I discuss Citigroup and TARP with Aaron Task and Henry Blodget at Yahoo Tech Ticker:
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Source:
Bailout Nation: Was TARP Just a Ruse to Protect Citigroup?
Aaron Task, Henry Blodget
Yahoo Tech Ticker, Jun 16, 2009 04:41pm
http://finance.yahoo.com/tech-ticker/article/264931/Bailout-Nation-Was-TARP-Just-a-Ruse-to-Protect-Citigroup;_ylt=AhXk7XQ4BDKzxdfvyta1qyVk7ot4?
The author of Money Ball – and one of the most trenchant commentators on the current financial crisis – speaks to the Hudson Union Society.
The Excess Political Influence of Wall Street
Full Program
via Fora.TV
At the request of an interested party, an analyst of our acquaintance did a full review of PIMCO’s track record as a Fed forecaster.
Long story short, their public track is rather poor. Whatever insight PIMCO gleaned from being the world’s biggest bond fund was consistently overridden by their talking their book, rather than making good forecasts.
Indeed, I can suggest that a Bond fund manager forecasting either a drop in Fed Funds or the end of a Fed tightening cycle is no different than a long only equity manager advising investors to buy the dip. That is each of their inherent biases.
I did find the call demanding Greenspan cause a housing bubble, and the drumbeat for a GSE bailout to be in hindsight, to be terribly wrongheaded . . .
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UPDATE: June 19, 2009 9:44am
A fund manager just called to point out that there is another, potentially more serious issue: PIMCO is a giant advertiser on various FinTV channels, and they have had an open mike at these outlets. This manager wonders if the lack of challenges to consistently poor calls is mereyl an affectation, or a related conflict of interest. I have no idea, but it sure is an interesting question.
If anyone from PIMCO wishes to respond, I will give them the platform to respond to any of these issues.
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This analysis of the long term track record of PIMCO’s managing director was performed by a long time Fed watcher, Analyst X, who apparently is unimpressed with Mr. McCulley’s forecasting acumen. Below you will find his review of a full decade’s worth of Fed calls by .
Analyst X interprets this as PIMCO talking their book, consistently forecasting rate cuts, or the end of the tightening cycle, being wrong most of the time — they were wrong much more than right.
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A few days ago, Paul McCulley of Pimco said:
June 17, 2009, Target 0.00% to 0.25% range
(Bloomberg) — Pacific Investment Management Co.’s Paul McCulley said the Federal Reserve’s exit strategy from the unprecedented initiatives put in place during the economic crisis won’t include interest-rate increases until 2011 and will likely involve paying interest on reserves. The Fed will raise its benchmark lending rate “no sooner than 2011,” and any speculation officials will raise interest rates this year is “simply silly,” McCulley wrote in a commentary on Pimco’s Web site.
Let’s review Paul McCulley’s public forecasts since 2001.
Amazingly in 2001 he was begging the Fed to create a housing bubble ….
Pimco’s Fed Focus by Paul McCulley for July 2001
Paul McCulley: Show A Little Passion, Baby
The average American also owns a home. In fact, the home ownership rate in America is at a record high 68%. And while most of those homes are levered, there is room to lever them even more, from both a balance sheet and an income statement perspective, as shown in Figure 4. Most important, perhaps, valuation of homes – the price of a home divided by the shelter services that it provides – is secularly cheap, as shown in Figure 1 on the cover. There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing (just like he denied belatedly attacking the NASDAQ bubble). So, while I may think Washington needs to put more Keynesian proof in the policy beverage it is serving, there is no question that Washington is pouring from the right decanter.
On June 30, 2004 The Fed raised rates from 1.00% to 1.25%. This was the first of 17 consecutive rate hikes that would eventually end when the Fed hiked to 5.25% on June 29, 2006. During this period the fed funds futures contract predicted what the Fed would do with nearly 85% accuracy as much as 50 days before the FOMC meeting. What did McCulley think during this period?
