Search Results for: Unstable

Unstable Value Funds (VII)

Posted on by David Merkel

Picture Credit: Boston Public Library || When total systemic leverage is so high, you can’t tell what might go wrong

Because of the fall in interest rates since the last post, the risks have declined with Stable Value Funds. That said, the FOMC still sounds hawkish, even though the yield curve is inverted. The FOMC needs fewer macroeconomists, and more economic historians. They are deluded by the bad models of the last fifty-five years, which lack any credibility outside of the sterility of academia.

Here are the two equations that I left out of the last piece. How to calculate the premium/discount of a stable value fund:

How to calculate the annualized yield to maturity:

Here are the definitions:

BV: Book value — the accrued value of the stable value fund assets so far.

MV: Market Value — the market value of the assets now, if we are able to liquidate the assets at current prices.

AYTM: Annualized Yield to Maturity — the annualized rate that the assets are yielding at current market prices. Note that if you have the SEC Yield, that is the Semiannual yield to maturity, sometimes called the bond-equivalent yield [YTM]. To convert YTM to AYTM:((1 + YTM/2)^2) -1 = AYTM.

D: Effective Duration — The first derivative of Market Value with respect to AYTM. For those that have not taken Calculus, or have forgotten what that means, it measures the sensitivity of market value to small moves in the AYTM. A bigger D means the market value changes more than a smaller D. (And always remember, as interest rates rise, the value of all ordinary bonds goes down.

It is called effective duration, because on a present value basis it measures the weighted average time at which you can expect to receive the cash flows, typically measured in years.

CR: Credited Rate — Though all of these values are artificial in some sense (channeling my best Matt Levine), this one is the most artificial. It means this: in the past the book value accrued to its current value. Now, over the length of time expressed by the Effective Duration, what should the current credited rate be in order for the book and market value to converge? The credited rate is a figure that is like a “heat-seeking” missile, always adjusting (monthly or quarterly) to new conditions as the book value chases the market value. When book value is above market value, the credited rate slows down relative to the AYTM. When the book value is below the market value, the credited rate speeds up relative to the AYTM.

Unstable Value Funds (VI)

As my reader who prompted the last post wrote:

I’m trying to get my head around the implications of the lower MV/BV ratios, but I’m not sure I completely understand the how the crediting rate mechanism works with respect to inflows and outflows.

As I understand it, when MV/BV is less than one, inflows are going bring it closer to par and outflows will further decrease it (assuming outflows are at BV), yes? There are not separate calculations for different plans or different participants, correct?  I feel like this may not be a big concern under more typical market conditions, but with MV/BV so low people’s crediting rates are going into look a lot less competitive relative to the returns available with other conservative options and there is more incentive to do as you describe and take the short-term risk in a non-competing fund. Plans leaving is one thing, but a significant participant lead outflow would be much harder to manage, wouldn’t it?

Also, you mention duration longer than 5 being potentially worrisome, but isn’t possible that funds may extend duration early next year as a way of simultaneously goosing the crediting rate and positioning to recoup some losses in anticipation of a Fed pivot? But if rates go higher than expected….

Private email to me

She is a bright lady; she understands it perfectly. Given the recent lower inflation estimates, maybe everything works out easily. But will the FOMC understand that and stop raising the Fed funds rate? Given their desire to appear bold, I think the answer is no. And so I repeat my advice from my last post:

It is not a bad idea now for most participants to move your stable value assets to a balanced fund for 30 days, then move that to a short-to-intermediate term bond fund. You will escape the low-yielding and possibly defaulting stable value fund. You will also earn more from the bond fund.

Remember, there is no FDIC for stable value funds. Watch out for your own best interests while most people don’t notice.

Unstable Value Funds (VI)

Posted on by David Merkel

Photo Credit: Ruin Raider || It is important to recognize the limitations of any system. Don’t overestimate what is possible.

Well, the last installment in this series was 2009. I ran a Guaranteed Investment Contract [GIC] desk at Provident Mutual from 1992-1997. I also managed our internal stable value funds for our pension line of business. This was during a period where increasingly Stable Value Funds were being replaced by bonds and bond funds being wrapped by a type of derivative that would allow for “benefit responsive payments,” called a “wrap contract.”

Now, I know I lost most of you with the last paragraph. Definitions:

Guaranteed Investment Contract: A group annuity issued by a life insurance company. It is like a bond, paying principal and interest until it matures. But it is more secure than most bonds because it is an insurance liability, which has a higher bankruptcy priority than a bond issued by the insurance company. Also, a GIC will pay money out sooner if there is a need to pay “benefit responsive payments.” Absent default, the value of a GIC never falls. Its value accrues like a savings account, because it is an annuity from a life insurer.

Benefit Responsive Payments: In Defined Contribution Pension Plans (401k, 403b, 457, etc.), if a participant dies, gets disabled, leaves his current employer, gets served with a QDRO [Qualified Domestic Relations Order — child support, alimony], exchanges funds in the stable value fund for noncompeting funds (funds that are not short-to-intermediate fixed income), etc., then the GIC may pay benefits out early at book value.

Stable Value Funds: Funds that buy investments that absent default, only appreciate, and thus act like a savings account, but with much better yields. Those can be insurance contracts (rare now), or bonds wrapped by “wrap agreements.”

Wrap Agreements: Derivative instruments that receive money if benefit responsive payments occur and the market value of the wrapped bonds is higher than the book value, and pay money if benefit responsive payments occur and the market value of the wrapped bonds is lower than the book value. The objective is that benefit responsive payments go to the beneficiary at book value, and no one else in the Stable Value Fund is affected.

Why am I Writing This?

I received an email from a lady working at a major investment bank, asking me where she could find independent commentary regarding stable value funds, because most of the commentary is produced by the stable value fund managers themselves. Why is that so? Stable Value Funds are complex beasts. Typically only insiders understand them. She was wondering how the funds were doing given the rapid increase in interest rates. This is the toughest scenario for stable value funds.

The Math

Basic Formula of Stable Value by Aleph Blog

Let’s define terms first.

BV: Book value — the accrued value of the stable value fund assets so far.

MV: Market Value — the market value of the assets now, if we are able to liquidate the assets at current prices.

AYTM: Annualized Yield to Maturity — the annualized rate that the assets are yielding at current market prices. Note that if you have the SEC Yield, that is the Semiannual yield to maturity, sometimes called the bond-equivalent yield [YTM]. To convert YTM to AYTM:((1 + YTM/2)^2) -1 = AYTM.

D: Effective Duration — The first derivative of Market Value with respect to AYTM. For those that have not taken Calculus, or have forgotten what that means, it measures the sensitivity of market value to small moves in the AYTM. A bigger D means the market value changes more than a smaller D. (And always remember, as interest rates rise, the value of all ordinary bonds goes down.

It is called effective duration, because on a present value basis it measures the weighted average time at which you can expect to receive the cash flows, typically measured in years.

