Focus on the Fed

Funny money: When the Laughing Stops

Tuesday Tune-up

Jay Ungar, "Ashokan Farewell

Quote for the Week, August 25-31, 2013

There can be few fields of human endeavor in which history counts for so little as in the world of finance.
--John Kenneth Galbraith

Tuesday Tune-up

The Milk Carton Kids, "Snake Eyes"

Quote for the Week, August 18-24, 2013

This was not a tempest in a teapot but rather a perfect storm of individual misconduct and inadequate internal controls.
--U.S. Attorney Preet Bharara on the failure of upper management at JPMorgan Chase to rein in rogue traders of derivatives

PDO Means We're SOL

Cyclical climate change over the Pacific Ocean is likely to lead to the following:

1. write-downs of homes in some fire-prone areas;
2. brown-outs in the Pacific Northwest;
3. diminished irrigation in California's Central Valley;
4. slow-downs in shipping traffic on the Great Lakes;
5. mark-ups for property insurance along the Atlantic seaboard.

Read the whole story here.

Tuesday Tune-up

Emily Wolfe, "Lion Heart"

Quote for the Week, August 11-17, 2013

All persons who work for an unselfish purpose for little or nothing are incomprehensible to persons who never work for nothing, and who can be hired to work for anything.
--John Reed (1887-1920)

Tuesday Tune-up

Leo Kottke, "Little Martha"

Quote for the Week, August 4-10, 2013

We have a pretty smart group of guys, which is a positive.  Hopefully, they will keep being smart.
--N.E. Patriots quarterback Tom Brady on this year's crop of rookies

Tuesday Tune-up

Escondido, "Black Roses"

Quote for the Week, July 28-August 3, 2013

Start every day off with a smile and get it over with.
--W.C. Fields

Bromance, Unrequited

Tom Terrific & 'friend'

Tuesday Tune-up

The Wailin' Jennys, "Beautiful Dawn"

Quote for the Week, July 21-27, 2013

America has no functioning democracy.
--Former U.S. President Jimmy Carter

Tuesday Tune-up

Mount Moriah, "White Sands"

Quote for the Week, July 14-20, 2013

If you live in South Florida and you're not building a boat, you're not facing reality.
--Harold Wanless, Department of Geological Sciences, University of Miami

Beijing State of Mind

rapping at the Great Wall (and other hot spots)...

Cameraman Taken Out

Chilling video from Egypt
[story here]

Tuesday Tune-up

Tift Merritt, "Sweet Spot"

Quote for the Week, July 7-13, 2013

Preach the Gospel at all times and, when necessary, use words.
--attributed to Saint Francis of Assisi

Quote for the Week, June 30-July 6, 2013

War should only be declared by the authority of the people, whose toils and treasures are to support its burdens, instead of the government which is to reap its fruits.
--James Madison

Tuesday Tune-up

2Cellos, "Fields of Gold"

More Snapshots from China

Father and son.  No, really.

Tiananmen Square, Beijing

[06-06-13]

Ceramic wall decoration,

Imperial Palace, Beijing

[06-06-13]

Cathy learned how to make dumplings.

[06-09-13]

Beachfront development in Haigang district,
Qinhuangdao
[06-10-13]

Construction boom in downtown Qinhuangdao.
[06-11-13]

Brett had a tennis buddy with connections.
Result: a gratuitous "lunch" while Wall-hopping,
Shanhaiguan district, Qinhuangdao
[06-12-13]

The Great Wall ascending Jiaoshan Mountain,
Shanhaiguan
[06-12-13]

Jiumenkou
[06-14-13]

Jiumenkou

[06-15-13]

Stop the tea party--we needed a coffee fix.
Tony [left, with Brett, Alex and Cathy] found just the right spot.
[06-17-13]

Cathy's still life by the Bohai Sea
[06-18-13]

Bird sanctuary, Beidaihe district
[06-18-13]

Quote for the Week, June 23-29, 2013

It is getting to the point where the mark of international distinction and service to humanity is no longer the Nobel Peace Prize, but an espionage indictment from the U.S. Department of Justice.
--Julian Assange

More From Brett's Laptop

Great Wall, Jiumenkou
Qinhuangdao
[06-14-13]

Mongol tourists want photo-op with Americans,
Brett goes Genghis.
[06-14-13]

Tuesday Tune-up

Itzhak Perlman & Yo Yo Ma, Dvorak's "Humoresque"

Quote for the Week, June 16-22

There are decades when nothing happens and there are weeks when decades happen.
--Vladimir Ilyich Lenin

