Things to Read on the Morning of December 1, 2014
Must- and Shall-Reads:
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Hillary Clinton’s rickety bridge to the White House:
“Voters lack a compelling reason to embrace Democrats, as opposed to simply rejecting Republicans…. Without a credible economic plan, the US left risks being little more than a rainbow coalition. This is the danger facing Mrs Clinton’s candidacy. It is possible–perhaps even likely–that Republicans will select a nominee who has alienated so many Americans that he will be unable to compete in a general election. It is also plausible that Mrs Clinton will appeal to enough women, Hispanics and others to ensure her electoral maths are prohibitive. That is the working theory. Unless Mrs Clinton can find a positive story to engage America’s middle classes it is the only one that is likely to work in practice…. Mrs Clinton’s network of donors are comfortable with social liberalism. The bulk of her money will come from places like Wall Street and Silicon Valley, which are either neutral or supportive on social issues. Their focus is on lower taxes and fewer regulations. Mrs Clinton’s challenge will be to square her donors’ priorities with America’s increasingly apolitical young voter…. Those who are unemployed want jobs. Those who have jobs want a pay rise. All that most will remember is eight lean years under President Barack Obama…. Mrs Clinton will need new ideas and new faces. Who they will be–and what they will advise–is anyone’s guess…. In the absence of new ones, Mrs Clinton’s bridge to the White House looks rickety.” - :
Three Words and the Future of the Affordable Care Act:
“Adler and Cannon have offered a strained interpretation of the ACA that, if accepted, would make a hash of other provisions… and undermine its stated purpose…. The more natural reading… [is that] the “by the State” language just reflects Congress’s assumption, unchallenged at the time, that the states would establish their own exchanges. But even if you think that Adler and Cannon’s claim is plausible… the contrary interpretation offered by the government is at least reasonable. That brings me to the aspect of their argument that troubles me the most: their unyielding conviction that they’ve identified the only possible construction of the ACA. Nowhere do they so much as acknowledge the possibility that maybe, just maybe, they’re wrong. That’s because they can’t admit to doubt. Because of the deference extended to agency interpretation, doubt means they lose. But their unwillingness even to acknowledge ambiguity reflects an important difference between legal advocacy and neutral interpretation…. The courts would violate their obligation of fidelity in statutory construction if they mistook [their legal] ingenuity for genuine obeisance to congressional will. The latest challenge to the ACA is political activism masquerading as statutory restraint.” - :
The German Inflation Undershoot: The European Outlier:
“The point is a simple but important one: at this point any European imbalances associated with the surge in capital flows to the periphery after the formation of the euro have been worked off via extremely painful and costly disinflation…. From 1999 to the present, most of Europe has had cost growth and inflation just about consistent with the ECB’s long-standing just-under-2 percent inflation target. There’s just one big outlier…. The European imbalance problem is a German problem, caused by Germany’s persistent failure to have wage and price increases in line with what the euro requires. This German undervaluation is in turn exporting deflation to the rest of Europe. By contrast, France, Spain, and even Italy have been playing by the rules.” - :
NYT Columnist Andrew Ross Sorkin’s Faulty Attack on Elizabeth Warren’s ‘Rage’:
“Not so fast, says Sorkin–this is no normal inversion: ‘While the merger is technically an inversion, it isn’t comparable to so many of the cynically constructed deals that were done this year simply to reduce taxes.’
That’s what Burger King says–though Stephen Shay… says, ‘I would be surprised if in five years’ time, their tax rate does not come down reasonably dramatically.’… This is the crux of Sorkin’s argument that Warren ‘is, to put it politely, mistaken.’ She calls this a tax inversion, and it’s not–or actually it is, since it’s ‘technically an inversion.’ Is that clear enough for you?… Sorkin admits that Warren could have had a better argument if she wasn’t so blinded by her rage: ‘It is true that Mr. Weiss doesn’t have a lot of experience in the regulatory arena… will be the beneficiary of a policy at Lazard that vests his unvested shares… by taking a government job…. Ms. Warren might be more persuasive if she focused on those issues.’ Good point: Warren should have focused on his lack of regulatory experience. Oh wait, she did…. ‘That raises the first issue. Weiss has spent most of his career working on international transactions–from 2001 to 2009 he lived and worked in Paris–and now he’s being asked to run domestic finance… oversee consumer protection and domestic regulatory functions at the Treasury.’ Free tip for Andrew Ross Sorkin: Don’t say someone should have emphasized a point they in fact raised as ‘the first issue.’ It makes it seem like you didn’t read the article you’re critiquing.”
