POSTERITY MEASURES

Bogle OWS

Another John Bogle winner.

Canadian Ties

This is an interesting and premonitory article. While there’s no denying a moral hazard implicit in the reality of having an NYC-based hedge fund trying to ‘improve’ a regional Canadian railway service, I can’t ignore the fact that CPR sought investment in public capital markets, presumably without taking into account that there are hidden contigencies in everything. Who did they think would buy their equity? The average sightseeing passenger? 

The Bee’s Knees

Can’t believe I slept on this. Yesterday someone told me Mossad was employing robobees in recon missions so I did some online research. Couldn’t verify that claim but I came across the above which is equally impressive.

So does the disintermediation of the construction industry loom? Either way, I think a lot people would want to have one of these things around the house.

America’s Pension World: Faulty Warehouse

America’s pensions are in a bad way. The math doesn’t add up and in as plain language as I can come up with, here’s why.

Think of a pension plan as a big shipping and receiving warehouse. It has assets (things it brings in) and liabilities (payments) which are the things it ships out. Many of the assets are bonds and the rest are stocks. Bonds are contracts between a borrower and a lender. The pensions in this case are the lenders and the things they bring in from the bonds are bags of money. Eventually those go out as payments to retirees. Easy right? Almost.

The thing about bonds is that they have a feature called duration. Duration sounds like it could be a complicated concept but all it represents is a bond’s sensitivity to changes in interest rates. Simpler still, it’s how much the value of the bond drops when the cost of borrowing goes up. And vice versa. This happens because old bonds (previously established contracts) are worth less compared to new bonds created with higher interest rates. Duration is measured in years. That is, it’s the average of the times when the cash flows from the bond are received by the lender. A bond without coupons has a duration equal to the length of the loan, because it doesn’t have payments along the way. Low duration means a bond is relatively insensitive to interest rate changes. So short term bonds or bonds with big coupons (regular payments) have low duration.

Now here’s the problem. Pension assets (the bags of money coming in) have a lower duration than pension liabilities (the bags of money going out). The average asset duration is between two and five years and the average liability duration is between 15and 20 years. So the liabilities are from 400 to 1000 percent more sensitive to changes in interest rates. When interest rates drop, liabilities skyrocket. That is, the amount that the warehouses clients want rises substantially but there’s much less coming in with which to give it to them.

As anyone who’s looked at the laughably low interest in their savings account or considered trying to get a mortgage (good luck with that - eligibility requirements are far more stringent since the subprime crisis) knows, interest rates have fallen to and stayed at historically low levels. The result is that pension liabilities have ballooned in excess of assets. This has happened with the backdrop of constrained growth for the corporations that support the pensions. Also, new regulations dictate that corporations have to declare their pension shortfalls on their public filings or as one bond manager put it, “they have to wear it on their shirts.” Companies with big pension obligations will therefore have a significantly harder time raising money from the investing public. Rightfully so. But still, these have to be high pressure times for pension managers.

You know that saying, ‘fool me once, shame on you; fool me twice, shame on me?’ Pension managers do. Especially those managers who could lose their jobs like everyone else who earns a salary in this economy. If pension funds take another big dump right as the boomer wave retires, heads are going to roll. So these days the managers are muttering the ‘fool me’ proverb as they modify their investment strategies (by matching assets to liabilities) to prevent further losses by locking in the current ones. The problem with this strategy is that it negates the possibility of realizing gains when rates rise again. It’s a confirmation that the certainty of misery is better than the misery of uncertainty (that would come from hoping rates rise again).

The end result is that companies are going to have to make greater cash-out-of-coffers contributions to their pension plans. This means less money for research and development and less money to be reinvested into the companies themselves. It will also mean lower wages and lay-offs for current workers. Which will constrain the economy further and make things even harder for the under 30s. 

The bigger they come, the harder they..[‘re hated]?

It’s a hard time to be a big offline corportation. My view on this is that these are companies that haven’t realized the power of online commerce and are in a defensive mode because their business models are failing. Maybe that’s too simplistic. BofA should’ve never told the public that it was going to charge fees for ATM usage.

Red curtains?

Funny how there are certain things that make headlines, stealth photo-wise. Middle Eastern weapons facilities (or doctored photos thereof right Colin?), people shoplifting, and now, Chinese ghost cities / industrial parks. The connection, I guess, is that the perps didn’t consider that they’d be broadcasted.

Maybe this photo was taken on the weekend. Either way, it’s starting to feel like China’s going to eat it. If only because the Western press says it is.

Generational money management issues

Will Silicon Valley fall for Wall Street? I think not.

Also, “Sharks game.” Ha.

How much does Obama know about finance?

If the President knew more about markets and the theory behind the financial capitalist system in which we live, would he be better equipped to make independent decisions about how to handle the fall out from two decades of irresponsibility?

Was he too dependent on his advisors that are better schooled in the ways of banking in ‘08 and ‘09? 

How can a politician talk about finance without alienating people who know less about it and regard it as an elitist arena?

More of this, please

There’s a lot to think about here.

Morality and Abstractions

Good article.

And a MUCH better reply. A call to action, even.

The Wisdom of Will Rogers

“Every guy just looks in his own pocket and then votes. And the funny part of it is that it’s the last year of an administration that counts. [A president] can have three bad ones and then wind up with everybody having money in the fourth, and the incumbent will win so far he needn’t even stay up to hear the returns. Conditions win elections, not speeches.”

But politics is still a total circus and so like Altucher says, wake me up when the election is over.

Jobs or the credit rating?

The other day Krugman put some worthwhile stuff out about how dithering over the debt is the wrong priority for DC. 

Here’s El Arian saying the national credit rating should be a top objective. I would be more inclined to agree if the ratings agencies had more legitimacy.

I tend to subscribe to the version that the comatose labour market, not the perception of our future financial solvency, should be immediately addressed. 

The sage speaks

Being married to someone who graduated from Harvard, you don’t hear heaps of Yale praise around the home. That said, I regard Shiller as economist in a class of his own so I’m looking forward to this.

I recommend interested parties take his Financial Markets class through the online Yale Open Courses. It’s also available on iTunes U.

Real stats

The other night I had a friend from Shanghai over for a pizza and some beer. I asked him about the recent bump in the Chinese PMI and he said he doesn’t believe the numbers. That must be frustrating, I thought, to live in a place where you have to question what’s behind the economic data releases.

This coming Friday the Department of Labour will provide December’s (un)employment numbers. Obviously there’s a seasonal consideration, but it’s likely that the latest 8.6 will shed a bit. But how much of that can WE believe? One thing’s for certain, if you’ve fought for the country, you’re (statistically) worse off.

If anyone can provide me with a plain English guide to unemployment numbers and criteria, please do. Otherwise, I’ll write one myself.