Scenes from China, June 2013

Posting photos in anything close to real time has been difficult, as a virtual private network is required to access blogspot.com here in China.  Internet access from a hotel room just won't cut it.  Here are a few photos from Brett's laptop.

one of the Forbidden City palaces,

Beijing

[06-06-13]

Brett (top center) hosting a gaggle of girls from his English class (and his parents),
Qinhuangdao
[06-08-13]

Beach walk, Qinhuangdao
[06-10-13]

Tuesday Tune-up

Elton John, "Moon River"

First Full Day in China

left-most of nine dragons, ceramic mural,

Forbidden City, Beijing

[06-06-13]

[click to enlarge]

Quote for the Week, June 9-15, 2013

All progress is precarious, and the solution of one problem brings us face to face with another problem.
--Martin Luther King, Jr.

Tuesday Tune-up

Vanessa Paradis & Suzanne Vega, "Blowin' the the Wind"

Quote for the Week, June 2-8, 2013

Mistakes are the portals of discovery.
--James Joyce

QE Or Not QE

"All of us would like to observe lower unemployment, but the belief that quantitative easing will materially contribute to this outcome is unsupported in both theory and evidence. The present course of Fed policy is destabilizing the global economy by contributing to a financial environment that encourages the allocation of scarce savings toward speculative activity, not productive investment. When 'QE' and the 'Bernanke put' are the sole focus of the financial markets – not productivity, not innovation, not sound policy options, not careful intermediation of capital, and certainly not the plight of the elderly that have been starved of interest income – it should be obvious that things have gone too far.

"This experiment has played out long enough. Establishing the largest fiscal and monetary imbalance in U.S. history has certainly created a pleasant environment for speculators, but it does not create employment, and it sows the seeds of the next collapse. The Fed is stepping on a gas pedal in the hope of making the wheels go faster, and instead the gasoline is spurting out of the tank and feeding speculative flames, because a reliable transmission mechanism does not exist."

--John Hussman, Ph.D., in his weekly market comment (includes an open letter to the Federal Open Market Committee)

Tuesday Tune-up

Ludovico Einaudi, "Walk"

Do the Math

[48:45]

Or let Grant Williams do it for you.

Your assignment:  watch this video.  But if you are ADD-constrained, at the very least watch Grant's Problem #1, the disconnect between equity valuations in the U.S. and macro-economic reality, a 9-minute piece starting at the 7:30 mark.  Now class, begin.

Takeaway #1:

"Massive central bank intervention makes traditional value investing virtually impossible."

which leads to Takeaway #2:

"Beware suppressed volatility."

[n.b.--"suppressed volatility" is econo-speak for "mindless herd-like behavior."]

Abenomics: A High-Risk Wager

Lower liquidity, higher volatility.
Get ready for massive market dislocations.

Gross: The BoJ dominates asset markets for better or worse. Watch JGBs, the Yen and the exodus from each.
— PIMCO (@PIMCO) May 26, 2013

Quote for the Week, May 26-June 1, 2013

Oh, I gotta get rid of my goddamn Halliburton stock.
--Lyndon Johnson on the phone from the Parkland Hospital to his tax lawyer, just after JFK was pronounced dead

Grisly Market Action This A.M.

He's ba-a-ack.

Tuesday Tune-up

The Piano Guys, "Rockelbel's Canon"

Getting the Lead Out

[click to enlarge]

Maine Legislature to vote on LD 730:

An Act to Protect Maine's Loons By
Banning Lead Sinkers and Jigs

Act now.

Quote for the Week, May 19-25, 2013

Certainly, European imperialism brought misery to the world.  But the world was making itself miserable before, and has since.
--George Friedman

David Stockman's Latest

David Stockman,

author of The Great Deformation

"The combination of free markets and freely printed money gave rise to a toxic financial deformation; namely, the vast financialization of the world economy and the rise of endless carry trades, massive arrangements of speculative hedging, and monumental daisy chains of debts, owned by debts, owned by still more debts."

Stockman Ch12 by zerohedge

Tuesday Tune-up

The Doors, "Riders on the Storm"

Quote for the Week, May 12-18, 2013

Thus the metric system did not really catch on in the States, unless you count the increasing popularity of the nine-millimeter bullet.
--Dave Barry

QE a Double-Edged Sword

[9:32]

Dallas Fed President Richard Fisher points to the risk of "overkill" in the Federal Open Market Committee's current policy of QE∞.  Trimming a $4 trillion balance sheet, when the time comes, may be nigh impossible.  Fisher likens the challenge to that facing the Hunt Brothers when they tried (unsuccessfully) to exit the silver market in 1980.  When you are the market, to whom can you sell?  Meanwhile, the U.S. economy pokes along, unresponsive to all that quantitative easing.  Fisher calls it "the best-looking horse in the glue factory."  Faint praise, indeed.