Should Be Aware of:
- “The reason ESPN reporter Keith Law got suspended last week was stupid: He defended the theory of evolution on Twitter, kindly and calmly, to his co-worker, creationist Curt Schilling, and ESPN punished him for it. The reason he’s probably going to be suspended again? Sheer awesomeness.”
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Prepare for a long-term fall in energy prices
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The Juncker fund will not revive the eurozone:
“As a financial instrument Jean-Claude Juncker’s new investment fund is very clever. As an economic measure it will not work…. It reminds me of a product that was briefly popular in the credit bubble of the past decade: a synthetic collateralised debt obligation… an attempt to get from nothing to something.
I have no problems with structural finance if it can be applied to a useful social purpose, as in the case of Mr Juncker’s fund. My objections are practical…. The commission starts off with €8bn… as collateral for a guarantee of €16bn…. The European Investment Bank adds another €5bn… use the €21bn to raise some €60bn in cash by issuing bonds…. It could then use the €60bn to co-finance €315bn in investments from the private sector…. Mr Juncker wants to encourage €300bn in investment over three years, which translates to roughly 0.8 per cent of the EU’s gross domestic product per year. This would make a difference. But even if he manages to achieve this headline number, it is not clear that he will have prompted new investments…. Mr Juncker’s fund could turn out to be both a bureaucratic triumph, and an economic non-event…. The heavy lifting will have to come from the European Central Bank… a programme of quantitative easing will have to be drawn up that is quite different in spirit from Mr Juncker’s €300bn programme. It will have to go on for as long as it takes, and it will have to involve real money upfront, and no guarantees, and no tricks. The eurozone needs a truly grown-up response if growth is to be revived.” - :
Hard-Won Lessons and the Bird in the Hand:
“The tendency [today] for extremely overvalued, overbought, overbullish syndromes to extend much further than in prior market cycles, without material correction, as a result of Fed-induced yield seeking by speculators with little regard for valuation…. In prior market cycles, extreme overvalued, overbought, overbullish conditions had almost invariably resulted in steep and abrupt market declines in relatively short order…. I hear that I’m a polarizing figure in internet chat circles. While I write a lot of market commentary, I rarely read comments on social media, following Neil Stephenson’s rule that ‘arguing with anonymous strangers on the Internet is a sucker’s game–they turn out to be indistinguishable from self-righteous sixteen-year-olds with infinite free time’…. Given extreme bullish sentiment and the necessity of justifying prices that are so disconnected from historically reliable valuation measures here, it’s also not a surprise that value-conscious, historically-informed views are increasingly polarizing. As George Orwell wrote, ‘The further a society drifts from truth, the more it will hate those who speak it.’… The S&P 500 is more than double its historical valuation norms on reliable measures… sentiment is lopsided… dispersion across market internals…. None of those considerations inform us that the U.S. stock market currently presents a desirable opportunity to accept risk…. I know exactly the challenge that Fed-induced yield-seeking has posed to our discipline in recent years…. During the Depression, valuations similar to those of 2008 were still followed by a loss of two-thirds of the stock market’s value to its final low in 1932…. The equity market is now more overvalued than at any point in history outside of the 2000 peak… 115% above reliable historical norms…. Even 3-4 more years of zero short-term interest rates don’t ‘justify’ more than a 12-16% elevation above historical norms…. We estimate that the S&P 500 is likely to experience zero or negative total returns for the next 8-9 years…. The suppressed Treasury bill yields engineered by the Federal Reserve are likely to outperform stocks over that horizon, with no downside risk…. Wall Street is quite measurably out of its mind…. Yet somehow the awful completion of this cycle will be just as surprising as it was the last two times around…. Honestly, you’ve all gone mad…. I encourage… investors to understand the actual depth of market declines that have been part and parcel of market cycles… 30-50% and occasionally more…”