Cato Institute’s 34th Annual Monetary Conference – Mark Spitznagel And James Grant


Q&A session from the Cato Institute’s 34th Annual Monetary Conference.

Moderator: Craig Torres – Financial Reporter, Bloomberg News

John A. Allison – Former President and CEO, Cato Institute, and former Chairman and CEO, BB&T Bank

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Mark Spitznagel – President and CEO, Universa Investments, LP

James Grant – Editor, Grant’s Interest Rate Observer

Cato Institute

John Allison: Talk about Monetary vs Real economic effects.  Wall Street did not cause the crisis.  Was a combination of CRA and the GSEs, aided by the Federal Reserve.

When the dot-com bubble deflated, Greenspan ran monetary policy too loose, and deliberately inflated a housing bubble.  Greenspan (DM: Bernanke) talked about the global savings glut.  When rates rose, they rose rapidly in percentage terms rapidly.

Bernanke inverts the yield curve, incenting banks to take undue credit risk.  Bernanke said that there would be no recession amid all of the bubbles.  Many mainstream businessmen felt fooled by the Fed.

Average businessmen expect businessmen expect inflation, but it is not happening.  Now they behave conservatively.

Regulation was worse than monetary policy.  Risk-based capital. Privacy act. Sarbox.

A big deal, and I am the only one talking about it: Early ’80s: attacked bad banks and they failed — a good thing.  Good banks kept operating.  This time regulators saved bad banks and regulated good banks more heavily — perverse.  Totally irrational.

Sheila Bair should not be viewed as a hero.  Closed barn door after cow got out.  Later “solutions” not useful.

Bernanke’s book: on the verge of global armageddon… JA thinks contagion was far smaller than perceived.

Liquidity requirements are restraining lending.  Thinks that banks can’t aid in creating jobs.  Lending standards are tight.

Likes a bill coming out that would loosen matters.  Talks about the ’90s when BB&T opposed regulation on supposed racial discrimination in lending.

(DM: What a dog’s breakfast of clever and stupid)

Mark Spitznagel — management and hedging of extreme risks.

Mises — No laboratory experiments can be performed with respect to human action.

Talks about equilibria, correcting processes, etc.  (DM: Loquacious, not going anywhere… boring.)  Mentions Tobin’s q-ratio.

(DM: I remember that I didn’t give his book a good review.  His talk validates that review.)

Tobin, a Keynesian, looked at the q-ratio as a monetary policy tool.  But investment doesn’t get affected much by the q-ratio.

Shows how the q-ratio is negatively correlated with future returns, and the left tails get bigger as q-ratios get higher.

Trump can stimulate, but crashes will bring correction.

James Grant: Gruber, Obamacare founder said that it passed because the American people are stupid.

New ideas: what to do now after the election? Grant suggests older policies that existed over one century ago.  Or, more modern: Taylor Rule?  Friedman’s constant growth rate of money…

Monetary policy has been debated for the last 250 years… the Fed was viewed as a solution to the Money Trust, but brought its own problems.  Pension fund problems…

The Fed has paid no price for its manifold failings.  Double Liability would be a better method.  Bank shareholders should bail out, not taxpayers.  Monopoliies: PhD economists w/tenure, Federal Reserve.

$15 Trillion of government bonds have been sold with negative yields.  A promise to store fiat money at a loss.

Panics used to occur at 10-year intervals, w/gold backing and double liability.  The economy grew rapidly then.

Overstone: “the trouble with money is credit, and the trouble with credit is people.”

We like being spared volatility.  How many truly want to have a Old Testament-level bear market?

Swiss National Bank? Creates francs to tamp down the currency and buys up euros, dollars, then stocks.

QE is a cautionary tale.  It failed politically because it did not work.  Failure of the PhD standard will lead to new thinking.


Mark Q1: Trump sounds monetarist, not radical.  Who will bring change?  Who will swim against the tide of Statism?

Grant: Will swim against statism.  Yeah!

Q2: Could gold trading be viewed by the US as a currency exchange? (lower taxes)

Grant: would be easy to do, but difficult to get done politically.

Q3: Isn’t the cost of funny money low productivity growth?  (True everywhere it has been done)

Allison agrees.  So does Spitznagel.

Q4 Julie Smith: recent events in India — the war on cash.  Comments?

Grant talks about Ken Rogoff, and remove $50 and $10 bills so that negative rates can prevail.  Someone picked up a copy in India — and it will be self-destructive.  It murders the cash system, which is the real banking system in India.

Q5: Alex Billy Grad Student at Georgetown: Did the Mexican crisis in 1995 have an impact on future developments?

Allison: big New York banks got bailed out of an irrational risk.  The cure for too big banks is to let them fail.  Wall Street was bailed out at the cost of Main Street.

Bert Ely Q6: Support for Basel III is sagging.  What would the effects be?

Allison: Great.  Let’s just have a leverage ratio.

Me Q7:  Risk based capital vs liquidity Life insurers vs Banks?

Allison: doesn’t see it that way.  Insurers are very different than Banks.  Buying too much MBS at banks as a result.

Q8: “Ships are safe in harbors, but that is not what ships are for.”

Grant: agrees. Goodhart: Banking and the finance of trade in New York.  Banks had to remain liquid and well capitalized in order to survive.  It was a good system.

Q9 (Torres): What should we do now?

Allison: Modify Dodd-Frank such that bank with a 10% leverage ratio could opt out of Dodd-Frank.

Grant: How to modify the Fed: End Humphrey-Hawkins.  Don’t take a poison chalice… reform wisely after there has been a real crisis and want real solutions.

Spitznagel: end low rates so that economic actors don’t take marginal risks.

Article by David Markel, The Aleph Blog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

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