E-piphany

Congratulations to the stock market on the one-year anniversary of the lows. And congratulations to all of you who are net sellers of stocks, and will be as you enter your retirement. For you, an overvalued stock market is absolute gold. For those of us who expect to be net investors for many years, of course, an overvalued stock market is bad news, since we are buying at higher-than-fair values, but we still congratulate those of you who are lucky enough to be able to sell high while we buy high.

I never have understood why young people – certainly anyone under 50 – get so excited when stocks rally. If these same people walk into a 7-11 and see the price of a Slurpee rising every day, or go to fuel up the car and watch the price of gasoline going up every day, they’d be depressed and/or outraged. Even if they already own a car, they hate to see car prices rise because they know they will be buying another car eventually. So why does it make people so darn happy to see stocks rise when they know that they will be buying on balance for many years?

Maybe it’s the recency effect, whereby we tend to exaggerate the importance of local improvements simply because they happened recently. Interestingly, not all institutions have this bias; the etiquette books say that if a marriage breaks up before two years are out, the bride and groom should return the gifts to the givers. So the paper anniversary really is not such a big deal. It’s the second year that counts. I would say the same is true in this case, with the stock market. The one-year rally was impressive; a second year would be incredible.

Some people think that the conditions are right to extend this bull market because the economy is developing so nicely. After Deutsche more or less led the way by forecasting that 350,000 new jobs will be reported next month, a number of other economists have joined the chorus with better-than-200,000 forecasts. While Census hiring will certainly provide a boost, I have trouble seeing where the sudden growth is coming from. But then, at economic turns it is always difficult to see I suppose.

So equity bulls (who chased stocks higher today until a late-day fade left them up only 0.2%) opine that the stock market might not be overvalued if the economy is in fact beginning another 4-5 year expansion and we value on forward earnings estimates. That’s a lot of “ifs” for me, and I rather think that the one-year rally in stocks just might discount some of that growth, don’t you think? Surprisingly, bonds did fine despite the new-found economic exuberance, with June Notes +4.5/32nds and the 10y yield down to 3.70%.

Investors (and that’s most of us, even if you’re only putting aside a few dollars a month in a 401(k) plan), as I said, tend to focus on the short-term growth in their fortunes rather than trust in the fact that if they systematically make good decisions, then over the long run they’ll pull ahead. Buying low and selling high, systematically, is lots more important than what your net worth did this month, but it is hard not to look at that broker statement and feel elation or depression. Ironically, this is one reason that surveys of consumer confidence are such effective early reads of changes in the economy: consumers tend to be very sensitive to small changes that don’t mean much in the big picture, and often do better at filtering out the “noise” than all of our Kalman filters and other fancy econometric methods.

But perhaps this time they feel like they are stuck in the bottom of a well and can be excused if they don’t get excited the moment they set foot on the first rung of the ladder out? The chart below (Source: Federal Reserve) shows the net worth of American households and nonprofits (I have no idea, by the way, why these two groups are lumped together), which have obviously taken quite a hit this decade.

Net Worth of US Households in Dollars

Still, really, households aren’t doing too shabbily. Sure, net worth is well off the highs but is probably reasonably close to the long-term trend. You may have left the casino without that wad of cash, but you still have what you came in with.

Or do you? As an inflation guy, I am not really comfortable with measuring my wealth in terms of dollars. The purpose of investing isn’t the accumulation of money, after all. As Marie (Bernadette Peters) said to Navin (Steve Martin) in the movie The Jerk, “I don’t care about losing all the money. It’s losing all the stuff.” Investing is about accumulating stuff, and if you don’t agree then look at those Zimbabwean dollars I posted last month and tell me how those trillionaires feel about the phenomenal return on investment they have had.

