The Big Picture

Evaluating Unconventional Monetary Policies ─ Why Aren’t They More Effective?
The Myth that U.S. Has Never Defaulted On Its Debt
Highlights and Impressions from The Big Picture Conference 2013
Monday PM Reads
How the Government Pays Its Debt
How Columbus Caused Inflation
10 Monday AM Reads
Shiller’s Financial Markets Course (Open Yale Courses)
NYT Discovers Confirmation Bias
Insect Macro

Evaluating Unconventional Monetary Policies ─ Why Aren’t They More Effective?

Posted: 15 Oct 2013 02:00 AM PDT

The Myth that U.S. Has Never Defaulted On Its Debt

Posted: 14 Oct 2013 10:30 PM PDT

The U.S. Has REPEATEDLY Defaulted

Some people argue that countries can't default. But that's false.

It is widely stated that the U.S. government has never defaulted. However, that is also a myth.

Catherine Rampbell reports in the New York Times:

The United States has actually defaulted on its debt obligations before.

The first time was in 1790, the only episode Professor Reinhart unearthed in which the United States defaulted on its external debt obligations. It also defaulted on its domestic debt obligations then, too.

Then in 1933, in the midst of the Great Depression, the United States had another domestic debt default related to the repayment of gold-based obligations.

(Update.)

Donald Marron points out at Forbes:

The United States defaulted on some Treasury bills in 1979 (ht: Jason Zweig). And it paid a steep price for stiffing bondholders.

Terry Zivney and Richard Marcus describe the default in The Financial Review…:

Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.

The United States thus defaulted because Treasury's back office was on the fritz in the wake of a debt limit showdown.

This default was temporary. Treasury did pay these T-bills after a short delay. But it balked at paying additional interest to cover the period of delay. According to Zivney and Marcus, it required both legal arm twisting and new legislation before Treasury made all investors whole for that additional interest.

Many consider Nixon's decision to refusal to redeem dollars for gold to constitute a partial default. For example, University of Massachusetts at Amherst economics professor Gerald Epstein notes:

Forty years ago this month, on August 15, 1971, President Nixon "closed the gold window", refusing to let foreign central banks redeem their dollars for gold, facilitating the devaluation of the U.S dollar which had been fixed relative to gold for almost thirty years. While not strictly a default on a US debt obligation, by closing the gold window the US government abrogated a financial commitment it had made to the rest of the world at the Bretton Woods Conference in 1944 that set up the post-war monetary system. At Bretton Woods, the United States had promised to redeem any and all U.S. dollars held by foreigners – later limited to just foreign central banks — for $35 dollars an ounce. This promise explains why the Bretton Woods monetary system was called a "gold exchange standard" and why many believed the US dollar to be "as good as gold". When Nixon refused to let foreign central banks turn in their dollars for gold, and encouraged the devaluation of the dollar which reduced the value of foreign central bank holdings of dollars, the Nixon administration effectively "defaulted" on the United States' long-standing obligations ending once and for all the Bretton Woods System.

James Grant says in the Washington Post:

The U.S. government defaulted after the Revolutionary War, and it defaulted at intervals thereafter. Moreover, on the authority of the chairman of the Federal Reserve Board, the government means to keep right on shirking, dodging or trimming, if not legally defaulting.

Default means to not pay as promised, and politics may interrupt the timely service of the government's debts.

***

Things were very different when America owed the kind of dollars that couldn't just be whistled into existence. By 1790, the new republic was in arrears on $11,710,000 in foreign debt. These were obligations payable in gold and silver. Alexander Hamilton, the first secretary of the Treasury, duly paid them. In doing so, he cured a default.

***

But in the whirlwind of the "first hundred days" of the New Deal, the dollar came in for redefinition. The country needed a cheaper and more abundant currency, FDR said. By and by, the dollar's value was reduced to 1/35 of an ounce of gold.

By any fair definition, this was another default. Creditors both domestic and foreign had lent dollars weighing just what the Founders had said they should weigh. They expected to be repaid in identical money.

Language to this effect — a "gold clause" — was standard in debt contracts of the time, including instruments binding the Treasury. But Congress resolved to abrogate those contracts, and in 1935 the Supreme Court upheld Congress.

