James Grant on the US Treasury, rates, and the dollar

James Grant is a long time observer (and chronic bear) on interest rates and has an interesting interview on Bloomberg.  And the folks at Zero Hedge point out

Grant has put together a Treasury prospectus (which we will post as soon as we procure it) which as Jim puts it "is a compendium of the salient facts about the Treasury as if it were an issuer that did not have a printing press... All you need to know about the credit risk of the US." The first risk factor, via the GAO, "improper payments that should not have been paid by the Treasury totalled $98.7 billion, equivalent to 5% of Treasury outlays." Keep in mind the UST raised $333 billion in net debt in March, as we pointed out yesterday.

The Treasury prospectus will no doubt be a barn burner, and we recall Nassim Nicholas Taleb's quote not too long ago, “every single human being should bet U.S. Treasury bonds will decline."

Keep watching long Treasury's.

Through a glass darkly

"Our views on the way a government should run the economy can be described as “libertarian”: that is to say freedom to develop trade and industry within the framework of a strong and clear law. The most important part of the case for this economic freedom is not the way it produces greater prosperity but its consistency with certain fundamental moral principles of life itself. Each soul or person matters; man is imperfect; he is a responsible being; he has freedom to choose; he has obligations to his fellow man.

Morality is personal. There is no such thing as a collective conscience, collective kindness, collective gentleness, collective freedom. To talk of social justice, social responsibility, a new world order, may be easy and make us feel good, but it does not absolve each of us from personal responsibility. We don’t carry out our moral commitment by taking up a public stance on these things, but only by choosing to do something about them ourselves. You can’t delegate personal morality to your country. You are your country."

Thoughts on the Moral Case from the Margaret Thatcher Papers in Cambridge (courtesy of a Chicago based reader)

Important reading on broker dealer obligations or lack of them...

Jason Zweig's article in the WSJ, Brokers Win, Investors Lose Key Reform is an important read for those who wish to understand the actual risks of dealing with the broker/dealer community on an uninformed basis. However, I found Jan Sackley's comments on the article compelling, and I present them in whole below (with some nominal formatting changes).  For my thoughts see Comments below for this posting or go here.

 _________________________________________________________________________________

The question on the table is whether or not Congress should require that individuals and firms that hold themselves out as providing financial advice to investors and others who seek financial management assistance (remember that some people do not "invest" in any securities but still require financial advice), should be held to a fiduciary standard so that the citizenry can be assured of a certain level of objectivity and professionalism untainted by the financial reward to the adviser.

If such a requirement is adopted, today's brokers could not be called "advisors", "consultants", or other titles that imply to the average consumer that the broker is an objective advisor. Rather, the broker should be correctly perceived by the public as a seller of products and services as a representative of his or her firm, and an insurance agent as a seller of insurance policies and annuities.

In contrast, the fiduciary-advisor is the customer of the brokers and agents. The fiduciary-advisor utilizes the services of brokers to fulfil their client’s wishes with respect to the purchase or sale of investment products. Or, the client could make his or her own selection of which broker or agent to use to buy (or sell) securities or purchase insurance products. The fiduciary-advisor and the broker should not be one and the same professional in a client relationship.

In other words, brokers and insurance agents would provide for the execution of trades or sell products to fiduciary advisors and individual consumers as their customers. If a fiduciary advisor is in the picture, they are an intermediary working on behalf of the consumer. Or, the consumer who does not want to pay an advisor for advice could go directly to the broker to have their transactions executed. It should be made clear to these consumers that the broker is not responsible for the consumer’s investment choices nor for the ongoing monitoring of those choices.

