Comments on recent market events

Perspective is important to maintaining a clear head in face of market turbulence.

Below is a picture of the last 6 months price performance of VTI (in green), Vanguard Total U.S. Stock Market, which represents approximately 95% of the tradable US equity market. We added BIL (orange) , SPDR 1-3 Month T-Bill ETF (0.2yr) which tracks short term Treasury bills, and VEU (blue), Vanguard FTSE All-World ex-US, a proxy for all non-US equities.

You can see the decline of VTI of about -5.6% over the last 6 months and -8.5% for VEU. Not a good or pleasant thing.

Click to read more ...


Aggregate funded and unfunded liabilities of the states divided by the number of taxpayers

We came across The 2013 Financial State of the States and wanted to bring broader attention to it. The report addresses the scale of the problem of unfunded liabilities of state pensions & other retirement benefits. Recall these amounts are typically off balance sheet items, unseen & poorly understood by the public, and therefore a great source of financial & fiscal abuse by politicians. They are very real and large.

Below is an estimate of the scale of the aggregate problem: you can see that only $195 billion of the estimated $1.1 trillion of liabilities are actually reported on states’ balance sheets. So how is a citizen to know? Well, the intent was that citizens were not supposed to know and that’s the point of abuse. The deception has largely been successful:

Click to read more ...


WWB comments on DoL's Proposed Conflict of Interest Rule

Watson Wilkins & Brown, LLC, submitted formal comments to the Department of Labor on it's Proposed Conflict of Interest Rule.

Although the formal comment period is formally closed, we understand DoL is still accepting comments. We wanted to submit the comments by email, but after 5 phone calls to various offices in the Office of Regulations and Interpretations... well, we snail mailed it.

And that, my friends, is part of the problem.


Come play the backtest and overfit game!

 We've written before about the risks of excessive back testing in our posting The Effect was Never There... It Was Just a Random Pattern. But now thanks to the good folks at the Scientific Data Management Group at Lawrence Berkeley National Laboratory at UC, we have a nifty little gizmo that will take you for a test drive.

Give it a go on the link below: then open your own quant hedge fund!

Backtest Overfitting: An Interactive Example

If you want to actually read about the toy before you use it, well, you go here, Backtest Overfitting Demonstration Tool: An Online Interface, a paper in the Big Data & Innovative Financial Technologies Paper Series. If you do that, however, you are not qualified by disposition to run a quant fund.

One suspects this phenomena, which is rampant in the investment arena, is going to get some attention in the form of litigation or regulatory scrutiny. In the meantime caveat emptor. A different group is coming to the same conclusion:

"We argue that most claimed research findings in financial economics are likely false."

Remember, kids, actual results may vary!





Q2 2015 Commentary: the pruning knife vs two issues

Updated on Saturday, July 18, 2015 at 11:27AM by Registered Commenterhb

Updated on Monday, July 20, 2015 at 02:53PM by Registered Commenterhb

Our market outlook is simple. Nothing will happen between now and November 8, 2016, that is, nothing particularly good. Anticipate no reform of policy or regulations...  tax, fiscal, monetary, environmental, energy, labor, or educational matters. We may see futile, symbolic, political gestures, and we will most certainly see Obama launch a last wave of initiatives, mostly by Presidential fiat, and some will likely be materially destructive. A cynic might argue Republicans have incentive to let them roll, to sit and watch the rubble in advance of the elections. But who among us would be a cynic?

Meanwhile the big economic picture remains the same. Our national problems remain unsolved, and so they compound, become more deeply embedded, more complex & costly to remedy.

Click to read more ...


Cochrane on Tucker and Bagehot at Hoover

A must read, probably one of the most important pieces we've seen recently on financial regulation & systemic risk.  It is concise & easy to understand and has links to all the good stuff.

Tucker and Bagehot at Hoover





Caring for Digital Assets

We encourage all our clients to read Digital Assets and Fiduciaries to get an understanding of an important and frequently overlooked necessity of personal financial planning: managing online personal data, financial & otherwise. From the article:

“As we live more of our lives online, important parts of our lives continue to live online, when we die. Legally appointed fiduciaries need to access our online lives in order to delete, preserve, and pass along digital assets as appropriate. Estate planning attorneys are increasingly advising their clients of the importance of planning for their digital assets just as they plan for their non-digital assets. And the laws on trusts and estates (and other fiduciaries) are moving slowly towards ensuring appropriate fiduciary access.”

