Morning Reading – December 16, 2010
Macro Man: More on Ratings Agencies and Consultants – What a bunch of quants!
The fundamental problem is there is a total disconnect between the “risk taker” and the “risk controller”. In this case the “risk taker”, the real name for whom in the modern market is “investment manager” and the risk controller, i.e. the legal rules and compliance depts set up to control the dangerous risk taker (because as we all know taking any kind of risk is far too dangerous for the masses) and “protect” the capital of the end investor. The good investment manager does the research, finds the asset, works out the fair value, compares this to the market price and, if the market price is cheap to fair value, should be able to buy as much as possible within his level of prudence and conviction. But then in steps the risk controller who has no more information than an arbitrary set of rules thereby emasculating the investment manager and guaranteeing that the investor’s capital is put at higher risk than it needs be.
The Big Picture: 10 Questions for GOP Members of Financial Crisis Inquiry
I never wanted to write Bailout Nation.
That only came about after Bear Stearns collapsed. McGraw Hill approached Bill Fleckenstein to do a follow up to his successful Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, about the end of Bear.
Fleck turned them down, but the publisher asked him who else was covering this subject. I was told he said “That’s easy, Ritholtz has been all over this story.”
The Big Picture: Benign inflation? Not as I see it
Headline Nov CPI rose .1% (expectations up .2%) as did the core rate (in line). The y/o/y gain is up 1.1% and the core is up .8%. Benign inflation right? Not. The absolute CPI price index (aka cost of living) is now at the 2nd highest reading on record at 218.88 seasonally adjusted, just a hair off the all time high of 219.10. The core rate, which the Fed loves to focus on, is at an all time record high.
The Big Picture: Inflation expectations spiking today
Inflation expectations in the 10 yr TIPS today are spiking by 10 bps to 2.36%, to the highest since May 3rd and it’s the biggest one day move since Sept (Sept was on a closing basis). Looking at the 5 yr TIPS has the same message, rising 8 bps to 1.97%, the highest since also early May. The 5y5y inflation breakeven is up by 14 bps to 2.96%, a one month high. Specifically since Aug 26th, the implied inflation rate in the 10 yr TIPS is up by 79 bps while the conventional 10 yr is higher by 100 bps. Thus, the rise in interest rates has been a mix of expectations of better growth but certainly also of higher inflation and, right now unquantifiable, likely concerns over debts and deficit.
FT Alphaville: The (not so) curious case of the 9.85m bbl crude oil draw
Wednesday’s weekly EIA oil inventory data is worth coming back to on Thursday.
Not only did the EIA report an exceptionally large and unexpected crude draw, it turns out the draw was the largest of its kind for this time of year since 1989.
FT Alphaville: Europe’s stress test was RIGHT
Ancient Greek mothers would often finish mythic tales told to their children (wholesome stuff like Oedipus, Electra and so on) with ‘…and then the story came true’, goes an apocryphal historical canard.
A lesson on tragic predestination and omnipotent fate, apparently.
FT Alphaville: Waltzing towards the next, inevitable implosion
Much head scratching in the latest note from Albert Edwards.
The SocGen perma bear says he hasn’t got a clue what is going in financial markets at the moment or why investors believe the economic recovery is sustainable.
FT Alphaville: Could Exxon bid for BP?
Yes, says Fred Lucas of JPMorgan, who notes that BP is trading on an implied reserve multiple that’s 30 per cent below its peers and equal to ExxonMobil’s long run finding and development costs…
FT Alphaville: FCIC-ya later
Depending on your point of view, this is either sad, funny, weird, pathetic, or just idiotic…
Calculated Risk: Commentary: Subprime Thinking
When I started this blog in January 2005, one of my goals was to alert people to the housing bubble, and to discuss the possible consequences of the then approaching housing bust. Residential investment has historical been one of the best leading indicators for the economy, and I was deeply concerned a major housing bust – both in terms of activity and house prices – would take the economy into recession.
The Slope of Hope: Cramer the Bear
For those who think Cramer is a permabull, allow me to disabuse you of that notion. He spoke in a meek voice in October 2008 (yeah, that was the month before the NASDAQ bottomed) that people should take their money out of stocks for “5 years.” Just sayin’.