CR: Credited Rate — Though all of these values are artificial in some sense (channeling my best Matt Levine), this one is the most artificial. It means this: in the past the book value accrued to its current value. Now, over the length of time expressed by the Effective Duration, what should the current credited rate be in order for the book and market value to converge? The credited rate is a figure that is like a “heat-seeking” missile, always adjusting (monthly or quarterly) to new conditions as the book value chases the market value. When book value is above market value, the credited rate slows down relative to the AYTM. When the book value is below the market value, the credited rate speeds up relative to the AYTM.

So what’s the issue here?

Interest rates have risen rapidly, after dwelling at low rates for a long time. Back when I was developing a stable value product in 1996, I knew this was the disaster scenario for stable value. More than most actuaries at the time, I had realistic interest rate scenario models the reflected the true volatility of interest rates. I would create 10,000 full yield curve scenarios over a 10 year period, then analyze the ones where the stable value fund failed. Failures occurred in the scenarios where short rates rose rapidly.

Wait. How can a stable value fund fail? If the credited rate drops below zero, practically it has failed. The fund sponsor will credit zero in such a situation, but it will face the problem of participants exiting to non-competing options, worsening the problem. The stable value fund may not be able to return book value to its participants.

But this isn’t bad for everyone, at least not yet

I don’t think everyone needs to worry, though. The edge cases, those who have taken too much risk at the wrong time should worry. for the worst-managed funds, there is some risk of a “run-on-the fund.”

I did a little digging around the large stable value managers, at least among those who publish all their data publicly. I’m not naming names, I have my own liability risk here. There are a number of insurance companies running their stable value plans at durations higher than 5, and their ratio of market value to book value is near 85%. If you are in such a situation, move your stable value assets to a balanced fund for 30 days, then move that to a short-to-intermediate term bond fund. You will escape the low-yielding and possibly defaulting stable value fund. You will also earn more from the bond fund.

At present, most stable value funds have a market value to book value is between 91-95%. If you are in a fund like that, don’t worry, unless a panic happens because of the funds running at long durations. Then do the same shuffle that I suggest: move your stable value assets to a balanced fund for 30 days, then move that to a short-to-intermediate term bond fund. You will escape the low-yielding and possibly defaulting stable value fund. You will also earn more from the bond fund.

Other Issues

There is also the risk of stretching for yield. Though the bond managers who manage fixed-income portfolios for stable value funds are generally conservative, when rates are low, many bond managers take chances that don’t work out. As such if the YTM/AYTM of the asset manager seems aggressive, maybe pare back. (If it is more than 1.5% above Treasuries, consider leaving.) If something seems too good to be true, it very well may be too good to be true.

Conclusion

Say what you will about Stable Value Funds, they are more opaque than other investments. As such, they deserve more scrutiny. It is not a bad idea now for most participants to move your stable value assets to a balanced fund for 30 days, then move that to a short-to-intermediate term bond fund. You will escape the low-yielding and possibly defaulting stable value fund. You will also earn more from the bond fund.

I don’t think most people have to do this, but it is not a bad strategy for all. Take your opportunity and move stable value money to a balanced fund. Then if you don’t like the volatility, move to a short-to-intermediate term bond fund.

Unstable Value Funds (5 – CMBS Edition)

Unstable Value Funds (5 – CMBS Edition)

Posted on by David Merkel

Over the last two months, the assets underlying most stable value funds have done well, and short ABS, CMBS, and RMBS bonds have rallied.? Insurance debt as well.? But just when you think you can relax, S&P comes in to jolt confidence.? Here are some articles:

You don’t have to read all of these.? The main ideas are:

  • Super-senior AAA CMBS is not bulletproof.? From the S&P report, “In particular, 25%, 60%, and 90% of the most senior tranches of the 2005, 2006, and 2007 issuances, respectively, could be downgraded.”
  • Some view S&P’s new criteria as draconian.
  • Rents from properties underwritten in the boom period 2005-7 are definitely declining.?? The stress tests impose a 25%-ish haircut for rents in everything but multifamily, whose haircut would be around 6%.? These would be adjusted for geography and quality.
  • Prior to the announcement the quote? in Markit CMBX AAA 4 — 2007 super senior exposure was in the low $80s.? Now it is in the low $70s.
  • That’s more than a 1% move up in yields.
  • Many maturing loans will not be able to refinance at the same principal levels.? Property owners will need to feed the properties, and equity capital is scarce.
  • This undermines the Fed?s efforts to expand the TALF to some legacy CMBS that will be downgraded below AAA.

There’s one more knock-on effect.? This review by S&P will also incude a review on how CMBS Interest Only [IO] securities will be rated.? The old philosophy was “Since IOs have no principal, they can’t lose principal, and securities that can’t lose principal are AAA.”? But when I would review CMBS securities 1999-2001, my models would indicate credit risk akin to BBB or BB securities.? Underwriting standards were much higher back then, so the new ratings for CMBS IOs will likely range between BBB to CCC.? Think single-B and below for vintages since 2005.

Though it won’t change the underlying cash flows of the CMBS IOs, it will change the ability of regulated financial institutions to hold them, particularly if Moody’s and Fitch follow along, which I think it makes sense to do.? With lower ratings, financial instutions will have to hold more capital against them, which lowers their desirability.? The regulatory arbitrage goes away.

So what then for Stable Value funds?? It’s a PR, marketing and a liquidity issue.? AAA CMBS plays a large role in stable value, particularly the short stuff that could be financed by the TALF.? If TALF is off the table, then prices have slipped considerably.? That doesn’t affect cash flows of the securities, but it? does mean that:

  • The difference between book and market widens.
  • Any SV fund with a need for liquidity can’t find it in their CMBS, because it is likely below the amortized cost.
  • There will be optical problems for current and prospective clients as they see the credit quality of the SV fund decline.
  • Those with a significant allocations to CMBS IOs (I hope there aren’t any) will see those assets go to junk, fall in current value, and be even harder to trade.

This is just another issue for Stable Value Funds — by itself, it is not likely to be enough to break the funds.? That would require something really nasty, like a quick run upward in short- and intermediate-term interest rates, or credit stress beyond this.? For the former to happen would require the FOMC to begin tightening, and absent a major dollar panic, they are not doing that anytime in the near term.? As for the latter, we have not yet seen the impacts from Alt-A recasts and resets, and the declines in commercial property values.? We will wait, pray and see.

Unstable Value Funds? (IV)

Unstable Value Funds? (IV)

Posted on by David Merkel

This should be my last post on this topic for a while.? I thank those that sent me additional data that agreed with my theses in the piece Unstable Value Funds? (III).? I would like to start by quoting from my piece at RealMoney The Biggest Asset Class You Never Heard Of.

The bonds held in stable value funds can’t be valued at book value, because accounting rules require that they be held at market. The stable value pool goes out and purchases derivatives known as wrap agreements in order to allow the bonds to be held at book value. The wrap agreements agree to pay or receive money if any of the bonds have to be liquidated at a loss or gain respectively, thus making the fund whole for any book-value loss.