Deflating wealth by CPI is one way to look at “real wealth,” but while I think CPI is a very well-done number it is undeniably complex. Another way to look at real wealth is simply to convert into units of other stuff (of course, this is what CPI is trying to do, where the ‘other stuff’ units are standard baskets of consumption goods). One popular unit of stuff is an ounce of gold, which (as any number of gold bugs will tell you) is an efficient store of value compared to fiat money, even if subject to occasional fits of speculative euphoria. So let’s look at the same chart of household wealth denominated in ounces of gold (Source: Bloomberg, Federal Reserve):

Net Worth of US Households...in ounces of gold

Hmmm. Well, I guess people can be excused, perhaps, for feeling a bit down in the dumps. If they had simply converted their wealth into bullion in the early 1990s, then they would be in the same place they are today in terms of wealth without all the angst – even though gold pays no dividend and (thus) has an expected long-run real return of zero.

Of course, the story doesn’t stop there; by the same measure (see below, Source: Bloomberg and National Association of Realtors) houses are screamingly cheap. That is somewhat hard for me to believe; the alternative is that gold is expensive. Yes, both of these statements are true, since gold is expensive relative to housing and housing is cheap relative to gold. It’s really just a question of your choice of yardstick. But, since many more people own houses than own gold, this is another reason that consumer surveys could be a little more morose than the level of economic growth (at least according to Deutsche) would lead us to believe. I remain to be convinced on this point, but need to keep an open mind.

Existing Home Sales Median Price...in ounces of gold

No data that is due out tomorrow will affect that view. The calendar is again quite sparse and the weather in New York due to be quite nice. Expect another slow session.

Monday was as-expected…which is to say, it was quiet. Stocks ended the day flat; fixed income lost a little more steam but the 4/32nds decline in the June Note contract was not exciting. The 10-year Treasury now yields 3.72%: still firmly within its recent range, but slipping a little to the high end of that range.

It will bear watching how yields develop over the next month as the Fed ends asset purchases. Tonight Brian Sack, head of the New York Fed’s Open Market Desk (SOMA), spoke to the National Association for Business Economics Policy Conference in a general reprise of his comments last December. His remarks tonight are at this link. My generally laudatory comments on his December talk are linked to here. 

I really like the way that Dr. Sack explains how the asset purchases helped the market. In this speech, he says:

In my previous speech back in December, I discussed in detail the channels through which these market effects may arise. By removing large amounts of duration and prepayment risk from the market, the Fed’s asset purchases reduced the volume of risk that the market had to hold, which lowered the risk premia on those assets. Put differently, the purchases bid up the prices of those assets and hence lowered their yields. The lower levels of yields would be expected to boost other asset prices as investors substitute into alternative asset classes. These patterns describe what researchers often refer to as portfolio balance effects.

Where I disagree a bit with Sack is when he talks about the impact of the eventual exit. In both the December talk and this evening’s remarks, he expresses great confidence that the Fed can sell a couple of trillion dollars of securities into the market, as long as they do so slowly, or effectively shrink the balance sheet through massive reverse repurchase agreements. Recognizing that he doesn’t really have the option to say “Holy geez, this could get ugly,” I still think it’s worth pointing out that if it turns out to be the case that the Fed can keep rates low by buying lots of securities but can also sell them without impact (or add liquidity by buying them and drain liquidity by doing reverse repos), then we have a financial perpetual-motion machine.

I am generally skeptical of perpetual motion machines.

I rather suspect that when the Fed goes to sell a couple of trillion dollars’ worth of MBS, Treasuries, and agencies – and especially if they wait until the economy is growing nicely, as Dr. Bernanke has suggested they will – while the Treasury is also raising trillions in new money plus rolling trillions in maturing securities…the result may not be as graceful as Dr. Sack suggests. In several years in the early ‘Aughts…2001 and 2003, if memory serves…the bond market in October got absolutely shellacked when “convexity-related selling” overwhelmed a dealer community that was thin due to year-end risk budgets at some major dealers. The scale of that convexity selling was on the order of a couple hundred billion, and it moved thin markets a hundred basis points.

Yes, the Fed is not talking about doing this specifically in thin conditions at year-end…but the Volcker Rule being contemplated would make every day year-end for dealers, from the standpoint of their ability to take proprietary risk. These two policies are like elemental Sodium and water. They won’t mix well.

There is no data today, so I wanted to return very briefly to a comment that someone posted to this blog recently. As a reminder, I write this thing mainly so that I can receive (considered, and considerate) feedback on the thoughts and ideas, and link to greater ideas from greater minds. It also helps me avoid sloppy thinking when I have to explain my thoughts prosaically, and when a chance exists that someone will call me on the carpet for an error.

