Apr 25th

Say It Ain’t So – Credit Risk in US Treasuries?

Author: Kenn Lamson

Comments: 0

My impression is that not that many experienced practitioners, including yours truly, slavishly subscribe to the doctrine after it’s been shot full of holes past few years, but for those of us raised on Modern Portfolio Theory it’s dogmatic that US Treasury bonds are THE credit risk-free asset that underpins valuation calculations for everything else.  I mean, EVERYTHING else – stocks, bonds, commodities, whatever, fair value calculations start with a risk-free rate to which risk premia are added.

Caused me to do a double-take, then, when I saw this graphs from the IMF (not some tin-hat blogger like yours truly, the IMF!) that shows a credit premium – the pink area on the graph – beginning to appear, according to their models in 2008.

On the other hand, anyone who’s not been on another planet, in a CIA black-ops prison or a coma knows that the gold ol’ US Treasury note just isn’t what it used to be (case in point, S&P’s spectacularly un-newsworthy downgrade of US debt - that horse is so far out of the barn he’s over the horizon and in the next county).

An excellent write-up of the graph and related info is on Barry Ritholtz “The Big Picture” blog.

Editor’s note: I no longer subscribe to the MPT / EMH doctrine as it was taught nearly 20 years ago when I waded through the CFA program. Sometimes you have to learn the theory so you can understand why it doesn’t always work in practice…

Hat tip: Global Macro Monitor for the graph

Apr 25th

More Sobering Idaho Economic Data

Author: Kenn Lamson

Comments: 0

Sorry to be such a downer – gotta call them as you see them, not as you wish they were…

Anyone who’s read this blog or spoken with me about the subject knows I have no love for most tv financial commentators. Their breathless and hyperbolic “reporting” mostly amplifies the market noise rather than providing investors much substance – “financial pornography” is a great phrase for much of their content. That said, I’ll give credit where it’s due: MSNBC has partnered with Moody’s Analytics to produce the interesting (if not immediately useful) “Adversity Index” that uses several pieces of economic data to assess the state of the economy at the state and city levels.

Moody’s adjudicates Idaho to be “At Risk” of returning to recession. The statewide figures, according to the website (data as of Feb 2011):

  • Employment +1.01%
  • Single-family Housing Starts -40.87%
  • Housing Prices (n/a)
  • Industrial Production +6.96%

The interactive site allows the user to scroll through the past 16 years and drill down on states and municipalities nationwide. An explanation of the Index is here.

Hat Tip: Dr. Pat Shannon, Dean of Boise State University College of Business and Economics
(and member of Harmonic's advisory board)

Apr 22th

Like Lehman All Over Again

Author: Kenn Lamson

Comments: 0

Remember the shockwaves created by Lehman’s collapse in September 2008? (I certainly do – I phoned from the Sawtooth wilderness to coach my panicking then-employer how to buy 1 week T-bills at negative interest rates.)  While it’s a little hyperbolic, Annie Lowry’s piece in today’s Slate.com proposes a similar global market reaction if the US defaults on its Treasury debt.

Among the cascade of problems she foresees on that fateful day:

  • sharply higher interest rates
  • dumping of Treasuries onto skittish global bond markets, fueling a “run on the bank” similar to Sept ‘08
  • widening of the repo “haircut” that causes further evaporation of market liquidity
  • collateral calls on projects where Treasuries were presented as collateral
  • money market funds “breaking the buck”, and subsequent massive withdrawal of investor funds from that market

I’d add to the list the headache of bank capital and liquidity levels coming into question since many financial institutions maintain large Treasury note positions. Municipalities, pension funds and other large institutional investors are also required to hold certain percentages of their pools in high quality assets, so would feel the effect of deteriorating credit quality (not to mention the painful price markdown.)

Read the full article here.

ADDENDUM 5.38pm MST, 25 APRIL 11:  A JP Morgan research piece echoing most of Lowry’s points can be read here -> JPM Domino Effect

Apr 21th

A Primer on Preparing for Economic Collapse

Author: Kenn Lamson

Comments: 0

This post from BusinessPundit.com is kind of funny, but with an unsettling kernel of truth.

http://www.businesspundit.com/10-things-you-can-do-to-prepare-for-economic-collapse/

Apr 06th

Economic Insight: Boise-Nampa MSA Unemployment, February 2011

Author: Kenn Lamson

Comments: 0

The US Bureau of Labor Statistics recently released February 2011 Unemployment data for the 372 metropolitan statistical areas (MSAs) it surveys. According to the BLS the non-seasonally adjusted unemployment rate for the Boise-Nampa MSA was 10.5% for the month of February, an increase of +0.5% from February 2010. Over that period, the number of unemployed workers in the Boise area climbed by 1700, while the labor force rose from 294,900 to 295,300.  The unemployment rate fell -0.3% from January 2011.

GRAPH: Harmonic Investment Advisors

At 10.5% Boise’s seasonally unadjusted unemployment rate was higher than the national average (9.5%) but was slightly lower than the state average (10.7%) and most other areas surveyed within the state.  Boise’s +0.5% year-over-year change in the unemployment rate was also less favorable than the national average (-0.9%) but smaller than the average of the Idaho cities surveyed (+0.7%).

