Governments should adjust taxes and transfer policies to make Canadian incomes more equal, because it’s better for the economy in the long run, says a new study by TD Bank.
Governments should adjust taxes and transfer policies to make Canadian incomes more equal, because it’s better for the economy in the long run, says a new study by TD Bank.
Just buy and hold forever baby. The central banks will prop up asset prices forever. There may be a singularity down the road but it is nowhere in sight.(Via MoneyWeek)
Merryn: OK. Well, let’s talk about your view of the world now. Last year there was the infamous letter, the great bullish letter, as something you’d be interested in and your clients said, “No, not really.” Can we make mention of it now? Is there something you can say to your clients now that would re-interest them in this concept of the great bull?
Hugh: Well, let’s have a go. Because there are two things unfolding. Hedge funds and within the broad tranche of hedge funds, macro hedge funds are struggling to make money, and there is a dissatisfaction with that. I’m not the only manager to have suffered withdrawals.
Merryn: Why do you think that this sector as whole is failing to make money? What’s going on there?
Hugh: Well, I can’t be a spokesman for other and far better managers.
Merryn: But I’m sure you can allow yourself to comment on them.
Hugh: But I can reflect on my own difficulties, if you will. What I’ve found is that macro is distinguished, I believe, by superior risk control. It’s almost analogous to a disaster insurance programme. In 2008, all the good macro managers, they made you money. That’s what you pay them for. The world became profoundly unsettling and you cashed in your insurance policy.
Today, I question the relevancy of that disaster insurance. In a world where the central banks seem to have your back, seem to be underwriting risks and global asset prices, do you require that intense scrutiny of risk?
So when I look at my fund, my fund’s not dissimilar to others. We go out of our way to avoid traumatic periods of losing money. For us, typically, that would be defined as losing 5% or more in one month. Such, I think, is our capability that we have 12 years, in running this fund. So 144 monthly observations. Out of that we have had the indignity of suffering nine such months. Not that many when you consider the tremendous amount of either bull market or bear markets that have gone on.
But it forces you, that disaster scheme if you will, or prevention scheme, it forces you to reduce risk. Which is to say to sell the things you like when they go down in price. Notably this year, I had constructed this argument that I wanted to be bullish, yes, and yet, with risk control, I found myself a seller at lower and lower prices. Lo and behold, it became impossible to fulfil my mandate and to make money. I think that is a problem that I shared with many others.
Now I have, again I’m introvert, and I look and I examine my own behaviour. I have concluded that my risk tolerances were too taut and it was creating too much of my own intervention, in the portfolio, and it was damaging to the client’s performance. So I’ve pulled back or I’ve widened the tolerance of the portfolio.
Merryn: So your basic point here is that if the central banks have your back, there’s no need to have the same kind of risk controls that you used to have.
Hugh: There is less need. Less need. I tell you, I was at a conference with some of the great and the good global macro managers in September in New York and I asked them all the question, “If the S&P is down 12% what do you do? Are you selling more or are you buying?” Guess what? They’re all buying. So the central banks have created a behavioural tic which is becoming self-reinforcing and I believe we saw another manifestation of that behaviour in October.
So when I look at the year, I started the year hugely bullish on Japan. Hugely bullish, let me say, not qualitatively. I’m not an advocate of the three arrows and the resuscitation to the great heights of whatever Japan represented in the 1980s.
I am saying that I can see persistent failure to achieve such honourable ambitions, which leaves no recourse but to intervene again and again and again. Therefore I see the Yen being a weak currency.
The other side of that, the stock market, being higher and higher and higher. But I think four months of the year the Japanese market had fallen 16% from its high, and I had to swallow my pride and I had to reduce position.
I had to sell at lower prices, and yet, such is the foreboding presence or shadow cast by the Bank of Japan, that not even if we mentioned the recent intervention, without that intervention the Nikkei had gone back to its previous highs. So I was wrong in selling.
Again, over the summer the European stock markets had a similar decline, even greater if you look at the banks’ index, I think it was down over 20% and what happened? The ECB responded and took its rates negative and it committed to re-engaging, re-utilising its balance sheet to acquire European risk assets. Prices rapidly rallied from the middle of August into September. Why did I sell?
So thankfully, you only make those mistakes a few times, if you’re wise. So when we came into October, I got it. I got it. That, as a discipline, meant we stayed invested in the month of October and then we were able to buy more equity risk towards the middle of the month. Which is to say, we made money in October. We made money in September and we made money in August.
So if you will, it’s not just the narrative, it’s the risk engagement and giving trade expressions the room to breathe, such that they may prosper.
Merryn: So the simple message here, is in a market like this never sell anything and you’ll be fine.
Hugh: You can say that, but I cannot.
