Archive for June, 2013

June 2013 CapitalDrain newsletter is out

Sunday, June 30th, 2013

Hi,

I just posted and emailed the June 2013 Capital Drain newsletter. If you’re on the direct mailing list for that, you should be receiving it now.

If you’re not yet on the list, but would like to be, send me an email.
If you just want to read the letter, follow this link: June 2013 CapDrain.

I hope you’ll enjoy it. You can sample from the past several years of newsletters on this page.

-R

Longsplice rope

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A New Home Port

Tuesday, June 25th, 2013

Alameda_city_flag 2

Longsplice Investments is now happily licensed for business in our new home port, the city (and island) of Alameda, California.

 

Alameda color-seal-bluerim2-96dpi-02

The motto on the city Seal translates “Prosperity on Land and Sea”.

OK, that’s a good goal to pursue, responsibly.

 

Formerly, we were at Pete’s Harbor in Redwood City, but that harbor has been closed to make way for condos. Progress is not always pretty. Boaters and neighborhood activists are still working to keep a public-access marina as part of the new development.


Doing the Un-Twist

Wednesday, June 12th, 2013

Back in September 2011, the Federal Reserve announced a new policy initiative. As part of their attempt to resuscitate the economy (with no help from Congress’ fiscal tightening), they launched Operation Twist.

The Fed wanted to “twist” the curve of interest rates for various maturities of Treasury debt. Specifically, it wanted to force down the yield for long T-bonds, by buying those while selling short-term bonds as a balance. The goal was to encourage more long-term investing, by lowering long-term interest rates. As they hoped, Treasury rates were pushed down, and commercial long-term rates fell too.

Treasury rate curve

You can see in the chart that a year ago, long term rates (for example, ’10y’ means 10-year maturity) had been driven down to between two and three percent.

Without actually announcing a plan, a bit over a month ago they allowed the longer rates to start rising again. From the 5-year maturity onward, they’ve risen more than half a percent.

Partly, that was done by the market itself. The investment community is now seriously considering the timing of the Fed’s inevitable increases to the Federal Funds overnight lending rate (FF on this chart), and the effect that will have on longer bonds. The market did the work of bidding rates up, but the Fed did nothing to stop it with new Twist purchases.

From the Fed’s perspective, all is as it should be. The economy is recovering adequately, Operation Twist is over, and the Fed is letting the long-maturity part of the yield curve return to its natural market-set levels. This is the beginning of the beginning of the Fed’s removal of its extraordinary monetary policies for supporting the economy.


New Ways of Cheating

Wednesday, June 12th, 2013

Once again we see the familiar problem with regulating the financial industry: so many companies will cheat if they can. It’s seldom the “outright lying” sort of cheating, but rather the “maybe we can hide this little bent rule” sort. They’ll take a little more risk than they’re allowed to, hoping to get a little more profit than they would have, but setting themselves up for a failure and loss that will seem to come out of nowhere.

Even as the Dodd-Frank regulations are being delayed and neutered by the industry, some companies are trying to sneak around long-established rules. When they do that, they risk devastating their general-public customers, or getting another taxpayer bailout, or both.

Here’s an interesting post by Mary Williams Walsh in the New York Times’ Dealbook blog:

Insurers Inflating Books, New York Regulator Says