Powerball

I'm buying a Powerball ticket
(Or several, or even a thicket),
In hopes I may win
A billion bucks in
The unlikely case that they pick it.

The money on tickets I spent
Undoubtedly wastefully went,
As the odds it's apropos
Work out to point oh-oh-
Oh oh-oh-oh three-four percent.

The lotteries have their detractors,
Who point out, among other factors:
They regressively tax
The shirts from the backs
Of poor and irrational actors.

But what should one say in regards
To those who've considered the odds?
The learned and lettered
Who ought to know better
But still end up wagering wads?

We're not quite as dumb as we seem
To fall for the lottery scheme;
Though remote is the chance,
There's still the romance
That our dollar may buy us a dream.

   **********************

First of all: happy New Year!
Greetings dear readers, and especially (and apologetically) to those of you who have enquired as to when Dr. Goose would break his long blogging silence. Happy to be back though, things being as they are, I make no promises or predictions as to the length of the next hiatus.

Now to the topic at hand: it has long been accepted that participation in a lottery is economically irrational because the expected payout is so small and remote. However, in the realm of behavioral economics - i.e., the psychology of the economic choices that people make - such participation follows predictable patterns. For example, in economic hard times, lottery sales increase somewhat; not because the jackpot is any likelier, but just because the dream is that much sweeter. Behavioralists would also warn us that we should not really want to win, lest the subsequent let-down rob us of the enjoyment in everyday things.

Of course, you and I have virtually no chance of winning. As disclosed by the Powerball organizers, the odds are just 1 / 292,201,338, or 0.00000034%. We are literally (or statistically) more likely to die in an asteroid strike.

Bottom line: winning is bad, the odds are effectively nil, but the game is cheap and the dream is sweet. So, "play on, America" - I, too, will join the queue of hopefuls.

Piqued by Oil

The price of petroleum's slacking

With all of that pumping and fracking

Maintaining supply

At a level so high,

While demand, at the same time, is lacking. 

One would think, from the low price of crude,
That the future has been misconstrued,
But there's finite supply
In the ground, which is why
When it's emptied, it can't be renewed.

The price of oil continues to fall as, in the face of weak demand, producers from the Arabian peninsula to the tar sands of North Dakota keep pumping it out.   Like the protagonists in the famous Prisoners' Dilemma, exploration & production companies know that they would collectively benefit by slowing the pace of production, but individually they are motivated to cover as much of their costs as possible. 

In the short run, this development benefits consumers around the world, especially where the cost of driving is a major factor. At the same time, the oil exploration & production companies and their lenders are reeling from prices far below those they assumed when budgeting for the costs of extraction. 

In such times it is helpful to take the long view, which is that we are headed toward an eventual fall from the "net energy cliff," in the words of oil analyst Chris Nelder. This is the point at which it takes so much energy to extract the petroleum that it's no longer worth it. Notwithstanding today's bargain prices, that point may be closer than you think. 

The Real Deflategate

The Fed has intensely debated
When interest-rate hikes should be slated.
Like a team I won't name,
They're playing the game
With balls that are underinflated.

With a mandate to find the right measure
Of balancing jobs versus treasure,
They're Patriots all,
But the Hawks want the ball
To be at the usual pressure.

The rate of the jobholding share
Is less than appears to be there,
As if it were tested
And then one suggested
To secretly let out some air.

In spite of the fear of inflation,
Wages display moderation,
Since it's hard to inflate
With a tumbling rate
Of labor force participation.

Says Yellen: "It starts to annoy,
In discussing the rate of employ,
The analogy calls
For playing with balls;
Is it something the fellows enjoy?"

"It seems to me, based on my role,
The economy's just like the Bowl:
The material might
Be flaccid or tight,
But the point is to get to the goal."

A Wall Street New Year's Greeting

In the bustling New York metropolis 

Of moguls, tycoons and monopolists

At the end of the year

The moment is here

For cynics to turn into optimists. 

It's time for us all to examine

The balance of love and of Mammon, 

The better before

We pass through the door

Which after us soon will be slammin'.

This year, may you find a new mission

To better the human condition,

And your stock market plays

Be so good as to raise

Unwarranted federal suspicion. 

*******************************

As a New Year's bonus, I have included a link to yesterday's Marketplace explainer on the concept of "fiscal year," to which I contributed a limerick verse. 

