Tuesday, December 27, 2016

Calafia Beach Pundit: The Fed doesn't control bond yields

The Fed doesn't control bond yields

For years I've been saying that the Fed can't control bond yields, but the myth that the Fed can manipulate yields (e.g., by buying lots of 10-yr Treasuries and/or by buying lots of MBS) persists. Experience tells us that the Fed can only control short-term rates, and even then it is questionable whether the Fed can move rates up or down by more than the market is ready for at any given time. Recall the bond market tantrum earlier this year when the Fed hinted that it might raise rates several times during the course of the year, and the Fed then quickly backed off, raising rates only once (recently). Bond yields are effectively set by market forces, and are heavily influenced by the market's perception of the future of Fed policy, the expected level of inflation, and the outlook for economic growth.

Here are some charts which compare the history of the Fed's purchases of Treasuries and MBS and their corresponding yields. You can judge for yourself whether the Fed has managed to manipulate those yields with its Quantitative Easing programs.

The chart above shows what happened to 10-yr Treasury yields during the Fed's three Quantitative Easing programs. In each period, despite massive bond purchases, the yield on 10-yr Treasuries rose. Ironically, the Fed justified QE by saying it would depress yields, and that in turn would stimulate the economy. What I think really happened to cause yields to rise despite Fed bond purchases was that the Fed's QE efforts supplied badly-needed bank reserves to the system, and that satisfied the market's thirst for safe assets; that in turn resulted in healthier market liquidity, which in turn caused the market to become somewhat more optimistic about future growth, which in turn caused the market to anticipate higher short-term interest rate guidance from the Fed in the future.

The chart above compares the magnitude of the Fed's Treasury purchases with the level of 10-yr yields. It stands to reason that the Fed could potentially manipulate the bond market only if it buys or sells a quantity of bonds that is significant relative to the outstanding supply of those bonds. Thus the rationale for the blue line, which is the ratio of the Fed's holdings of Treasuries relative to the total marketable supply of Treasuries. Several things jump out: 1) during 2008, as Fed holdings of Treasuries were plunging, yields were falling, and 2) in 2013, as Fed holdings of Treasuries was surging as part of QE3, Treasury yields surged (both in contrast to what the Fed promised QE would do), and 3) the Fed currently holds about 18% of outstanding Treasury debt, and that is about the same amount it held at the end of 2004 and less than the 20% of Treasury debt it held at the end of 2002, yet yields today are much lower than they were back then. Tough to see any convincing or enduring correlation between these lines.

The chart above compares the magnitude of the Fed's MBS purchases with the level of MBS yields. Here we see that despite huge MBS purchases in 2009, MBS yields were relatively unchanged. More recently, with Fed holdings of MBS holding relatively steady, yields have surged. No convincing causality or correlation that I can see between these two lines.

The recent surge in bond yields has almost nothing to do with Fed policy, and very little to do with increased inflation expectations. It's mostly about an improving outlook for growth assuming that Trump is able to reduce the tax and regulatory burdens that have been holding back growth for the past decade.  

Sunday, October 16, 2016

Index Fund Ownership Concentration

Collaborative Economy Honeycomb v3.0 - The Big Picture

Don't Be So Sure the Big Tech Breakthroughs Are Behind Us - Bloomberg View

Don't Be So Sure the Big Tech Breakthroughs Are Behind Us

Vox tech writer Timothy B. Lee used to be one of the most ardent techno-optimists. But he's had a bit of a conversion, of late, and is now on the side of those who think tech progress is slowing. Maybe it was the economist Robert Gordon who convinced him, or maybe years of observing the tech world changed his mind. In any case, Lee now broadly suggests that the inventions of tomorrow won't be as world-changing as those of yesteryear. The idea that tech will remake our lives, he writes:

has fallen flat in recent years, and I think it's going to continue failing in the years to come. There are a number of industries — with health care and education being the most important — where there's an inherent limit on how much value information technology can add. Because in these industries, the main thing you're buying is relationships to other human beings, and those can't be automated.

Lee illustrates his argument with a chart of prices for various goods and services in the U.S. economy during the past four decades. As the chart below shows, manufactured goods have mostly fallen in price, while college and health care have soared. He reasons that these are difficult industries for technology to disrupt, since they rely so much on human-to-human interaction.

It's a compelling argument, but I see a number of ways it could potentially be wrong. There's a case to be made for continued techno-optimism.

First, Lee's chart only includes final goods -- the things that consumers buy. But there are a vast number of other goods that also use huge amounts of time and resources to create. Economists call these intermediate goods. That category includes parts and components, but also all the back-office services that make the business world run -- accounting, payroll, legal services, human resources and the rest. It also includes finance, which is a huge cost both to businesses and to investors.

