Wait rate don’t tell me

Ben Walsh
Mar 21, 2014 21:34 UTC

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Wednesday marked the first FOMC statement and press conference of the Janet Yellen era, and it ended up being quite difficult to understand. The QE taper proceeds, interest rates remain unchanged, and the Evans Rule (no rate hikes considered until unemployment is below 6.5%) is out. It was replaced by the statement that “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends”.

Yellen elaborated in her press conference, quantifying that considerable time at something like six months, and markets momentarily threw a hissy fit. Calculated Risk unpacks the carefully written FOMC language, along with Yellen’s comment, and concludes that there really isn’t much news in it: “Yellen’s comment fit previously released projections”.

Cardiff Garcia thinks discarding the quantitative threshold is ultimately a dovish decision. However, he thinks it “is also a little sad for those of us who had hoped that the Fed would keep moving in the direction of greater clarity and transparency… and who think that numerical markers are helpful for reinforcing it.”

Minneapolis Fed president Narayana Kocherlakota, the lone dissenter to Wednesday’s decision, agrees. He says the new guidance weakens the Fed’s credibility on its 2% inflation target and “provides little information about its desired rate of progress toward maximum employment”. Kocherlakota argues that the old rule should have been replaced by new quantitative, not qualitative, guidance: no rate hikes at least until unemployment is below 5.5%, so long as the long-term inflation outlook remains below 2.25%, long-term inflation remains “well-anchored”, and the financial system remains stable.

After a press conference that he thought was surprisingly, if unintentionally, hawkishTim Duy calls Kocherlakota’s statement “remarkable”. Duy backs out the thinking of the rest of the committee from Kocherlakota’s dissent: “If the most dovish member of the FOMC can tolerate no more than a 25bp upside miss on inflation, what does it say about the other FOMC members?” – Ben Walsh

On to today’s links:

The rise of the cult CEO - HBR
Invest a moderate amount for most of your life, or the power of compound interest - Sam Ro

CitiBike needs a bailout after annual membership proves too popular (and too cheap) - WSJ

Study Says
Only 1 in 10 long-term unemployed Americans end up finding a stable, full-time job - Brookings

Big Ideas
The movement to end traffic deaths in New York - Maggie Astor
A wonderfully detailed proposal for Guaranteed Basic Income in America - Morgan Warstler

Legal migration “is the oldest poverty-reduction and human-development strategy” - Project Syndicate

Billionaire Whimsy
Larry Page hopes to leave his wealth to a deserving billionaire - Marcus Wohlsen

Apple’s estimated share of smartphone profits is between 76% and 87% - Farhad Manjoo

Our Dystopian Future
When algorithms take over, we’ll be techno serfs and techno aristos - Signe Brewster

“Very cold water with corners” and other awesome pseudotranslations - Stan Carey

City Mouse Country Mouse
“The difference in this country is not red versus blue. It’s urban versus rural.” - WSJ

Is there a gender gap in tech salaries? (Hint: yes) - Shane Ferro

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Morning Bid — Just the Beginning

Dec 19, 2013 14:00 UTC

And now the hard part begins.

The Fed’s decision to reduce its monthly bond purchases to $75 billion from $85 billion suggests this is not the beginning of the end, but the end of the beginning, or some other cliche (your mileage may vary).

Later today, the Federal Reserve will release its weekly data on its balance sheet, which is expected to tip the scales at more than $4 trillion in reserve bank credit. Given that this is a slowing in growth of the balance sheet, and not a reduction, it’s not stopping there.

So this “taper” means the rate of growth finally slows, as the Fed starts to buy fewer Treasuries and mortgage securities each month.

Ben Bernanke, in his farewell presser (you could see the glee in his unmoving, implacable face), suggested the Fed might reduce purchases by a similar amount at each subsequent meeting. Assuming that goes to plan, this implies a slow reduction of purchases until November, when logically, instead of cutting from $15 billion to $5 billion, it may just do away with it altogether.

Adding what’s left to buy in December, that brings the balance sheet ultimately to about $4.5 trillion. This then needs to eventually be unwound through allowing bills, notes, bonds and mortgage securities to mature or be sold – the ultimate in threading a Monster truck through the eye of a needle.

Taking a closer look at that balance sheet, letting it all mature out (sort of the way the Mets are paying disgruntled ex-outfielder Bobby Bonilla for another million years, and you’re forgiven for not getting that reference) would eventually allow the Fed to exit the markets around the time the earth crashes into the sun. Or, more accurately, in the realm of 2024 to 2028 or so, depending on the situation (assuming no other catastrophic recessions that require a stop or reversal of the tapering process).