Happy New Year to all,

Dr. Goose

A Bad Trade

The economy once ago sank
From abuses at many a bank,
Which Congress attacked
In a really big act
That went by the name of Dodd-Frank.

As Wall Street perceived a montrosity
Of Congressional excess verbosity
That was bound to constrain
Their potential for gain,
They resisted with extra ferocity.

An especially prominent section
That met with the bankers' objection
Expressly forbade
The derivatives trade
From counting on federal protection.

It's a problem the banks have endured
Since young J.P. Morgan matured:
How to keep the return
The good bets may earn,
While the bad are by others insured.

To safeguard their profits from harm
They launched an offensive of charm;
Contributions were made,
And lobbyists paid
To dazzle, dissuade and disarm.

But none of those flacks could compare
To the JPMorgan Chase chair;
His pockets well-lined,
His manner refined
And silver his tongue and his hair.

Mr. Dimon instinctively knows
How to lobby his friends and his foes
To attach what he will
To an omnibus bill
That few can afford to oppose.

A bill to keep government funded
Not many would like to see undid,
So you plant your revision
Where few can envision,
While quietly hoping that none did.

But for some, there was just no ignorin':
Moral hazard, once out, was once more in,
A setback so bitter
That Sen. Vitter
Admitted he felt just like Warrin'.

So once again Congress was played
To help the derivative trade;
The hazard is moral,
But no one would quarrel
That that's how the sausage is made.

***********

Wall Street has been trying to roll back provisions of the Dodd-Frank Act ever since it was passed in 2010. Now it has partially succeeded with the help of the sausage-making process in our dysfunctional Congress.

Buried in the $1.1 trillion omnibus spending bill passed by the House is a repeal of the “push-out” regulation — a measure to ensure that banks trade their riskiest financial instruments without the protection of the Federal Deposit Insurance Corporation or backing of the Federal Reserve.   Such a repeal brings back some of the financial moral hazard that was removed - or at least reduced - by Dodd-Frank.  In other words, if financial enterprises make risky trades within the insured banking institutions that are part of their corporate groups, they get to keep all of the gains, but taxpayers could be on the hook for losses that exceed the banks' capacity to absorb.

As Senator Elizabeth Warren put it, though neither Democrats nor Republicans like bailouts, "here we are five years after Dodd-Frank with Congress on the verge of ramming through a provision that would do nothing... but raise the risk that taxpayers will have to bail out the biggest banks once again."  Sen. Warren pointed to the revolving door between Citigroup and the Obama Administration as one culprit.  The Guardian's finance and economics editor Heidi Moore asks a more personal question: "Why does Jamie Dimon always get his way?"  The well-connected JPMorgan Chase CEO made direct calls to key lawmakers to assure their support.  Mr. Dimon, whose way with Congress has previously been noted on this site, has the unique talent of persuading legislators that, as Ms. Moore puts it, "bank profits are something every American should fervently hope for."  

Perhaps that is because members of Congress have developed the talent of persuading Americans that more political contributions are something that every American should fervently hope for.

Consumption Be Done About It?

The US has always depended

On a rate of consumption that's splendid,

By consumers for whom

The means to consume 

May soon have them overextended. 

It's best if our various strata

Could recover their income pro rata

To grow GDP,

But as you can see,

It isn't borne out by the data.  

If there's anything that we have learned,

It's consumption that cannot be earned 

Will grow if we let it 

Be funded by credit,

A fact that should have us concerned. 

One may imagine that "the 1%" do not care about stagnating prospects of the other 99, but the Journal's Pedro da Costa has found a notable exception.  In his Real-Time Economics blog post, da Costa says that Wall Street Cares About Inequality. Of course, it's because the U.S. economy depends heavily on the rising tide of consumption to lift all the boats. If an economic recovery does not feature broadly shared rising personal income, then there is no sound basis for greater personal spending. 

Unfortunately, the data show that this sound basis is precisely lacking.  As depicted in the accompanying chart, wages for the average worker (a non-management employee in the private sector), which fell in the recession, have not quite gotten back up. 

In a report entitled “Inequality and Consumption," Morgan Stanley economists Ellen Zentner and Paula Campbell note: “It has taken more than five years for U.S. households to ‘feel’ like they are in recovery. Before the recession, the expansion of credit simply delayed the day of reckoning from declining incomes and rising inequality.”

