Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Boldly flying in front of a stained glass window

Portfolio Management

• Sick of the ups and downs of the markets? Assets that don’t trade at all might sound tempting, but @jasonzweigwsj says beware of the pitfalls of private offerings https://t.co/AO2RWVMdVq  Don’t let the volatility of publicly traded assets scare you into buying opaque investments Jan 13, 2023
• Why investing will grow more difficult in 2023 https://t.co/nq173pzVFO  The VIX, and option volatility generally is over-followed, and there are options speculators than before, particularly with calls. 2023 is merely a sequel to 2022, already anticipating the FOMC stopping Jan 13, 2023
• Experts Spent Years ‘Angst-ing’ Over Value. In the End, the Answer Was in the Textbook. https://t.co/7gEByaPayA  Abundant liquidity from the Fed emboldened growth investors to bid prices to unsustainable valuations. Jan 11, 2023
• Barbarians Are at Grayscale’s Gates. Can They Take Over $GBTC? https://t.co/pKLMtrt4go  This situation may be hopeless, so learn from the broader principle: be careful before investing in anything where it is extra difficult to vote out management. Jan 10, 2023
• 3 Ways to Measure Management Integrity https://t.co/ft2IfzGblW  Integrity is important because if a management team is unethical toward stakeholders, in a tough situation, they will cheat shareholders as well Jan 10, 2023
• How often do you need to rebalance your portfolio? The answer may surprise you https://t.co/Q21GMn5zLj  Rewards for rebalancing have declined because risky asset classes have become more correlated over time, as diversification has become more broad Jan 10, 2023
• Brokers that offer traders the chance to buy less than a full share of a stock are set to face more scrutiny from a key industry watchdog https://t.co/NvfIUAnFyE  These are worthy of scrutiny, but the amounts involved are small potatoes, for the most part. Jan 10, 2023
• The California Public Employees’ Retirement System is making a $1Bn wager that small private equity firms can boost the pension giant’s returns and clout https://t.co/NGKkU6tnmD  CALPERS has a knack for being late… adding money to two small private equity shops now? #pe_glut Jan 10, 2023
• Monte Carlo Failures Aren’t Plane Crashes https://t.co/AenaX40s1k  Attempts to distinguish between meeting needs and wants. Does not take into account, as far as I can see: quasi-MC, return assumptions, variances, correlation, mean-reversion, momentum, extreme events, etc. Jan 09, 2023
• Estimating Future Stock Returns, September 2022 Update https://t.co/EwIuzWnCDL  My but future returns are limited. 3.2%/year over the next 10 years. Does that sound attractive? Jan 08, 2023
• A look back at the wildest financial predictions from the everything bubble https://t.co/oOIPcQ7Se4  Impossible to have an “everything bubble.” That said, stocks, housing, and crypto are still overvalued. Jan 08, 2023

Culture

• US birth rates are at record lows – even though the number of kids most Americans say they want has held steady https://t.co/Nz026ECbUX  There is no mystery here. If you don’t have children while young, odds decrease that you will have children, and a higher number of them. Jan 14, 2023
• The Half-Madness of Prince Harry by @peggynoonannyc https://t.co/l34TqzQmK9  Seems like a PR “scorched earth policy.” Why should we care about the English monarchy, including Harry? Is he trying to destroy something because he cannot have it himself? #envy Jan 13, 2023
• The new conservative Israeli government means Jewish activists have more support for praying at the Temple Mount. https://t.co/Cbxx8xqrNq  Playing with dynamite Jan 12, 2023
• Why Italians have become the most common foreign nationality in London https://t.co/SCsAskWoS2  Culture matters. There is more opportunity in London than much of Italy Jan 10, 2023
• Xi Jinping’s plan to reset China’s economy and win back friends https://t.co/ezTQgj9u62  It’s rare to see someone have severe opinions “spin on a dime.” These efforts are meant to end the protests and regain some Western support. Xi will revert when he finds it advantageous Jan 10, 2023
• The Engineers Are Bloggers Now https://t.co/j9DU5Ot69p  Anytime you can get good writers in STEM fields to break down the complexity, it is a treat. Management appreciates those who can take a tough subject and explain it to them. Jan 10, 2023
• CFP? CSLP? There is an alphabet soup of financial-adviser credentials https://t.co/reycid43Lm  Credentialing is overdone. The only ones who directly benefit are those who create the credentials. This will eventually fade, aside from credentials that are genuinely hard to obtain Jan 09, 2023
• Is it time to kill calculus? https://t.co/7vmGjNozdI  Maybe, and it might be good to replace geometry with analytic geometry, but adding data science and probability will leave most STEM majors underprepared for college math. Jan 08, 2023
• Also, the article is wrong when it states that current math pedagogy favors boys over girls. It is the opposite, except in the top decile. This proposal would not make things better; it would create new problems. Math pedagogy peaked in the 1950s and has gone down since https://t.co/qxQl3tnt2z  Jan 08, 2023

Companies

• Bed Bath & Beyond continued to surge on Thursday after the company’s bankruptcy warning reignited interest from retail traders https://t.co/EeW4tHeUdT  Time for a secondary offering of $BBBY stock, or quietly do a PIPE. Or a rights offering w/some warrants, or a junior convertible Jan 12, 2023
• With $200 billion already squandered and Tesla in sharp decline, it’s possible Elon Musk will never be the world’s richest person again https://t.co/VPqvOEMAOk  Could Elon Musk lose all of his $TSLA stock? Dubious, but losing almost all of it is quite possible. Jan 11, 2023
• A swing and a miss https://t.co/Iva3XAYNIT  A commercial real estate pro comments on Univ. CA’s recent transaction In BREIT. His conclusion: even with the discount, they would have gotten a better deal in the public REIT markets Jan 10, 2023
• Pizza Robot Company Stellar Draws Engineers From SpaceX https://t.co/ZcxP4vAI08  If it can get the cost of a pizza down with reasonable quality, this could be interesting on a mass market basis. Jan 10, 2023
• Ukrainians accounted for 45% of all the new foreign companies that set up shop in Poland last year, according to a report https://t.co/lhFlsqYkJn  Will be interesting to see how Polish/Ukrainian relations evolve. Jan 10, 2023
• Warren Buffett’s excellent Japanese adventure will probably keep pumping out profits even as oil and gas prices slip from their highs, writes @JavierBlas https://t.co/wZrceogkZY  Another small win for Buffett Jan 09, 2023
• The US Supreme Court turned away four appeals by Fannie Mae and Freddie Mac shareholders who wanted compensation after the Treasury collected more than $100Bn in profit from the GSEs https://t.co/Uud0coWGJO  The common stock should have been canceled after the bailout Jan 09, 2023