It isn’t likely, but for kicks, here’s how the balance sheet looks:
The Fed holds about $2.18 trillion in Treasuries and $1.48 trillion in mortgage-backed securities. Breaking it down by maturity, it’s got about $748 billion in notes maturing between one and five years from now, all of it in Treasuries; $864 billion in five-to-10-year notes, most of which are still Treasuries, and $572 billion in longer-dated governments and the bulk of that $1.48 billion in mortgage notes as well.

Of course, it’s not all going to be sold. At the beginning of 2007, the Fed held about $900 billion in marketable securities, of which only about $150 billion were of a maturity greater than five years. Any effort it makes is going to be slow – Bernanke said that himself in a speech in February 2010.
Draining reserves through reverse repos and other agreements will be a primary way of going about business, and that will help tighten the Fed’s control over the funds rate again.

With regard to the Treasuries and mortgage debt, the Fed is likely to discontinue rolling over that debt for starters – it doesn’t want to simply sell it all and panic the bond market. This version would slowly reduce the amount of outstanding debt, sure, but the rate early on would be so slow as to be non-existent.

With just $750 billion in debt (as currently constructed) maturing in the next five years, by the end of 2018, the Fed balance sheet – assuming an additional $500 billion in purchases and no other offsetting operations (though there will be) – would still be somewhere around $3.8 trillion.
Bernanke, in that same speech, said the Fed “anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities.”

When would that be? Well, again, the mortgage debt is almost exclusively super-long-dated stuff, so the Fed most certainly at some point will start selling securities – when the “economic recovery is sufficiently advanced.”

Daniel Thornton, economic adviser at the St. Louis Fed, leans toward the idea of selling bonds rather than just paying additional interest on excess reserves – which has a number of other complications.

The problem with the sales, he says, is the Fed could lose money, though most of the bonds were at least bought when bond prices were much lower and yields were higher (the buying that’s been done in the 2012-mid 2013 area is probably the most problematic, particularly the longer-dated issues).

“The likelihood of significant capital losses could also be reduced by selling longer-term securities and simultaneously purchasing short-term securities in advance of reducing the overall size of the Fed’s balance sheet,” he wrote in August. So there’s that.

The Fed’s exit strategy appears to be on a timeline similar to removing U.S. troops from the Korean Peninsula, in other words. Will the markets freak out? Not if they’re bored to death, which seems to be the objective. But hey – whatever works.

The last Fedbye

Dec 18, 2013 23:00 UTC

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The Fed’s December meeting statement is out, and the big news is that the taper is here. More specifically, the FOMC announced it will reduce its asset purchases to $75 billion per month from $85 billion. This was Fed chairman Ben Bernanke’s last scheduled press conference before the Senate votes on the confirmation of his chosen successor, Janet Yellen, who is set to take over February 1. Having served as Fed chief since 2006, Bernanke’s term is effectively over, and it’s now time to consider his legacy.

In the WSJ, Jon Hilsenrath and Victoria McGrane write that “Mr. Bernanke labored to forge consensus even among Fed officials for his complex and untested easy-money policies. He spent much of the past four years wooing support.” Paul Krugman thinks that history will be kind to Bernanke. While “the whole policy community sort of fell down on the job” during parts of Bernanke’s term, he writes, “there wasn’t that much that he could have done differently”.

The FT’s Robin Harding says Bernanke’s place in history rests on one question: “The crisis was and still is agonising for the US and the world – but could anyone have managed it better?” Harding then says, “At present, it seems most likely Mr Bernanke will be regarded as one of a cohort of policy makers who failed to prevent the crisis, but did not actively cause it. The blame for that failure will be widely shared.” Mohamed El-Erian goes further, saying Bernanke weathered the crisis well, but what Janet Yellen does after he leaves will affect how we look back on his post-crisis management.

Christina Romer is not such a fan of recent monetary policy:

Today, I worry that guilt over letting asset prices reach the stratosphere in 2006 and 2007 has made some policymakers irrationally afraid of bubbles. As a result, they focus on the slim chance that another bubble may be brewing, rather than on the problems we know we face—like slow recovery, falling inflation, and hesitancy on the part of firms to borrow and invest…

There are two possible black marks on Bernanke’s record, according to Brad DeLong: first, the decision to let Lehman Brothers fail in late 2008, and second, “the failure to grasp in 2009 that the situation was of the same order of magnitude as that facing Roosevelt in 1933 or Volcker in 1979, and failing to assemble the FOMC behind a policy of ‘regime change’”.