It's a Mad, Mad World

[click to enlarge]

The S&P 500 over the last twenty years.

Think  of all that dough under the Big W:

Robert Caro Visits Colbert

Pulitzer Prize-winning author talks about LBJ's legacy.
(And reveals who "Jumbo" is.)

Tuesday Tune-up

George Harrison, "Let It Be Me"

Quote for the Week, May 5-11, 2013

People.

--Grace Coolidge, First Lady, when asked what her favorite books were.

Tuesday Tune-up

Eva Cassidy, "Songbird"

Quote for the Week, April 28-May 4, 2013

Stop feeling sorry for yourself, find the silver lining and get to work with the same belief, same drive and same conviction as ever.
--Kobe Bryant, hours after rupturing his Achilles tendon in an NBA game

Footloose

[enlarge]

China's Mississippi River

[2:25]

Forget what you learned as a child about the Yangtze River being a remote backwater serving snails to that cute little duck Ping from the boat with the two wise eyes.  Continued economic development--and Chinese unification itself--depends on the world's third-longest river.

The Strategic Importance of the Yangtze River is republished with permission of Stratfor.

Full report here.

Beware Bulls on Pogo Sticks

Rule o' Thumb:  When the cover of a major financial magazine features a cartoon of a bull leaping through the air on a pogo stick, it's probably about time to cash in the chips...[T]he endgame of overvalued, overbought, overbullish, overleveraged markets is forced liquidation.

--John Hussman, in his weekly market comment

Tuesday Tune-up

David Choi & Kina Grannis, "The Way You Are"

The Week That Was

...starting one week ago:

[courtesy Boston Globe]

Quote for the Week, April 21-27, 2013

The quickest way to extreme wealth in this world is to attach oneself to giant piles of institutional money like public pension funds...[you] don't actually do anything, other than shave cuts off of other people's money.
--Matt Taibbi

Like Thoreau, But More So

"Walden Pond:  Part Deux"

Mismatch

Dzhokhar tries to ram this with a dry-docked motor boat.

And loses.

Euroskeptic Channels Lady Thatcher

[3:02]

Margaret Thatcher said it wouldn't work.

Now Nigel Farage says that it hasn't worked:

"This European Union is the new communism.  It is power without limits.  It is creating a tide of human misery, and the sooner it is swept away the better."

Farage, a member of the European Parliament and the leader of the UK Independence Party, is "looking plausibly like the heir to Thatcher."

One World

Tuesday Tune-up

Marlene Dietrich, "Lili Marleen"

Scream Tunnel 2013

No, not the one at Wellesley College.

Finish line on Boylston Street, Boston Marathon, earlier today.

Quote for the Week, April 14-20, 2013

For decades the U.S. economic growth engine that we all love to brag about has really just been an exercise in consuming stuff we didn't need with money we didn't have.  This generational trend is now in reverse and potentially so massive that it transcends monetary and fiscal policy.
--Vince Foster

Doctor's Rx For What Ails Us

Dr. Ben Carson's keynote address,
61st annual National Prayer Breakfast

Bank Q1 "Earnings" Start to Roll In

$JPM reports earnings of "Whatever the hell we thought our loans were worth March 31st + or - internal hedges being hidden somewhere"
— Jeff Macke (@JeffMacke) April 12, 2013

JPMorgan Chase has kicked off earnings season this morning with its announcement that it "made" $6.5 billion in the first quarter of 2013.  Looking under the hood, $1.2 billion of that consisted of "old" earnings retrieved from the firm's loan-loss reserve. The earning's presentation can be found at the company's website here.  Some quick observations:

• Total revenue was down $900 million (over 3%) from the year-earlier quarter (page 2).
• The Consumer and Community Banking division had revenue that was down 6% from both the prior quarter and 1Q2012 (page 4).
• The Net Interest Margin dropped another 3 basis points  from 4Q2012 (page 13).
• Net Interest Income for the fiscal year is expected to drop 1% from 2012 (page 14).
• Over $5 billion of "profits" from the last four quarters have come from the loan-loss reserve (page 19).