Click to read more ...


Mutual funds or mutual fund companies as Systemically Important Financial Institutions (SIFI)

We strongly recommend all read Bill McNabb's piece in today's Wall Street Journal. He is the CEO of Vanguard.

Regulators prepare to declare that large funds pose a ‘systemic’ financial risk. Investors will pay the price


This is an important issue: the proposed regulations are hugely destructive to the US capital markets and investors alike. Unlike the assets of banks, mutual funds have no maturity, hence no roll-over risk therefore no risk of default. They merely have price which reflects supply and demand.

At base we can extend the terribly flawed notions implicit in this regulation: equity investors now will be the lender of last resort to (or you may read that as "owners without voting rights" of) the TBTF banks. 

Of course, consider the preferred, but politically unavailable solution (at least for now) these regulators really want: the ability to prohibit sales of mutual funds whenever the Fed so macro-prudentially deems it appropriate. We jest? The institutional money market funds already have gating mechanisms, and they are now trying to push them in a slightly different form to the equity markets.

And we haven't even mentioned the costs which present yet another taking, a confiscation & transfer, of property rights & wealth to the regulatory state.


On mythology: Q1 2015 review & outlook

Updated on Friday, April 10, 2015 at 07:47AM by Registered Commenterhb

Our fundamental outlook has not changed from last quarter’s review, and we think we got the broader mechanics right. We actually suggest readers go back and read the first five paragraphs. These are long lived themes, and we’re going to be multiplying and extending some of them.

What is new, or slightly different, is that the pressures are building, some accelerating, and there seems to be increasing recognition by the markets and electorate that something is amiss.

Click to read more ...


Q4 Review & Outlook for 2015 

Updated on Thursday, January 15, 2015 at 08:37AM by Registered Commenterhb

Updated on Thursday, January 15, 2015 at 08:42AM by Registered Commenterhb

Our intermediate term outlook is shaped by the sense that ill conceived macro policies - fiscal, monetary, tax, regulatory & social - have done large scale damage to essential components of the US economy and that recovery of the wealth creation process will be slow & increasingly risky.

Click to read more ...


Review & outlook Q3 2014: how long will this last?

 Since the market low of 2009 to date we have seen an incredible run of domestic and foreign equities. We’re in the 6th year of a ~300% cumulative bull run with domestic equities and ~200% in non-US equities. It one of the longest, if not the longest, sustained bull runs in the equity market.

Click to read more ...


The SEC's money market rules: Buridan's Ass redux

Updated on Thursday, July 24, 2014 at 12:48PM by Registered Commenterhb

Updated on Thursday, July 24, 2014 at 03:24PM by Registered Commenterhb

Updated on Thursday, July 24, 2014 at 03:27PM by Registered Commenterhb

Updated on Friday, July 25, 2014 at 12:36PM by Registered Commenterhb

Updated on Wednesday, July 30, 2014 at 12:00PM by Registered Commenterhb

Updated on Thursday, July 31, 2014 at 08:36AM by Registered Commenterhb

The SEC finally passed it’s final regulations on money market “reform”.  The short story is that institutional money market funds will now mark to market & trade at Net Asset Value, such as it can be priced from the market. Retail funds sold to individual investors will continue the mythology of trading at $1 per share. All money market funds will have the ability to temporarily block redemptions and impose a 2% redemption fee at their discretion.

Our conclusion: while the NAV mechanic presents an improvement on the margin, the basic problems remain the much same, unchanged from the days of crisis. The SEC’s proposals

  • are in and of themselves ineffective in significantly reducing systemic risk or altering the mechanic of transmitting it. The interconnections of the participants are unchanged while the concentration of the markets are greater than they were in the days of crisis

  • will not improve underlying credit quality or provide incentives to funds to improve risk management

  • rely on the NAV mechanic for liquidity. This is untested in distressed markets. How this works when price discovery itself is opaque is open to question.

  • require no directly paid in capital to support the risk implicit in all money market funds

Click to read more ...


The effect was never there... it was just a random pattern

This caught our attention and we thought it worth sharing: Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance wherein we learn, should we have ever doubted, that Phineas Taylor Barnum is alive and well in the form of excessive back testing. Excessive backtesting is easy to do given the computational power currently available to most researchers and when combined with an absence of disclosure of relevant backtesting parameters, it creates an in inability to distinguish valid from invalid results and often with the consequence of adverse investment performance. The abstract is excerpted in whole below the quotations, also from the paper.