One of my favorite examples of this came not following a blog post but during a talk. I once spent a couple of days traveling to visit some investors with the great Bob Shiller. The company I was with was working with Dr. Shiller’s company on a product and we wanted to get some feedback from some important investors; people won’t open their doors for me, but Dr. Shiller always gets a meeting (especially in August 2007, when this happened). Well, at each meeting I would deliver the reasoning for the product we were working on jointly. And I would say something like “when spectacles were first invented, there weren’t lots of prescriptions. There was just one, and it probably improved your vision but it wasn’t made for you” and this led me into the meat of the pitch. 

After delivering this line a couple of times, we were at another meeting and, after delivering the line I happened to glance over at Dr. Shiller, who was looking at me intently and curiously. He interrupted me, asking “Is that true? Was there really only one ‘prescription’?”

Well, I looked back at him and tried desperately to say with my gaze, “Not now. I am delivering a pitch. It’s not even important. It’s plausible. And it makes the relevant point.” But he didn’t get the impact of my gaze, and pressed me further on the point, whereupon I had to sigh and say “I think so. I’m not 100% sure, but I wouldn’t think that prescriptions preceded the invention of spectacles. But I don’t know.” Which was awesome, to have to deconstruct my analogy right in the middle of a pitch meeting. (It turns out that the answer is that we don’t know because no one is sure when spectacles were first invented, but that’s not the point dammit!)

So when someone raises an objection to something I say, then I will often go and check my facts (and again, unlike in the Shiller case this is actually a key reason I am writing this blog). Several days ago, someone mentioned that the BLS, in making the oft-maligned “hedonic adjustments” that correct the CPI for changes in the quality of the sampled items, “never makes negative hedonic adjustments.” (I hadn’t claimed otherwise, but I was discussing the importance of hedonic adjustment and how it factors into people’s perceptions of the CPI).

It turns out that isn’t true, and in fact the biggest component of consumer inflation is hedonically adjusted to reflect lower quality over time. The BLS hedonically adjusts the housing inflation figures to account for the aging of the housing stock. If you hate the concept of adjusting the computer price index (down) for quality even when the sticker price doesn’t change, then you ought to recognize that in the case of housing, the effect works in the opposite direction because the housing stock ages and so, if no adjustment is made, over the years a rental property that goes from a mansion to a decrepit hovel as it falls into disrepair, but carries the same rent, should show inflation since you’re getting less housing for your money. 

The effect is about 0.3% or 0.4% per year on the housing part of the CPI, which doesn’t sound like much; housing, however, is about a third of the CPI so this effect adds 0.1% or so per year to the CPI. At the current level of core CPI, that is actually reasonably significant! You can read more about the update to the “Housing Age-Bias Regression Model” here.

As I have said before, I am convinced that of all the statistics put out by our government, the one that has probably been studied most meticulously and therefore does what it is supposed to do the best is CPI. 

For the second month in a row, the Employment report was stronger-than-expected. Let me attach two caveats, however. First, this month’s exceeding of expectations was much more marginal than last month’s (unless you buy the Deutsche Bank argument; see below). Second, the report was stronger-than-expected mostly because expectations had been ratcheted back by other weak data. When success comes largely because a previously lowered hurdle was then cleared, we call that either (a) the soft bigotry of low expectations or (b) “normal,” if it involves technology company earnings reports. But I digress.

The Unemployment Rate, rather than rising as had been generally expected after the plunge last month, was unchanged. Exactly unchanged, to three decimal places! That will get some conspiracy nuts exercised, but of course any half-witted conspirator would make some change in the Rate to avoid suspicion. It actually sounded more like someone forgot to hit Shift-F9 on the spreadsheet (for those who don’t use spreadsheets: Shift-F9 is the Excel keystroke to force calculation of the page). On further review, however, it turns out that the Unemployment did in fact rise… to 9.6872% from 9.6866%. I think that is called, literally in this case, “close enough for government work.”