In sum, organic business is growing more slowly than JPM's stock price (which is down half a buck in early pre-market trading).  And how about this:  JPM's own analysts have just issued a report saying that Tier I investment banks are "un-investable"--not what the boss wants to hear.

ZeroHedge has a chart showing how our two-tier economy works these days.  Loans from JPMorgan Chase to the real economy are flat-to-declining.  Loans from depositors to JPM are burgeoning.  JPM invests the difference in the canyons of Wall Street, hidden from the light of day.  Money, like manure, works best when it is spread around--and stinks when it is piled up in one place.

[click here to enlarge]

Wells Fargo also released quarterly earnings today (summary here).  Same story as JPM:  nice bottom line, but total revenue was down $300 million year-over-year and twice that from the quarter just prior (page 2); net interest margin was down 8 bps from 4Q2012 (page 3); and in the Community Banking segment (which includes mortgage lending) revenue was down 4% YoY and 6% from the prior quarter.

In this short video [5:06] Christopher Whalen explains to Jeff Macke of Yahoo Finance why banks must shrink their businesses and why some might be getting out of mortgage lending altogether.

More From Kyle Bass

[20:01]

Kyle Bass of Hayman Capital:

"When you see things like Argentina, Greece, Cyprus, Ireland, Italy, you see how fast things go from perfectly stable to completely unstable.  In this case [Japan] I think it will happen more quickly because of the twenty-year build-up."

Needless to say, Bass is short the yen.  See the full clip for his thoughts on gold as an investment, on residential mortgage-based securities, on Fannie Mae and Freddie Mac, on near- and intermediate-term interest rates in the U.S., and more.

Tuesday Tune-up

Santana, "Samba Pa Ti"

"Riskiest Time"

[10:08]

Kyle Bass of Hayman Capital:

Now is "the riskiest time to be complacent in our generation...Investing with the traditional endowment model...is not going to work much longer...

"The insidious nature of a runaway inflation is it bankrupts the middle class.  So the poor stay poor.  The middle class--people that have had some fiscal rectitude, the doctors, the lawyers, the civil servants that have saved their money and put it in the bank--these are the people that get wiped out, or let's say severely impaired in this situation.  The wealthy that are levered with productive assets actually do the best...

"That's an awful scenario for the world to engage in."

Quote for the Week, April 7-13, 2013

I have wondered at times if some of the managed-care bureaucrats I have encountered over the years had been subjected to a bilateral hemispherectomy.  It would certainly explain some of their rulings.
--Dr. Ben Carson

Volatility is Cheap--Beware

Investors scaling back their tail-risk insurance, must mean a black swan is right around the corner-- reut.rs/10hJUlf via @reuters
— Bill Hine (@billhine) April 5, 2013

Recommended Reading

For all you history buffs:

Bob Schieffer chats with authors of new books about Coolidge, Churchill, FDR, Lindberg, Eisenhower, and Nixon.

Tuesday Tune-up

Hrysoula Stefanaki, "I Varka Gyrise Moni"

Opening Day

Getch'ur tickets heah!

America in "End-Stage Metastasis"

Former OMB Director David Stockman pulls no punches.

"The way out would be so radical it can't happen.  It would necessitate a sweeping divorce of the state and the market economy.  It would require a renunciation of crony capitalism...It would require, finally, benching the Fed's central planners, and restoring the central bank's original mission:  to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy.  Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism."

Complete N.Y. Times commentary here.

Quote for the Week, March 31-April 6, 2013

Did EU banking officials really believe that haircutting depositors would be sufficient to restore confidence in Cypriot banks?  The infantile quality of the actions of EU officialdom is mind boggling.
--Christopher Whalen

Big Brother in Asia

Trailer:  "State of Control"

American filmakers are trying to document social unrest in occupied Tibet.  Their chief obstacle:  Chinese computer hackers trained to delete.

Criminals to the Left of Me, Criminals to the Right

€100,000 invested with Madoff 5 years ago would still be worth €79,000. If you deposited it in Laiki Bank, you now have €20,000 <cough>
— Grant Williams (@ttmygh) March 27, 2013

Tuesday Tune-up

Jefferson Airplane, "White Rabbit"

Bair Refuses to Hibernate

Sheila Bair with Bill Moyers

[22 min.]

The former FDIC Chair talks about the U.S. Senate's investigation into the risk-taking and disinformation campaign carried out by JPMorgan Chase.  She points out that federal regulators are subject to "cognitive capture" by the very industry which they are charged to oversee.  "We need a culture change with the regulators," she tells Moyers.  "They confuse bank profitability with bank safety and soundness."

