October 20, 2017

Fed Chair Nomination

This post will be a constantly evolving entry, as we enter the Fed Chair Nomination period, a critical juncture for the U.S. economy, for the current U.S. administration and finally (and this is my main concern) for the global financial markets. I will be quoting and linking to articles I find interesting. I may also share some of my thoughts on the subject.

Current Fed Chair Janet Yellen has been at the helm since February 3, 2014, when she was appointed by President Barack Obama, and her term ends on February 3, 2018. Who appointed her is relevant to her chances of being renominated for a second term. Also relevant and I am not being exhaustive are:

  • Her perceived performance as chair by the Market Participants, the White House, the punditry (media analysts, economists and in-house Bank and Investment Bank experts).
  • The anticipated effect her non-renomination would have on the Markets 
  • The political repercussions of the decision. 
  • The identity, qualifications, perceived biases of the other possible candidates, who are all identified in the article quoted below.

Here's a quote from a Bloomberg article in favor of reappointing Janet Yellen as Chair of the Board of Governors of the Federal Reserve System:
Yellen and her predecessor Ben Bernanke built broad consensus within the Fed in support of radical measures, and that consensus helped restore calm and confidence in financial markets and the wider economy. It would be rash to cast these gains aside.
[...] At the moment, an abrupt change in policy isn't called for. Faster progress on normalizing interest rates and reducing the Fed's distended balance sheet would be good, but that is not to call for a fundamental rethink. An appointment raising the possibility of such a change would be a needless risk. The best and safest choice is Yellen.
Here's a quote from a Business Insider article by David Rosenberg, chief economist and strategist at Gluskin Sheff, formerly a long time chief economist at Merrill Lynch and one of the most respected voices in Finance, who plays down the importance of who's the head of the Federal Reserve and places more weight on the institution in general:
"The Fed is a democracy, not a dictatorship," [David Rosenberg] told Business Insider. "This chatter and talk about who the next Fed chairman is is interesting, but I think it's less relevant than a lot of other people do." 
Alan Greenspan is one example of a chairman who became bigger than the institution, Rosenberg said. But he was an exception. 
This just in: we have a favorite! Namely, Federal Reserve Governor Jerome Powell, according to this Politico article.
Powell, known as Jay, has been heavily favored by Treasury Secretary Steven Mnuchin, who is leading the Fed chair search for Trump. 
Other finalists include former Fed Governor Kevin Warsh, Stanford economist John Taylor and National Economic Council Director Gary Cohn.
"They’re all at the same level of consideration at this time. The president said himself on Tuesday, he likes all of the candidates and has great respect for them all," White House spokeswoman Natalie Strom said.
Of the five finalists, Powell would likely face the least opposition to confirmation in the Senate, according to interviews with nearly a dozen members of the Banking Committee.
Here's his bio from the Federal Reserve website.

If you believe in the wisdom of crowds and trust prediction markets, here's a link to PredictIt.

Here's an article that recommends choosing the most politically savvy contender rather than the best technocrat. I would tend to agree but it's hard to judge somebody's political chops before a crisis hits. Having been "in the room" and witnessed crisis management up close is certainly a big plus. Janet Yellen was a voting member of the FOMC in 2009. Draw your own conclusion (Narayana Kocherlakota does it here). Here's a quote from the article:
But the next time major economic volatility comes around, Fed decisions will be scrutinized and politicized like never before. This will happen in the mainstream media, on social media, and perhaps by our very own president in his tweets or offhand remarks. The key factor for any Fed leader will be the ability to maintain and project a coherent, unified voice at the Fed, so that the Fed remains an island of relative sanity in the polarized nation. This will be a problem of crisis management, but unlike Bernanke’s crisis management it will be fought first and foremost in the trenches of public opinion. 
What does this mean for the short-listed candidates? Former Minneapolis Fed president Narayana Kocherlakota made a strong case in Bloomberg View for Janet Yellen, and I agree she has done a good job to date. I am less sure she will be able to lead and build consensus in 2019, when the appointed board members will all be Republicans and the bloom of the economic recovery may have worn off. She still deserves serious consideration, but I would judge her less on her monetary policy decisions and more on how she might manage relations with the board, president and public during a crisis. One of the major arguments in her favor is simply that Trump often appears to be tougher and more erratic with his own nominations than with holdovers from President Barack Obama’s era, and perhaps he would continue to regard her as one of the latter. 
Is this it?
President Donald Trump stoked the sense of drama surrounding his choice for the next Fed chairman Friday as he tweeted out a video teasing an announcement he said would come next week. 
The president is leaning toward appointing Federal Reserve Governor Jerome Powell to be the next chairman of the Fed, according to three people familiar with the matter.
Jerome Powell is set to become the next Fed Chairman. He has been supportive of all Janet Yellen's decisions and rationales, but, despite what the following excerpt would have you think, that says little about what he may do going forward. We shall see.
Mr. Powell, a Fed governor since 2012, is a Republican with deep roots in the party’s establishment and in the financial industry. He has steadily supported the Fed’s current approach to monetary policy and financial regulation, creating an expectation that he would bring continuity to the role. 
One person familiar with the president’s thinking described Mr. Powell as the "safe" choice and the one who most closely fit Mr. Trump’s penchant for filling his government with characters from “central casting,” as he often puts it.
It's a done deal.