Central Banking

• Transcript: Why Banks Are Suddenly Borrowing From the Fed’s Discount Window https://t.co/3YUSj4Jnhv  Long, but valuable if you want to learn how the Fed’s discount windows, and other liquidity facilities work Jan 13, 2023
• Peru extended its biggest-ever phase of monetary tightening Thursday to curb a spike in inflation that is aggravated by anti-government protests https://t.co/gwJ82CTznj  When no foreigners have to buy your debt, in order to aid exporters, inflation can get out of control quickly Jan 13, 2023
• The Bank of Korea raised its benchmark interest rate on Friday in what could be the final act of its 18-month tightening cycle https://t.co/5K5LrbIsK1  Yield curve inverted, seemingly stopping. Jan 13, 2023
• More investors are putting greater focus on services inflation and labor-market data as they try to grasp a more complex inflation picture https://t.co/6UsJ8f4SY6  Leaving out anything skews the inflation picture. But ignore the Phillips curve. Wages have low impact on prices Jan 11, 2023
• Jerome Powell said the FOMC is strongly committed to lowering inflation even though interest-rate increases could fuel political blowback https://t.co/BaPhhEtJM7  FOMC drives through the rearview mirror. Should use forward looking indicators even if at odds w/present conditions Jan 10, 2023
• The Fed is not a ‘climate-policy maker,’ Powell says https://t.co/fHymyqQHI0  Well said, stick to your statutory mandates — if you can actually achieve them (Tsst… the Phillips Curve was a post-WWII statutory anomaly. It does not exist when there is global trade) Jan 10, 2023

Auto Lending

• Used-vehicle volume hits lowest mark in nearly a decade https://t.co/Jwi4SzmNaq  Delinquencies are rising, & as there are more new cars, there will be more trade-ins. Used car prices should continue to fall. Then expectations effect as dealers pay less for trade-ins as lots fill Jan 14, 2023
• Inventory crisis dragged auto sales to a decade low in 2022 https://t.co/Kq8MJthZNm  Oversupply of used cars coming as many trade in for new cars Jan 13, 2023
• Growing new car supplies means used car prices are starting to drop https://t.co/6VEB0oOfkF  And the prices will likely fall further, as interest rates are higher, and credit is tighter. Jan 12, 2023
• Used car prices post biggest drop ever as new luxury car sales boom https://t.co/STXfvk1Emx  Conspicuous consumption among the wealthy Jan 11, 2023
• It’s Not Just a Car-Loan Crisis https://t.co/t6W4ZDo923  The author is partially right, in that many mortgages and car loans are now inverted as asset prices fall, as the FOMC has raised rates. But car loans are shorter, which makes inversion more severe. Defaults will be greater Jan 11, 2023
• Why worries over subprime auto bonds might be only getting started https://t.co/foKwjdA7Og  More reasons why overprovision of credit in auto finance will either led to 1) more defaults, or, 2) reduction in loan options if $CACC has to pull back –> falling used car prices Jan 08, 2023

Crypto

• Sam Bankman-Fried should be treated as innocent until proven guilty, Ackman says https://t.co/ASTbvVsyy7  A worthy thought. Spitzer won when he got people to compromise. Remember that the grand majority of cases that went to trial were won by the defendants vs Spitzer in the 2000s Jan 13, 2023
• Samsung Asset Management indicated the firm could consider starting a spot Bitcoin ETF in Hong Kong if the city allows such products https://t.co/xaiqRnevBB  Enabling people to lose more money while leveraged, and perhaps unleveraged. Jan 13, 2023
• Mike Novogratz sounds off on Sam Bankman-Fried and Barry Silbert: “The toxic masculine side of me would like to punch them both in the jaw.” https://t.co/z21VhMAhBj  A crazy dreamer — all crypto is a Ponzi at some level. Jan 12, 2023
• FTX advisers have found more than $5 billion in cash or crypto assets that it may be able to sell to help repay creditors, a lawyer for the company said https://t.co/M5UiEHUhnn  Like Madoff, claimants won’t get nothing, but they won’t get paid in full. Jan 11, 2023
• Coinbase Crypto Exchange to Cut Nearly 1,000 Jobs https://t.co/uFKd747eM0  If you are laying off people, you are likely not a growth company. With $COIN estimate cash burn rate vs cash available to the holding company Jan 10, 2023

Credit Issues

• A deal frenzy that included Elon Musk’s Twitter takeover has left Wall Street banks struggling to revive the lucrative business of backing big mergers https://t.co/X9QhKAolI8  Take your losses & be done. The bear phase of the credit cycle lasts well into the FOMC’s loosening cycle Jan 13, 2023
• To many young consumers, zero-interest layaway plans such as Afterpay mean free money, and the idea of paying down daily indulgences doesn’t faze them. A report on the problem with Gen Z’s love of “buy now, pay later” programs https://t.co/JLg75QPM3q  Credit losses emerging Jan 12, 2023
• Japanese Internet Firm Rakuten Selling $200 Million Bond https://t.co/VjsYLTR3Cz  Interesting that some junk credits are also bringing deals. Jan 10, 2023
• Europe’s Bond Sales Top $130 Billion in Record Time https://t.co/aYljLxYqkr  Interesting to see this level of borrowing… also the $20B Saudi Arabia deal. Many Non-US entities borrowing long in USD Jan 10, 2023

Rain in California

• Beach towns such as Capitola, where a wharf was torn in half, have borne much of the brunt from California’s recent series of torrential rainstorms https://t.co/ejqXBkHZbA  If you build on the coast of the ocean, or next to a large river, you are asking for trouble. Jan 13, 2023
• EXPLAINER: Storms put California levees to the test https://t.co/fjndwqBvbI  I used to live in Davis, CA. The levee systems of California are crucial for avoiding flooding. But responsibility for the levee is dispersed in public and private hands. Complex and underfunded Jan 10, 2023
• California faces more drenching rain, as concerns about drought have been replaced by fears of flooding that’s killed at least 14 people https://t.co/A2ZqSxJlBg  Excellent news for farmers and skiers. No drought in 2023. Can we get this for the Mississippi river basin? Jan 10, 2023

Science

• Why Not Mars https://t.co/cYPeEfG5Ta  I don’t favor going to Mars, unless it is done with private money. And if we go there we should ignore the international treaty requiring that we don’t contaminate Mars with Earth organisms. Impossible to avoid. Jan 14, 2023
• A climate startup removes carbon from open air in a first for the industry, potentially launching an industry to address climate change https://t.co/NDpLZUTJIv  Looks like a promising technology, if CO2 is indeed a pollutant. Jan 13, 2023
• Why ChatGPT may be the most human form of A.I. yet: It produces informed BS https://t.co/wyzVlZoSrz  I’ve been playing around with the chat utility at https://t.co/ATiFIuhEjl.  It’s not always right, but if you point it to the right resources, it learns. Jan 13, 2023

