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Jason Nees
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I have worked as a financial advisor at a couple of the wirehouses and managed money for corporate executives of publicly traded companies. I left the industry to help finance a small non-publicly traded consumer finance company. Now I spend my spare time analyzing companies and economic trends.... More
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  • QE Calculator Misfires
     



    In a NY Times article this morning, Eric Rosengren, president of the Federal Reserve Bank of Boston was defending the Fed’s recent QE actions. In his view the $600bn QE program will decrease unemployment by .5% by the end of 2012. According to a quote attributed to him, “This would translate into 700,000 additional jobs…” Okay, sounds good. We need jobs.

    Hang on, let me get my napkin. This works out to $857,142.86 per job. Ouch that seems a bit spendy is these days of austerity. Let’s see what the numbers reveal. Assuming this policy creates all 700k jobs and the average income in the US is 42k that works out to $29.589bn in salaries annually of which $11.bn is discretionary dollars. That means, excluding the multiplier effects, these people need to keep their jobs for 20 years to recoup the $600bn.

    Now, before you go go batshit on me, I realize that this is a crude and rudimentary way to calulate the economic effects of this type of spending. The point of this little exercise is to find out where we would draw the imaginary line in a never-ending QE world. At what point do we dare to say; we have done all we can do.  Does that ever occur? 

    Mean-reversion is certainly painful, but an important keeper of a quasi free-market system. Maybe we’ve already had it and we are now in the new normal. I don’t know. I do know I will be placing my investment dollars on the opposite side of that trade.



    Disclosure: No positions mentioned
    Tags: DIA, QQQ, SPA, QE
    Nov 18 10:32 AM | Link | Comment!
  • Book Review: Bailout Nation with New Post-Crisis Update
     Bailout Nation by Barry Ritholtz should be required reading for all investors seeking to better understand the events that lead to the Great Recession. The book, published by Wiley, succinctly covers the framework of problems that caused the housing boom and subsequent bust.

    Rarely do I read a book where, upon completion, I can say I agree entirely with all of the major points argued. Somehow, I usually find one or two points that I just can go along with. Barry does a great job of going through the history of bailouts from Chrysler, the S&L crisis and how they were all subsequently an unintended consequence of the first moral hazard created by the Lockheed bailout.

    One of the most important parts, in my view, is that he clearly and unambiguously lays blame at the feet of “The Maestro” Alan Greenspan. Many people, it seems, hold Mr. Greenspan in the same “untouchable” light as Warren Buffet. Rarely is harsh criticism assigned to him because of the various policies he implemented which were designed to not allow capitalism to work. Barry shows how his policies not only ignored all of the warning signs, that even his colleagues brought to his attention, but he actually did quite the opposite and continued to promote the reckless lending standards that helped add fuel to the subprime tank.

    Furthermore, he goes on to shows the causal relationship that regulators, ratings agencies, broker-dealers, legislators and others played in the freezing of credit and the collapse in the mortgage market. One of the unique factors that I liked about the book is that after he goes through the history of bailouts, the blame game, and how the market failed, he actually put his suggestions as to how we could solve the problem. A novel idea which most writers conveniently leave out.

    Some of the advice given, which I wish Ben Bernanke would listen too, is to allow the market to establish true price discovery and allow home prices to fall.

    I encourage you to pick up a copy of the book or you can simply follow his thoughts on his blog at ritholtz.com.



    Disclosure: No positions mentioned
    Nov 01 9:33 PM | Link | Comment!
  • Bull Flattener will continue in the face of QE2
    To get straight to the point, I believe the obvious trade right now is the continuation of the flattening on the long end of the curve.
    The Federal Reserve is fighting intermediate deflation and is still trying to inflate assets to spur confidence and spending. The first attempt at this was through the alphabet soup of liquidity facilities that we are all too familiar with. The failure of these facilities was to ignore some very straightforward facts. The theory (not the intent in my opinion) behind the bailouts was to provide enough liquidity to ensure banks solvency so that they could continue accessing cheap funding which they could turn around and lend.  The fact is that consumers are so far indebted that some consumers won’t spend, some are being forced to deleverage and still others who want to spend cannot find additional credit.
    So what does this have to do with our beloved curve? I believe that we are about to enter the second phase of the “Great Recession”.  Entering this phase at unemployment of 10% and consumers who are unwilling and/or unable to spend will be highly deflationary and very uncomfortable.
     I believe that the Fed has shown that it will not tolerate falling asset prices even in the face of credit contraction. This means they will create more money and begin targeting the long end of the curve to stimulate the economy. You can find a reference to the proposed action on page 24 of Dr. Bernanke’s 1999 paper titled, “Japanese Monetary Policy: A Case of Self-Induced Paralysis?”
     
    He states, “A nonstandard open-market operation without a fiscal component, in contrast, is the purchase of some asset by the central bank (long-term government bonds, for example) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending (for example, by raising collateral values). I think there is little doubt that such operations, if aggressively pursued, would indeed have the desired effect, for essentially the same reasons that purchases of foreign-currency assets would cause the yen to depreciate. To claim that nonstandard open-market purchases would have no effect is to claim that the central bank could acquire all of the real and financial assets in the economy with no effect on prices or yields.”
     
    I fully expect that we will see QE2 after the elections and buying the long-end of the curve seems like the most politically acceptable way to stimulate without having the stigma of a “stimulus bill” or “bailout”. The yield on the 30 year is 3.74% and the 20 year is 3.43%, currently. I expect that by the time this trade plays out rates will be lower on the long end by 160 bps.”

    Full Disclosure: I am long 10, 20 and 30 yr. Treasuries


    Disclosure: Long 10, 20 & 30 yr. Treasuries
    Tags: DIA, SPY, QQQ, Macro
    Sep 23 12:36 PM | Link | Comment!
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    Aug 19, 2010
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