"with four parameters I can fit an elephant, and with five I can make him wiggle his trunk"

 John Von Neumann

"another thing I must point out is that you cannot prove a vague theory wrong. [...] Also, if the process of computing the consequences is indefinite, then with a little skill any experimental result can be made to look like the expected consequences." 

 Richard Feynman [1964]

“the effect was never there; instead it was just a random pattern that gave rise to an overfitted trading rule”

the authors

Click to read more ...


Volatility: the inverse bubble

Updated on Wednesday, June 18, 2014 at 01:34PM by Registered Commenterhb

We were dismayed to see today’s WSJ article Fed Officials Growing Wary of Market Complacency only because we were working on the final draft of this posting yesterday. No matter.  We recommend the better and earlier article of May 20th,  Tranquil markets are enjoying too much of a good thing by Ms. Trett of the FT about the continuing decline of volatility in nearly every market. It is worrisome, and we’re not sure anyone understands why it is happening. Nor is it limited to equity markets: oil, fixed income, currencies... pick a card.

Click to read more ...


Another public body blow to active management

The anomalies of language can often be instructive. What Americans properly call “pensions”, British call “schemes”.

The Brits claim to speak English, and we Americans find their accents quaint and, if you consider the rampant overuse of British accents in US media any evidence, vested with a soupçon of sophistication. So it was with interest that we read in the Financial Times, Britain needs local authority pension revolution. Americans particularly like revolutions that involve the British.

It seems the Department for Communities and Local Government had the good sense to retain the consulting firm of Hymans Robertson to review the pension operations & results of funds managed by Local Government Pension Scheme, which is one of the largest public sector pensions in the UK, managing some 99 pension funds for more than 4.6 million members comprising some £178 billion. It’s a pretty big deal.

Click to read more ...


Lowering your state tax burden: you will be surprised at the size of the benefits

Updated on Tuesday, July 22, 2014 at 03:09PM by Registered Commenterhb

Since we've all just finished our taxes, well, we couldn't resist...

Taxes make a huge difference in your personal financial picture, and it's worth taking a look at the burden that the 72,000 page federal & state tax codes place on you, your retirement, and your estate. State taxes add to considerable burdens, which we don't need to tell those in CT, NY, NJ, CA, etc. They never stop, even when you die.

Those thinking about retirement or relocation should pay attention. There are material & significant benefits to be had by arbitraging state taxes... yes, moving. 

We present some informational resources that caught our attention. Art Laffer in this video, Laffer: Save Taxes By Moving outlines some simple examples where the savings on state income taxes alone can add $500,000 to $1,000,000 to your retirement funds over time. You can visit his state tax calculator to explore particular options.

Click to read more ...


Uncertain & sideways: our QI 2014 take on the markets and economy

Let’s start with fixed income and look at some pictures.

One year look back at 5, 10 & 30 year Treasury yields:  5 (blue), 10 (red), and 30 (green) years all indexed to inception date:

 5’s and 10’s had significant moves over the last year while the 30 year has been remarkably stable. The middle of the curve, 5 years, took a fairly dramatic move upwards. No one who owned duration was particularly happy. We suspect a slow and modest grind upwards, notwithstanding and ever mindful of Ms. Yellen.

Changing the perspective to the last 3 months as pictured below gives a dramatically different picture, one that reflects convergence of three sources of uncertainty  

  1. the start of Yellen’s tenure

  2. the macro regulatory & policy uncertainty that seems to continually cloud the economic outlook. Is the economy picking up? Do we have naturally increasing demand for money that derives from an expanding economy? Or do we have a whiff of no growth or even deflation?

  3. lastly, the geopolitical instability in Crimea that came to a head, don’t you know, in February (see below).

We see this three month period as more interesting than iconic or dispositive, but we see none of these broader factors mitigating in the near to intermediate term. Note the same relative volatility focused on 5 year Treasury yields which led the way down and up. A three month lookback with the same color scheme as above.

We can’t do any better at defining fog, so we’ll quote Ms. Yellen’s first FMOC statement:

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. ... asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.

With the unemployment rate nearing 6-1/2 percent, the Committee has updated its forward guidance.

Our take: the FMOC will not say what it really means which we translate as “we will do whatever we feel like.” No rules based policies here, so don’t look for any, and while that may seem helpful to the current administration, it is not helpful to the productive direction of global capital flows.