Payrolls fell 36,000, but with net positive revisions to the prior two months were effectively unchanged. Also, there were only 15,000 Census workers added, compared with roughly twice that expected, so on both the Payrolls and Unemployment Rate counts the data scored slightly better-than-expectations.

But not that much better. I was impressed that other sub-indicators improved, such as the diffusion index (more industries – roughly half – are now showing payroll growth) and the median and mean duration of unemployment. This is, as far as it goes, good news. If it is true that the employment situation is improving, then it is probably also true that (despite the recent declines in survey measures of confidence) the economy is growing. I find it hard to square those two things with the other data, but all will become clear in time. Perhaps in a deep recession the likes of which we are (perhaps) emerging from, consumer confidence lags all other indicators. Perhaps consumer confidence improves with payrolls – we usually assume this – but not in a linear fashion…when unemployment is very high, perhaps the level of the ‘Rate, and not the change, is what matters. As with many of these indicators, it pays to remember that we don’t have a lot of good data to mine from similar sorts of historical periods (because there aren’t many similar periods), so we need to be careful of making strong statements about the significance – either bearish or bullish – of the data we are seeing, when it seems to be confusing. Maybe it is just that we have the wrong context.

However, some observers did indeed make very strong statements about the Employment Report. People really got exercised by the fact that around a million people said they had a job but were not able to make it to work because of the weather. The normal average for this measure, in February, is 300,000. So, you might say, wow, 700,000 would have been counted as employed but weren’t?!?

Well, not exactly. The BLS doesn’t tell us how many of these people were counted as employed anyway. This measure comes from the Household survey, which establishes the Unemployment Rate; to be counted as employed in that survey, you need to have a job whether you got paid for it or not that week – if you couldn’t work because of weather, you still had a job, so you’re not unemployed; and this is why the Unemployment Rate is probably a better indicator this month than the Payrolls figure.

But to be counted as employed on the Establishment survey (where the “count” of Payrolls comes from), you had to be paid for some work done during the reference week. You are counted as employed, in this tally, if you got paid even though you didn’t come to work (for example, you are salaried), or if you worked as little as a single hour during that week.

There is absolutely no way to tell how many of those million people who were unable to get to work would have been counted as employed had they been able to get to work. More to the point, we don’t know how many of them in fact were counted as employed because they did make it to work for even a little bit, or were salaried. There is absolutely no way to tell. In such a case, there is no way to discern if the economists’ a priori estimates were too strong or too weak on this score, because none of them forecast this (logically useless) number. The BLS also made the astute observation that “some industries, such as those dealing with cleanup and repair activities, may have added workers.” In other words, heck if we know.

Deutsche’s economist (who is on record as saying that a strong recovery has begun), though, speculated that without weather effects, Payrolls would have been up about 300,000. No one else saw anything like the size of that effect, which would also be at odds with an unchanged Unemployment Rate (remember, that’s the cleanest piece of data we have in this report). Deutsche immediately forecast a 350,000 Payrolls rise for next month as a catch up. This is despite the fact that the ‘Rate was unchanged, none of the surveys of opinions about the job market are improving, initial claims are rising, and ADP – which has not historically shown any impact from weather – was about as-expected.

Personally, I suspect that in this economy, the weather would have less impact than otherwise because there isn’t much freedom to shut down business for a whole week, nor to stay away from work if it is humanly possible to make it to work. I suspect the Deutsche Bank economist will be off by at least 250k; I would say the miss would be by more except that there are census hires coming to the fore. (However, I also expect he will revise his guess to not be a huge outlier next month).

As I said on Thursday, what all these crosscurrents mean is that we have bigger error bars on the data than we otherwise would. That means that it is harder to reject the null hypothesis about the rate of growth in Payrolls than it otherwise would be. With the number near expectations, it is extremely hard to claim that we have any information about a sudden shift to a much higher rate of employment growth, especially with every other survey of employment conditions showing at best tepid expansion.

On Monday, there is no economic data on tap. I suspect we will hear some talk about the implications for the U.S. if China severs its peg to the dollar (many people assume the dollar will weaken and China’s unit will strengthen if this happens), which speculation was brought to the fore when the head of China’s central bank was quoted in the Financial Times this weekend. China continues to sound like she wants to find ways to take advantage of the position the U.S. is in right now with respect to needing the financial flows from China. I am not sure whether I would want, if I were China, for the U.S. to call my bluff. If you owe the bank $1,000, you have a problem, but if you owe the bank $1 billion, the bank has a problem. China is the bank.

