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

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

Picture Credit: David Merkel, with an assist from the YouImagine AI image generator || Twitter bird flies off into the sunset

Companies

• Missed signals: behind Trafigura’s $577mn loss on non-existent nickel https://t.co/fJNQSmKbgl  Fascinating that they never did physical checks of what was delivered. Also that they didn’t do a background check on TMT. Feb 16, 2023
• Podcast Companies, Once Walking on Air, Feel the Strain of Gravity https://t.co/RaNTop40uS  My kids ask me to do a podcast. I tell them it’s too much work for too little gain. I would rather read than listen, unless I am driving or cutting the yard. Feb 15, 2023
• One of the world’s richest families was thrust into the spotlight by a surprising share sale from one of its own members https://t.co/Gk6Xzr2OcU  You need a liquidity plan, akin to what a private real estate fund does. You can’t assume that no family member needs liquidity Feb 15, 2023
• How Ben & Jerry’s ended up at war with itself https://t.co/x2W5knUvR7  The revolution eats it own children, even as they eat ice cream Feb 15, 2023
• As tech companies shed thousands of jobs, more employees want a say in their severance https://t.co/WHDVvdwRCO  Hiring a lawyer at your severance can be valuable. Feb 15, 2023
• On the latest episode of the Zero podcast, @AkshatRathi speaks to the founder of Imprint Energy, which developed a printable battery for internet-connected devices. https://t.co/uIdNoxfPlz  Looks promising Feb 15, 2023
• FICO scores are flawed. These lenders say they’ve found a better way to judge your credit https://t.co/jklyVW53r3  Sowing the seeds of new consumer bankruptcies on the low end of the income scale. Avoid debt for consumption purposes. Feb 14, 2023
• A $4B accounting shortfall typically raises alarm bells for an auditor. Somehow a PwC affiliate missed it at Americanas https://t.co/Vr72rqV6c7  PwC may have cultural problems. If you can miss something that large & not be culpable, it calls into question the value of audits Feb 14, 2023
• As tech giants look to slim down, middle managers are feeling the pressure https://t.co/4I5JhO6ez8  Not sure if this is good or bad Feb 13, 2023

Odds & Ends

• New Car Prices Are So High Only Rich Americans Can Afford Them https://t.co/yrGEmDSIVS  This will eventually have political impacts, as regulations affect poor people more than the rich Feb 18, 2023
• Wanting to go big with AI in search, Microsoft could end up causing the kinds of harm it will come to regret, writes @parmy https://t.co/e9g3Mlom6D  They are not sentient. They are easily tricked. They are code. Feb 18, 2023
• The buildout of so-called dark warehouses has begun, but the high-tech facilities are far from common due to their high price tags and the limitations of robotic technology https://t.co/i1xgwi8BKY  Not quite ready for prime time Feb 17, 2023
• A ‘Crucial Bridge’ to History, the Codex Sassoon Could Fetch $50 Million https://t.co/z9xQGClGoF  Really, you can’t put a price on this. I bet there are Hebrew scholars worried about who will buy this, & future access. Feb 16, 2023
• 3 amateur codebreakers set out to decrypt old letters. They uncovered royal history https://t.co/kNGYZx6YT7  But nothing significant, really… Feb 16, 2023
• This Company Uses Machine Learning to Track Your Antibodies https://t.co/c0r5Bk1Tn4  Promising technology Feb 15, 2023
• Two of the most-talked-about Super Bowl ads on Sunday focused on an unlikely topic: Jesus https://t.co/lDOsgH3cjM  The gospels were written for a Roman audience as eyewitness accounts of who Jesus was & what he did. Read them & ask, was Jesus a legend, liar, lunatic or Lord? Feb 13, 2023
• @codywillard Wow, Cody. Glad you’re alive. The Lord had mercy on you and your family. Feb 12, 2023