It is now official. It's important to note that Jerome Powel, unlike his four predecessors is not an economist, which leaves a fairly big question mark.
But some argue that there is more uncertainty surrounding Mr. Powell’s approach than for other recent Fed chairs. Lewis Alexander, chief United States economist at Nomura Securities, said it is unclear how aggressive Mr. Powell would be in responding to an economic slowdown. 
“I don’t think it’s right to think of Powell as a Yellen clone,” Mr. Alexander said. “In terms of the core issues of monetary policy, we just don’t have much of a baseline for him.” 
Mr. Powell would also be the first Fed chair in four decades who does not have a degree in economics — meaning his opinions may not be as fully formed as some of his predecessors. He also lacks a body of academic work that analysts could parse for his views.
(Latest Update: 11/03/2017)

October 10, 2017

Richard Thaler, Behavioral Economics and A.I.

Richard Thaler is the third Behavioral Economics giant to be awarded a Nobel Prize in Economics after Daniel Kahneman (2002) and Robert Schiller (2013). I found his intellectual autobiography very enlightening:

 Here's the 10/9/2017 Nobel Prize press release, from which I quote this fascinating tidbit:
Lack of self-control: Thaler has also shed new light on the old observation that New Year's resolutions can be hard to keep. He showed how to analyse self-control problems using a planner-doer model, which is similar to the frameworks psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing. Succumbing to shortterm temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts.
and here's a quote from a New York Times article:
Professor Thaler has played a central role in pushing economists away from that assumption. He did not simply argue that humans are irrational, which has always been obvious but is not particularly helpful. Rather, he showed that people depart from rationality in consistent ways, so their behavior can still be anticipated and modeled.
Richard Thaler is one of the fathers of Behavioral Economics, whose basic assumption is that human beings, far from being the Homo Economicus of orthodox, neo-classical economics, can behave in irrational ways. Tangentially related is the subject of Artificial Intelligence. A commentator in the New York Times article mentioned above, Bey Melamed posted: "I wonder how Thaler's theories clash with / are supported by or commensurate with artificial intelligence. If / when AI has reached sufficient sophistication it should be able to (or even measured by the ability to) make human decisions with appropriate irrationality sprinkled in, no?"

My response to this comment is that alternatively, in a more sinister vision of the future, AI could be programmed to follow all the rules and behaviors of Homo Economicus, never showing the irrational idiosyncrasies exhibited by humans. Since we have a huge theoretical framework for just such creatures, it would make sense to replace human agents by algorithms across many domains. It is already the case in Financial Markets, where algorithmic, non-human traders have been taking over many tasks human traders used to perform. That would, of course, accelerate the replacement of humans by programs and algorithms, a pervasive process already under way. A failure to adapt to this trend will result in negative outcomes such as mass unemployment, community disintegration and social upheaval.

Here's another great New York Times article (from a 2001 NYT magazine profile) on Richard Thaler, written by Roger Lowenstein, the author of When Genius Failed, the definitive book on the saga of the hedge fund Long Term Capital Management (LTCM, 1994-1998):
Thaler spearheaded a simple but devastating dissent. Rejecting the narrow, mechanical homo economicus that serves as a basis for neoclassical theory, Thaler proposed that most people actually behave like . . . people! They are prone to error, irrationality and emotion, and they act in ways not always consistent with maximizing their own financial well being.

