Upside-Down?

Posted on by David Merkel

Picture Credit: National Library of Ireland on The Commons || Interest rates always move in lockstep, right?

So the Fed loosened 0.50%. Long past the time it should have done so. What was the result on the long end of the Treasury yield curve?

Well, look at that! As the Fed cut the short-term policy rate, yields in the portion of the yield that matter more rose. And as an example, yields on 30-year MBS (mortgage backed securities) rose by 0.04% in yield. 15-year MBS rose by 0.02%. All of the yield curve rose from 1 year our to 30 years.

50 basis points of loosening was an upward surprise, so I take the steepening move in the yield curve as an expression that the market expects fewer cuts in the future, perhaps due to rising inflation, or just an unwillingness to lend more without additional compensation. I mean you two horrendously lousy presidential candidates making extreme promises to make the deficit even bigger. The GDP of the US grew faster when we ran balanced budgets — admittedly long ago. But fools think national credit is unlimited, and the grand enabler of that fantasy is the Federal Reserve.

Now, this just a day. Let ‘s watch what happens. The steepening could reverse, and even more so. But if this persists and goes further, you could see the Fed questioning whether they want to loosen more. Remember, the Fed is a slave to the bond market, not vice-versa.

Anyway, watch the slope of the yield curve. It tells you more about what is going on than the yammering of the Fed.

A Suggestion to the CFA Institute

Posted on by David Merkel

Image Credit: Andy Kobel || Remember, the market is mostly a weighing machine, not a voting machine

There are three main gripes that I have with respect to the CFA Institute regarding the way they do exams.

  • The exams cost far more than the marginal cost of providing them. CFAI is a nonprofit that acts like a for-profit enterprise. If you are a non-profit, why are you building up so much cash? Is it merely to employ people who have non-economic goals?
  • For the last 30 years, you have gone in search of novelty. Do students really need to learn derivatives? Alternatives? Do they have to learn about fads like ESG, which have little attachment to making profits over the long haul. Focus on the basics.
  • Why did you adopt a lousy testing method like multiple choice? Good exams are essay exams where you can see what the person is thinking and whether they can get to the correct answer via good reasoning, with out specifying possible answers.

I have an idea to improve things. Go ahead and continue to hold exams at testing centers via computers. Turn the exams into essay exams. Make them submit answers to essay questions. See if they get the right answer. See if they give the right logic. Have correct answer template, and use AI to see the degree to which the answers correspond to the template. Rank the answers from a given set of exams, question-by-question from 0 to 100.

We need to get CFA students thinking in a qualitative way, as it was when I passed the exams. This would not be hard, and would improve the quality of CFA Charterholders that pass the exams.

Please stop following fads, please create better exams, lower the fees, and stick to matters that CFAs genuinely care about.

Remember, we ripped out the head of CFA International back in 2003. We can do it again. I was at the meeting in Boston. We can have another revolution.

When Should the New Yew York Department of Financial Services have Rehabilitated American Transit Insurance?

Posted on by David Merkel

Hey! Maybe we can grow our way out of the problem! || All images from Aleph Blog

At one point in time, I was a Fellow in the Society of Actuaries, a Life Actuary specializing in investment issues. Eventually, I was hired by a hedge fund to analyze all types of insurance stocks. I knew some things about reserving outside of life insurance, but I had to learn more to become competent at understanding what made for good insurance stocks.

I learned that good P&C management teams state their financials conservatively, and aim for adequate margins over growth. They set reserves for the current year’s business high (conservative), so that in most cases reserves for business from prior years produce slight gains over time as the claims come in at less than the reserves.

I wrote an article about this back in 2014, Ranking P&C Reserving Conservatism. When I went back and looked at it after 3 years or so, those that had to strengthen reserves for prior year business did worse than those that could release their reserves for prior year business. Never published a second article on this, though.

Today I’m going to tell you about the worst P&C reserves I have ever seen, and tell you the story of how this came about. American Transit Insurance over the last few decades was the largest insurer of hired vehicles (taxis, black sedans, Uber, livery, and rideshare vehicles) in New York City. They gained a dominant market share by underpricing their insurance, and under-reserving. While market returns were high, that covered all or part of the underwriting losses.

ATI has been shaky for a long while. From this story at Insurance Journal:

“DFS said regulators made significant efforts to address ATIC’s financial problems, including filing multiple petitions to put the company into liquidation, starting back in 1979. The New York State Supreme Court denied that petition, a decision that was upheld by the Appellate Division and the State Court of Appeals in the 1980s, DFS said.”

Update: NYC’s Largest Cab Insurer Ordered to Explore Sale After Losses

And this story: “While ATIC is required by the state’s DFS to submit to an examination every five years, there are no publicly available exam reports for the company. A 1986 DFS evaluation obtained by Bloomberg described ATIC as insolvent by $6 million.”

New York City’s Biggest Taxi Insurer Is Insolvent, Risking Transit Meltdown

As a result, they raised $6.6 million of capital and continued in business. When the next five-year exam rolled around, NYDFS tried to take ATI into rehabilitation, but lost in the courts. From the first article:

“In 1991, the Insurance Department again tried to put the company into rehabilitation, prompting ATIC to seek an injunction to halt the proceeding. Ultimately, a special referee assigned to arbitrate the case suggested ATIC seek a capital infusion. A year later, the company and the state reached a settlement that allowed ATIC to remain in business, but stipulated the company keep surplus contributions and submit to enhanced state monitoring, DFS said.”

Update: NYC’s Largest Cab Insurer Ordered to Explore Sale After Losses

Now for my graphs and efforts: I downloaded the Statutory Statements for 2023, 2018, and 2013. That enabled me to look at the Five-Year Historical Data Pages, which gave me data series on important aspects of ATI’s business from 2009-2023. If you look at the graph at the top of this article, you will see how surplus declined 2009-2013. Incurred losses and loss adjustment expenses [LAE] were higher than earned premiums, and that didn’t take into account underwriting, marketing, management, and other expenses.