Culture

• Yes, Single People Can Be Happy and Healthy https://t.co/6mrXtdv6ai  It is better to be single & wish you were married, than to be married & wish you were single. That said, this article is wrong, at least for men. Married men live longer & are happier than single men, on average Feb 18, 2023
• The adults celebrating child-free lives https://t.co/hkiZK3zrpn  Those not having or adopting children should be excluded from government pensions and healthcare benefits Feb 18, 2023
• Some school districts are doing away with honors classes, which has made some parents unhappy https://t.co/rPHDXEx68L  All teaching only reaches a fraction of IQs. This is why there needs to be many levels of teaching: high, middle, low, if you want to have all children improve. Feb 17, 2023
• Education should not be a social experiment. It needs to be based off of what works, not wishful theories. What gets taught to prospective teachers in college is positively harmful to pedagogy. We need to end that. https://t.co/uHyxOznUxl  Feb 17, 2023
• Miriam Adelson, along with her late-husband, poured tens of millions of dollars into former President Trump’s reelection campaign. Now she’s leading a push to legalize gambling in Texas https://t.co/jMmlxpVWq7  Legal gambling leaves society as a whole worse off Feb 16, 2023
• As the country emerges from a pandemic that left children zoning out over Zoom, parents are turning to the turbocharged “Russian math” method to give their kids an academic edge. https://t.co/zsdtgrNnel  The examples given are not impressive Feb 16, 2023
• Disney has tightly controlled Winnie-the-Pooh’s image. With the copyright expired, ‘Winnie-the-Pooh: Blood and Honey’ breaks the wholesome mold https://t.co/2H3IxjRtOc  This is not good, but it is notable. Perhaps $DIS will find a way to sue. Feb 15, 2023

Real Estate

• America’s Priciest Neighborhoods Are Changing as the Ultra-Rich Move to Florida https://t.co/GOIJ61QsPD  The wealthy seek lower taxes and warmer places. There should be no surprise here. Feb 15, 2023
• Turning offices into condos: New York after the pandemic https://t.co/z8zoyRUTyy  Popular concept. Tough but not impossible to execute Feb 15, 2023
• Brookfield Defaults on Two Los Angeles Office Towers. The properties include the Gas Company Tower and the 777 Tower https://t.co/KmTLc9r9OZ  Losses go to Brookfield DTLA Fund holders, & their lenders Feb 15, 2023
• When It’s Easy to Be a Landlord, No One Wants to Sell https://t.co/brqym7aoJS  With help from firms like Mynd that do property managment, you can keep your home w/a low rate mortgage, and rent it out Feb 13, 2023
• Why mortgage rates spiked from 6% to 6.5% early-February 2023 & what’s next https://t.co/y6sKncYEBs  Complex way of saying “We don’t know.” Hint: the long end of the curve does not move much in response to short-term inflation. FOMC, take note Feb 13, 2023
• The high costs of housing are influencing romantic decisions https://t.co/opJ5P2Abjw  Moving in reveals who each of you really are. Selfishness, laziness, bad communicating, substance abuse, lying… break relationships Feb 13, 2023

Adani Group

• Adani Group tells investors that they will address deadlines to repay debt with options including private placement notes and cash from operations https://t.co/FUEWh43C3I  But will they be profitable after refinancing near-term debt at higher rates? What covenants will they make? Feb 17, 2023
• Adani halts $847mn acquisition of coal-fired power plant in India https://t.co/hJQDR61XfB  Financing is less available. Not a good sign. Feb 16, 2023
• That would functionally subordinate some of their public debts, making them even less valuable. I remember looking at the final private placement Enron issued. Complexity was over the top; we did not participate. I would love to see the PP memorandum leaked. https://t.co/sDRoh7P6qc  Feb 16, 2023
• Indian conglomerate Adani Group is in talks with potential investors as it considers offering privately placed bonds for at least three of its group companies, people familiar with the matter say https://t.co/YF98mIE4Vb  Maybe they do secured debt, or add protective covenants Feb 16, 2023
• Adani Group sees no material refinancing risk for its listed companies and has no significant near-term liquidity requirements https://t.co/frK2aP7nZq  Complex holding company structures make liquidity management difficult. I’ve lost money on a few of those. Feb 15, 2023
• Adani Group sees no material refinancing risk for its listed companies and has no significant near-term liquidity requirements https://t.co/frK2aP7nZq  If so, keep paying down your debts, and feed losses to the shorts. Feb 15, 2023

The Markets

• The rise of short-dated options is creating event risk on the scale of the stock market’s early-2018 volatility implosion, JPMorgan’s Marko Kolanovic says https://t.co/IRIg7SYOb8  Possibility of self-reinforcing move if 0DTE options go into the money, forcing option deals to hedge Feb 16, 2023
• A once arcane corner of Wall Street is now in demand as borrowing costs soar and $6 trillion of bond maturities loom https://t.co/XZsM1nDN43  The corporate bond market is not arcane, & though there will be bankruptcies, this is not a crisis. Feb 16, 2023
• The shares have surged so much that it’s creating a dilemma for investment giant Nuveen — and posing a little-known risk to its investors https://t.co/jmcR1WpDbH  Why not do an “in kind” distribution as a dividend, or a discounted buyback, or just “ride the ask” $ENGH Feb 16, 2023
• Credit Suisse is offering investors a hefty incentive to buy its new euro bonds just days after announcing a bigger-than-expected quarterly loss https://t.co/OeuM8J31NO  Seems desperate Feb 15, 2023
• The mood is starting to shift in global credit markets after a three-month rally https://t.co/VRjlamNJ0W  Credit rally overdone & difficult to get away from LIBOR #liborwasbetter Feb 13, 2023