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As an aside, I really enjoy reading Dr. Thomas Sowell’s work. Sowell is a very good economist (and also a very sharp conservative thinker who gets the arguments right, so if that doesn’t describe your politics and you are not open-minded then just ignore the rest of this comment). His book The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy is the only book I have ever sent to several friends, and I am looking forward to reading his book Intellectuals and Society, which was just published in January. But he also writes an online column (that is syndicated at Jewish World Review.com) and recently wrote a few brief, easy-to-understand articles on health care. One of them is here. It is about a 3-minute read, but it encapsulates a bunch of the key arguments against the notion of government-run health care in simple, clear prose. If you are attentive to the health care debate, I recommend you look at this article (and he has a part 2, 3, and 4), even if you disagree (since these are the best points your opposition will make, and you will need to marshal reasonable counterarguments).

Sometimes Employment week can be a long slog before we get to the Main Event, and this week is proving no exception. It is unfortunate, because March also tends to slow down in the middle of the month when the NCAA tournament gets underway and traders keep (at least) one eye on the television or scoreboard. I have never done the hard-core research, but I suspect that March is a great month in which to sell volatility. Heck, you’re not going to be sleeping anyway…

Today’s shot at excitement was the ADP report, but it came in about as-expected at -20k (though there was a downward revision to last month’s figure of ~40k). After that, we entered a fairly slow snooze. Stocks shot higher at the open and then drifted until President Obama spoke about his preferences for the health care bill. Specifically, he expressed his willingness to pass a bill that only garners his party’s support, and to use the reconciliation process (the so-called “nuclear option,” although it is used quite a bit more than nukes are) in order to pass his bill. Although polls repeatedly show that a majority of Americans oppose the plan (see, for example, the regular polling on the question at Rasmussen Reports here) and that a large majority of Americans are happy with their insurance as it is, the Administration’s determination to get the bill they want, damn the torpedoes, has greatly improved the odds of passage. According to the real-money markets at Intrade.com, the odds of “Obamacare” passing by mid-year are now better than even (see Chart below, which illustrates the recent spike).

People with money on the outcome think Obamacare passes soon.

Good for Obama, but stocks dipped when he started talking. There are good reasons to be concerned, if not terrified, of parts of the bill. The part that I can hardly believe is in there is the provision for another new agency, the “Health Insurance Rate Authority,” which will not only set “guidelines” for insurance rate increases that the government thinks are “reasonable” but also would allow the Health and Human Services Secretary to block those increases.

Everyone who thinks price controls work, please raise your hand. Hmmm, I see that none of you who raised your hand is old enough to remember Nixon’s wage and price control calamity, but you ought to realize what will happen to insurance companies that cannot cover their costs because they’re not allowed to recapture cost increases through premiums. As a hint: it’s almost impossible to get car insurance in New Jersey.

It being a lethargic Employment week, though, even the setback on the President’s speech was dull. The S&P ended up less than 0.1%; June Note futures rose 1/64 again, and 10y yields ticked up to 3.62%.

The stock market hasn’t done anything technically wrong yet, but it’s a little less than inspiring how it hasn’t managed to break away from the neckline of that head & shoulders pattern. For the second day in a row, the market sprang higher only to fade back. Perhaps it’s too much to ask for investors to commit chips to a technical breakout when important fundamental data is only a day or two away, but it may be now or never.

On Thursday, Q4 Production and Unit Labor Cost revisions are due (little change is expected from +6.2%/-4.4% last announced). More important is Initial Claims (Consensus: 470k from 496k last week; expect a comment from BLS on the weather effects). Also out are Pending Home Sales, chain store sales, and Factory Orders among the second-tier releases. Prior to the Employment report on Friday, they’re probably all second-tier releases, and I would expect that we have another quiet day ahead of us.

It was another quiet day on Tuesday. The stock market opened with a gap up, but faded; bonds with a gap down, but covered that gap into the close. June T-Note futures closed 1/64th higher, with 10y yields unchanged at 3.61%.