NYU economics professor Mark Gertler, however, sees Bernanke’s role in the crisis somewhat differently: “he was the calming influence — the grownup in the room — during the darkest days of the economic turmoil”.

It also wouldn’t be a discussion of Bernanke without mention of forward guidance. During Bernanke’s term, the Fed has become more transparent about its intentions, and has staked out clear targets for the unemployment rate (6.5%) and inflation (2%).

After seven years covering Bernanke, Neil Irwin (coming through with a killer Bernanke headshot), writes that we still don’t know what the outgoing Fed chair’s legacy will be. Bernanke  he writes, “didn’t have the perfect tools for the job, but he searched his academic knowledge of how economies work, and used what he did have to try to put America’s jobless back to work.” — Shane Ferro

On to today’s links:

Trading places
JP Morgan is suing the FDIC for $1 billion – Reuters

Data Points
Between 25-30% of content on the web is copied from somewhere else – Quartz

16 times when Ben Bernanke was a total badass – BI

NSA official: “I have some reforms for the First Amendment” – Dan Drezner

Primary Sources
The Fed finally tapers its bond-buying program – Federal Reserve

The Fed
The Bernanke Era in two words: Thanks but… – WSJ
5 takeaways from the Bernanke era – WSJ

Banks would like traders to restrict market manipulating chats to 1-on-1 venues – Bloomberg
The newest Bloomberg terminal feature: letting clients ban employees from chatrooms – WSJ

“Our current global [currency] system is pretty crap, but I submit that Bitcoin is worst.”  - Charlie Stoss
The bitcoin-tulip exchange rate is crashing – Rob Meyer

Why companies are raising dividends – Reuters

Renters are largely ignored by Federal housing aid – Center for Budget and Policy Priorities

Year-End Lists
The 41 best stories Businessweek staffers didn’t write – Bloomberg Businessweek

Aural Histories
How boomboxes became so complex and awesome – Collectors Weekly

Land of Wonk and Plenty
Bloomberg View’s “bloodless kind of centrism” and its struggles to grow – TNR

Data Points
The (SEC) taper is on! The agency is doing less probing and enforcing – WSJ

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The Fed Dream Team

Dec 13, 2013 23:06 UTC

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Stanley Fischer is likely to be tapped as the vice chair of the Fed once Janet Yellen takes the helm on February 1, according to Jon Hilsenrath. From 2005 until last June, Fischer served as the head of the Bank of Israel. “His broader résumé—MIT, IMF, Citigroup, Bank of Israel—places him very much at the center of the economic policy-making establishment of the past two decades, including the years leading up and after to the 2008 financial crisis”, says Hilsenrath.

Fischer was born in Northern Rhodesia (now Zambia), educated in South Africa, then London, and spent most of his academic career at MIT (after a brief stint at Chicago). While at MIT, Fischer taught Ben Bernanke, Mario Draghi, and Larry Summers. He also literally wrote the book on macroeconomics.

Morgan Stanley put out a report yesterday that called Yellen and Fischer the “Fed Dream Team”. Sam Ro quotes it: “Fischer has been around the inner circle of international economic policymaking for three decades. If he was not at a major meeting in person, one of his students from his long tenure at MIT probably was”. Cardiff Garcia says “it’s impossible to think of anyone more qualified for the gig”.

In a separate WSJ story flagged by Tyler Cowen, Hilsenrath describes Fischer’s record as head of the Bank of Israel, particularly his work with the Palestinians:

In Israel, his interventions won their share of support. [Palestinian Monetary Authority Chief Jihad] Al Wazir said Mr. Fischer helped ease strain in the Palestinian banking system during recurring liquidity crises  … He helped to get shipments of cash into the Gaza Strip’s blockaded economy. Mr. Fischer was one of the first central bankers to cut interest rates during the 2008 crisis.

Binyamin Appelbaum looks further back into Fischer’s career, focusing on the 1977 paper in which he “helped to transform the practice of monetary policy, creating the world in which Ben S. Bernanke has operated”. Fischer’s revolutionary theory, he writes, was that activist monetary policy can, in fact, boost the economy in the short-term. With this paper, says Appelbaum, Fischer helped usher in a new wave of Keynesian thinking about the role the government can play in the economy. Central banks were no longer powerless in the face of crisis.

