Thursday, October 19, 2017
On this day 50 years ago/1967
THE DOW CHEMICAL "RIOT"
I was sitting in Professor Condor's American Literature class in the main lecture room of Bascom Hall when we heard a loud roar from across the way near the Commerce Building. After class was over, I walked out the west side of Bascom and watched students throwing rocks at the police who were guarding the building. I saw a police officer get hit by a rock. Police officers were swinging clubs and dragging away protesters. The police shot off tear gas canisters. The kids ran in all directions. I ran to one of the back basement doors of Bascom and went down a flight of stairs to get to the door. I was temporarily OK because tear gas rises. I tried to get in the back door. It was locked. I tried again and knocked. People were inside looking out at me, not knowing what to do. Finally, they opened the door and let me in.
It was the beginning of increasingly turbulent protests during my years at UW-Madison, which ended early when the school was closed mid-May, 1970, before the end of my final semester, because the police and national guard could not control the protesters and the classrooms had been saturated with tear gas.
Grant's Interest Rate Observer
The state of the late-80’s bond market generally takes a backseat in the financial history books as stocks were plunged into chaotic freefall before their eventual recovery. The (perhaps) still-ongoing bond bull market began in 1981 – however that was far from clear at the moment in late 1987.
The 10-year Treasury yield reached an astounding 15.8% on September 30, 1981 and re-tested 14% three years later, despite a contraction in CPI inflation from near-15% in early 1980 to 4% in 1984 on its way to 1.1% at year-end 1986. A strong bond rally in 1985 and early 1986 stalled by the end of that year, and by the summer of 1987 borrowing costs were again rising sharply: The 10-year yield zipped higher through September and early October to reach 10.2% on October 15, four days before the crash.
Grant’s, which displayed no particular clairvoyance on the coming rout in stocks, did spot what turned out to be a compelling opportunity in the debts of Uncle Sam. The October 5, 1987 analysis titled “In praise of compound interest” took inventory of that morale-busting bond market selloff and resultant opportunities:
The down side of 10% is vividly clear to anyone who has recently purchased bonds at the heretofore historically high yields of 8%, 9% or 9 ½%. Financial perspective is not a market timing device, and it’s possible that the market will slice through 10% as it did through 9%. It will be hard to retain one’s faith in the magic of compound interest if rates climb back up to 15%. However, as a bullish friend observes, at yields of 10%, one may lose 10% of one’s principal over the next 12 months while still breaking even. The same cannot be said for Merck common.
It is easy, in the current demoralized market, to hate bonds, but 10% is not to be despised.
It bears mention that the double-digit 10-year yields on offer through mid-1987 coincided with CPI inflation that peaked at 4.5% in October, good for a real yield in excess of 5%. Today’s 10-year obligation of the U.S. government bestows a 2.3% nominal yield, against a backdrop of modest but visible inflationary pickup. Year-on-year CPI growth, which averaged virtually nothing in 2015 and 1.3% in the twelve months of 2016, has jumped to an average reading of 2.1% this year through September, leaving the real yield on the 10-year Treasury at mere basis points. Wage growth, according to average hourly earnings compiled by the Bureau of Labor Statistics, has accelerated in each of the last five years to average more than 2.6% so far this year compared to sub-1.9% in 2012.
Paul Volcker crushed inflation, while Janet Yellen and her overseas counterparts are determined to unleash it. More than likely, a sequel to “In praise of compound interest” won’t be appearing in the pages of Grant’s any time soon.
Meanwhile, Simon Potter, the head of markets at the Federal Reserve Bank of New York, struck a similar chord in a 5,907 word speech (but who’s counting) discussing the Fed’s imminent tapering of its Treasury and Mortgage Backed Securities (MBS) portfolio, at the European Money and Finance Forum on October 11 in New York.
I am confident that the FOMC’s plan will reduce the size of the portfolio in a gradual and predictable, ‘no surprises’ manner. . . We cannot and should not prevent Treasury and MBS prices from reacting to relevant economic and financial developments . . . In fact, we actively want asset prices to respond appropriately and fully to economic and financial news.
That said, we do seek to mitigate the risk that our operational actions contribute to unnecessary surprise, disruption, or volatility.
What volatility?
Gone are the days
Today marks an even 30 years from the stock market crash of 1987. The leading features of that event are well worn in finance lore, from the strong bid through spring and summer, to the accelerating downward reversal in the preceding days that cascaded into a 22.6% swoon in the Dow Jones Industrial average on that “Black Monday,” to the prominent role of so-called portfolio insurance (a widely adopted hedging strategy that by all accounts led to indiscriminate selling in equity futures and aggravated the downdraft).The state of the late-80’s bond market generally takes a backseat in the financial history books as stocks were plunged into chaotic freefall before their eventual recovery. The (perhaps) still-ongoing bond bull market began in 1981 – however that was far from clear at the moment in late 1987.
