Tax Tourists and Digital Watches

Also a flood of migrants, an EU army, the Dow, a GM share buyback, a GS not-share-buyback, and fund manager bonuses.

Happy ECB QE day!

The European Central Bank's quantitative easing program kicked off today, with national central banks buying German bonds, Italian bonds, Belgian, French, whatever you've got really. And if you think negative yields in Germany and Switzerland are weird, get excited:

“We could even see the two-year Spanish, Portuguese and Italian bond yields falling below zero in coming months,” said Azad Zangana, a European economist at Schroders.

In less cheery European sovereign debt news, Greek rates probably won't go negative any time soon:

The list of measures Greece’s government sent to euro-region finance ministers last Friday, including the idea of hiring non-professional tax collectors, is “far” from complete and the country probably won’t receive an aid disbursement this month, Eurogroup Chairman Jeroen Dijsselbloem said on Sunday. 

"It seems their money box is almost empty," is another thing that Dijsselbloem said. I suppose it was silly of me to think that the four-month extension of Greece's bailout agreed two weeks ago would defer this sort of brinksmanship for, well, four months, but still this is pretty quick; Greece "has to present detailed proposals to European creditors or risk running out of cash as soon as this month," and the current list didn't get the job done. To be fair, it included things like:

a proposal to enlist “casual” tax spies -- tourists, students, housekeepers and other nonprofessional inspectors -- “to pose, after some basic training, as customers, on behalf of the tax authorities, while wired for sound and video.”

Can you imagine spending part of your Greek island vacation getting "some basic training" and being "wired for sound and video" to scout out tax cheats? I feel like there'll be a lot of German tourists lining up to volunteer. Here's another Greek proposal. Elsewhere, here is a profile of the 37-year-old former investment banker who serves as economy minister in the Socialist government of France. And here is a proposal for a European Union army.

Happy Apple Watch day!

I don't know, it's a watch, it's sort of expensive, it goes with your iPhone, it comes in a box. It'll be rolled out at 1 p.m. Eastern. There's a live stream, and there will be live blogs more or less anywhere there's Internet.

In other Apple news, Apple is replacing AT&T in the Dow Jones Industrial Average later this month. You can read representative "the Dow is dumb" pieces here or here or here. The Dow is dumb, of course -- it's a price-weighted index of just 30 stocks, almost none of which are actually "industrial" -- but, I mean, here we are. Here is a defense of the Dow that consists solely of pointing out that its monthly returns have a 96 percent correlation and 0.97 beta to the S&P 500's monthly returns, which is to some degree impressive -- the Dow people do a good job of picking stocks that, on a price-weighted basis, track the stock market -- though it is not exactly a robust defense of the Dow's usefulness. 

Dan Davies sort of defends the Dow against the S&P by arguing that market capitalization "weighting is such an obviously bad idea that more or less any alternative, even one that's effectively 'random numbers,'" is better; this might be a good reason to avoid market-cap weighting in your investments, but is not a good argument for price-weighting as a description of market. Do people invest using the Dow? Bloomberg News thinks not ("In terms of impact on the stock itself I don’t think it’s going to be overly significant"; "I couldn’t tell you the last time I thought about the Dow Jones Industrial Average and what it means for its constituent stocks"), while the New York Times thinks some people might ("Many portfolio managers and investors use the Dow to measure their performance, and with Apple added to the index, they will be compelled to buy the stock or add to existing positions").

Finally, here and here you can read about the Dow curse, in which companies that are added to the Dow under-perform the market. An exercise for the reader is: If the Dow closely tracks the S&P, how can all of the stocks in the Dow under-perform the S&P? Does it have something to do with price weighting?

Disgorge the cash.

General Motors will buy back a bunch of stock in order to avert a proxy fight with Harry J. Wilson, a sort of activist-for-hire who was trying to get elected to the board with the help of four hedge funds that own GM stock, and who helped restructure GM in 2009 as a Treasury official. If you say that the board "needs a shareholder advocate" and that it should be you, it's a little embarrassing to change your mind in exchange for a big buyback program; that's like admitting that shareholder advocacy is a one-dimensional demand for buybacks. And here are some criticisms of Wilson's proposed compensation plan -- basically he's going to share in the hedge funds' upside in GM stock over the next three years -- that I don't find particularly compelling; it seems a little silly, at this stage of late capitalism, to complain about directors getting paid for increasing the stock price.

In sadder capital-return news, Goldman Sachs is sweating this Wednesday's stress test results:

Several analysts have released research questioning whether the Federal Reserve would allow Goldman to continue its buyback programs given the results of the stress tests. Brian Kleinhanzl, an analyst with Keefe, Bruyette & Woods, estimated that if Goldman is unable to repurchase shares, it could earn 42 cents a share less than expected this year, and $1.78 a share less than expected next year.

Goldman spent about $5.5 billion on buybacks last year, and has 435.6 million shares outstanding, so 42 cents a share is like $183 million, meaning that Goldman would be getting about a 3.3 percent better return spending that $5.5 billion on buybacks than on whatever else it would use that money for. (Prop trading? Lending to small businesses? Anyway, disclosure: I used to work at, and be a shareholder of, Goldman.)

Bonus caps.

The main argument against banker bonuses -- that their asymmetrical nature (unlimited upside, downside floored at zero) encourages excessive risk-taking -- more or less applies to fund manager bonuses too. Your investors want a high risk-adjusted return, but you've got an option on their return so you care less about the risk-adjusting. I don't know, though; most of the bank's money comes from very risk-averse creditors, while the fund manager is mostly managing for a single class of fund equity investors whose interests are considerably more aligned with the manager's. Anyway, here is a weird story about how some big fund management companies (BlackRock, Fidelity, Aberdeen) will be subject to European bonus rules (bonus capped at two times base salary, 40 percent required deferral), while other companies (Vanguard, T. Rowe Price, Standard Life) will not be, depending on whether they fall under the scope of Capital Requirements Directive IV. The distinctions among those companies are a little non-obvious, and there are some obvious competitive advantages to being able to pay your staff for performance. I mean, it attracts staff, for one thing, but also you'd think it would attract clients? 

Things happen.

Happy retirement of the War Loan day! Planet Money on the 10 most-shorted stocks. "About 52% of all debt on credit reports is from medical expenses." Skew in inflation derivatives markets. Volatility in muni bond markets. Blood gold. The U.K. government is selling down its Lloyds stake. There's still a Euribor manipulation investigation. "Why do we need both liquidity regulations and a lender of last resort?" There will be a Harvard/Yale basketball playoff. Doing a public reading from your teenage diary is no longer original or clever. Economists are happy.

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(Corrects spelling of Jeroen Dijsselbloem's name in third paragraph and size of Goldman Sachs's prior buyback in 11th paragraph.)
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    Matt Levine at

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