The "American default," as this piece of domestic stimulus was known in foreign parts , provoked condemnation in the City of London. "One of the most egregious defaults in history," judged the London Financial News. "For repudiation of the gold clause is nothing less than that. The plea that recent developments have created abnormal circumstances is wholly irrelevant. It was precisely against such circumstances that the gold clause was designed to safeguard bondholders."

The lighter Roosevelt dollar did service until 1971, when President Richard M. Nixon lightened it again. In fact, Nixon allowed it to float. No longer was the value of the greenback defined in law as a particular weight of gold or silver. It became what it looked like: a piece of paper.

John Chamberlain argues at the Mises Institute that the U.S. defaulted on its:

Continental Currency in 1779

Domestic debt between 1782 through 1790

Greenbacks in 1862

Liberty Bonds in 1934

States Have Defaulted Also

States have also defaulted. The Wall Street Journal notes:

Land values soared. States splurged on new programs. Then it all went bust, bringing down banks and state governments with them. This wasn't America [today], it was America in 1841, when a now-forgotten depression pushed eight states and a desolate territory called Florida into the unthinkable: They defaulted on debts.

And Catherine Rampbell explains:

There were two episodes when a spate of American states defaulted on their debts, in 1841-42 (nine states) and 1873-84 (10 states). The havoc wreaked by these state-level defaults is part of the reason that so many states now have constitutional balanced-budget requirements.

China Alleges that the U.S. Has Already Defaulted By Weakening the Dollar

James Grant argues:

If today's political impasse leads to another default, it will be a kind of technicality. Sooner or later, the Obama Treasury will resume writing checks. The question is what those checks will buy.

***

This is the unsustainable conceit of the world's superpower-cum-super debtor. By deed, if not audible word, we Americans say: "The greenback is the world's great monetary brand. You have no choice but to use it. Like it or lump it." But the historical record of paper currencies is clear: Governments always over-issue it. The people finally do lump it."

(Indeed, the average life expectancy for a fiat currency is less than 40 years.)

And our creditor – China – has said that America has already defaulted by printing too many dollars. For example:

A Chinese ratings house has accused the United States of defaulting on its massive debt, state media said Friday, a day after Beijing urged Washington to put its fiscal house in order.

"In our opinion, the United States has already been defaulting," Guan Jianzhong, president of Dagong Global Credit Rating Co. Ltd., the only Chinese agency that gives sovereign ratings, was quoted by the Global Times saying.

Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors including China, Guan said.

That might be Chinese propaganda. But the point remains that the U.S. might not be able to print money forever without facing consequences from its creditors.

Highlights and Impressions from The Big Picture Conference 2013

Posted: 14 Oct 2013 03:00 PM PDT

I’m finally getting caught up this week after a whirlwind conference-related stuff and I wanted to jot down a few thoughts about the event itself.

For starters, all of you who came and shared the day with us – you guys are amazing. I really enjoyed talking with you and learning about your businesses and lives, we’re truly fortunate to have such fascinating and engaged readers. We also had a lot of celebrity finance and media folks in attendance (Peter Boockvar, Jim Bianco, Jeff Hirsch, Louise Yamada, etc), and it was cool watching them ask questions of the speakers on stage and interact with the crowd during breaks.

The other thing I want to say is that of all the conferences I’ve attended this year – and I’ve been to, like, all of them – I genuinely believe ours was the best. I know I’m totally biased, but still, I honestly think it’s true. No other event could match the eclecticism or the insights per minute our speakers had to offer. It was simply amazing, there wasn’t a single panel of filler or moment in which anyone’s time was being wasted. Assembling a day like that was no mean feat, Barry and Marion outdid themselves this year.

Watch Videos Here: Fora.TV

As far as the day’s events, my quick impressions below:

Barry Ritholtz gave a talk about the high cost of hedge funds and why the industry is having so much trouble delivering results these days, even with a few outliers still continuing to crush it. The statistics were shocking, the conclusions were merciless and iron-clad. When he delivers this presentation to pension fund people and other institutional investors, as he often does, it’s got to be devastating.

Michael Mauboussin discussed the results of his research for The Success Equation, maybe one of the most important books of the year. Mauboussin gave us some practical tips about determining how much luck is playing a role in our activities and how we can avoid confusing it for skill. The crowd was floored by his easygoing mastery of the subject matter, if you can read the book or catch him speaking, I highly recommend it.