Their consulting actuary said in her 2013 review: “In my opinion, based on the information available for my review, the stated reserve amount does not make a reasonable provision for the liabilities associated with the specified reserves.  It is my opinion that the $47,100,000  net  reserves  for  losses  and  loss  adjustment  expenses  are  deficient  by  approximately $31,000,000. It is my opinion that the $47,100,000 direct reserves for losses and loss adjustment expenses are deficient by approximately $31,000,000. Additional information or further changes in such items as the claim handling procedures could change my estimate of the deficiency.” The surplus of ATI was a little less than $31 million. ATI was insolvent. This information was available to the NYDFS. This was the last moment to rehabilitate ATI without taking significant losses.

ATI chose to ignore the consulting actuary, and did two things. First they rolled the dice and likely said, “Let’s grow our way out of the problem!” And so they doubled their underwriting over the next five years. (See graph above.) The second thing they did was lower reserving on new business. (See graph below.) From 2009-2013, the implied expected loss plus LAE rate for new business was 81.2%. Now they had never once achieved that rate in that era. They were under-reserving new business. But from 2014-2018, they dropped that rate to 60.7%. That allowed them to report statutory profits, and growing surplus (look at the top graph). This came at a price of under-reserving even more. Looking at the graph immediately above, losses from prior year business doubled 2014-2018.

In 2018, the company again ignored their consulting actuary. In their 2018 MD&A, they said: “The Company has rejected the reports for December 31, 2018 and 2017 from its independent actuary. The actuary has estimated that the Company’s reserves for unpaid losses and loss adjustment expenses as of December 31. 2018 and 2017 were understated by approximately $45,000,000 and $36,000,000, respectively, on its filed statutory financial statements after taking into account anticipated salvage and subrogation and anticipated investment income. No such adjustments have been reflected in the accompanying financial statements since the Company has rejected the reports.”

The consulting actuary definitely underestimated the amount of under-reserving, but at least she was consistent in telling the company that they were under-reserving.

2019-2023 was the last gamble for ATI, again akin to a Ponzi, where you rob the future to pay the present. They lowered the implied expected loss plus LAE rate for new business to 27.6%. No P&C insurance company has a loss rate that low. As such the under-reserving continued to build.

We compare company surplus to the authorized control level of risk-based capital. When the ratio gets below 100%, the insurance department can seize the company for rehabilitation. So, in early 2024, NYDFS could seize it. They have not done so, and ATI, finally listening to the successor consulting actuary (to the one in 2013, 2018 etc.) announced a $700 million loss for the second quarter of 2024. The jig is up.

Note: my “true” surplus figure above assumed a 95.8% loss and LAE ratio, which was the average 2009-2023, and said the deficit is the difference between that and the implied new business loss ratio times earned premiums. Now at the end, all underwriting was out of control, and so that ratio had to be a lot higher than 95.8%. But the graph above shows directionally how bad things were going, which could not be seen by the regulatory surplus vs ACL RBC ratio calculation.

NYDFS has told ATI to find a buyer. I can tell you they will not be able to sell the joint until after the guaranty association covers the claims that ATI cannot cover. I don’t think there is any franchise value in ATI, as their only selling point was an overly cheap premium that could not cover losses, much less generate a profit. They will go into liquidation, and other insurance companies writing auto business in New York will have to cover the tab. (You have my sympathies. I lost one year of profit when I was surcharged for the losses of Confederation Life to cover their group annuity losses. Adding insult to injury, the failure of Confederation, indirectly kicked me out of the GIC business, as credit rating standards rose, and my company could not meet it. That said, it freed me to do three projects that added 5% to the surplus of the company.)

On the bright side, the CEO, Director and 3 former directors own 56% of the equity, and it will go out at zero. They may face various lawsuits from creditors not covered by the guaranty association. Perhaps the no-name auditor may also face some lawsuits. They earned a lot of fees, but did they hire a consulting actuary to validate the reserves? Did they talk to ATI’s consulting actuaries?

This brings up one final point: ignoring actuaries. In the life insurance business, management teams can’t push around their appointed actuaries (at least not much). Why do P&C management teams get to ignore their actuaries? Actuaries are bright, and they have an ethics code that they have to follow. P&C management teams should have to have actuaries that set the reserves, and they can do nothing about it.

Now I’m not going to tell you that I am a genius, all of the figures presented here are “spit-in-the-wind” estimates, and I know a trained FCAS (Fellow in the Casualty Actuarial Society) could do a lot better than me. But these estimates could be done easily at any State Insurance department with ease, as they take just seven variables from the Five-Year Historical Data Pages, and can flag reserving problems easily. NYDFS did not do what it took me three hours to do. This could have been caught in 2013 or earlier. The evidence was there.

The Best of the Aleph Blog, Part 43

Posted on by David Merkel

Picture Credit: sevoo || I’m not dead yet…

In my view, these were my best posts written between August 2017 and January 2018:

The Crisis at the Tipping Point

A reprise of what some people knew in advance of the Great Financial Crisis. Includes a link to what I wrote 10 years earlier, where I got a lot right, and a lot wrong.

Where Money Goes to Die

Wrong at least in the medium-run: Bitcoin. Right in the short-run: shorting the VIX, which blew up five months later.

The Many Virtues of Simplicity

Eight reasons why simplicity in investing works. Avoid anything that relies on options, or trading strategies. Buy and hold. Reduce turnover. Focus on quality.

Notes from an Unwelcome Future, Part 1

The best of the bunch, and my prediction that no effective action would happen with respect to Social Security has proven true so far. Seven years have burned away. Eight years until the crisis. The Greenspan Commission hosed Americans by raising “contribution rates” when it really didn’t need to do so. Nothing should have been done in the early 1980s, leaving the Social Security system to face insolvency in the mid-2000s decade. There could have been a reasonable reckoning then. As it is, we are still facing a train wreck in 2032, and Greenspan drained our pockets unnecessarily.

The Crisis Lending Fund

Cute idea, but it never saw the light of day. A way for mutual fund companies to reduce systemic risk, while allowing investors to make money during crises. On the other hand, maybe we should have some funds that pay on credit default swaps.