Securities Fraud at JP Morgan
Matt Taibbi @ Rolling Stone
Back in 2006, as a deal manager at the gigantic bank, Fleischmann first witnessed, then tried to stop, what she describes as "massive criminal securities fraud" in the bank's mortgage operations.
Thanks to a confidentiality agreement, she's kept her mouth shut since then. "My closest family and friends don't know what I've been living with," she says. "Even my brother will only find out for the first time when he sees this interview."
Six years after the crisis that cratered the global economy, it's not exactly news that the country's biggest banks stole on a grand scale. That's why the more important part of Fleischmann's story is in the pains Chase and the Justice Department took to silence her.
She was blocked at every turn: by asleep-on-the-job regulators like the Securities and Exchange Commission, by a court system that allowed Chase to use its billions to bury her evidence, and, finally, by officials like outgoing Attorney General Eric Holder, the chief architect of the crazily elaborate government policy of surrender, secrecy and cover-up. "Every time I had a chance to talk, something always got in the way," Fleischmann says.
Interfluidity on QE
Once again I present the post unedited.
“Quantitative Easing” — economics jargon for central banks issuing a fixed quantity of base money to buy some stuff — has been much in the news this week. On Wednesday, US Federal Reserve completed a gradual “taper” of its program to exchange new base money for US government and agency debt. Two days later, the Bank of Japan unexpectedly expanded its QE program, to the dramatic approval of equity markets. I have long been of two minds regarding QE. On the one hand, I think most of the developed world has fallen into a “hard money” trap, in which we are prioritizing protection of existing nominal assets over measures that would boost real economic activity but would put the existing stock of assets at risk. My preferred policy instrument is “helicopter drops”, defined as cash transfers from the fisc or central bank to the general public, see e.g. David Beckworth, or me, or many many others. But, as a near-term political matter, helicopter drops have not been on the table. Support for easier money has meant support for QE, as that has been the only choice. So, with an uncomfortable shrug, I guess I’m supportive of QE. I don’t think the Fed ought to have quit now, when wage growth is anemic and inflation subdued and NGDP has not recovered the trend it was violently shaken from six years ago. But my support for QE is very much like the support I typically give US politicians. I pull the lever for the really-pretty-awful to stave off something-much-worse, and hate both myself and the political system for doing so.
Why is QE really pretty awful, by my lights, even as it is better than the available alternatives? First, there is a question of effectiveness. Ben Bernanke famously quipped, “The problem with QE is that it works in practice, but it doesn’t work in theory.” If it worked really well in practice, you might say “who cares?” But, unsurprisingly given its theoretical nonvigor, the uncertain channels it works by seem to be subtle and second order. Under current “liquidity trap” conditions, where the money and government debt swapped during QE offer similar term-adjusted returns, a very modest stimulus (in my view) has required the Q of E to be astonishingly large. The Fed’s balance sheet is now more than five times its size when the “Great Recession” began in late 2007, yet economic activity has remained subdued throughout. I suspect activity would have been even more subdued in the absence of QE, but the current experience is hardly a testament to the technique’s awesomeness.
I really dislike QE because I have theories about how it actually does work. I think the main channel through which QE has effects is via asset prices. To the degree that QE is taken as a signal of central banks “ease”, it communicates information about the course of future interest rates (especially when paired with “forward guidance”). Prolonging expectations of near-zero short rates reduces the discount rate and increases the value of longer duration assets. This “discount rate” effect is augmented by a portfolio balance effect, where private sector agents reluctant (perhaps by institutional mandate) to hold much cash bid up the prices of the assets they prefer to hold (often equities and riskier debt). Finally, there is a momentum effect. To the degree that QE succeeds at supporting and increasing asset prices, it creates a history that gets incorporated into future behavior. Hyperrationally, modern-portfolio-theory estimates of optimal asset-class weights come to reflect the good experience. Humanly, momentum assets quickly become conventional to hold, and managers who fail to bow to that lose prestige, clients, even careers. So QE is good for asset prices, particularly financial assets and houses, and rising asset prices can be stimulative of the economy via “wealth effects”. As assetholders get richer on paper, they spend more money, contributing to aggregate demand. As debtors become less underwater, they become less thrifty and prone to deleveraging. Financial asset prices are also the inverse of long-term interest rates, so high asset prices can contribute to demand by reducing “hurdle rates” for borrowing and investing. Lower long term interest rates also reduce interest costs to existing borrowers (who refinance) or people who would have borrowed anyway, enabling them spend on other things rather than make payments to people who mostly save their marginal dollar. Whether the channel is wealth effects, cheaper funds for new investment or consumption, or cost relief to existing debtors, QE only works if it makes asset prices rise, and it is only conducted while it makes those prices rise in real and not just nominal terms.
