800-year financial perspective

The linked article, “Venetians, Volcker and Value-at-Risk: 8 centuries of bond market reversals” by Paul Schmelzing, a financial historian atHarvard University, delves into the esoteric details of the fixed income market but some stated facts are relevant for general discussion.

Paul Schmelzing, Harvard UniversityThe economist Eugen von Böhm-Bawerk once opined that “the cultural level of a nation is mirrored by its interest rate: the higher a people’s intelligence and moral strength, the lower the rate of interest”. But as rates reached their lowest level ever in 2016, investors rather worried about the “biggest bond market bubble in history” coming to a violent end. The sharp sell-off in global bonds following the US election seems to confirm their fears. Looking back over eight centuries of data, I find that the 2016 bull market was indeed one of the largest ever recorded. History suggests this reversal will be driven by inflation fundamentals, and leave investors worse off than the 1994 “bond massacre”.

Chart 1: The Global risk free rate since 1285

Chart 2: Length and size of bull markets since 1285

As chart 2 shows, over 800 years only two previous episodes – the rally at the height of Venetian commercial dominance in the 15th century, and the century following the Peace of Cateau-Cambrésis  in 1559 – recorded longer continued risk-free rate compressions. The same is true if we measure the period by average decline in yields per annum, from peak to trough. With 33 bps, only the rallies following the War of the Spanish Succession, and the election of Charles V as Holy Roman Emperor surpass the bond performance since Paul Volcker’s “war on inflation”.

The article goes on to conclude, “On balance, then, more than to a 1994-style meltdown, fixed income assets seem about to be confronted with dynamics similar to the second half of the 1960s, coupled with complications of a 2003-style curve steepening. By historical standards, this implies sustained double-digit losses on bond holdings, subpar growth in developed markets, and balance sheet risks for banking systems with a large home bias.”

“Republicans to gut ethics office”, flavour added

Once again BBC hyperventilates about the misdeeds of Republicans and informs us of the following.

Republicans have ditched a plan to gut the independent body that investigates political misconduct after a backlash.

The lawmakers’ surprise vote to strip the Office of Congressional Ethics of its independence prompted public uproar and a dressing down from Donald Trump…

The secretive move, which overshadowed the first day of the 115th Congress, was reversed in an emergency meeting.

Perhaps some background material is in order to put this in perspective.

Jun 10, 2010 (recall that during this period Democrats controlled the House and the Senate). Liberal publication Politico informs us of the following:

Lawmakers seek to gut ethics office

The Office of Congressional Ethics, a powerful symbol of Democrats’ promise to “drain the swamp” in Washington, is in danger of having its power stripped after the midterm elections.

Members of the Congressional Black Caucus have led the charge, airing complaints about the aggressive, independent panel in a private session with House Speaker Nancy Pelosi last month, and they’ve drafted a resolution that, if approved, would severely curtail the panel’s power.

Jan 2, 2017. Liberal publication WaPo informs us of the following:

The 119-to-74 vote during a GOP conference meeting means that the House rules package expected to be adopted Tuesday, the first day of the 115th Congress, would rename the Office of Congressional Ethics (OCE) as the Office of Congressional Complaint Review and place it under the oversight of the House Ethics Committee.

Under the proposed new rules, the office could not employ a spokesman, investigate anonymous tips or refer criminal wrongdoing to prosecutors without the express consent of the Ethics Committee, which would gain the power to summarily end any OCE probe.

The OCE was created in 2008 to address concerns that the Ethics Committee had been too timid in pursuing allegations of wrongdoing by House members. Under the current House ethics regime, the OCE is empowered to release a public report of its findings even if the Ethics Committee chooses not to take further action against a member.

The move to place the OCE under the Ethics Committee’s aegis stands to please many lawmakers who have been wary of having their dirty laundry aired by the independent entity, but some Republicans feared that rolling back a high-profile ethical reform would send a negative message as the GOP assumes unified control in Washington.

A bit of a different perspective than BBC, don’t you think? On top of that, this perspective is from liberal publications, which highlights how out of touch BBC has become.

EU, light at the end of the tunnel?

