Search Results for “insurers”

Why Life Insurers, Defined Benefit Plans, and Endowments Invest Differently

Posted on 25 April 2015 by David Merkel

Despite the large and seemingly meaty title, this will be a short piece. ?I class these types of investors together because most of them have long investment horizons. ?From an asset-liability management standpoint, that would mean they should invest similarly. ?That may be have been true for Defined Benefit [DB] pension plans and Endowments, but that has shifted over time, and is increasingly not true. ?In some ways, the DB plans are becoming more like life insurers in the way they invest, though not totally so. ?So, why do they invest differently? ?Two reasons: internal risk management goals, and the desires of insurance?regulators to preserve industry solvency.

Let’s start with life insurers. ?Regulators don’t want insolvent companies, so they constrain companies into safe assets using risk-based capital charges. ?The riskier the investment, the more capital the insurer has to put up against it. ?After that, there is cash-flow testing which tends to push life insurers to match assets and liabilities, or at least, not have a large mismatch. ?Also, accounting rules may lead insurers to buy assets where the income will show up on their financial statements regularly.

The result of this is that life insurers don’t invest much in risk assets — maybe they invest in stocks, junk bonds, etc. up to the amount of their surplus, but not much more than that.

DB plans don’t have regulators that care about investment risks. ?They do have plan sponsors that do care about investment risk, and that level of care has increased over the past 15?years. ?Back in?the late ’90s it was in vogue for DB plans to allocate more and more to risk assets, just in time for the market to correct. ?(Note to retail investors: professionals may deride your abilities, but the abilities of many professionals are questionable also.)

Over that time, the rate used to discount DB plan liabilities became standardized and attached to long high quality bonds. ?Together with a desire to minimize plan funding risks, and thus corporate risks for the plan sponsor, that led to more investments in bonds, and less in equities and other risk assets. ?Some plans try to cash flow match expected future plan payments out to a horizon.

Finally, endowments have no regulator, and don’t have a plan sponsor?that has to make future payments. ?They are free to invest as they like, and probably have the highest degree of variation in their assets as a group. ?There is some level of constraint from the spending rules employed by the endowments, particularly since 2008-9, when a number of famous endowments came to realize that there was a liability structure behind them when they ran low on liquidity amid the crisis. [Note: long article.] ?You might think it would be smart to have the present value of 3-5?years of expenditures on hand in bonds, but that is not always the case. ?In some ways, the quick recovery taught some endowment investors the wrong lesson — that they could wait out any crisis.

That’s my quick summary. ?If you have thoughts on the matter, you can share them in the comments.

On Captive Insurers

Posted on 13 June 2013 by David Merkel

Sometimes, when I see an insurance article that could be big, relevant, and tough to explain, I say to myself, “Dave, you’re going to have to write about that.”? But now, I get requests via email to write about it.

So tonight I write about the New York Department of Insurance’s attempt to rein in captive insurers.? [Long report here.]? My first question to the department would be: “What took you so long?? These issues have been known for years.”

I write this as one that in general admires the New York Department of Insurance.? They are the toughest regulator of insurance in the US.? If I could have my way, I would replace the Federal Insurance Office (?FIO?) with the?New York Department of Insurance, and let New York regulate the country.? But that can’t happen.? Insurance is regulated by the states.? As a result, if some states are liberal with respect to reserving practices, companies can set up reinsurers there, and shed reserves to a state that allow the reserves to be lower.

Now, why does this happen with respect to life insurance, and not other insurance?? There are complexities in the regulatory [“statutory”] reserving where the statutory reserving does its estimates such that every advantage a policyholder has versus an insurer gets used against the insurer.? That makes the reserve high.? But on average, policyholders aren’t that smart; the reserves should be lower.? Should they be as low as the GAAP reserve, which is supposed to be conservative and realistic?? That seems to be the goal of many insurers.

Life insurance is long in duration, which means small differences in assumptions can make relatively large differences in the reserves.? That’s why you only see it in life insurance.? This happens with long-dated term insurance, universal life, and any product that guarantees that are not core to the product, and are hard to calculate reserves as a result.

But what about mutual versus stock companies?? First, let’s take a step back.? Why does statutory accounting matter?? It matters because it affects the ability of regulated insurance companies to dividend money to their holding companies.? The lower statutory reserves are, and the lower risk-based capital requirements are, the more that can be dividended, and the greater the flexibility of the enterprise.

Mutual life companies typically have more capital than they need, and they do not have a claimant on the excess (unless it is management, and that is quiet, slow, through the pension plan, the hidden plans, etc. Shh.)