The 10-year Treasury yield reached an astounding 15.8% on September 30, 1981 and re-tested 14% three years later, despite a contraction in CPI inflation from near-15% in early 1980 to 4% in 1984 on its way to 1.1% at year-end 1986. A strong bond rally in 1985 and early 1986 stalled by the end of that year, and by the summer of 1987 borrowing costs were again rising sharply: The 10-year yield zipped higher through September and early October to reach 10.2% on October 15, four days before the crash.
Grant’s, which displayed no particular clairvoyance on the coming rout in stocks, did spot what turned out to be a compelling opportunity in the debts of Uncle Sam. The October 5, 1987 analysis titled “In praise of compound interest” took inventory of that morale-busting bond market selloff and resultant opportunities:
The down side of 10% is vividly clear to anyone who has recently purchased bonds at the heretofore historically high yields of 8%, 9% or 9 ½%. Financial perspective is not a market timing device, and it’s possible that the market will slice through 10% as it did through 9%. It will be hard to retain one’s faith in the magic of compound interest if rates climb back up to 15%. However, as a bullish friend observes, at yields of 10%, one may lose 10% of one’s principal over the next 12 months while still breaking even. The same cannot be said for Merck common.
It is easy, in the current demoralized market, to hate bonds, but 10% is not to be despised.
It bears mention that the double-digit 10-year yields on offer through mid-1987 coincided with CPI inflation that peaked at 4.5% in October, good for a real yield in excess of 5%. Today’s 10-year obligation of the U.S. government bestows a 2.3% nominal yield, against a backdrop of modest but visible inflationary pickup. Year-on-year CPI growth, which averaged virtually nothing in 2015 and 1.3% in the twelve months of 2016, has jumped to an average reading of 2.1% this year through September, leaving the real yield on the 10-year Treasury at mere basis points. Wage growth, according to average hourly earnings compiled by the Bureau of Labor Statistics, has accelerated in each of the last five years to average more than 2.6% so far this year compared to sub-1.9% in 2012.
Paul Volcker crushed inflation, while Janet Yellen and her overseas counterparts are determined to unleash it. More than likely, a sequel to “In praise of compound interest” won’t be appearing in the pages of Grant’s any time soon.
Give me price discovery, but not yet
With apologies to the philosopher Augustine of Hippo, his timeless musing on human nature has found modern application from different constituencies. Bloomberg today relayed data from real estate appraiser Miller Samuel, Inc. and brokerage Douglas Elliman Real Estate, which shows a 31% year-on-year drop in Greenwich, CT luxury home listings in the third quarter. Would-be sellers hoping for higher prices tomorrow, rather than accepting the market-clearing ones today, drive the supply reduction.Meanwhile, Simon Potter, the head of markets at the Federal Reserve Bank of New York, struck a similar chord in a 5,907 word speech (but who’s counting) discussing the Fed’s imminent tapering of its Treasury and Mortgage Backed Securities (MBS) portfolio, at the European Money and Finance Forum on October 11 in New York.
I am confident that the FOMC’s plan will reduce the size of the portfolio in a gradual and predictable, ‘no surprises’ manner. . . We cannot and should not prevent Treasury and MBS prices from reacting to relevant economic and financial developments . . . In fact, we actively want asset prices to respond appropriately and fully to economic and financial news.
That said, we do seek to mitigate the risk that our operational actions contribute to unnecessary surprise, disruption, or volatility.
What volatility?
One of America's finest.
Gen. John Kelly's Press Conference Statement re Gold Star Family Telephone Calls
Please watch the 1st 12 minutes and last minute of the video
NYT: John F. Kelly, the White House chief of staff, delivered an emotional, personal defense of President Trump’s call this week to the widow of a slain soldier, describing the trauma of learning about his son’s death in Afghanistan and calling the criticism of Mr. Trump’s call unfair.
Mr. Kelly said that he was stunned to see the criticism, which came from a Democratic congresswoman, Representative Frederica S. Wilson of Florida, after Mr. Trump delivered a similar message to the widow of one of the soldiers killed in Niger. Mr. Kelly said afterward that he had to collect his thoughts by going to Arlington National Cemetery for more than an hour.
In a remarkable, somber appearance in the White House briefing room, Mr. Kelly, a retired Marine general whose son Second Lt. Robert Kelly was slain in battle in 2010, said he had told the president what he was told when he got the news.