Non-US

• Nigeria is trying to gain more control over its vast cash economy by compelling citizens to swap their old money for newly designed naira bills. But the plan is running into serious trouble https://t.co/63mjaLLbBQ  Difficult to outlaw cash when financial systems are underdeveloped Feb 16, 2023
• It’s undermining Beijing’s attempt to engineer an economic recovery tied to consumption https://t.co/GrjowTdfdT  Efforts to get Chinese to consume more creates financial speculation via low rates on personal loans. Feb 15, 2023
• More than 200 construction bosses face arrest in Gaziantep and cities across Turkey’s earthquake zone. https://t.co/sCgMpMdLup  Corruption leading to deaths Feb 15, 2023
• Japan is quietly experiencing its biggest outbreak of the pandemic https://t.co/rbwea15TwH  Elderly population is more likely to die. Medical resources are stretched. Feb 15, 2023
• Moldova’s pro-European president accused Russia of trying to overthrow its democratic system and open a fresh front in Moscow’s war on Ukraine https://t.co/2koKvf0DbJ  Putin wants the USSR back. Feb 13, 2023

Central Banking

• Richmond Fed President Tom Barkin says he supported the central bank’s plans to continue raising interest rates in quarter-point increments https://t.co/R9w8bhtw3l  Driving through the rear-view mirror. My three questions he didn’t answer at the 3/22 @CFASBaltimore all came true Feb 17, 2023
• President Christine Lagarde reiterates that the European Central Bank intends to raise borrowing costs by another half-point next month https://t.co/zGOtVri6ka  Unless you want to discover hidden weaknesses in EU financial systems, you shouldn’t invert the yield curve further Feb 15, 2023
• Liquidity, leverage and interconnectedness? https://t.co/abqrRH6lsZ  Good interview w/@fmnatalucci. He understands financial risk and liquidity. A lot of what he said sounds like me. Where I see risk is not open-end high yield funds, but EU banks & pseudo-banks. Feb 15, 2023
• The White House is considering nominating Austan Goolsbee, who became president of the Chicago Fed last month, to serve as vice chair of the Federal Reserve’s board of governors https://t.co/QwxJJD5Gph  We could do worse, but why not Lacy Hunt? Feb 15, 2023
• The end of distressingly high inflation is coming into view, but the cost of goods, housing and other services is complicating path for easing consumer prices https://t.co/laCY0cZDdn  Focus on median inflation than all of the measures that drop out whole spending categories Feb 13, 2023

Economic Policy

• How three major bills could change the American economy. https://t.co/ufiiuufFTw  Nothing useful, lots of additional debt Feb 17, 2023
• The US Supreme Court could rewrite the rules of the internet with a challenge to the liability shield cherished by online companies https://t.co/sQfeDhzmJO  I lean in favor of allowing lawsuits against social media companies for inadequate moderation, but limiting damage claims Feb 17, 2023
• Odd Lots Transcript: This Is What Happens If the US Actually Hits the Debt Ceiling –What if it doesn’t get lifted? https://t.co/AkPZE6hxoy  No one knows. Maybe the 14th amendment section 4 can be invoked to invalidate the debt ceiling Feb 16, 2023
• New York City is pausing a small business loan program less than a month after it launched after an unanticipated influx of over 10,000 applications https://t.co/i9uRS9Ml2o  Why governments should not subsidize: they are either too generous or cheapskates Feb 15, 2023

China

• China’s sweeping policy support for the property sector has been no quick fix for developers’ liquidity struggles, leaving some investors waiting until the last minute for cash https://t.co/EB7wDHkaJH  The Chinese Communist Party learns reflating a bubble is surprisingly difficult Feb 17, 2023
• Heard on the Street: China’s fiscal position—and ability to fund other priorities—will increasingly be threatened by threatened by rising healthcare costs https://t.co/0sX2iyoBoE  Social welfare systems only work well when populations are young. Feb 17, 2023
• Investors are buying Chinese stock funds, betting that the reopening of China’s economy will help push markets higher  https://t.co/hISEKrfwbN  ‘“There’s opportunity, to be sure, but I think those are trades, not investments,” said Nancy Tengler.’ Feb 15, 2023
• In China, single mothers are facing fewer hurdles as Beijing tries to boost its fertility rate https://t.co/BNIeVRlIs2  Reduces abortion Feb 15, 2023