The concept of a "single" or "uniform" fiduciary standard implies that some regulator could simply author rules that are the “be all and end all” for fiduciaries. This misunderstanding is inconsistent with the reality that acting as a fiduciary is a behavioral concept, not a rules concept. Yes, there are certain guidelines that are articulated in regulations (and some statutes) from those agencies that regulate financial institutions that provide fiduciary services. Examples include

• 12 CFR 9 (http://www.occ.gov/fr/cfrparts/12CFR09.htm), which applies to bank trust departments of national banks and most state banks;
• the OCC Handbooks (http://www.occ.treas.gov/handbook/amgt.HTM) ;
• FDIC rules for certain non-member banks (http://www.fdic.gov/regulations/examinations/trustmanual/section_1/section_i.html);
• Office of Thrift Supervision rules for fiduciaries that are chartered as thrifts ( http://www.ots.gov/?p=TrustAssetManagementHandbook);

and, of course, SEC rules for registered investment advisors. In addition, Erisa fiduciaries must comply with both IRS and DOL rules on fiduciary behavior. States have statutes and rules as well.

In spite of all of these rules, all of the banking regulators (the states, FDIC, OCC and OTS) expect bank fiduciaries to act (behave) in accordance with common law principles, including those articulated in Scott on Trusts. I am not convinced that the SEC has this same expectation, or conveys it adequately in their rules, but that is a separate issue. Common law principles are often the decisional measures when a case is adjudicated, whether the "fiduciary" is a bank, a registered investment advisor, an executor of an estate, or any other financial fiduciary.

The debate about brokers possibly being held to a fiduciary standard must recognize that the business model followed today by brokerages is not consistent with common law fiduciary principles. The questions about commissions and proprietary products are non-starters; fiduciaries do not "sell" and thus do not (or should not) earn commissions. Proprietary products fall under the well-established Duty of Loyalty: mitigation requires full disclosure and well-informed consent, a specific statutory exemption, or a regulatory exemption that has been thoroughly vetted and open to comment.

It is puzzling why certain members of Congress do not want to provide our citizens with the comforting knowledge that someone called an “advisor” or a “consultant” is expected to put the customer’s needs at the forefront without any conflict created by compensation methods. Of course there will always be bad fiduciary apples, but at least the barrel would have a consistent framework.

Jan Sackley, Principal
Fiduciary Foresight, LLC
Risk Management and Regulatory
Compliance Consultants

Twitter@jansackley 
_________________________

Reproduced with the permission of the author, for which we are grateful.

Dynamite in the hands of children

The problem of the deficit and out of control spending is not as complex as many would make it.  The "deficit problem" for any government is not one issue, but two components:

• Debt: if you have debt you have to pay it back, and the more you have, the more it costs
• Investment: if you borrow money, what you do with it determines the generation of wealth, the economic outcome

So, by simple analogy, if you borrow money and buy a bottle, well, let's make it a case, of Château Ausone St. Emilion 1998, and throw a kicking party, the next day all you have is a headache and the debt to pay back. You may have joie de vivre, but you are impoverished. On the other hand, if you borrow the same amount of money and buy productive assets, the next day and for all future you will have the economic production of those assets. You may be dour, but you are creating wealth, the extent of which is determined by the economic productivity of the asset in which you invested.

To modify this example for sovereign states, you simply need to make the dollars bigger (add zeros !?!) and the time frames longer. A simple, but essentially correct analogy.

Even Moody's , continuing its tradition of better late than never, has noticed that all is not right with the fiscal house of the United States:

a small start to the big task of returning to a sustainable debt trajectory...Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the Aaa government bond rating

Nassim Nicholas Taleb of Black Swan fame is perhaps a little less delicate in his comments to Bloomberg:

“every single human being” should bet U.S. Treasury bonds will decline

“Deficits are like putting dynamite in the hands of children...they can get out of control very quickly.”

If Moody's, Taleb, and WWB agree on the Debt component of the deficit problem, we can declare consensus and move to the government's actions on the Investment side.  Our readers are already familiar with our analyses of Cash for Clunkers and the stimulus package.  More technical readers will recall our noting Mr. Robert J. Barro's comments that "the available empirical evidence does not support the idea that spending multipliers [for governmental stimulus programs] typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending." That's economist-speak meaning we bought the case of Chateau Ausone St. Emilion and threw the party, or more specifically, that the whole concept of 'stimulus' just doesn't work in the first place.

As a consequence, our nation will face a significantly reduced standard of living, our children will have diminished economic opportunities.

Investors will ask, "Ok, we got it. What do we do now?"