Fischer’s time as the number two at the IMF, from 1994 to 2001, was rockier than other moments in his career. “During Fischer’s tenure, he had to confront both the 1994 Mexico and 1998 Asian financial crises. The IMF contained both problems, preventing global meltdowns, although success came at a high cost”, writes Dylan Matthews. Still,  it’s hard to find significant criticism of Fischer. “I don’t know what Fischer stands for on regulation”, from former IMF chief economist Simon Johnson, is the closest Hilsenrath gets to controversy around Fischer’s candidacy.

In arguing that Fischer should be picked as Fed chair (before Yellen got the nod), Neil Irwin said, “The reason Fischer is not viewed as a front-runner for the Fed chairmanship is that he is viewed as a foreigner”. Irwin noted that Fischer is a US citizen (he kept his citizenship during his time in Israel) and lived here for decades. — Shane Ferro

On to today’s links:

Your shrinking unemployment benefits, in two charts – Brad Plumer
1.3 million of the long-term jobless are preparing to lose unemployment insurance payments- Annie Lowrey

Big tobacco’s justification for fighting anti-smoking laws in poor countries? Free trade – NYT
“Enjoyed today’s New York Times story on trade deals and tobacco more when I wrote it in September” – Tim Fernholz

Cost Cutters
“Jon Lovitz is in a duck costume” – Byron Allen’s low-cost, factory-style TV revolution – Bloomberg Businessweek

The Fed
The Fed doesn’t really trust banks either – Matt Levine

Public transit, private fare card: card: Chicago’s Ventra debacle – The Nation

Fiscally Speaking
The war against austerity is over – Kevin Drum

Classic Bess
Chinese entrepreneur isn’t just going to sit back and let his wife have all the fun – Bess Levin

Long Reads
What does it mean to have a good death? – Lapham’s Quarterly

Thoughtful post on Jack Bogle as a finance industry heretic – Justin Fox
SAC Capital may change its name – WSJ

Niche Markets
Lance Armstrong, currency arbitrageur – Cyclingnews
You are more likely to get extra toppings on your pizza when you don’t have to order from a human – Duke University

Strangely Existential
“Audio nirvana was always just out of reach” – Anxious Machine

“The real reason so many of us inflate grades is to avoid students complaining” – Allison Schrager

Why do female academics in science get fewer citations? – Nature

Says Science
James Bond “downed 1,150 units of alcohol in 88 days” – BBC

Fewer guns means fewer suicides – Alex Tabarrok

Popular Myths
Government spending is now lower than during Reagan’s first term – Menzie Chinn

It’s Academic
NYU grad assistants unionize – Steven Greenhouse

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Morning Bid: The Market’s House of Cards

Oct 23, 2013 15:00 UTC

(The author is a Reuters editor. The views expressed are his own.)

These aren’t the words anyone really wants to hear, but some of the favored momentum greats of the current era, ones that Jim Cramer called the Four Horsemen of Who Cares What the Price Is, are starting to crack a little bit.

The most obvious example is Netflix, the purveyor of all things media (rent movies! rent shows! watch their programming! Kevin Spacey!) that’s seen its stock more than triple en route to the best performance by an S&P 500 component in 2013. Rumors abounded all through Tuesday that Carl Icahn had chipped away at his stake in the company, and the rumors were dead-on as the billionaire investor (TM) had sold a bit more than half of his 9 percent stake — part of the reason the stock, after opening up big on Tuesday, cratered within a span of a couple of hours and ended down nearly 9 percent on the day.

It could be that Icahn was just taking advantage at a point when it would have been hard not to do so, and seeing as how he netted a cool $800 million for watching his money make money for 14 months, it’s hard to blame him. But momentum stocks have a way of breaking, and breaking fast, and if Icahn is selling, it’s because he’s happy for his profits, but it just seems like a good time – the kind of thing that feeds on itself.

Furthermore, the charts would show you that Netflix endured what’s known as an “outside reversal” day – where if you look, the high of the day is higher than the previous day’s high, and the lowest price is lower than the previous day. Given that shares hit a closing record Monday, to drop so dramatically on Tuesday can often mean bad tidings. It suggests that a group of people saw a stock hit a certain level and found that it couldn’t sustain it, and then didn’t feel the need to defend it on the way down — the kind of activity that often begets additional sellers. (In the world of Fed stimulus for-EVAH, it may not be the same…your mileage may vary, of course).