The only economic datum was vehicle sales, which ended up approximately on-target thanks to an exceptional performance by Ford, which sold more vehicles than GM for the first time (but probably not the last!) in a very long time. Apparently, consumers are choosing private enterprise over Government Motors. Go figure! (Polls tell us the same thing is true when it comes to choosing health care, but some folks think they know better.)

Domestic car sales ended up at about 7.9mm units, essentially flat to consensus estimates and a continued recovery from very low levels seen pre-cash-for-clunkers last year (see Chart, source Bloomberg). It wasn’t so long ago that 12mm units was considered a bad year, although it pays to remember that from about 2000 through 2006 car sales were kept artificially high through crazy dealer incentives. In those days, 0% financing for 5 or 7 years represented a 30-40% discount in the cost of a car to the consumer, and the fact that the auto majors couldn’t wean themselves of such ridiculous discounts should have been a clear sign that the structure of the industry in the U.S. was unsustainable in the long run. (Of course, now 0% financing isn’t a big deal, since all rates are about 0% anyway!)

Not so long ago, 12mm cars was a bad year (thanks to incentives).

On the day stocks added only 0.2%, but importantly the positive close was approximately at the low of the day after a gap above the “neckline” of the head and shoulders pattern I mentioned yesterday. I am not a big techie, but if the market can open positive on Wednesday then I would expect momentum to grow toward a test of the January highs. It’s important to remember that this isn’t a bull market lift-off we’re talking about; it’s 4-5% and I wouldn’t expect anything beyond that, even if we get there.

On a quiet day I found myself musing about just how quiet it has been for a while after the gyrations of 2007, 2008, and part of 2009. Remember, even prior to the crisis the shape of the yield curve had been quite volatile (a neat dynamic illustration of the yield curve is available here); one of the early painful episodes in the financial crisis was the dramatic inversion of the yield curves in the U.S. and abroad, driven partly by the need to hedge billions of “non-inversion notes” that all tended to need hedging at about the same time.

In inflation-land, the curve was inverted as recently as the summer of 2007, when high near-term energy prices led people to expect that inflation would stay high for a couple of years and then decline to some long-term average. As the crisis hit, the 1y inflation swap collapsed from 3.83% in July of 2007 to -5.35% in mid-December 2008, before finally bouncing as people jumped on 8+% short-term real yields.

But since early 2009, the inflation curve has been remarkably stable. The chart below (Source: Bloomberg data) shows inflation swap curves (2y, 5y, 7y, 10y, 30y) on the first business day of the month from March 2008 to March 2009. The months aren’t labeled, because the sequence isn’t important. What is incredible is that the curve moves up, the curve moves down, but the moves have been almost in parallel for the period of a whole year.

Over the last year, the shape of the inflation curve has been amazingly consistent.

That is nothing short of amazing. Everybody agrees that inflation should rise in the future; what changes is the perception of from-what-level. I won’t say anything about how to play that in inflation-space, but I will say that the expectation of low inflation evolving very gradually into acceptable and moderate inflation is a recipe for good equity market performance. It isn’t clear how we could have an inflation curve much more supportive of equities than it is and has been since the stock market bottom last year.

It won’t always be that way. Remember that.

Tomorrow, Employment-Week hype gets started with the release of the ADP figures (Consensus -20k vs -22k last month). Goldman Sachs points out that while their weather models suggest a 100k drag to Payrolls, the ADP doesn’t seem to have any weather bias they can detect. Still, a weak figure will likely be written off to…er…global warming while a strong figure will probably provoke more relief given the recent skein of weak data.

Also out is the ISM Non-Manufacturing report (Consensus: 51.0 vs 50.5 last). The Non-Man ISM seemed like a good idea when they first split it out from the Manufacturing ISM, but now it doesn’t seem like anyone cares very much.

With the positive technical situation in stocks and a built-in excuse for economic weakness, I’d prefer to play these numbers from the short (fixed-income) side, even though I don’t really believe those excuses.

