Per Stratfor:
Despite its problems, France is still a fundamentally wealthy nation whose global reach knows no rival in continental Europe. Many French companies are leaders worldwide, and the country remains a significant agricultural producer. Furthermore, contemporary French governments still espouse military intervention abroad. Sarkozy and Hollande were willing to protect France's interests in the Levant and sub-Saharan Africa in ways that Britain seems increasingly reluctant to and Germany can't even dream of.
Additionally, France has some of the highest birthrates in Europe and, by midcentury, will probably have the largest population on the Continent. This means that a substantial number of young people will keep entering the workforce each year, pay work-related taxes, sustain the pensions of the elderly, and consume goods and services.
On the other hand, a growing population also means a permanent risk of social unrest if the French economy fails to absorb the future cohorts of workers. Boasting not only the strongest nationalist party but also the largest Muslim community in Western Europe, France will prove a test case for the evolution of nationalism and the role of Muslims in Europe. Though birthrates are falling in France across all segments of the population, Muslim families have higher birthrates relative to non-Muslim families, which means the Muslim community will likely play a greater political and social role in France in the coming years.
Tuesday, April 19, 2016
Monday, April 11, 2016
What the end looks like...
In the context of the typical question "How can the Fed ever lose control of the bond market, since they can always print more money?", today's Ask Fleck had a submission that probably spells out the answer...
Specifically, there is a quote in the most recent Barron's from Bill Gross:
"Years of easing by central banks mean that interest rates in most of the developed world will fluctuate narrowly. That offers an opportunity to sell volatility to create return. If you bought a 10-year Treasury bond today and nothing changed, you would get a 1.9% yield. If you bought a seven-year German Bund, you’d get zero. If, however, you sold a three-month call or three-month put on that same Treasury with a 20-basis-point [hundredths of a percentage point] variation—in other words, the yield stayed in the range of 1.7%-2.1% for three months—the trade would produce an annual return of 6%, as opposed to 1.9%.
The risk is that interest rates will go up or down by more than 20 basis points over a three-month period. But my premise is that central bankers will do anything possible to contain interest-rate fluctuations. The sale of volatility is producing the predominant amount of return in my fund."
The reader goes on to suggest (reasonably) that if Gross is pursuing this strategy, then plenty of other money managers are as well. Which leads to his pertinent insight:
"You've been asked over the years how the fed could ever not control the outcome in the bond market (in so many words). After all, can't they just print money and buy bonds? Well, trillions upon trillions of notional bond money, leveraged and selling volatility on top of it? That's how - they will be totally overcome when the time comes as these managers are forced to deal with portfolio problems all at the same time. Again, it's not today's business, treasury bond yield will likely move lower, perhaps much lower, during a nasty equity bear market (see Europe and Japan). But that would likely reinforce this behavior in the bond market of selling vol on leverage. If ever there were a coiled spring the Fed would be unable to deal with this is it..."
Specifically, there is a quote in the most recent Barron's from Bill Gross:
"Years of easing by central banks mean that interest rates in most of the developed world will fluctuate narrowly. That offers an opportunity to sell volatility to create return. If you bought a 10-year Treasury bond today and nothing changed, you would get a 1.9% yield. If you bought a seven-year German Bund, you’d get zero. If, however, you sold a three-month call or three-month put on that same Treasury with a 20-basis-point [hundredths of a percentage point] variation—in other words, the yield stayed in the range of 1.7%-2.1% for three months—the trade would produce an annual return of 6%, as opposed to 1.9%.
The risk is that interest rates will go up or down by more than 20 basis points over a three-month period. But my premise is that central bankers will do anything possible to contain interest-rate fluctuations. The sale of volatility is producing the predominant amount of return in my fund."
The reader goes on to suggest (reasonably) that if Gross is pursuing this strategy, then plenty of other money managers are as well. Which leads to his pertinent insight:
"You've been asked over the years how the fed could ever not control the outcome in the bond market (in so many words). After all, can't they just print money and buy bonds? Well, trillions upon trillions of notional bond money, leveraged and selling volatility on top of it? That's how - they will be totally overcome when the time comes as these managers are forced to deal with portfolio problems all at the same time. Again, it's not today's business, treasury bond yield will likely move lower, perhaps much lower, during a nasty equity bear market (see Europe and Japan). But that would likely reinforce this behavior in the bond market of selling vol on leverage. If ever there were a coiled spring the Fed would be unable to deal with this is it..."
