Felix Salmon

Safe Savings Rates: A New Approach to Retirement Planning over the Life Cycle — FPA

How America went from surpluses to deficits — WaPo

“We don’t need to be told every time something breaks on Twitter. Once per year is probably enough.” — Brian Van

Did quantitative analysis and movie modelling algorithms kill Anchorman 2? — Slate

GeoEye publishes post-raid satellite image of Bin Laden compound — Ogle Earth, ibid

Tweets per second, evening of May 1, 2011 — Flickr

The front page the NYT tore up last night, and its replacement — Flickr

The St. Louis Fed Guide To Our Unemployment Nightmare — TBI

Ritholtz 1-0 Schiller — TBP

Are law school merit scholarships a scam? — NYT

Sleepwalking through America’s Unemployment Crisis by Mohamed El-Erian — Project Syndicate

What I learned in econ grad school — Noahpinion

Guggenheim’s Scott Minerd, speaking at the big morning panel discussion which kicked off this year’s Milken conference, laid out a simple case for how the next crisis could arise:

When you look at Greek assets, about 55% of bank capital in Portugal is exposed to Greece. And 83% of bank capital in Ireland is exposed to Greece. So it’s pretty clear that if we restructure Greece, we will severely damage the banking systems of Ireland and Portugal. And the big exposure to Ireland and Portugal is in Spain. Ireland represents 138% of the capital of the Spanish banking system, and Portugal represents 133%. And if we take out Spain, Spain represents 94% of the capital of the German banking system. And I’m not adding these numbers up. You see how it’s very easy to get a scenario going in Europe where the dominoes start to fall and it causes a crisis.

Greece is going to restructure, and when that happens (not if), creditors are going to take some kind of haircut. The buffer in Minerd’s scenario is Ireland: since the banks have all been nationalized anyway, their debt won’t necessarily get downgraded just because their capital is wiped out.

I’m also not convinced that Iberian exposure to Irish banks is as large as Minerd says it is. Here’s Michael Lewis, in his epic article on Ireland:

One of the most closely watched numbers in Europe has been the amount the E.C.B. has loaned to the Irish banks. In late 2007, when the markets were still suspending disbelief, the banks borrowed 6.5 billion euros. By December of 2008 the number had jumped to 45 billion. As Burton spoke to me, the number was still rising from a new high of 86 billion. That is, the Irish banks have borrowed 86 billion euros from the European Central Bank to repay private creditors. In September 2010 the last big chunk of money the Irish banks owed the bondholders, 26 billion euros, came due. Once the bondholders were paid off in full, a window of opportunity for the Irish government closed. A default of the banks now would be a default not to private investors but a bill presented directly to European governments.

Still, Minerd’s main point remains: insofar as the losses from a Greek restructuring aren’t socialized, they have the potential to cause a serious crisis. As a result, they probably will be socialized. And if you’re going to socialize those losses anyway, you might as well do it directly, rather than doing it by bailing out affected banks. Which means that Greek debt could go the way of Irish bank debt, and simply disappear into the ECB, which can afford to take a haircut on it.

That will take time — which is one reason why the people here at Milken predicting a Greek default in 2011 might well turn out to be wrong. Right now, the ECB has about €40 billion in Greek debt. That’s due to rise to €80 billion in 2013, at which point the ECB will own about half of all Greece’s outstanding bonds. If the number starts rising more quickly than that, it could be a sign that a restructuring is nigh.

Kid Dynamite and The Analyst have taken issue with my post about levered ETFs. We’re all in agreement that they shouldn’t be held for a period of longer than 1 day. But their argument is basically that the SEC can’t and shouldn’t protect people from their own stupidity. Here’s the Analyst:

As should be extremely obvious at this point, understanding how these ETF’s work is not rocket science, and it does not take much time/effort to do. If you do a quick google search for “how do leveraged etfs work” returns a large number of posts, most of which answer the question with little ambiguity.

Let me put this as nicely as possible: You have to be self-defeatingly ignorant/naive/lazy to trade these things without learning about them. If you have an internet connection, you’d actually have to go out of your way not to pick-up some basic knowledge about how leveraged ETF’s work just by sheer happenstance. The information is EVERYWHERE, easy to find, and just as easy to understand for anyone capable of opening a brokerage account.

Except, if you go back a month to when KD last wrote about these things, you’ll find him linking to a column by Dave Kansas — the founding editor of thestreet.com, and about as veteran and admired a markets journalist as it’s possible to find. And he got it wrong, as the correction at the bottom of the column attests.

My point here is that if you want to find out how easy and obvious something is, you don’t first look for someone who understands it and then ask them whether understanding it is easy. Instead, you look at a broad audience of people who ought to understand it, and look to see what percentage of them actually do.

And if you look at the people who are investing in TBT, it’s clear that the vast majority of them do not understand how it works. For all that there are prominent disclaimers in the abbreviated summary prospectus about such things, those disclaimers are not preventing people from making long-term investments in a security which should never be held for longer than one day. They’re not working.

What worries me here is that we’re taking rules which apply to stocks and applying them to levered ETFs, even when levered ETFs are very different creatures from stocks. Stocks are permanent long-term stores of value — ownership stakes in something real in the world. Levered ETFs, by contrast, are pretty much guaranteed to go to zero eventually; the only question is how long they will take to get there. That’s not a problem for people who hold them on an intraday basis, as trading vehicles. But they trade on the stock exchange with a stock-like ticker symbol, and they look similar to unlevered ETFs which do things like replicate the S&P 500, and which really are long-term investments. So it’s easy to see where the confusion arises.

What I’m not getting from KD or the Analyst is any good reason why levered ETFs should exist. What purpose do they serve? If you want to make a leveraged bet on a certain asset, you can buy it or short it using borrowed money. These things are obviously harming a lot of people — the investors wielding billions of dollars who are holding them for long periods of times. Who are they benefiting? It seems to me that the cost of leveraged ETFs is greater than the benefit; that’s why I think the SEC should look into them.

It’s one thing allowing people to invest in individual stocks which can be highly risky investments — that’s fine, because there’s a strong social upside to allowing companies to raise capital on the stock market and allowing individuals to buy those stocks. But there’s no such social upside to levered ETFs, and if they disappeared tomorrow, anybody using them the right way could very easily put on the same trades just by using their margin account. So if there’s good reason to believe they’re causing harm, and no reason to believe they’re causing any good, why keep them?