Food

• Alchemist: Is this the world’s most creative restaurant? https://t.co/suamcigX9z  Odd, not creative, I will pass on this even if one like it is nearby. Jan 14, 2023
• This new, eco-friendly ‘sugar’ has half the calories of cane sugar: ‘A world-changing ingredient’ https://t.co/DYZgg5PiVe With so many people skeptical about additives, drugs, vaccines, why is there quick adoption of new ‘sugars?’ Jan 14, 2023
• A US government agency will move to regulate gas stoves as new research links them to childhood asthma. “This is a hidden hazard,” said an official https://t.co/limmfmgZSj  If this were true, we would have known it long before. Gas offers much better control in cooking. Jan 09, 2023

Energy

• The Edge of Productivity https://t.co/VZE0RrV3nz  Interesting article on energy use trends, but way too bullish on the impact of AI for productivity. Jan 14, 2023
• The US is backing a Nevada lithium project in an effort to create its own supply chain of the metal. https://t.co/p1w4J57hdT  If it’s that good of an idea, why do you need public financing? National security? Jan 13, 2023

Odds & Ends

• A case before the Supreme Court challenging the liability shield protecting websites such as YouTube and Facebook could “upend the internet,” Google said in a court filing https://t.co/xyLPZIveIL  The internet would survive, but profitability of social media would decline. Jan 13, 2023
• “It would be great if the companies would switch away from email and start using other services,” one executive said, “but people don’t change.” https://t.co/w0q4gGOsuU  Don’t trust email. Skepticism is warranted w/those you don’t know, & those you do know when it looks weird Jan 13, 2023
• The West Coast, for the past decade a leader in the housing boom, is stumbling, while eastern and southern cities are holding up better https://t.co/CHQluSWy2F  Places where the boom was no so large, or where there have been many migrating to the area. Jan 13, 2023
• Private jet business booms despite commercial airline revival https://t.co/HG8PosSnZ4  ‘“Inflation never affected the 1 per cent,” said Kevin Singh, president of Icarus Jet, a private jet broker.’ Convenience, flexibility, and not having to go through security are the keys. Jan 10, 2023
• President Biden asked Treasury Secretary Janet Yellen to stay in her post, and she agreed, a White House official said https://t.co/GnR4FrlRAl  This should not be news Jan 10, 2023
• Unmarried Women No Longer Pay a Financial Penalty in Retirement https://t.co/caAhCPHrN8  Accurate title would be: Middle Income Women Do Badly in Retirement, Married or Not Jan 10, 2023
• Brazilian police clashed with supporters of former President Jair Bolsonaro in the capital of Brasilia on Sunday https://t.co/zLbWuoW9IP  There was no possibility that they could overthrow Lula. Jan 09, 2023

Picture Credit: Aleph Blog || I know this is late, but still, here it is…

At September 30th, 2022, the S&P 500 was priced to return 4.14%/year over the next ten years. Given the rally since then, that return has shrunk to 3.20%/year. Does that sound attractive? It is lower than the yield on the 10-year T-note, and lower than current inflation (which is falling like a stone, don’t tell the geniuses at the FOMC).

And you could be adventurous, as I was when I was a corporate bond manager (2001-2003) buying long single-A and BBB/Baa bonds. Even at 10 year maturities, you can get well over 5% for sound credits.

The stock market needs to fall around 20% to be at parity with lower-rated investment grade bonds. This is not pleasant news, but given the media drumbeat of:

Stocks always beat bonds! Stocks always beat bonds! Stocks always beat bonds! Stocks always beat bonds! Stocks always beat bonds!

It needs to be said that it is not always true. It wasn’t true in the 2000s decade. It wasn’t true in the Great Depression.

I’m keeping this short this evening. The US corporate bond market is still more attractive than the US stock market. If the S&P 500 drops below 3100, with no changes in interest rates, then the stock market will be a better buy.

So be ready for the stock market to fall further after the Fed stops tightening, when the recession ensues, and buy stocks amid the panic.

PS — when the tech giants are firing people, that is a sign that they are no longer growth stocks.

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Even logos need a vacation every now and then

Investing

• Hedge funds gave Discord, Stripe, SpaceX and other startups billions. A Bloomberg News analysis shows what they may be worth https://t.co/vBOZSoqyIJ  Far better to write them down, so as to keep an air of honesty. Jan 07, 2023
• Berkshire Hathaway Could Face a Big Tax Hit if the Bull Market Resumes https://t.co/TIZsdztH9T  This is a proposal that I support: tax the change in unrealized capital gains. In the first year, tax unrealized capital gains. For private equity, an EBITDA tax Jan 07, 2023
• ARK’s Cathie Wood Isn’t Backing Down. She Explains Exactly Why. https://t.co/7hsvVaV8Ea  An amateur who got lucky for a while, who throws money at companies that generally can’t produce positive free cash flow to reward shareholders. Jan 07, 2023
• How private markets became an escape from reality https://t.co/ouOZMxC7JT  ‘Investor Cliff Asness wrote recently of the “mind blowing” possibility that investors now knowingly accept lower returns “for the privilege of not being told the prices”.’ Jan 07, 2023
• Silicon Valley staff rush to offload start-up shares as valuations plummet https://t.co/T6hxfFBzJt  Watch for more deals where a big investor buys in at the last round price, but with additional goodies atached. Jan 07, 2023
• The Fed needs to jack rates up by 10% right now https://t.co/DbWnztkWNw  “But we’re sure that the good folk at Andreessen Horowitz, Sequoia and Founders Fund have done exhaustive due diligence and been disciplined in their capital allocation.” Jan 07, 2023
• A tried-and-true investing strategy just turned in one of its worst years ever. But is the strategy dead? Not even close, says @jasonzweigwsj. https://t.co/jWP36ra4DM  80/20 is best for the long haul. 60/40 does about as well as 100/0 but with less volatility Jan 06, 2023
• If you receive a windfall, should you pay down debt or save for the future? https://t.co/X82JnL6Wp8  It may be a good idea if you have a long time horizon. Valuations are *still* not cheap yet. There is more downside likely after the FOMC stops raising rates. Jan 05, 2023