My panel was supposedly “the most fun” according to the feedback we’re getting. I had three of the sharpest chief strategists in the game on stage with me (Art Hogan, Jeff Kleintop and Dan Greenhaus) and, instead of asking them for their S&P targets, we talked about the silliness of targets themselves, the positivity bias that all strategists inherently have, the career risk of being bearish and wrong and the best and worst indicators for people to follow (or ignore). This was truly a one-of-a-kind look behind the scenes of the strategist profession itself, we got lucky to have had these guys and for them to have been so forthcoming.

Jack Brennan, the chairman and former CEO of Vanguard, gave a talk about the revolutionary role ETFs are having on the industry and why financial advice has never been more important. Brennan believes that the $2 trillion in ETF assets today is just the starting point, and that someday it will be more like $10 trillion. I’m not sure if the industry is truly prepared for that. Most interestingly, Jack said that he did not believe that active management was dead – in fact, “just the opposite.” He believes, however, that “high-cost active management” is dead – or dying – and that a great way for investors to allocate is partly passive, low-cost index and partly low-cost active. There is a misunderstanding that Vanguard despises active investing, they do not. What they do despise, however, is high cost investing, and a lot of active strategies and vehicles are in that category.

Lunch was sponsored by our friends and partners at TD Ameritrade Institutional, the custodian for all of our managed assets at Ritholtz Wealth Management. TD has been great to us over the years and we were thrilled to have them representing at the conference.

After lunch, Randall Forsyth (Barron’s) interviewed maverick economist Stephanie Pomboy. She was the most bearish of all the speakers this year, her central point was that the consumer has been killing itself to keep spending while deleveraging at the same time. The couch cushions have been raided and every trick in the household spending book has been tried and exhausted. And now, running on fumes, the consumer needs wage growth and job growth to kick back in to save the day. And she just doesn’t see it happening in time, stimulus or not.

For the next panel, Michael Santoli took the stage and brought on three gentlemen (Rich Repetto, Mark Boyar and Robert Matthews) who’ve been working on or analyzing Wall Street for decades to discuss “the big shrink.” In the aftermath of the crisis, the brokerage firms themselves have been getting smaller and fighting to figure out which businesses were healthy enough to invest in. Units and employees are being discarded, unprofitable business lines are being shuttered and the customers themselves are finding better alternatives to the traditional wirehouse service model sprouting up everywhere. The panelists discussed what’s going away forever, what’s going to come back and where the opportunities of tomorrow might be.

James O’Shaughnessy was one of the lone bulls at 2012′s TBP conference and he absolutely nailed it. This year, O’Shaughnessy returned to hammer home is thesis that this is a “generational selling opportunity” for the long bond. He also shows why global dividend stocks are a screaming buy versus their US counterparts, which are already over-owned and over-loved. Jim says you’re going to have to deal with the volatility of stocks for your returns in the coming years as the bond bear market has just begun – the last one was almost four decades long.

Finally, the guest of honor had arrived and taken the stage – the legendary Art Cashin, whose fifty years on the floor of the NYSE have afforded him the opportunity to watch the great drama of fear and greed from the front row, in every conceivable permutation. Art told some amazing stories that really get to the heart of what it means to be a trader. including some fascinating anecdotes concerning JPMorgan, Charles Tiffany, the day JFK was assassinated and trying to get a sale done while the markets were panicking about a Cuban missile launch. Barry sat in with Art for this epic fireside chat and, I gotta tell you, I’ve never seen him keep his mouth shut for so long! A few questions were fielded from the crowd after which Art announced that, “Fellas, there are some ice cubes that need to be marinated.” We laughed and laughed, all the way to the hotel rooftop bar across the street.

From there, the rest was a blur

If you missed the conference and would like to watch any of the individual sessions or the whole thing, go to Fora.TV here.

And if you didn’t make it this year, we’ll see you in 2014!