Stock Life companies have to optimize their capital to compete against everyone else.? Sorry, but that is the way it is.? Let’s move to the recommendations of the NY Insurance Department:

Given the troubling findings uncovered during its investigation, DFS [Department of Financial Services] is taking immediate action and making several recommendations to address the potential risks and lack of transparency surrounding shadow insurance:

Through its authority under New York Insurance Law, DFS will require detailed disclosure of shadow insurance transactions by New York-based insurers and their affiliates.
In the interest of national uniformity, the National Association of Insurance Commissioners (?NAIC?) should develop enhanced disclosure requirements for shadow insurance across the country.
The Federal Insurance Office (?FIO?), Office of Financial Research (?OFR?), the NAIC, and other state insurance commissioners should conduct similar investigations to document a more complete picture of the full extent of shadow insurance written nationwide.
State insurance commissioners should consider an immediate national moratorium on approving additional shadow insurance transactions until those investigations are complete and a fuller picture emerges.

Number 1 is a given.? New York can do that on its own.? New York could unilaterally refuse to give reserve credit to any reinsurance agreement they think is not creditworthy.? But that comes with a cost: native New York insurers might leave, and leave behind a small New York only “pup” insurer.? (Imagine Metlife decamping to New Jersey, and AXA’s American subsidiary also.)? That’s what most insurers do, because New York is a tough state for insurance.? If the size of the New York insurance industry shrinks, so will the New York Insurance Department.

Number 2 is not a given.? There are a number of states that benefit from looser regulation.? The NAIC only advises & proposes; it does not create law.

Number 3 could be done, but will they do it?? There are many other issues that press.? The states that benefit from captive insurers will not want to cooperate.

And for the same reasons as 2 & 3, 4 will not likely succeed.? Not everyone has the same incentives here.? New York is engaging in bluster.

What Would I Do?

I would take the risk, and disallow reserve credits from companies in locales that don’t regulate insurance well.
I would disallow the use of surplus notes for stock companies.? With stock companies, it is just a hidden form of leverage.
I would eliminate all surplus relief from reinsurance treaties that do not rely on “diversifiable risks.”? If it is merely shifting a nondiversifiable risk, offer no reserve credit.? The company should bear that itself.

Insurance CEOs can be glad I am not their regulator; they would have a tough time under me.? There is nothing that they know that I don’t.? That said, the New York Department of Insurance will have a a hard time making their ideas work, unless all the states agree with them, and that is not likely.

Investing In P&C Insurers

Posted on 6 December 2012 by David Merkel

When I was half my current age, an actuary in my life insurance firm said to me, “Property-Casualty insurance is not real insurance.? When they lose money, they just raise rates, and they make the money back.”? Today, with greater knowledge, I know that he was half-right.? Here is where he was wrong:

If a P&C insurer risks a significant fraction of its surplus, such that if they could lose enough in a single year that they would not be able to write more business, that is an insurer to avoid.? Good P&C insurers do not bet the farm.? They manage such that they will always stay in the game, allowing themselves to write good business at good rates after a disaster.
If a few badly-run insurers die after a disaster, that is all the better for those that remain.? Capacity exits, and those left standing raise rates and earn strong profits.? P&C insurers and reinsurers that “swing for the fences” tend to die.
As with most things in life, it is those that take moderate risks that do best.? Invest in those P&C insurers.
P&C insurance is insurance on a micro level.? It is not as if losses are directly rated back to insureds.? On a macro level, conservative P&C insurers and reinsurers are toll-takers.
This applies more closely to short-tail and mid-tail insurers.? Long-tail insurers take a long time to validate their underwriting, and in certain environments, can go broke more easily than other P&C insurers.

That said, P&C insurers and reinsurers that underwrite and invest carefully tend to make money regularly, and with a better return on equity than most industries.? It is one big reason why Warren Buffett has done so well over the years.? Small underwriting gains combined with small investing gains can compound quite well, leading to a very nice overall return.

There is one more advantage here.? Insurance fuses the twin problems of uncertainty and time [accruals].? This is difficult enough, but the accounting treatment discourages many from analyzing the insurers.? Complexity in business begets accounting complexity.

That is why I think that my main job with insurers is analyzing the management team. Good management teams think like owners, and reduce exposure when times are aggressive.

That’s why 15% of my portfolios for clients & me are in P&C insurers.? They have done well in the past, and there are no changes indicating why they won’t do well in the long run if they are conservative.

On Complexity in Financials, and Insurers Specifically

Posted on 9 August 2012 by David Merkel

I’m not a fan of complexity in financial companies.? Complexity is a sign of trying to be” too clever by half,” as the British might say.? If an economic idea is good it can be executed simply.? Complex financial business stems from a desire to do accounting, regulatory, and other arbitrage.

Like my piece on AIG in 2009, I am doing low level research on an insurer using the statutory data. ?Let me give an example of what I mean.

There is no economic reason to have internal reinsurance treaties aside from sharing losses on short duration coverages.? To have large internal reinsurance credits is a sign that you are passing your reserves to the subsidiaries in domiciles with weak rules.

Also, to have a complex organization chart means that you are taking advantage of weak reserving requirements, capital requirements, except to the extent that national requirements call for a separate subsidiary.