Quote for the Week, March 24-30, 2012

Hell hath no fury like a saver robbed.
--Ambrose Evans-Pritchard

We Have Met the Enemy

"Have they no grandchildren?"

--Jeremy Grantham, interviewed by Charlie Rose

03-11-13

[53:39--click here]

Investment adviser Jeremy Grantham (GMO) worries that the human population has surpassed the carrying capacity of planet Earth.  We are seven billion going on ten by 2050; we need to be on our way back down to four.  We survive at the moment solely because of fossil fuels, representing "millions of years of stored energy" and affording us "an amazing, but short, time-out."  How short?  Let's say 250 years, and we are well into the second half.

In the competition for resources, "the rich half of the world is pricing out the other half."  Crude oil has quadrupled in price since 2000.  Indeed, "resource prices are squeezing the rest of the system," likely constraining economic growth to little more than 1% annually for the foreseeable future.  The world's phosphorus, essential in sustaining animal and plant life, will be exhausted in 50 years, assuming an annual increase of 2% in consumption.  Most portfolio managers don't care.  They live in a "paper world," not the real one, and are too busy chasing short-term returns to worry about long-term consequences.

Grantham advises that we not confuse human ingenuity with a resource bonanza.  To those confident that we will somehow figure things out, Grantham observes that throughout human history robust civilizations, prior to the mining of coal, routinely collapsed.  After the time-out, they may again.

Ripple (Or Tsunami?) From Cyprus

Now, whenever you hear the word "bailout" assume your bank account goes missing. Unless it's for Wall St. in which case they get trillions.
— Michael Krieger (@LibertyBlitz) March 21, 2013

Tuesday Tune-up

Priscilla Ahn, "Dream"

Quote for the Week, March 17-23, 2013

When interest rates rise into decelerating nominal GDP, 'accidents' can happen.
--Vince Foster

Too Big To Nail?

In the crosshairs:  JPM CEO Jamie Dimon

"JPMorgan Chase, the nation's biggest bank, ignored internal controls and manipulated documents as it racked up trading losses last year, while its influential chief executive, Jamie Dimon, briefly withheld some information from regulators, a new Senate report says."
--N.Y. Times DealBook [full article here]

Full Senate report here.

Senate hearing begins in one hour.

Tuesday Tune-up

Lindsey Stirling, "Song of the Caged Bird"

Quote for the Week, March 10-16, 2013

The experience of over 250 debt crises over the past few hundred years tells us that there is no specific point when the markets lose confidence in a government's debt.  When it happens, though, it is ferocious in its intensity.
--John Mauldin

Tuesday Tune-up

Steve Miller Band, "Swingtown"

ZIRP Is a Zero-Sum Game

The man with a plan.

"Further deficits are not a viable option, and threaten undesirable long-term consequences. The ideal solution is to pair deficit reduction efforts with policies to stimulate gross domestic investment. 'Investment' in this context does not mean financial investment, but real investment in factories, equipment, capital goods, research, and development. Policies to stimulate investment include investment tax credits, accelerated expensing of investment, R&D incentives, and similar programs....[emphasis author's]

"The only sustainable course to a higher standard of living is to encourage productive investment. Policies like those currently pursued by the Federal Reserve attempt to encourage consumption, but do so by distorting savings and investment decisions toward speculative activity rather than productive investment. Unfortunately, the reluctance of consumers to spend is tightly linked to existing mortgage and consumer debt burdens, many of which remain unserviceable and have not been restructured. Attempts to squeeze greater consumption demand from these individuals, without a strategy to increase productive activity and income, is likely to produce continued failure.

"While policies to stimulate gross domestic investment may be viewed as unwanted 'tax expenditures' in deficit reduction efforts, these policies are critical to prevent the unintended consequence of economic contraction."

John Hussman's commentary appears in full here.

Quote for the Week, March 3-9, 2013

[Those who] are waiting for the arrival of intelligent government are utopians.  The real choice today is between bigger or smaller unintelligent government.
--George Will

Hurdles for Would-be Home Owners

Want a home loan?  Submit your fingerprints and grab a Snickers.  It's going to be awhile.

"It's very painful to be a borrower in a refi or a purchase position...it's the relatively small number of approvals.  And I hate to say this, but it's probably going to get a little bit worse along those lines before it gets better."
--Rick Sharga, Carrington Mortgage Holdings, in a recent radio interview