Politics

• Kevin McCarthy’s torturous bid for House speaker exemplifies the dysfunctional state of the Republican Party heading into the 2024 presidential race https://t.co/X3BIIk5cRq  Be bold. Want centrist politics? Ban political parties and primaries. Jan 07, 2023
• South Carolina’s congressional maps will be redrawn after a federal court ruled that the House district lines intentionally split Black neighborhoods https://t.co/iePGQNglOT  District boundaries should be chosen to minimize the length of internal boundaries Jan 06, 2023
• Why can’t Kevin McCarthy get the votes he needs, and what happens until the standoff is resolved? Here are answers https://t.co/eExsSCCvpZ  Well, who knows? Maybe nothing gets done by Congress, and the government shuts down. The Russians invade Alaska, & the Chinese take Taiwan Jan 05, 2023
• Representatives Matt Gaetz and Andy Harris, and even a freshman GOP House member, stand to gain from their votes for Kevin McCarthy for speaker https://t.co/QXtkZIUXJD  Somewhat piggish here, problem of a small majority… perhaps the “Freedom Caucus” could do a deal with the Dems Jan 04, 2023
• Directors who often have little financial expertise are looking after the retirement funds of US public servants. They’re proving to be no match for a system that’s exploded in size and complexity https://t.co/vXZiUcPc33  We do our best to keep investment expertise off the boards. Jan 04, 2023
• I applied to serve on the Maryland & Howard County Pension Boards as a citizen representative. I am more than a generalist investor; I am an investment actuary. I understand it all. Of course they didn’t choose me. Politics. https://t.co/9FP9JeS9vp  Jan 04, 2023

Science

• The phenomenon behind California’s double-whammy drought and storms has a name: “hydroclimate whiplash” https://t.co/Z8yUafaHwu  Climate change is getting stretched pretty thin to explain every unusual bit of weather. Jan 08, 2023
• US Army’s Flow Battery Could Change Military Power https://t.co/malEss9iyc  If this actually works, it would be significant for intermittent power sources Jan 07, 2023
• Improved Solid-State Batteries for Electric Vehicles Are On The Way https://t.co/gkKCcEKDIt  Still has to be developed to scale, but this could be promising Jan 07, 2023
• San Francisco is in the path of one of the worst rainstorms yet in a season that has likely left behind $1 billion in damages and losses across California https://t.co/GSDxXdfpTe  At least this will good for the farmers Jan 07, 2023
• Meet Tree Energy Solutions, a green-hydrogen startup looking to provide low-emission fuels to European companies amid the energy crisis https://t.co/8JCKHUqBe3  This does not make sense. Most projects in this vein are trying to turn NG into hydrogen. Jan 04, 2023
• Is my study useless? Why researchers need methodological review boards https://t.co/nDKAEgFS2s  It would also help if they reviewed the data & statistical analysis in advance, so that it will be “set in stone” and not arbitrarily modified to get a “significant” result Jan 03, 2023

Companies

• How Amazon grew an awkward side project into AWS, a behemoth that’s now 4 times bigger than its original shopping business https://t.co/eAg7FtrYkh  Long read, worth it. How an internal project to standardize $AMZN programming became a business for others needing computer services Jan 07, 2023
• Why Banks Are Losing the War Against Fintechs https://t.co/6NUII7cwNH  This article is really about cultural differences between bankers and programmers. It would pay the banks to teach programmers about banking, then listen to their suggestions once they have learned Jan 05, 2023
• Southwest’s Biggest Mistake Was Forgetting Its Own Culture https://t.co/6yHLAXawM6  This was coming for a while. On a $LUV flight over a year ago, the crew was openly complaining about the long hours and unpredictability of scheduling. Jan 04, 2023
• About that $4bn BREIT deal https://t.co/KoBvPE6FCj  You have an opportunity to exit the troubled BREIT. Take the exit, and feed the losses to $BX, the University of CA, and those who are too slow to act. Jan 04, 2023
• Bank regulators say holding cryptocurrencies is likely inconsistent with safe banking practices https://t.co/lt7wvzuZwv  “Regulators say holding cryptocurrencies is likely inconsistent with safe banking practices.” Keep the two systems separate. Same way we don’t allow FX mismatch Jan 04, 2023

Economics

• What makes the least sense in Chinese economic policy is trying to maintain residential real estate prices at such high levels, virtually requiring huge amounts of debt to support the prices. Housing is important, but it can’t truly be 70% of the assets of the nation. #3redlines Jan 07, 2023
• The Fed needs to stop raising rates https://t.co/eFgO1Oc1ti  I used to accuse Bill Gross of “talking his book” when he was at PIMCO, but in this case, I think he hit the nail on the head. Jan 04, 2023
• Japan’s new benchmark 10-year note brings a fresh headache for the nation’s central bank in its battle against bond bears https://t.co/GtnWVv45eF  Japan risks a situation where something may break. Better to let the 10-yr float. Jan 06, 2023

Financing

• Wall Street wants capital rules eased to unblock $22tn Treasury market https://t.co/VyNaOGhrr7  This could make sense. Treasuries and cash reserves hit the supplemental leverage ratios disproportionate to their actual riskiness Jan 07, 2023
• The deal was unusual because of its timing and purpose. Most banks and borrowers were holding off on bringing new deals after a rocky year https://t.co/lYIn3LYbPU  Dividend deals are usually bad investments. Do they think the credit bear cycle is over? Jan 06, 2023
• “There’s a durable arbitrage built into AAA CLOs. There’s a regulatory arbitrage,” said Sycamore Tree’s Okada. “You’re floating rate, you’re AAA. I’m pounding the table on that trade.” https://t.co/Bpp20OM083  And that will work until it doesn’t Jan 06, 2023

Odds & Ends

• If you’re looking to earn some extra income, these are the most profitable side hustles https://t.co/A3VDHLIjVu  Useful article Jan 07, 2023
• Extra pharmacy certification requirements put an unnecessary stigma on abortion medication https://t.co/hPZ4FkO6Tx  Yes, “safe” medicine that kills an unborn child Jan 06, 2023
• Walgreens plans to seek certification to dispense pills that can induce an abortion, part of a new program through the US FDA to broaden access to the medication https://t.co/VnIunu2BfK  I will be selling my CVS shares. FD: + $CVS Jan 06, 2023
• The Patriarch Behind Vladimir Putin by @tunkuv https://t.co/hltSakx8fR  This is believable, given the long-term fractious relationship between the Russian and Ukrainian Orthodox Churches. But both are empty ritualism. Jan 04, 2023
• Pope Francis has been the leader of the Catholic Church for almost 10 years, but he has only been the sole pope in the Vatican since Saturday https://t.co/TxW06Raa9c  Bergoglio is a relativist, similar to a liberal protestant with few absolutes Jan 04, 2023
• The moves partly stem from a growing consensus among many who work in education that disruptive behavior often reflects underlying mental-health issues such as anxiety, depression and trauma https://t.co/KRbLENCvxW  In-school suspension is effective. So is expulsion. Jan 04, 2023
• Sam Bankman-Fried has said Alameda prospered until it was tripped up in a crypto crash. Its troubles were much deeper than that. https://t.co/7JrH5fxqnH  Hindsight is 20-20, even for things with a lot of red flags. Jan 04, 2023

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || I’m giving this another try

Dear Readers,

I know I don’t write as much as I used to. I typically write when I motivated by a given topic, and that’s just not coming as much to me now. But I still tweet on Twitter. I did sorted weekly tweets from 2012 to 2014, then I stopped tweeting as much for a while, and so discontinued them.