8/14/2004, Target 1.25%: 16 consecutive hikes to come
(Bloomberg) — The Federal Reserve will raise the overnight bank lending rate target another quarter point by year’s end to 1.75 percent, said Paul McCulley, who runs the money market desk at Pacific Investment Management Co., in an interview with Barron’s.
9/21/2004, Target 1.75%: 14 consecutive hikes to come
(Bloomberg) Paul McCulley, a managing director at Pacific Investment Management Co., said Federal Reserve policy makers may raise their benchmark interest rate once more this year, to 2 percent, and then “pause.”
12/14/2004, Target 2.25%: 12 consecutive hikes to come
(Bloomberg) — The U.S. Federal Reserve, which today boosted its target rate for overnight loans between banks to 2.25 percent, has “basically” reached a neutral rate, said Paul McCulley, a managing director at Pacific Investment Management Co.
1/7/2005, Target 2.25%: 12 consecutive hikes to come
(Bloomberg) — The U.S. Federal Reserve is “almost finished” with its campaign to raise the target interest rate, said Paul McCulley, a managing director at Pacific Investment Management Co.
3/18/2005, Target 2.50%: 11 consecutive hikes to come
(Bloomberg) — The Federal Reserve may be nearing the end its interest-rate increases as a result of higher oil prices, Paul McCulley, a managing director at Pacific Investment Management Co., told financial news network CNBC. “I think the Fed will reflect in their policy the fact that they’re near the neutral zone,” where the federal funds rate is equal to the rate of inflation, McCulley said. Newport Beach, California-based Pimco manages the world’s largest bond fund.
4/1/2005, Target 2.75%: 10 consecutive hikes to come
(Bloomberg) — The Federal Reserve may pause after raising its benchmark interest to 3 percent, said Paul McCulley, a managing director at Pacific Investment Management Co. … “I do think they are about finished,” McCulley, who helps manage a quarter of the Newport Beach, California-based firm’s $400 billion of assets, said in an interview with Bloomberg Television. “Once they get to 3 percent, they are at the low end of the common known range of neutrality and I think they will want to stop punishing us every eight weeks.”
4/19/2005, Target 2.75%: 10 consecutive hikes to come
(Bloomberg) — The Federal Reserve may raise its interest-rate target just two or three more times because of a “soft patch” that is emerging in the global economy, according to Paul McCulley, a managing director at Pacific Investment Management Co. The forecast by McCulley, whose firm manages the world’s biggest bond fund, means the Fed’s target rate for overnight loans between banks would peak at 3.25 percent to 3.50 percent. The median estimate of 59 economist surveyed by Bloomberg News from April 1 to April 7 was for a year-end target rate of 4 percent.
5/23/2005, Target 3.00%: 9 consecutive hikes to come
(Bloomberg) — Paul McCulley, a managing director and fund manager at Pacific Investment Management Co., said the Institute for Supply Management’s monthly manufacturing index may be the catalyst that leads the Federal Reserve to slow the pace of interest-rate increases.
6/22/2005, Target 3.00%: 9 consecutive hikes to come
(Bloomberg) — The Federal Reserve will add to eight increases in its benchmark interest rate one or two more times before stopping, said Paul McCulley, a managing director at Pacific Investment Management Co.
7/18/2005, Target 3.25%: 8 consecutive hikes to come
(Bloomberg) — The Federal Reserve will probably stop raising interest rates next month after guiding the economy to a “soft landing,” said Paul McCulley, a managing director at Pacific Investment Management Co.
8/11/2005, Target 3.50%: 7 consecutive hikes to come
(Bloomberg) — The Federal Reserve will continue raising interest rates until the “bubble” in the housing market bursts, Paul McCulley, a managing director at Pacific Investment Management Co., told financial news network CNBC. If Fed Chairman Alan Greenspan “wants to pop a bubble in property, he has got to use a nasty bear market in bonds as his vehicle,” McCulley told CNBC from his office in Newport Beach, California. Pimco manages the world’s biggest bond fund.