Typically, wrap agreements are only done on the highest-rated bonds, AAA, so credit risk is not covered by most wrap agreements. With most wrap agreements, once a payment is received or made by the wrapper, the wrapper enters into a countervailing transaction with the pool to pay or receive, respectively, a stream of payments over the life of the bond that was wrapped equal to the present value of the initial payment when the bond was tapped. The wrapper bears almost no risk in the arrangement; the risks are rated back to the stable value pool, and the stable value pool pays for the gains and losses through an adjustment to the pool’s credited rate. Because wrappers bear almost no risk, wrap pricing in 401(k)-type plans is typically 0.05%-0.10% per year of assets wrapped. The only risk a wrapper faces is that the interest-rate-related losses on a bond in a rising interest rate scenario are so severe that the losses can’t be repaid out of the yield of the wrapped bond. In this case, the wrapper would have to pay without reimbursement.

Interest Rate Risks

Stable value funds attempt to maintain a stable share price, but the assets underlying the fund vary as interest rates, prepayment behavior and credit spreads change. There is almost always a difference between the book value of the assets, expressed by the NAV, and the market value. When the stable value fund has a higher market value than book value, typically it pays an above-market yield. There is a risk that in an environment where interest rates have risen sharply, a stable value fund would have a lower market value than book value, with a below-market yield. In a situation like this, particularly when the yield curve inverts, there is a risk that shareholders in the stable value fund will leave in search of higher yields. If that happens to a high degree, it will worsen the gap between the market value and book value of assets. That gap will be covered by the wrappers in the short run but will reduce the fund’s yield as it pays the wrappers back. It is unlikely but possible to get a death spiral here if more and more shareholders leave the pool and the yield sags to zero. It hasn’t happened yet, so this is theoretical for now. In theory, the wrappers would keep paying once the fund’s credited rate dropped to zero, so no one would lose money unless a wrapper defaulted on his obligation. There probably would be some legal wrangling in such an event; the wrappers might try to get the fund manager to take on some of the liability, or negotiate down the amount owed, leaving policyholders with a loss. In 401(k) plans, there are limitations on transferring funds out of a stable value fund to funds that would offer an easy arbitrage, so the risk of a death spiral is further reduced but not eliminated.

Asset Default Risks

For the most part, stable value funds take little credit risk, but it’s little known that this is not universally true. Some of these funds buy corporate bonds or other, more riskily structured product bonds. Some of them take credit risk in hidden ways. For example, there are some exotic, asset- or commercial-mortgage-backed interest-only bonds that are rated AAA by the rating agencies. The agencies rate them AAA because they can’t lose principal; they have no principal to lose. But if the loans underlying the interest-only bonds default or prepay, the interest stream gets shortened. The sensitivity on these securities to default risk is more akin to BB or BBB bonds, but a manager using them can count them as AAA. If an asset in a stable value fund defaults, the fund probably will temporarily suspend withdrawals while the managers pursue one or two courses of action. If the loss is small, its managers might buy a wrap contract for the loss, which will give a haircut to the yield on the stable value fund for the life of the wrap contract. If the loss is big, they will reduce the NAV and attempt to keep the NAV stable from there. Given the history of money market funds breaking the buck, it is possible that the fund manager might pony up the funds to make the stable value fund whole, but I wouldn’t rely on that.

I want to publicly thank Chris Tobe for writing to me.? He brought me back up to speed on some aspects of stable value that I was not in touch with.? (Any errors here are mine, not his.)? After reading what he sent me, there are two major risks.? One I have described in-depth: credit risk.? The other I described in my RealMoney piece: wrapper risk.

When the market value of assets is lower than the book value of assets, the wrapper covers the difference when withdrawals are made.? But the difference typically gets amortized into the credited rate of the stable value fund, lowering the interest rate credited to pay back the wrapper.

But what if the interest rate were forced to zero?? Then the wrapper would take losses.? Investors take losses is if the wrapper is insolvent when book value is more than market value.? The stable value fund could try to replace the wrapper, but it will come out of the hides of investors, unless the management company bears it.

There aren’t many wrappers today.? Here’s a list:

  • JP Morgan
  • State Street
  • RBC
  • CDC
  • AEGON
  • ING
  • Pacific Life
  • AIG (few buying from them)
  • Rabobank (not accepting new business)

As such, with the current financial stress, wrap fees have doubled.? There is more need for wrap capacity than is currently available.? There is the potential for losses as wrappers could go into insolvency.

But how big is this problem for investors?? The stable value marketplace is very big, though the severity of any loss should be small — under 10% of capital on average (some could be worse than 10%).

There are two troubles here.? First, because the stable value industry does not reveal the market value of their assets under management.? The opaqueness adds to the mystery.? Second, because the stable value funds have more accounting flexibility than most investment options, they can wait much longer than a money maket fund, which must declare a credit event if the NAV of the MMF is under 99.5%.? There is not such a threshold for a stable value fund.? The risk is that a stable value fund engages in wishful thinking, assuming that the value of their bonds will rebound, and the rebound does not happen.

Is a loss of 5% horrible, in an investment that is supposed to be safe?? How about 10%?? 20%?? I can’t go over 20%, the fund managers must act by then.

It is likely that losses will be small in the stable value option, but losses are a real possiblity.? Transferring assets to other fixed income options or other stable options could be smart.

Unstable Value Funds? (III)

Unstable Value Funds? (III)

Posted on by David Merkel

There’s a lot that I don’t know here, but what I do know concerns me.? Stable Value funds are a murky part of the market.? They are murky because they don’t report the value of the underlying assets, but only the smoothed value of assets, and the rate that they are currently crediting.? (Note: for those that want the grand tour of Stable Value Funds, I wrote this piece at RealMoney, The Biggest Asset Class You Never Heard Of.

Other articles I have written:

I have debated as to whether I should write a piece like this, but at this point I figure that someone will eventually point this out, so better for me to do it, than for it to come from another quarter.? Let’s start with the question, “How does a stable value manager manage the fund?”

In the old days, it meant buying Guaranteed Investment Contracts [GICs] from insurance companies, and buying the highest rate offered, because they were all AAA in the late 80s.? Even before defaults happened, the stable value funds found that there was not enough capacity in the insurance industry to write GICs at reasonable rates.? As a result, they began buying AAA assets in the structured product markets, and purchase wrap agreements that allowed those assets to be carried at book value rather than market value.

The difference is this: book value is for savers.? Just take their deposit, and credit interest to them.? No volatility.? That’s the beauty of stable value; it seemingly eliminates the volatility of the markets, and lets savers be savers.

But what is going on under the hood?? Many AAA asset classes have done poorly in the recent past, and I am not talking about CDOs.

Stable value funds have an average maturity of around 2 years.? If I look at AAA asset-backed, commercial mortgage-backed, or corporate securities in the 2-year maturity bucket, I see dollar prices that average around $90.? Stable value funds may have $90 of assets at current market value backing $100 of book value.

This is not a stable situation, no joke intended.? If I were in this situation, I would move all of my money to the most stable option in my DC plan that I could, because of the possibility of a run on the fund.? Now, if few withdraw on net, after 2-3 years, this situation will likely resolve itself.

But who can rely on the intelligence of other fundholders?? This is like the prisoner’s dilemma, where he can act and get something, harming others in the process, or get harmed himself.? Consider your own needs here; my own view is that we will see failures of stable value funds within 2009.