“He was doing exactly what he wanted to do when he was killed,” Mr. Kelly recalled. “He knew what he was getting into by joining that 1 percent. He knew what the possibilities were, because we were at war.”
“I was stunned when I came to work yesterday, and brokenhearted, when I saw what a member of Congress was doing,” he said. “What she was saying, what she was doing on TV. The only thing I could do to collect my thoughts was to go walk among the finest men or women on this earth.”
Mr. Kelly, who had long guarded his personal story of loss even as he served as a high-profile public official, broke that silence in dramatic fashion on Thursday. With no advance notice to reporters, Mr. Kelly offered poignant criticism of the news media and the broader society for failing to properly respect the fallen.
The appearance came after Mr. Trump and the White House were consumed by criticism after the president’s actions this week — first appearing to criticize former presidents for failing to call the families of fallen service members and later for the words Mr. Trump chose to use in speaking with the widow of Sgt. La David T. Johnson.
Mr. Kelly defended Mr. Trump by offering a detailed, even excruciating description of what happens to those killed in combat, including how the remains are packed in ice for the flights back to the United States. He testified to the deep pain that parents feel when they get an early-morning knock on the door from an official there to tell them that their son or daughter has been killed in action.
“The casualty officer proceeds to break the heart of a family member,” Mr. Kelly said, his eyes reddening as he spoke.
President Trump with then Secretary of Homeland Security John Kelly at the grave of his son, First Lieutenant Robert Kelly, at Arlington National Cemetery last May. Credit Aaron P. Bernstein/Getty Images
He said that presidents often are not among those who call family members directly, and he confirmed what Mr. Trump had alluded to publicly this week: that former President Barack Obama had not called him after Lieutenant Kelly was killed.
“That was not a criticism, that was simply to say I don’t believe President Obama called,” Mr. Kelly said, adding that President George W. Bush and other presidents did not always make personal phone calls to family members. He said Lieutenant Kelly’s friends in Afghanistan called him in the hours after his son died.
“Those were the only phone calls that really matter,” Mr. Kelly said. “Yeah, the letters count to a degree. But there’s not much that can take the edge off.”
The controversy over Mr. Trump’s remarks began even before he made the calls to the families, when former Obama administration officials took offense at the suggestion that Mr. Obama had not done as much as Mr. Trump to pay honor to the fallen.
Mr. Kelly said that Mr. Trump did not intend that to be a criticism of his predecessor, but rather was repeating what Mr. Kelly had briefed him on before he got the question at an impromptu news conference on Monday in the Rose Garden.
Mr. Kelly expressed frustration and even anger at the fact that the conversation between Mr. Trump and Sergeant Johnson’s widow was exposed to the world by Ms. Wilson, a friend of the family, who was in the car with the family when the president’s call came in.
“I thought at least that was sacred,” Mr. Kelly said, expressing dismay at other aspects of society that were no longer sacred, including women, religion and Gold Star families.
Ms. Wilson had publicized her criticism of Mr. Trump’s call, saying that the president had told Sergeant Johnson’s widow that he “knew what he signed up for,” and that the family was offended by Mr. Trump’s words.
Mr. Kelly said that Mr. Trump had tried, in the call, to express what Mr. Kelly had talked to him about ahead of time — that people like her husband were doing what they loved, and what they had chosen to do, when they were killed serving the country.
“That’s what the president tried to say to four families,” Mr. Kelly said.
Mr. Kelly said that he was so upset on Wednesday that he went to the cemetery to walk among the service members who had died fighting for the country.
“Some of them,” he said, “I put there because they were doing what I told them to do when they were killed.”
Wednesday, October 18, 2017
On this day in 1867,
Seward's Folly: U.S. Buys Alaska for $0.02/acre from Russia
On this day in 1867, the U.S. formally takes possession of Alaska after purchasing the territory from Russia for $7.2 million, or less than two cents an acre. The Alaska purchase comprised 586,412 square miles, about twice the size of Texas, and was championed by William Henry Seward, the enthusiasticly expansionist secretary of state under President Andrew Johnson.
Russia wanted to sell its Alaska territory, which was remote, sparsely populated and difficult to defend, to the U.S. rather than risk losing it in battle with a rival such as Great Britain. Negotiations between Seward (1801-1872) and the Russian minister to the U.S., Eduard de Stoeckl, began in March 1867. However, the American public believed the land to be barren and worthless and dubbed the purchase “Seward’s Folly” and “Andrew Johnson’s Polar Bear Garden,” among other derogatory names. Some animosity toward the project may have been a byproduct of President Johnson’s own unpopularity. As the 17th U.S. president, Johnson battled with Radical Republicans in Congress over Reconstruction policies following the Civil War. He was impeached in 1868 and later acquitted by a single vote. Nevertheless, Congress eventually ratified the Alaska deal.