Now that we have that sorted out, ladies and gentlemen, place your bets.  And that’s where we are. We will defer until later the implications for fixed income strategy, but Putin seems more predictable than our domestic monetary policy.

Equity markets: let’s take a longer term look at the broad domestic US (VTI in blue) and foreign equity markets (VEU in red) first. These are big numbers. Those who sold at the bottom out of fear suffered huge & permanent impairment.

We are five years in to a significant bull run built on the weakest recovery since the Great Depression. How long do these things run? Not forever.

Certainly equities are not cheap and by some metrics fully priced as the time series below of the S&P index priced to real GDP suggests. Or maybe not if the shale and fracking boom, not to mention genomics, are finally incorporated into a sane North American centric political and geostrategy that redirects petro$ capital flows & investment back here?

S&P 500 Index/real GDP

If you are sobered by the chart above, there is another perspective. Consider that on March 24, 2000, the S&P was at 1,527. As of this writing it stands at 1,889. Have we only added 362 points or ~23% of value in almost a decade and a half?

We do consider the hypotheses that uncertainty has slowed the rates of economic reaction, that

  • policy and regulatory uncertainty has slowed the recovery materially and may have the consequence of extending the tenor of recovery beyond normal timeframes?

  • monetary velocity is already starting to heat up, that transactional demand and excess liquidity of the banks can quickly cause a run up in money supply?

  • if so, will the Fed in turn get spooked or more likely be forced by the rational market bond vigilantes to increase interest rates in a hasty and defensive move?

Note the last data point above is Q4 2013. You can’t get much lower in terms of money velocity and still keep breathing, nor, as you can see below, can you get much more gunpowder stuffed into the cannon of excess bank reserves.

GDP checks in at a 3.36% continuously compounded rate as of last and endlessly adjusted data available on 3/27/2014. This suggests some slow but residual tectonic strength in the economy.


Our loyal readers know that we have wondered though how you get a sustainable economic recovery with weak employment, hence weak consumer demand, hence weak capital expenditures to fulfill it. A known unknown as Mr. Rumsfeld would say.

And we are unwilling to exercise fiscal discipline: we are over levered and this problem will continue to compound until it is solved.


There are significant cross currents that make it difficult if not impossible to suss out reliable themes: we have none, at least with conviction. These wheels grind slowly.

We retain our focus on risk, so we again emphasize the importance of the asset allocation and diversification. We acknowledge the bull run of the equity market is getting long in the tooth but suspect there is more to go.

Given the likelihood of ongoing domestic political paralysis the major risk to the equity markets comes from the fixed income market where the equilibrium is delicate. If money velocity kicks up the Fed may be forced to respond quickly and a chaotic repricing may ensue. On the other hand, if the Fed  stays wedded for too long to the QE mechanic & manipulation of rates or is perceived to back off from the unwind, a shoving match may break out again between the Fed and the rational market players as happened on Bernanke's first foray into the taper scenario. The lack of clarity from the Fed is not helpful to avoiding the volatility of either outcome. We leave you to speculate on the odds of a perfect landing....

So the question for equities is how do you price a seasoned, though continuing, weak domestic recovery marked by weak employment and lower levels of capital expenditure and low growth. Can the Fed juice equities more in the short term? Probably. They’ve done it for a while. Can we have a robust and prosperous economy in the long term on our current trajectory? Probably not. We know what that economy looks like:

source: Zero Hedge

The costs of Obamacare will dramatically increase and that may not be fully priced into equities yet. Europe and the emerging markets seem to be synchronized in their indigestion. Europe shows no sign of significant reform. Asia has asset quality problems, but perhaps more political elasticity to solve them. We still think domestic US growth for 2014 will end up around  2-3%. We may be low. We hope so.

Lastly, we draw your attention to two important articles: New, Revolutionary Way To Measure The Economy Is Coming -- Believe Me, This Is A Big Deal. It involves a new metric, an alternative to GDP and perhaps more accurate view of the economy:

The statistic is called Gross Output and will be issued by the Bureau of Economic Analysis (housed within the Commerce Department) .... Why is GO such a big deal? Because it measures the economy in a far more comprehensive and accurate manner. GDP represents the value of all final products and services. It ignores all the steps that go into the making of these things. It’s sort of like looking at a carton of milk and paying no heed to everything that goes into creating that milk and getting the carton onto the store shelf.

GDP thus gives a distorted picture of the economy. How many times do we read that consumption represents 70% of the economy and therefore it’s important to “stimulate demand” by increasing government spending?