Those who know us also know that we are not inclined to modify long term investment strategies based on tactical issues or short term data. We are concerned about the broader, longer term issues and confess, in spite of much effort and open ended strategy sessions with people whose opinions we value, we're not at all sure we've got it figured out.  Humility is probably not a bad starting point.

We're clearly in for a run of greater uncertainty across all kinds of dimensions: 

• domenstic & foreign fiscal, monetary & tax policy;
• less certain property rights & rule of law in the US;
• increasing loss of confidence in broader agency processes of all stripes, both sovereign & corporate; 
• geopolitical instability, conflict & terrorism; 
• credit risks of sovereign, municipal & financial entities;
• an increasing dependency ratio domestically; and 
• instability of the US tax code.

So, one implication is that investment strategy must accommodate uncertainty. Don't think you've got it figured out: you don't. Emotional responses to spot data are rarely constructive and generally very expensive.

Our view has been and remains that asset allocation is fundemental and must accomodate a prudent assessment of risk in face of uncertainty. Liquidity reserves are important and even though short rates are near zero, cash may be viewed in one sense as a call option on cheap assets. You also need it to not go bankrupt.

We do think one needs be cautious about fixed income strategy. The Fed is, of course, trying to drive investors out the yield curve into the killing fields of future inflation. It creates a dilemma: stay short & earn nothing or go long & get slaughtered. It's a real problem for the elderly or others living on fixed income, including many endowments. We thank Bernake for the invitation, but we'll pass. We've had a creeping bias to higher quality, short duration, and TIPS for some time and intend to keep it. 

Inflation risk is on everyone's mind. We are inclined to favor the view that equities over time tend to be the most effective source of real returns. While not a perfect solution, it is a sensible one and arguably a 'least bad'.  TIPS can be an important component of fixed income strategy, but a low real return is still a low real return. We also note that inflation indexing can be 'rigged' by those who tally what inflation is and also note that indexing works in reverse. Note tax inefficiencies for taxable accounts: inflation adjustments on TIPS are taxable.  We're not prepared to place a massive spread trade (buy TIPS/sell nominal long treasuries) but are intrigued with the idea. Nor are we ready to recommend inflation swaps or the purchase of dividend strips. We're not so sure that the people who may put you into these trades will be around to take you out....some of you may remember the firms formerly known as Bear Stearns or Merrill Lynch?

Rising tax rates will drive many to the municipal market, but stay out of the kill zone. Municipal credit & structural risk is non-trivial: note that Pennsylvania considers Chapter 9 bankruptcy protection as an option now. More will follow and many will start to trade like declining emerging markets debt. If you play in this sector, you'd better know your stuff as to credit & structural risk, market liquidity & execution. If not, we suggest you stay with a credit savvy mutual fund.

Equity allocations should be built for the long term. We retain our focus on highly diversified beta driven portfolios and cost efficiency. We haven't changed our approach, although we're always exploring new information. We simply don't buy the notion that short term trading generates sustainable value. We do think it's reasonable to revisit overall portfolio allocation strategy and suggest that any process be grounded by analytics. Emotion can be very costly, as can these four words: "this time it's different."

Longer term we as a nation must hope for and demand more responsible fiscal, economic and regulatory policies ... shall we just say responsible governance?

"Everyone wants to live at the expense of the state. They forget that the state lives at the expense of everyone."  Claude Frédéric Bastiat

We're from the government, and we're here to help

I tried to subscribe to the Dept. of Labor's emailing of employment statistics and came across this little gem. You have no idea how helpful your government can be.  May I suggest you sign up some friends for the full monte?

You may also be interested in information from these agencies 

By the way, it's a big file, so it may take a bit of time.

Part of the conversation, if you want to call it that

“I don’t go because it has become so partisan and it’s very uncomfortable for a judge to sit there,” he said, adding that “there’s a lot that you don’t hear on TV — the catcalls, the whooping and hollering and under-the-breath comments.”