It isn’t alone. Tesla Motors, the high-flying electric car maker, has seen its shares teeter a bit since the beginning of October. Remember, these names were the ones that actually held up in the weeks leading to the government shutdown. They perversely became the “safe” asset of choice when investors were selling utilities and consumer staples stocks because higher U.S. yields were undermining the case for those stocks, and then later when it seemed like everything was going to get taken down by the shutdown. These names were the “Who cares, they’ll be fine” group, and they were. Tesla is now down about 12 percent from its all-time high, which probably isn’t enough to get truly alarmed, especially as the volume of trading doesn’t suggest an aggressive amount of distribution – that is, lots of investors cashing in – but just the normal to-and-fro. (Netflix, with more than 25 million shares traded on Tuesday, saw its busiest day since July, the very definition of a “distribution” day, and a bearish signal.)

Some of the other big winners this year are less concerning so far. Priceline’s peak is $1,098.70 a share, and it ended Tuesday at $1,075.63 — a $23 drop equivalent to about a two percent decline that’s hard to get worked up about just yet, and the 3.5 percent drop in Salesforce.com is also really nothing special, again, because the volume isn’t there. Given that dedicated short strategies are down about 13 percent this year, it’s not hard to see why names like this don’t feel the kind of heat that they might have in the past when a stubborn short base sets its sight on a stock.

That’s not to say it’s all rosy for Netflix going forward. Shares are still about 80 percent overvalued, per Starmine, the shorts are likely to re-load now that Icahn has given up half of his stake with a cool 450 percent profit, and again, when stocks like this turn, they TURN, fast.

Federal Overly Mouthy Committee

Oct 10, 2013 21:59 UTC

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“This economy management stuff is hard” is how Cardiff Garcia sums up the minutes from the Federal Reserve’s September FOMC meeting, which were published yesterday. The document paints a picture of a cautious and divided Fed, worried both about the fragile recovery and how its own actions and communications would affect markets:

But with financial markets appearing to expect a reduction in purchases at this meeting, concerns were raised about the effectiveness of FOMC communications if the Committee did not take that step. For several members, the various considerations made the decision to maintain an unchanged pace of asset purchases at this meeting a relatively close call.

Garcia points out that the Fed confusion in the minutes backs up Jon Hilsenrath’s article from earlier this week about ongoing tensions within the institutions. The September meeting “followed six months of tense negotiations inside the central bank, and a stumbling effort to let the public know what was going on”, Hilsenrath writes.

Ryan Avent calls the Fed a “clown show”. He takes issue with the communications leading up to the September meeting, which signaled the Fed might taper asset purchases — not because it had fulfilled its mandate, “but because the FOMC members didn’t want markets to think it wouldn’t end”. Matthew Klein, however, thinks the reality is more complicated than that: “Officials who are trying to understand these complex transmission mechanisms and the various trade-offs involved should be given the benefit of the doubt”.

Avent, not to be out-argued on this issue, declares “the Fed’s communications over the past nine months have been hopelessly confusing, intellectually unmoored, and economically harmful”.

At least this month’s meeting is unlikely to produce any surprises. The government shutdown has made an Octaper unlikely when the FOMC meets on the 29th and 30th, according to St Louis Fed president James Bullard. — Shane Ferro

On to today’s links:

Who the US government owes money to – Planet Money
The most important charts on Wall Street – Matthew Boesler

Meredith Whitney gives up on brokerage business, starts a fund – Bloomberg

Chrysler CEO to investors: please don’t invest in Chrysler’s IPO – Reuters
Previously: Explaining the weird Chrysler IPO – Floyd Norris

The shutdown is interfering with your access to new craft breweries – AP

Former NY Fed regulator claims she was fired because she wouldn’t back off Goldman – Dealbook

What a default would look like – Tyler Cowen

Long Reads
How Amazon became the everything store – Brad Stone

Seventeen academic papers by Janet Yellen you’re unlikely to read but maybe should – Dylan Matthews

Shut It Down
Treasury and the Fed have started making default contingency plans – Reuters

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Meet the next Fed chair

Sep 30, 2013 21:32 UTC

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Janet Yellen may get the nomination to lead the Federal Reserve next week, Goldman Sachs predicts. Joseph Stiglitz writes that she was one of his best ever students when she was at Yale, adding that “she is an economist of great intellect, with a strong ability to forge consensus”. Robin Harding sums up her most important contribution to the Fed: her “conviction that the central bank can and should try to stabilise the real economy – in particular, unemployment – as well as just inflation.”

Yellen’s support for the unemployment half of the Fed’s dual mandate makes her an attractive candidate to Sheila Bair: “I don’t agree with her monetary policy, but she really does care about unemployment, and that’s not a given”, she told HuffPo’s Zach Carter last week.