On Finding a Job in Finance

I get this question a lot. This is a specific answer to five questions a reader asked.

Since 1950, the S&P 500 in 2017 Ranks First, Fourth, Tenth or Twenty-third?

Written just before Volmageddon, I deal with factoids in the ultra-smooth 2017 market, and try to point out how “The Little Market that Could” was not as good as it was celebrated.

That’s all for now. I will put out some more posts, including “best of” posts in the short-run.

Estimating Future Stock Returns, December 2023 Update

Posted on by David Merkel

Credit: Aleph Blog || Really, we should be expecting a bubble as the Baby Boomers retire.

As of December 31st, 2023, the S&P 500 was forecasting a return of 1.34%/year over the next ten years, with no adjustment for inflation. As of the close on May 10th, 2024, that figure was 0.32%/year.

Why so glum? US entities are overinvested in stocks and private equity. Since 1945, the fraction of total wealth in stocks today is in the 98th percentile. The pension funds of many states are counting on equities to allow them to fulfill their promises. They have the added advantage of higher interest rates to aid them as well, but those rates may fall, because the US Government needs low rates to limit its deficit. The Fed is not independent; it does what the US government wants it to do.

The hidden assumption behind this model is that the return on assets in the US is mostly constant. What if the market is higher because of AI or GLP-1 drugs? Huge innovations, right?

Maybe. It’s unclear what genuine productivity enhancements will come from AI. Will rents, food and energy become cheaper? I doubt it. Negative side effects from GLP-1 drugs after long exposures are not yet realized. Away from that, gains in one industry may be matched by equal losses in another industry.

When we are overinvested in stocks, negative news will have higher impact. There is less slack capital to absorb the troubles.

Now, all that said, value stocks are cheap, and will be affected less by market events. Same for some small and midcap stocks. Lots of good opportunities over the long-haul if you look for them. Just ignore the large cap growth market leaders that are overvalued. They are the reason the market as a whole is overvalued.

So, add to safe assets, and cut back on large cap growth. This feels like June 2000, where everyone was so optimistic, sailing into the teeth of the storm. Get ready, because value and small are back.

A few thoughts

A few thoughts

Posted on by David Merkel

I know I haven’t been blogging for a while. I also haven’t been tweeting. I am shut out of X-Twitter because of two factor authentication issues. As such, I am doing a post today that is Twitter-like, giving my thoughts on a variety of news articles. Here we go:

President Xi’s hero, Chairman Mao said “Women hold up half of the sky.”  And, that randy guy Mao certainly “held up half the sky” with many of them.  But women in China will not “hold up half the sky” for President Xi.  Women in China increasingly do not want to marry and have children.  If present trends continue for 75 years (dubious to go out that far), India will be four times larger than China.  Even the US will be bigger than China.

Inside a Flaming Jet, 367 Passengers Had Minutes to Flee. Here’s How They Did It. This is very impressive, and shows how a highly conformist society like Japan has its advantages.

‘“Everyone was screaming from the initial impact and then everything got eerily quiet because everyone was confused,” Hayashi said. The passenger next to him appeared to know about emergency procedures. “She started yelling, ‘Put your head down, keep your seat belts on, stay in your seat,’ ” he said.’

From Bloomberg’s evening summary (1/2/24):

“The most common concern or belief we have heard from investors is that overbought conditions and euphoric sentiment will set up for a reversal to start 2024 in both bond yields” and stocks, said Dennis DeBusschere, founder of 22V Research. “The overbought conditions and sentiment readings are tough to argue with.”

Nobel Prize Winner Cautions on Rush Into STEM After Rise of AI

No, keep your eyes on the prize. STEM majors can do creative work. Humanities majors can’t do STEM.  Don’t go to college for a major that doesn’t pay you back.

LPs Doubt Venture Funds’ Startup Valuations

The incentives are perverse in setting marks for private equity.  There is a tendency to overstate values, and face the problem later when the fund winds up and has to admit losses versus the overestimated marks.

Xi’s Solution for China’s Economy Risks Triggering New Trade War

China’s investment-driven economy is much less productive than most think.  It overinvests in industries where the world already has too much capacity (think of what they did with steel), and creates product prices where their investments are practically wasted.  This leads to overstated GDP statistics, and greater inequality in China.  The Chinese Communist Party has a materialism fetish that makes them think only industry matters.  And so they impoverish most of their citizens.

China Leaders Sought Quick Zhongzhi Resolution to Shield Markets

Note that the CCP takes no blame for this.  While housing was a tailwind for their economy, they let the bubbles grow in multifamily housing, financial companies, and local government financing vehicles.  They only cared that headline GDP statistics kept growing, not the net economic welfare of their citizens.

2023 saw record killings by US police. Who is most affected?

“From 2013 to 2022, 98% of police killings have not resulted in officers facing charges, Mapping Police Violence reported.”

Unless you can get rid of police unions, this is not likely to change.  The unions take lower pay raises in exchange for making it difficult to fire officers.

Buying Home and Auto Insurance Is Becoming Impossible

Not so much impossible, but expensive. When the P&C insurance has back-to-back losses from underwriting, surplus is not adequate to write as much business at the same price.  Premiums rise for almost everyone, but more so in recent disaster-prone areas… and that goes extra for states that over-regulate insurance.

BuzzFeed’s ‘Dire’ Debt Problem

I know this is kind of “old school,” but don’t buy stocks that don’t earn profits.  I know this means I will miss rare unicorns.  But most people don’t buy them near the beginning, anyway.

It’s also wise to avoid highly indebted small-cap stocks, whether owning the stock or the debt.  It doesn’t take much to capsize a small company like $BZFD.

The Bond Market Rally Is Overlooking a Soaring $2 Trillion Debt Problem

I think deflation is more likely than inflation.  The US and other nations are likely to use financial repression (again) to deal with their debt issues.  Eventually that will fail in a messy way.

Trumponomics 2.0: What to Expect If Trump Wins the 2024 Election

More of the same, only louder and meaner.

Xi’s Chief of Staff Is Quietly Amassing Even More Power in China

Cai Qi – a man to watch. President Xi is losing touch with reality as almost no one dares to give him honest feedback.