9/1/2005, Target 3.50%: 7 consecutive hikes to come
(Bloomberg) — The Federal Reserve is “finished” raising its interest-rate target because Hurricane Katrina will have a “profound effect” on the economy, said Paul McCulley, a managing director at Pacific Investment Management Co.
10/28/2005, Target 3.75%, 6 consecutive hikes to come
(Bloomberg) — The Federal Reserve, to accomplish its goal of raising longer-maturity debt yields, should stop increasing interest rates, according Paul McCulley, a managing director at Pacific Investment Management Co., and Bill Miller, the head of Legg Mason Fund Management.
12/20/05, Target 4.25%, 4 consecutive hikes to come
(Bloomberg) — “The Fed will stop tightening, most likely at the end of January.”
1/3/06, Target 4.25%, 4 consecutive hikes to come
(Bloomberg) — ”They were warm and fuzzy minutes with the FOMC telling us they are about finished,” McCulley said. … “I was certainly premature in anticipating the Fed drawing this tightening to a close,” he said. Now, “our view and the Fed’s view are very close,” he said. That is, “the Fed is not accommodative anymore and it’s an issue of how far they are into the neutral zone. We are on the same page.”
4/7/2006, Target 4.75%, 2 consecutive hikes to come
(Bloomberg) — ”We’re looking for a slowdown in the housing market. If the property market defies what the Fed’s done and defies what the market’s doing right now, we’d have to rethink. We think they’re going to stop at 5 percent, but I can’t put fists on the table and say there’s zero probability of that.”
6/29/2006, Target 5.25%, the last of the 17 consecutive hikes done
(Bloomberg) — Paul McCulley, who oversees $100 billion at Pacific Investment Management Co., said the U.S. Federal Reserve has finished raising interest rates, barring any economic surprises.
From June 29, 2006 to September 17, 2007, The Fed held the target rate steady at 5.25%.
August 2, 2006, Target 5.25%
(Bloomberg) — The Federal Reserve has raised interest rates “too far” and will lower them in the next six to nine months, Paul McCulley, managing director of Pacific Investment Management Co., wrote in a report.
November 2, 2006, Target 5.25%
(Bloomberg) — Pimco’s McCulley Says Fed to Cut Rates to 4.25% Next Year
January 30, 2007, Target 5.25%
(Bloomberg) — McCulley of Pimco Sees Economy Slowing, Fed `Easing’ This Year
February 2, 2007, Target 5.25%
(Bloomberg) — McCulley of Pimco Says U.S. Housing Drop May Lead to Rate Cut
May 29, 2007, Target 5.25%
(Bloomberg) — The case for the Federal Reserve to cut interest rates is growing more “robust” because the U.S. jobless rate is poised to rise, according to Paul McCulley, a bond fund manager at Pacific Investment Management Co.
August 17, 2007, Target 5.25%
(Bloomberg) — The Federal Reserve may cut its target for overnight loans between banks by a half-percentage point to 4.75 percent at the next meeting in September, said Paul McCulley, a fund manager at Pacific Investment Management Co.
September 10, 2007, Target 5.25%
(Bloomberg) — The Federal Reserve will cut its benchmark interest rate “substantially” by year-end to avoid a recession, said Paul McCulley, a fund manager at Pacific Investment Management Co. “Here’s saying a prayer that 100 basis points of Fed funds cuts, by the end of 2007, will not be too late,” McCulley wrote in a report Sept. 5 after attending the Kansas City Fed Bank’s annual symposium in Jackson Hole, Wyoming. The Fed will pare borrowing costs following a slump in the housing market, he said.
On September 18, 2007 , The Fed cut the target rate 50 basis points to 4.75%. This was the first of 10 moves that would take the funds rate to a range of 0% to 0.25% by January 2009.
