Credit Where Credit is Due

By |2014-09-11T09:23:11-04:00November 30th, 2011|Global Market Update|

Who elected the credit rating agencies? It turns out that the credit downgrade of MF Global is what sparked its death spiral. S&P downgraded the company on October 24th. On October 25th the company reported a $200 million loss. Moody’s and Fitch followed suite shortly thereafter. As a result of the downgrades, MF Global’s repo counterparties demanded more capital, and on October 31st MF Global filed for bankruptcy—one of the largest filings in US history. The company has listed some $40 billion in assets [...]

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A Nation of Mercenaries?

By |2017-07-17T12:34:59-04:00November 29th, 2011|Global Market Update|

Is conscription becoming less common? In a celebrated exchange, General William Westmoreland testified in favor of the draft, stating that he did not want to command an army of mercenaries. Milton Friedman challenged him: did he prefer rather an army of slaves? He was a mercenary professor; he used a mercenary dentist; he employed a mercenary accountant, and so on. Around the world conscription—mandatory military service—has been in decline. When Napoleon Bonaparte imposed the draft in1793 and then went on to conquer most of [...]

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Super Failure?

By |2014-09-11T09:22:07-04:00November 28th, 2011|Global Market Update|

Was the deficit Supercommittee’s failure a fiscal disaster? On the face of it, no. Their failure to come up with $1.2 trillion in tax increases and spending cuts over two years will simply trigger an automatic sequester process that will begin in 2013. There’s no risk from this of a government shutdown or a debt default. All three ratings agencies affirmed the US’s credit rating. But on a deeper level it illustrates that our political system is broken. The fiscal path the nation is [...]

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Giving Thanks

By |2014-09-11T09:21:24-04:00November 23rd, 2011|Global Market Update|

What do we have to be thankful for? We can be thankful that we have free markets and free capital, where we can invest where we want and when we want without many restrictions. If I want to buy shares in a Chilean airline or a Chinese oil company, I can do that. And they’re obligated to provide audited financials. We can be thankful that we have an open and deliberative political process. Sure, it can be chaotic. The failure of the Supercommittee and [...]

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The Revenge of the “Yeti”

By |2017-07-17T12:34:59-04:00November 22nd, 2011|Global Market Update|

There’s one weasel-word that can immunize any prediction: “yet.” Talk to an inflation hawk about price stability and he’ll concur that prices haven’t risen much…yet. Complain to an unreformed Cold Warrior about how Russia seems to be much more market-oriented she’ll agree…for now. Challenge mega-bears or uber-bulls with the 10-year do-nothing nature of the stock market and they’ll smile and say, “Not yet.” “Yet” is the universal acid: it indemnifies anyone who uses it. I once read a market analyst who, after predicting a [...]

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Small is Beautiful?

By |2014-09-11T09:20:00-04:00November 21st, 2011|Global Market Update|

Could Little Rhody show the way? Up until now Rhode Island has been a bit player in the financial crisis. The State suffered tremendously during the recession: unemployment is currently 10.5%; almost double New Hampshire’s 5.4% and the worst level in New England. In addition to cyclical issues, Rhode Island’s economy has been beset by structural challenges for some time. When the headline bankruptcy of Central Falls hit the tape, many municipal investors decided to avoid the State entirely. Their yields rose, exacerbating fiscal [...]

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57,000 Questions

By |2014-09-11T09:18:33-04:00November 18th, 2011|Global Market Update|

Something is wrong. Something is wrong when GE employs an army of accountants to file a 57,000 page tax return in order to pay no taxes. Something is wrong when our 35% marginal corporate tax rate nets a 20% effective tax rate. Something is wrong when a country like Finland--with a 26% marginal rate--collects corporate taxes equal to 4% of its economy, while the US, with a 35% marginal rate, only collect taxes equal to 1.8% of its economy. And this isn’t just a [...]

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Counting on Trouble (Part 3)

By |2014-09-11T16:34:51-04:00November 17th, 2011|Global Market Update|

So how do we fix accounting? Someone once said that free elections are meaningless as long as the politicians control who counts the votes. In the same way, accounting reform is meaningless as long as management controls the accountants. At present, audited financials are the responsibility of the firm. You can’t list a company without hiring an auditor to look at your books. But the independence of such audits is a fiction. If the auditors come up with an opinion that differs dramatically from [...]

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Counting on Trouble (Part 2)

By |2014-09-11T09:16:32-04:00November 16th, 2011|Global Market Update|

So what is wrong with accounting? I know. As soon as I mention accounting, most people’s eyes glaze over. It’s like those dreadful, interminable Algebra 2 classes: the teacher talked to the board and went on and on and on while everyone else got to go outside and you were stuck with this boring class forever! Or that’s what it seemed like. And accounting seems like that. The problem is there are these really strange rules in Accounting-land. It’s like Math-world, only it pretends [...]

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Counting on Trouble (Part 1)

By |2014-09-11T09:16:00-04:00November 15th, 2011|Global Market Update|

Is accounting part of the problem? At its heart, accounting is an attempt to translate the economic reality of an enterprise into a set of standardized reports. Accounting’s high-point was captured in a statement by Larry Summers in 1999 while Deputy Treasury Secretary. He stated that General Accepted Accounting Principles were perhaps the most important financial innovation on the American landscape. Talk about overreach! Accounting is in many ways a disaster. For example, accountants now mark much of a bank’s balance sheet to market. [...]

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