I can think of three good reasons to try this again:

1. Readers can see the most interesting articles that I have been reading, and can see some of my thoughts about them.
2. It may give me an idea for a blog post when I see them categorized.
3. In the past, some people have asked me to try this again

So, here is the first episode of this go-round of “Sorted Weekly Tweets.”

Credit Trends

• The worst year for equity bulls since 2008 will also be remembered as one when the predominant investment strategies veered from one another by the most in 21 years https://t.co/BWG0OaRZok  2022 key: “immunize yourself from interest-rate sensitivity.” 2023 key: reduce credit risk Dec 31, 2022
• Despite performance, corporate issues OneMain Financial to raise $460.5 million https://t.co/wszreQ7DXr  Though terms of the securitization offer more structural protection than prior, underlying asset quality looks poor. Credit deterioration on the low end. Dec 31, 2022
• Predictions for 2023: Car Prices Fall as Dealers Suffer https://t.co/glne5aK761  There are a lot of good charts and analysis here. Should be good deals on used cars around mid-year 2023, if you have cash… Dec 31, 2022
• Consumer ABS experts: Keep an eye on employment amid rate policy, inflation https://t.co/cCv1vsPkPP  Early signs of weakness on the low end of credit Dec 31, 2022
• Multiple stress points are emerging in credit markets after years of excess. With cheap money becoming a thing of the past, this may just be the start https://t.co/SqGbFUu5wR  Recently issued loans, with weak covenants, became the financing of choice for many weak companies Dec 28, 2022
• Still one place to get a good deal on an auto loan: Credit unions, which have been offering some of the lowest rates around, undercutting banks and other lenders https://t.co/kDiPkbSfPy  They don’t pay taxes; gives more flexibility. Can cut deposit interest if defaults spike Dec 28, 2022

Politics

• Trump’s tax returns released, launching fresh scrutiny of his finances https://t.co/q9B3s71DTG  If it becomes a question of fraud for assets Trump wrote down in the past to generate losses, his tax returns prior to the seven-year limit could be audited also, particularly 2009. Dec 30, 2022
• Brazil President-elect Luiz Inacio Lula da Silva has selected a senator and former Petrobras official to lead the country’s state-controlled oil giant https://t.co/Bc9PRFoPDi  Sounds like a disaster that will come back to bite Lula. Another unforced error, like Europe & China Dec 30, 2022
• Weeks before the government approved a wind farm off Rhode Island, US scientists warned it could jeopardize the area’s iconic cod https://t.co/Ent7FU1qFK  Environmentalists arguing with environmentalists Dec 30, 2022
• 10 Ways Secure 2.0, Part of Spending Bill, Changes Retirement Planning https://t.co/45p2tW2xzT  Marginal ideas at best Dec 27, 2022
• Going Boldly: The Retirement Savings for Americans Act 2022 https://t.co/HkIDtzSrlq  This will do less good than most imagine. Many poor people need the money to live now. They will not use this. Dec 27, 2022
• Inside TurboTax’s 20-Year Fight to Stop Americans From Filing Their Taxes for Free https://t.co/Fa0tWhAzNA  & Intuit spends millions lobbying amid accusations of deceptive TurboTax advertising https://t.co/UZ378WSCa7  $INTU is annoying, especially paying annually for Quicken Dec 24, 2022
• Intuit collects as much as $1.6Bn in annual income from its TurboTax products, and ProPublica & OpenSecrets find that $INTU has spent >$10Mn lobbying Congress to keep the IRS from simplifying taxes (which would undercut the need to purchase TurboTax). https://t.co/iLHl9qJqk3  Dec 24, 2022
• The Sordid Saga of Hunter Biden’s Laptop https://t.co/VeY2ynEWSW  “The most invasive data breach imaginable is a political scandal Democrats can’t just wish away.” Very long, and sadly, we will likely hear a lot more about this. Dec 24, 2022
• The Surreal Case of a C.I.A. Hacker’s Revenge https://t.co/g6Z8kIovAN  This is indeed surreal, and quite long. Who watches over the watchers? Dec 24, 2022
• I golfed a full course of congressional districts in 84 strokes – 11 strokes over par! Tee off in @washingtonpost’s Gerrymander Invitational: https://t.co/pbmw1nZSvv  I live in MD’s 3rd district, likely the most gerrymandered in the country. It is hole 9, par 26 on this course Dec 24, 2022
• “Isn’t administrative complexity a problem for the government to solve, not a bunch of unelected do-gooders?” @AnnieLowrey writes: https://t.co/N8T8Q6OUIy  Cool idea. I am concerned that in dealing with the government, poor people are disadvantaged by legal & regulatory complexity Dec 24, 2022

Cryptocurrencies

• Opportunities Around GBTC – Valkyrie https://t.co/fkPmSuOPzR  Why should Grayscale voluntarily give up its profits? Dec 30, 2022
• Has Sam Bankman-Fried finally managed to make accounting class sexy? https://t.co/miOiI5y865  No, but he has shown its necessity. Also, the “run on the bank” at FTX would have happened even if CZ hadn’t taken action. That said, when will Binance have its run? Dec 30, 2022
• MicroStrategy shares hit the lowest since 2020 after the enterprise-software firm, the largest corporate buyer of Bitcoin, disclosed its first ever sale of the token https://t.co/XVVczgL629  $MSTR is just levered Bitcoin. Goes broke in 2025 as 2028 secured notes accelerate. Dec 30, 2022
• Criminal charges against a trader who swiped $100M from a DeFi platform show that even as crypto remains largely unregulated, it offers no shield against prosecution over alleged fraud https://t.co/gUtpv4I4fF  I think the plaintiffs have the better argument. Dec 30, 2022