Unstable Value Funds? (II)

Unstable Value Funds? (II)

Posted on by David Merkel

Well, here’s a first crack in the foundation for stable value funds.? From the article:

The $235 million Lehman vehicle, though, lost 1.7% in value in December because bond prices fell and the insurance backing, called a “wrap” in financial parlance, ended after Lehman’s mid-September bankruptcy filing.

The reason is tied to the wrap agreements negotiated for at least two of the fund’s seven insurance providers, Pacific Life Insurance Co. and J.P. Morgan Chase & Co. Since the full coverage was no longer effective, Invesco severed the arrangements with them.

The 1.7% loss was subtracted from Lehman investors’ accounts, so fund investors ended up receiving about 2% in interest in 2008. The entire situation is causing a stir among stable-value investors, who fear that it may spread to their funds if more bankruptcies crop up. Of course, the shortfall doesn’t come close to the 39% decline in the Standard & Poor’s 500-stock index last year.

The Lehman fund’s 1.7% loss is a rare occurrence in the $416 billion stable-value industry, which has had few problems in its 35-year history. More than half of 401(k) plans in the U.S. now offer stable-value funds.

Stable value funds do have credit risk.? That credit risk is often spread among AAA and AA corporate names, and among the financial guarantors, MBIA and Ambac, and GSEs like Fannie and Freddie, back when they had those ratings.

Often, Stable value funds would purchase mortgage bonds guaranteed by Fannie, Freddie, or one of the guarantors.? They would then purchase a wrap to guarantee that benefit-responsive payments would be made at par, not at market value.? All fine, except that the wrap might not last as long as the mortgage bond in a rising interest rate scenario, or that the guarantor might default.? The former happened this time.

I’ve written about stable value funds before:

Stable value funds dodged bullets with Fannie and Freddie.? They still have issues with MBIA and Ambac, but the jury is out there.? There is one more major risk area for stable value funds: rapidly rising interest rates.

In a situation where short-term interest rates rise rapidly, the crediting rate of the stable value fund will lag the rise significantly, leading some to withdraw when the market value of the fund is less than the book value, leading to a possible run on the fund.? Now my proposal, A Proposal for Money Market Funds, and More, could deal with the problem, but that’s not in any of the contracts that I know of.

This is not to scare you out of stable value funds — after all, in a bad market, what does worse?? Stocks or stable value?? Stocks, of course.? But where you can move to other options that are more palatable, like short-term bond funds, money market funds, etc., it could be a good move.? Even a blanced fund or a corporate bond fund could work in this environment.

Be aware, and pressure your DC plan providers for more data on the stable value option.

Unstable Value Funds?

Unstable Value Funds?

Posted on by David Merkel

David Merkel
Things That Go “Bump” in the Night
1/17/2008 1:45 PM EST

One piece that I wrote three years ago for RealMoney has relevance today in a new way. Stable Value Funds often invest in AAA securities (some are solely invested in AAA securities), and some funds will have above-average exposure to securities credit-wrapped by the financial guarantors, and possibly, to some asset-backed securities that were rated AAA at issue, but don’t deserve that rating now. For those who have exposure to stable value funds through their defined contribution plans, it might be wise to check what exposures your funds have to the guarantors, and to AAA structured securities that are trading significantly below amortized cost. The summary statistic to ask for (not that they will give it to you) is the market-to-book ratio of the fund. If it gets lower than 97%-98%, I would avoid the fund.

Now for the good news: If a stable value fund breaks, the total loss is likely to be small, like that of a busted money market fund. The one exception would be if a stable value fund manager tried to meet withdrawals while facing a run on the fund, and ratio of the market value of the assets to the book value of the assets kept falling.

In such an event, better for the fund manager to stop withdrawals early and announce a new NAV that counts in the loss.

I don’t know of any stable value funds that are in trouble, so take this with a grain of salt. Most stable value funds are managed conservatively, so any testing will likely reveal that most of them are fine. There may be a few that aren’t fine, though, so a little testing is in order.

If you do find a need to move, money market and high quality bond funds are an excellent substitute for stable value funds. Be aware that you might have to leave funds in a non-competing fund option for 90 days to get there. In this market, the risks there could be as great as the losses on the stable value fund, so think out the full decision before making any change.

Position: none

That was my post at RealMoney today.? I wrote it with some degree of uncertainty, because stable value funds have a defense mechanism.? They can lower the crediting rate to amortize away the difference between book value and market value, and in a crisis, many will not argue with the credited rate reductions.? They are just happy to preserve capital.

Do I think this is a big problem?? No.? Do I think that no one is talking about this?? Yes.? The thing is, a lot of things can be hidden by the various wrap agreements that stable value funds employ.? If I were a stable value fund, I would not want to publish my market value to book value ratio.? If it’s above one, the fund will attract inflows, diluting existing investors.? If it’s below one, net outflows will increase, threatening a run on the fund.

Just be aware here, because if you can’t get a feel for the underlying economics of your stable value fund, you should probably seek another investment in the present environment.

Sorted Weekly Tweets

Posted on by David Merkel

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Twitter bird visits China

Banking

  • Saba Capital’s Boaz Weinstein talks bank CDS; Carvana exchange falters; Evergrande reveals restructuring plan https://t.co/SFUXCBASiZ  Thinks bank sub debt is overpriced in general… Mar 24, 2023
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  • The banking precedent that matters for where we are now isn’t 2008, but the empire-building a decade earlier https://t.co/wgPsiKSHFC  As I have said before, hand banking regulation back to the states. End interstate banking. I like JP Morgan so much, I want 50 of them Mar 24, 2023
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  • JPMorgan Chase Chief Executive Jamie Dimon is leading discussions with the chief executives of other big banks about fresh efforts to stabilize troubled First Republic Bank https://t.co/IJgU7riYOm  Uninsured deposits have to live somewhere… Mar 20, 2023
  • Treasury Secretary Janet Yellen and Fed Chair Jerome Powell are seeking to reassure investors to halt a slide in financial stocks https://t.co/fAJXDXvTzX  Will it be able to keep uninsured depositors? If so, will they be able to earn money over the cost of their liabilities? $FRC Mar 20, 2023
  • A coalition of midsize US banks asked regulators to extend FDIC insurance to all deposits for the next two years https://t.co/HMueRWZjHk  You could quietly raise the rate you pay on deposits, but don’t seem panicked Mar 20, 2023