GRAPH: Harmonic Investment Advisors

GRAPH: Bureau of Labor Statistics

In February, 308 of the 372 MSAs had unemployment rates lower than a year earlier and 259 MSAs had lower unemployment rates than Boise. The MSAs with the lowest unemployment rates nationally were Lincoln NE (4.2%) and Bismarck ND (4.6%). Those with the highest rates were El Centro CA (26.9%) and Yuma AZ (21.5%). The largest decrease in the year-over-year rate was seen in Elkhart-Goshen IN (-4.7%) while the largest increase was in El Centro CA (+1.8%).

GRAPH: Harmonic Investment Advisors

One explanation for Boise’s stubbornly high unemployment rate is that over the past two years the labor force has risen much faster than hiring. This situation has historically been self-adjusting as companies ramp up the pace of hiring when the economy improves.

Apr 05th

TARP Special Inspector Gives Treasury a FAIL

Author: Kenn Lamson

Comments: 0

Neil Barofsky, appointed 2 years ago to hold the Treasury Department’s feet to the fire in the execution of the “bank bailout” known as the Troubled Asset Relief Program, offered his public assessment in the March 30th New York Times. It’s unfortunately and distressingly negative. Among Barofsky’s findings (emphases mine):

  • “There is no question that the country benefited by avoiding a meltdown of the financial system, but this is not the only yardstick by which TARP’s legacy is measured.”
  • TARP funds have been used to infuse the nation’s largest banks, rather than to purchase and modify mortgages to assist homeowners, as Congress was promised.
  • The Treasury Department has not required banks receiving TARP funds to lend them or even to report how the funds were used.
  • “The Home Affordable Modification Program is a colossal failure”, with far fewer permanent modifications than mods that have failed. Treasury officials refuse to correct the program’s shortcomings, however.
  • The promise to implement regulatory reform that would address systemic threats represented by the largest financial institutions “appears likely to go unfulfilled.”

“Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals – whether born of incompetence, timidity in the face of crisis or a mindset to closely aligned with the banks it was supposed to rein in – may have so damaged the credibility fo the government as a whole that future policy makers may be politically unable to take necessary steps to save the system the next time a crisis arises.”

The full op/ed can be read here.

A clever visual outline of TARP is here.

Apr 01th

A Graphical History of American Finance, 1861-1935

Author: Kenn Lamson

Comments: 0

The archive at the St. Louis Fed contains some work that’s fascinating to those, like me, who are captivated by the intersection of history, economics and finance. Regarding a piece that was clearly one man’s life’s work, to quote the Federal Reserve Archive for Economic Research (underline mine):

The work was created by L. Merle Hostetler in 1936, while he was at Cleveland College of Western Reserve University (now known as Case Western Reserve University). At some point after it was printed, he added the years 1936-1938. Mr. Hostetler became a Financial Economist at the Federal Reserve Bank of Cleveland in 1943. In 1953 he was made Director of Research. He resigned from the Bank in 1962 to work for Union Commerce Bank in Cleveland. He died in 1990. The volume appears to be self published and consists of a chart, approximately 85′ long, fan-folded into 40 pages with additional years attached to the last page. It also includes a “topical index” to the chart and some questions of technical interest which can be answered by the chart.

Wow. A hand-drawn and labeled chart of historical and economic data almost 30 yards long. Extraordinary.

Page 1 of Hostetler's research volume, showing the events, economic and market
activity in 1861

The full interactive volume is here.

hat tip: Ritholtz.com

Mar 30th

Economy Balanced Like An Egg

Author: Kenn Lamson

Comments: 0

Simple but effective pair of graphics from Global Macro Monitor illustrating how narrowly balanced the global economy is between inflationary and deflationary forces. To this list, which appeared on the site in early March, one could add a global supply chain slowdown thanks to the Japanese disaster (in the deflation column) and further oil shocks (potentially in both columns, depending on whether one’s considering the impact on businesses or consumers.) The complete post is here.

Mar 29th

Top 10 Dying Industries

Author: Kenn Lamson

Comments: 0

Not good news for Boise-based companies like Guerdon Enterprises, Record Exchange and Costume Shop…

Analysis by IBIS World, via the Wall Street Journal, listing 10 industries that contracted 2000-2010 and are expected to contract through 2016 (the end of the forecast period.)

Mar 21th

NOT a List We Want Boise On

Author: Kenn Lamson

Comments: 0

For several years Boise found itself pleasantly included in quite a few lists of best places to live. They ranged from best places to start a business to best cycling, and most of us (not least the city government, our convention and visitors bureau and real estate agents) were pretty pleased with the positive notoriety.  Now we find ourselves on an unfortunately different list.

One of our favorite sources of graphical depictions of economic data, VisualEconomics.com, recently produced an information-rich infographic ranking the recessions affect on a number of American cities, including Boise. A snippet of the graphic is below.

The full infographic is available here.

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