Is private credit a systemic risk?

Probably not, unless investors as a whole underestimate their need for liquidity.  Still, remember that new fast-growing asset classes have to go through a failure cycle in order to mature into an asset class where risks are priced mostly right.

Google Lays Off Hundreds in Hardware, Assistant, Engineering

I worked a firm that did annual layoffs.  It really ruined employee morale.

There’s Finally Hope for the Office Real Estate Market

This might be a good opportunity. Things aren’t getting worse.

Iran Captures Oil Tanker Off Oman as Mideast Turmoil Deepens

Things are getting messy enough globally, and with US weapons stockpiles depleted, we could be on the edge of something that will prove hard to deal with.

Credit Card Delinquency Rates Climb to Decade High in Fed Study

Credit weakness on mostly the low end of the consumers.  There has also been an increase in buy now pay later activity mostly in this same demographic area.  It will be a mess, but not big enough to have material second order effects.

Larry Hogan Steps Down From Advocacy Group, Fueling Talk of 2024 Bid

He would be a good president – he’s the best governor the State of Maryland has had in my lifetime.

Fed Posts Largest-Ever Annual Operating Loss

If we are going to have fiat currency, let the Fed’s assets be only T-bills and gold. Don’t take on duration risk, including RMBS.

Taiwan Election Piles Pressure on Delicate U.S.-China Ties

Taiwan’s Raucous Democracy Is Another Challenge to Xi’s Ambition

Dolt that he is, Xi does not get that his recent actions have turned marginal Taiwanese away from reunification. Taiwan is very happy that it is a capitalist democracy. They don’t want to be ruled by authoritarians.  Taiwan will not join Communist China without a fight that will destroy most of the value of Taiwan.

Fed Tiptoes Toward Dialing Back Key Channel of Monetary Tightening

The Fed should stop playing around with the size of its balance sheet, and shift its assets to what it was pre-GFC.  Simplify. The Fed is doing too much, and as always, they don’t know what they are doing.

Reinsurers launching provisions amid continuing Middle East conflict

Insurers Seek to Exclude US, UK Ships From Red Sea Coverage

War is an undiversifiable risk.  Pseudo-wars are similar, so reinsurers are quickly updating new contracts to reflect that.

The Humiliation of Davos Man

Humanity does not want to be one big happy family on the terms of the developed countries.

Inside a Plan to Save Homeowners Hundreds of Dollars Closing Their Mortgages

“The alternative, called an attorney-opinion letter, allows a real-estate attorney to essentially attest that there are no problems with a property’s title. The average borrower relying on such a letter has saved more than $1,000 compared with more traditional title insurance, Fannie said.”

Probably would work, though title insurance is almost bulletproof.

The M.B.A.s Who Can’t Find Jobs

This happens from time to time.  When I was an undergrad (1982), out of curiosity I went to a presentation on whether you should get an MBA or not.  The advice then was don’t get it, many employers don’t want to pay up for an MBA, so get your BA and apply for work.

Large Backers of Private Equity Are Asking For Their Money Back

Many large LPs are telling GPs they won’t invest in their new PE funds unless they pay them off for old funds that are past the ending date.  PE is kind of like a life insurer that mis-reserved a block of their policies, allowing too much income to flow early, and then figures out too late that the block now has an embedded loss.

US Companies Pay Up to Hedge Debt After Interest-Rate Volatility Soars

Looks like many CFOs fear long rates rising again, and are willing to pay up for a cap on their financing rates.

Xi, Biden and the $10 Trillion Cost of War Over Taiwan

The $10 Trillion figure is a wild guess in my opinion, but this article is a good qualitative breakdown of all the risks involved.

================

Maybe I will blog more in the future, but business has taken up a lot of time lately.

Estimating Future Stock Returns, June 2023 Update

Posted on by David Merkel

Image Credit: Aleph Blog || Has the return on assets for public equities permanently risen? The return on bonds has risen for now.

From the last piece: “At March 31st, 2023, the S&P 500 was priced to return 2.41%/year over the next ten years. Given the rally since then, that return has shrunk to 0.49%/year. Currently the 10-year Treasury yields 3.76%. In investment grade corporates, you could earn more than 5% with considerably lower risk.”

There was an error in that statement, the return had only shrunk to 1.64%/year. A similar adjustment would have to be made to the second graph, which would look more like the graph below.

At June 30th, 2023, the S&P 500 was priced to return 1.65%/year over the next ten years. Given the rally since then, that return has risen to 2.03%/year. Currently the 10-year Treasury yields 4.29% [bond-equivalent yield, add 0.09% to annualize]. In investment grade corporates, you could earn around 6% with considerably lower risk.

Here’s my current outcomes graph:

Image Credit: Aleph Blog || Upside capped, long left tail…

So, on average no price change for 10 years. You just collect your dividends.

There are several ways to get better outcomes from stocks. First, go abroad, there are much better values available in Europe, Japan, and in the emerging markets that respect the rule of law. Second, decouple from the high-tech growth stocks. I’m able to find a lot of stocks in the US with good balance sheets that are small-to-midcap that are cheap relative to growth prospects. Away from the “cool” sectors of the market there are many large-cap stocks with reasonable prices relative to prospects.

That’s all for now. I may blog more, I may not. Business is taking up more of my time. Watch your risks to keep your returns.

Estimating Future Stock Returns, March 2023 Update

Posted on by David Merkel

Image Credit: Aleph Blog || Has the return on assets for public equities permanently risen?

At March 31st, 2023, the S&P 500 was priced to return 2.41%/year over the next ten years. Given the rally since then, that return has shrunk to 0.49%/year. Currently the 10-year Treasury yields 3.76%. In investment grade corporates, you could earn more than 5% with considerably lower risk.

But, maybe it’s different this time. Yes, I know the danger of the phrase. What if AI increases total productivity of assets and labor by 1%/year on net, permanently? Will companies make more money as they need fewer smart people to do the same amount of intellectual work? Or, will we reach a new equilibrium as the smart people who are laid off start using AI to create totally new businesses, or create even leaner competitor businesses that eat into the profits of those slow to adapt?