In figuring GDP, government spending is said to represent 20% of the economy, investment a measly 13%. (Incredibly, imports are counted as a negative for the economy and subtract 3% from GDP. Protectionists love this absurdity.)

GO counts all the intermediate steps in the making of products and services. The results are stunning: Consumption is 40% of the economy, not 70%; government outlays are down to 9%; and business spending soars to 50%.

It begs a reevaluation of cause & effect. Does healthy consumer spending create a robust economy or vice versa?  Does cancer cause smoking or vice versa? GO presents, potentially, a re-ordering of the major components, perhaps the priorities that might be appropriate from a policy perspective, of the economy. Keep an eye on this. What if we were delivering all that wonderful stimulus to the wrong place and in the wrong way?

And just for current events, if you want to get schooled on the high frequency trading stuff we recommend Cochrane’s posting  Budish, Cramton and Shim on High Frequency Trading which will prep you for an in depth paper he cites,  The High-Frequency Trading Arms Race. Good luck.





Outlook for 2014: the dawn of reality or infinite QE?


  • A reduction of long term energy costs driven by natural gas is underway and will bring significant long term benefits. Fracking, entirely driven by private sector initiative, is now starting to transform the United States, despite federal policy, into an exporter of energy. This will partially re-route global petro$ capital flows... well, to us... and have an impact on related geostrategic matters. Imagine that. Take a look at Exxon’s annual Energy Outlook here.
  • The bankruptcies of Detroit, Stockton, and others yet to come, are starting to induce a greater awareness of financial & economic reality. We also see as a signal event the recent vote of the International Association of Machinists & Aerospace Workers District 751 (IAM) to accept Boeing’s contract. A key part of the deal was a transformation from defined pension benefit plans to defined contributions styled akin to a 401K. A different outcome of the vote would have seen Boeing move to South Carolina and precipitated a crisis for Seattle, the state and the IAM. We see more reality creeping into contractual behavior & the assumption of risk. Sight of the gallows sharpens the mind: this is necessary, will spread, and is a long term positive trend.
  • While domestic economic growth is still too low, it is positive, increasing, and seemingly sustainable. We look for ~ 2% real GDP in 2014 and hope we turn out to have been a bit pessimistic.
  • Political paralysis may stop some of the bleeding induced by bad policy. We sense a growing perception that government is too big and doesn’t do things well. We also sense that the electorate and particularly young people, are learning the hard way about legislated generational theft. More political failures, and we do expect more, will create a growing awareness that results actually count, that there is a growing need to assess cost, effectiveness, and quality of all our important national initiatives: fiscal, monetary, tax, regulatory, defense, and educational policy issues, and, last but not least, quality of leadership.


  • The US has a crisis of ineffective & unethical leadership. Abroad we see an erosion of our credibility, strength & leadership, while at home we face bitter divisions of seemingly all descriptions, inflamed by our leaders for political purpose. A divided citizenry watches the paralysis and quietly growing Constitutional and cultural crises. The failure of education, corruption of leadership, and the advent of the welfare/dependency state as a preferred permanent political outcome by our leadership has put the heart of America, the American Creed at risk. If not turned around, this trend will define the end of the country... think of a different kind of Supreme Court, one with Romulus Augustus and Maximilien de Robespierre deliberating while the mob chants “You didn’t build that!” The mob could win.
  • We anticipate continuing softness in the labor market. Low labor force participation will make consumers and corporations cautious. The measured unemployment rate may improve but the labor market participation will only marginally improve.This is bigger than the usual short term cyclical issue. A whole generation of young Americans are at risk of being left behind in the job market... courtesy of misguided policy... and that loss is an age based demographic and permanent. It is not: “Take a ticket and move to the back, please.” It’s: “Get off the bus.”
  • State, municipal, and federal finances are in the main unsustainable and demonstrably so. Kyle Bass presents the dark side here. Our national perspective on debt discussions must be changed to always include funded & unfunded liabilities. The topic must be constantly brought to public attention. The politicians will fight tooth and nail to prevent it: that’s their vig.  They know if you can’t see the problem, you can’t solve it. Improved disclosure & enforcement is absolutely necessary.
  • Regulatory & tax uncertainty will continue to depress employment, corporate capital expenditures, investment & innovation. It is lowering our standard of living.


