John Lounsbury

Long/short equity, value, momentum, bonds
John Lounsbury
Long/short equity, value, momentum, bonds
Contributor since: 2008
Company: John B Lounsbury CFP
Sovereign Investment Insight - - -
Great comment. But I want to add some additional factoids:
1. We have never gone into a recession when Treasury rates 6 months and under were less than 0.5% for an extended period of time (years) (and maybe when under 1%, although I have not checked all the data).
2. We have never gone into a recession after a period of several years where growth was as low as in the current expansion.
3. We have never gone into recession when private sector employment growth rate was so much greater than public employment.
But the problem with depending on these comparisons is that the current period has debt deflation pressures not seen for most of the last 100 years.
Could it be that this time might be different because the conditions are different?
I agree with the author that we will not know until we can look in a rearview mirror.
JHHAlpha - - -
Ah! The paradox of Thrift, macro scale.
Jeremy - - -
Valid data.
But the 10-year Treasury is considered the predominant Treasury rate, not either the 5-year or the 30-year. I am not checking but I have little doubt that the 10-year rates will show the same pattern.
So you are looking at what happened during each time of QE. If it is valid to isolate the periods then your point is well taken. But then how do you rationalize the entire 7-year trend to lower rates?
If there had been no QE the rates would have been lowered by a greater amount?
If there had been continuous QE rates would have risen much higher?
I think the time interval effect for the period indicates that interest rates fell over the term of the alternating QEs. Whether there is cause and effect is a debatable point and I think difficult to prove.
Good discussion.
Jeremy - - -
There are a lot of reasons why QE didn't work as the Fed had hoped. But failure to lower long-term interest rates is not one of the factors. You wrote:
<<QE didn't work, it was supposed to stimulate by lowering long-term rates and it barely nudged rates.>>
Your arguments would be stronger if you left out that statement. Here are the year-end 30-year Treasury yields:
2009 4.6%
2010 4.4%
2011 3.1%
2012 3.0%
2013 3.9%
2014 2.4%
2015 2.8%
No child labor laws where you live?
Black swan for those benefiting from low oil prices. But a very white swan for the U.S. oil patch.
I can buy either "perverse" or "perverted". :-)-
GmanIV - - -
The amount of bank reserves has nothing to do with the creation of credit. Credit is issued based on the willingness of banks to create it based upon their underwriting of borrower creditworthiness.
You are perhaps confused by the idea that banks lend from deposits which are backed by a fractional reserve. This is an empirically proven falsehood, unfortunately still surviving in some (many?) elementary economic textbooks.
Lance - - -
Excellent comment. All following this thread should follow your links.
I am reminded of an excellent short essay a few days ago by Derryl Hermanutz, "Money and Credit: It's Time to Recognize the Difference":
Steven Bavaria - - -
Good comment.
You didn't use the term but I believe you are talking about "perverse incentives" when you say "corruption and perversion of basic economic principles".
Zorrow - - -
A word of caution on your link. It is a mixture of good, straightforward information and a few incorrect statements of fact. (To be charitable, I could attribute the errors to oversimplification.) This response is kept short in deference to GmanIV.
(Signed) Mr.Spock
Martin Archer and Steven Bavaria - - -
Good comments. Let me elaborate. The Fed Funds rate in the current environment is significantly symbolic rather than operational. In more "normal" times, the Fed Funds rate has a greater operational component. From Wikipedia (
In the United States, the federal funds rate is "the interest rate"[1] at which depository institutions (banks and credit unions) actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. (End of quote.)
The unusually large Fed balance sheet has created trillions of dollars of excess reserves for the banking system so that the need for short term loans from the Fed to maintain required reserves is a much rarer event than in "normal times".
But there remains the "symbolic" component of the Fed Funds rate, which derives from the use of that rate as a benchmark for other financial transactions. It is this symbolic component which is subjected to "market forces" in that market participants can receive higher than benchmark rates for loans when the demand for credit exceeds the willing supply from lenders.
Let me note: The willing supply from lenders has little relationship to reserve requirements. It has to do with the competition for profit from loans (made with posted security in some form, even simply the promise to repay by a creditworthy borrower in some cases). If lenders feel the risk is not properly compensated by whatever security is posted they do not lend, but seek other means of compensation (trading existing equity or debt securities, for example). It is by such a mechanism that I rationalize the recent BUBBLES IN EQUITIES, DEBT SECURITIES AND HOME PRICES.
So how can the market lead the Fed? My view is that happens only when the demand for credit combined with the willingness of banks to meet that demand pushes commercial rates above those indicated by the benchmark. It is clear to me that is not happening currently.