Technology that makes these things cheaper will make the business world more efficient, just like cheaper steel makes manufacturing cars more efficient. And it's here, in the realm of white-collar work, where I believe the technologies bow under development have the potential to create huge productivity gains.

A lot of effort right now is being poured into machine learning and artificial intelligence, thanks in part to technical advances in the field, and also thanks to the availability of large amounts of data to train machines. In a recent interview with Lee, venture capitalist Marc Andreessen explained why he thinks machine learning is the next transformative technology.

Essentially, machine learning allows machines to do your thinking for you. One of the earliest applications was recognizing addresses on envelopes -- instead of armies of humans sitting there doing the reading, the process could be accomplished with just one or two humans managing the machine readers. That's a big productivity improvement.

It isn't hard to imagine fancier versions of that technology taking over many of the tasks we now spend our time and energy on. Machines will evaluate business proposals for banks and other lenders. Machines will scan contractors and take bids. Machines will seek out targets for mergers and acquisitions. Machines will write most of the text of legal briefs. A machine might even write my columns someday. In fact, many of the things that white-collar workers now spend hours on every day will be managed by machines. That will free up enormous amounts of time -- machines don't have to go to meetings or read e-mails.

Technology is fundamentally about saving labor, and most of the labor in the typical white-collar work-day consists of thinking. Just as factory tools and vehicles saved physical labor in the Industrial Revolution, smart machines will save more and more mental labor in the Information Revolution. And since machine learning is still in its infancy, at least in terms of applications, it's a good bet that this part of the Information Revolution isn't over.

Now, one might look at Lee's graph and say "OK, fine and good, but which of the consumer goods on this graph will get cheaper as a result of all this automation? If the things we want don't fall in price, who cares?"

There are two answers to that. The first is that Lee's graph only includes the things that people consumed in the 1980s. But as technology frees humans from the work necessary to produce the old things, humans will spend their time creating new things. We just don't yet know what most of those things will be. Forty years ago, video games barely existed -- now they're a major consumption item. Who knows what we'll desire four decades from now?

Of course, there's also a second possibility -- the possibility that many humans might become redundant. If machine learning makes most of us obsolete, we will have to alter the structures of society to redistribute the massive abundance created, in order to make everyone's leisure time as pleasant as possible. This is the rise-of-the-robots scenario that lots of people are worried about, but it doesn't have to be a scary thing, if society changes accordingly.

But whichever future occurs, it seems likely that the world of white-collar work is due for some much-needed disruption. That makes me a little more optimistic than Lee.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net

Saturday, September 24, 2016

Business Insider: 8 signs people think you're smart

8 signs people think you're smart
Business Insider

Do people view you as intelligent? Strelka Institute for Media, Architecture and Design/Flickr No one wants to be viewed as a fool. That being said, while it's certainly tempting to worry about how others see you, it's probably more beneficial to just keep working on broadening your knowledge every day. Still, it can be helpful - not to mention a bit of an ego boost - to know when others perceive you as intelligent. Here are several signs that you might be viewed as the smartest person in the Read the full story

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Saturday, July 23, 2016

20 misused English words that make smart people look silly — Quartz

20 misused English words that make smart people look silly — Quartz

This post originally appeared at LinkedIn. Follow the author here.

We're all tempted to use words that we're not too familiar with. If this were the only problem, I wouldn't have much to write about. That's because we're cautious with words we're unsure of and, thus, they don't create much of an issue for us. It's the words that we think we're using correctly that wreak the most havoc. We throw them around in meetings, e-mails and important documents (such as resumes and client reports), and they land, like fingernails across a chalkboard, on everyone who has to hear or read them. We're all guilty of this from time to time, myself included.

When I write, I hire an editor who is an expert in grammar to review my articles before I post them online. It's bad enough to have a roomful of people witness your blunder—it's something else entirely to stumble in front of 100,000! The point is, we can all benefit from opportunities to sharpen the saw and minimize our mistakes. Often, it's the words we perceive as being more correct or sophisticated that don't really mean what we think they do. There are 20 such words that have a tendency to make even really smart people stumble.

Have a look to see which of these commonly confused words throw you off.

Accept vs. Except

These two words sound similar but have very different meanings. Accept means to receive something willingly: "His mom accepted his explanation" or "She accepted the gift graciously." Except signifies exclusion: "I can attend every meeting except the one next week." To help you remember, note that both except and exclusion begin with ex.

Affect vs. Effect

To make these words even more confusing than they already are, both can be used as either a noun or a verb. Let's start with the verbs. Affect means to influence something or someone; effect means to accomplish something. "Your job was affected by the organizational restructuring" but "These changes will be effected on Monday." As a noun, an effect is the result of something: "The sunny weather had a huge effect on sales." It's almost always the right choice because the noun affect refers to an emotional state and is rarely used outside of psychological circles: "The patient's affect was flat."