November 20, 2007, Target 4.50%
(Bloomberg) — The Federal Reserve may reduce its target interest rate to below 3 percent to keep the U.S. economy from lapsing into recession, said Paul McCulley, a fund manager at Pacific Investment Management Co.
December 28, 2007, Target 4.25%
(Bloomberg) — Pimco’s McCulley Says Fed Funds at 3% Makes Sense
January 30, 2008, Target 3.50%
(Bloomberg) — Pacific Investment Management Co.’s Paul McCulley said the economic outlook calls for a half- percentage point reduction in borrowing costs today by the Federal Reserve.
On January 23, 2008 the Fed cut the funds rate 0.75% in a inter-meeting move about an hour before the NYSE was set to open. Stocks were set to open several hundred DJIA points lower as a reaction to the news that Socgen’s Jerome Kerviel lost nearly $7 billion in unauthorized trading. The Fed cut the funds rate again by 0.50% to 3.00% on January 31, 2008 completing a 8 day 1.25% reduction on the target rate.
So far, McCulley has had the same call the entire decade, cut rates aggressively or stop raising them. By the spring of 2008 that is exactly what the Fed was doing. Now that his eight year forecasting campaign to drive rates as low as possible was finally happening ….
March 31, 2008, Target 2.25%
(Bloomberg) — The Federal Reserve will stop cutting its target rate for overnight lending between banks once it reaches 1.5 percent, Paul McCulley, a portfolio manager at Pacific Investment Management Co., told CNBC.
April 18, 2008, Target 2.25%
(Bloomberg) — Paul McCulley, a fund manager at Pacific Investment Management Co., comments today on the Federal Reserve after a panel discussion in Charlotte, North Carolina. “I think the Fed is nearing the end of the easing process. I think they have signaled that. Importantly, the Fed has stressed that a lower fed funds rate by itself as a solo tool can’t cure all that ails us, which is an open invitation for fiscal authorities, regulatory authorities and the private sector to pick up some of the load. It doesn’t mean the Fed won’t ease a lot more if it has to, but it would prefer to have some partners, if you will.”
Finally, The U.S. Government has pumped in over $150 billion to rescue the GSEs Fannie Mae and Freddie Mac. They are seeking an authority to extend up to $400 billion of taxpayer assistance to these two entities.
August 22, 2008
McCulley Says Taxpayers Should Gain From GSEs
The Treasury Department put Fannie and Freddie into a “conservatorship” on September 5, 2008
A day after the World Bank raised its ’09 China GDP growth estimate to 7.2% from 6.5%, the Shanghai index broke out for a 2nd day to the highest level since July. The economic green thumb was passed around overnight as IMF official Lipsky said they will revise their global growth estimates “modestly upward.” Also, optimism was revealed at the EU summit when they said “further budgetary stimulus would not be warranted and attention should shift toward consolidation, keeping pace with economic recovery…there is a clear need for a reliable and credible exit strategy.” BoE Gov King said the rate of economic decline “is beginning to flatten off,” but he didn’t think “anyone should draw strong conclusions” and “it’s very easy to lose confidence quickly.” With most of the open interest at the 900 strike in the SPX and the index 18 pts above, today’s quad witch expiration will likely be uneventful.
In today’s WSJ, we learn of the proposed shift in standards for retail stock brokers — from “Suitability” to “Fiduciary:”
“Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own.
Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.”
While this is important, the entire structure of the brokerage industry — incentivized to be long only and fully invested at all times — is what destroyed so many investors in 2008.
As we have noted in the past, this manifests itself in many ways — but most egregiously, in the Penalty Box. It is a very misaligned incentive system, one that penalizes brokers who did the right thing. Back in March ’09, I noted two Merrill Brokers who had put 75% of their asset base is in money market funds early in 2008. This pays essentially nothing to the broker — but preserves the clients capital. When 2009 rolls around, their manager calls them into his office, and says: “Bad news, boys. Your revenues dropped so much last year you are in the Penalty Box. As per your contract, your payout for this year is down to 25-30%.”