Below, some of the press coverage from the event:

Recap of the Big Picture Conference (MarketWatch)

Hedge Funds Are Victims of their Own Size, Success: Ritholtz (Barron’s)

Ritholtz's Big Picture: 24-7 Media Cycle Is Going to the Blogs (Think Advisor)

A "Big Picture" View of a Smaller Wall Street (Breaking Call)

Three Wall Street Strategists Explain What Investors Are Missing Right Now (Business Insider)

ECONOMIST: The US Consumer Will Drop ‘Like Road Runner’ Falling Off A Cliff (Business Insider)

Top Tweets: Ritholtz, Brown Conference Takeaways (Financial Planning)

Art Cashin Just Gave A Hilarious Wall Street History Lesson Going Back To The 1950s (Business Insider)

Monday PM Reads

Posted: 14 Oct 2013 01:30 PM PDT

My afternoon train reading:

• This Week Is Do or Die for Market Bears (Yahoo Finance) see also Hedge Fund Bears at Year High as Equities Focus on Budget (Bloomberg)
• Open Season on C.E.O. salaries (New Yorker)
• Shiller's Nobel win is a nod to the asset bubbles we lived through (MarketWatch) see also The prize-winning property Shiller (FT Alphaville)
• What's an Economist to Do Without Government Data? (Real Time Economics)
• China’s Greenland Invests in New York Project (World Property Channel)
• U.S. May Join Germany of 1933 in Pantheon of Defaults (Bloomberg) see also U.S. Default a Road to Catastrophe (Moneybeat)
• The Rush of Football Twitter (WSJ)
• Putting Robots to Work in Solar Energy (NYT)
• Qualcomm’s brain-inspired chip: Good phone, good robot (Phys.org)
• Banksy Engaged In An Ingenious Stunt This Weekend, Secretly Selling Incredibly Valuable Art For Cheap On The Street (Business Insider)

What are you reading?

How Digital Behavior Differs Among Millennials, Gen Xers and Boomers

Source: eMarketer

How the Government Pays Its Debt

Posted: 14 Oct 2013 11:30 AM PDT

Click for interactive graphic

Source: Washington Post

How Columbus Caused Inflation

Posted: 14 Oct 2013 08:30 AM PDT

Click to enlarge

Source: Economist

According to the Economist:

“Some modern economic historians dispute Smith's argument that the discovery of the Americas, by Christopher Columbus in 1492, accelerated the process of globalisation. Kevin O'Rourke and Jeffrey Williamson argued in a 2002 paper that globalisation only really began in the nineteenth century when a sudden drop in transport costs allowed the prices of commodities in Europe and Asia to converge. Columbus’ discovery of America and Vasco Da Gama's discovery of the route to Asia around the Cape of Good Hope had very little impact on commodity prices, they argue.

But there is one important market that Mssrs O'Rourke and Williamson ignore in their analysis: that for silver. As European currencies were generally based on the value of silver, any change in its value would have had big effects on the European price level. Smith himself argued this was one of the greatest economic changes that resulted from the discovery of the Americas:

The discovery of the abundant mines of America, reduced, in the sixteenth century, the value of gold and silver in Europe to about a third of what it had been before. As it cost less labour to bring those metals from the mine to the market, so, when they were brought thither, they could purchase or command less labour; and this revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account.

The influx of about 150,000 tonnes of silver from Mexico and Bolivia by the Spanish and Portuguese Empires after 1500 reversed the downwards price trends of the medieval period. Instead, prices rose dramatically in Europe by a factor of six or seven times over the next 150 years as more silver chased the same amount of goods in Europe.

There you have it. Columbus ended price deflation by discovering lands rich in Silver.

10 Monday AM Reads

Posted: 14 Oct 2013 07:00 AM PDT

My good Columbus Day, congrats to Bob Shiller, Monday morning reading:

• Forty Years After OPEC Embargo, U.S. Is Energy Giant (Bloomberg)
• Art market: Painting by numbers (FT.com)
• This is the danger of default: U.S. fiscal failure warrants a de-Americanized world (Xinhua) see also Why China may not be over-investing (FT Alphaville)
• How important is an adviser's track record? (MarketWatch)
• Todays WTF headline: David Stockman: Soak the Rich (Barron’s)
• The 13 reasons Washington is failing (Wonkblog) see also World Keeps Full Faith in U.S. Treasuries If Not Politics (Bloomberg)
• Why You’re So Bad With Your Money (Motley Fool) see also How Aging Impacts Our Financial Decisions (Forbes)
• My weekend with the iPhone 5s: It's hard not to recommend this phone to anyone (Gigaom)
• Scott Adams’ Secret of Success: Failure (WSJ)
• Review: Paul McCartney sounds revitalized in ‘New’ (Pop & Hiss)

What are you reading?