Things are also tough when you interlace the capital of your subsidiaries, whether through equity, preferred stock, trust preferreds, or debt.? And with insurance companies, surplus notes.

That’s one reason why investment banks trade at low valuations, and might be better to be broken up.? Complexity.? “If you are not buying a Sunkist orange, you don’t know what you are eating.”? Okay, that dates me, but if the financials of a company are not transparent, in this environment, they will trade at a discount.? That is what I have said to reporters who have called me.? Complexity deserves a discount.? Level 3 assets deserve a discount.

Also, under-reserving deserves a discount, when you see significant claims arise out of prior year business.

Good financial businesses are simple and have few complexities to make them look like they are trying to scam the accounting rules.? Please remember my folly with Scottish Re, where I was a bull, and when it? got into trouble, I did a deep analysis, and turned into a bear.? When the company announced superficial changes and the price almost doubled, we sold out, though we held ~5% of the stock in a very busy day.? Where did the stock go out at? Zero.? Do I feel bad for losing money? Yes.? Do I feel good for cutting losses? Yes, and even more so.? Risk control is important.

Scottish Re was Bermuda domiciled, and so we didn’t get as much data as with a US domiciled company, but I had enough in the SEC-required documents to see the morass that Scottish Re was in, and the lack of ability for cash to flow to the publicly-traded holding company.

Financials are tough to invest in and the simpler that they are, the better.? To the degree that you can see that margins are assured, they are safe, but that is tough to assure.

Financials require extra caution.? That is most of what I am trying to say.

On the Reinsurers

Posted on 11 March 2011 by David Merkel

Insurance is a part of my life.? I’ve spent more than half of my life working with insurers in one way or another, and when unusual events happen, my phone rings, or I get e-mails, with people seeking insight.? Recently it has been regarding AIG, but in the last day it has been regarding reinsurers.

Full disclosure: my clients and I own shares in PartnerRe [PRE].? I may take positions in other reinsurers, but I am not planning on that anytime soon.

So, one friend of mine who writes a pseudonymous blog wrote me, saying:

Hi David – perhaps you can shed some light on this – for years I’ve heard the logic that catastrophes are bullish for insurers, as it allows them to raise rates.? I REFUSE to believe this.? I cannot for one second imagine that insurers would choose A) catastrophic payouts and rate increases vs B) no payouts and lower rates.

Here was my response:

They are bearish for insurers with large exposure to the contingencies, and bullish for insurers with no/little exposure to the contingencies.? But in aggregate, it is bearish ? think of the ?brick through the window? fallacy on GDP.

David

PS ? the better managed, less levered insurers/reinsurers do tend to do relatively better out of big crises, because they will have the capital to write the juicier business in the next year?

Now, PartnerRe was off a little today, but that doesn’t surprise me much — they usually have a little exposure to everything.? Very diversified in their liabilities, and conservative in the way they run their business.? My kind of reinsurer.

But then Flagstone Re was off over 12% today.? I owned this at one point in time, but don’t now.? After today’s losses, I may revisit them, but I am not in a rush.

Story: in 2004 and 2005, working for a hedge fund, I found the reinsurers to be some of the most intriguing companies to invest in, or short.? Particularly in hurricane season, there were a lot of trading opportunities.? Whenever there are significant events, you start keeping a spreadsheet, and as companies report likely losses, you populate your table.? You have to talk with investor relations, or the CFO, to see whether a company plays in that area of reinsurance, and to what degree.? Most of this is not in documents filed with the SEC, until results come afterward, through press releases, and 8Ks.

In 2005, one company, Montpelier, admitted no significant losses after Katrina, and it really stood out as an anomaly on my spreadsheet.? This was the only time I have ever gone from long to short on a company, ever.? Eventually Montpelier admitted the claims that were coming, and the stock price adjusted lower, and we covered.

Now, I am not up on all of the exposures of reinsurers at present.? Were I back in the saddle as a buyside analyst, I would be building my spreadsheet, and calling reinsurers to get an idea of how much exposure (not losses per se, but did they write business there?) they have to the recent troubles:

Last year?s New Zealand earthquake
Flooding in Australia in December and January
Tropical Cyclone Yasi (Northern Queensland)
This year?s New Zealand quake
The current Japan quake

Now if I were more of a trader, after research I might be inclined to take positions in Aspen, Axis, Flagstone, and Platinum.? But there is a lot of research to be done here, and I would not take any positions without significant due diligence, which I have not done here.

So be careful.? Rule number one is don’t lose money.? Rule number two is don’t forget rule number one.

Full disclosure: long PRE, for me and for clients

Why the Feds Shouldn’t Regulate Insurance Yet, and Certainly not Own Insurers

Posted on 13 November 200813 November 2008 by David Merkel

Insurance is complex by nature.? Anytime one brings in a third party to be a protector/guarantor against adverse events, it creates some weird dynamics.? Now, a few of the states, including the best of them, New York, have been regulating insurance for a long time.? But the Feds have not dealt with insurance in any significant way, because that role has been ceded to the states.