Saturday, March 26, 2016
The Pile
With a little time off recently, I paid a visit to my old friend, reading.
(1) St. Marks is Dead by Ada Calhoun (2016). The subtitle is The Many Lives of America’s Hippest Street. A fun and interesting read, particularly for someone who holds New York City dear. In fact, the City’s entire history is played out from colonial times by focusing on one of its most eccentric streets and neighborhoods. As a bonus, I also discovered that the term “Knickerbocker” derives from a Washington Irving book, and came to mean someone who had been in New York City since colonial times – and as those times belonged to the Dutch, no wonder the orange and blue.
(2) The Forgotten Depression by James Grant (2014). The subtitle is 1921: The Crash That Cured Itself. The author attempts to demonstrate how the depression of 1920-21 undermines the Keynesian and Monetarist prescriptions that have been at work since the New Deal.
In accomplishing that feat, Grant must first demonstrate that the downturn could be qualified as a depression on par with other notable periods. It all starts with World War I, and the common phenomenon where the government creates buying power by printing money and borrowing where taxes could not cover the costs. The result is a great and crushing inflation that knocks the economy over after the war ends. To put the decline in context, Grant offers the following:
“According to Historical Statistics of the United States, gross national product, before adjustment for changes in prices, plunged to $69.6 billion in 1921 from $91.5 billion in 1920, a loss of 24 percent. Even after making allowances for falling prices, the decline in national output amounted to 9 percent. For perspective, the Great Recession of 2007-09 delivered a drop in nominal domestic product of 2.4 percent, a price-adjusted fall of 4.3 percent. From 1920 to 1921, the Federal Reserve’s index of industrial production fell by 31.6 percent; in 2007-09, it declined by 16.9 percent.”
And from a first-hand commentary standpoint, Grant found the following from none other than Irving Fisher: “It seems manifest that thus far the difference between the present comparatively mild business recession and the severe depression of 1920-21 is like that between a thunder shower and tornado.” What makes that quote extra special is that Fisher was looking at the landscape in 1930 and praising Hoover and the Federal Reserve for being very reactive to the circumstances and stepping in with fiscal and monetary measures to boost the economy. How ironical, no?
In any event, having set the stage, what we see the government do in response in 1920-21 is to raise interest rates, run budget surpluses, and actually act to see wages go lower in tandem with prices. An overall deflation was permitted and encouraged as the appropriate remedy to the excesses that had gone in the other direction. As a result, as American investments became more “value-laden” and exports more attractive, within 18 months, the bottom was in and the roaring ‘20s were set to start. The interesting contrast is Great Britain, which went through its own economic downturn after the War, but where folks like Keynes had already gained more influence over policy. Accordingly, political forces intervened and a floor was set in wages where unions had a stronger foothold. Their recovery was certainly weaker and more tepid and unemployment higher. In the U.S., standing down from action was apparently the right tact.
What shouldn’t be lost, however, is that this approach did lead to human suffering with jobs lost, companies bankrupted and wealth destroyed. But, the depth and length of that suffering was shortened because natural market processes were allowed to play out. There should be a lesson in that, particularly when viewed through recent downturns. The recession that followed the tech boom of the ‘90s was difficult, and the so the Fed went to work and we ended up with a housing crash that nearly upended the entire financial system. And so here we are, witnesses to monetary policy that is simply beyond anything that we have seen before. Is it reasonable to believe that the next time will be even worse?
Anyway, to finish the story, despite a seeming understanding of the causes of the 1921 downturn, over the course of the years to follow, the political tides changed and the forces in Europe that took a more Keynesian turn found their way to these shores as well. And, to make matters worse, the inflation which should’ve put everyone on notice, as it did in 1919-20, was much more subtle and dangerous. The ‘20s was a period of innovation, but unlike the second half of the nineteenth century where a healthy deflation ensued, prices largely went sideways because of the offsetting activist Federal Reserve and loosened credit standards; so the obvious symptom of the past simply looked like price stability. Moreover, where the inflation lived was where people weren’t looking – stocks, real estate and other capital investments. And when the bust came, there weren’t any adults left to offer the remedies that worked before.
