January 2014 - Page 2 of 2 - Bankers Anonymous

I wrote a few days back about how a serious, academic, review of past and prospective debt restructurings can be on the one hand useful, on the other hand not particularly predictive of market conditions, and on the third hand (I have three hands!?!) easily manipulated by the Financial Infotainment Industrial Complex into unhelpful click-bait.

But I want to also highlight an interesting, but less noted, point of the Reinhart Rogoff paper. Namely, a world of financial repression leads to a lot less financial crises.

The big, ignored point, of the Reinhart-Rogoff paper

The most interesting insight of their paper – although one which contrasts sharply with the narrative that the Financial Infotainment Industrial Complex in the US would like to tell – is that the Financial Repression period (1945-1979) of economic policy-making correlates to a lower incidence of financial crashes, inflation-shocks, and banking crises.

It’s worth clicking on this screenshot of the Reinhart Rogoff figure on historical crises. They made an index of banking crashes, currency runs, hyperinflation, and debt defaults/restructurings, weighted by country. Spikes in crises all occur in the the ‘open markets’ periods, but rarely happen during ‘financial repression periods.’

History_of_debt_crises — Financial Repression = Less Crises

Only in the more liberal (with a small “L,” meaning “less-controlled”) economic period they study (1900-1939 and 1980-Present) did we experience very high spikes in financial crashes, inflation-shocks and banking crises. Correlation is not causation – I hasten to add – but it’s so clear from their graph of financial shocks that Reinhart and Rogoff have to acknowledge it.

Is financial repression a good thing?

Now, no card-carrying member of the mainstream Financial Infotainment Industrial Complex wants to be caught dead advocating a more interventionist financial regime. Among the financial news I read on a regular basis – The Wall Street Journal, Business Insider, Bloomberg – basically nobody is going to write “Hey, let’s gum up the financial markets to reduce the probability of financial crises,” which led me at first to think that this under-reported correlation in the Reinhart Rogoff paper has no support in media and politics.

The more I thought about it,[1] however, the more I realized that the idea of financial repression leading to fewer crises actually does have plenty of support. I just usually don’t read that media.

In Washington, Senator Elizabeth Warren – an ex-academic colleague of Reinhart and Rogoff – represents the view, as far as I can tell, that if we regulate Wall Street a lot more – to the point of financial repression – then we won’t experience a replay of 2008.

In financial media, when I read Matt Taibbi in Rolling Stone or Gretchen Morgenson in the New York Times, my sense is that they share Warren’s basic view. The point of regulating Wall Street is to create a system of financial repression sufficient to dampen financial excess, which will in turn dampen financial crises.

I don’t share what I interpret as the Warren/Taibbi/Morgenson[2] policy view, but I think Reinhart and Rogoff’s paper provides some academic ammunition for their views.

Please also see related post Reinhart Rogoff and the irony of political affiliations

[1] Fine, it actually wasn’t me thinking about it, it was my wife who made the next point.

[2] I’m sure any one of this troika would be offended, each for their own reason, that I have lumped them together, as if they share a common world view. No doubt there are important distinctions. Oh well. My blog. I get to do the lumping. I lump them together because I don’t ever see evidence in their writing that they evaluate members of the for-profit financial world on the terms of the for-profit world. In place of that, I see a lot of evidence of moralistic tsk-tsking about profit-seeking. “Why oh why don’t those financiers consider the children first???” I’m paraphrasing of course.

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January 16, 2014November 12, 2016

1930s Style Debt Defaults?

A sometime gold-coin buyer and a frequent reader of Bankers Anonymous sent me a message a few days ago, linking to the CNBC headline “1930s-style debt defaults likely, says IMF,” and with the simple question: “Mike – True?”

Harvard economists Carmen M. Reinhart and Kenneth S. Rogoff’s latest paper, commissioned by the IMF and published in December 2013, re-raises the specter of sovereign default in the so-called ‘developed world,’ warning of restructuring, restrictive capital controls, and debt write-offs.

