Tuesday, January 23, 2018

Thirty Year Trend Ending?

We thought just for an instant
We could see the future
We thought for once we knew
What really was important
--Til Tuesday

Eyes continue to migrate to Treasury yields and the 10 yr yield chart in particular. Is the 30+ yr secular decline in interest rates about to meet its technical demise?


May be the most important chart on the planet.

no positions

Monday, January 22, 2018

Perverse Incentive

And if your head explodes with dark forebodings too
I'll see you on the dark side of the moon
--Pink Floyd

During a federal government shutdown, Congress still gets paid. Seems very wrong at first blush. On the other hand, if Congress didn't get paid during a shutdown, then there would be less incentive among lawmakers to shut parts of government down.

Of course, since they are getting paid, there is zero chance that Congress would voluntarily shut themselves down (which, until we have lawmakers who remain faithful to the Constitution, is what we need).

Paying Congress during government shutdowns is what is known as a perverse incentive.

Sunday, January 21, 2018

Purdue Annual Letter

"When I signed up for the course, I thought I was playing it smart. I thought, 'I'll take shop. It'll be such as easy way to maintain my grade point average.'"
--Brian Johnson (The Breakfast Club)

Interesting annual letter from Purdue University President Mitch Daniels. Purdue made headlines last spring when it acquired the assets of online education provider Kaplan.

Daniels updates stakeholders on the Kaplan acquisition and how the institution plans to integrate the Kaplan assets into its higher ed processes. It remains to be seen whether a top tier institution can simultaneously do both face-to-face and distance education exceptionally well.

I found Daniels' comments on gradeflation particularly interesting. The evidence at Purdue is consistent with what is happening elsewhere: grades are drifting higher without commensurate improvement in student skills. Here is his central concern:

"In too many places, 'self-esteem' has apparently taken precedence over candor in student assessment. For many of our arriving students, anything less than an A comes as a jolt and a rude surprise. The student evaluations of our faculty which are collected at the end of each term are thought by many to be heavily tilted toward professors who are less demanding or inclined to easier grading."

I can attest to his latter point. Want better end-of-course evals? Grade easier.

Daniels admits that his "bias on the topic is evident." Further, he states that, "I believe that, in a sea of leniency, a university that maintains tough standards of performance will set itself and its graduates apart in a highly positive way."

Perhaps, but there be a wind in the face of an institution that seeks to attract large numbers of students by advertising candor and rigor in its evaluation systems. Students have been conditioned to seek out 'easy' classes and professors in order to achieve the highest mark possible.

I should add that Daniels writes like a CEO who demonstrates solid understanding of his organization's external environment and internal strengths/opportunities. Purdue is fortunate to have him.

Saturday, January 20, 2018

Government Shutdowns

"Shut it down. Shut it down NOW!"
--Telco Supervisor (Die Hard)

With a 'government shutdown' seemingly pending, let's review some process and history. As discussed here, routine activities of most federal agencies are funded prior to the start of each fiscal year (October 1) by one or more regular appropriations acts. These are acts of Congress.

When a regular appropriations act is delayed, then a continuing resolution (CR) can be passed by Congress to provide interim budgetary funding.

The Antideficiency Act prohibits expenditure of federal funds in the absence of appropriations except for government activities involving "the safety of human life or the protection of property." Because this language can be broadly interpreted, a practical implication of this exception is that a large portion of government remains in operation regardless of whether a CR is in place or not.

When a regular appropriation or CR is not in place, then a 'funding gap' occurs. A funding gap may occur at the start of a fiscal year or anytime a CR expires without a replacement. When a funding gap occurs, federal agencies begin to shutdown non-excepted activities and furlough non-excepted personnel. Because it has been customary to retroactively pay furloughed personnel for time missed once the 'shutdown' has ended, these temporary layoffs amount to paid vacations.

Since 1977, there have been 18 funding gaps. The most recent of these occurred under the Obama administration in Fall of 2013 and lasted 16 days. The stated concern at the time was raising the debt ceiling, something that, ironically, Barack Obama had been on the record as previously opposing. Sadly, the John Boehner-led GOP ultimately caved.


The 2013 event constituted the first 'government shutdown' since December of 1995, when the last of the previous 17 funding gaps was closed.

As in 2013, both Democrats and Republicans are pointing fingers accusing each other as being responsible for 'shutting down the government'--as if shuttering government was bad.

I long for the day when we witness the opposite. When both parties trip over themselves to take credit for shrinking the size of government and transferring another increment of power from the State into the hands of the people.

Friday, January 19, 2018

Failure to Yield

We thought just for an instant
That we could see the future
We thought for once we knew
What really was important
--Til Tuesday

A year ago bond maven Bill Gross argued that 2.6% represented the Maginot line of resistance for 10 yr Treasury yields. Over the past couple of days, 10 yr yields broke thru that level.


