I hope this is not affirmation bias...

This discussion follows up nicely with Rosenberg's piece from earlier.

Employment: Some slides

Brad DeLong with no commentary provides these slides on his website.

This is what happens when you find a stranger in the Alps

Google announces a GPS system and down goes Garmin and Tom Tom.

A Gold Idea

Source Tudor Management

This is a chart that shows the market cap of gold in relation to the global money supply [blue](proxied by M2 of the G-20) and the US money supply [orange.] So relatively the metal is still cheap, even despite it's recent run up.



I took a long position in it in mid-December 2008 and feel it will be a good hedge until we (the market) can determine the austerity of the monetary/fiscal/political regimes in place around the globe. For a quick example of my dire view of the regimes here is David Rosenberg commenting on the US,

CASH FOR CLUNKERS CLUNKED
The government thought it could buy some time with this gimmick but of the 690,000 units that got sold, only 125,000 or less than 20% were truly incremental buying (according to Edmunds.com). In other word, the payback on future sales performance is going to be significant. Instead of wasting time and money trying to prevent households from kicking the spending and borrowing habit, shouldn’t the government be concentrating on helping the population save for retirement; helping the youth solve this 20%+ unemployment rate; finding ways in the fiscal system to promote growth in the capital stock, and improve skills and productivity enhancement?

That fact that equity markets are anal over whether an $8,000 tax credit for first-time buyers is extended or not should not be the focus of policymakers because this subsidy does not address the real fundamental problems in the economy, which is a defunct credit system, a jobs crisis, an massive overhang of vacant homes, apartments, shopping malls and office buildings — not to mention an economy that is becoming dangerously addicted to government
stimulus. As an example of what the government can do without adding further to what is already a burdensome debt load is to reverse the dramatic downtrend in skilled-worker immigration flows (have a look at the front page of the WSJ — slump Sinks Visa Program). Part of the problem — “the anti-immigrant tide in Washington.”

We see on page 2 of the FT, that the Obama team is now contemplating tax credits for new jobs created by companies — a gimmick that Jimmy Carter tried in the late 1970s (if we recall, two recessions followed quickly thereafter). But are companies really lacking in cash right now? Is that why they are not hiring, or is it a subdued and generally uncertain economic outlook? Or the fact that bank credit is contracting at a 15% annual rate and impairing the small business
sector’s ability to secure working capital. Or maybe domestic demand is just plain soft, notwithstanding a brief Q3 bump. A company may well use a tax credit from Uncle Sam to hire a worker, but if business is slow, what is the new worker going to do? File papers? Clip booklets? How does that add to productivity growth? The country needs a job and skills strategy for the future and here we have politicians still pulling out tired gimmicks from failed
presidencies. No wonder confidence is as low as it is.

We may seem overly critical, but if all this fiscal short-termism is what we can expect out of the Washington economic brain trust, then the prospect for a durable economic recovery and the transition to the next sustainable expansion will prove even more elusive than we currently think. The deficit is already 10% of GDP and government debt as a share of GDP is quickly approaching the 100% milestone. The budget plan for the future, at this point, has to be
carefully thought out because we are running out of fiscal bullets.

A Good idea

The House has released its proposal for financial regulatory reform. While some of it is dicey, including the Resolution Fund (it charges fees to the surviving firms to pay for the failed firm) and also the wind down provision specifically excludes secured bond holders. All in all it is rather vague, which given the history means the regulators will have the tools but not the will to enforce the law.

This particular section though, was pretty spot on in regards to securitization.
Credit Risk Retention

• Directs the federal banking regulators and the Securities and Exchange Commission to jointly write rules to require creditors to retain 10 percent or more, of the credit risk associated with any loans that are transferred or sold including for the purpose of securitization. Regulators can adjust the level of risk retention above or below 10 percent, but not lower than 5 percent. In the case of the securitization of assets that are not originated by creditors, the regulators will require the securitizer to retain the credit risk.

I have thought all along that the originate-to-distribute model was flawed because it favored applying teaser rates to allow the borrower to make the minimum amount of payments necessary to then sell their loan asset into the securitized pool. It will be interesting to see, again the wording is vague, how this portion gets hammered out. It's one thing if the pools, is just that a pool which pays out regular cash flows. However, if the pool is tranched so that i-bank can create super senior tranches all the way down to the equity tranche, then what portion will the originator have to keep. Would it be just the equity portion which suffers first loss or will it be a portion of each tranche? (If you have no idea what I am talking about with tranching please click here for a primer.)

Source

Correlation, correlation but where art thou causation

This chart is produced from a data set kept by Yale and Robert Shiller. It shows the 10 year price earning ratio in a scatter chart plotted against the actual 10 year return.

It looks like it could be follow a logarithmic or power law function, and is definitely not linear.

However, we can see that as the PE level is lower the returns are higher. So I made another chart just showing the different levels of PE <5,>25. Here it is.



So while each section has a considerable range between its high and low points, you see lower highs and lower lows as you move from left to right. So this Shiller might be on to something.

Currently Mr. Shiller's has us at 19.48, at the market low in March we briefly nuzzled 13.32 so in the 6 month expansion we have seen the multiple increase by 6x!!!

Last chart


So you can see the bubbles like in 1929 and 2000 were all caused by multiple expansion, as they correlate tightly in those periods. However, in more recent times (2003 - 2007) you can see that earnings kept growing while the price of the index rose in accordance [the P/E line is flat while the red index line moves upward] Finally, as I stated above this last move seems to be all about the multiple expansion as opposed to real growth prospects.

I'd be happy to keep up momentum trading for awhile, even after this week's set back but I think we will test the 750 level again before the Great Recession is over.

Life as a Consumer

Yuppie 911 is a darkly amusing side effect of our lives as a consumer.

The Grand Canyon's Royal Arch loop, the National Park Service warns, "has a million ways to get into serious trouble" for those lacking skill and good judgment. One evening the fathers-and-sons team activated their beacon when they ran out of water.

Rescuers, who did not know the nature of the call, could not launch the helicopter until morning. When the rescuers arrived, the group had found a stream and declined help.

That night, they activated the emergency beacon again. This time the Arizona Department of Public Safety helicopter, which has night vision capabilities, launched into emergency mode.

When rescuers found them, the hikers were worried they might become dehydrated because the water they found tasted salty. They declined an evacuation, and the crew left water.

The following morning the group called for help again. This time, according to a park service report, rescuers took them out and cited the leader for "creating a hazardous condition" for the rescue teams.

Just goes to show, that as emergency services become accessible it needs to have consequences just like 911. Prank calls to 911 can result in arrest and fines, therefore it would make sense to apply those same rules and punishments to calls to rescue services. As a benevolent dictator, I would first outlaw the beacons. The emergency service provider cannot speak with the signaler, so there is no way of knowing what the emergency is or how critical the situation is, thus they are inherently dangerous and expensive tools. Then once the service is set up via sat-phones or regular cellular phones let calls for rescues because of "salty water" be faced with fines and repayments of the cost of rescue personnel and equipment.

Basically, these signaling devices have removed the fear that you can get into trouble in the wilderness, so that people take risks that they might not take if they did not have the safety device. It is what an economist might call a moral hazard. Another interesting take is called the Tullock effect.