“One of the consequences,” he added in an apparent reference to last week’s address, “is now the court becomes part of the conversation, if you want to call it that, in the speeches. It’s just an example of why I don’t go.” - Clarence Thomas on why he stopped attending State of the Union speeches (NYTimes 2/3/10)

"I'd cheat to keep these bastards out..."

Just heard this outburst by Ed Schultz of MSNBC on the job advocating voter fraud to defeat Scott Brown in tomorrow's special election in Massachusetts.

Regardless of one's political views, the advocacy of criminal behavior by a national media outlet to subvert our election process should not be tolerated by people of any political party or by the board of directors of any responsible media company that values its consumer constituency or its credibility.

 

Shareholders will evaluate this information and act accordingly. I intend to communicate my thoughts to the board of GE and invite readers to do the same. Contact data is provided below as is a graph of GE's stock price relative to the S&P 500 the source of which is the Investor Relations area of GE's website:

 

 

 

 

________________________

 

Contact info for GE Corporate Investor Communications:

Trevor A. Schauenberg

Vice President, Investor Communications

General Electric Company

203 373 2424

ir.contacts@corporate.ge.com

More on the negative multiplier

excerpted from Don't Like the Numbers? Change 'em in the WSJ

"The Obama administration claims a dubious "Keynesian" multiplier of 1.5 to feed the Democrats' thirst for big spending. The administration's idea is that virtually all their spending creates jobs for unemployed people and that additional rounds of spending create still more—raising income by $1.50 for each dollar of government spending. Economists differ on such multipliers, with many leading figures pegging them at well under 1.0 as the government spending in part replaces private spending and jobs. But all agree that every dollar of spending requires a present value of a dollar of future taxes, which distorts decisions to work, save, and invest and raises the cost of the dollar of spending to well over a dollar." - Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution.

If you read our earlier posting  Views on the economic stimulus package: is it effective? you begin to wonder. It seems the whole premise of Keynesian stimulation is questionable, if not discredited. Negative multipliers bring us to the result contemplated by our posting The car guys weigh in on Cash for Clunkers : take it out back and burn it.

What, then, is the purpose of such magnitude of effort and inefficient dissipation of taxpayer resources by policy makers?  

No better than monkeys throwing darts

"William Sheridan was an economist called in to testify in front of Congress on near term inflation. He got the brilliant idea to say, “You know what? I ought to check the track records of these other geniuses like me who have previously been called to testify on the outlook for inflation and see if they got it right.” And guess what he found? He found these geniuses had no better forecasting record than what is called naive forecast.  In economic terms, that means if inflation is currently 3%, you project 3%.  In other words, they were no better than monkeys throwing darts..." - Larry Swedroe, Principal & Director of Research, BAM Advisor Services, in Jan/Feb 2010 Journal of Indexes, Is Buy & Hold Dead?

Can we include the Fed as well?  How about those that predict when intermediate or long term becomes near term?

Update on Tuesday, January 5, 2010 at 03:28PM by hb

The article Is Buy & Hold Dead? is a round table discussion of investing greats including John Bogle, Burton Malkiel, Jerome Siegel, Gus Sauter, and others. It is a must read.

Clueless Janet Napolitano has to go

[after taking her driver's test]
Cher: So, how did I do?
DMV Tester: How'd you do? Well, let's just see shall we? You can't park, you can't change lanes, you can't make right hand turns, you damaged private property and you almost killed someone. Off hand, I'd say you failed.

memorable lines from Clueless (1995)

How the stimulus plan really works

The Hill today reports on exactly how the federal stimulus plan works:

Nearly $6 million in stimulus money was paid to two firms run by Mark Penn, Hillary Clinton’s pollster in 2008.

Federal records show that $5.97 million from the $787 billion stimulus helped preserve three jobs at Burson-Marsteller, the global public-relations and communications firm headed by [Mark] Penn.

Whatever happened to the old fashioned notion that looters should be shot on sight?

Update on Tuesday, January 5, 2010 at 04:16PM by hb

And what was the balance of debt owed by Hillary Clinton's campaign to Penn's nexus?

Too good not to read

Robert Arnott & John West have just published an article, '3D' Hurricane Force Headwind, that is probably the best I've read for those concerned about the longer term forces acting on our economy, the impact of inflation, and what it may mean for traditional investing. It's too good not to read.