 Jan 7, 2017, German Vice Chancellor Sigmar Gabriel:

Germany’s insistence on austerity in the euro zone has left Europe more divided than ever and a break-up of the European Union is no longer inconceivable, German Vice Chancellor Sigmar Gabriel told Der Spiegel magazine. (emphasis added)

Gabriel, whose Social Democrats (SPD) are junior partner to Chancellor Angela Merkel’s conservatives in her ruling grand coalition, said strenuous efforts by countries like France and Italy to reduce their fiscal deficits came with political risks.

“I once asked the chancellor, what would be more costly for Germany: for France to be allowed to have half a percentage point more deficit, or for Marine Le Pen to become president?” he said, referring to the leader of the far-right National Front.

“Until today, she still owes me an answer,” added Gabriel…..

Is that because Merkel has suddenly realized that there are greater threats elsewhere?

Dec 31, 2016:, German Chancellor Angela Merkel:

Islamist terrorism is the biggest challenge facing Germany, Chancellor Angela Merkel has said in her New Year message.

Sanctuary cities, a blessing in disguise?

One of the first order of battle for the Trump administration might be “sanctuary cities”. The list of sanctuary cities is a long one and includes several major cities.


Mayors of several cities have already indicated that they will not cooperate with the federal government. Just the other day Rahm stated the following.

Chicago Mayor Rahm Emanuel, President Barack Obama’s former chief of staff, said Monday at a news conference that city officials have been fielding calls from residents worried that it may change its status because of the threat from Trump.

“Since the presidential election, there has been a sense of uncertainty among many immigrant communities in Chicago and across the nation,” Emanuel said. “I want to assure all of our families that Chicago is and will remain a sanctuary city.”

The sanctuary city designation broadly means that local police will not coordinate with federal law enforcement in efforts to deport undocumented immigrants.

One option Trump has stated is to cut off funding for these cities. Another viable option is to proceed in a manner similar to what Eisenhower did in Little Rock, Arkansas.

Woodrow Wilson Mann, the mayor of Little Rock, asked President Eisenhower to send federal troops to enforce integration and protect the nine students. On September 24, the President ordered the 101st Airborne Division of the United States Army—without its black soldiers, who rejoined the division a month later—to Little Rock and federalized the entire 10,000-member Arkansas National Guard, taking it out of the hands of Faubus.

A better option might be to consider devolution of power to States, i.e. strengthen the Tenth Amendment, thus reversing the recent trend which has seen power gradually erode at the State level. The law of unintended consequences, will ensure that the Democrats will come to severely regret the choice of making their cities a sanctuary for illegal immigrants, contrary to the wishes of the federal government. Who could foresee the adverse and unintended consequences of the Seventeenth Amendment when it was originally enacted?

Post-election US, lay of the land

It is time to tabulate the results of the 2016 election. At the federal level, Republicans control the White House, Senate and the House of Representatives. They will also get a chance to reshape the Supreme Court. How did this happen? Well it has been happening for a while, with gradual erosion of Democrats at the State level, which has in turn led to Clinton and Sanders, neither one of them a spring chicken, being the the only primary candidates. Contrast that with the Republican primary which started off with 17 candidates. This affect of extirpation of the farm-team cannot be underestimated.

Surprisingly that erosion has continued at the state level in this election. Republicans control a record 69 of 99 state legislative chambers, and wound up with at least 33 governorships, the most since 1922. All that is the net result of Obama’s own preternatural self-assurance and inability to heed lessons. For them it might get worse because in 2018, the Democrats must defend an 25 seats in their Senate caucus, many of them in states that Trump carried.

This first shot across the bow was Obama’s inability to understand or to heed the lessons of the election of Scott Brown in the liberal state of Masschusetts. This was followed by the 2010 election in which the “Republican Party gained 63 seats in the US House of Representatives and making it the largest seat change since 1948 and the largest for any midterm election since the 1938 midterm elections. The Republicans also gained 680 seats in state legislative races, to break the previous majority record of 628 set by Democrats in the post-Watergate elections of 1974.” Instead of addressing the issues, Obama decided to unleash the IRS on the Tea Party, in the true Chicago-way, which inexorably brings us to where we are today.


Some have received the memo, and the ‘publisher of The New York Times penned a letter to readers Friday promising that the paper would “reflect” on its coverage of this year’s election while rededicating itself to reporting on “America and the world” honestly.’ Other leftist are holding back less.

Others like Juncker have not received the memo. He stated the following.