Odds & Ends

  • Crypto fugitive Do Kwon, creator of the failed TerraUSD stablecoin, has been arrested in Montenegro https://t.co/oWPI8PUoIt  Lose enough people enough money, and it is likely you will be caught and prosecuted. Mar 24, 2023
  • Excel Never Dies, by @packyM https://t.co/OFjdeIFwV5  It’s the Swiss Army Knife of software. Used carefully, it can do amazing things. Mar 24, 2023
  • Researchers did DNA testing on strands of Ludwig van Beethoven’s hair and found answers to questions about the composer’s health and family history https://t.co/lqEv106yVV  A temperamental genius who was a wreck as a man. Still, there are a lot of unproven aspects to DNA testing. Mar 22, 2023
  • Elon Musk’s global empire has made him extremely powerful — and a major headache for Washington https://t.co/Mj5kZM70X4  How Elon Musk gives many politicians distress in the US Government, while having fun at the same time Mar 21, 2023
  • Here’s a visual guide to how America uses freight trains https://t.co/3g2iB4jfmv  Interesting graphics. Seems that safety improvements reversed around 2010. Mar 21, 2023
  • JPMorgan owned the London Metal Exchange nickel contracts that turned out to be backed by bags of stones rather than metal https://t.co/EewStihuef  Hmm… this *did* lead LME to ask the warehouses to check all the nickel inventories. Mar 21, 2023
  • Forget simple shampoo and conditioner. More consumers are adding extra steps to their showers–enough for the process to last 60 minutes or more. https://t.co/VHfulhcl9v  I realize I am an old guy, but this seems overboard. Mar 21, 2023
  • Why have a drab lawn when you can paint it green? Grass-painting is a growing way to save money and water. Neighbors might be shocked. “One day it’ll be yellow and the next day it’s green.” https://t.co/Chz6qpqH70  I would rather live with my weedy yard, with its many problems. Mar 20, 2023
  • The problem with AirPods and other Bluetooth earbuds? Their tiny, irreplaceable batteries https://t.co/81Wo8v1dOz  You could buy wireless headphones. They are better for your ears as well. Mar 20, 2023

Commercial Real Estate

  • As funding markets seize up, malls are headed for one more shakeout and that may be just what the long-suffering sector needs https://t.co/L9Bsj38U8P  Class A retail should be okay, though there will still be stress Mar 24, 2023
  • Small bank struggles could hit the real estate market hard https://t.co/1JujTvSqwZ  16% of CRE is offices Mar 24, 2023
  • Smaller banks are likely to respond to the crisis of confidence in banks overall by tightening standards and slowing lending to raise capital ratios https://t.co/j7gTP9Kr9L  Especially commercial real estate lending Mar 24, 2023
  • Remote work is starting to hit office rents https://t.co/MDGnDAedFl  Effect is higher where commuting is hard Mar 24, 2023
  • A large number of office defaults could force banks to mark down value of these and other loans https://t.co/bxyTAzZTee  Most of the carnage should be confined to offices, and malls that are not Class A Mar 22, 2023
  • Transcript: Where Stress Is Brewing in the $20 Trillion Commercial Real Estate Market https://t.co/pbWdLkcuZw  @TheStalwart & @tracyalloway did a great interview w/Rich Hill of Cohen & Steers. Offices are in trouble, Malls less so. And, it’s still about location. Mar 20, 2023

Science

  • The Sun Is Stranger Than Astrophysicists Imagined https://t.co/joHsDfna1D  Far more gamma rays than expected, and a big block of spectrum missing. Mar 24, 2023
  • A space object baffled scientists as it zipped through our solar system in 2017. Theories ranged from an asteroid to an alien probe, but a new study offers another idea. https://t.co/HG0lsIqwWb  It’s only a comet Mar 22, 2023
  • Google opens early access to its ChatGPT rival Bard — here are our first impressions https://t.co/zIVLnaXPL5  Bard is coming soon to a screen near you. You can sign up for the waitlist. Mar 22, 2023
  • Space junk getting you down? Just get out of the way https://t.co/8aNEFoA80b  Send up less, decommission more (burn up on re-entry), and dodge junk is the least costly solution Mar 23, 2023
  • A test vehicle unveiled by Chinese carmaker JAC has the battery world buzzing about sodium-ion cells https://t.co/OLMA08ggtH  Has the potential to deliver power at half the cost of lithium ion batteries. Plus: no fire risk. Minus: added weight Mar 21, 2023
  • Here’s everything you need to know about deadly fungus Candida auris, which has spread to more than half of all US states https://t.co/WMS0ixGumM  This one is challenging, as it is resistant to present antifungals & has a death rate of 30-60%. Mar 21, 2023

Culture

  • TikTok’s content moderator backtracks on a promise to stop making employees review the web’s most extreme content https://t.co/e7mAmHs2PN  It would be a rare person who could deal with every type of disturbing content day after day, and stay sane. Mar 25, 2023
  • Lawsuits and legislation targeting sex trafficking are causing collateral damage: they are damaging the livelihoods of online sex workers https://t.co/2fxX1lmIES  Suing Visa $V did the trick. Do we really want payment networks to be ethics guardians? That’s the government’s job Mar 24, 2023
  • The Real Reason South Koreans Aren’t Having Babies https://t.co/vXCgz96mQR  Evangelicals are 20% of SK’s population. This article doesn’t go into this, but the #1 factor differentiating fertility is strong religious faith. Likely true in SK. Mar 23, 2023
  • Is it a bad idea to assign a sex to digital assistants and other robots? https://t.co/dBwInqoxnJ  No, in most fiction, robots are assigned a sex, as they mimic humans. Example: Yokohama Kaidashi Kikou, where almost all the robots are female https://t.co/Hfl0JuTgMZ  Mar 23, 2023
  • What happens when sexting chatbots dump their human lovers https://t.co/o6N012otk5  This reads like something Asimov wrote (not just “I, Robot) in some of his stories in the 1970s. Mar 22, 2023

Monetary Policy

  • Federal Reserve Bank of Atlanta President Raphael Bostic says the decision to raise interest rates by 25 basis points this week came after “a lot of debate” https://t.co/KpzSjt2iXo  Smart short-term moves that lead to bad long-term results. Mar 25, 2023
  • The crisis that claimed Credit Suisse and SVB heralds a new chapter for financial capitalism https://t.co/S7ZkUfxSXt  The errors of monetary policy compound, creating a debt-ridden unstable economy. The government will take it over. Then the system as a whole will fail. Mar 25, 2023
  • The Fed’s Self-Directed Tragedy https://t.co/rPjnfyvKxi  If the FOMC would avoid inverting the yield curve or making it ultra-steep, we could avoid lot of problems. Toss all the neoclassical economists out of the Fed. Mar 22, 2023
  • STEVE HANKE And MATT SEKERKE: Fed’s Monetary Blunders Put The Entire Banking System In A Bad Spot https://t.co/CShCuEQaOS  This is the cost of QE. Load the banking system w/long debt, & the costs come due when policy tightens Mar 22, 2023
  • The Fed Must Not Flinch https://t.co/cQW7Ynwol5  Total idiot. Inflation is less important than systemic stability. Mar 22, 2023

Companies

  • Apple plans to spend $1 billion a year to make films for theaters https://t.co/sWbCMqCyo6  There is too much money chasing entertainment. Crowded trade. $AAPL $NFLX $AMZN Mar 24, 2023
  • Diebold Nixdorf and some of its lenders remain in confidential talks as the automated teller machines maker works to head off a liquidity shortfall https://t.co/vDO4aqd2qQ  This stock took a while to die $DBD People don’t use cash much Mar 21, 2023
  • The world’s most indebted developer said it expects that a restructuring support agreement will be ready by the end of March, after it won preliminary support from a group of major creditors https://t.co/r1ZjnnvxTF  Playing for time, one last time. Mar 21, 2023
  • Joe Hinrichs had never worked for a railroad when he was named CEO of $CSX, but the company is counting on his outsider perspective https://t.co/yXWnPKybDU  Key question: how much incremental profit will come from treating workers better? Mar 21, 2023
  • Some job listings don’t give anyone a ghost of a chance. Why some companies are posting ads for positions they aren’t actually trying to fill https://t.co/jgSDzj3wHb  The labor market is not as strong as it seems Mar 20, 2023