Public opinion of the purchase turned more favorable when gold was discovered in a tributary of Alaska’s Klondike River in 1896, sparking a gold rush. Alaska became the 49th state on January 3, 1959, and is now recognized for its vast natural resources. Today, 25 percent of America’s oil and over 50 percent of its seafood come from Alaska. It is also the largest state in area, about one-fifth the size of the lower 48 states combined, though it remains sparsely populated. The name Alaska is derived from the Aleut word alyeska, which means “great land.” Alaska has two official state holidays to commemorate its origins: Seward’s Day, observed the last Monday in March, celebrates the March 30, 1867, signing of the land treaty between the U.S. and Russia, and Alaska Day, observed every October 18, marks the anniversary of the formal land transfer.
On this day in 1767,
Mason and Dixon finish drawing their line
On this day in 1767, Charles Mason and Jeremiah Dixon complete their survey of the boundary between the colonies of Pennsylvania and Maryland as well as areas that would eventually become the states of Delaware and West Virginia. The Penn and Calvert families had hired Mason and Dixon, English surveyors, to settle their dispute over the boundary between their two proprietary colonies, Pennsylvania and Maryland.
The tragic plight of Germans in AMERICA during WWI
Tarred and feathered, lynched in the street and locked up in internment camps.
The Daily Mail
Tuesday, October 17, 2017
Hillary colluded with the Russians i.e. was bribed by them.
FBI uncovered Russian bribery plot before Obama administration approved controversial nuclear deal with Moscow
Before the Obama administration approved a controversial deal in 2010 giving Moscow control of a large swath of American uranium, the FBI had gathered substantial evidence that Russian nuclear industry officials were engaged in bribery, kickbacks, extortion and money laundering designed to grow Vladimir Putin’s atomic energy business inside the United States, according to government documents and interviews.
Federal agents used a confidential U.S. witness working inside the Russian nuclear industry to gather extensive financial records, make secret recordings and intercept emails as early as 2009 that showed Moscow had compromised an American uranium trucking firm with bribes and kickbacks in violation of the Foreign Corrupt Practices Act, FBI and court documents show.
They also obtained an eyewitness account — backed by documents — indicating Russian nuclear officials had routed millions of dollars to the U.S. designed to benefit former President Bill Clinton’s charitable foundation during the time Secretary of State Hillary Clinton served on a government body that provided a favorable decision to Moscow, sources told The Hill.
The tyranny of liberal judges
Hawaii judge blocks latest Trump travel restrictions to the US from eight countries
CNBC ArticleMonday, October 16, 2017
Grant's Interest Rate Observer 10/16/17
BlackRock’s primary competitor Vanguard Group is seeing an even more pronounced surge in popularity, attracting a net $291.7 billion in new funds for the first three quarters of 2017 to put John C. Bogle’s not-for-profit enterprise on pace to eclipse last year’s inflows of $323 billion. Count current Vanguard chairman and CEO F. William McNabb among those surprised by the prodigious 2017, in an interview last Tuesday with The Wall Street Journal he noted that “last year was one that I never thought we’d see again.”
The potent force of momentum -- shown here in the dual form of the longstanding bull market and growing popularity of indexation strategies -- plays a starring role in the cash pile up. So too does a helpful nudge from regulators. Both in Europe (in the form of MiFID II regulations set to take effect in 2018) and in the U.S. (with the Department of Labor’s fiduciary rule requiring increased disclosure on commissions), investors are being herded to lower cost products. On BlackRock’s second quarter conference call in July, chairman and CEO Larry Fink cited the government paradigm: “We’re seeing regulatory changes change the ETF environment. We do believe we’re seeing accelerated flows because of MiFID II, because of the movement toward the fiduciary rule in the United States.”
The bourgeoning popularity of indexation isn’t translating into better economics for its architects. To the contrary: Judging by recent moves from smaller industry players such as State Street Global Advisors and Charles Schwab, a full-on price war is underway. Last week, Barron’s reported that Charles Schwab launched the Schwab 1000 Index ETF, which covers 90% of the entire U.S. equity market according to the company, at an expense ratio of just five basis points (by comparison, institutional cash equity trading commissions used to frequently top 10 basis points). This morning, State Street responded in kind, slashing its own fees on 15 separate ETFs. For its SPDR Portfolio Total Stock Market ETF, three basis points is the new expense ratio, down from 10 basis points.
