01 June 2013

Fellini Meets Bergman

Federico Fellini and Ingmar Bergman crossed paths in the news the last couple of days; satiric hilarity meets major depressive disorder in the span of one day.

So, first Federico.

We all still remember The Great Recession's start, and the London Whale's puking (not Jonah, alas), yes? Much has been made here that quants, by and large, know little about economics (beyond certain micro adages) and, it turns out, little beyond Excel to accomplish their "analyses". Turns out, they don't learn much Excel until just as they're needing to use it. Kind of like a soldier who's never loaded or fired his weapon (a single action Colt revolver) until the enemy comes out of the bushes, Uzis blazing. What a way to run an economy.

Imagine my surprise, then to read that quants, in a manner of speaking, are being trained in just a few days, and to use Excel!!! As if that were what a serious quant would depend on. I guess when there's sufficient money to be made by going on the cheap and stupid, Wall Street just can't resist.
Enter specialized boot camps where -- for fees that sometimes exceed $1,000 a day -- would-be masters of the universe can perfect Excel modeling techniques and financial analysis.

So, where are these Masters?
"I just want someone who can really use Excel and PowerPoint," said one senior loan syndication banker at a European bank, describing his recent interviews of newly minted M.B.A.'s in New York.

Excel and PowerPoint, the Leopold and Loeb of finance. "Wonderful", as Dirty Harry opined. It's the Lemming Triple Crown.

But, it gets better:
In June, Training the Street will start a four-day Undergraduate Wall Street Boot Camp in New York and will charge students $3,000 (not including accommodations) to learn the basics of financial modeling, valuation and analysis. Wall Street Prep, widely viewed as more intensive on analytics, sells CD-ROMs for $39, for a basic Excel course, and as much as $499 for a "premium package" detailing financial modeling.

If you've ever been a cigarette smoker, and of a certain age, let me take you back to the Goode Olde Days of matchbooks. Inside, invariably, was an ad for some get rich quick program, for just a few dollars. Taxidermy at home, was my favorite. Now, you can spend a few dollars, and you too can participate in destroying the world economy.

Wait, wait. Could it be? Yes, as we read on to find:
But Wesley Hansen said such a course was vital when he switched to a career in finance. He was a camera operator on reality shows like "The Bachelor" before graduating last year from the University of Southern California's Marshall School of Business, where he took Training the Street courses.

"I had no clue how to use Excel, so it helped me get a job, no doubt," said Mr. Hansen, who is now an equity analyst in California with the brokerage firm BMA Securities.

I suppose it's beyond hope that Mr. Hansen stays as far as possible from Other People's Money.

And now for Ingmar, and his tale of a canary in a coal mine.

Recall how this endeavor has pointed to the disconnect between median house price and median income, starting about 2003? The canary in the coal mine, so to speak. Widely ignored, of course, because ignorance was compensation bliss for the Masters of the Universe. As one said, paraphrasing, "everybody else was dancing, so we had to, too". The Lemming Trifecta.

Also, as this endeavor has mentioned more than once, most of that Fed moolah has been going to Banksters and the like, not wage earners. Thus, it's obvious, a priori, that this moolah flood is the reason the Dow and NASDAQ and S&P are on a tear. More dollars chasing a, more or less, fixed bundle of stocks. The other side of the coin, also mentioned here ad nauseum, is the flight to "higher risk free returns" by those coupon clippers who used to get a 7% solution holding Treasuries. Livin' high on the hog off the taxpayer. Whether the coupon clipper class realizes they're now embedded in a Ponzi scheme is unknown.

The ever dependable Floyd Norris has data on a related aspect: margin. Margin means you buy stocks without paying all the bill. Your broker lends you the extra. All is fine so long as the price goes up, since you sell off some of the appreciated shares to clear the bill.
The latest total of borrowing amounts to about 2.4 percent of G.D.P., a level that in the past was a danger signal.
The first time in recent decades that total margin debt exceeded 2.25 percent of G.D.P. came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom -- when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes. That boom in margin loans also ended badly.

Recall the lesson learned from the run up to the Great Recession? Median income was, at best, stagnant. Greenspan crashed interest rates. The coupon clippers went on a frenzied search for "nearly risk free returns", and settled on US residential housing. In order to secure enough "product" to fulfill the demand from the coupon clipping class, the Subprime/ARM/liarLoan/etc. were devised. This clusterfuck had two, in the very short term, beneficial effects: 1) the 99% had a source (home equity loans against unearned appreciation) of consumption not of their meager wages, and 2) the coupon clippers got back to living high on the hog with their 7% (or even better) solution. But like heroin, the withdrawal hurt like an asteroid hitting in the Yucatan.

If that pattern repeats, it could indicate that the stock market rally, which carried the S.& P. 500 to record levels in May, will not last much longer.

Economists have a term, "wealth effect", which means that if you think you've got lots of moolah, you'll spend as if you do. The Wiki has a thumb nail sketch. It is clear from the data that during the Dubya years households spent, on the whole, motivated by the ability to monetize real estate appreciation, which was not driven by retiring mortgage value, but by increases in appraisals. That increase in demand for housing, in its turn, was driven by corruption in the mortgage process (not by rising median incomes able to pay higher prices for houses), to create ever more instruments for the coupon clippers. Kind of like screeching positive feedback one sometimes hears at rock concerts. Whether we're seeing the same thing with margining in the stock market, buying low and selling high on credit, hasn't yet been revealed in enough data. We likely won't have enough data until after the patient has died. A postmortem analysis, so to speak. What we do know is that median income remains stagnant. The inference is thus clear.

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