‘The Stock-picking Process’ Archive

They Were Just, Y’Know, Kidding.

Monday, July 8th, 2013

While some people are calling it the Housing Crisis or the Sub-Prime Mortgage Crisis, if it had been either of those things it would not have grown to the world-shaking scale it did.

It was more accurately a Garbage Debt Derivative Crisis. Lots of really bad loans were bundled together, and then sliced into various debt bond-like derivatives. Some were designated to take the hit first if there were losses– those were considered riskiest, and had junk bond ratings. Other slices took the next risk, then the next, until one reached the top slice that would only lose money if all the others had already been wiped out.

If you were dealing with normal mortgages or company IOUs or bundles of credit card debt, and all other aspects were equal,  it would seem far-fetched that that top slice could have a loss. It seems safe. It seems like it should get a very good credit rating.

Wall Street firms  employ a lot of math whizzes who can expand the previous two paragraphs into pages of stochastic calculus equations, modern finance jargon, and unintended consequences. The regulatory highest rung of these firms are the Ratings Agencies, which are supposed to look at the debt, the models, and the assumptions, then grant an appropriate credit rating.

All other things were not equal, the debts were casually obviously garbage, and still the Ratings Agencies gave some of the slices high ratings.

Matt Taibbi of Rolling Stone tells the story with a lot more astonishing details:

The Last Mystery of the Financial Crisis

P.S. Although as Matt describes the US DOJ is suing the Agencies for $5Billion, I don’t think I need to tell you that none of the Wall Street workers or executives have been indicted, despite the ample evidence that they knew they were committing fraud. Sheesh.


Do Jobless Benefits Make Us Lazy?

Sunday, July 7th, 2013

There’s no shortage of opinions from political conservatives and libertarians that jobless benefits cause people to delay looking for work.

Opinions are all very well. What about data? What does actual data say?

The WSJ’s Ben Casselman wrote a nice post for their Real Time Economics blog.


Are extended unemployment benefits leading to higher rates of long-term unemployment? A new paper from the Federal Reserve Bank of Boston suggests the answer is “no”—or at least, “not much.”

You can read the full article here:

Are Jobless Benefits Leading to Higher Unemployment?


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.

May 2013 Capital Drain newsletter is out

Friday, May 31st, 2013


I posted and emailed the May 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: May 2013 CapDrain.

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


Longsplice rope

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