Crypto

• Binance is considering ending relationships with US business partners as regulators turn up the heat on crypto https://t.co/8f7dIWson0  Pushing crypto out of the US is good policy Feb 17, 2023
• Crypto platforms could soon face a new set of hurdles to hold digital assets owned by clients of hedge funds and private equity firms in the US https://t.co/m9bZLCxokL  Makes sense if you want custodial accounts. Feb 15, 2023
• Sam Bankman-Fried was blocked from using virtual private networks while on bail, with the judge overseeing his fraud case expressing concern that VPNs present similar risks as encrypted messaging apps https://t.co/7zpiWHoMjE  From crypto-king to peasant disallowed encryption Feb 15, 2023
• US regulatory crackdown on crypto aids Tether’s USDT, a stablecoin that’s located offshore, even as the transparency of its reserves faces scrutiny https://t.co/didoPeEO6t  US holders of Tether will appreciate the foreign domicile when Tether fails & recovering value is hard Feb 15, 2023

War

• Hundreds of fuel vessels are taking steps to hide where they’re going https://t.co/wK67gNEjV2  Evading sanctions — there is a profit to be made, and Russia needs money for the war Feb 18, 2023
• Many countries are reassessing their military might — and it’s not just limited to Ukraine’s neighbors https://t.co/C0QpA7rXOj  War takes resources, & budgets are stretched… what will be given up? Feb 18, 2023
• The world’s war machine is running low on ammunition https://t.co/VAMcJLwxbp  Together with stretched government budgets and relatively tight money globally — is this why the long end is selling off? Feb 16, 2023

Pensions

• Time Bomb of Public Pension Funding Ticks Louder https://t.co/QO6mS07lwI  One way the article could have been improved would be to add in the effects of falling interest rates, not just the long stock rally Feb 13, 2023
• The aggregate funding level for state and local pension plans is below 50%, inviting a disaster that would outstrip the occasional municipal bankruptcy https://t.co/QO6mS07lwI  Well written. Will it take the failure of a US State to get serious about this? Feb 13, 2023

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: 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.

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

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

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

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

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

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

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

Why am I Writing This?

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

The Math

Let’s define terms first.

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

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

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

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

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

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

So what’s the issue here?

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

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

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

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

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

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

Other Issues

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

Conclusion

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

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

Graph Credit: Aleph Blog || How do you feel about 3.00%/year nominal returns over the next 10 years? That’s less yield than the 10-year T-note

Stocks always beat bonds. Stocks always beat bonds. Stocks always beat bonds. Stocks always beat bonds.

Quite a mantra. And for those with a long time horizon, this is true. What I am telling you this evening is if you want that to work for you, your time horizon should be greater than ten years. With the ten-year T-note yielding 3.41%, the S&P 500 at 3946 indicates likely nominal returns of 3.00%/year over the next ten years. Though the bond market has had a lousy year, many of the times I wrote about this over the last few years, the S&P 500 had return expectations in line with a 10-year single-A corporate bond. When the market indicates returns lower than a 10-year T-note, it is still quite expensive (95th percentile).

As the end of December 2021 was near the recent highs, so the end of June 2022 was near the recent lows, projecting a nominal 3.32%/year return for the S&P 500 over the next ten years. The weak rally of the last eleven weeks has reduced future returns to 3.00%.

So what to do? For me, not much. I have always kept my asset allocation around 70% risky, 30% safe. I am near that now, and don’t feel the need to panic. I like the stocks that I own for me and my clients. We are up this year. All that said, I haven’t had a good year prior to this since 2013. Versus the broad market, my performance has been poor as value has lagged, and I am more value-y than most value managers.

The histogram above attempts to show scenarios when likely returns per year were within 1% of where they are now. Positive returns are expected with a considerable left tail.

So What Might Happen?

My view here is that the Fed will overshoot in tightening, leading the stock market to new lows in this bear market. Ray Dalio has said something like this. Looking at the ’70s or the Great Financial Crisis are not what I would look at. My best analogy here is the dot-com bubble.

