Lawrence York

The End of Asset Allocation

Asset Allocation is based upon statistics. It fails because the economy moves through business cycles and quants operate models they don't fully understand the assumptions behind. Foremost among those assumptions is regression to the mean. And although models now have become real-time adjusting for new inputs their failure rests on errors like chasing the market and staying diversified. In short they fail to correctly price both value and risk.

Deflation vs. Inflation - How Will This Crisis Be Resolved?

Excellent analysis and my view too. Yet I think the day of reckoning will be off in the future as the Fed and Treasury have a plan I call the Buy American plan--get US public institutions to take up the slack in foreign purchases of treasuries. This does not address the amplitude of debt but it gives time for savings to rise and match asset values. It will take both time and luck to prevent the inevitable. Here's praying we're lucky.

Deflation vs. Inflation - How Will This Crisis Be Resolved?

Excellent analysis and my view too. Yet I think the day of reckoning will be off in the future as the Fed and Treasury have a plan I call the Buy American plan--get US public institutions to take up the slack in foreign purchases of treasuries. This does not address the amplitude of debt but it gives time for savings to rise and match asset values. It will take both time and luck to prevent the inevitable. Here's praying we're lucky.

Deflation vs. Inflation - How Will This Crisis Be Resolved?

Excellent analysis and my view too. Yet I think the day of reckoning will be off in the future as the Fed and Treasury have a plan I call the Buy American plan--get US public institutions to take up the slack in foreign purchases of treasuries. This does not address the amplitude of debt but it gives time for savings to rise and match asset values. It will take both time and luck to prevent the inevitable. Here's praying we're lucky.

Deflation vs. Inflation - How Will This Crisis Be Resolved?

Excellent analysis and my view too. Yet I think the day of reckoning will be off in the future as the Fed and Treasury have a plan I call the Buy American plan--get US public institutions to take up the slack in foreign purchases of treasuries. This does not address the amplitude of debt but it gives time for savings to rise and match asset values. It will take both time and luck to prevent the inevitable. Here's praying we're lucky.

Deflation vs. Inflation - How Will This Crisis Be Resolved?

Excellent analysis and my view too. Yet I think the day of reckoning will be off in the future as the Fed and Treasury have a plan I call the Buy American plan--get US public institutions to take up the slack in foreign purchases of treasuries. This does not address the amplitude of debt but it gives time for savings to rise and match asset values. It will take both time and luck to prevent the inevitable. Here's praying we're lucky.

Commercial Banking: What Went Wrong?

Wonderful articles and a good summary of the evolution of banking.
Of course the 'claimless credit' is fact not claimless at all as the claim is on tax revenues of which the assumption in Washington is that its endless.
The other interesting insight is that in the current Depression, if indeed we do not avert it, the root cause was not in the stock market, but the debt market. And looking at the parallels with 1929 the other three major differences are that this time the leverage was not 100% but 4000%; that this time we have the FDIC to insure bank (and money market) deposits and are bailing out the too big to fail; and this time we're printing massive amounts of new money to fight a symtom--deflation--when in fact prices are simply falling to their mean. Neither time did we have a Glass Steagall Act in place and this time their is a power grab by the very regulators whose largess to their constituents created the problem.
So in conclusion, I agree the system is broken and must get back to the basics of sound lending practices for real value produced. And if we are to guarantee deposits it must not be put at risk. If investors on the other hand want to speculate they should do so, but not with or through a bank where the taxpayer's money is at risk. That said, now we have come full circle to see that the real issue is that banks have morphed into a position where they seek, through their regulators who desire to self-perpetuate themselves, to keep a competitive advantage of using deposits with guarantees to compete with investors for higher profits than otherwise available on risk-free money.