Markets

• Cash holdings at U.S. state government pension funds dropped to the lowest level since the financial crisis https://t.co/xBk8rGpJhh  Many of these funds are desperate: looking for higher returns to bail out the underfunding, taking on risks they don’t grasp including illiquidity Dec 30, 2022
• Tech-heavy hedge funds had a banner year in 2020, but that was the last of the good times https://t.co/zXBkkzK66a  In general long-only management is less risky than hedge funds, and over a full market cycle provide better returns Dec 30, 2022
• After the worst year for global stocks in more than a decade, & a rout in bonds that’s unmatched this century, some investors aren’t going to take anything for granted in 2023 https://t.co/4i6ExvYesP  In the past, few took account of war, contagion, expropriation, sovereign crises Dec 28, 2022
• Home prices fell 0.5% in October compared with the previous month, as higher mortgage interest rates continue to weigh on home-buying demand https://t.co/cUEtw52Ppd  Leading indicator on inflation and growth Dec 28, 2022

Stocks

• Wall Street’s best and brightest got inflation all wrong this year, leaving them & their clients exposed to the full brunt of an epic market collapse. Now, they have to adjust to a new era https://t.co/7Y4AcgaLWd  Stock valuations are still top decile by the equity share model Dec 30, 2022
• US automobile industry; Final Sales of 2022 and Trends for 2023 https://t.co/p2THEFWRXZ  Of the top 10 new car sellers: 1) 9 had their stock price fall. Exception: Subaru. 2) 8 sold fewer cars than 2021. Exceptions: Tesla and GM. In general, I prefer owning auto part makers. Dec 30, 2022
• @MikePTraffic @retheauditors As a value investor, I could not see how Border’s would survive vs $AMZN. It was weakly capitalized, and had to carry a lot of inventory. I agree with your point about management loving their business, and understanding the economics thereof. There is no generic business. Dec 30, 2022
• Used Tesla prices are plummeting four times faster than other cars https://t.co/GEKnx91fIg  Calling Elon Musk! Time to focus on your main business! Dec 30, 2022
• VanEck is the latest asset manager to liquidate Russia ETFs nearly a year into Vladimir Putin’s invasion of Ukraine https://t.co/44trdYkzRf  Isn’t it: 1) Convert ADRs to local Russian shares 2) Deposit Russian shares with a Russian broker 3) Sell them on a Russian exchange? Dec 29, 2022
• 4) Convert rubles to dollars. 5) Wire dollars to the custodial account in the US. 6) Distribute pro-rata to shareholders https://t.co/De3NJTMy2y  Dec 30, 2022
• Silicon Valley staff rush to offload start-up shares as valuations plummet https://t.co/T6hxfFB1TV  Too much money chased too little profit in the past. Now liquidity is needed. Who will provide it, and at what price? Dec 29, 2022

Economics

• After a turbulent year, signs are emerging that wage inequality may be starting to reverse https://t.co/lTdjd4aOVi  Unlikely. Technology aids those who are intelligent, and doesn’t help those who aren’t. Dec 30, 2022
• David A. Shaywitz reviews “Escape From Model Land” by Erica Thompson https://t.co/522DtNmOMl  Send a copy to the Fed Dec 29, 2022
• We Aren’t Ready for a Financial Crisis https://t.co/u5to9iTDqY  We grew faster when we had less debt, public and private, and ran balanced budgets. Dec 24, 2022

Central Banking

• The central bank horror story https://t.co/HBpCjxDEWJ  May not be so bad. Swaps in aggregate net to zero, but there are winners & losers. If the losers run out of money while margining, the winners may lose as well. Dec 30, 2022
• The Bank of Japan announced a third day of unscheduled bond purchases as it fights back against speculation it’s moving toward ending its super-accommodative monetary policy https://t.co/TFZ322s70j  Rippling across global bond markets, creating lots of Yen deposit liabilities Dec 30, 2022
• The long Australian boom shielded the central bank. That’s changing, for the better https://t.co/IG9Yba411h  Just set up a currency board, and end your misery. Dec 30, 2022
• Global debt markets extended an end-of year selloff Wednesday, prompting additional bond purchases from the Bank of Japan https://t.co/9TEV4yBfWO  Say goodbye to negative yields. Hope we never go there again. Dec 29, 2022

China

• Rural residents worry for elderly as COVID rips across China https://t.co/m38cO0ORAO It would have been better if the CCP had given two months warning so people could get vaccinated prior to dropping the COVID zero policy. But the CCP couldn’t be thoughtful Dec 30, 2022
• China’s unprecedented assault on its housing market has left would-be home buyers asking if it was all worth it https://t.co/BJyH7vsZvf  The real estate situation in China is even worse than Japan’s in 1989. Crackup, or three lost decades? Dec 29, 2022
• A growing number of affluent Chinese are coming to Japan to live, in an indication of social and political tensions back home https://t.co/MHst0tbhLe  I find this fascinating given the past antipathy between Chinese & Japanese. Dec 28, 2022

Global

• Billionaire Adani Says India Will Add $1 Trillion to GDP Every 12-18 Months https://t.co/FAbMGwkyV5  Not likely. When this overindebted conglomerateur flames out it will be stunning. Dec 29, 2022
• Putin Wants Fealty, and He’s Found It in Africa https://t.co/rdCmko1vD7  The Central African Republic has always been among the most corrupt nations in the world. Should this be surprising? Dec 28, 2022
• In Record Numbers, Venezuelans Risk a Deadly Trek to the U.S. Border https://t.co/bgoGTQNV9a  This is dated, but I had not heard about this. You have to be pretty desperate to take on a trip like this. Thanks a lot, Chavez & Maduro, for ruining Venezuela. Dec 24, 2022

Science

• Unlike Covid shots, vaccines for cancer need to be customized for each individual, writes @lisamjarvis https://t.co/rDIed7BhJn Looks promising, but there is a long way to go. $MRK $MRNA FD: + $MRK for clients and me Dec 31, 2022
• Our investigation traces plastic recycling from US households to a city in India where the items are burnt for energy https://t.co/jdtBUxjxbr  I’m surprised that you would not expect this. People have to live. Global warming is just a theory. We need 100 years to make it a fact. Dec 28, 2022
• The deep freeze that blanketed most of the US temporarily plunged millions into darkness, and laid bare just how vulnerable the electric grid has become to a full-on catastrophe https://t.co/VYidNKPC8Q  I would not assume this won’t revert. Weather often has decadal streaks Dec 28, 2022
• These Prenatal Tests Are Usually Wrong When Warning of Rare Disorders https://t.co/kSGzVgjj8R  This is a practical example of how the misuse of statistics by scientists (ignoring false positives) harms patients. Aside from common diseases, it is better not to get your baby tested Dec 24, 2022