The capital gusher into ETFs and other passive instruments corresponds with the almost-robotic upward march in the stock market. A dispatch in Bloomberg Businessweek detailed the somnolent environment at the midtown prime brokerage desk of Credit Suisse Group AG. Noting the absence of client reaction to the escalating tensions with North Korea in August, Credit Suisse’s global head of risk advisory Mark Connors marveled that: “Two rockets flew over the land mass of Japan and nothing happened. There were no calls. That’s absolutely crazy.”
Fueled by unprecedented conditions such as negative nominal interest rates in large swaths of Europe and sustained central bank asset purchases despite the absence of recession in any major economy, the bull market continues apace. The severe dislocations of many ETFs relative to their underlying net asset values seen back on August 24, 2015 (in which one-fifth of all equity ETFs experienced price movements of 20% or more, compared to just 4% of individual stocks, according to Bob Rice of New York-based Tangent Capital) begs the question of what becomes of the passive uprising if and when conditions do shift.
As always, the timing of any such potential sea change remains a mystery. Daniel Wiener, editor of the Independent Adviser for Vanguard Investors, says: “I don’t think there’s much that changes these flows until we have a negative market. I can’t tell you when that happens, but when it does there will be a lot of very surprised investors.”
Free money
The flow of capital into passive investment strategies has intensified into a veritable deluge. Last week, BlackRock, Inc. reported third quarter net inflows of $96.1 billion, bringing its year-to-date influx to $264.3 billion, and easily surpassing 2016’s take of $202.2 billion. ETF industry assets, under its iShares umbrella, posted 32.1% year-on-year gains in the third quarter.BlackRock’s primary competitor Vanguard Group is seeing an even more pronounced surge in popularity, attracting a net $291.7 billion in new funds for the first three quarters of 2017 to put John C. Bogle’s not-for-profit enterprise on pace to eclipse last year’s inflows of $323 billion. Count current Vanguard chairman and CEO F. William McNabb among those surprised by the prodigious 2017, in an interview last Tuesday with The Wall Street Journal he noted that “last year was one that I never thought we’d see again.”
The potent force of momentum -- shown here in the dual form of the longstanding bull market and growing popularity of indexation strategies -- plays a starring role in the cash pile up. So too does a helpful nudge from regulators. Both in Europe (in the form of MiFID II regulations set to take effect in 2018) and in the U.S. (with the Department of Labor’s fiduciary rule requiring increased disclosure on commissions), investors are being herded to lower cost products. On BlackRock’s second quarter conference call in July, chairman and CEO Larry Fink cited the government paradigm: “We’re seeing regulatory changes change the ETF environment. We do believe we’re seeing accelerated flows because of MiFID II, because of the movement toward the fiduciary rule in the United States.”
The bourgeoning popularity of indexation isn’t translating into better economics for its architects. To the contrary: Judging by recent moves from smaller industry players such as State Street Global Advisors and Charles Schwab, a full-on price war is underway. Last week, Barron’s reported that Charles Schwab launched the Schwab 1000 Index ETF, which covers 90% of the entire U.S. equity market according to the company, at an expense ratio of just five basis points (by comparison, institutional cash equity trading commissions used to frequently top 10 basis points). This morning, State Street responded in kind, slashing its own fees on 15 separate ETFs. For its SPDR Portfolio Total Stock Market ETF, three basis points is the new expense ratio, down from 10 basis points.
The capital gusher into ETFs and other passive instruments corresponds with the almost-robotic upward march in the stock market. A dispatch in Bloomberg Businessweek detailed the somnolent environment at the midtown prime brokerage desk of Credit Suisse Group AG. Noting the absence of client reaction to the escalating tensions with North Korea in August, Credit Suisse’s global head of risk advisory Mark Connors marveled that: “Two rockets flew over the land mass of Japan and nothing happened. There were no calls. That’s absolutely crazy.”
Fueled by unprecedented conditions such as negative nominal interest rates in large swaths of Europe and sustained central bank asset purchases despite the absence of recession in any major economy, the bull market continues apace. The severe dislocations of many ETFs relative to their underlying net asset values seen back on August 24, 2015 (in which one-fifth of all equity ETFs experienced price movements of 20% or more, compared to just 4% of individual stocks, according to Bob Rice of New York-based Tangent Capital) begs the question of what becomes of the passive uprising if and when conditions do shift.
As always, the timing of any such potential sea change remains a mystery. Daniel Wiener, editor of the Independent Adviser for Vanguard Investors, says: “I don’t think there’s much that changes these flows until we have a negative market. I can’t tell you when that happens, but when it does there will be a lot of very surprised investors.”
Subscribe to:
Posts (Atom)