If you're keeping the good stuff inside as a compensation scheme, what are you selling the public?

The abstract of The Good, the Bad or the Expensive? Which Mutual Fund Managers Join Hedge Funds? by Dueskar, Pollet, Wang & Zheng is below:

Abstract:     
Does the mutual fund industry lose its best managers to hedge funds? We find that a mutual fund manager with superior past performance is more likely to start managing an in-house hedge fund while continuing to manage mutual funds. However, a mutual fund manager with poor past performance is more likely to leave the mutual fund industry to manage a hedge fund. Thus, mutual funds appear to use in-house hedge funds to retain the best-performing managers in the face of competition from hedge funds. In addition, the managers of mutual funds with greater expenses are more likely to enter the hedge fund industry. The magnitude of such expenses is negatively related to subsequent performance in the hedge fund industry. Hence, hedge funds do not acquire superior performance for their investors by hiring these expensive managers.

We'll let the academics and the hedgies chew on this a bit more, but it does raise some interesting questions. First, the mechanic of hedge funds as a repository for over priced, under performing mutual fund managers may be good news for investors in actively managed mutual funds.

On the other hand, the issue raised in the title of this posting is worth considering.  Consider the implications: they offer internal emolument to managers of mutual funds in the form of hedge funds (platform, assets, manager compensation via carry, leverage, optionality, tax 'structuring' etc.) and perhaps subsidize them via operational cost absorption. Is that form of investment available to the preponderance of mutual fund investors? Well, the short answer is no.

Hmmm ... good for me, but not for thee.  We all know what that means for retail and smaller institutional clients. And all fully compliant, too.

Unable to obtain any concessions, but evidently willing & able to provide them

The Federal Reserve letter of Nov. 15 offers some interesting reading for those skeptical of the settlement of counterparty risk granted in favor of counterparties to the detriment of US taxpayers, the duration of which detriment will last perhaps a half a century or so. You may read that more broadly as all US citizens, all participants in the current and future US economy.

 

Well, in the spirit of glasnost, do tell! Can we see the book, the list of all the AIG related counterparties and amounts of date, so we may determine whose interests were served and how specifically "systemic" was defined and administered?  

No doubt the list contained "a wide range of creditors." In addition to the usual suspects cited above one may very well surmise the list also includes mind numbingly large amounts paid to soverign entities; foreign central banks; agencies of soverign entities or foreign central banks; foreign banks & US and foreign branches of foreign banks; NGO's; US banks; US investment banks; and bunches of other counterparties all of whom should have joined in the "concessions".

It was a colossal failure of nerve, confidence, and equity. We need to follow the money, and US citizens are due an open accounting of how much was given to whom and why.

Update on Wednesday, February 3, 2010 at 11:06AM by hb

The people at Zero Hedge have done a great job on the Fed / AIG counterparty book in Moral Hazard Defined. The list of counterparty settlements is presented in detail. Read'em & weep.

Nouriel Roubini on the US$ carry trade

Nouriel Roubini has an article in today’s Financial Times that is a must read: Mother of all carry trades faces an inevitable bust , excerpted below. 

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates – as low as negative 10 or 20 per cent annualised – as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.

He's got the broad structural issues right, although perhaps stated with a flair for the dramatic. Timing & rates of reaction are critical for these kinds of things: will we have a moderate point of inflection or a herd stampeding over a cliff?

A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.

I'm not sure any analyst, including the Roubini or the Fed, has a clue, or at least a valid one.  My experience in the global markets has led me to believe that >80% of any liquidity (sovereign or otherwise) is determined by no more than 15 players, 3 of whom are seated next to the door, proximity to which is in order of cognitive ability. The other 12 investors are watching them. This is the stuff of which catalytic events are made.  The rates of reaction can be a little slower here given the scale involved and limited options for alternative reserve currencies. But an observer of grizzly bears knows that big things may look slow but can actually move quickly, particularly when faced with threats or a prospective meal.  Big things can also can grind quite finely.