That is a horrific misalignment of incentives. And while a fiduciary obligation on retail brokers is an okay idea, if it is going to be remotely effective, IT MUST ALSO BE APPLIED TO THE BROKERAGE FIRMS ALSO.
The Penalty Box is “Exhibit A” as to why.
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Previously:
Big Firm Conflict of Interest: The Penalty Box (March 3rd, 2009)
http://www.ritholtz.com/blog/2009/03/big-firm-conflict-of-interest-the-penalty-box
Source:
Big Change in Store for Brokers in Obama’s Oversight Overhaul
JANE J. KIM and AARON LUCCHETTI
WSJ, JUNE 19, 2009
http://online.wsj.com/article/SB124536973514629609.html
Good Evening: U.S. stocks managed to finish with modest gains Thursday, though the performance by the major averages could have been better considering today’s positive economic news. Then again, it was this same set of data that helped push Treasury yields quite a bit higher, and therein lies the rub facing investors. With all the paper slated to be issued by the Treasury in the coming months, any improvement by the economy may lead to the type of higher interest rates that could choke off any recovery. And if the economy instead steps on the green shoots by continuing to stagnate, then equities will at best go sideways (and could roll over to the downside). Perhaps this boxed-in feeling among investors is why volume has trailed off in recent weeks and why prices have much such little headway in either direction. Adding to this sense of unease is an aspect of President Obama’s regulatory reform proposal that could politicize (and thus compromise the independence of) the Federal Reserve.
Overseas markets were once again weak last night, but our stock index futures were only a bit lower as jobless claims hit the tape this morning. Initial claims remained above 600K, but continuing claims declined for the first time in what seems like forever. Of course, what we don’t know is how much of this reduction in ongoing claims is due to the stoppage of benefits once the long term unemployed have “timed out” of the program, but the news is welcome nonetheless. Stocks were hovering only slightly above unchanged when both the Philly Fed and LEI figures came in well above expectations. Manufacturing in the Philadelphia Federal Reserve district still fell in May, but this stat came close enough to the zero (neutral) mark that some eager investors thought they spied “growth”. This notion was only reinforced when the Leading Economic Indicators figures for May rose a full 1.2%. The BAC-MER economic team was impressed enough to opine that the U.S. economy is now “closer to the trough” (see below).
Equities immediately popped once these data points were made public, and the major averages were up 1% or so within minutes. With recent economic numbers on the weak side and with the indexes down approximately 5% from last week’s highs, the stage was set for a short-squeezing explosion to the upside. Not quite; the rally fizzled and the averages went more or less sideways into the closing bell. Perhaps what doused the match before it could light the fuse was a spike in interest rates. A combination of the firm economic data, a potential change in how LIBOR will be calculated, and word from the Treasury that they’ll need to raise a few billion more than thought at next week’s auctions caused bond bids to wilt on Thursday. Yields rose between 9 and 17 bps as the middle of the yield curve bore the brunt of the damage. Those higher rates seemed to help the dollar while leaving most commodities relatively unscathed. The CRB index finished almost on top of Wednesday’s closing level.
At the beginning of this year, the S&P 500 was in the low 900′s when I came out with a forecast for 2009. I guessed that the S&P would trade in a wide range, with 1000–1100 representing the top end and the November 2008 lows at the bottom end. I also speculated that there was “a better than 50/50 chance” we would set new lows in 2009, and while this aspect of my idle musings came true, I honestly thought we’d test 1000 first. As we approach mid year, I see no reason to pen a different opinion. Still, the next six months look like an especially tough call to make with any degree of confidence.