Yellen has critics on the left; they point to her support for deregulation in the 1990s. In 1997 she was appointed by President Clinton to head the Council of Economic Advisors. During the two years she was there she supported repealing Glass-Steagall and pushed the BLS to adopt a chained-CPI calculation, which would reduce Social Security payments over time.

But Ezra Klein points out that it’s not surprising that President Clinton “chose a chief economist who supported his economic policies”, and “supporting the repeal of Glass-Steagall in 1997 doesn’t say that much about somebody’s opinions on regulating Wall Street today”. Indeed, Yellen was one of the first to sound the alarm on the housing crisis, in 2007, when she was head of the San Francisco Fed.

Allison Schrager writes that Yellen doesn’t have enough finance experience to effectively regulate the banks. “Her qualifications may have been sufficient a decade ago, but may not be for the Fed of the future”. Alison Fitzgerald, meanwhile, says that Yellen would likely be much tougher on big banks than her predecessor: “she doesn’t favor breaking up too-big-to-fail banks, but would demand they hold more capital than international regulators now propose”. — Shane Ferro

On to today’s links:

Trend Stories
10 stealth economic trends that rule the world today  - Noah Smith

The Guardian’s plans for world domination: aggressive investigations and newspapers-as-platforms – Ken Auletta

Twitter plans to make its IPO filing public this week – Quartz

Rebirth and reincarnation: How big companies can avoid the corporate death spiral – Aswath Damodaran

Legitimately Good News
Manufacturers are scrambling to find workers to fill textile plants — in America – Stephanie Clifford

Bold Moves
Obama may singlehandedly raise the debt ceiling using the 14th Amendment – Joe Weisenthal

The JPMorgan apologists of CNBC – Reuters

New Normal
Short-term unemployment has recovered, but long-term unemployment is a catastrophe – WaPo

Shiller: The housing market is heating up, if not quite bubbly – NYT

How a debt-ceiling crisis could become a financial crisis – Annie Lowrey
Siemens is cutting 15,000 jobs, 4% of its workforce – Bloomberg

EU Mess
“Spanish engineers will move to southern Germany and Ecuadorians will move to Spain” – Marginal Revolution

America’s looming debt ceiling standoff: the key dates – Izabella Kaminska

“This is a window into cockroach society and it is very much like our own” – WSJ

Blackstone: We’re in an “epic credit bubble” – CNBC

Thank God
Don’t fear the government shutdown: BLS will likely release the jobs report anyway – WSJ

“As more of our economy becomes about marketing this will mean economic theory explains less and less of what’s going on” – Tyler Cowen

Long Reads
Why do sports fans hate Darren Rovell? - Steve Kandell

Can’t Make This Up
Microsoft CEO says goodbye — with a song from 1987, of course – The Verge

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Clear and insouciant danger

Sep 4, 2013 21:43 UTC

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In a note preceding the upcoming G20 meeting in St. Petersburg, the IMF warned that the Federal Reserve’s planned taper of its bond-buying program threatens to harm emerging market economies. This isn’t a total surprise: it’s been an ongoing concern. The problem from the perspective of the EM countries (including Turkey, Brazil, India, Malaysia, Indonesia, and China) is that low interest rates in the US have allowed emerging markets to borrow cheaply. Now, however, companies and governments that borrowed in dollars but bring in most of their revenue in local currency have a problem: their currencies have started to weaken.

Last week, China officially warned the Fed that a taper would have detrimental effects on emerging market economies. The OECD wrote in its economic outlook report that “financial market turbulence – partly triggered by discussion of a tapering of quantitative easing in the United States – has highlighted difficulties facing a number of other emerging economies, especially those with large current account deficits”.

Fed officials, meanwhile, don’t seem overly concerned with the woes of global markets. At Jackson Hole, Terrence Checki from the New York Fed said that, “as much as we may like to find it, there is no master stroke that will insulate countries from financial spillovers”. This reaction is “dangerously insouciant,” Ambrose Evans-Pritchard writes. “The bank has made a series of errors over the past six years, the result of a ‘closed macro-economy model’ that fails to take full account of global interactions”.

For what it’s worth, John Makin doesn’t think the taper will last long: “the Fed will have to reverse itself (again) and start talking about “un-tapering” or QE4 at its December meeting”, he says, citing slowing growth and a drop in the inflation rate.

However, the emerging markets problem is about much more than the taper. Cardiff Garcia, who comes out relatively positive on EMs, summarizes the various worries:

Among the various possible causes normally cited are the Fed’s talk of tapering; the unwinding of carry trades; Chinese rebalancing; the pass-through effects of this rebalancing on commodity-exporters (Australia, South Africa, various countries in South America); the end of the commodity super-cycle generally; the limits to growth in countries that procrastinated on necessary structural changes; continued sluggishness by developed-country consumers; and dwindling investor patience with widening current account and budget deficits.