With the failure of AIG, and it getting acquired by the Feds, the questions of regulation have taken on new significance.? I have written before about the Federalization of insurance regulaton, indicating some indifference about who regulates it, but pointing out the difficulties — what an effective insurance regulator needs to learn.

The following is personal to me in four ways:

I used to work for AIG (’89-’92)
My main local paper is the Baltimore Sun (though I don’t subscribe, because of lack of value)
Elijah Cummings is my Congressman, at least since the last gerrymander. (Hey, give him credit, he voted against the bailout.)
I have interacted with many insurance regulators of varying abilities over the last 20+ years.

Elijah Cummings and some other congressmen have gotten offended over seemingly extravagant expenses over conferences, particularly for agents/representatives of the company.? Now, as a young actuary, I would sometimes say, “Why do the agents get to go to all of the fun conferences?”? Not true — only the top agents went to those conferences, and it was a reward that would stimulate extra performance (and the real reward was bragging rights — the companies often made money off of conference-type rewards).? Actuaries are nice, and all that, but the ability to sell product, particularly in life insurance and annuities, is rare.

When the government gets involved in industry, the incentives become messy:

A1) We need to do a lot of mortgage workouts for the good of mortgage payors and those in residential real estate.

A2) We need to minimize the cost of the mortgage bailout to the taxpayer.? Or, we can’t borrow that much.

B1) We must reduce tobacco smoking in our state; it is harming our dumbest citizens.

B2) But we issued tobacco bonds against the recent settlement with the tobacco companies.? We can’t afford to lose revenue.

C1) We’ve got to crack down on shady life insurance sales practices.? Too many people are getting cheated.

C2) That insurance company employs a lot of people in our state, and they are located in the district of the head of the commerce committee.

D1) Gambling has introduced new forms of addiction to our state, and perhaps organized crime as well.

D2) We can’t afford to give up the tax proceeds from gambling — the schools depend on it.

Have I made it clear?? Politicians want political results, and they want tax revenues, which are often opposed to each other.? They aren’t typically businessmen, so they don’t understand the tradeoff.? Rather, they swing from one to the other, as political convenience dictates.

And so in this situation, I would say that the amounts in question are rather nominal.? Why fuss over the conferences?? Rewarding top performers is important, and if you don’t do that, you will lose business, and the government will lose on its “investment” (what a word 😉 ) in AIG.? Most companies have conferences like AIG, and I can tell you, they wil think twice about coming under the government’s umbrella for that reason, as well as many other reasons that have political significance, but harm corporate performance.

State legislatures took time to build up expertise in insurance regulation.? Some more so like New York (we should move the NY regulators to DC if we federalize), and some less so.? Congress doesn’t have the vaguest idea on what to do with insurance and AIG.? The ignorant statements of Rep. Cummings are a great example.? Ed Liddy has only been on the job for less than two months.? Why call for his head?? Insurance companies are complex organizations where most significant things are planned a year in advance or so.

Now, so I like the AIG bailout?? No, perhaps we should have let the holding company fail, and the underlying insurance subsidiaries would have been fine.? Some CDO holders would have been hurt, but what are you doing dabbling in CDOs, anyway?? And why didn’t you question why so much of your CDO exposure was AIG guaranteed?? When only one company guarantees much of the business, that is a bad sign (underpricing).

But seeing the ruckus here, this is why it is bad for the government to own an insurance company.? All of the incentives are confused, which will lead to a greater failure, and more expense to the taxpayers.

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UPDATE 1PM 11/13/08? Adam corrects me below.? Cummings voted against the initial bailout bill, and for the final bailout bill.? Thanks for the correction, Adam.

A few thoughts

Posted on 16 January 2024 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.

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

Sorted Weekly Tweets

Posted on 4 April 2023 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

Sorted Weekly Tweets

Posted on 18 March 2023 by David Merkel

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Twitter birds run by a bank run