(3) The Ministry of Guidance Invites You To Not Stay by Hooman Majd (2013). The subtitle is An American Family in Iran. I have read a couple of his books before. As a reminder, he is Iranian born, Western educated, and currently lives in Brooklyn. In 2011, he decided that he should move to Tehran for a year with his American wife and infant child. During that time, he observes how the government really is not working for its people in the way that it should, and that many citizens understand the problems and would like to see change. As such, the section that resonated most was where he tried to rationalize the disconnect between word and deed:
“A number of different groups of Iranians are opposed to the current political system or the government, and certainly object to the continuing human rights abuses, but the ones looking to overthrow the regime through revolution still seem to be in the minority. Perhaps the memory of the 1979 Islamic Revolution is too strong, if not in their own young minds, then in the minds of their parents and grandparents who took part in it; for it was a revolution hijacked, a revolution that broke promises, a revolution that, even with its authoritarian and sometimes fascist impulses, has yet to provide economic security, or any other kind, for a large portion of its population. In 1979, eliminating the 2,500-year-old monarchy was supposed to usher in a democratic era, albeit with an Islamic hue; now the disappointment many Iranians feel, even pious Iranians who once believed in the revolution, is tangible and observable. Many of them seem reluctant to repeat what they believe will be another disappointment.”
(1) St. Marks is Dead by Ada Calhoun (2016). The subtitle is The Many Lives of America’s Hippest Street. A fun and interesting read, particularly for someone who holds New York City dear. In fact, the City’s entire history is played out from colonial times by focusing on one of its most eccentric streets and neighborhoods. As a bonus, I also discovered that the term “Knickerbocker” derives from a Washington Irving book, and came to mean someone who had been in New York City since colonial times – and as those times belonged to the Dutch, no wonder the orange and blue.
(2) The Forgotten Depression by James Grant (2014). The subtitle is 1921: The Crash That Cured Itself. The author attempts to demonstrate how the depression of 1920-21 undermines the Keynesian and Monetarist prescriptions that have been at work since the New Deal.
In accomplishing that feat, Grant must first demonstrate that the downturn could be qualified as a depression on par with other notable periods. It all starts with World War I, and the common phenomenon where the government creates buying power by printing money and borrowing where taxes could not cover the costs. The result is a great and crushing inflation that knocks the economy over after the war ends. To put the decline in context, Grant offers the following:
“According to Historical Statistics of the United States, gross national product, before adjustment for changes in prices, plunged to $69.6 billion in 1921 from $91.5 billion in 1920, a loss of 24 percent. Even after making allowances for falling prices, the decline in national output amounted to 9 percent. For perspective, the Great Recession of 2007-09 delivered a drop in nominal domestic product of 2.4 percent, a price-adjusted fall of 4.3 percent. From 1920 to 1921, the Federal Reserve’s index of industrial production fell by 31.6 percent; in 2007-09, it declined by 16.9 percent.”
And from a first-hand commentary standpoint, Grant found the following from none other than Irving Fisher: “It seems manifest that thus far the difference between the present comparatively mild business recession and the severe depression of 1920-21 is like that between a thunder shower and tornado.” What makes that quote extra special is that Fisher was looking at the landscape in 1930 and praising Hoover and the Federal Reserve for being very reactive to the circumstances and stepping in with fiscal and monetary measures to boost the economy. How ironical, no?
In any event, having set the stage, what we see the government do in response in 1920-21 is to raise interest rates, run budget surpluses, and actually act to see wages go lower in tandem with prices. An overall deflation was permitted and encouraged as the appropriate remedy to the excesses that had gone in the other direction. As a result, as American investments became more “value-laden” and exports more attractive, within 18 months, the bottom was in and the roaring ‘20s were set to start. The interesting contrast is Great Britain, which went through its own economic downturn after the War, but where folks like Keynes had already gained more influence over policy. Accordingly, political forces intervened and a floor was set in wages where unions had a stronger foothold. Their recovery was certainly weaker and more tepid and unemployment higher. In the U.S., standing down from action was apparently the right tact.
