The Float

Toles on the Economy

The guy never fails.

October 5th...

October 6th...

Toles on Leverage on Leverage

Pitch-perfect, as usual...

May 19th...

June 8th...

Monday Reading

To help get the new week underway...

• Roger Altman on one of a recurring theme around here: The likelihood of a decidedly slow-growth recovery (via Calculated Risk).
• Our friends at BrightScope note an important new appointment at the Emplyee Benefits Security Adminsitration and provide a summary report on the recent APPSA Summit.
• More on the 401(k) front: Scott Simon's overview of the process by which plan sponsors can delegate most of their fiduciary responsibility: By naming an external, independent fiduciary.
• Some handy research from Vanguard on the advantages of index-based investing. Our take: In a probabilistic world, an appropriate mix of index-based vehicles make good sense for most investors.
• Jane Bryant Quinn channels Rob Arnott on the relative returns of stocks and bonds. No doubt: It's all about the price you pay. We'd draw special attention to this passage:

Conservative investors were stunned when their corporate bond funds took double-digit losses in the frightening market collapse of September-October 2008. Long-term corporate bonds fell 16 percent through October, according to Ibbotson Associates--their worst performance on record.

That wasn't supposed to happen. In bad stock markets, investors expect their bonds to rise in price or at least hold flat. Instead, for the first time, all the major asset classes fell together. In February, they were all savaged again.

Yep. As David Swensen has long noted, for portfolio diversification and risk-management purposes, treasury notes and bonds have substantial advantages over corporates, which can (and when it matters most, do) behave too much like their equity cousins.

The Float's Second Year

We're woefully late with this, but March 25^th was The Float's birthday. We'll mark the occasion by sharing our 10 favorite posts from this blog's second year. (Click here for the first year's Top 10.) In chronological order...

1. The "Lost Decade," March 26^th, 2008
2. Two Housing Crises, April 10^th, 2008
3. Thinking About Housing, May 9^th, 2008
4. Learning from Bill Miller, May 15^th, 2008
5. Bloomberg 401(k) Story, June 24^th, 2008
6. West Virginia Revisited, August 7^th, 2008
7. Do Rising Stock Prices Mean the Fundamentals Have "Bottomed?" September 3^rd, 2008
8. Fannie and Freddie, Sitting in a Tree, F-A-I-L-I-N-G, September 9^th, 2008
9. Fun With Exchange-Traded Funds, January 13^th, 2009
10. Putnam's "Absolute Return Funds," January 30^th, 2009

We'll keep typing. We hope you'll keep reading too.

Thursday Reading

For your personal enlightenment:

• Per our Wednesday post, here's a discussion of bringing banks back down to size from Felix Salmon (at his new Reuters blog). 
• Also related to yesterday's post: Eliot Spitzer on Washington's refusal to use its existing regulatory authority to bring the banks to heel.
• Looking for a tidy summary of economic conditions? Here's an impressive array of charts from Calculated Risk, delightfully pretty and depressingly ugly all at once.
• On the question of protecting bank bondholders, we have John Hussman in one corner, and Guest Contributor (writing at the WSJ's Real Time Economics) in the other.
• If hope-revulsion-indifference really is the sequence, we appear to be lurching into that second stage.

Toles: Relentless

More good stuff from our favorite cartoonist.

Monday Reading

A little reading to get the week started...

• The bad news is that the SEC has shelved reform of 12b-1 fees. The good news is that we still have plenty to complain about in the world of mutual funds.
• Interesting piece of research from Vanguard on the effects of bear markets on retirees.
• Here's a slick, simple presentation of data on the increased correlations among asset classes in times of acute market stress (via Barry Ritholtz).
• This is a few days old, but it's still plenty relevant, especially on an afternoon of trading that ended like this one: Calculated Risk on last week's real estate data.
• As if all that weren't enough, we have the Pension Benefit Guaranty Corporation making an absolutely horrific, ill-timed shift in its investment policy.

Friday Reading

A few items to usher in the weekend...

• As we wrote on Wednesday, calling February home sales "improved" required either breathtaking innumeracy or outright dishonesty. Barry Ritholtz agrees.
• Yesterday we pointed you to Roger Gibson's discussion of strategic asset allocation, one characteristic of which is the assumption of roughly normal/Gaussian distributions. Nassim Taleb sees power-law distributions instead, and this is a distinction with a difference. 
• Yale's David Swensen holds forth on money management. You watch. And listen. Via Mebane Faber.
• More from Faber on the asset allocation discussion: "The Volatility of Correlation."
• This is a great presentation of current economic data, trends, and historical norms. From Russell Investments, via Barry Ritholtz. 

Small Enough to Fail

Today's Tom Toles...

Geithner's Toxic Menu

John Hussman weighs in on the latest emergency measures from the federal government (emphasis added in bold):

[F]rom early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount -- the remainder being "non-recourse" financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficiently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.

...

There is no doubt that the Fed also intends for the extra trillion in base money to end up as bank reserves. But think about what this move implies in equilibrium. The largest purchasers of U.S. Treasury bonds at present are foreign central banks. So what the Fed is really doing is printing enough money to crater the exchange value of the U.S. dollar, while leaving foreigners with a trillion dollars of savings that they would otherwise have invested in Treasury bonds, which they will now use, not to buy our lousy, toxic assets, but to acquire our productive assets, and at a steep discount thanks to the currency depreciation. So yes, the extra trillion in dollar bills will ultimately end up as bank reserves (and currency in circulation), but only by encouraging Beijing to go on a shopping spree to acquire a claim on our future production. Ultimately, funding the bailout of lousy assets comes at the cost of debasing our currency and selling our good assets to foreigners.

And for good measure, here's Tom Toles, who's all over this story...