These issues have Kenneth Rogoff concerned: “The fact that relatively moderate shocks have caused such profound trauma in emerging markets makes one wonder what problems a more dramatic shift would trigger”. — Shane Ferro

On to today’s links:

JPMorgan can add a criminal obstruction probe to its list of legal woes – Emily Flitter

Demolition is the new foreclosure prevention – Marketplace

When Twitter wants to search its archives, it doesn’t use Twitter search – NYT

S&P adds a revenge twist to its Lebowski defense – WSJ

Your Retirement Plans
401(k)s are bad, and increasingly prevalent – Lydia DePillis

Pete Well’s rather convincing argument against leaving a tip – NYT
Why tipping should be outlawed – Elizabeth Gunnison Dunn

Very Long Reads
How the bank lobby loosened US reins on derivatives – Bloomberg

Mergers & Awkwardness
Publicis-Omnicom now represents Philip Morris, and a handful of anti-smoking campaigns – Ad Week

Data Points
“There really is no typical household type anymore” – Marketing Charts

NYC’s rich: Don’t let De Blasio tax us to pay for free preschool – Henry Goldman and Max Abelson

J.C. Hewitt, Downwardly mobile – Quora

Chinese regulators do not appreciate attempts to conceal trading errors – FT

“I would argue that in some sense you become a brand the second you’re born” – NYMag

Crisis Retro
“God, Country, Lehman,” he added – The Street

The government is getting tougher on for-profit colleges that leave students in debt – Blooomberg Businessweek

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Exporting the taper

Aug 21, 2013 22:03 UTC

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The minutes from the Fed’s Open Market Committee are out, revealing little except the fact that members are “broadly comfortable” with the plan to start tapering quantitative easing later this year. While the economic implications for the US have been discussed to death, the focus now seems to have shifted to the effects QE tapering will have on the rest of the world.

All emerging market problems, it seems, have been blamed on the taper. Reuters reported Tuesday that “the Indian rupee fell to a record low, Indonesian markets tumbled and Turkey raised a key interest rate to halt a slide in its currency as turmoil in emerging markets deepened on Tuesday in anticipation of reduced U.S. monetary stimulus”.

Economic consultant Tim Lee told the NYT that the world’s in the midst of a “Bernanke bubble”. Free Exchange has a good overview of the problem, but basically low interest rates in the US have allowed emerging markets to borrow cheaply. Now, however, companies and governments that borrowed in dollars but bring in most of their revenue in the local currency have a problem after their currencies have started to weaken. So far, the list of countries this problem include: Turkey, Brazil (which has made Ben Bernanke aware of its displeasure over QE for at least a year), Indonesia, Malaysia, China, and India.

This issue is particularly acute in India, which has a relatively high government debt burden. Larry Elliott writes that “India’s financial woes are rapidly approaching the critical stage”. Matt Phillips points to the Indian central bank as one of the problems — first it was trying to suck rupees out of the system, but now it has reversed course and announced an 80 billion rupee government bond-buying program. The WSJ explains that India “relies on huge energy imports to fuel its economy. Investment has ground to a halt because of the government’s failure to push through clear rules meant to open up sectors like retail and aviation to foreigners”. Meanwhile, India’s corporate debt is at its highest level in over a decade.

James Saft points out that this sort of credit crunch has happened before: in Latin America in the 1980s and in Asia in the 1990s. Still, he says, lessons learned in both those instances might help the world avoid crisis this time. India has large reserves of foreign currencies (more than $270 billion), and more broadly, the IMF “has become more pragmatic” in dealing with similar situations. However, a solution relying on the IMF’s pragmatism isn’t necessarily comforting. — Shane Ferro

On to today’s links:

Hatfields McCoys Etc.
The behind-the-scenes feud between Team Summers and Team Yellen – Washington Post

Primary Sources
And Bill Ackman would have succeeded, too, if it weren’t for meddling reality – Pershing Square
The FOMC minutes, July 30-31 – The Fed

Welcome To Adulthood
Ripping off young America: The college loan scandal – Matt Taibbi
What’s really behind skyrocketing tuition at NYU? – Jake Flanagin

Old Normal
Median household income is still 6.1% lower than when the financial crisis began – NYT

The case against Larry Summers or Janet Yellen mowing your lawn – Jared Bernstein