Some have argued that Fed policy distorts a variety of macroeconomic factors including inflation measures, that nominal Treasury bonds less TIPS spreads are artificially low (I'm less sure on that one but am unwilling to rule it out). Roubini below argues Fed policy has induced an artificially low global volatility (although equities recently seem to contraindicate) with a tsunami of liquidity and artificially low interest rates.

The structural aspects do seem to follow a certain logic of unintended consequences that derive from the Fed's strategy of trying to manage excessively large and stupid concentrations of risk (i.e. "too-big-to-fail") by further aggregating and centralizing even greater concentrations of stupid risk.

Now, the question is, if you're the Fed,

"You're thinking...now to tell you the truth I forgot myself in all this excitement. But being this is a .44 Magnum, the most powerful handgun in the world and will blow your head clean off, you've gotta ask yourself a question: "Do I feel lucky?" - Dirty Harry

Well, do we?

The unwind could get a bit bumpy, but the point here is not to scare people but to help.

From from a practical perspective, what does this mean for investors? Our framework of bounded asset allocations, efficient diversification, and prudent risk management in many ways accomodates many of the concerns implicit here. Appropriate asset allocation is the touchstone. It is not only a measure of expected returns, but a matter of risk management. And if you find yourself inclined to changing it or second guessing things in response to market activity or headlines, stop right there. It doesn't fit or you're mis-using it. 

Rebalancing is critical. In broad concept if you've had a run up of some 80-92% in equities over the last 12 months (for example China, Turkey, or Brazil) rebalancing as a mechanic would lead you naturally to sell some of the rockets and perhaps lead you to consider some that have fared less well (US regional banks were off some 27% over the same period). Similarly, foreign small caps are up nearly 50% over the same time period while US large cap value stocks weigh in at 2-4%. The same goes for fixed income: emerging markets debt and domestic high yield bonds have racked up 12 month returns in the low 40%'s, while US short bonds have gone sideways. A rebalancing in front of the US$ unwind may not be a bad thing. Rebalancing will naturally remove the excesses from the portfolio, a systematic sell high/buy low (for many of us a novel experience).  Generally, this takes the portfolio in the direction you are intuitively inclined to go, but in a bounded and disciplined way.

It is very clear that now is not the time to stretch prudence in reaching for yield. Take the market rates and live within prudent risk budgets. Now is also not the time to run short on liquidity.

Stay the course with diversification. The corelations are in the words of a trader 'all kinds of screwed up' by virtue of the artifice of the Fed. It is not clear to us that anyone has an elegant solution to model and correlation risk (just ask the rating agencies), but common sense can go a long way.

Lastly, as an enterprise and portfolio matter, take a look at counterparty credit risk profiles and potentially embedded performance risks. Like it or not you've got 'em. For example, make sure you understand the operational risks of your book... like hypothecation risk in your custody agreements. On credit/counterparty performance risk I remain suspicious of whatever is highly regulated, complex, and opaque...insurance comes to mind....and for that matter Congress as well.

You know it's got to be bad when ABC gets in the game

We noted today's blog by Jake Tapper in Political Punch $160,000 Per Stimulus Job? White House Calls That 'Calculator Abuse'  October 30, 2009 7:12 PM

“Posting its results late this afternoon at Recovery.gov, the White House claimed 640,329 jobs have been created or saved because of the $159 billion in stimulus funds allocated as of Sept. 30.

Officials acknowledged the numbers were not exact, saying that states and localities that reported the numbers have made mistakes….

The White House argues that the actual job number is actually larger than 640,000 -- closer to 1 million jobs when one factors in stimulus jobs added in October and, more importantly, jobs created indirectly, such as "the waitress who's still on the job," Vice President Biden said today.

So let's see. Assuming their number is right -- 160 billion divided by 1 million. Does that mean the stimulus costs taxpayers $160,000 per job?

Jared Bernstein, chief economist and senior economic advisor to the vice president, called that "calculator abuse."

He said the cost per job was actually $92,000 -- but acknowledged that estimate is for the whole stimulus package as of the end of 2010.”