In fact, yields are marking multi-year highs across the Treasury spectrum.

To review, higher yields are bearish for stocks because a) fixed income alternatives appear increasingly more attractive to income-oriented investors and b) higher interest rates are deadly for leveraged economies (like ours).

When this begins to matter to stocks in a big way is anyone's guess. That higher yields will matter is not a guess, however.

Thursday, January 18, 2018

Tax Cuts and Prosperity

Arthur: What is his punishment for? Answer me!
Ganis: He defied our master, Marius. Most of the food we grow is sent out by sea to be sold. He asked that we keep a little more for ourselves, that's all.
--King Arthur

Current arguments against tax cuts, claiming that they do little to spur incomes or investment, are foolish. Taxes forcibly take production from people. Income is, by definition, an individual's rightful share of output generated by productive effort. When people keep more of their production, their incomes are higher. Simple math.

Investment comes only from production that has been set aside (a.k.a. 'saving'). When people keep more of their production due to tax cuts, then more resources are available for saving and, consequently, for investing. Again, simple math.

The plethora of announcements since the recent tax cut bill was signed into law--announcements of bonuses and raises for workers and of investments in plant, property, and equipment, merely demonstrate the obvious.

Stated differently, tax cuts advance prosperity. Only those who blindly worship the State would attempt to argue otherwise.

Wednesday, January 17, 2018

Pulitzer's Reprise

"A free press, like a free life, sir, is always in danger."
--Ed Hucheson (Deadline U.S.A.)

Hard to imagine that today's mainstream media could be further from Joseph Pulitzer's 'able, disinterested' ideal and closer to his 'cynical, mercenary, demogogic' fault line.


What he didn't envision was the technological advancement of media platforms which instills competition and offers alternatives for information consumers.

Stated differently, the interested mainstream media is gradually losing control of the market.

Tuesday, January 16, 2018

Fear of Missing

"Ever wonder why fund managers can't beat the S&P 500? Because they're sheep. And sheep get slaughtered."
--Gordon Gekko (Wall Street)

Which is worse for a money manager?

a) 100% invested in stocks just like everyone else and subsequently losing 30% similar to the rest of the field.

b) 0% invested in stocks while everyone else is 100% invested in stocks and consequently missing a 30% upside move.

If a) occurs, then your fund (comprised primarily of your client's money) loses money--at least on paper. But everyone else is in a similar boat. Your performance is in line with the field. If your clients are angry, where else can they go? All funds are down.

If b) occurs, then your fund hasn't lost a dime. On a relative basis, however, you are lagging the field. You have not made money for your clients like other managers have. Angry clients now see alternatives to you. They start pulling funds and placing them elsewhere. Pretty soon, you're out of a job.

The career risk associated with b) makes this a far scarier scenario for most financial professionals. As noted here, even when there are investment strategies that have been tested to outperform over time by staying on the sidelines during big moves (both up and down), money managers shy away from them because they fear missing some of the upside.

It is this fear of missing that ultimately leads to dominant strategies that bring catastrophic losses to most fund managers.

Monday, January 15, 2018

Greatest Economic Threat

Everybody wants you to be special
And everybody wants you to be high
They throw you down a rope 
When you're in trouble, baby
Screamin', 'save me'
Then they charge you with the rescue blues
--Ryan Adams

Courtesy of MacroMaven Stephanie Pomboy, plot of consumer spending alongside expectations for higher stock prices. As Steph puts it, "stocks are now the single greatest threat to the economy...heaven forbid the market ever goes down!"


You can bet that policymakers understand the above relationship. If markets experience a down draft, then you can bet that policymakers will, in the words of the Maven, "cue the helicopters!"

Sunday, January 14, 2018

Rock On

And where do we go from here?
Which is a way that's clear?
--Dave

When I was playing baseball, I constantly scanned all major league hitters for ideas that I might incorporate into my approach at the plate. In the later years of my game, two players in particular had out sized influence. One was Don Mattingly. I liked how he got ready at the plate.

The other was Rafael Palmeiro. Since first seeing him in the star studded College World Series of 1985, I liked his stance, how he cocked his hands as he lifted his foot, and that pretty swing and one-handed release. I borrowed profusely.


After putting up Hall of Fame numbers that included 569 HRs and over 3000 hits, Palmeiro's career sadly ended in a controversy over PEDs. His name quickly left the Hall of Fame ballot after garnering little support from the writer/voters.


About a week ago I was stunned to learn that Rafael Palmeiro has been training for a comeback. While not sure any team will take a flyer on a 53 year old, even one who looks to be in excellent shape, I am certain that his swing is still sweet.
Watching a guy not too far from my age still rockin' 'em like that makes me want to hit the cage...