The Fed is not justified in raising rates based on current financial activity, as the author of this article has pointed out.
But the question raised by author Steven and commenters is: What would happen if the Fed raised rates?
My feeling is not much would happen (other than the temporary fluttering of speculation which would quickly subside) for a raise of 25 bp. There would probably be little economic consequence for four raises over and extended time to a 1% rate achieved in 18-24 months.
Such a gradualism would allow the Fed to remain assured the "tightening" was having no lasting detrimental effect and could establish an increased level of credit due to the expectation that the Fed could tighten for some time into the future - therefore borrowers would increase demand for credit to get rates lower now than later.
Such a scenario could actually produce the inflation the Fed has been trying to achieve with ZIRP. This reasoning is consistent with the idea that FED POLICY HAS ACTUALLY BEEN DEFLATIONARY. All in all, the ignorance of how monetary systems work could be hidden in plain view here. [Including my own ignorance. :-)- ]
Also included in 'Early Bird' for 16 November:
Very interesting comment. I have put the article linked in "What We Read Today" at GEI and included two excerpts from your comment here. This will be posted later this afternoon.
Unfortunately you are correct ("two very different disciplines") and I do not blame finance. Economist Steve Keen once suggested that economics could be improved by making it a sub-discipline of accounting. :-)
vinyl1 - - -
What you say is true. However, let me offer two comments for additional thought:
(1) The enterprise survey (non-farms payrolls data) almost certainly includes only W-2 reported employment. Unreported (W-2) employment would be included only in the household survey. The household survey is consistently lower over the past 3 years or so (with a few exceptions). Would this suggest that "off-the-record" employment has declined most of the time 2011-2015 from what it was 2007-2010?
(2) Or does the data suggest that people changed they way they answered questions (systematically) in the more recent time period? (An interesting question which I think very difficult to try to answer.)
The data shown by the author indicates something appears to be different between the two time periods. What it is doesn't seem to have any easy explanation. I think that is why his suggestion that the recent divergence without attempted analysis by the BLS is "unacceptable". Perhaps a statistically expert actuarial can look into this?
Gayle - - -
"Full blown recession"????? I think you overstate the situation.
The two quarters of negative GDP growth (0.2% and 0.1%, quarterly rates 1Q and 2Q) reflect an oil shock but are pretty mild. The fact that employment has continued to rise (+193,000 in a year through August - +318,000 full time) - and the participation rate has increased year-over-year - have caused some to question if this downturn is really a recession. Others have called it the "best recession ever" because of its small impact on the economy. But few are predicting boom times either.
As far as employment, which is a lagging indicator of the economy, we will not know the real impact there from this downturn for another year.
Canada employment data:
Weakness of downturn:
Yes, I was totally misreading what you wrote. GDP per quarter (which is what you said) hit a blind spot. I couldn't get my mind around the corner from full-year GDP. Thanks for tolerating my dullness.
Dig Deep - - -
Not sure where you got $4.25 T Q2 GDP. The current GDP of the U.S. is close to $18 trillion. Or am I misreading what you meant?
Angel - - -
bbro said GDP was up 4.7% w/o the lower energy price losses which held it down to 3.7%. Aren't both numbers better?
Andrew - - -
Are you trying to say that shipping traffic is not a good coincident indicator of U.S. economic activity? If so please supply some data. It would help in my education.
Moon - - -
I think the author addresses this concern:
"There is reasonable correlation between the container counts and the US Census trade data also being analyzed by Econintersect. But trade data lags several months after the more timely container counts."
James - - -
I think the strike last winter is very evident in the data displayed by the author. The way I read this discussion he is talking about shipping traffic currently.
<<<Money grows on trees in Academia, State Houses and the Federal Government.>>>
2/3 sarcasm and 1/3 factual. :-)
You are smarter than me (at least as of today): I bought DIS for $115.39 on July 8 and sold for $102.66 Thursday. :-(
But I did make money doing something I almost never do: Held put options until expiration day. Sold them with more than enough profit to cover my DIS loss. Holding out-of-the-money options into the last week is a fools errand. I don't even like to hold past the first of expiration month. This time being a fool was a lucky gamble, but I won't do it again soon. :-)
Dialectical Materialist - - -
You wrote:
<<<Senators with a minimal understanding of banking would be "educated" by not only the banking lobby but by nearly every wealthy and business savvy person they came into contact with. Very few capitalists are going to accept the wisdom of partial nationalization of the banking system.>>>
I agree. The last thing that a capitalist wants is unencumbered free enterprise markets. The capitalist mind is all about gaining control of markets to the diminishment of competition. The capitalist mindset might better be call "monopolist". The system we have might, in some regards, be called "monopolism". (Although from time to time government "rules" are imposed to inhibit extreme levels of monopoly.)