Risk Management

  • The M-Score is warning that the chance of fraud at major companies is the highest in over 40 years, writes Numbers columnist @JoshZumbrun https://t.co/ijbzyL9VMA  Take note, financial flexibility is ebbing. Mar 24, 2023
  • It’s the Most Thankless Job in Banking. Silicon Valley Bank Didn’t Fill It for Months. https://t.co/ZeoxnnEFww  If the CEO, CFO, & Chairman do not fully buy in to limit risk, rather than optimize risk, it does no good to have a Chief Risk Officer. Mar 23, 2023
  • Most companies don’t take steps to keep their bank accounts safe. Here’s why and how they should. https://t.co/R1cpJR3Y23  These are clever ideas, but why not just keep a laddered account of T-bills for the cash above normal transactional needs? Mar 23, 2023
  • The collapse of two lenders has prompted a rethink of banking rules, but risk experts say the failures could be something else: risk overseers who can’t stand up to the bosses https://t.co/gbbY2x0vsj  Boards exist to excuse management. Interest rate risk management at banks stinks Mar 22, 2023
  • The Federal Reserve raised concerns about risk management at Silicon Valley Bank starting at least four years before its failure earlier this month https://t.co/El3a1mjYV9  Since no one will talk about it, we have no idea of what this was. Mar 20, 2023

Market Dynamics

  • Hedge funds that bet on big-picture market moves have been hit with steep losses as a spate of recent bank failures upends bets that interest rates would remain elevated https://t.co/5NH5HT7hqg  Macro hedge funds are not infallible. Same for CTAs. Mar 23, 2023
  • Steve Leuthold, a financial guru known for partying and potatoes, has died at age 85. https://t.co/wANYmLz0RC  For a few years, I enjoyed reading his research. I knew he was a character — I didn’t know he was *such* a character. Mar 22, 2023
  • Banks and investors are reviving a push for changes to securities accounting after the SVB collapse https://t.co/YVRuZGWbvX  As I said to IASB 20+ years ago, there should be book and fair value balance sheets and income statements. More info for stakeholders. Mar 22, 2023
  • Why your financial conditions index sucks https://t.co/lJn1Rh2Zgf  I like the yield on 2-year US Treasury minus the yield on 30-Day A2/P2 Nonfinancial Commercial Paper https://t.co/KWJ42jOwnE  Mar 21, 2023
  • Record debt levels around the world have spurred fears of a ‘Minsky moment.’ Here’s what that means https://t.co/ljaM2Dmtms  So long as keep increasing debt levels, we will always face instability due to misfinancing of assets Mar 21, 2023

Around the US

  • CNN Visits San Francisco https://t.co/ifaUGKWgoG  CNN reporters with added security get robbed in San Francisco. Progressivism at its finest. Mar 22, 2023
  • Should New York be able to force suburbs to approve housing? Gov. Kathy Hochul’s plan to do so faces pushback https://t.co/NWahNVpLyQ  Zoning imposes costs on poor people Mar 20, 2023
  • As NBA fans wring their hands over star players missing games, the league’s coaches, owners and commissioner agree on one thing: it seems to work. https://t.co/715oUeUpWS  You have to remember — it’s a business. Disappointing fans when you are on the road is bearable. Mar 20, 2023
  • California’s torrential rains have plunged tens of thousands of homes into darkness, but may end up keeping the lights on during its summer blackout season https://t.co/ZSMf0aGSqk  You wanted more rain & you got it. Why complain? Mar 20, 2023
  • Chicago’s mayoral frontrunner Paul Vallas is taking a leaf out of Rahm Emanuel’s book to try to lure businesses back https://t.co/fxVWL6jQjY  Consider the economic drag of Chicago and Illinois state pensions & the task is very hard. What budget area will you cut? Mar 20, 2023

Islamic World

  • Iranian activists want tech companies to ban the Ayatollah https://t.co/0P00BQ7T5y  Tough to do, even though leader in Iran can use Twitter, but its citizens can’t Mar 22, 2023
  • About 79% of Turkish citizens think home sales to foreign nationals should be banned, according to a survey https://t.co/GrI5YPKp60  But well-off Russians, Iranians & Iraqis need a place to flee to. Mar 21, 2023
  • Iran is the big winner in the agreement with Saudi Arabia. Having given Tehran the upper hand, Riyadh should expect to be slapped around. https://t.co/MDqXXGRFwo  Hard to say. The disagreements of over 1300 years are not easily overcome Mar 21, 2023
  • The Taliban’s supreme leader, who banned girls from attending secondary school a year ago, is discovering it is one thing to issue a fiat, and quite another to enforce it. https://t.co/P7uzKoYPZR  Similar to those who homeschool underground in many totalitarian nations Mar 21, 2023

China

  • Those fretting about the challenge a united China and Russia pose to the West should have another look at the history of their relationship https://t.co/dMm4qPn105  Article indirectly compares Russia to N. Korea. China supports both, but has little leverage over either. Mar 25, 2023
  • Xi Jinping used two days of talks in Moscow to firmly align with Russia against the US. But the Chinese leader held back from offering Vladimir Putin something he’s been looking for: A commitment to buy a lot more gas https://t.co/2oXmXmS1dT  A lot of gas Mar 23, 2023
  • Chinese lenders and small businesses are stuck in a doom loop https://t.co/5jujZE5Iyt  You can’t have strong small & medium sized firms without freedom Mar 22, 2023

Credit Suisse

  • Credit Suisse’s top shareholders and AT1 bondholders are among the big losers while $UBS is a winner https://t.co/lCx0y3KOY6  Well said… other winners include employees of CS that will have jobs, & liability-holders of CS that will get paid. Mar 21, 2023
  • Credit Suisse’s riskiest bonds will be wiped out as part of its deal with UBS Group, dealing a blow to investors who held the lender’s AT1 bonds https://t.co/ZVp64UFRcz  When buying innovative bonds, be sure to read the terms in the prospectus. I like my bonds simple. Mar 20, 2023
  • After the write-down of Credit Suisse’s riskiest bonds, the Bank of England sought to clarify its rules regarding the order in which shareholders and creditors should bear losses in the event of insolvency https://t.co/g7uHWvbrhP  Read the terms of the bonds. Hard to cancel common Mar 20, 2023

CFA Institute

  • The AV CFA Meme Competition: the winners https://t.co/nHMeURHkZp  I had never seen these. Pretty funny. Easy exams that keep getting easier. Mar 20, 2023
  • Good news: ChatGPT would probably fail a CFA exam https://t.co/P5GMfOArRT  Scored at the same level as random guessing. Mar 20, 2023

Sorted Weekly Tweets

Posted on by David Merkel

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Twitter bird with his best friend