On PPIP and Geithner's Latest Power Grab (Linkfest)

The Fed and Treasury seek to expand their powers that permit them to annoint the winners and losers rather than letting the free market do so. Intregal to this power grab is letting their constituent banks operate with guarantees from the taxpayer. This is not Capitalism, but a design to control it and the players. What is remarkable is that Geithner's call for more capital assumes that the Fed and Treasury would know when it was necessary. Clearly they failed miserably in the past and have an exceedingly consistent record of missing abuses until they cause crisis. Yes we need reform, but we need to separate regulation from the purse and politics. Geithner's proposal is indeed a power grab and will not fix the fatal flaw of promising safety on inherently risky practices. Banks need to banks not investment banks if they are to offer guarantees backed by the taxpayer.

Geithner's Financial Reform Is Doomed to Fail

Bravo and well stated! Banks, with the Fed and Treasury as their salesforce, want to keep the competitive advantage of placing public money at risk to make profits. It is incredulous that Congress can't or won't see this point. We either need to be a capitalistic system or not and the promise of guarantees by the taxpayer has no role.

What If the Low Is in? A Look at Some Dow History

Good article. I too like to play devil's advocate and question am I wrong. I too think the financial system is irreparably broken. In fact we can not know till we see. So I advice going with the short term dynamics and to use predefined stop losses. As for now the trend is up, there are lots of securities to trade.

Some Thoughts Ahead of the G20 Summit

The US goes into the G-20 Meeting seeking multi-lateral domestic spending to boost its exports as exports had been the single bright spot before the global economies met the same fate as the US economy. Europe argues that they have considerably greater social programs already in place and do not therefore have to spend as the US does to help the people.
At the same time, Europe, Asia, South America, et al want reforms so that financial institutions can not leverage up and take the system down. The US will try to mitigate the extent of reforms to preserve flexability for its largest multi-national banks. Likewise the US will try to dissuade moves that will unseat the dollar as the trade currency of the world by seeking to diliniate it as something to "study."
In the end, the G-20 meeting is about limiting protectionism and agreeing to reform. Lipservice agreement will be given to the former and agreement on reforms will occur. Because all the nations need more revenues the common agreement will absolutely arise will be one to initiate co-ordinated efforts to get tax cheaters.
As to public protests, the fact of the matter is that most all the other nations have a history of active mass public protest as their citizens pay greater attention to what their governments do and zero in on theft and corruption unlike America, perhaps until recently. At present Obama has taken a reasoned approach and their is nothing to protest except the AIG bonuses which hopefully some legislation will address. If not, just maybe American voters will get rid of some incumbent members of Congress. First on the list should be Christopher Dodd, Barney Frank and Richard Shelby--though the list is quite a bit longer.

Economic Risks Were a Result of Bad Assumptions, Not Bad Intentions

I disagree that hubris was not present. Greenspan testified to Congress that derivatives issued by the banks "were simply a way for banks to offset credit risks." Inherent in this statement is the fact that their was known risk being off-loaded to others without full disclosure as Greenspan advocated no regulation while CDSs grew to $65 trillion. The irony and hubris is that to sell their securitized toxic waste disguised in SIVs with names like "Secured Mortgage Trust" the issuers and investment banks convinced S&P to give them (mortgage pools) a AAA rating. AIG then insured them. And the intelligent banking crowd then believed their liar loans were someone else's problem--they purchased their own crap. Hubris, greed, stupidity, and speculation with guaranteed funds caused the house of cards to fall. One might legitimately also wonder if fraud were not an element as well?

Added Debt Won't Rescue the Great American Ponzi Scheme

I think the author is dead on in his assessment that more debt is not the cure of America's financial woes. I would additionally add that US unrealized debt will amplify as the US is forced to repatriate the fruadulent securities it packaged and sold around the world; as GNMA's losses are realized, and as a wave of credit card and auto securitizations go bust. Indeed the solution is also a problem. The big bang will come when the US government completes its transfer of bad debt to the Treasury and the world, en masse, concludes that private securities are the place to be as government guaranteed securities are a complete illusion. The answer then, is a for sale sign--selling US private sector assets to foreigners in any amount they desire.

