Monetary matters

Jul 15, 2014 21:47 UTC

Today, Janet Yellen appeared before the Senate Banking Committee to give her semi-annual monetary policy report to Congress. Her basic message, laid out in a prepared statement, hasn’t changed: the economy is slowly improving, but certain measures of the labor market still worry her. Since her last report to Congress in February,“important progress has been made in restoring the economy to health and in strengthening the financial system. Yet too many Americans remain unemployed, inflation remains below our longer-run objective, and not all of the necessary financial reform initiatives have been completed.”

“Yellen’s testimony is likely to reinforce a sense of complacency among investors who regard the Fed as convinced of its forecast and committed to its policy course,” writesBinyamin Appelbaum. He continues that, with regard to the future of monetary policy, “uncertainty about the future is actually contributing to the sense of stability, by making the Fed more cautious about retreating.” Ylan Mui summarizes Yellen’s comments generally: “Move too fast or too abruptly, and the fragile recovery could falter.”

In the Q&A with senators, The WSJ (and a number of others) picked up this detail:

The Fed says house prices are within historic norms, as measured by price-to-rent ratios. However stock market valuations for small firms, social media and biotechnology firms “appear to be stretched.” Meantime risk spreads on corporate bonds have reached all-time lows, a sign of over-valuation.

To that, Cullen Roche writes, “despite being Fed Chief, Janet Yellen doesn’t understand the concept of ‘value’ relative to what is a proper ‘value’, any better than anyone else pretending to do so.” Neil Irwin says, “she sees some risks out there, though it’s clear she is not ready to sound an overall alarm bell over asset prices.” Reuters has a goodoverview of other interesting tidbits from the Q&A.

After reading the speech, Tim Duy thinks the next big policy battle at the Fed relates to the language it has been using about the amount of time between the ending of asset purchases (which we now know will be October 2014) and a change in the Fed funds rate (which is up in the air). It currently reads a “considerable time” or “considerable period.” However, he says, “it is no longer clear that a ‘considerable period’ between the end of asset purchases and the first rate hike remains a certainty.” Thus, Fed watchers should look for a change in that language in the future — just how soon, though, is up for debate. — Shane Ferro

On to today’s links:

Service With a Smile
A word on behalf of that Comcast customer service rep - John Herrman

Please Update Your Records
SEC Commissioner gives the FSOC a superhero group name: Firing Squad On Capitalism - Michael Piwowar

Ouch
Job prospects for humanities Ph.D.s are, well, take a guess - Jordan Weissmann

Do No Evil
Project Zero: Google’s new web privacy research initiative - Chris Evans

Regulators
Why can Uber operate in New York but Lyft can’t? - Alison Griswold

Crisis Retro
Here’s an explainer on mortgage-backed securities in case you zoned out during the financial crisis - Danielle Douglas

USA! USA!
U.S. roads have a D+ grade, but are still “in better shape than those in Sweden, the U.K., New Zealand and Australia” - Angela Greiling Keane

Tech
Kara Swisher, tech’s “most feared and well-liked journalist” - Benjamin Wallace

Stressing regulation

Jul 2, 2014 22:04 UTC

Today at the IMF, Janet Yellen gave a speech on financial stability. More specifically, she talked about monetary policy’s shortcomings as a tool for financial stability. Neil Irwin calls it “the most significant speech yet in her still-young Federal Reserve chairmanship.”

Monetary policy’s “effects on financial vulnerabilities, such as excessive leverage and maturity transformation, are not well understood and are less direct than a regulatory or supervisory approach,” she said. She clarified that she’s not against raising interest rates to stem financial bubbles, but, she said, oversight and regulation should play the primary role (things like the Fed’s stress tests). Tighter monetary policy, she said, would not have been sufficient to stop the 2008 crisis.

In a post-speech Q&A, IMF director Christine Lagarde asked Yellen about risks from the shadow banking sector, to which Yellen responded, “that is a huge challenge to which I don’t have a great answer.” Regulators have to accept that as they put up regulatory walls, certain activities will deliberately move outside of them, she said. Yellen and Lagarde also spoke briefly about the spillover effects that the Fed’s policies have on emerging markets. “Ms. Yellen acknowledged the Fed’s role in that turmoil… but she also blamed investors, saying traders had built up positions that were based on unrealistic expectations about interest rate paths,” writes Ian Talley. However, to some extent, spillovers can’t be avoided given the size of the U.S. economy, Yellen said.

Yellen’s speech came just following — and seemed to be a response to — the release of the annual report from the Bank of International Settlements. In addition to critiquing the the moves of global central banks, BIS called for more austerity and higher interest rates from governments. “It is essential to move away from debt as the main engine of growth,” concludes the report. Ryan Avent, however, calls BIS a stopped clock: “Though the BIS’s diagnoses of the global economy’s ills have evolved over time its policy recommendations have not.” Martin Wolf says the BIS report gives mostly bad advice, even as it correctly diagnoses a problem. “The BIS is entitled to warn. Central banks should listen to it politely. But they must reject important parts of what it advises,” he says.