Really, I don’t think AI will permanently increase productivity. The system should adjust and things should remain mostly the same.

Image credit: Aleph Blog

The graph above shows what the outcomes have been when the share of investor funds held in equities has been as high as it is now, 49.0%. (Range: 21.9% — 52.7%, average 35.6%) Returns have typically been poor.

So, maybe buy the 10-year investment grade bonds. Inflation is going down, and the US government can’t finance all its debt if rates rise too much. Bonds are a real alternative now.

One last note: the estimated rate of return over the next ten years more than you would ordinarily expect as the data series underlying this model made significant revisions to past data values.

Anyway, be cautious. Bond yields have risen, equity yields (E/P) have fallen. This rally is more speculative than most think… momentum blinds many people to stretched valuations. Unless, we are genuinely in a new era. Which I doubt.

Sorted Weekly Tweets

Posted on by David Merkel

Picture Credit: David Merkel, with an assist from Bing Chat in Creative mode || Twitter bird is disappointed that he is short, like this post

Artificial Intelligence

Around the US

Israel

Markets

Other

Sorted Weekly Tweets

Posted on by David Merkel

Picture Credit: David Merkel, with an assist from Bing Chat in Creative mode || Twitter bird shops for groceries

Market Dynamics

  • Transcript: Matt King Sees a $1 Trillion Liquidity Drain Coming to Markets https://t.co/kr9SMaMV9b  Monetarism, with bank reserve flows driving the market for risk assets. Mar 31, 2023
  • Battered banks have been the most lucrative short bet in US stocks this quarter, while surging technology companies delivered the steepest losses https://t.co/2joY6G7xTn  It’s tough to make money shorting. Mar 31, 2023
  • Citi’s Matt King sees a $1 trillion liquidity drain heading for the markets. Here are the charts that help explain why https://t.co/H47MKNQqF7  Some interesting graphs to see. Mar 31, 2023
  • How wild was Treasury trading this month? https://t.co/LHtJYfmsRU  Much wilder than normal, but still, it’s a pretty liquid market. MOVE index is high but off peak levels Mar 30, 2023
  • If you didn’t rely on the belief that rates would be low forever, you’re probably going to get through this downturn just fine, writes @ConorSen https://t.co/QiTunyQn6H  A reasonable statement Mar 30, 2023
  • Governments want sustained growth, low inflation and financial stability, but they can’t expect to get all three for very long https://t.co/5ceYiH6EEw  Not true. Financial crises destroy more growth than monetary looseness creates Mar 29, 2023
  • On Share Buybacks, Directors Should Stick with Economics, Avoid Politics https://t.co/5DlmyWraM9  I just want the companies I own to deploy capital for the best tax- and risk-adjusted returns. When opportunities are few, send us the excess capital. Mar 27, 2023
  • Ray Dalio Warns Everybody Is Losing Money: ‘The World Is Leveraged Long’ https://t.co/ZtkcpO5xy4  Main point: Fed is keeping rates high to suppress inflation, while trying to mitigate the effects on bank funding, while the US Govt keeps borrowing. Difficult to do all at once. Mar 27, 2023
  • A huge pile of hidden leverage that’s been quietly built over the past decade may be the next source of market volatility https://t.co/vOtDBHfkHh  Private equity is opaque, but most of its liabilities are longer-term. They may lose money, but it’s unlikely to be a rapid crisis Mar 27, 2023
  • Double-digit losses suffered by several star traders is a dramatic reminder why investors are rapidly migrating towards bigger hedge funds run by an army of risk takers https://t.co/eztv91fEhD  Volatile strategies usually lose more than they win. Mar 27, 2023
  • ‘Bonkers’ Bond Trading May Be Sending a Grim Signal About the Economy https://t.co/x9YVXMhLb7  When future policy is very uncertain, you should expect high volatility in fixed income. Mar 27, 2023
  • Transcript: Betsy Cohen on SVB and Tech Dealmaking Now https://t.co/KQeACngT5e  Time to focus on profitability, then maybe deals come. Mar 27, 2023
  • Where are the risks in the financial system? Here are 12 charts that highlight some big ones. https://t.co/mENl677FIP  A mélange of interest rate risk & credit risk Mar 27, 2023
  • Estimating Future Stock Returns, December 2022 Update https://t.co/BadwQJLdDx  Are you happy with 3.12%/year returns for the next 10 years? Mar 26, 2023

Banking

  • The NBA star grew up in Greece, where a sovereign-debt crisis in the early 2010s left citizens worried their cash wasn’t safe https://t.co/fzXzktYfP2  That takes some effort to maintain Mar 31, 2023
  • US Bank Deposits and Lending Both Dropped Last Week Amid Turmoil https://t.co/PilffVDUph  On the bright side, deposits at small banks increased. Mar 31, 2023
  • Will FedNow Enable Greater Deposit Flight from Troubled Banks? https://t.co/5C8H1ZxzT8  Interesting. I had not heard of this. Instant payments/receipts to almost anywhere once this is fully rolled out. Mar 31, 2023
  • SVB’s collapse turbocharged the deposit flight from banks. That’s forcing a rethink about what role banks should play in the US financial system – and whether there are too many of them https://t.co/2ToZEoilIk  The Fed could lower the rate paid on reverse repos. Mar 31, 2023
  • The FDIC may pressure the nation’s biggest lenders to pick up a bigger-than-usual portion of the $23 billion bill from recent bank failures https://t.co/a1V9ne9R6Q  It’s like the state guaranty funds for life insurers Mar 31, 2023
  • As the Fed’s interest-rate hikes sent bond prices plunging last year, some of the country’s largest banks used a simple accounting maneuver to help keep billions of dollars of losses from piling up https://t.co/fgvdZViBso  Under ordinary conditions this is not allowed. Mar 30, 2023
  • Though the Federal Reserve and FDIC have stopped contagion from Silicon Valley Bank for now, smaller and regional banks could face pressure for years to come https://t.co/rYDFFk5UGt  Slow motion train wreck created by overly loose then tight monetary policy Mar 29, 2023
  • As the banking turmoil drags on, Schwab investors are starting to unearth risks that have been hiding in plain sight https://t.co/gZb8btFCMw  Whistling while walking past the graveyard… $SCHW Mar 29, 2023
  • Rich Bank Dumb Bank https://t.co/mFZLYudWnt  The many problems of Signature Bank Mar 27, 2023
  • How the banking crisis could ripple through the economy https://t.co/zYG1KxaIn6  Credit from banks will be harder to get as the stickiness of their deposits diminish. Mar 27, 2023
  • Large US banks gained $120Bn in deposits while their smaller counterparts lost $109Bn https://t.co/MUbvEXHbxU  It would be smart for the Fed to make reverse repo facility less attractive, to reduce the flow to money market funds Mar 27, 2023
  • Marc Lasry, the billionaire co-founder of Avenue, says there’s little benefit for small businesses and other depositors to keep their money with regional banks instead of Wall Street giants https://t.co/2nFcnuA0u4  Disagree. small banks tend to be more risk-averse Mar 27, 2023