What shouldn’t be lost, however, is that this approach did lead to human suffering with jobs lost, companies bankrupted and wealth destroyed. But, the depth and length of that suffering was shortened because natural market processes were allowed to play out. There should be a lesson in that, particularly when viewed through recent downturns. The recession that followed the tech boom of the ‘90s was difficult, and the so the Fed went to work and we ended up with a housing crash that nearly upended the entire financial system. And so here we are, witnesses to monetary policy that is simply beyond anything that we have seen before. Is it reasonable to believe that the next time will be even worse?
Anyway, to finish the story, despite a seeming understanding of the causes of the 1921 downturn, over the course of the years to follow, the political tides changed and the forces in Europe that took a more Keynesian turn found their way to these shores as well. And, to make matters worse, the inflation which should’ve put everyone on notice, as it did in 1919-20, was much more subtle and dangerous. The ‘20s was a period of innovation, but unlike the second half of the nineteenth century where a healthy deflation ensued, prices largely went sideways because of the offsetting activist Federal Reserve and loosened credit standards; so the obvious symptom of the past simply looked like price stability. Moreover, where the inflation lived was where people weren’t looking – stocks, real estate and other capital investments. And when the bust came, there weren’t any adults left to offer the remedies that worked before.
(3) The Ministry of Guidance Invites You To Not Stay by Hooman Majd (2013). The subtitle is An American Family in Iran. I have read a couple of his books before. As a reminder, he is Iranian born, Western educated, and currently lives in Brooklyn. In 2011, he decided that he should move to Tehran for a year with his American wife and infant child. During that time, he observes how the government really is not working for its people in the way that it should, and that many citizens understand the problems and would like to see change. As such, the section that resonated most was where he tried to rationalize the disconnect between word and deed:
“A number of different groups of Iranians are opposed to the current political system or the government, and certainly object to the continuing human rights abuses, but the ones looking to overthrow the regime through revolution still seem to be in the minority. Perhaps the memory of the 1979 Islamic Revolution is too strong, if not in their own young minds, then in the minds of their parents and grandparents who took part in it; for it was a revolution hijacked, a revolution that broke promises, a revolution that, even with its authoritarian and sometimes fascist impulses, has yet to provide economic security, or any other kind, for a large portion of its population. In 1979, eliminating the 2,500-year-old monarchy was supposed to usher in a democratic era, albeit with an Islamic hue; now the disappointment many Iranians feel, even pious Iranians who once believed in the revolution, is tangible and observable. Many of them seem reluctant to repeat what they believe will be another disappointment.”
Friday, March 18, 2016
Sigh
Courtesy of Jesse:
"The main thing is that the debt is in dollars. So we can't run out of cash--we print the stuff. Suppose that foreigners decide we're not reliable. How does that drive up interest rates? The Fed controls short-term interest rates, and long-term interest rates reflect expected short rates. How's that supposed to happen?"
-Paul Krugman
I take exception to the notion that the Fed, or any other central bank, is bigger than the market. If that were really true, then why do we see so many results/recessions/busts that run counter to their agendas and policy plans?
But, more than that, if we look at the broader implications of his comment, do the problems end simply with where rates are? In fact, if the Fed has to print endless amounts of money to battle bond sellers, foreign and domestic, what happens to the dollar? There are so many possible knock-on effects that are troubling, that the sheer academic arrogance in his comment is astounding.
"The main thing is that the debt is in dollars. So we can't run out of cash--we print the stuff. Suppose that foreigners decide we're not reliable. How does that drive up interest rates? The Fed controls short-term interest rates, and long-term interest rates reflect expected short rates. How's that supposed to happen?"
-Paul Krugman
I take exception to the notion that the Fed, or any other central bank, is bigger than the market. If that were really true, then why do we see so many results/recessions/busts that run counter to their agendas and policy plans?