Financial Regulation and Policy

Dodd Frank Was Never Gutted – It Was Barely Touched https://t.co/sRapmRVUrx Interesting sidelights on how little Dodd-Frank got changed Mar 18, 2023
Banks borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week, a sign of escalated funding strains after SVB’s collapse https://t.co/xq4nCKYON5 Things are that bad… Mar 18, 2023
A federal appeals court in New York is asking the Securities and Exchange Commission to share its views on whether syndicated loans are securities https://t.co/N2xYrY6xE3 I think they are if securitized, and not otherwise. Mar 18, 2023
Let me try again. They are securities if you don’t mark them as “held to maturity.” https://t.co/HdBSJotVWc Mar 18, 2023
President Biden called on Congress to pass legislation to impose tougher penalties on bank executives who are deemed responsible for the collapse of financial institutions. https://t.co/Xq4MpXLTRr Better you should punish the Fed & the Administration for its lousy regulation Mar 17, 2023
US banking system sound but not all deposits guaranteed, Yellen says https://t.co/PpAzFR5K37 Will they finally do stress testing of bank interest rate risk to the degree that life insurers do? Mar 16, 2023
Banking in very uncertain times https://t.co/0fDg23dzHz I know few will agree with me, but we need to rethink banks doing maturity transformation. Mar 15, 2023
Gradually, Then Suddenly https://t.co/kfEJZD8csg There were a few times as an investment actuary I got to review bank interest rate risk analyses. They were comically simplistic, and wondered why the regulators allowed it. The same applied to illiquidity mismatches. Mar 15, 2023
STEVE HANKE And CALEB HOFMANN: Banks Have Now Become Gov’t-Backed Businesses — Just Look At Silicon Valley Bank https://t.co/5w2ZUmFQ9U “Under such a government-backed regime, a massive amount of moral hazard will be injected into the commercial banking system.” Mar 14, 2023
‘People full of hubris and greed take stupid risks’ https://t.co/5gFk63iQfG More hidden monetization of bad debts. Continuing to foster more moral hazard Mar 13, 2023
After Silicon Valley Bank and Signature Bank closed, here are some questions and answers to explain what is happening now https://t.co/pCyCbmtTCl The Fed further expresses its lostness via its new “Bank Term Funding Program.” The FDIC joins in by insuring some uninsured deposits. Mar 13, 2023

Odds & Ends

“A lot of corpses and there was nowhere to put them.” Authorities are overwhelmed by the record number of migrants who die trying to cross the U.S.-Mexico border. https://t.co/ZmP3gIFwwI Sad Mar 18, 2023
The CFA Institute unveiled sweeping changes to its three-level financial analyst exam in the biggest reworking since the test was introduced in 1963 https://t.co/ERmkWJ94qS Seems like a downgrade on investment knowledge to me. Mar 18, 2023
3 reasons to sleep more: avoid dementia, have great sex and become a better investor https://t.co/nh043CTvTB When research is this sloppy, you can believe anything Mar 17, 2023
They thought the artworks were in storage. Until they saw them on the news—hanging in the White House. A family art dispute worthy of “The West Wing”: https://t.co/XLaxNiPK1q Real life can be stranger than fiction. Mar 16, 2023
Check Fraud Is on the Rise. Here’s What You Can Do to Prevent It. https://t.co/UJ6g0tqIdW Good article. Avoid mailing checks. Mar 15, 2023
The surprise villain of Americans’ diets: sandwiches https://t.co/Kn4DGVRM0I Moderation is the key; also ingredient freshness and diversity Mar 15, 2023
Hospitals are tapping technology in a new push to reduce stubbornly persistent medical errors https://t.co/hEv9YaIupp This will help, but hospitals will remain a dangerous place… too many sick people, and people with compromised immune systems. Mar 15, 2023
LastPass was hacked. Columnist @nicnguyen explains why you should still use a password manager https://t.co/qCsU7vvIUP One strong pass phrase & two-factor authentication Mar 14, 2023
Stuck in the Sunbelt: In most U.S. cities, traffic is less congested than it was in 2019. In some Sunbelt cities, such as Miami, Nashville and Las Vegas, it has become worse https://t.co/gejcKye5V7 A First World problem. Welcome to the disadvantages of growth. Mar 14, 2023
After a decade of Pope Francis’s leadership, church teaching on issues once considered settled, such as homosexuality and contraception, is now hotly contested https://t.co/3WWfj8JykX In a different way, he rivals the bad popes prior to the Reformation — little is Scriptural Mar 14, 2023

Monetary Policy

This isn’t the start of a banking crisis, it’s markets waking up to the fastest rate-hike cycle since the 1980s — & the growing risk of recession https://t.co/jl4arf05a7 If the yield curve inverts, monetary policy is tight. Separation principle is wrong unless you want a crisis Mar 18, 2023
Exactly a year into its rate-raising campaign, the Fed is likely to pay a price for its late start, & SVB could be just the beginning https://t.co/bBC68G2xBY We forget Fed’s third mandate: protect the banking system. When that is threatened, inflation & unemployment don’t matter Mar 18, 2023
This is no time for the Fed to retreat on tightening https://t.co/mYsAnSWdpc Idiotic opinion from @Bloomberg. Bad things happen when you invert the yield curve, and you want to make it worse. Mar 16, 2023
For all the concern about Silicon Valley Bank, the latest CPI shows why the Fed can’t abandon its inflation fight just yet https://t.co/foyr8JdGo3 The author & Waller are wrong — the Fed always cares more about banking stability over inflation & unemployment Mar 14, 2023
Transcript: How the Federal Reserve Grew More Powerful Than Anyone Ever Imagined https://t.co/TzWD1uLLEY @tracyalloway & @TheStalwart interview @jeannasmialek — we are waiting for the day when the Fed does something nonstandard & the markets rebel… too many balls to juggle Mar 14, 2023
The Treasury market is signaling that a recession is all but inevitable, if history is any guide https://t.co/s68Zm031gu I doubt the FOMC is intelligent enough to pause their rate hikes. They envy Paul Volcker, but don’t get that it is different than 1980 — too much debt Mar 13, 2023

