, December 7, 2012

Handel's Big Trade

When Handel composed The Messiah,
The markets were caroling highah.
He sold, shouting "Boo-yah!
Now sing Halleluia!
To be a contrarian buyah."

For many investors at this time of year, 'tis the season to review portfolio investments that hath been exalted, or laid low. If unto you a gain has been given, shall the government be more upon your shoulder this year, or next?

One man who handled such questions adroitly was George Frideric Handel, according to Jason Zweig of the Wall Street Journal. Mr. Zweig says that the renowned composer "never went Baroque" because he knew when to get into and out of the hot investments of his day. The greatest investment bubble of the early 1700's was the South Sea Co., driven by the mania of colonization. Mr. Handel played the South Sea Co., but acted earlier than contemporaries such as Sir Isaac Newton, buying his shares at lower cost and selling them before the bubble burst. It is estimated that Mr. Handel doubled his South Sea investment, making a £15,000 profit, roughly 2.9 million in today's dollars. At the end of his life, Mr. Handel's estate comprised about £20,000 ($3.8 million today).

As a footnote to this Yuletide tale, we must ask whether the German-born Mr. Handel came to the market with a natural advantage: his name, in his mother tongue, means "trade."

Thursday, December 6, 2012

It's Beginning to Look A Lot Like...

It's beginning to look a lot like Cliffmas
Evvvv'rywhere you go.
They're intractable on the Hill,
The President's stronger still,
He's setting his toboggan in the snoooww...

It's beginning to look a lot like Cliffmas;
Soon the bells will chime,
And the posturing will be worst
On January First,
When we're ouuut o-o-of tiiime.

The President and his Republican Congressional opposition continue to sing from different hymnals on the major issues of taxation, while trying to reach a long-term deficit reduction deal that will avoid the "Fiscal Cliff." On a related note (see what I did there?), Matt Miller hypothesizes an Endless Cliff in the Washington Post:
It seems almost certain that any new deal that is struck, either before January 1 or some time afterwards, will involve some minor near-term “action” or “down payment” combined with the creation of a new fiscal cliff of unpleasant consequences to be triggered sometime in 2013 if a broader deal on tax and entitlement reform is not reached.

This, because a divided Washington needs “a forcing device” to instigate action.

But what will have changed later in 2013 to produce a different outcome? Arguably nothing. And so we have the prospect of another deal with illusory progress later in 2013, along with the creation of the next forcing device. Which eventually forces the next sham deal and the creation of the next forcing device.
It's beginning to look a lot like only a major political disruption - such as Congressional district un-gerrymandering, a Democratic sweep of the next midterm elections, or the complete removal of money from politics - could stand in the way the Endless Cliff Hypothesis becoming reality.

(Embedded music track powered by

Tuesday, December 4, 2012

Inside Tip

Justice is always condemning
Insider activity stemming
From positions of trust,
Indiscreetly discussed
By monitored phones and IM'ing.

But let me say more than is minimal,
Lest my message be seen as subliminal:
When it comes to affairs
In the trading of shares,
Information asymmetry's criminal.

On the trading floor, all electronic communications - be they phone, e-mail or IM - are recorded and retained, just in case any questions arise later on. Sometimes, though, folks can get complacent and indulge in an instant message chat much like the following:
Weishaus: we should get [RR3] to buy a f***load
Conradt: jesus don’t tell anyone else
Weishaus: like, [RR3] buy 100000 shares
Conradt we gotta keep this in the family
Weishaus: dude, no way
i don’t want to go to jail
f*** that
Conradt: jesus christ
Weishaus: martha stewart spent 5 months in the slammer
Conradt: does [a friend] know?
Weishaus: and they tried to f*** the mavericks owner
This was the dialogue between Thomas C. Conradt and David J. Weishaus, brokers at Euro Pacific Capital, after they came upon the privileged information that IBM was about to purchase SPSS, Inc. for $50 per share. Their chat was not only colorful, but actionable.

Just in case anyone infers here a subscription to the "don't-get-caught" school of insider ethics, let me say plainly: insider trading is theft. To trade on information which one's counterparty could not be expected to know is literally stealing value. Don't do it, folks.

Monday, December 3, 2012

Purchasing Managers' Limerick

There's a purchasing index quite candid,
That tells what supply and demand did.
On the first business day
Of the month, it will say:
Manufacturing shrank or expanded.

If PMI's 50 or less,
Manufacturing's bound to regress;
If 50 or more,
Expansion's in store,
A predictor of wealth and success.

Each month, in the opening hours,
The surveyor patiently scours
The thoughts of those guys
Who manage supplies
In the global industrial powers.

They learn, from each guy they contact,
If supplies will expand or contract,
In sum, they depict
The trends that predict
How growth on the whole will have tracked.

Then, around the world (first in the East),
The PMI stats are released
To financial brigades,
Who position their trades
Whether growth has reduced or increased.

Yes, it's the first business day of December, which means that the November Purchasing Managers Index in each of the world's economically important countries is being released. At this writing, the PMIs from Asia and Europe show positive trends, although the former continues to outshine the latter. Nobody is more enthralled by purchasing managers' predictions than Joe Weisenthal and the folks over at Business Insider, who have been live-blogging the results all night. With only the US and Brazil left to report on November's supply chain activity, indications are that the world is turning back from the recessionary cliff, if not the fiscal one.

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