Their paper was rewarded and echoed with headlines from Business Insider like “Extreme Debt Means 1930s-Style Defaults May Be Coming to Much of the Western World” and CNBC’s “1930s-style debt defaults likely, says IMF,” the headline that prompted my reader’s email to me.

This seemed like a great opportunity to reflect on the problem of different, confusing, contradictory messages constantly streaming from the Financial Infotainment Industrial Complex.

Academia, Click-bait, and Markets

Those headlines, loosely based on the Reinhart and Rogoff IMF paper, are a great example of the giant gulf between financial academia, click-bait, and actual markets. Each information source follows its own rules and logic – but mixed up together provide a cacophony of worse-than-useless dis-information.

First, academia on its own terms

Professors of international economics should consider a wide variety of scenarios, and they should present historical data, as Reinhart and Rogoff have done, with their book This Time is Different: Eight Centuries of Financial Folly.

[I confess I have not yet read this, but I suspect I will find this a useful addition to other books I have enjoyed on sovereign debt defaults, such as A Century of Debt Crises in Latin America: From Independence to The Great Depression 1820-1930 by Carlos Marichal.]

I enjoyed the Reinhart and Rogoff paper, with its useful historical data, reminding readers that sovereign debt defaults in Europe are not particularly rare. In addition, sovereign defaults sometimes come hidden in sheep’s clothing – as when a combination of capital controls, high inflation, or forced ‘savings’ from captive sources such as workers’ pensions effectively bail out overly indebted governments.

As a former emerging markets bond guy I read Reinhart and Rogoff’s work with much interest. Here’s a summary of their main points, and my reactions:

Drastic sovereign debt restructurings are historically more common than many realize, and come in a variety of forms. [Totally agree]
Financial repression, while brutal and inefficient, probably reduces financial excess, and therefore financial crises. [Totally agree]
The 5 year-old crisis we are in will involve more explicit restructuring of sovereign debt in the so-called ‘developed’ world, presumably peripheral Europe. [Mmm. Squinting. That depends. Doubtful.]
We will see a return of ‘financial repression’ in the ‘developed world.’ [I see no evidence of this. Or, I guess it depends how you define ‘financial repression.’]

But what about the click-bait?

Reinhart and Rogoff are legitimate economists (at a reasonably decent University) so it’s not surprising that they have produced serious work on historical sovereign debt restructurings. I wonder, however, to what extent they anticipated (and even encouraged?) the click-bait aspect of their paper.

“1930s-style debt defaults likely, IMF says” is a totally misleading version of their report.

“Ex-Goldman bond salesman may make billions blogging his random opinions, says blogger,” is a headline I could write about myself, but it would have as much relationship to the probabilistic truth as that CNBC headline has to the IMF report.

Unfortunately, CNBC – and the rest of the Financial Infotainment Industrial Complex – runs on nonsense click-bait, so people like my reader who sent me the email query get pummeled with emotionally-charged or scary bullshit, on an hourly basis.

Market Data

How do I know that – on a probabilistic basis – both the click-bait headline as well as points 3 & 4 of the Reinhart-Rogoff paper can be safely ignored?

Because what neither academia, nor the click-bait-setting members of the Financial Infotainment Industrial Complex typically take into account is that we have a ton of aggregated financial information available in markets about exactly their topic. Right now. At all moments.

The bond market

At any given moment – with updates on a minute-by-minute basis – the most–informed people in the world on sovereign risk – with the most to gain or lose financially – are indicating the probability of default on all sovereign debts.

Bond traders – at mutual funds, hedge funds, banks, insurance companies, and broker-dealers – control the flow of capital into or out of investments in sovereign debt.

Yield or bond spread indicate aggregate market perceptions of risk by the most knowledgeable and interested people in the world.