The economists go on to say that stronger wage growth would lift spending across the economic spectrum, and the lack of such a broad-based recovery means the Fed will continue its easy-money policies for the foreseeable future.  But, is monetary stimulus the best we can do? 

Fed's Letter to Deutsche Bank

"In reviewing your earnings per annum,
We're less than impressed, and we pan 'em.
The bank may have gains,
But this letter pertains
To the haphazard way that you ran 'em."

The Wall Street Journal reports that the Federal Reserve Bank of New York has vented its frustration with the sloppy reporting of Deutsche Bank's US branches and subsidiaries.  In a December 2013 letter to the bank, senior Fed supervisor Daniel Muccia complained  that the bank's reports "are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm's entire U.S. regulatory reporting structure requires wide-ranging remedial action."  It's a problem long in the making, wrote Mr. Muccia: "Since 2002, the FRBNY has highlighted significant weaknesses in the firm's regulatory reporting framework that have remained outstanding for a decade."

Of course, it's not only the Fed that should be concerned.  Investors too rely on firms' financial reports to value their securities and decide when to buy, sell or hold.  Lest we forget, the feeling that "you can't trust the numbers" was a factor in the global financial meltdown of not so long ago.

New Home Starts and Stops

Housing construction has had

A month that's exceedingly bad

And the drop may be due

To Millenials who

Live at home with their Mother and Dad. 

The trouble of this generation
Finding jobs after their graduation
Has certainly stalled 

The stat that is called

The rate of new household formation. 

It's up to America's young

To climb on the opening rung;

From the nest you must fly

So the housing supply

Will not be so much overhung. 

Two loosely related statistics came out on Thursday: first, that the number of US multigenerational households had climbed to a new high; and second, that the number of housing starts had fallen off dramatically in June.  The first datapoint indicates less demand for homes and the second, less supply.

The Pew Research Center, in an analysis of US census data, determined that 57 million Americans, or 18.1% of the population, are living in households that combine young adults and their parents or even grandparents.  This is the largest proportion of such households since the '50s.  Pew sees the trend thusly: "The declining employment and wages of less-educated young adults may be undercutting their capacity to live independently of their parents."   While such arrangements may serve a few purposes, they do directly reduce the demand for housing.

Meanwhile, the Commerce Department announced that housing starts across the USA had fallen by 9.3% in June; in the South, they fell by 30%.  In spite of my poetic license above, most industry people interview by the Wall Street Journal did not blame stay-at-home Millenials for this development, which actually flies in the face of a more broadly upward trend over the last few years.  Many factors were cited, including the lingering effects of wet winter and spring weather; lack of skilled construction labor in some markets; and persistently weak consumer confidence.

However, the multigenerational household trend is not a flash in the pan; it has been building since the '80s, and over the long term it must impact the housing market in a fundamental way.

High-Frequency Trade-Off

An HFT trader named Cunningham

Remarked on the skeptics confron'ing 'im:

"The spreads I've compressed

Make it cheap to invest,

So it's okay that I am front-running 'em."

The issue of high-frequency trading won't go away, and positions are hardening like the western front in the 1st World War. On the one side are journalists and many investment managers who say that these ultra-fast trades simply skim income off the top of the market; on the other, HFT firms and other market participants who say that such lightning-fast activity is benign and makes markets cheaper and more liquid. Sure, says the first group; HFTs supply all the liquidity you want until you actually need it. 

In the latest salvo, The New York Times and the Guardian's Heidi Moore editorialized yesterday that HFTs have rigged the market, as the exchanges and policy makers have allowed them to do over the last several years. This provoked a furious counterattack, adding a number of industry participants to Ms. Moore's already-formidable list of blocked Twitterers. 

Meanwhile, the US Senate has held inconclusive hearings on the issue, evidently deciding to leave it to the SEC.  The Commission, for its part, is looking into the issue but playing its cards close to the vest. One can only hope that the commissioners keep investor protection uppermost in their minds, even if the harm to investors from HFT is not blindingly obvious. 

***********************

Here is the link to Heidi Moore's column: http://www.theguardian.com/commentisfree/2014/jun/22/wall-street-washington-stock-market-rigged-investors

Here is the link to the Times editorial: http://mobile.nytimes.com/2014/06/23/opinion/best-execution-and-rebates-for-brokers.html

Here is a typical response: http://www.forbes.com/sites/timworstall/2014/06/23/heidi-moore-doesnt-seem-to-understand-high-frequency-trading/