Market Dynamics

  • Short sellers are betting against Cathie Wood’s flagship fund more than ever before https://t.co/Gkck6wyVws  This may give Cathie Wood a tailwind… shorts eventually have to be bought in… Mar 11, 2023
  • US buyback announcements are running at a record pace, with $261 billion in commitments so far this year — though much of it is spread across just five companies, according to JPMorgan strategists https://t.co/2y0XNg9jGq  Profitability, but limited opportunities to reinvest Mar 09, 2023
  • Presentation: How to Avoid Financial Disasters by @ritholtz https://t.co/x66S0upQrC  I downloaded and viewed the slide deck. I thought it was quite good. Mar 08, 2023
  • As stock markets take another pummeling, more traders are hiding out in credit markets https://t.co/Gf8P2aGdcU  This is making me feel a little more bullish on stocks. Mar 08, 2023
  • The bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to bigger interest-rate hikes https://t.co/P5lwUgRm2i  Converting junk-grade floating rate finance to credit risk. Mar 08, 2023
  • What I Don’t Own https://t.co/HC5DPTZ3aq  Sounds pretty similar to me, except I primarily invest in individual stocks w/ some ETFs (together with my clients) Mar 08, 2023
  • The largest-ever buyout financing arranged by private credit firms would allow health-care technology company Cotiviti to pay a whopping 50% of the interest on a $5.5 billion loan with additional debt https://t.co/ytzVQubTMY  Bear market in credit not yet complete for this cycle. Mar 08, 2023
  • A cyberattack that disrupted derivatives trading in January is prompting calls for more oversight to combat the risk of hacks across financial markets https://t.co/NvZIUTz5ds  There are basic safeguards for avoiding hacks, but don’t shocked when a hack happens. Mar 08, 2023
  • While stock-picking investors wait around trying to decide their next market move, their computer-driven counterparts have no such luxury https://t.co/QEBS5qftSH  Another CTA article, which suggests they might be buying US stocks. Who knows? Mar 07, 2023
  • CTAs are minnows, not whales https://t.co/yvT2LmHFpt  Explains how CTAs do position sizing. Mar 07, 2023
  • Dividend stocks are hot. Here are ways to pick the right ones https://t.co/DHBWUkrHWY  Watch free cash flow Mar 07, 2023
  • Junk-rated companies are borrowing again https://t.co/ZVVFazw0Ck  Spreads may be down, but yields are up. Mar 07, 2023

Odds & Ends

  • Recent snowfall won’t end the US Southwest’s historic drought https://t.co/YnKGFUO6Nv  Be happy. After all — weather varies, but sometimes you get a streak where conditions give you more (or less) rain for years. Mar 09, 2023
  • This is your brain on AI: Powerful billionaires are pouring money into life-extending technology — and they just might succeed. https://t.co/ncjE9HZmhH  A faulty mirror of the way you think could live after you die, but face it, you’re still dead, and in the afterlife. Mar 09, 2023
  • Why your house is a terrible investment https://t.co/Atp9TGOuWp  In general I agree, unless you live in an area that people are still moving into, and there is little land to develop. That said, a house gives you more flexibility in how you live. Mar 08, 2023
  • Enough: The Forgotten Lesson of Ben Graham’s Life https://t.co/El31glsWBK  Once he had enough money, he did what he loved Mar 08, 2023
  • Chuck E. Cheese Still Uses Floppy Disks To Make Its Rodent Mascot Dance — For Now https://t.co/Q0ie46iBCd  It is truly hard for old tech to die completely Mar 08, 2023
  • He’s the Oscar-nominated director of “Tár.” He’s also the accidental inventor of Big League Chew. https://t.co/AHJbyEilBN  This is very weird Mar 08, 2023
  • It’s not just you: Customers say they are experiencing more problems with products and service than ever before https://t.co/U7pkDWqdDp  Much as I like Southwest, they have cancelled flights on me too frequently. Mar 08, 2023
  • Ken Griffin said his firms are in the process of negotiating an enterprise-wide license to use OpenAI’s ChatGPT tool https://t.co/fhBIQB8N4j  I’m considering it as well; I’m less certain about how much it would help me. Mar 08, 2023
  • Second Norfolk Southern Train Derails in Ohio in a Month https://t.co/CSCUXoHm3y  Remember that $NSC is culpable here, the owners of the railcars have some liability here as well Mar 07, 2023
  • How Four Scientists Created Gatorade and Became Billionaires https://t.co/I84CCpAbdZ  Excellent and weird story of how Gatorade was created, then monetized. Mar 07, 2023
  • SO YOU WANT TO BE THE NEXT WARREN BUFFETT? https://t.co/cOll6lGZBe  Because this is a “paid” substack, this guy will never learn from me how much he doesn’t know about the liability structure of $BRK.A $BRK.B. I would have given him a nice comment Mar 07, 2023
  • E-Bike battery fires are soaring, especially in New York City where the number of fires more than doubled last year https://t.co/9hz0ngasL7  People aren’t thinking hard enough here. Any battery that can charge fast and discharge fast is likely to be unstable. Mar 07, 2023

Banks

  • The collapse of Silvergate and the takeover of Silicon Valley Bank by the government don’t repeat the Texas banking crisis of the 1980s, but they share similarities https://t.co/5cWjJ2R2Mr  Undiversified & uninsured deposit bases are more prone to runs. And rates have risen Mar 11, 2023
  • The US could learn a thing or two about banking regulation from its strategic rival, China https://t.co/5Qx4iCkvrn  Smaller banks tend to be more cautious in their financing. $SIVB is not representative of small banks. And, no, China’s banks aren’t well regulated. Mar 10, 2023
  • US bank stocks plunged by the most in nearly 3 years https://t.co/Xr3h4ldo1S  Deposits are seeking higher yields, little by little Mar 09, 2023
  • The average 30-year US mortgage rate hit 6.73%, the highest since November, after five straight weekly increases https://t.co/mLjJo24pAn  Interesting to see mortgage yields rise as long treasury yields fall. Bank stock prices have taken a hit also. Mar 09, 2023
  • Silvergate Capital plans to wind down operations and liquidate its bank after the crypto industry’s meltdown sapped the company’s financial strength https://t.co/jQSjAnrwwZ  Will they try to sell of SEN? If they do, will anyone buy it? Mar 09, 2023
  • Fed Chair Jerome Powell laid out a series of concerns he has with crypto and said lenders the regulator oversees must be “taking great care” when engaging with it https://t.co/ci12LaI68t  They have proof of concept with $SI Silvergate Mar 08, 2023