Odds & Ends

• Explaining the baby formula shortage. Mapping abortion access after the end of Roe v. Wade. Breaking down the FTX collapse. Here’s how we used data and graphics to tell 2022’s most important stories https://t.co/8I4bdgJzdB  Beautiful graphics on an artistic page that is clunky Dec 29, 2022
• As travel springs back and even China dismantles the last remaining Covid curbs, one stark truth is beginning to emerge — the world is running desperately short of planes https://t.co/rhJjRDk6Xx  I missed this. Thought the planes in the desert could be easily restarted, but no Dec 28, 2022
• You can fix most of your tech problems with these simple troubleshooting tricks from @nicnguyen https://t.co/nBpr4Cv02I  I knew about these, but it is very good and simple advice. Off and on. Disconnect and reconnect. Uninstall and reinstall. Clear Cache. Delete Cookies. Dec 28, 2022
• @TasteAtlas The last battle in the manga “Food Wars” was to make a dish that no one has ever seen before using elements of the five great cuisines of our world. What was their list of five? Chinese, Indian, French, Italian, and Turkish. A reasonable list. Dec 28, 2022
• Twitterati are looking for their next destination. https://t.co/MmUw4w4J9F  Then again, there may be some out from Twitter, but Twitter stays large enough to remain dominant over things that are trying to be like Twitter. Elon may bail on the investment, but Twitter will survive Dec 28, 2022
• How Telegram Became the Anti-Facebook https://t.co/6l5kFll3GO  Utterly long, but fascinating. There will always be demand for unfiltered social networks, and governments will fight that. Dec 24, 2022
• These three brothers scammed their investors out of $233Mn. Then they lived like kings https://t.co/W7J0nv3hmj  There is never anything easy about investing, especially if aiming for high returns. Safety can be controlled, mostly. Avoid people who advertise easy high returns Dec 24, 2022
• The Precarious Future of Sanibel Island https://t.co/XFmkZrwWWk  I went to beautiful Sanibel as a boy. Time & chance happen to all men and places. “Old Town” Ellicott City has been badly flooded twice in the last decade. Twice rebuilt, but the cost was high, & higher for Sanibel Dec 24, 2022
• @VIXandMore I get it. Hope you are doing well, Bill. I write less than I used to, but I am still writing. Dec 24, 2022

Photo Credit: Inhabitat || What is wealth, but concentrated efforts from the past organized by a man?

I’ve written on this topic many times, and I summarized my thoughts in this piece, Understanding Investment Consensus. Journalists and investors are often cavalier regarding how the market is positioned versus a given issue. Just because journalists and bloggers talk about something that is a possible crisis, that does not mean that investors have acted on those opinions.

Think of our last two major crises, the Great Financial Crisis (2008) and the Dot-Com Bubble (2000). Were there many people warning about those events in advance? Yes, there were many who did so. Did institutional investors react to these correct predictions? No, they didn’t. Why?

First, institutional investors have been trained not to time the market. Thus they tune out what they view as noise. Second, indexing and pseudo-indexing dominate the markets. Pseudo-indexing is the asset managers who are benchmarked against the market as a whole. All of them hug the indexes on average. There are generally few asset managers that are willing to be unique.

Most of the market is passive investing when aggregated, which leaves more opportunity for those that are willing to take chances on a portfolio that is not index-like in the slightest.

There is a real advantage at present to managers who are willing to run value portfolios that are distinct — not like the indexes, and willing to tolerate a lot of deviation versus the indexes.

Picture credit: Kevin Trotman || In general, it is probably best to put off retirement as long as you can…

I’ve seen a number of articles suggesting that it is a bad time to retire at present, because the market value of portfolios has declined. I’m here to tell you that the opposite is true.

Why did I pick these three dates to show you the US Treasury Yield Curve? On 1/3/2022, the stock market hit its high point. On 11/7/2022, pessimism about FOMC policy hit its high point. 12/13/2022 is now, leaving aside the rally in long Treasuries after the FOMC announcement on 12/14/2022.

Yes, asset values on a mark-to-market basis have declined by around 15%. But the yield you can obtain from those asset has doubled! You are not in a worse position to retire. You have a greater expectation of income now if you converted your assets to a bond ladder.

And I can tell you that the yield that you can get from a bond ladder has more than doubled since the beginning of 2022. So even if your assets have declined by 15% or so, the income you can receive now from bonds is far greater then before. You can even throw in some TIPS for inflation protection, and still have more income.

What’s that, you say? Why not stocks that pay growing dividends? Why the focus on default free bonds?

I start with Treasury securities because they are the backbone of the fixed income market. Everything else prices off of them.

Most dividend-paying common stocks yield less than Treasury securities now. That said, one way to compare a stock with growing dividends is to look at its current yield, and add to it half of your estimate of how fast stockholders’ equity per share is growing. If you were perfectly accurate, you would not cut it in half, you would add in the whole percentage growth in equity. This would assume that management is reinvesting the equity at high returns on equity, or planning on paying it out to shareholders at a more rapid rate.

Income opportunities are much higher now than in the yield-starved 2010s. Do you want income in retirement? It is on offer now.

Picture Credit: Marco Verch Professional Photographer || Being a financial analyst is being a competent generalist in business

Let me tell you why I am writing this, roughly three years later than I said I would. It started with a post I entitled Limits. The post itself is not why I am writing this, but in the the comments there was great criticism of the CFA Institute. They asked me what I thought of the criticisms and I said I would write about it.

I suspect no one will like this post. I will mention that I served on the board of the Baltimore CFA Society for 12 years, serving nine years as its Secretary, and two years as its programs chair. I am grateful that I earned my CFA credential in 1996, which enabled me to transition from being a life actuary, to being an investment actuary, to being a a financial analyst with actuarial skills.

Four weeks ago, I gave a talk at the Baltimore CFA Society’s Charter Award Dinner. The title of the talk was “The Value of Ethics –The Value of a CFA Charter.” The main point of my talk was that the uniqueness of the CFA Charter did not stem from the “Body of Knowledge” imparted in the exams, but rather from the emphasis on ethics. The men who created the “National Federation of Financial Analysts Societies” in 1947 wanted financial analysts to be competent and ethical. After all, the Great Depression soured many people on investing, considering all of the unsavory tactics that many speculators used.

So what made me decide to write this tonight? My friend Tom Brakke made the following post at LinkedIn. He laments the decline in the teaching of the “Body of Knowledge” at the CFA Institute. I agree with him. The leadership of the CFA Institute seems weak to me, and gives in to political and cultural trends. Two examples: first, adding cryptocurrency to the “body of knowledge,” when it has no intrinsic value. Second, adding ESG to the body of knowledge, when it is ill-defined, useless, and not in the interests of those served by fiduciaries.