July 28, 2017

Michiko Kakutani

Michiko Kakutani, one of the most feared, respected and fearless book critics of our times is leaving her high priestess perch as the New York Times Chief Book Critic. I am sure she will keep reviewing books from wherever she lands next. As I am sure many writers are breathing a sigh of relief at the news of her stepping down. She will be greatly missed by book lovers. Here is a list of some of her more trenchant and prophetic reviews of the last 4 decades.

“Beloved.” “Infinite Jest.” “White Teeth.” “Team of Rivals.” Four decades of signature reviews and essays by The Times’s Pulitzer Prize-winning book critic.

March 2, 2017

Pity the Bear Chin

I wrote this last year on 3/2/2016. One year later and the Bears are still taking it on the chin. Only the S&P 500 is 450-point or about 20% higher!

The Bears are taking it on the chin this week, the S&P 500 Index having breezed through the 1950 level of resistance. It will however all be meaningless if it dips back below it by Friday's close. If the index closes above 1950 on a weekly basis, 2000 becomes the next big (huuuuuuuge) resistance level. Everything is still in play. I might (don't hold me to it) write up a more detailed analysis of the stock market this coming weekend.

February 24, 2017

What Have You Done For Me Lately?

Shameful. Unforgivable. I'm not big on soccer but this has to be the most cruel sacking in the history of sports.

In soccer, as in life these days, you're as good as your last performance. As they say in the financial markets, past performance is in no way indicative/predictive of future performance. In other words, "what have you done for me lately?" is the only question that matters in this brave new world. Is it good or bad? I think this is no longer a moral issue, it's just the zeitgeist. Get used to it.

February 10, 2017

The Other Wall (No Politics, I Swear, Read On)

There's a Wall Street saying that goes like this:

A bull market climbs a wall of worries.

As many other Wall Street sayings, it reflects a true phenomenon. When the stock market is bullish, as it has been since 2009, every piece of bad news is absorbed by each and every market participant, chewed a little (i.e. the market goes down a bit) and then fully digested. And then, a few days (or weeks at most) later, the market soldiers on and makes new highs.

What this means is that, in a bull market (which is nothing else than a rising market), the fundamentals, the technicals and the sentiment are so good that one or two pieces of short-term bad news can only be but a temporary setback, a soft, very climbable "Wall of Worries". And the supply of stocks that suddenly materializes (often at a lower, thus more interesting price) as a result of those worries is gladly devoured by the market participants and provides fuel for the next leg up.

And I believe we've basically been in this configuration since the horrendous low reached in the doldrums of the "Great Recession" of 2008-2009, namely the infamous 666 level reached by the S&P 500 Index in early 2009.

This bull market is still going on strong 8 years later, which makes it one of the longest bull markets of all time ("all time" sounds impressive but it only means since people have been studying these things, which is about 100-odd years ago).

This is what I wrote exactly one year ago:

It looks like the 1810-1830 support band for the S&P 500 has been tested successfully again. 
That's the 5th time since April 2014, which reinforces it as support. The Bears have to decisively pierce this 1800-ish support level to have their views vindicated. The onus is on them.
Granted the Bulls have a lot of resistance levels above too (More on this in future posts), but don't let yourself be scared out of your long-term investments by the voices of doom. They're always loudest near significant bottoms.
To add meat to my analysis, I'll make a probabilistic prediction (which should be the only kind of prediction when it comes to markets, as they are dynamic and chaotic): I give the S&P 500 a 65% chance of rebounding from here.

Which brings me back to the Wall of Worries. Well, it looks like we keep climbing it. So much has happened since last year, much of which would very much qualify as proverbial walls of worry. Yet, the market keeps climbing and climbing. It's up about 25% (yesterday, the S&P 500 closed above 2300 for the first time "in the history of the universe" 😃) since I wrote the paragraph above and will keep climbing until it doesn't! When would that be? I can't tell you, I'm just a Technical Analyst, not a fortune teller!

See, like I promised, no politics! Have a great day.

Isam Laroui, CMT

February 7, 2017

Food for Thought

“The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.” 

Seth Klarman, who manages the $30-billion hedge fund Baupost Group.

January 26, 2017

The More You Store (In Your Brain), the More Additional Storage Room You Have!

"Memory storage [in the brain] creates capacity for more storage" Bob Bjork, UCLA. 

In other words, contrary to what one may think, the more you know, the more room for additional knowledge you have in your brain. 

Put yet another way, your brain, far from being a finite box (or a hard drive), is infinitely elastic and the more information and knowledge you put in it, the more you CAN put in it.