Around the US

  • MLB’s new pitch clock may reduce player workloads by the equivalent of one game per week. Team managers hope players feel less physical and mental fatigue as a result. https://t.co/psKvJtT7Vg  Will improve focus and rest Mar 31, 2023
  • The world’s most important oil price is about to be transformed for good, allowing crude supplies from west Texas to help determine the price of millions of barrels a day of petroleum transactions https://t.co/MP4MmgkLuI  A sign of US dominance in producing light sweet crude oil Mar 31, 2023
  • Americans returned $212 billion worth of merchandise last year. A host of startups are now working with retailers to the process more efficient — and even profitable https://t.co/slzM3eXCBs  Looks promising. Mar 30, 2023
  • In repairing the damage done by highways that divided communities of color, the US risks creating new disasters https://t.co/i2A57bM4hg  Baltimore got the “worst of all worlds” on this one. Doing nothing or doing the whole thing would have been better. Mar 30, 2023
  • Ken Fisher made a serious investment when he moved his money management firm north from California to Washington seeking a friendlier business climate to house its rapid expansion https://t.co/ueUzpzvQ7i  Low taxes attracts businesses Mar 29, 2023
  • Why there may be no return to ‘normal’ for the U.S. used vehicle market https://t.co/xlYWybXETt  It is a capital-intensive cyclical business. This will eventually normalize. It may even overshoot on the downside. Mar 26, 2023
  • Feral Hogs Are the Invasive Menace You’ve Never Thought About https://t.co/oDxSjznZi1  “Wild hogs destroy crops, uproot landscapes, and spread diseases—and not much is stopping them.” Mar 26, 2023
  • 2 high schoolers say they’ve found proof for the Pythagorean theorem, which mathematicians thought was impossible https://t.co/gXRzswTHO5  I disagree. Proof #4 on this page does not rely on the unit circle. https://t.co/mb0cn3KBXx  Mar 25, 2023
  • @guardian Is the paper available anywhere on the Internet? Mar 25, 2023
  • A new study of nearly 12,000 women finds that getting married brings significant benefits in health and well-being, bolstering the case for marriage as a social good. https://t.co/yIrYcnr4FX  Marriage has great potential for happiness & sadness. Unselfish behavior is crucial. Mar 25, 2023

Artificial Intelligence

  • Several tech executives and top artificial-intelligence researchers, including Elon Musk and AI pioneer Yoshua Bengio, are calling for a pause in the development of powerful new AI tools https://t.co/emJZrXpqiS  This will not happen. Mar 29, 2023
  • Artificial intelligence experts are calling on AI developers to pause training any models more powerful than the latest iteration behind OpenAI’s ChatGPT https://t.co/3euzVgNP2d  Foolish. AIs are inexpensive to create. Trying to control AI is like grasping water w/your hand. Mar 29, 2023
  • Google’s ChatGPT rival Bard is now open for public use https://t.co/rozmsae9A8  Since hosting my moderated chat between Bing and Bard, which went well, Bing no longer allows such chats. https://t.co/KrAqv77b4R  https://t.co/koYUIPXUr2  Mar 29, 2023
  • A new study finds that AI tools could more quickly handle at least half of the tasks that auditors, interpreters and writers do now https://t.co/hEDpTk2TWV  This may be a “use it or lose it” scenario. Mar 29, 2023
  • Introducing Two Friends https://t.co/KrAqv77b4R  A conversation between OpenAI ChatGPT-4 and Bard https://t.co/ohqyZTb15j  Mar 29, 2023
  • Society’s Technical Debt and Software’s Gutenberg Moment https://t.co/5RC0yIdhFO  Thought-provoking commentary on the effect that Large Language Models may have on writing software. Mar 28, 2023
  • The US Federal Trade Commission is paying close attention to developments in AI to make sure it isn’t dominated by major tech players https://t.co/Dp3vicuiV4  Foolish FTC, see “The genie escapes: Stanford copies the ChatGPT AI for less than $600” https://t.co/7VfE1GNtrr  Mar 27, 2023
  • The genie escapes: Stanford copies the ChatGPT AI for less than $600 https://t.co/7VfE1GNtrr  It also implies that $MSFT overpaid for OpenAI. Not only can people build their own models, but they could do it quite cheaply. Mar 26, 2023