But, more than that, if we look at the broader implications of his comment, do the problems end simply with where rates are? In fact, if the Fed has to print endless amounts of money to battle bond sellers, foreign and domestic, what happens to the dollar? There are so many possible knock-on effects that are troubling, that the sheer academic arrogance in his comment is astounding.
Monday, March 14, 2016
Hello
In the great void that has been my absence from this site, I have read a grand total of two books.
The New York Nobody Knows: Walking 6,000 Miles in the City by William B. Helmreich (2013). An interesting idea put into practice by a sociology professor at CUNY – he attempted to walk every block in the city over 4 years. Some interesting encounters along the way and a description of how there is a real change in cultural dynamic and feel as you move from neighborhood to neighborhood. An interesting statistic is that the Jewish population in the five boroughs has decreased over time from 2 million to about 1.2 million.
Public Housing That Worked. The subtitle is New York in the Twentieth Century and the author is Nicholas Dagen Bloom (2008). As the title should suggest, the author believes that NYCHA’s version of public housing has been far more successful than in other cities because of the greater emphasis placed on implementing practices of competent property management. That is the case in spite of high-rise buildings (which are not ideal for a troubled and drug-addled population), political maneuvering by other city agencies that served to undermine the tenant selection process (and therefore the average tenant’s ability to pay rents), and the federal government’s decision over time to reduce support for public housing nationally. Far from perfect, but better than most.
The New York Nobody Knows: Walking 6,000 Miles in the City by William B. Helmreich (2013). An interesting idea put into practice by a sociology professor at CUNY – he attempted to walk every block in the city over 4 years. Some interesting encounters along the way and a description of how there is a real change in cultural dynamic and feel as you move from neighborhood to neighborhood. An interesting statistic is that the Jewish population in the five boroughs has decreased over time from 2 million to about 1.2 million.
Public Housing That Worked. The subtitle is New York in the Twentieth Century and the author is Nicholas Dagen Bloom (2008). As the title should suggest, the author believes that NYCHA’s version of public housing has been far more successful than in other cities because of the greater emphasis placed on implementing practices of competent property management. That is the case in spite of high-rise buildings (which are not ideal for a troubled and drug-addled population), political maneuvering by other city agencies that served to undermine the tenant selection process (and therefore the average tenant’s ability to pay rents), and the federal government’s decision over time to reduce support for public housing nationally. Far from perfect, but better than most.
Tuesday, September 1, 2015
Monday, June 22, 2015
2015 NBA Draft
I've got a story. Tell me if you've heard it...
A team stuck in the doldrums for a very long time has a shot at the first pick in the draft and an opportunity to get a potentially game-changing big man. But, led by a rookie coach and a part-time rookie executive, they win two of their last three games and don't end up with the worst record. Fast forward a month and they end up as the only team that moves backwards in the lottery. So, now, rather than probably drafting first, they are sitting at four.
Karma is a bitch.
Well, with all that as prelude, this Thursday is the coronation of what has been a terrible offseason already for the Knicks. And the Warriors only put the final stamp on a title less than a week ago.
Since Karl-Anthony Towns is no longer an option, I hope the Knicks end up with his frontcourt mate from Kentucky, Willie Cauley-Stein. He is a defensive stud and the Knicks could really use one of those. But, now, since I said it, assuredly it will not happen.
A team stuck in the doldrums for a very long time has a shot at the first pick in the draft and an opportunity to get a potentially game-changing big man. But, led by a rookie coach and a part-time rookie executive, they win two of their last three games and don't end up with the worst record. Fast forward a month and they end up as the only team that moves backwards in the lottery. So, now, rather than probably drafting first, they are sitting at four.
Karma is a bitch.
Well, with all that as prelude, this Thursday is the coronation of what has been a terrible offseason already for the Knicks. And the Warriors only put the final stamp on a title less than a week ago.
Since Karl-Anthony Towns is no longer an option, I hope the Knicks end up with his frontcourt mate from Kentucky, Willie Cauley-Stein. He is a defensive stud and the Knicks could really use one of those. But, now, since I said it, assuredly it will not happen.
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