Posts filed under “Think Tank”

Just Desserts and Markets Being Silly Again

My long time readers are familiar with Jeremy Grantham of GMO as I quote him a lot. He is one of the more brilliant and talented value managers (and I should mention very successful on behalf of his clients). He writes a quarterly letter which I regard as a must read. I have excerpted parts of his recent letter, where the chief investment strategist really takes the current financial system follies to task. Typical of his great writing and thinking is the quote from this week’s Outside the Box selection:

“I can imagine the company representatives on the Titanic II design committee repeatedly pointing out that the Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any failures of the ship’s construction, of the company’s policy, or of the captain’s competence. “No one could have seen this coming,” would have been their constant refrain. Their response would have been to spend their time pushing for more and improved lifeboats. In itself this is a good idea, and that is the trap: by working to mitigate the pain of the next catastrophe, we allow ourselves to downplay the real causes of the disaster and thereby invite another one. And so it is today with our efforts to redesign the financial system in order to reduce the number and severity of future crises.”

You can get the full letter at (You will have to register).

Your glad to be back home at least for a week,

John Mauldin, Editor
Outside the Box

Just Desserts and Markets Being Silly Again

by Jeremy Grantham

Just Desserts

I can’t tell you how surprised, even embarrassed I was to get the Nobel Prize in chemistry. Yes, I had passed the dreaded chemistry A-level for 18-year-olds back in England in 1958. But did they realize it was my third attempt? And, yes, I will take this honor as encouragement to do some serious thinking on the topic. I will also invest the award to help save the planet. Perhaps that was really the Nobel Committee’s sneaky motive, since there are regrettably no green awards yet. Still, all in all, it didn’t seem deserved. And then it occurred to me. Isn’t that the point these days: that rewards do not at all reflect our just desserts? Let’s review some of the more obvious examples.

1. For Missing the Unmissable

Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just reflected the unusual strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque financial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefits to society, he was reappointed! So, yes, after the fashion of his mentor, he was lavish with help as the bubble burst. And how can we so quickly forget the very painful consequences of the previous lavishing after the 2000 bubble? Rewarding Bernanke is like reappointing the Titanic’s captain for facilitating an orderly disembarkation of the sinking ship (let’s pretend that happened) while ignoring the fact that he had charged recklessly through dark and dangerous waters.

2. The Other Teflon Men

Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had encouraged (I hope inadvertently) wild and reckless financial behavior by helping to beat back attempts to regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks. And there are several others (discussed in the 4Q 2008 Letter). You know who you are. All promoted!

3. Misguided, Sometimes Idiotic Mortgage Borrowers

The more misguided or reckless the borrowers, the more determined the efforts to help them out, it appears, although it must be admitted these efforts had limited effect. In comparison, those who showed restraint and either underhoused themselves or rented received not even a hint of help. Quite the reverse: the money the more prudent potential buyers held back from housing received an artificially low rate. In effect, the prudent are subsidizing the very same banks that insisted on dancing off the cliff into Uncle Sam’s arms or, rather, the arms of the taxpayers – many of whom rent.

4. Reckless Homebuilders

Having magnificently overbuilt for several years by any normal relationship to the population, we have decided to encourage even more homebuilding by giving new house buyers $8,000 each. This cash comes partly from the pockets of prudent renters once again. This gift is soon, perhaps, to be extended beyond first-time buyers (for whom everyone with a heart has a slight sympathy) to any buyers, which would be blatant vote-buying by Congress. So what else is new?