Companies

Elon Musk’s carmaker has been more active on his social media service since he acquired it for $44 billion https://t.co/gz1i6qJzcj Just wait until $TSLA acquires Twitter. Mar 16, 2023
Kroger and Albertsons are working on the supermarket of the future. https://t.co/rSykseLoz1 I’m not sure it matters if they merge or not. There are so many ways to shop today. Mar 16, 2023
The maker of Cheez-It crackers and Frosted Flakes is splitting its business in two—a snacks business and one for North American cereals https://t.co/P1WHVHxHnn This makes sense $K Mar 15, 2023
BuzzFeed wants its scaled-down newsroom to produce more articles in an effort to boost traffic and revenue https://t.co/lbzqKKfJLS This doesn’t make economic sense. How do you do more with fewer people? AI? Quality? Mar 15, 2023
SVB wasn’t just important to the tech and startup scenes — it was a key player in affordable housing https://t.co/n5krF0ZdJK This is just business, baby. Most journalists don’t get how affordable housing lowers corporate taxes. It’s not meritorious. Mar 14, 2023
The London Metal Exchange finds bags of stones instead of the nickel that underpinned a handful of its contracts at a warehouse in Rotterdam https://t.co/Pb7BRAU416 Probably worth doing an audit of all LME warehouse inventories Mar 18, 2023

Non-US

Pakistan says the International Monetary Fund is seeking the release of funds pledged by some third-party countries before signing an agreement under its bailout program https://t.co/mvvnFHGWw1 This usually doesn’t work Mar 18, 2023
South Africa’s newly appointed electricity minister warns that record electricity outages could get worse before they get better https://t.co/ncptD1xdxJ First clean up the corruption, and prosecute those stealing coal. Mar 18, 2023
China’s Communist Party unveiled an overhaul to strengthen its role in managing finance, social affairs and technological development https://t.co/bICBlMpdAm Will likely lead to a lack of competence if the CCP closely directs everything. There will hesitation to speak truth Mar 16, 2023
Russia was able to save abroad about a third of the $227 billion windfall earned last year from its commodity exports https://t.co/nl3RU7snQI Money frequently finds a safe home. Value is fungible, if not liquid. Mar 15, 2023
Italy’s defense minister is seeking NATO and EU’s help to deal with a new influx of migrants from north Africa he says has been sparked by Russian meddling in the region https://t.co/opQpHr02pn NATO was not designed to deal with migration issues Mar 13, 2023
North Korea fires two cruise missiles from a submarine and issues a new threat to “mercilessly punish” the US as it starts large-scale military drills with South Korea https://t.co/6vIIA09qlY Greatest possibility of accident is here Mar 13, 2023

Market Dynamics

Markets are grappling with a $600 billion question right now: Are the half-dozen banks in the spotlight outliers or a warning sign of a wider malaise? https://t.co/95LCDU832W Credit will be less available as the cost of capital has risen for banks. Mar 18, 2023
Wealthy Executives Make Millions Trading Competitors’ Stock With Remarkable Timing https://t.co/5nfo6WZIsk Fascinating that an article can write about this and not mention “mosaic theory” where a person doesn’t know for sure but has made an educated guess. Mar 16, 2023
In the Hunt for Fraud, the Red Flags Start With the Auditor https://t.co/yLyAbkm3vq Beware small auditors, and odd phrases in the audit report. Mar 14, 2023
Asset managers including Invesco and Franklin Resources added shares of SVB Financial Group in the months before the collapse of Silicon Valley Bank wiped 60% off its stock value in a single day https://t.co/XHNW4uK7w6 They are value investors. They resist trends. Mar 14, 2023
The ‘Investor Identity’: The Ultimate Driver of Returns @SSRN https://t.co/OzBVe4cCLg This is too basic of an idea to think this is something special Mar 13, 2023

Contagion

Schwab clients pulled $8.8 billion from the firm’s prime money market funds this week https://t.co/ZG5G247vZ3 So much for the commercial paper market Mar 18, 2023
Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY-Mellon, PNC Bank, State Street, Truist and U.S. Bank to make uninsured deposits totaling $30 billion into First Republic Bank https://t.co/ga6k7xBKTM Reminds me of LTCM and Wall Street Mar 16, 2023
All your modern-day bank run questions, answered https://t.co/Zc2dqsv1Ea Will we finally deal with repo and other types of short-dated margin funding as well? Have we just given permission to banks to take as much interest rate risk as they like? Mar 16, 2023
Credit Suisse bonds tumble to levels typically associated with distress https://t.co/U0PDMmnj3T It’s better to measure financial distress by looking at the dollar price curve by maturity — w/low prices & everything outside of 1 year trades at roughly the same price -> distress Mar 15, 2023
In the wake of the Silicon Valley Bank collapse, those looking for the industry’s next threat should start with commercial real estate https://t.co/tyTeNsfPwR Yes, look at banks have a lot of loans to office and retail real estate, and CMBS, etc. Mar 13, 2023

