Fed Watching – January 19th

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10 (5!) minute long breakdown of the week’s events in markets and the economy.

Markets up again. No economic news. IQs stagnating?

Links:
Timothy Taylor comments on the Flynn Effect: http://conversableeconomist.blogspot.com/2019/01/the-flynn-effect-rising-iq-scores-over.html

Jacob Falkovich’s post, Tails of Great Soccer Players: https://putanumonit.com/2015/11/10/003-soccer1/

Fed Watching – January 12th

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10 minute long breakdown of the week’s events in markets and the economy.

Markets up. Clarida speech.

Links:

Crypto Double Spend Attack

See this link on actual double spend attacks.

Clarida Speech Transcript

Powell Speech

Meeting Minutes from December FOMC Meeting

Fed Watching – January 5th

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10 minute long breakdown of the week’s events in markets and the economy.

Markets up. Powell dovish.

Weekend reading:
James Osborne at Bason Asset Management 2018 in Review: https://basonasset.com/2019/01/02/2018-in-review/

Scott Sumner at Econlib, It’s getting harder to influence the Fed: https://www.econlib.org/its-getting-harder-to-influence-the-fed/

Fed Watching – December 22nd

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10 (15!) minute long breakdown of the week’s events in markets and the economy.

Markets hammered, Fed raises rates.

Weekend reading:
FOMC Press Conference with Jay Powell: https://www.youtube.com/watch?v=e_t-CuKEAhA

AQR’s Cliff Asness, Once More Without Feeling: https://www.aqr.com/Insights/Perspectives/Once-More-Without-Feeling

Fed Watching – December 15th

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10 minute long breakdown of the week’s events in markets and the economy.

Markets slightly down, little economic news and decent numbers, we await next week’s FOMC meeting.

And a new segment! Weekend reading:
In Defense of Finance: https://putanumonit.com/2018/12/14/defense-of-finance/
Bitcoin is not a bubble: https://www.econlib.org/bitcoin-is-not-a-bubble/
Good News & Bad News About Saving For College: https://awealthofcommonsense.com/2018/12/good-news-bad-news-about-saving-for-college/
Lambda School: https://lambdaschool.com/

Monetary Offset

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People are always enthralled with stories of the man behind the curtain, a force that doesn’t get much recognition, but actually runs the world. I think this is why the Narcos shows on Netflix are so popular.

Enter the ultimate economic version of this, monetary offset. In the last episode of my weekly market and economy recap show, I talked about how Trump is complaining about the Fed.

Monetary offset is the reason why.

We often hear about fiscal policy, whether you are for it or against it, the government spending dollars undeniably has an inflationary effect. However, fiscal policy has an older brother that is actually pulling the strings, and that’s monetary policy. Monetary policy is what the Fed sets, and the Fed has the luxury of seeing exactly what the government is doing with fiscal policy, and then can factor that in when deciding whether to tighten or loosen borrowing conditions.

This is the essence of monetary offset. Of course, if the Federal government pays people to dig holes and fill them back in, that will still happen, so clearly an economy is best served by having both sides doing a good job. However, just one doing a bad job can derail the other, and at the end of the day, the Fed controls inflation because the Fed can offset anything that the treasury does.

8 Reasons People Hate Stock Buybacks

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With stock buybacks taking heat and even crazy uncle Bernie getting in on the action, I figured the time was right for me to join the chorus of finance professionals happy to give you their two cents about them.

I won’t focus much on the theoretical side, other than to briefly cover the main points that have been fleshed out many times. Here, here, here.

The theoretical argument goes pretty much as follows: a stock buyback is exactly the same as a dividend, except instead of cash landing in your account (as a taxable event, mind you), there are fewer shares outstanding and therefore the price of your stock goes up (ceteris paribus).

As the saying goes, in theory, there is no difference between theory and practice, in practice, there is.

So let’s talk about the differences.

As a brief refresher, dividends are pretty simple, and most of them are recurring (monthly, quarterly, or annual), and (mostly amateur) investment theses have been built around them. The company periodically takes some cash and distributes it to the shareholders, a certain amount per share that you own. This is taxable to you (usually between 15-24% Federally depending on your tax bracket).

Buybacks differ from dividends in a few key ways:

  1. They aren’t typically regularly recurring. This makes them feel special and unpredictable.
  2. They may be equivalent to many years of cash build-up, so you can get a nice headline grabbing number like $100 billion.
  3. They don’t show up as cash in your portfolio, you have to make the cash available yourself by selling a portion of your shares.
  4. It is hard to keep track of how much value is being returned to you via share buyback. Your portfolio does not have a section that tells you how much of the appreciation of your shares is due to the fact that you now own a larger portion of the company.
  5. The value of a buyback is small compared to the daily fluctuations of the market. A stock could easily be down the day of a substantial share buyback for reasons related to the economics of the company.
  6. Somehow dividends seem to escape scrutiny here (see #5 above), despite stocks losing value when the dividends become payable.
  7. Dividends have acquired a sheen of being deserved, we work hard at something and it pays dividends this is good.
  8. Buyback has a negative mood affiliation. I’m not sure if it is the ‘buy’ that sounds greedy, or ‘back’, where it also sounds greedy, or a combination of the two, but somehow share buybacks sound greedy to most people. It manages to bring out the Australian in all of us.

However, even given these concrete reasons, I think the most likely reason people dislike buybacks is simple misunderstanding. Dividends are simple. Own shares, get cash. Buybacks are complicated, and somewhat unseen.

Most people do not have the mental energy to spare on the thought exercise of a share buyback (see example at bottom here). To them, stock ownership is some form of gambling, and therefore buybacks do not confer value to the shareholders while dividends clearly do.