The constant buying and selling of bond traders sets a price, in yield terms, that tells us a lot about what the odds of default are. The higher the yield, the higher the controller of capital is demanding to take the risk of the bond. In aggregate, the self-interested decisions of bond traders give a very full view of the total risk associated with these bonds.

The most common way bond traders compare the relative risk of sovereign debt is through a ‘spread,’ which means the additional yield investors receive over the yield of a riskless bond yield.[1] A 1% bond yield spread, or as bond traders would actually say, “100 basis points”[2] spread over an equivalent riskless bond, indicates that highly informed and highly interested investors find the bond mildly, but not extraordinarily, riskier than a ‘riskless’ bond

Most of us do not see the minute-by-minute information on government bond spreads but we can access it, updated at least daily, on the global government bond yield pages of financial news sources like The Financial Times or Bloomberg or The Wall Street Journal.

Why so much about the bond markets?

Why am I going into this excruciating detail about the bond markets? Because if you know something about how the bond markets work, and what information they convey, you can interpret both the Reinhart-Rogoff thesis on defaults and the Financial Infotainment Industrial Complex’s click-bait headlines for what they are.

In sum:

Reinhart-Rogoff: Improbable

CNBC’s headline: Nonsense

How do I know this? Because the bonds markets give us bond spreads on the sovereigns they reference. Here are some select 10-year bond spreads this week from The Wall Street Journal’s global government bond page:

Italy: 97 basis points (less than 1% yield premium)

Portugal: 225 basis points (2.25% yield premium)

Spain: 88 basis points (less than 1% yield premium)

The bond market is saying, with these spreads, that it finds these European bonds mildly risky, but not terribly risky. Default, while possible, is highly improbable over the next ten years.

Of course, Greece already restructured its sovereign debt, so Reinhart-Rogoff’s ‘prediction’ came true. But since they published their ‘prediction’ in December 2013, however, they really can’t take credit for being nearly 2 years late.

So, no, 1930s-style defaults are neither likely to happen nor likely to be widespread, as implied by the IMF paper, and by CNBC’s headlines. Of course, anything can and will happen with markets, but the smart money’s not betting on that, and you shouldn’t either. Leave the fear-mongering to Harvard economists and click-bait headline writers.

and upcoming related post on Reinhart Rogoff: The irony of political affiliations.

[1] Among bond traders primarily trading in US $ Currency, a ‘riskless bond’ for the purpose of determining bond spread, is usually a similar maturity US Treasury. Bond traders in Europe or Japan might use a different riskless bond as the basis for comparing risk in their own currency. We can argue about whether US bonds, or Japanese bonds, or German bonds are actually ‘riskless,’ and traders do, but traders also need a convention for comparison, so US Treasuries often serve that purpose regardless of whether its truly ‘riskless’ in the absolute sense.

[2] A basis point is 1% of 1%. Hence, 100 basis points for every 1% in yield or yield spread. If we say 5 basis points, or 5bps, (pronounced “5 bips”) that means 0.05% in yield, or spread terms.

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January 6, 2014December 15, 2014

Book Review: The Richest Man In Babylon by George S. Clason

My taxi driver to the airport – upon hearing I was a ‘finance guy’ – told me all about The Richest Man in Babylon by George S. Clason, a book which changed his life. From this one book, my driver told me, he had built his life plan for savings, investments, and wealth creation.

I had never heard of the book, and, of course, the fact that my taxi driver told me about the book reminded me of the classic sign of a frothy stock market: Be very cautious, for example, when the doorman in your building starts swapping stock tips with you.

I needn’t have worried, and I’m glad I set aside my initial snobbery and skepticism to read this.

Clason wrote and distributed a series of “Babylonian parables” in the 1920s in pamphlet form,[1] stories that later gathered wider distribution through banks and insurance companies throughout the 1930s.

The parables read like traditional biblical tales – like the Fishes and Loaves, or the Prodigal Son – full of Thy And Thou, Giveth and Taketh. We meet slaves and camel-traders, brick layers and money-lenders, soldiers and scribes.