Monday was a reasonably quiet day, with stocks up 1% on no real news (gap open and then trade dully), as they continue to build momentum back towards the January highs. The day’s highs correspond pretty cleanly to the neckline of what even a school child can see is an inverted head-and-shoulders (although purists would say that the decline from the January highs wasn’t deep enough in relation to the scale of the head-and-shoulders to conclude that normal projections will apply). Further advance on Tuesday will likely create some itching among techies to at least re-test the highs.

June T-Notes were down 3/32nds, and 10y yields remain aimlessly in the middle of the range at 3.61%.

The economic data was not particularly exciting, either. Personal Income was a little weaker-than-expected, Personal Spending a tad stronger. ISM was 1 point weaker than expected at 56.5, but the Employment subindex rose to 56.1 from 53.3 (although New Orders and Production subindices declined), so you can take what you want out of that figure.

AIG sold a $35.5bln chunk of the company and is working on calving off other pieces. Folks seem to think this is great news, but they seem to think that it’s great news for everyone (taxpayers, AIG management, the buyers) and few of the observations seem to have anything to do with the price at which the unit was sold. I don’t have an opinion on that, but it seems to me like it might matter. Well, perhaps to AIG the value of getting the public off its back outweighed any haircut they took on the assets. I hope that isn’t Benmoche’s reasoning, because I doubt the people carrying flaming brands up to AIG’s castle care very much about the particulars of acquisitions and divestitures. Especially the ones who are agitating the masses in order to divert the masses away from their own castles.

Speaking of scapegoats, Richmond Fed President Jeff Lacker apparently feels put-upon, and that some people are scapegoating the Fed for similar reasons relating to politics. Perish the thought, but what is interesting is what Lacker also said in the context of the Federal Reserve and the crisis. For example, he opined that the Fed ought to be out of the mortgage finance business, and is likely to end mortgage purchases on schedule this month (as almost everyone expects). Of course, it was the Fed who originally put themselves into that business. Lacker also declares that the Fed’s emergency authority ought to be “sharply” limited.

Well, he will get a lot of “amen!” from the congregation on that one, although less-charitable souls may point out that the prior limits on the Fed’s authority didn’t seem to bind them during the crisis when they felt that, for example, guaranteeing low-quality, non-bank assets to facilitate the “purchase” of Bear Stearns by JP Morgan was acceptable because, darn it, something needed to be done! Lacker, as a member of the FOMC but not of the Board of Governors, was not party to the invocation of exigent circumstances, and this may be his reasonably-tactful way of pointing out that someone needs to put restraints on Frankenstein’s monster in case he wrecks the place next time.

I generally agree with most of what Lacker said, including his comment that there is a relatively minor risk of a double-dip recession. I just think that the one we are still in isn’t going to be over very soon! But as a former member of another scapegoated demographic (traders on Wall Street), I don’t have a lot of sympathy for his pity party on that score. Cry me a river, Dr. Lacker.

One person I am surprised hasn’t gotten more positive attention in all this mess is about to publish a book (due out tomorrow) that I am anxious to read. Harry Markopolos, who tried to alert the SEC to inconsistencies in Bernie Madoff’s pitch for a long time, gave a Bloomberg interview today in which he declared that the SEC should pay “Wall-Street-like bonuses” for finding financial fraud. I think this is a brilliant idea, and it probably wouldn’t even cost very much since you could cut the actual size of the staff if they were incentivized properly to find the real problems. Of course, I could be cruel and point out that “Wall-Street-like bonuses” aren’t what they used to be; one of my former employers is in the process of paying US employees uniformly $0 for the second year in a row (whether your book was +$100mm or -$100mm…yes, that’s the way to incentivize good performance!). Anyway, Markopolos’s book “No One Would Listen: A True Financial Thriller” is due out tomorrow. I hope people will read that book. Want my advice? Order it with the new edition (due March 7th) of Howard Schilit’s fantastic “Financial Shenanigans” which is really a must on the analyst shelf (the subtitle is “How To Detect Accounting Gimmicks & Fraud In Financial Reports).

You might as well order the books. There aren’t any crucial economic reports out on Tuesday, although auto sales will be released throughout the day. Keep an eye on the S&P “neckline,” as that may well be the main source of excitement for the day. And stay out of trouble.