U.S. Debt Watch: Paths to Repudiation

It is unfortunately the case but we have time. China our largest creditor is trapped--one the one hand they know it and don't like being overconcentrated in US Treasuries nor getting puny interest rates and on the other until their own economic crisis dissapates they can not afford to let their currency appreciate. The US therefore has time but the clock is ticking. First order of business is to stablize the economy and stop the job losses. Second order is to create jobs through small business and circumvent the money center banks by direct lending to small businesses. Thirdly we must build confidence by working together. Hearing the rebuttal of Obama's address and knowing the Republican agenda of keeping dysfunction until the 2010 elections, I think the author is correct but would say the probability is greatest for hyper inflation to pay off our debt in cheap dollars. With this plan the Congress can still bring home the bacon to their constituencies.

The U.S. Is Losing the Economic Cold War

Our first reactions are anger and denial. Its time to move to acceptance and resolution. SB was one of the first the call the Recession and foretold the Banking industries' insolvency and lack of capital to lend. Now, though we are not yet in a Depression, we are accelerating toward one because of the emotional hard coding that drives most to hang on to wishes instead of reality and take corrective action.
The truth of the matter is that we need lending and it is not necessary to save the too big to fail banks.The Fed and Treasury have already begun cirucumventing them with their 'quantitative easing' policies that have racked up $8.5 trillion in security purchases (note I don't use the words 'asset purchases'). My statement is that the US is likely to end up with a $15 trillion dollar deficit-or debt-but the choice of deficit is best because constantly rolling the debt, will have the burden on-going deficit spending as the debt must be serviced. My major point though is that policy makers must look a little futher down the road and think strategically instead of tactically--just fixing the problem of day. That would lead them to seeing that denial and tactical spending is aimless and will ultimately indenture the US beyond its capacity. SB argues instead for Growth, agreeing that foreclosure is not the answer. With policies consistently focused on tactical needs, policy makers have ingored the demand side of the equation exacerbating the problem causing job losses. Now handing out tax cuts, money to cities and spending on infrastructure, instead of empowering growth via small businesses that create jobs, is another example of a policy designed to keep what you had and it is a policy that will do more to run up deficits and debt than one to solve the problem.
US GDP was indeed goosed and balooned by the use of securitization iand leverage. The math of losses applies. The paradyme of chucking original research and credit analysis for statistical modeling is dead because most everyone outside the US will not soon be fooled again.
US GDP will slow massively then, because we will not be able to package and sell crap securities and leverage in any case will be curtailed. The risk of denial is the risk that others act and the US experiences a lost decade. Japan finally emerged from their ruins by exporting their electronics and auto expertise. Unfortunately the US has long ago sold its crown jewel exports. Now SB uses the word 'Growth' to convey new technologies and invention. SB argues that it is only by Growth and far-sighted policies empowering businesses that we can pay the enormous tab--a tab conservatively estimated to sum to $15 trillion. No Way. My friend, go through the arithmatic. We officially acknowledged the Recession at $10 trillion. The Government has nationalized Fannie Mae and Freddie Mac, bailed out the 'too big to fail' banks and AIG while keeping quiet on Ginnie Mae. The $12 trillion in mortgages held in these government entities have inflated principal values by and large and represent sub-prime and moderate income loans. The Fed has bought or holds as collateral, $8.5 trillion in securities, some percentage of which are not worth their principal value and no one but the government will buy them without a discount in their price. The Obama administration is fast at work getting a $820 billion stimulus program launched and has forecast that the US will run double or back to back (oct 2008-Oct-2010) trillion dollar deficits. Since the Treasury is outsourcing management (disposal) of the securities it is purchasing via TARP and TALF for a fee and these are held at real, inflated values, since China, Russia, the UK, etc. are demanding being made whole on the fraudulent securities they bought, since it is not unreasonable to estimate that the Treasury will ultimately lose 15-20 percent in the final accounting (if we get one) when housing prices will average that or more, then settling out at the 7/15 GDP/Deficit ratio is not KOOK forecasting. Moreover, it will be the rate of change in recovery and the years to get back even that will punish the US. And that is why I reaffirm that 'Growth' is the only answer.