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Boutique state-registered RIA, specializing in (1) liability driven investment strategies and (2) an active investment strategy focused primarily on macro, small/micro cap, and distressed opportunities.
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  • Bond Boogeyman on the Sideline

    Someone in the media is finally getting the story right on the Treasury market's poor 10Q4 performance. According to Daniel Kruger at Bloomberg:

    The worst performance by Treasuries since the second quarter of 2009 reflects prospects for faster U.S. economic growth rather than concern that rising budget deficits will drive investors away from government debt.

    While the average yield on Treasuries rose to 1.89 percent from 1.42 percent at the end of September, according to the Bank of America Merrill Lynch Treasury Master index, the price of credit-default swaps tied to U.S. debt declined to 41.5 basis points from 48.4 basis points at the end of September, Bloomberg data showed. The dollar rose 1.5 percent against an index of currencies of six major U.S. trading partners.

    The drop in swap prices and the greenback’s strength shows bond vigilantes aren’t ready to punish the U.S. for its spending.

    As we pointed out almost a year ago, the fact that default swaps even trade on Treasury debt is bizarre, but their recent price action does lend support to our thesis that the Treasury selloff was almost entirely positive from an economic and risk-taking point of view. 

    IMPORTANT DISCLOSURES: Symmetry Capital Management, LLC (“SCM”) is a Pennsylvania registered investment advisor that offers discretionary investment management to individuals and institutions. This publication is for informational, educational, and entertainment purposes only. It is not an offer to sell or a solicitation to buy securities, or to engage in any investment strategy. Past performance is not indicative of future results.  This material does not take into account your personal investment objectives, your personal financial situation and needs, or your personal tolerance for risk. Thus, any investment strategies or securities discussed may not be suitable for you.  You should be aware of the real risk of loss that accompanies any investment strategy or security. It is strongly recommended that you consider seeking advice from your own investment advisor(s) when considering any particular strategy or investment.  We do not guarantee any specific outcome or profit from any strategy or security discussed herein.  The opinions expressed are based on information believed to be reliable, but SCM does not warrant its completeness or accuracy, and you should not rely on it as such.  At the time of writing, some clients of the firm hold long positions in TLT and/or individual Treasury securities, while neither the firm nor its principals hold positions in any securities mentioned.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Some clients of the firm are long TLT, TIP and/or individual Treasury securities.
    Tags: TLT, TBT
    Jan 03 6:45 AM | Link | Comment!
  • Auerback on "Real Change"

    This is one of the most powerful articles on political economy that I've read in a long time. In it, Marshall Auerback assails Obama and his fellow Democrats' utter mismanagement of ecoconomic policy, and highlights the risks that continuing adherence to Rubinomics poses to them in future elections (not to mention, more importantly, current and future generations in terms of economic performance). Choice excerpts follow. This is highly, highly recommended reading.

    Obama still genuinely does not have a clue as to why he has lost the trust of so many progressives. Many would have been prepared to cut him some slack if he had given them anything over the past two years, rather than a perpetuation of Rubinomics — an economically regressive blend of crony capitalism and deficit reduction fetishism...

    Obama loves cutting deals, claiming that he is “getting things done for the American people”, even when the actual substance of his legislative efforts come to virtually nothing (as in the case of both financial regulation and health care). His presidency is all about form and presentation over substance.

    I can offer some anecdotal evidence to support this criticism of Obama.  Shortly after the fiscal compromise was announced, while estimating the net impact on our household's monthly cash flows (a slight but welcome bump), I learned that our health insurance premiums are going up 50% in 2011, plus another 36% on top of that as my stepson, a recent engineering grad from a very prestigious school, has not been able to find employment yet. So personally speaking, the tax compromise leaves my household slightly less worse off in 2011 than it would otherwise be. There's really not a lot of discretionary spending left for us to cut at this point, though I know there are many families in far worse shape than we are, which is distressing.

    From the little bit of research I've done, we're not the only ones in this situation. Apparently a lot of small and medium business plan participants and individual policyholders are getting (and have previously gotten) a similar reaming from insurers, which would probably not have happened (at least not to the same extent) if a basic public option had been included in the legislation (whether it's gouging or the government's fault should show up in industry profit margins in 2011). It's also well established that young adults are having a horrible time in the job market right now, so it's safe to assume that many households are facing the same kinds of decisions we are. And a one-year, 2% payroll tax cut, with expiration of Making Work Pay netted out, is only going to ease the pain very marginally. Gee thanks, Mr. President.

    Back to Marshall:

    That said, the anger of the president’s base is somewhat misdirected right now. The real problem is that the repeal of the Bush tax cuts at the upper end wouldn’t have solved income inequality...Any good accountant worth his salt can always find a clever tax avoidance strategy for the super wealthy. The tax system’s very complexity facilitates this...To deal with income inequality, you need something more radical. You need reforms such as caps on executive pay and probably a system that simplifies the tax structure (to avoid creative tax avoidance), along with a broad base and a few basic, low rates to ensure a modicum of compliance.