“Not even the $50 Olive Garden gift card BofA gave him… [persuaded] him to stick with the bank” – Charlotte Observer

Blue Jasmine and Steve Cohen – John Fullerton

A princeling’s job at a bank is about as rigorous as you’d expect – DealBook

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A mid-Summers nightmare

Jul 26, 2013 21:54 UTC

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It being an off-election year, alternative horse races must be found. Current Fed chair Ben Bernanke isn’t slated to step down until January, but rumors of who President Obama will chose to succeed him have already narrowed down the candidates to two: current Fed vice chair Janet Yellen, and former Treasury Secretary (and Citi consultant) Larry Summers. Ezra Klein reported earlier this week that Summers is the favorite at the White House.

But reports that Summers will be the nominee have brought a host of protests. As Felix wrote on Wednesday: “The arguments for Yellen are very strong; the arguments against Summers are strong; the arguments for Summers are weak; and the arguments against Yellen are all but nonexistent”.

In favor of Summers, Edward Luce argues that he has more “intellectual leadership” than the other candidates, which is the most important quality in a Fed chair, and that Yellen is too dovish. Tyler Cowen thinks that Summers “has more right-wing street cred,” meaning he would be more effective should a Republican take over the presidency in 2016. Klein’s sources essentially argue that the administration favors Summers because they are comfortable with him. According to the NYT, Tim Geithner and the president’s chief economic adviser Gene Sperling are quietly pushing for Summers. Summers is also, Klein’s sources say, “trusted by markets”.

The arguments for Yellen? She “has a much better track record of correctly analyzing the economic situation,” according to Bill McBride.  Cardiff Garcia gives Yellen the edge in experience: she has  “a much longer entry in her CV as a monetary policymaker”. Yellen would also make a far superior chair of the Federal Open Market Committee — perhaps the most important role of the Fed chairman in the coming years — argues Mike Konczal. There’s a base of support for Yellen in the Senate, which will eventually have to confirm President Obama’s pick. Richard McGregor and Robin Harding report that a letter is circulating among Senate Democrats backing Yellen.

Then of course, there are the arguments that are neither pro-Summers nor pro-Yellen, but specifically anti-Summers. Scott Sumner writes that Summers “seems to think the slowest NGDP growth since Herbert Hoover was president is just fine”. Noam Scheiber thinks “Summers is too fond of big shots—he’s always wanted to be part of the most exclusive club that will have him”. Felix trots out all of the controversies that have involved Summers over the last couple of decades:

…the utter shambles that Summers made of Harvard, or the way he treated Cornel West, or his tone-deaf speech about women’s aptitude, or the pollution memo, or the Shleifer affair, or the way he shut down Brooksley Born at the CFTC, or his role in repealing Glass-Steagall, or his generally toxic combination of ego and temper…

The third count against Summers — based on his remarks that the lack of women in the science may have something to do with innate ability — will certainly be front-and-center, particularly considering the  “sexist whisper campaign” that Ezra Klein and the NYT report is being waged against Yellen behind-the-scenes. – Shane Ferro

On to today’s links:

Long Reads
How America’s top tech companies created the surveillance state – Michael Hirsh
The economics of a North Dakota boomtown through the eyes of a traveling stripper – BuzzFeed

“Designing a higher education system around maintaining living standards for college professors is an insane idea” – Jonathan Chait
Online education can be good or cheap, but not both – Reihan Salam

Fab takes the stand, day 2: Emphasizes his less-than-fabulous low status at GS – Bloomberg

Steve Cohen’s assets may be in jeopardy in SAC case – Bloomberg

Sad Declines
Zynga gives up gambling, hope – Slate

Winners and losers in China’s economic rebalancing – FT

JP Morgan is “pursuing strategic alternatives” to its physical commodities business – JP Morgan

Greek factory workers re-open the plant previously run by their bankrupt former bosses

Dunkin Donuts plans to teach California what a Munchkin is – Bloomberg Businessweek

Amazon reports surprise loss because of warehouse spending – Bloomberg

Legalize insider trading: “We don’t want a nation of shareholders… We want a nation of index fund holders” – Dylan Matthews
A few issues with Obama’s view of economic history – Brad DeLong

Halliburton pays the max fine for destroying evidence in the Gulf oil spill case. A max of $200k, that is – NYT

Lloyd Blankfein defines infinity – CNBC

With Their Powers Combined
Sinkholes threaten to merge – The Sentinel

Exactly what this week was missing: Dominique Strauss-Kahn to be tried for pimping – Reuters

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