Politics & Policy

The U.S. Needs a Budget Straitjacket https://t.co/xuFqLQ1NON It’s a good idea, but it will never get enough political traction Mar 18, 2023
Trump’s tariffs couldn’t save the California olive industry https://t.co/zHcGa6TZIC In general trade wars aren’t worth fighting Mar 17, 2023
Pensions are where the money is https://t.co/MtGusEwsUG Using pension funds to fund government projects is a colossally bad idea. Mar 15, 2023
Biden’s budget is dead on arrival — and deserves to be https://t.co/qsoUZwX7i2 Both the GOP & Democrats live in separate fantasylands. Mar 14, 2023

Corporate Life

HR departments usually deliver the bad news of a layoff. What happens when they are the target? https://t.co/Phrym51dqX Given my dealings with HR in my life, hearing that they are getting laid off makes me grin. Least productive department Mar 17, 2023
Some white-collar training programs have become as selective as Ivy League universities https://t.co/dMqtiucPN1 An idea that is better than college for many young people Mar 16, 2023
Communicating through technology may seem easier than meeting in person, but it leaves us more depleted in the long run https://t.co/YEMG6m01Io We are designed to relate to each other in person. Mar 15, 2023
CEOs often stay long past their prime due to their star power, spineless boards and a lack of succession planning. https://t.co/4HhDBvV4HB Disagree. More often, effective CEOs get removed due to age. The opposite is far less common Mar 14, 2023

Artificial Intelligence

OpenAI Unveils GPT-4, Months After ChatGPT Stunned Silicon Valley https://t.co/pTJXnIojvH Interesting and affordable, but still you have to analyze whether the output is valid Mar 18, 2023
What is ChatGPT-4 and how can I use it right now? Here’s everything you need to know about OpenAI’s new release https://t.co/Szr6pUQVgS Reasonably good summary including costs Mar 15, 2023
Here’s what it takes to run the latest AI chatbots in the cloud https://t.co/n5MmtMF750 Pretty ambitious, but will it be accurate? Mar 13, 2023

Economics

US Homebuilder Sentiment Unexpectedly Rises for a Third Month https://t.co/prC3YZ8WOB But will people have enough confidence to buy them in a recession? Mar 15, 2023
Egg prices in the US fell for the first time in 5 months https://t.co/GyhGqlBU6j A welcome change Mar 14, 2023
The typical homebuyer’s monthly mortgage payment hit an all-time high of $2,563 https://t.co/JFWp16GtgO There is still pressure lowering housing prices and mortgage rates, which would bring mortgage payments down in the short run Mar 13, 2023

California

Farmers warn US strawberry prices are going to rise if disastrous California flooding continues https://t.co/3xWgX7dg7Y It’s almost like someone is messing with the weather just to hurt California. Mar 18, 2023
The unending storms pounding California are testing the state’s extensive but weakened system of levees, causing some to fail as happened last weekend in the farm town of Pajaro https://t.co/LK3DD7ABwY These were known issues. California & its counties used their taxes badly. Mar 16, 2023

French Pensions

French President Emmanuel Macron should press ahead with his plan to raise the retirement age in the face of public opposition, OECD head Mathias Cormann says https://t.co/vnlOMrKW1Z Easy for him to say. He doesn’t face the consequences Mar 18, 2023
The government of French President Emmanuel Macron invoked a special provision of France’s constitution to bypass Parliament and increase the country’s retirement age https://t.co/pFreR1Yf8K Macron is right that it is unsustainable, but he just touched the “third rail.” Mar 16, 2023

Sorted Weekly Tweets

Posted on 6 March 2023 by David Merkel

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator and Pinetools || Twitter birds read books