Companies and Corporate Life

  • Munich Re has quit the world’s largest climate finance alliance, a step the German company says is necessary to protect itself from legal risks https://t.co/xrnFgjwdii  “German insurer cites the risk of antitrust allegations” There is a fiduciary angle to this also Mar 31, 2023
  • The stock of Charles Schwab is on pace for its worst month in more than 35 years https://t.co/4cvffr5oOx  $SCHW cost of capital rising, and shares continue to fall. Mar 31, 2023
  • Disney is using a Royal Lives Clause to extend its reign over Florida theme parks. https://t.co/rD3Squdbrl  How to create perpetual trusts Mar 31, 2023
  • $AMC rose as much as 18% after the Intersect website reported that Amazon is weighing a possible acquisition of the struggling movie-theater chain https://t.co/CCJNaL2Hx6  Start by buying the $APE units. Mar 29, 2023
  • This Citigroup Preferred Yields 10%. Is It Too Good to Be True? https://t.co/DtIzLn2GuH  There is likely a cheaper way to finance $C. I would not rely on the argument that accounting reasons matter more than economics. Mar 29, 2023
  • The US Air Force’s test of a hypersonic missile was marred by failure to transmit in-flight performance data, sources say https://t.co/Z1kBgR5FyT  $LMT is paid a lot to do this. They should get it right. Mar 29, 2023
  • In financial services, chief information officers are working more closely than ever with chief risk officers to ensure the right tools for analyzing risk are in place https://t.co/H7ORMMU6u7  Hire an investment actuary to eliminate interest rate risk. Follow his advice. Mar 29, 2023
  • How The New York Times managed to avoid ruining Wordle https://t.co/bQdCK6QlXT  In hindsight, The New York Times was a natural buyer. Mar 25, 2023

Non-US

  • Sweden’s construction industry may be facing years of drought as investment in housing plummets https://t.co/dYSThCm4pn  The effects of higher interest rates hit highly levered sectors first. Mar 31, 2023
  • Heard on the Street: The European Union just moved an important step closer to turning its climate ambitions into law. The impact will be felt well beyond the energy industry https://t.co/bAnXYcNrQr  This will be difficult to achieve. Mar 30, 2023
  • France’s financial prosecutor is searching 5 banks as part of a probe into tax fraud and money laundering, according to a statement https://t.co/VnIiCQ8Vlp  European banks are more opaque than US banks. Mar 29, 2023
  • South Korea needs to adopt an “emergency mindset” to reverse its fertility rate that ranks as the lowest in the world, its president says https://t.co/LFvd9pcUSs  Changing a culture is very difficult. Once women think they are only rewarded by external work, kids are a burden. Mar 29, 2023
  • A Russian economy that survived 2022 faces a long-term deep freeze. “There will be no money next year.” https://t.co/BpqFON0AA1  Russia is losing economic vitality, and quickly. Autarky is tough to pull off. It killed the USSR. Mar 29, 2023
  • A significant buying opportunity in Asia—for longer-term investors—could be hiding in plain sight https://t.co/3W02aGynDH  Interesting opportunity. FD: + $EWY Mar 28, 2023
  • @BubbleTIsland When I was young, I was told that Taipei had a lot of air pollution, but indeed, this is beautiful. Perhaps it is the same as America — the 1970s were smoggy. Mar 26, 2023

Commercial Real Estate

  • Shares in German real estate firm Aroundtown slump to an all-time low https://t.co/wZUvArZzVp  Too much debt, and how will the losses get shared with lenders? Mar 31, 2023
  • A 5% writedown on commercial real estate loans would wipe out almost a quarter of the banks’ profits in the European Union with the Nordic region potentially hit the most, Bloomberg Intelligence estimated this week. https://t.co/lqmcOl9KoF  Challenging times. Mar 31, 2023
  • Everything is looking down for Europe’s worst-hit sector: Real estate https://t.co/Q5YpvaAZJy  Too much debt magnifies the effect of changes in property values, rents, etc. Mar 31, 2023
  • Manhattan’s office-vacancy rate is at a record high as new developments add even more space to the struggling market https://t.co/KeLHbyn00B  This will be quite a transition for New York City Mar 31, 2023
  • Signs of stress in commercial property https://t.co/pcmISa2L7s  Looks overdone. Mar 30, 2023
  • Defaults and vacancies are on the rise at high-end office buildings, as remote work and rising interest rates spread pain to more corners of the commercial real-estate market https://t.co/rZHtubWQog  This is like the slow-motion pressure in the Great Financial Crisis w/subprime. Mar 29, 2023

US Politics

  • Trump indictment is going to make US politics even more divisive https://t.co/N28inU5VJE  Really, it stinks that this indictment, which has its own issues, makes it more likely that Trump will be the GOP nominee. Apr 01, 2023
  • Lawyers who have dealt with court-imposed limits on speech, often referred to as gag orders, say Donald Trump should be wary of giving judges cause for concern https://t.co/kcS6YLCZit  Inciting violence could be a reason to do so, or harming the ability for jurors to be neutral Mar 31, 2023
  • Looming changes to Medicare and Medicaid may temper growth at the biggest health insurers. https://t.co/raovXdK9AO  Growth in government reimbursement levels falling Mar 31, 2023
  • The looming failure of the Chips and Science Act shows all that’s wrong with American industrial policy https://t.co/azu23Kk56M  Aside from national defense, there is no reason for industrial policy Mar 28, 2023
  • Rural America Grows Weary of Waiting for Its Mail https://t.co/U3pZWrX5ge  Wish we could remove the current postmaster general… Mar 27, 2023
  • The pandemic split parents over schools. It’s tearing Mentor, Ohio apart https://t.co/ec9PTIVGV5  Schools mirror parenting culture(s). If there are wide differences in parenting cultures, you should expect fractious school board meetings Mar 27, 2023

Employment

  • Accenture says it will cut 19,000 jobs over the next 18 months https://t.co/hLRF41Pxh4  Interesting to see lack of demand for consultants Mar 28, 2023
  • The era of remote work has ended for millions of Americans https://t.co/IVuhIuwZNp  “Share of businesses with workers on-site most of the time neared prepandemic levels in 2022, Labor Department finds” Mar 28, 2023
  • McKinsey is embarking on a rare round of major job cuts, with plans to eliminate about 1,400 jobs https://t.co/GV0xwLtg8p  Interesting place for job cuts. Perhaps demand for their services have declined Mar 28, 2023
  • How to explain the covid baby boom https://t.co/vs4lpSRhGj  Very small boom, but it highlights a shift where those who are better off are more willing to have more kids, particularly when they can work from home. Mar 27, 2023
  • It’s a debate playing out at workplaces: Who should be included in a layoff? The behind-the-scenes process is complicated. https://t.co/cUKUgK0KaL  Answer: it varies a lot. Mar 27, 2023