“We will need to teach the president-elect what Europe is and how it works,” Juncker, arguably the EU’s most powerful politician, told students during a conference in Luxembourg, his home state. “I think we will waste two years before Mr. Trump tours the world he does not know.”

It is not a surprise that Juncker said that, but it is surprising that he was sober enough to be understood by the reporters.

All said “roughly 80 percent of the population living in a state either all or partially controlled by Republicans.”

No wonder there is talk of a Democrat civil war.

Progressives are itching to see the national apparatus reduced to rubble and rebuilt from scratch, with one of their own installed at the top.

And there is talk among some progressives, like Bill Clinton’s former Labor Secretary Robert Reich, about splitting from the Democratic Party entirely if they don’t get the changes they seek.

“The Democratic Party can no longer be the same, it has been repudiated,” Reich said on a conference call with members from the progressive grassroots group Democracy for America.

Heckuva job Obama!

Comment on Peter Thiel’s comments

Peter Thiel is a Libertarian and has been for a long time. His opinions are not a surprise, but what is surprising is his comment on government efficacy, with a nod to Manhattan and Apollo project. With that he inoculates himself from the “crazy-libertarian” charge. His venture capital background gives him a rational thought process which he displays in his speech. He also touches on the fact that we have moved from a military-industrial complex to a government-industrial complex. Hence the disparities he alludes to, i.e. either you are a player, or you are being played.



Random facts aka Obama’s Legacy

Posted without comment.

Finanz und Wirtschaft

There is not quite a bestseller, but a very substantial book called «The History of Interest Rates». It was written by Sidney Homer and Richard Sylla. Sidney Homer is no longer with us, but Richard Sylla is alive and well at New York University. So I called him and said: « Richard, I’ve read many pages but not every single page in your book which traces the history of interest rates from 3000 BC to the present. Have you ever come across negative bond yields?» He said no and I thought that would be kind of a major news scoop: For the first time in at least 5000 years we have driven interest rates below the zero marker. I thought that was an exceptional piece of intelligence. But I notice however that nobody seems to have picked up on it.

Washington Post

The typical American might not be able to quote statistics about how if the labor force participation rate were the same today as it was when Obama took office, the unemployment rate would be 9.2 percent instead of 4.9 percent…

CNS News

President Barack Obama may become the first president since Herbert Hoover not to serve during a year in which the growth in real GDP was at least 3 percent.

New York Times

President Obama came into office seven years ago pledging to end the wars of his predecessor, George W. Bush. On May 6, with eight months left before he vacates the White House, Mr. Obama passed a somber, little-noticed milestone: He has now been at war longer than Mr. Bush, or any other American president.

Trump and down-ballot impact

This is not a prediction of Trump’s demise, but rather an opinion on Trump’s impact on down-ballot candidates in case he loses. This election, more so than other elections, is saturated with “complex, layered, and divisive issues”, to use Oban’s phrase.

In the event of a Clinton landslide, it is very unlikely that down-ballot Republican candidates will suffer. The electorate has learned their lesson from the 2008 wave election which by April 2009 had handed the Democrats a filibuster-proof 60-40 majority in the Senate. This combined with 257-178 seat majority in the House of Representatives, allowed Democrats a free reign to run amok. The electorate realized the error of its way and in January 2010 took the matter into their own hand. This led to a dramatic upset, where the thoroughly solid blue Massachusetts, handed Edward Kennedy’s old seat to the Republican Scott Brown. It is likely that the same scenario will come into play this time and with the same thought permeating through several locales, instead of just one as in January 2010, it is entirely possible that the electorate might overdo it, thus handing the Republicans larger than expected majorities in the House and the Senate. The converse scenario is also applicable in case Trump wins, with comments about Trump and his coattails leading the coverage. A Clinton landslide, along with Republican loss of House and Senate, is a view that is simplistic and based on conventional and pedestrian thinking.

If one thinks that thing are acrimonious now, then just wait. A Clinton presidency, with its Court appointments, is likely to lead to liberals controlling the Supreme Court till 2050. Republicans finding their spine by refusing the acquiesce to a replacement for Scalia, is indicative of what the future holds. Garland was nominated on March 16, 2016 and his nomination has remained before the Senate since then. This constitutes a period longer than any other Supreme Court nomination. Atlantic magazine also opines on this scenario.