During the IMF event today, Binyamin Appelbaum tweeted, “Yellen to BIS: Calm down.” — Shane Ferro

On to today’s links:

Disruptions
In the 1930s, “a company on the S&P 500 had an average lifespan of 75 years. By 2011, that lifespan had dropped to 18 years” – John Hagel

Study Says
Watching “Game of Thrones” might be killing you – Reuters

Secular Declines
Social media killed America’s malls – James Greiff

Equals
“Women can’t have it all if they are expected to do it all” – Shane Ferro
Both Tinder and Goldman Sachs face sexual harassment lawsuits – Gail Sullivan

Euphemisms
“The administration will ‘implement a new process of cash management’” for state transportation funding – Sam Stein

Inflation
To save money on your wedding, travel back to 1930 – Jenni Avins

Stuff We’re Not Linking To
Ben Stein writes about his crushes

from Data Dive:

Wage growth: Still stagnant

Jun 27, 2014 18:07 UTC

Reuters has a story out this week delving into Fed chair Janet Yellen’s views about employment. Yellen wants to see more wage growth before she really believes the employment situation is improving, as “research from the Fed's staff and her own past academic work both suggest there may be more slack in the economy than inflation hawks believe,” according to the Reuters piece.

But wage growth continues to be stagnant:

productivity-growth

Here are more details about her research:

Her research outlined a number of possibilities, including that companies realize upsetting workers may only cost companies more in the long run as some will quit or become less productive, while rehiring in a recovery will prove more costly.

But a flip side is that, as economies recover, firms make up for the lack of wage cuts by keeping worker pay constant for as long as possible.

The San Francisco Fed, where Yellen served as president until 2010, tracks the percentage of workers whose wages did not rise in the prior year. The bank's "Wage Rigidity Meter" remains near an all-time high - evidence it will take more time before the type of wage-growth Yellen hopes to see.

Fed hawks

Jun 19, 2014 22:05 UTC

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The Fed’s Open Market Committee concluded its two-day June meeting yesterday with a moderately positive note: economic activity has rebounded from the terrible first quarter and labor market conditions seem to be improving, according to the statement. That said, because of said terrible first quarter, the outlook for U.S. economic growth is lower than it was at the last policy meeting in April: the Fed now expects the economy to grow 2.1-2.3%, compared to 2.8-3% previously.

Interest rates still remain unchanged, but Fed chair Janet Yellen cautioned the market not to be too confident that they will stay that way. “She noted there is a wide range of views even among Fed officials about where rates will be by 2016. Fed forecasts range between 0.5% and 4.25%,” writes Jon Hilsenrath.

The taper continues, with the Fed reducing its monthly asset purchases by another $10 billion. It will now buy $15 billion in mortgage-backed securities per month and $20 billion in Treasuries. Though Yellen stressed the taper isn’t on a set course, Pedro da Costa thinks it is. “The only real wiggle room for doubt at this point appears to be whether the Fed will go the full $15 billion in one last go or be more incremental.” Jared Bernstein writes that while it may seem strange that the Fed both lowered its growth forecast and continued the taper, “I don’t think $10 billion less in asset purchases will make much difference in the movements of the longer term rates they’re targeting with this part of the program.”

The FOMC also reduced its long-term target for the federal funds rate to 3.75% from 4%. In a video post, Cardiff Garcia says he thinks the lower federal funds rate means that the FOMC might be starting to buy in to the theory of secular stagnation. However, the median projections for the funds rate in the shorter term, 2015 and 2016, did go up a bit. Jim Sullivan at High Street Economics says that he thinks the Fed is “becoming at least a bit less dovish as unemployment continues to decline — even though the GDP projection for 2014 was cut.” Tim Duy goes further, saying he thinks yesterday’s press conference was actually Yellen showing her hawkish side. “Yellen and Co. are so committed to the 2% inflation target that they are willing to tolerate a persistently lower level of national output to maintain that target,” he writes. — Shane Ferro

On to today’s links:

Sovereign Debt Problems
There might be a way for Argentina to have its steak and eat it too - Adam Levitin

Literary
My Prestigious Literary Novel - Mallory Ortberg

Generation Debt
“Servicers of federally issued student loans should not exist” - David Dayen

Apropos of Nothing
America is becoming a country of nihilists - Aaron Blake

That’s So Gross
There’s something weird going on with Bill Gross - Rob Wile

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:

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

Bikes
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

Interesting
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
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

Semantics
“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

Equals
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

Listicles
16 times when Ben Bernanke was a total badass – BI

Quotable
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

Regulations
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

Bitcoin
“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

Felix
Why companies are raising dividends – Reuters

Charts
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:

Charts
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

UGH
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

Fail
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

Alpha
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

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

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

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

FYI
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:

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

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

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

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

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

Politicking
What a default would look like – Tyler Cowen

Long Reads
How Amazon became the everything store – Brad Stone

Wonks
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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