With volume and volatility already on the wane, and with the summer doldrums directly ahead, it seems investors have already conceded that going to the beach, lowering the handicap, and spending some time with the family will take priority during July and August. A weak economy that continues to deleverage while the monetary and fiscal spigots are wide open should be the subject of more attention by market participants. If today’s desultory trading on the day before a quarterly expiration is any indication of what’s to come, however, then this might be a frustrating summer for those who like to ride trends. I think I will counter-punch by buying dips, selling rallies, and using tight loss parameters until the picture becomes less murky.
There are a myriad of reasons why volatility could return without much advance notice, and one of them became apparent after analysts and journalists had a closer read of Mr. Obama’s 85 page treatise on the subject of financial regulatory reform. It seems that Team Obama would like to empower the Fed, but — and here’s the catch — at the cost of giving up some of its independence. The Fed, it seems, will have to get written permission from the Treasury Department before acting as lender of last resort in the future. Vince Farrell, Art Cashin, BAC-MER, certain reporters, and a host of others all wondered if Mr. Obama was serious in attempting to politicize the Fed (see below). This question received the following answer by the administration’s own, Larry Summers, in an interview today:
“That type of lending is ultimately putting taxpayers at risk,” Lawrence Summers, director of the President Barack Obama’s National Economic Council, said in an interview with Bloomberg Television today. “There should be some democratic accountability.” (source: Bloomberg article below)
On the surface, it sounds like a reasonable request. For many reasons, it isn’t. Mr. Summers didn’t say whether this “accountability” was meant to be democratic with a small d or a big D, but in either case it is an unwelcome threat to the independence of our central bank. Now I’m no fan of an activist Fed, and we’ve had only one hard money Chairman (Volcker) at its helm during the last four decades. But requiring the Fed to report to, or be influenced by, either the executive or legislative branches of our government is just bad policy. I would rather see the U.S. return to the gold standard (Jim Grant’s idea) or even abolish the central bank entirely (Bill Fleckenstein’s idea) before I would want to see the Fed become politicized.
At a time when Treasury issuance is well above flood stage, the U.S. is more dependent than ever upon the perception of an independent Fed. Our formerly generous foreign creditors have already expressed some displeasure with the deficits that politics and a recession have conspired to swell over the banks of reason. If our creditors feel the green ink of monetary policy will be mixed by the same hands that brought so much red ink to our fiscal policy, then won’t they think twice about that next purchase of Treasury securities? If Mr. Obama is unhappy with the Federal Reserve Board, he can appoint a new Board members when vacancies open up — or even a new Chairman when Mr. Bernanke’s term expires. I also have no problem if Congress wishes to impose shorter term limits for Fed appointees (though we should demand similar “time served” limits for Congressmen and Senators, too). So, if we’re going to have a central bank at all, let’s keep it independent. In the modern era of easy money, it’s the only form of discipline the institution has left.
– Jack McHugh
U.S. Markets Wrap: Stocks Gain, Bond Fall as Economy Rebounds
Closer to the trough
Fed May See Independence Dented in Rules Overhaul
Slippery Slope?
Tomorrow! Friday (June 19), I will be at the Huntington Book Revue, discussing Bailout Nation. Its at 7pm.
Rather than a straight up reading I will instead discuss some of the more incredible factoids of the Bailouts in the book — Why I wrote the damn thing, why it was written and rewritten 3X.
Oh, and there will be a discussion of the usual bailout related issues, plus a Q&A.
If you live in Nassau or Suffolk County, swing by and say hello — It should be fun!
Directions to Book Revue
As part of the government’s intervention during the economic crisis, federal money has gone to a surprising number of unlikely candidates. Bob Davis reports.
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6/14/2009
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How much do you really understand about the the world of money, banks, and global trade? These podcasts take you beyond the screaming headlines and wobbling stock prices to show how the economy really works:
Note: These links are to various ITMS podcasts that can be subscribed to.
The alternative is to go to each of 8 sites separately and manually download a podcast each and every week; rather than do it that way, if you subscribe via ITMS, the podcasts just show up on your PC or iPod — like magic!
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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