It’s 2020, four years from now. The campaign is under way to succeed the president, who is retiring after a single wretched term. Voters are angrier than ever—at politicians, at compromisers, at the establishment. Congress and the White House seem incapable of working together on anything, even when their interests align. With lawmaking at a standstill, the president’s use of executive orders and regulatory discretion has reached a level that Congress views as dictatorial—not that Congress can do anything about it, except file lawsuits that the divided Supreme Court, its three vacancies unfilled, has been unable to resolve.

On Capitol Hill, Speaker Paul Ryan resigned after proving unable to pass a budget, or much else. The House burned through two more speakers and one “acting” speaker, a job invented following four speakerless months. The Senate, meanwhile, is tied in knots by wannabe presidents and aspiring talk-show hosts, who use the chamber as a social-media platform to build their brands by obstructing—well, everything. The Defense Department is among hundreds of agencies that have not been reauthorized, the government has shut down three times, and, yes, it finally happened: The United States briefly defaulted on the national debt, precipitating a market collapse and an economic downturn. No one wanted that outcome, but no one was able to prevent it.

As the presidential primaries unfold, Kanye West is leading a fractured field of Democrats. The Republican front-runner is Phil Robertson, of Duck Dynasty fame. Elected governor of Louisiana only a few months ago, he is promising to defy the Washington establishment by never trimming his beard. Party elders have given up all pretense of being more than spectators, and most of the candidates have given up all pretense of party loyalty. On the debate stages, and everywhere else, anything goes.

A parting forecast, if Clinton wins she might have to pardon herself.

Issues with Globalization

In the article Globalization and its New Discontents, Joseph Stilglitz addresses some of the issues that have led to discontent with Globalization and free trade. He notes the following.

“Among the big winners were the global 1%, the world’s plutocrats, but also the middle class in newly emerging economies. Among the big losers – those who gained little or nothing – were those at the bottom and the middle and working classes in the advanced countries.”

This is time for people to rethink their ideological beliefs.

Globalization has led it equalization of wages, i.e. decrease in wages in developed word and increase in wages in the developing world. That is not a surprise and was suppose to happen. What is a surprise is that the significant economic growth was expected to offset this. For those who believe in free trade, this has been a tough fact to digest.

Why didn’t we get the significant economic growth that was expected? Why will Obama, the smartest president ever we were told, end his term without a single year of 3% GDP growth? Well, in contemporary history the two most successful presidents were Reagan (right of center) and Clinton (left of center). Both had one thing in common during their presidency, technological innovation. Former, personal computer and latter, internet, i.e. presidential policies have very little to do with economic growth despite what leftist believe. You can only dig so many holes and then cover them up.

With people looking after their own interest, is it any surprise that the global elite are in favour of free movement of people? One reason you see Facebook’s Zuckerberg urge for increase in immigration is so people like him can have access to cheap labour. This unfettered supply of labour is contrary to the interests of the working class and it is no wonder that Trump has found a ready forum.

As for Trump, affirmative action has given us a half-black and half-woman on the Democrat side. Clowns are people too so one has to give Trump a chance. If you look at the RCP average of polls it is amazing how he closes in on his wife, err opponent, and then he falls back. There is still a lot of ambivalence about him. He is doing it right lately by sticking to the script, or as Obama fans were fond of saying about him in 2008 “staying on the message”, so he might come out ahead.

“Radical Islam”, a shift in opinion?

Two things of note happened today in relation to the narrative regarding the Orlando shooting.

Today Hillary Clinton used the term  “radical Islamism”, which is a departure from her earlier statements. That is most likely indicative of focus groups and overnight polling results. This is a candidate who doesn’t do anything without polls. Recall that her husband relied on polls to select vacation spots.

Second, during times like this people rally around the president thus boosting his approval rating. But as we know, Obama is a divisive figure as WaPo noted in the article “The new norm: When tragedy hits, Americans stand divided”. The latest daily approval numbers by Rasmussen reflect this and indicate that his reluctance not to blame radical Islam did not go over well. In fact his approval rating declined.

Obama Approval Index History

Date Approval Index Strongly Approve Strongly Disapprove Total Approve Total Disapprove
13-Jun-16 -10 28% 38% 49% 50%
10-Jun-16 -7 29% 36% 49% 49%