Like all good parables, the stories are short, simple, and may be summed up at the end with a pithy phrase. They are also memorable, credible, and true.

In one chapter Dabasir, the camel-trader, relates the story of his long journey from slave to camel-trader to fat merchant through luck and determination, but most importantly the habit of living below his means. Beginning from poverty and deep indebtedness, Dabasir figures out how to live on 70% of his income, dedicating the remaining 20% to paying his creditors, and 10% to “paying himself,” through savings and eventually investment. The result, over time, is a debt free and eventually prosperous living.

The parables’ simplicity does not imply banality, but rather the permanence of a set of basic laws about money. Although Clason wrote them nearly one hundred years ago, it’s not absurd think that wealthy Babylonians, three thousand years ago, could have actually passed on these stories contained in The Richest Man in Babylon.

The plain fact: Financial wisdom doesn’t really change from millennium to millennium.

The vast majority of us go through life wishing we had a simple, memorable set of rules on complicated topics like love, faith, death, personal fitness, and of course, money.

Because these topics seem to combine mysterious, personal, taboo and embarrassing elements we gather information from weird, flawed sources. We trust pop songs to learn about love and sex. We consult people like Deepak Chopra on faith. We pretend, against all evidence to the contrary, that death is avoidable, or some kind of failure of life. We let some guy with great abs on late-night TV and a set of unproven nutritional supplements or an exercise gadget determine our fitness regime.

Our relationship to money is the worst of these failings, because we’re all such easy marks. The Financial Infotainment Industrial Complex knows that people who think they need more money (that’s all of us), with a fundamental ignorance about money (that’s most of us) are easily separated from our money. Most of what the Financial Infotainment Industrial Complex has to say about money is the opposite of wisdom about money.

It’s wrong, expensive, and misleading.

Can I give you some advice about money?

Turn off the damn television, lower the volume on the radio, peel your eyeballs away from the Interwebs for a day, and read some Babylonian parables. There’s more simple goodness here than a year of the other crap.

After you finish, pass it on to a young person who can use the advice too.

You’re welcome.

Please also see related post: All Bankers Anonymous Book Reviews in one place.

[1] The early 20^th Century version of a financial blogger!

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January 3, 2014January 3, 2014

Book Review: Capital by John Lanchester

I’ve been searching in the past few years for the best book to explain the 2008 Crisis, but I have yet to find it.

John Lanchester’s novel Capital presents the 2007 and 2008 pre-conditions for the crisis in London – soaring real estate values, extraordinary inequality, random good and bad fortune, injustice, and fundamental cultural misunderstandings.

Lanchester’s diverse London characters occupy the same space – a single, gentrifying block in London – but arrive from entirely different worlds.

We meet the stand-in for pre-crisis London, the successful but clueless and doomed banker Roger, who finds his lifestyle nearly unaffordable at 1 million pounds per year.

A Banksy-style performance artist, his mother, and his dying grandmother show a temporal cross-section of England, unable to communicate across generations.

Lanchester has a gift for cultural nuance in portraying four distinct immigrant stories: The Zimbabwean meter maid working and living illegally, the Polish contractor riding the home renovations wave to save money before returning home, the Pakistani shopkeeper and his extended family, and the gifted 17 year-old footballer from Senegal signed to an extraordinary professional contract.

With few exceptions[1] Lanchester has empathy for all of his characters as they each suffer an existential crisis concurrent with the financial crisis.

Lanchester employs a unifying plot hook – a semi-mysterious harassment campaign affecting all of the homeowners of the single London block – that doesn’t quite matter to the novel. Neither the vague sense of dread the campaign engenders – nor the resolution of the harassment campaign – justify its prominence in most chapters. Nevermind, though, because the novel does not need it.

His sympathetic characters and gentle satire show us the way we live now, together in time and space but apart in everything else.