    Additionally, the notion that these tax cut extensions will “add” $700 billion to the deficit is nonsensical. One cannot predict the impact of government spending decisions absent a broader economic context. Applying a static revenue analysis to the deficit embraces deficit hawks’ logic, who make comparable claims when they argue that cutting government spending absent any consideration of the economy’s underlying condition will automatically reduce the budget shortfall as a percentage of GDP.

    There have been scads of news stories with headlines about what this agreement will "cost" the federal government. As Marshall points out, that's an utterly meaningless construct. The U.S. government is self-financing and has been for almost four decades.  Marshall then makes the critical point (emphasis added):

    Ultimately, the president (and what’s left of his rapidly imploding party) needs to get off this deficit fixation. It muddles the Keynesian message to say that we don’t need fiscal austerity in the midst of a serious recession — except we urgently need to reduce the dangerous deficit by taxing the rich.

    The whole focus on the deficit itself is profoundly misconceived. One of the state’s most important elements of public purpose is to maximize employment. Once the private sector has made its spending and saving decisions based on its expectations for the future, the government has to render them consistent with the objective of full employment. It can’t do this if it continues to focus on bogus questions of “affordability” and “national insolvency”.

    Take that, Rubinistas everywhere! Marshall and his fellow 'modern monetary economists' still face a long Sysiphian struggle in bringing their views to the mainstream. But hopefully this piece will get enough attention from both the left and the right (personally, I'd be happy to see either party demonstrate an understanding of these dynamics) to at least ameliorate some of the prevailing nonsense about--and hysteria over--U.S. budget deficits.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 10 6:52 PM | Link | Comment!
  • More Rubinista Voodoo

    In a piece for CNN, Professor Len Burman asks, "Will Dems fall for temporary tax cut gambit (again)?"  Burman is right to question the strategic vision of the White House brain trust.  But he's also a hopeless Rubinite:

    Permanent extension of the Bush tax cuts would do considerable harm to the economy. The debt is projected to rise by $10 trillion over the next decade. The tax cuts represent 40% of that total.

    We need to cut spending too. But halting the clearly unaffordable tax cuts - all of them, not just for the rich -- would be a good start at getting the budget under control.

    If we don't, under the best case scenario, interest rates will rise pushing up the cost of homeownership and business investment, and thus slowing economic growth.

    Burman apparently has a crystal ball on this stuff, despite the fact that there is essentially no empirical evidence to support his and others' hysteria over debt-to-GDP reaching 90%, 100%, or some other magical level. None. Nada. Zip. Meanwhile, returning tax rates to the level that prevailed at the end of the Clinton administration is all but guaranteed to do economic harm. Let's not forget what those vaunted "surpluses" got us, folks.

    In the worst case, rates will stay low for a while [sic], and then explode when investors figure out that we've passed a point of no return. When the bubble bursts, we will be an economic basket case like Greece or Ireland. Unlike those small countries, however, we'll bring down the world economy with us.

    Burman's crystal ball apparently knows nothing about monetary systems.  Neither Ireland nor Greece would be in their current situations if they hadn't joined the malformed EMU. And the U.S. is not even remotely like those countries or any other in the eurozone.  If there's an example we risk emulating, it's Japan.  And for decades, Japan's policy elites fretted about deficits, debt, and interest rates and enacted far more tightening measures than proactive stimulus.  That's the road Burman is pointing us down.

    The Dems are burdened with a weighty handicap these days, but it's not susceptibility to GOP tactics. Rather, it's the fact that the party is still firmly in the grip of Rubinistas like Burman who dispense garbage economics and garbage policy advice. The result could well be a GOP sweep in 2012 and the permanent extension of the Bush tax cuts which, from a deficit standpoint, would be a positive (I can hear the Rubinistas--not to mention Ron and Rand Paul--starting to gnash their teeth on that one). Unfortunately, a sweep would also perpetuate some of the wealth and income distribution problems the country has long struggled with (thanks in no small part to the shenanigans of Bob's industry and mine), and it would roll back some of the positive things that Dems have tried to do (however feeble or ham handed) such as re-regulating the financial industry, expanding access to health care, etc. 

    If the Dems want to avoid Burman's "nightmare scenario", they ought to consider cleaning house now, starting with all of those Rubinistas who believe that tax cuts are somehow "unaffordable", or that the U.S. in any way resembles a captive eurozone or U.S. state, as both assertions are utter fallacies.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: deficits, debt, taxes, GDP
    Dec 09 9:37 AM | Link | Comment!
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