Non-US

  • Western neglect has left Georgia, recently a staunch ally of the West, drifting into Putin’s insidious camp, writes @ThereseRaphael1 https://t.co/BzMLSDNySu  How does the Georgian law differ from US law which requires that foreign lobbyists register? Mar 09, 2023
  • Despite 100% inflation, Argentina is providing an unlikely haven for middle-class Russians who have given up on their homeland https://t.co/rNQgJ1sWtu  Argentina is a place for Russians to flee to, then figure out where they really want to live. Mar 09, 2023
  • Toblerone has to change its packaging to a generic mountaintop because the chocolate doesn’t meet Swiss laws for using the national symbol https://t.co/lKFt83YzBh  Costs win out over the Swissness business. Mar 07, 2023
  • One of the world’s most indebted countries will tell us if central banks went too far, or not far enough https://t.co/H64zsFJV5k  The day of reckoning comes to Canada. Balance sheet stress begets cash flow statement stress once interest rates rise. Mar 07, 2023
  • Estonia’s prime minister, one of Ukraine’s staunchest backers among Western leaders, won a second term, a sign of continuing support for Kyiv in Europe’s east https://t.co/ssRAzqgWMN  Brave Estonia. Mar 07, 2023

Commercial Property

  • Adler: The property group’s market capitalization has fallen more than €3Bn in just over two years. It now needs a €938Mn financing deal, but some creditors are opposing this in London’s High Court https://t.co/ACtqFHXFul  Near the start of a credit bear cycle the weakest default Mar 10, 2023
  • Even wealthy landlords are skipping payments on office buildings https://t.co/ta53kWt2LK  For office property owners, as they approach the balloon repayment of principal they face unwilling lenders. Then the mortgagees face unwilling buyers. Mar 10, 2023
  • A hedge fund manager who made a 119% return shorting debt linked to shopping malls is betting on fresh pain in the US commercial property market https://t.co/fEMWwLyRVT  Difficult to short office-related CMBS Mar 09, 2023
  • A handful of office landlords — from Pimco’s Columbia Property Trust to Brookfield — are defaulting on debt as interest rates ratchet up the pain for property owners https://t.co/USdBjJ03kW  And so the rationalization of unneeded office space begins. Mar 09, 2023

China

  • “It’s not our assessment that China wants to go to war” over Taiwan, US spy chief Avril Haines told a House panel https://t.co/5CScZBwYVN  Yet not everything goes according to plan. Accidents happen. Mar 09, 2023
  • China in a hard pivot to more supply-side reforms https://t.co/oRNbF7a0Gp  The Chinese Communist Party always talks about getting people to consume more, but the politics of that implies more freedom, so they never follow through. Japanese style malaise ensues Mar 09, 2023
  • More local government financing vehicles in China may seek debt reprieves after authorities issued clearer instructions on how to defuse one of the nation’s top financial risks https://t.co/gOEGTrBUrR  This doesn’t do anything to reduce debt at the local governments Mar 08, 2023
  • As China tries to turn the page on one of its worst stretches of growth since the 1970s, its economy is being weighed down by the colossal debts of its local governments https://t.co/sPQJDAwBr5  China’s debt capacity is surpassed by local govt debts. Local govts cut key services Mar 08, 2023

Politics & Policy

  • Stablecoins Like UDSC Are Commodities, CFTC Chair Says https://t.co/ZE42RfbIYE  Regulate them like money market funds Mar 09, 2023
  • Jenna Ellis, an attorney who once described herself as part of an elite strike force representing former Pres. Donald Trump, was disciplined by a judge after admitting to falsely claiming the 2020 election was stolen https://t.co/fuX7cUMWLR  Are lawyers allowed to lie in court? Mar 09, 2023
  • TikTok’s post-reality values increasingly clash with progressive ideals, say @parmy and @tculpan https://t.co/rlIEEXMjBZ  It is ridiculous to blame this on China. The US is a shallow place where many want to look more beautiful than they are. Who cares about “progressive ideals?” Mar 09, 2023

Superconductivity Breakthrough

  • A research team’s breakthrough in superconductors could lead to more efficient electrical grids, better battery life for handheld devices and improving nuclear fusion https://t.co/Z7rnW6acTk  Nitrogen-doped Lutetium Hydride. What a concept using an element that is hard to produce Mar 08, 2023
  • From the Time-Life book “Matter” (1968) regarding Lutetium: “With many of its chemical and physical properties unknown, it has no practical value.” It is a byproduct of processing monazite https://t.co/gelAuCYUvP  https://t.co/1CBTaS2oUz  Mar 08, 2023
  • And how you would maintain a PSI of 145,000 to use this as a superconductor would be challenging, though less challenging than other superconducting materials regarding temperature and pressure https://t.co/1CBTaS2oUz  Mar 08, 2023

Comments

  • @mark_dow What of those who pay on CDS indexes? Also, you could short $HYG while being long $IEF / $SHY to neutralize Treasury duration. Mar 10, 2023
  • @ritholtz You are welcome. Recently I did a presentation like that for the Baltimore CFA Society’s reception of new charterholders. That said, I am an active manager, but I eat my own cooking. 80%+ of my total assets are in my strategies, and 95% of my liquid assets. Mar 09, 2023
  • @JimPethokoukis Why “policymakers” use short-term data that is error-prone to make long-term decisions? (Neglecting lags as well…) Mar 08, 2023

Economics

  • Next big job cuts will be in finance and health care, data show https://t.co/ub34knyFh5  Job cuts are coming. Here is a good guess as to where they come from. Mar 11, 2023
  • Transcript: The Real Reason Companies Are Still Raising Prices https://t.co/NLjbnYE450  Great interview with @SamuelRines @TheStalwart @tracyalloway Mar 10, 2023

Adani Group

  • Heard on the Street: Adani stocks have bounced back strongly in March. But even assuming the group avoids regulatory trouble, a further recovery looks challenging https://t.co/t13vz2cW00  Capital is tight, and they are mostly in capital intensive industries Mar 10, 2023
  • More shares belonging to some Adani Group companies have been encumbered, a trustee says https://t.co/BYg24ow67p  Margin loans are a risky way to finance Mar 08, 2023

Why I Like the Debt Ceiling

Posted on by David Merkel

Picture Credit: WyldKyss || The greatest mistake of economics is thinking we can influence the economy to make it do more over the long haul than it otherwise would do.

I am not a liberal; I am not a conservative. I wish the Balanced Budget Amendment had been passed in the1970s, such that we would not be making such grandiose as a result of legislative/bureaucratic tinkering. I think the government should not try to solve economic issues, and should focus on Issues of justice. The US government has never done well managing the economy. Set some basic boundaries to define fraud, and then let the economy run.

But in the present environment, i like anything that hinders the US Government from borrowing more. Most government spending reduces real GDP. You want infrastructure? Build it locally. Tax the area needing it, and see if they really want to pay the price. Don’t do it at the Federal level, where no one understands what is in any omnibus spending bill. It is all a waste, where those in Congress engage in a form of fraud telling their constituents what they got for them. If they really needed it, their state, county, or city should have done it. Projects should be done at the lowest level of government possible.

Think of the situation regarding ports. We have spent 10x+ more money on ports on the east of the US rather than the west, and far more freight comes to the west. If these decisions were not federalized, we would not make such stupid choices.

Bring back the sequester. Bring back anything that restrains the idiocy of the Congress and the last four Presidents. The high level of debt makes the economy unstable. You want more and more crises? Keep adding to the debt. The US and the World grew faster in real terms when the rule was balanced budgets and restrictive monetary policy. As such, I appreciate any measure that restrains the ability of the US government to borrow more.

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