In the same way that you might put Andrew Jackson‘s face on a Federal Reserve Note, you might describe QE as the most “Kaleckian” form of monetary stimulus, after this passage:
Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.
Replace “state of confidence” in the quote with its now ubiquitous proxy — asset prices — and you can see why a QE-only approach to demand stimulus embeds a troubling political economy. The only way to improve the circumstances of the un- or precariously employed is to first make the rich richer. The poor become human shields for the rich: if we let the price of stocks or houses drop, you are all out of a job. A high relative price of housing versus other goods, a high number of the S&P 500 stock index, carry no immutable connection to the welfare or employment of the poor. We have constructed that connection by constraining our choices. Deconstructing that connection would be profoundly threatening, to elites across political lines, quite possibly even to you dear reader.
A few weeks back there was a big kerfuffle over whether QE increases inequality. The right answers to that question are, it depends on your counterfactual, and it depends on your measure of inequality. Relative to a sensible policy of helicopter drops or even conventional (and conventionally corrupt) fiscal policy, QE has dramatically increased inequality for no benefit at all. Relative to a counterfactual of no QE and no alternative demand stimulus, QE probablydecreased inequality towards the middle and bottom of the distribution but increased top inequality. But who cares, because in that counterfactual we’d all be in an acute depression and that’s not so nice either. QE survives in American politics the same way almost all other policies that help the weak survive. It mines a coincidence of interest between the poor (as refracted through their earnest but not remotely poor champions) and much wealthier and more powerful groups. Just like Walmart is willing to stump for food stamps, financial assetholders are prone to support QE.
There are alternatives to QE. On the fiscal-ish side, there are my preferred cash transfers, or a jobs guarantee, or old-fashioned government spending. (We really could use some better infrastructure, and more of the cool stuff WPA used to build.) On the monetary-ish side, we could choose to pursue a higher inflation target or an NGDP level path (either of which would, like QE, require supporting nominal asset prices but would also risk impairment of their purchasing power). That we don’t do any of these things is a conundrum, but it is not the sort of conundrum that staring at economic models will resolve.
I fear we may be caught in a kind of trap. QE may be addictive in a way that will be painful to shake but debilitating to keep. Much better potential economies may be characterized by higher interest rates and lower prices of housing and financial assets. But transitions from the current equilibrium to a better one would be politically difficult. Falling asset prices are not often welcomed by policymakers, and absent additional means of demand stimulus, would likely provoke a real-economy recession that would harm the poor and precariously employed. Austrian-ish claims that we must let a recession “run its course” will be countered, and should be countered, on grounds that a speculative theory of economic rebalancing cannot justify certain misery of indefinite duration for the most vulnerable among us. We will go right back to QE, secular stagnation, and all of that, to the relief of both homeowners, financial assetholders, and the most precariously employed, while the real economy continues to underperform. If you are Austrian-ish (as I sometimes have been, and would like to be again), if you think that central banks have ruined capital pricing with sugar, then, perhaps uncomfortably, you ought to advocate means of protecting the “least of these” that are not washed through capital asset prices or tangled with humiliating bureaucracy. Hayek’s advocacy of a minimum income for everyone, or a sort of floor below which nobody need fall even when he is unable to provide for himself may not have been just a squishy expression of human feeling or a philosophical claim about democratic legitimacy. It may have also have reflected a tactical intuition, that crony capitalism is a ransom won with a knife at the throat of vulnerable people. It is always for the delivery guy, and never for the banker, that the banks are bailed out. It is always for the working mother of three, and never for the equity-compensated CEO, that another round of QE is started.
The BoJ increases QE
Hugh Hendry's favorite position looks(and my only one in the market- short yen long nikkei) like it is set to payoff big time.
Last week, as the Federal Reserve officially announced the end of its long-term asset purchase program (commonly known as QE3), the Bank of Japan significantly ratcheted up its own quantitative easing program, in a surprising 5-4 split decision. Starting next year, the Bank of Japan will increase its balance sheet by 15 percent of GDP per annum and will extend the average duration of its bond purchases from 7 years to 10 years. The big move by Japan’s central bank comes amid the country’s GDP declining by 7.1% in the second quarter of 2014 (on an annualized basis) from the previous quarter following the increase of the VAT sales tax from 5% to 8% in Japan earlier this year and worries that Japan could fall into another deflationary spiral or fail to reach its stated goal of 2% inflation by 2014 (likely to be reformulated as 2% by 2015). The Government Pension Investment Fund (GPIF), Japan’s $1.1 trillion government pension fund, simultaneously announced its intentions to increase its overall equity holdings from 24% to 50% reduce its domestic bond holdings from 60% to 35%.