Capital Markets

Money managers are so eager to take advantage of high yields on shorter-term debt that they may be undervaluing an unusual risk embedded in many of the bonds https://t.co/xMsrMpPb3q I would hardly call callable bonds “quirky.” But 3NC1 bonds fit this yield curve Mar 03, 2023
US government bonds prices have been hit by inflation & economic growth fears https://t.co/oSqaVg72y6 “It’s unlikely that an economy as levered as the US economy can take real yields like that for an extended time. At some point, the expectation is that the Fed will have to cut.” Mar 03, 2023
@MebFaber My paternal grandpa bought CDs and rolled them in his retirement 1967-1991, my mom stayed invested in her stocks. Who won? My mom. Mar 03, 2023
These are some of the 1980s suburban offices that back Blackstone’s mortgage-backed securities now in default https://t.co/tnXDJX9X6I Higher rates lead to inability to refinance marginal commercial real estate debt — this time, in Finland Mar 03, 2023
The SPAC fad is ending in a pile of bankruptcies and fire sales https://t.co/KZs7UH5gRh A lack of focus on risk control, and the incentives of the sponsors meant that no one was really looking over the economics. I couldn’t see any value in it. Mar 01, 2023
Oaktree Capital moves into leveraged buyout lending with $10bn fund https://t.co/A8aRrdUcFp I respect Oaktree, but is this really the right time in the risk cycle to do this? Mar 01, 2023
The likes of Apollo and Blackstone are seizing a once-in-a-generation opportunity as Wall Street’s leveraged finance desks reel from billions of dollars in losses on mistimed loans https://t.co/5knMymTssP Increase of loanable money will compress spreads & misprice risk. Mar 01, 2023
The inherent flaws of corporate bond ETFs https://t.co/MUnliZRXyv There is a counterargument. Some market participants and academics argue that the bond ETFs more closely reflected the underlying economics of the market than did the multivariate pricing grids. Feb 28, 2023

Companies

Tesla already uses heat-pump technology in its cars. Now Elon Musk is teasing the idea of making heat pumps for homes https://t.co/F2Q90NbCCu Home heat pumps aren’t always effective. Mar 03, 2023
The financial lifeline that pulled Bed Bath & Beyond from the brink of bankruptcy is already at risk because of the retailer’s tumbling stock price https://t.co/vu667fkh9g Trying to avoid default via dilution is a ticklish business Mar 03, 2023
https://t.co/yIx3A3qmEF employees buying a home will soon be able to use their company shares as collateral, as part of a deal with mortgage lender https://t.co/bDkVjveM6J https://t.co/Ruv1VkH2P0 Someone will lose as a result of this… can’t tell who yet. Mar 03, 2023
Life insurers raised rates on policyholders. The policyholders fought back and won refunds. https://t.co/Aue1WomWPF Insurers forget that w/nonguaranteed elements they can adjust interest rates paid with impunity, but mortality charges have to be based off of experience. Mar 03, 2023
Viatris warns it will stop selling essential drugs in UK without changes to drug pricing agreement https://t.co/Jji5Mb8V9Y NHS not facing its limits. UK budget is strained. You can borrow money, but who will respect your creditworthiness? FD: + $VTRS Mar 03, 2023
Scandal at South Africa’s Eskom: the CEO and the cyanide-laced coffee https://t.co/v2SUs4GQyf Until South Africa gets rid of the corruption and crime surrounding Eskom, it will never have a stable supply of electricity Mar 02, 2023
The used car retailer is ceasing all operations and closing its headquarters in Memphis, Tennessee https://t.co/Vhdu2P5vhb Bad intermediate-term trends in used vehicle sales, prices, and default rates. Feb 28, 2023

Odds & Ends

Whiskey Fungus Fed by Jack Daniel’s Encrusts a Tennessee Town https://t.co/VI2a7DjWjm What an unusual externality. Jack Daniels should find a way to compensate those harmed, or find a way to kill the fungus. Mar 02, 2023
Will the Harm from Baltimore’s Highway to Nowhere Ever Be Repaired? https://t.co/Ikca1ej12Q Half-doing it was worse than doing it, or not doing it. We ended up with the worst of all worlds, but that’s just Baltimore. Bad political culture leads to very bad outcomes Mar 02, 2023
Some businesses have been told to remove certain adjustments in future financial statements to avoid violating rules against individually tailored metrics https://t.co/xBI9coSxSD The PCAOB could write a “principles” document to show in theory how non-GAAP earnings should work Feb 28, 2023

Railroads

Was Greece’s train crash that killed 57 people caused by more than “human error”? https://t.co/ECPZdEayAP Article goes into neglect of rail infrastructure Mar 03, 2023
Railroads aren’t the only ones that bear responsibility for making sure that train cars are fit to ferry cargo, @blsuth says. Most of them are privately owned by shippers, lessors and investors https://t.co/I0j2cy48dC Some private railcar owner might have to share in the damages Mar 03, 2023

Culture

Homicides were down in the US in 2022 and continue to fall in the biggest cities. The cause of the spike is still being determined, @foxjust says https://t.co/nryomAR3IZ It helps to factor in % of population that is male, 15-30 years old. Mar 03, 2023
Inside the tawdry, drug-fueled, violent world of America’s top life insurance salesmen https://t.co/WqToefmoUh They aren’t the top. They are just a backwater for a bunch of frauds. Aberrant companies like Globe Life $GL, that tolerate such malfeasance will lose to short-sellers Feb 28, 2023

Deflation

Rent declines in major US metro areas signal tenants may be maxed out on how much income they can devote to housing https://t.co/e588CD8iKt Good for renters & probably a good leading indicator on inflation Feb 28, 2023
Heard on the Street: Previously red-hot prices for cobalt and lithium are suddenly slumping https://t.co/dYhKcRfJRU The cure for high prices is high prices. Feb 28, 2023