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Category: Think Tank

Two Different Conversations In The Marketplace

James Bianco has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers, mutual funds, hedge funds, futures traders, banks, and institutional investors. Prior to founding…Read More

Category: Think Tank

The S&P 500 in gold terms ahead of tomorrow’s FOMC statement

With gold rallying to a fresh all time high today, let’s again put the performance this year in the S&P 500 in gold (real money, non fiat) terms ahead of tomorrow’s FOMC statement where we’ll hear whether they hint at any change in the level of their extraordinary accommodation. In gold, the S&P 500 is…Read More

Category: MacroNotes

Sept Factory Orders

Sept Factory Orders rose .9%, .1% more than expected as transportation orders were revised up from last week’s durable goods report which comprises about half of today’s figure. Non Defense capital goods ex aircraft orders were revised down to a gain of 1.8% from last week’s reading of 2%. Non durable goods orders rose .6%….Read More

Category: MacroNotes

The King Report: Brooksley Born vs Summers, Greenspan & Rubin

> Last week, PBS “Frontline” produced a story that describes how Bob Rubin, Easy Al, Larry Summers and others prevented Brooksley Born of the CFTC from instituting controls on the OTC derivative market in the late nineties. “I didn’t know Brooksley Born,” says former SEC Chairman Arthur Levitt, a member of President Clinton’s powerful Working…Read More

Category: Think Tank


As the FOMC begins their 2 day meeting, the key focus I believe is whether they leave in the word “exceptionally” in describing the low levels of the fed funds rate that will exist for an “extended period.” With the economy still fragile and a long ways away from a normalized rate, we know they…Read More

Category: MacroNotes

Incentive Compensation, Risk Management, and Safety and Soundness

Governor Daniel K. Tarullo

At the University of Maryland’s Robert H. Smith School of Business Roundtable: Executive Compensation: Practices and Reforms, Washington, D.C.

November 2, 2009

Incentive Compensation, Risk Management, and Safety and Soundness

It is a pleasure to be here this afternoon to give the closing address at this very timely conference on executive compensation. Executive compensation has for some time been an important part of academic and policy discussions of corporate law and governance. The public’s attention to the subject has periodically increased. Such heightened interest is not often part of corporate governance debates, but rather in response to high compensation levels for certain executives, or the contrast between rising executive compensation and sluggish overall wage growth. I think it fair to say, however, that public scrutiny has never been more intense than in the past year. And never has it been more concentrated on a particular industry than in the current focus on large financial services firms.

The interest and role of the Federal Reserve is both broader and more targeted than the issue of executive compensation as such. It is more targeted in that our concern with compensation matters rests squarely on our statutory responsibility to ensure the safety and soundness of the banking organizations we regulate. It is broader in that we are concerned not only with the compensation of executives, but also with compensation arrangements of employees other than executives where those arrangements may adversely affect the safety and soundness of their firms. In the remainder of my remarks, I will first elaborate a bit on how our safety and soundness mandate both defines and limits the scope of our activities on compensation. Then I will turn to the supervisory approach we have taken in the proposed guidance we issued 10 days ago, before closing with an explanation of the specific supervisory processes we intend to follow in putting this guidance into practice.1

Compensation as a Safety and Soundness Issue
Previous speakers have touched on some of the reasons why compensation arrangements of corporate employees can be a public policy matter. As I have already suggested, the compensation packages of employees–particularly senior executives–implicate the principal-agent concerns that inform much of corporate law. Shareholders have interests both in providing employees with incentives to maximize shareholder value and in restraining employees from using their direct control over the firm’s resources to take more than is necessary to attract and motivate quality employees. Additionally, as evidenced by the very fact of Ken Feinberg’s job as special master, the public has an interest in appropriate compensation arrangements at firms in which the government has made significant investments.

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Category: Think Tank

Apart From the Crowd

David L. Singer – 10-30-09 Apart From the Crowd – 10-30-09 ~~~ Apart From the Crowd – 11-2-09

Category: Think Tank

Economic data

In likely a result of a rush to buy a home in order to qualify for the possible expiration of the home buying tax credit, Sept Pending Home Sales, a measure of contract signings of existing homes, rose 6.1%, well above expectations of a flat reading m/o/m. The gain was led by the high foreclosure…Read More

Category: MacroNotes

China continues to charge ahead

China’s economic bounce has continued so far into Q4 as evidenced by both the October state enterprise and private sector weighted manufacturing indices which rose to the highest level since April ’08. There will also likely be no change in economic policies for the foreseeable future according to the Minister of Commerce as he believes…Read More

Category: MacroNotes