Capital does not explain the 2008 crisis, but it seems like an accurate time capsule of the “same street/different universe” world we occupy now – both before the crisis and since then.

Please see related post: Michael Lewis reviews Capital by John Lanchester.

Please also see related post: All Bankers Anonymous Book Reviews in one place.

[1] Roger’s wife Arabella notably displays no redeemable features – just neglect, cluelessness, self-absorption, and conspicuous consumption.

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January 2, 2014

My New Years Resolution

bird_by_bird_I_can_do_this — New Year’s Resolution

The artist’s perspective on money

I spent the morning of New Years Day with two artists talking about money. They asked questions about the meaning of money, and I tried to supply the answers as best I could.[1]

I waxed poetic about the importance of accumulating a small surplus every month, however tiny, which could add up, over time, to something significant.

They declared themselves indifferent to money, and I believe them.

One of their questions stunned me:

“What’s the point of even trying to save small amounts of money monthly if you don’t have something big, like a million dollars, to invest?” they asked. “Isn’t it just a waste of effort?”

Since they’d never had extra money – and they felt that if they tried to save now it wouldn’t add up to much at all – they figured it wasn’t worth even trying to generate a surplus on a monthly basis.

After I lifted my jaw off the floor I tried to persuade them that small sums today add up to big sums in the future through the magic of compound interest. I spluttered something inarticulate about “money generates money,” and probably failed to make any headway at all in trying to make them see my point.

In my own way in the last year I’ve been making the same mistake they make, I just didn’t realize it.

Bird by Bird

One of the best books I read last year was Bird by Bird: Some Instructions on Writing and Life, by Anne Lamott.[2]

Lamott’s advice to prospective writers is to focus, every single day, on producing some kind of written work.

Many days, perhaps most days she argues, every writer (even the greats!) feel inadequate to the task of producing anything remotely worth reading. Writers as a rule are distracted people, full of self-loathing, or conversely, wracked by narcissism, all of which gets in the way of producing decent written material.

Lamott’s refrain is to force yourself, through habit, to produce something every day, however paltry it seems. “Just 300 words a day,” she urges, if that’s all you can manage. “Write a shitty first draft,” she pushes, it hardly matters what it’s about. Just start. And then keep going.

Lamott tells the story of her 10 year-old brother who procrastinated for three months on a major grade-school ornithology project. Dejected and daunted by the looming deadline, he froze in panic the night before it was due. Lamott describes how her father put his arm around his brother and gave him the key piece of advice on writing, and life -“Bird by bird, buddy. Just take it bird by bird.”

What does this have to do with my conversation with the artists?

Lamott says writers have to produce a written surplus, however tiny, every day. But I’ve been frozen by the enormity of my project.

The money guy’s perspective on art

My New Years Resolution is to finally write the book(s) that has been dancing around in my head for the past few years.

I realize that the problem with writing my book, however, is the same one my artist friends have. If I can’t be sure the whole finished product will be awesome and successful and read by tons of people – the literary-publishing equivalent of a million dollars invested – then what’s the point of even trying to write it?

I mean, why even start?

So, uh, naturally, I didn’t write it in 2013.

I’m a finance guy, so I guess I needed to see the absurdity of my non-starter attitude put into money terms by these artists.

Maybe Anne Lamott’s analogy can help you too.

So whether your New Year’s resolution is to save more money, or lose some weight, or build that life-size replica of the Pyramid of Giza you’ve always wanted in your backyard, I invite you to join me.

I’m going to do my best to produce a small surplus on the book every day, and not get daunted by the enormity of the whole task.

“Bird by bird, buddy. Just take it bird by bird.”

[1] They may make a short video of my answers. We shall see.

[2] I haven’t reviewed the book on this site because the topic is – as the title implies – writing, which doesn’t fit my finance theme. But if you want to read about the process of writing – then wow this is a good one.

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