Lie vs. Lay

We're all pretty clear on the lie that means an untruth. It's the other usage that trips us up. Lie also means to recline: "Why don't you lie down and rest?" Lay requires an object: "Lay the book on the table." Lie is something you can do by yourself, but you need an object to lay. It's more confusing in the past tense. The past tense of lie is—you guessed it—lay: "I lay down for an hour last night." And the past tense of lay is laid: "I laid the book on the table."

Bring vs. Take

Bring and take both describe transporting something or someone from one place to another, but the correct usage depends on the speaker's point of view. Somebody brings something to you, but you take it to somewhere else: "Bring me the mail, then take your shoes to your room." Just remember, if the movement is toward you, use bring; if the movement is away from you, use take.

Ironic vs. Coincidental

A lot of people get this wrong. If you break your leg the day before a ski trip, that's not ironic—it's coincidental (and bad luck). Ironic has several meanings, all of which include some type of reversal of what was expected. Verbal irony is when a person says one thing but clearly means another. Situational irony is when a result is the opposite of what was expected. O. Henry was a master of situational irony. In his famous short story The Gift of the Magi, Jim sells his watch to buy combs for his wife's hair, and she sells her hair to buy a chain for Jim's watch. Each character sold something precious to buy a gift for the other, but those gifts were intended for what the other person sold. That is true irony. If you break your leg the day before a ski trip, that's coincidental. If you drive up to the mountains to ski, and there was more snow back at your house, that's ironic.

Imply vs. Infer

To imply means to suggest something without saying it outright. To infer means to draw a conclusion from what someone else implies. As a general rule, the speaker/writer implies, and the listener/reader infers.

Nauseous vs. Nauseated

Nauseous has been misused so often that the incorrect usage is accepted in some circles. Still, it's important to note the difference. Nauseous means causing nausea; nauseated means experiencing nausea. So, if your circle includes ultra-particular grammar sticklers, never say "I'm nauseous" unless you want them to be snickering behind your back.

Comprise vs. Compose

These are two of the most commonly misused words in the English language.Comprise means to include; compose means to make up. It all comes down to parts versus the whole. When you use comprise, you put the whole first: "A soccer game comprises (includes) two halves." When you use compose, you put the pieces first: "Fifty states compose (make up) the United States of America."

Farther vs. Further

Farther refers to physical distance, while further describes the degree or extent of an action or situation. "I can't run any farther," but "I have nothing further to say." If you can substitute "more" or "additional," use further.

Fewer vs. Less

Use fewer when you're referring to separate items that can be counted; use less when referring to a whole: "You have fewer dollars, but less money."

Bringing it all together

English grammar can be tricky, and, a lot of times, the words that sound right are actually wrong. With words such as those listed above, you just have to memorize the rules so that when you are about to use them, you'll catch yourself in the act and know for certain that you've written or said the right one.

We welcome your comments at ideas@qz.com.

Sunday, July 10, 2016

csen, Why the 21st Century May Be More of An "American...

csen, Why the 21st Century May Be More of An "American...

Some random thoughts on a summer Friday…

What's the rationale behind all of this talk of American declinism? Let's look at some of the key drivers of the 21st century:

Communications Technology: American-based companies dominate the internet, especially the mobile internet. Smartphones run on Google or Apple technology. Facebook, Twitter, and LinkedIn dominate social and professional networking. Whatsapp and Waze are now owned by American companies. Amazon may end up being the retailer of the globe.

Transportation and Energy: Solar's gaining a lot of momentum. Elon Musk is almost single-handedly dragging the US into a post-hydrocarbon world. And if that turns out to be a pipe dream, we've got plenty of oil and natural gas in the Dakotas and Texas. Still plenty of coal too, as out of favor as that's become. If ride-sharing really is a thing, we've got Uber and Lyft. Gen-X leaders are currently making our cities more walkable for rising Millennials who favor such things.

Diversity and Immigration: The US remains the country that the world wants to move to. The US's megacities are as diverse and tolerant as they come, and the urban south is becoming a new immigrant hub with megacities becoming too pricey. Atlanta looks to become the South's answer to Los Angeles. Legal same sex marriage in all 50 states may be less than 5-10 years away if SCOTUS rules that way.

Education: Lots of issues here at all levels, but increasingly cities are giving charter schools and other reform approaches more consideration. Elites from the developing world want to send their kids to get educated here in larger numbers. Whether they stay or not, they'll form university-based diasporas throughout the world, creating benefits for Americans. If and when online education takes off, hard to think Silicon Valley and/or American universities won't play a prominent role.