What should the CFA Institute do with respect to the “Body of Knowledge?” Investment knowledge is not a monopoly of the CFA Institute. You can get the same knowledge through many different sources. For me, I learned 90%+ of my investment knowledge before I took my first CFA exam. That’s why they were so easy for me. Many CFA Charterholders don’t like me saying the exams are easy, but I will say, “Have you taken an actuarial exam? There is no comparison.” Even the penultimate president of the CFA Institute said to me, “They have an amazing qualification process.” (Something like that…)

What should the CFA Institute do to create its “Body of Knowledge?” Choose the most compact and important knowledge that an intelligent investor needs to know, and then pursue it in a written exam format, not using computers. Why written? Because investing requires the ability to be able to write. The Society of Actuaries made a similar mistake when it eliminated their English exam, which turned their candidates into math nerds who often could not understand qualitative features in insurance. Actuaries once were CEOs of insurance companies, and that is rare now.

Does the CFA Institute’s Body of Knowledge need reform? Definitely. Clear out the crud, and make more room for the basics. Also, emphasize ethics, because that is what differentiates CFA Charterholders from other investment workers.

But Back to the Original Reason for Writing this

So what of people who pass the CFA exams, get a job, stop paying their CFA dues, and say that they passed the CFA exams, but not explicitly calling themselves CFA Charterholders? Are they cheating the system?

Yes, they are cheating the system, and if the CFA Institute had an ounce of courage, they would take them to court, saying that they agreed to the CFA Institute’s standards when they took the exams and received the Charter. If they are not doing so now, they can’t say they passed the exams. It might be true, but it is an obfuscation to have some benefit of a CFA Charter while not continuing to hold to its code of ethics. If you are not subject to the CFA Code of Ethics, you should not be allowed to mention that you were once a CFA.

The same is true for me. I never say that I am a Fellow in the Society of Actuaries, though I passed all of the exams and was inducted. I haven’t paid dues for over a decade, nor have I done their continuing education (that was the bigger issue). Do I still know their body of knowledge? I was a leader in asset-liability management inside life insurers, and I would still be a leader there.

To close this article, I would simply say to those who have dropped their CFA charters, but still try to benefit from them: pay the money and observe the code of ethics. Be a real CFA Charterholder. We are the ones that are supposed to be cleaning up the financial industry. This is our ethical obligation that you agreed to when you received your CFA Charter. Don’t be a cheapskate, and don’t be unethical by avoiding the duties that you accepted when you took the CFA exams.

Picture Credit: Kent Schimke || Ah, the downward spiral of cryptocurrency assets!

What I am writing was sparked by what is happening with FTX, which reminded me of promoted penny stocks. Now, before I go on to that, let me mention what the results were regarding the promoted penny stocks that I wrote articles about the last one of which was written a little less than seven years ago. I only wrote about promoted penny stocks when I personally received a promotion, whether by snail mail or email.

Of the 32 stocks I wrote about, how many failed in entire? Twenty-four. How many have a market cap over $1 million? Three. How many actually appreciated in price from the time I wrote the article? One, Barfresh [BRFH], which was the only one the I said seemed legitimate.

Penny stocks are less of a problem today as a result of the efforts of Seeking Alpha, and to a far lesser extent me. But now we have a new problem — cryptocurrencies that are not widely traded.

FTX had several cryptocurrencies which they held on their balance sheet where they held a huge amount of the cryptocurrency relative to the float, or trading volume. This included FTT and Serum, among others. If FTX sold those cryptocurrencies in size to raise US Dollars, the price would quickly go to something near zero.

The same is true of promoted penny stocks. If they did a large issuance of stock, the price would quickly go to something near zero. (Far better to do a rights offering.) Instead, they quietly deal stock in small amounts at a discount to the market price to pay for services, goods, etc. Promoted penny stocks are the only investment class where the statement of shareholder equity is the most important statement.

As such, FTX using the value of the last trade, overvalues their holdings of worthless crypto. It is actually more valuable for them not to trade, than to swamp the market. That said, what will happen when they are forced to liquidate? (Think of Luna and Terra.)

You could structure the accounting for assets on the balance sheet at entrance value, current value, or exit value. Each has its implications — success, survival, and failure, respectively. Unless we decide to have multiple balance sheets and income statements, which I have suggested in the past, but will never take place, a single balance sheet will never represent reality — survival is probably the best overall option, and that is close to what GAAP does, with its many imperfections.

As such, please realize that most unaudited intermediaries of cryptocurrencies are likely insolvent. It is time to liquidate and go back to US Dollars, prone as they are to inflation. Remember, if you are slow, you may end up with nothing.

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.

Photo Credit: gelbachdesigns || Pay less to pay off your debt.

For some people/entities with home/commercial mortgages, for the first time in a while, it is possible to invest in US Treasuries at rates higher than the rate on your mortgage. Now there are complexities around this, but let me give an example of how this might work. I’m affiliated with a group that owns a building worth $3.5 million, with a first mortgage loan of $470K @ 3.8% AEY [Annual Equivalent Yield], and a second mortgage loan of $270K @ 3.6% AEY. The first mortgage loan has a balloon payment in June 2028, and the second mortgage fully amortizes, and pays off in November 2035.

When interest rates were low, our best use of surplus cash was to pay down the first mortgage. But now it would be better to buy the 1.25% Treasury note maturing 5/31/2028, presently yielding around 3.93% BEY [Bond Equivalent Yield — AEY ~4%]. This isn’t a large advantage, but when I thought of writing this article 2 weeks ago, prior to the recent CPI number, the yield gap was considerably more compelling.

Now, we may still get a higher inflation surprise over the next few months, unsettling the bond market. Or, hawkish FOMC members may continue to blather that rates have to go a lot higher, raising yields on short-to-intermediate Treasury Notes. (Knut Wicksell had it right with his simplistic rules [yield curve slope], rather than the FOMC with their complex models and fear of the media. [We must be manly men!]) There may be better opportunities in the near future.

My main point for this short piece is to get people to think more broadly about how to find opportunities with interest rates.

Another idea would be for those with residential mortgage loans to buy participations a FNMA or FHLMC pool with similar characteristics to your loan. Why prepay your 3% loan when you can buy a participation in loans like yours at a yield of 6%?

I realize that I am glossing over a lot of things here, but this is simply to suggest that your behavior in higher interest rate environments should be different from that in lower interest rate environments.