Cryptocurrencies

  • Tether, the largest stablecoin, is continuing to extend its lead in the battle for supremacy among stablecoins https://t.co/fGveF8ZCt6  A money market fund with no accountability Mar 29, 2023
  • Some banks are rolling out the welcome mat for cryptocurrency firms that found themselves in need of banking services after the downfall of Signature Bank and Silvergate Capital https://t.co/ongomIieAR  Surprising that they want that risk. What will the FDIC & SEC say? Mar 29, 2023
  • US regulator sues top crypto exchange Binance, CEO for ‘willful evasion’ https://t.co/vdXVDZxHR6  KYC AML BSA allegedly violated. Mar 27, 2023
  • A decent rule of thumb is that all cryptocurrency exchanges are doing crimes, and if you’re lucky your exchange is doing only process crimes. https://t.co/RvXJaSKeuu  Maybe peaker plants should be paid a commitment fee like revolving credit agreements @matt_levine Mar 27, 2023

China

  • Chinese creditors are more hesitant to participate in sovereign debt restructuring because multilateral development banks are not offering debt relief, a senior official at China’s central bank says https://t.co/EdJWfijjBk  Chinese lenders want multinationals to eat their losses Mar 27, 2023
  • Beijing wants to show it’s backing private businesses, but Jack Ma’s decision to spend months overseas suggests otherwise. https://t.co/Ojlf1AHllL  A CCP cell inside every significant business. Enterprise free enough to serve the Party. Mar 27, 2023
  • Market confidence remains shaky for investors looking at China, revealing just how much damage has been done to the country’s credibility abroad. Here’s an explainer https://t.co/DMJmZhjXHH  Don’t confuse “rule of law” & “rule by law.” China has the latter: the CCP is not limited Mar 27, 2023
  • Chinese billionaire Jack Ma’s trip home comes as Beijing eases up on a tech crackdown that has hit confidence among private businesses https://t.co/YpXMcFA2Oa  Is the coast clear? Mar 27, 2023

Monetary Policy

  • Money-market mutual funds are proving an irresistible place for investors to park their cash right now instead of banks https://t.co/vAXF0RaoFH  Just lower the rates in the Fed’s reverse repo program. Is the Fed daft? Should have been done a year ago. Apr 01, 2023
  • The Federal Reserve’s preferred inflation gauge rose less than expected last month, and consumer spending stabilized https://t.co/IIC82Pu9ux  Would you rather have a solvency crisis or inflation? Apr 01, 2023
  • Is Japan’s new central banker the next big threat to global financial stability? https://t.co/1JF62TW9AT  Swelling bank balance sheet without economic purpose creates its own problems, as we are learning in the US. QE is not a free lunch Apr 01, 2023

Twitter

  • Elon Musk is upsetting celebrities by tying Twitter’s blue check mark to platform subscriptions https://t.co/auhdGcfbjx  When the service is free, you are the product. Mar 31, 2023
  • Elon Musk Values Twitter at $20 Billion https://t.co/hXbBPOz2JF  Let the banks that lent the $13 billion know that the debt-to-equity ratio went from 42% to 186%. Mar 27, 2023
  • Why advertisers aren’t coming back to Twitter https://t.co/A5vzydhrIU  When Twitter goes broke, the banks will hold an auction. Some entity will buy it for $1B or so, and rebuild it so advertisers will trust Twitter. Or, Musk will re-buy it. Mar 25, 2023

College

  • A majority of Americans don’t believe a college degree is worth the cost, according to a new Wall Street Journal-NORC poll, a new low in confidence in what has long been a hallmark of the American dream https://t.co/mT3jmg3YfV  People are getting more practical about college. Mar 31, 2023
  • College students are about to put a robot on the moon before NASA https://t.co/rLcHpj3ism  Pretty cool, and cost less than $1 million. Mar 30, 2023
  • Relief is expected for Howard University undergrads who have had to deal with questionable conditions living on-campus at some of the school’s dorms https://t.co/OQg94HLk5N  The economics of running a college are difficult. Mar 27, 2023

Space

  • Russia’s Viasat Hack Exposed Satellite Industry’s Security Flaws https://t.co/Vu5wpDoRqU  Scary stuff. Time to start encrypting satellite transmissions Mar 30, 2023
  • Astronomers Were Not Expecting This https://t.co/jjpzfnsTTQ  The universe looks a lot younger than expected. Faraway galaxies look fully formed, as near galaxies do. Mar 25, 2023
  • Russia’s (Civilian) Space Program Is in Big Trouble https://t.co/Ir1z499qzS  Lacks funding. Has increasing numbers of accidents. Even Kazakhstan has foreclosed on Russian space assets in their country for nonpayment on the Baikonur spaceport. Mar 25, 2023

Adani Group

  • Two months on, Hindenburg’s short seller attack has left the Indian tycoon Gautam Adani’s empire reevaluating its ambitions, reverting his focus to core projects https://t.co/C2fRGWNLsG  This is sensible — focus on core businesses & reduce debt Mar 31, 2023
  • In the aftermath of Adani Group’s woes, another sprawling Indian conglomerate—miner Vedanta Resources—looks vulnerable https://t.co/aYQuATQI7y  The bear phase of the credit cycle forces examination of badly-financed assets. Mar 31, 2023
  • Adani execs meet with US investors from BlackRock , Blackstone and Pimco as part of its plans to market some privately placed bonds https://t.co/O8fkBKEd6k  Unless the notes are secured, I don’t see why anyone would buy an 8% yield for 10-20 years from a complex firm like Adani. Mar 29, 2023

Materials Science

  • Snack companies are experimenting with packaging that uses less plastic without sacrificing taste https://t.co/TkTxU0eNFp  The economics of this is challenging Mar 27, 2023
  • Electrical steel, a crucial material used in EV motors, can be less than a quarter of a millimeter thick for the highest grade. It’s in high demand. https://t.co/CYzVkw3xyn  I had never heard of electrical steel before today. Mar 27, 2023
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