A Dynamic Economy: For all the talk about tax rates and regulations in the US, when it comes to corporate culture the US is blessed with dynamic and transparent shareholder-friendly companies. It's a phenomenal place in which to be an investor. And with demographic trends turning, should be a better and better place to be a worker. Whether we're going through a credit boom or credit bust, labor abundance or labor shortage, energy boom or technology boom, the US economy always manages to figure it out.

Demographics: Between birthrates and immigration, where else in the developed world is it better? And the US continues to be blessed with abundant land on which to build relative to its economic peers.

Institutional Strength: We're going through a rough patch, but relative to Europe, China, and Russia, it's hard to argue the US isn't #1 by a mile. Japan is kind of a special case, but it seems willing to accept its demographic demise in order to maintain ethnic homogeneity and harmony.

Military Strength: The US remains blessed to have two enormous oceans to its east and west, a peaceful neighbor to the north and increasingly a cultural and economic sibling to its south. Technology should continue to gain preeminence relative to soldier labor, and if drone and cyber-warfare are the future who else would you want to bet on?

The period from the mid 1940's to mid 1960's are thought to be the golden age for American hegemony, but a careful read of that time showed just how much the country struggled with it. "The olds" at the time, and much of the heartland, wanted no part of wearing the crown, preferring its "mind our own business" attitude that prevailed until World War I. The US made a series of foreign policy and political gaffes as it adjusted to its new role.

Much of the "American declinist" talk is about the end of the American empire, but the American empire is at most 70 years old. That'd make it one of the shortest reigns in history. Surely one day the American empire will end, but would a duration of 200, 300, or 400 years be out of line with the Roman or British empires, to which the American empire is compared?

While I expect the world as a whole to be more prosperous in my golden years than it currently is, I wouldn't be surprised at all if US power is even greater in the 2030's and 2040's than it was in my parents' childhood.

Friday, July 8, 2016

Sunday, July 3, 2016

11 TED Talks that will teach you how be happier

11 TED Talks that will teach you how be happier


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Friday, April 29, 2016

From McKinsey: How share repurchases boost earnings without improving returns

How share repurchases boost earnings without improving returns

Some actions that boost earnings per share don't create value for shareholders. Share repurchases are generally a wash.


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Thursday, April 28, 2016

Fwd: Why investors may need to lower their sights

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From: McKinsey Global Institute <publishing@email.mckinsey.com>
Date: April 28, 2016 at 11:30:18 AM CDT
To: jerryvillella@yahoo.com
Subject: Why investors may need to lower their sights
Reply-To: "support" <1ad7f2df5layfovcia3oixiqaaaaabzdl7vqdk2nh3qyaaaaa@email.mckinsey.com>

The forces driving exceptional returns are weakening
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Why investors may need to lower their sights
Why investors may need to lower their sights
The forces that have driven exceptional investment returns over the past 30 years are weakening, and even reversing. A new McKinsey Global Institute report finds it may be time for investors to lower their expectations.
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Tuesday, March 29, 2016

The 20 most popular TED Talks of all time

The 20 most popular TED Talks of all time


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Saturday, February 27, 2016

3 Cheap Tech Gadgets That Transform Your Home In To A Theatre For Just $150

3 Cheap Tech Gadgets That Transform Your Home In To A Theatre For Just $150

Buzzfeed  (null)
Only in 2016: Take Netflix and chill to the next level with these cool cheap gadgets. Via Twitter: @jens_allen Everyone loves going to the theatre, but it's expensive. What if you could stay home and watch your favorite movies (snuggled under your bedcovers) but still keep that huge screen theatre experience? Well, luckily for you it's 2016 and now you can! Discover how these 3 weird tech gadgets can transform your pad in to a budget home theatre for just $150! 1. 130" Wi-Fi Portable Projector - ($99) Via techsaved.com Gone are the days when having a high-definition projector was only for the rich and famous. Now you can get a portable Wi-Fi projector that projects up to 130 inches for just $99. Link it up with your iPhone, Laptop or even Netflix and stream straight on to your wall! Find it here. 2. MagicBox Wireless Speaker ($23) Via amazon.com This cool little bluetooth speaker hooks up wirelessly with whatever you're playing your movie from, so the projector and speaker all plays seamlessly. The sound is great and really takes your home theatre to the next level. Imagine watching a horror film with complete surround sound in the comfort of your home...pretty neat for $23. Find it here. 3. DIY Projector Screen ($39) Via amazon.com While you could project straight to a wall, a screen allows you to take your setup to the next level. Not essential by any means but certainly a nice addition if you don't have a huge empty wall somewhere around your place, or like entertaining guests outside with a big open space! Find it here.
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