  • A slow & steady increase in interest rates will be benign or beneficial for the equity markets.
  • Inflation will be neutralized by the significant slack in the economy, but the fuse which ignites inflation, unprecedented excess reserves on deposit at the Fed, has gotten much shorter. If the knots all hold it should be benign for the balance of 2014... bear in mind, that means low, not high economic growth. We anticipate the Fed is going to increase its scale of manipulation... uhh, we mean intervention... beyond the interest rate curve to include the (global?) repo market to directly manage excess banking reserves and money supply. We are unclear what makes them think the repo market will be stable absent the all-in-check book of the American taxpayer? Merely putting the pea under a different shell. John Cochrane has suggested that maybe the old rules don’t work in this economic, structural, and regulatory construct: the Fed should listen.
  • Valuations: we’re agnostic on equity valuations. Yes, they’re getting high, but not prohibitively so. We’ve been selling into to bull market to rebalance back to target for most of this year, and anticipate doing so when appropriate this year. It’s a matter of risk management.

Implications for 2014: short and simple

In 2013 we were primarily in short duration and selling equities into the bull market to rebalance back to target. We anticipate the same trend this year, although we expect much smaller absolute gains for equities in 2014, perhaps in the 4-6% range (but we don’t know, and we know we don’t know). We could be forgoing some upside, but our sense is that we’re due for a correction, and 2014 could deliver one. This kind of equity run doesn’t go forever.

Again, we focus on risk. We got the returns accorded by our allocations. Our strategy for 2014 will again be to rebalance back to target periodically, and we will be prepared to buy to target if a correction comes.

Below are the equities markets over the last 2 years (price only,  US equities/VTI in blue,  and non-US equities/VEU in red):

If you expand the timeframe the run in equities gets even more impressive. Again, the issue of risk management looms large in our thinking.

Interest rates will hopefully rise in a measured and steady manner if an improving economy increases demand for money, and if so, it will be beneficial for equity markets. This was the case for 2013 where as you can see below. The 10 year rates had a pretty dramatic move with no adverse impact on equities. If you were holding duration, well, our sympathies. Fortunately, neither we nor our clients were, nor will we for a while. We suspect there is more to go here, but we stipulate we don’t forecast interest rates.

There are just too many moving parts. Again, our focus is on risk management, and we are prepared to pay the opportunity cost of not buying mid to long duration until we have better clarity. We might reconsider if or when the 10 year hits ~4%. Frailty, thy name is Fed, currency wars, and leverage.

10 year Treasury yields over the past year:


We continue to like short duration and investment grade credit spreads which have narrowed but remain attractive.

Overall there are some powerful long term forces at work. On balance we tend to think the Positives will carry the day, or rather the year. We do expect some kind of correction, but it seems for now we have a semi-stable equilibrium. The question is how long it will last. Our concern is that we have a lot of pressures deriving from monetary and fiscal issues that without sensible & timely resolution will stress markets and social structures.  

So, for 2014 we keep our expectations modest, but positively so, and our risk budgets tight.  



Richmond Fed interviews Cochrane: a must read

Consider this interview of John Cochrane by the Federal Reserve Bank of Richmond as an exploration of the cutting edge of the major issues facing finance & economics, of both application and theory, as well as a great example of effective communication... simplicity, concision & clarity with little to no jargon. 

It is the best piece we've read in some time. We can only hope the administration is listening and that his influence grows.


Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound

Our readers know that we have been sharply critical of the Fed's policies. Here's one reason why.

Wu and Xia of University of Chicago Booth School of Business and University of California, respectively, have some interesting conclusions in their paper, Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound. We quote their abstract: 

This paper employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. We show that such a model offers an excellent description of the data and can be used to summarize the macroeconomic eff ects of unconventional monetary policy at the zero lower bound. Our estimates imply that the eff orts by the Federal Reserve to stimulate the economy since 2009 succeeded in making the unemployment rate in May 2013 0.23% lower than it otherwise would have been.
Now think about that for a minute in terms of the risk, magnitude, cost, and global impact of the Fed's actions. Their conclusion calls into question the entire and ethereal basis of Fed policy. And we do recall the plaintive, aspiration qua argument "Think of how bad it would have been if we had done nothing!
Turns out nothing is looking like a much better deal for all except those who borrowed to hold assets that were subsequently inflated by the Fed and, don't you know, funded by the wealth transfer from savers to borrowers implicit in the Zero Interest Rate Policy itself.
If you like your zero interest rates, you can keep 'em?