In addition to plain old common sense there is a credible body of competent macroeconomic evidence to suggest these kinds of PT Barnum scams have negative multipliers. It’s the same template as Cash for Clunkers with the same practical results. The government taxes working people to “create or save”[i] a job at cost of $160,000/job. Of course, there is not enough current tax revenue to pay the costs, so the government issues bonds which current and future generations (your children) will have to pay off.

In the spirit of constructive suggestions, how about this bold cost saving idea for next time? 

• give away $80,000 (instead of $160,000) to a million randomly selected people (random, because you wouldn’t want to risk value laden linking of outcomes to behavior)
• take $60,000 per person ( ~$60,000,000,000) out back and burn it in the same fire pit you burned the Cash for Clunkers money;
• you thereby save the taxpayers $20,000 per job ‘created or saved’ or about $20,000,000,000 
• you save the taxpayer interest on the interest on the $20,000,000,000 debt that wasn't issued

Better get used to it.  Now where is the US $ trading again?

Just wait for healthcare.

---

[i] c.f. p.176, Generally Accepted Enron Accounting Principles ("GAEAP") as cited by Madoff in Heads I Win Tails, You Lose, 2008, Wide Stripe Press, NY, NY

The car guys weigh in on Cash for Clunkers

Cnn reports here that the car people at Edmunds have weighed in on the Cash for Clunkers program. It's not pretty. Excerpts from CNN follow:

"A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site Edmunds.com ...

The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.

"It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone," said Bill Adams, spokesman for the Department of Transportation... "

No doubt Mr. Adams characterizes the plan to give away money as "wildly successful" but the people who funded this program might have found higher and better uses for their monies, such as saving for their children's college educations, saving for their retirements, or perhaps helping with their parents' eldercare expenses... or buying their kids or themselves a computer or a washing machine.  But the freedom to make those choices, to exercize their judgement in the best interests of their families was taken from them by this arbitrary government policy.

Those who are disappointed can still find your money...it's just that someone else is driving it.

As to the practical outcome of $24,000 per incremental car sold, how about this cost saving idea for next time?

• buy 125,000 cars for $18,000 instead of $24,000;
• give away the cars;
• take $5,000 per car out back and burn it;
• thereby selling the same number of cars but saving $1,000 per car!

Better get used to it.  Now where is the US $ trading again?

Just wait for healthcare.

Active management loses in risk study

"The study by Morningstar Inc. found that, [sic] over the past three years, while about half of actively managed funds outperformed their respective Morningstar indexes [sic] ... only 37% did so on a risk, size, and style adjusted basis. The numbers are similar for five and ten year returns."

source: Fund Track by Sam Mamundi , Wall Street Journal, October 8, 2008

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The empirical evidence just keeps stacking up. Active management is simply ineffective in most sectors of the equity market.

To Roth or not to Roth?

"From a mathematical standpoint, the decision of which type of IRA is more beneficial for a particular investor is primarily dependent on the investor’s expectation of their [sic] future tax rate relative to their [sic] current tax rate.... 

Since the future of tax rates is unknown, investors may want to hedge their bets by investing in both traditional and Roth IRAs. This approach, often referred to as “tax diversification”, allows the investor to lock in taxes at current rates on a portion of their portfolio balance, thus alleviating some of the uncertainty about future tax rate changes."

Source: The rules for Roth conversions are changing in 2010, Vanguard, Sept. 2009

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The analysis is, of course, correct, and it is based on a reasonable assumption of significant uncertainty regarding future tax schemes (translation: no one has clue what these crazy SOB's might do). 

An irrational, unpredicable tax policy might be helpful to those seeking to monetize the ability to dispense economic favor by way of law or regulation, but it is not a helpful policy for the creation of wealth, either individual or national.  

Something is fundamentally wrong with this process

"The Senate is expected to vote on a health bill in the weeks to come, representing months of work and stretching to hundreds of pages. And as of now, there is no assurance that members of the public, or even the senators themselves, will be given the chance to read the legislation before a vote."

source: Congressional leaders fight against posting bills online Washington Examiner of October 6, 2009