Republican Party Favorability Sinks to Record Low

Source: Gallup

Shiller’s Financial Markets Course (Open Yale Courses)

Posted: 14 Oct 2013 05:35 AM PDT

Financial Markets (2011) (ECON 252)

Professor Shiller provides a description of the course, including its general theme, the relevant textbooks, as well as the interplay of his course with Professor Geanakoplos’s course “Economics 251–Financial Theory.” Finance, in his view, is a pillar of civilized society, dealing with the allocation of resources through space and time in order to manage big and important risks. After talking about finance as an occupation, he emphasizes the moral imperative to use wealth for the purposes of philanthropy, in the spirit of Andrew Carnegie, but also of Bill Gates and Warren Buffett. Subsequently, he introduces the guest speakers David Swensen, Yale University’s chief investment officer, Maurice “Hank” Greenberg, former Chief Executive Officer (CEO) at American International Group (AIG) and current CEO of C.V. Starr & Co. and of Starr International, and Laura Cha, former vice chair of the China Securities Regulatory Commission, member of the Executive Council of Hong Kong and of the government of the People’s Republic of China, and director of the Hong Kong Shanghai Banking Corporation (HSBC). Finally, he concludes with a description of the topics to be discussed in each lecture.

00:00 – Chapter 1. Introduction to the Course
06:12 – Chapter 2. Broader Context of the Course
22:41 – Chapter 3. Finance as an Occupation
30:40 – Chapter 4. Using Wealth for a Purpose
40:30 – Chapter 5. Outside Speakers and Teaching Assistants
50:26 – Chapter 6. Outline of the Lectures

Complete course materials are available at the Open Yale Courses website: http://oyc.yale.edu

This course was recorded in Spring 2011.

NYT Discovers Confirmation Bias

Posted: 14 Oct 2013 04:20 AM PDT

“Perhaps something more complicated than sketching out voting districts is at play. The polarized political map is now accompanied by a media ecosystem that is equally gerrymandered into districts of self-reinforcing discourse.”

From the better-late-than-never files:

I want to direct your attention to an article from David Carr, titled It's Not Just Political Districts. Our News Is Gerrymandered, Too. That’s where the above quote came from.

The bad news is that we learn that the media reporter for one of the more important American newspapers is only now discovering both confirmation bias and the Balkanization of the press. The good news? Well, let’s consider this a form of progress.

As we have written oh so many times, confirmation bias is an expensive habit of investors. We tend to read that which agrees with our investments and posture. We disagree and downplay that which advises the other side of the trade. We even selectively forget things that challenge our views and holdings.

In politics, it can divide the electorate into two warring camps, with Party first and Country second. But it also works to drive people away from the political parties — which may turn out to be a good thing in the modern era. Party affiliation has fallen over the years, and is now near its lowest levels, pretty much, ever. Independents are the largest voting group (even if they don’t vote as a bloc).

Investors that read only that which agrees with their views do poorly in markets.

Political strategists who read only that which agrees with their views do poorly in elections.

Its not only important to be “reality based,” you must also seek out dissenting views and opinions. Find intelligent people of differing perspectives and worthwhile process, and see what they have to say. Not despite their disagreeing with you, but because of it.

I don’t always agree with what colleagues like David Rosenberg or Doug Kass or Bill Fleckenstien argue — but I respect their process, and know their is an intelligence and method to their writings. Reading what they say, especially when I disagree with it, makes me a better investor.

~~~

One last issue with Carr’s column: He makes the horrific comparison of confirmation bias in news consumption with gerrymandering. For the record, the former is a hard wired cognitive error inherent to all humans; the latter is a corrupt process that serves to defeat the ideals of Democracy and “One Man, One Vote.” They are not remotely similar, and the NYT should be embarrassed by the comparison.

Source:
It's Not Just Political Districts. Our News Is Gerrymandered, Too.
David Carr
NYT October 11, 2013 http://www.nytimes.com/2013/10/12/business/media/when-our-news-is-gerrymandered-too.html

Insect Macro

Posted: 14 Oct 2013 03:00 AM PDT

Click to enlarge