By what authority do I suggest this? I am a capitalist. And I strongly object to any rule imposed which could reduce my opportunity to "gain market share" - or otherwise establish dominance in any endeavor. So the strong opposition of private banking to public banks is very understandable to me. :-)
EK1949 ---
Agree with your observation about the political nature of public finance bottlenecks. The benefit of a public bank is that private profit is no longer extracted from public finance. That is both a benefit and a problem. The benefits I discussed in my original comment. The problem is that interest paid to the private sector by the government is a form of support for the overall economy. One observation about the Treasuries and MBS added to the Fed balance sheet is that they serve to depress growth of the economy because the better part of $100 billion in interest that would otherwise have been paid into the economy was returned by the Fed to the U.S. Treasury each year.
So separation of public and private banking would "save the government money" and would "cost the overall economy money" to the extent that the government reduced its Treasury securities issuance to the public.
I will repeat my suggestion that the banking "divorce" would serve to end the existence of TBTF; private banks would no longer live by nursing on the public teat. Free private enterprise would again become competitive on merit of performance.
Cullen - - -
I have this on the 'What We Read Today' reading/discussion list at GEI to be posted later this afternoon in a section with articles about shorting stocks. But I actually think your discussion of QE for the people is the most interesting part of your "thoughts". Your discussion of banking balance sheets gives rise to the question of public banking. Why should 'public business' federal expenditures be financed for private profit? Why not separate private and public banking?
Ken Rogoff gave a generally ignored presentation in the fall of 2013 the same day that Larry Summers presented his much ballyhooed secular stagnation talk. Rogoff inspired a blog by Rajiv Sethi about reformation of the U.S. banking system. I tried to summarize what came out of this sequence:
Ellen Brown, President of the Public Banking Institute, had a follow-on article after mine:
Yes, the private sector does require low risk (zero risk?) treasury securities for efficient operations but such could be created as needed in a split banking system. Government "debt" not held by the government would exist only as needed for private sector savings. Otherwise the assets and liabilities of the federal public bank would government assets and liabilities.
A big dividend of the dual banking structure: Too Big To Fail should vanish at the moment of creation of separate systems. Private banking and finance would become competitive enterprise again. The parasites now living off taxpayer funding would be free to prosper or fail according to their private enterprise function and successes (failures).
I am curious if you think the federal public bank idea has any merit.
Good comment! There are two ways to measure GDP: (1) Real GDP for a country which is related to the "wealth of the nation"; and (2) Real GDP per capita which is related to standard of living or "wealth of the individual" (although it does not address the efficiency of distribution - a key element of your comment - without further analysis).
I need a little help, Andrew. I cannot find the statement (question) you refer to in the article.
Yes, I did mistake the status of the two policies. The non-compliant policy you have applied for would save around $8,000 a year for maximum medical costs compared to the two compliant policies. I expect the major savings are as a result of the underwriting (not accepting pre-existing conditions) rather than the other coverages you itemize. But that is just a guess.
If you had $5,000 in medical expenses as discussed in previous comment, your out-of-pocket costs with the non-compliant policy would be $9,740, about $3,500 less than the ACA compliant policies.
So this is a good option because you have the back-up of going to ACA in the year following a major medical expense when underwriting would exclude you from renewing the non-compliant policy or replacing it with another non-compliant policy. This option may become more expensive in the future because I can envision a first year (or multiple-year) surcharge under ACA for anyone who had non-complaint coverage when they were healthy and then used ACA later when they ran into a pre-existing condition problem. ACA costs can only be minimized by avoiding adverse selection conditions. That means that if the healthy are avoiding a higher cost until they get sick they will have to pay a higher cost when they can no longer get the lower cost non-compliant policy.
So, to be certain of success with your strategy will mean you need to maintain your current good health at least until you get on Medicare. That can be done - millions have managed to do that up to this point.
@dunnhaupt I am hoping to see a good analysis of what losses would likely have been had a sustainable plan for Greece been put in place in 2010 instead of the incompetent "cut everything to the bone" to "restore the confidence fairy" to good health. I am going to look up the official 2010 plan document and compare the projections there with the actuals to date and post at GEI. If anyone reading this knows if that has been done somewhere I have not located yet, I can link to that and save redoing what I expect has been already done. Please reply with a link, Thanks.