I remember from that era how many people said that Fed policy was irrelevant to growth stocks. When the yield curve inverts, those who finance long assets with short-term debt blow up. During the dot-com bubble, that was mostly tech firms. The banks were mostly not affected. That is true today, as the banks are in good shape.

So expect:

• The yield curve to get more inverted
• Stocks to fall, especially growth stocks
• Real GDP will decline
• Commodities will suffer
• The Fed will panic, and loosen in 2023

That’s all for now. I have been going through a hard period in my life, thus I have not been posting much.

Picture Credit: photosteve101 || Maybe we can get some glue…

I used to write about this topic after the financial crisis a lot. I stopped after the SEC made their last set of changes. But when I read this article today, I decided to tweet this:

Investment firms are wary as money-market regulation changes are studied after the run early in the pandemic. https://t.co/SS34ndPUeM My proposal makes more sense — NAV under 0.995, cancel enough shares to renormalize NAV to 1.0025, at which point runs strengthen the MMMF

— David Merkel (@AlephBlog) August 30, 2021

When I was an investment actuary, I developed and worked with a large number of insurance products that were managed to be pure savings vehicles. There was usually a short-term guarantee of crediting interest together with a full guarantee of principal. The difference between the short-term guarantee and actual earnings would get factored into the next short-term guarantee, making the short-term guarantee reflect the actual asset performance over time. Benefits would get paid at book value, while plan sponsor deciding to terminate would get something a little under the market value of the assets.

The names for those products were Initial Participation Guarantee, Guaranteed Investment Contracts, Stable Value Funds, and hybrids and synthetics of them. For fixed income investments that acted like savings accounts they worked well for pension plans and their beneficiaries in an era when interest rates started high, and kept falling. They were complex compared to running a money market fund because they ran with longer fixed income, making stability of principal much more tricky.

I even created a product that was relatively short duration that could trade like a mutual fund, making it eligible for a wide number of applications. (Sadly, I left shortly after it was created, and those who followed me didn’t run it right, and so it didn’t amount to much.)

So, when I write about money market funds [MMFs], I think I get the math going on there, and the problem is simpler because of the short duration, yet harder, because all assets are redeemable at par immediately. With the longer-dated insurance products, terminating customers would face a relatively harsh market value adjustment at termination. The challenge with MMFs is to make those demanding liquidity in a crisis pay the penalty, while those staying in do not get penalized, and possibly, get rewarded.

My proposal is slightly different than my prior proposal, but the math is the same. (Bond math is inexorable, even if bonds aren’t.) The first thing to do is define when a MMF is under stress, which is when its shadow NAV is under 0.995. If at the time the shadow NAV is calculated at the end of the day, the shadow NAV is under 0.995 then two things happen in this order:

1. Those withdrawing funds lose additional units in the MMF in order to renormalize the shadow NAV to 1.0025. If any are doing a withdrawal of funds great enough that they won’t lose enough units, they suffer a market adjustment penalty of the same amount. The maximum amount of economic loss is 10% of the amount withdrawn.
2. If the shadow NAV is still below 0.995 after step 1, units of those that remain are cancelled to the degree that the shadow NAV renormalizes at 1.0025.

Why penalize those who exit in a crisis? They are causing the crisis. Liquidity is not a free good, and certainly not in a crisis. This will make them think twice about liquidating, because they will absorb a disproportionate amount of the loss.

Why renormalize to 1.0025? Why not to 1.0000? This helps prevent further runs on the fund. If parties exit when the shadow NAV is over 1, it will boost the shadow NAV further. Even if the continuing holders lose units when the shadow NAV is renormalized, they don’t lose any value unless there are genuine defaults within the assets held in the MMF. If there are no defaults, the unit losses will be made up by a higher yield which will pay back the unit losses over the weighted average life of the assets involved.

A weak analogy to this is what Vanguard does on some funds that are less liquid. They charge a small termination penalty, but it gets paid to the fund, not Vanguard. Long -term holders get a small benefit from this.

The benefits of this proposal are:

• Allows all MMFs to have a $1 share price all of the time
• Penalizes those that grab for liquidity when an MMF is under stress
• Discourages runs on MMFs
• Would allow regulators to allow Prime MMFs to run a more aggressive investment policy

This sounds too good to be true, right? Well, it isn’t. My next post will run some scenarios to show how this would work. Personally, I think if this were adopted, corporations using Prime MMFs would appreciate the stable share price of $1, the potentially higher yield, but against that they would think about how liquidity would not be so easily available in a crisis, and that they would have to report credit losses when units are renormalized.

There is no free lunch, but there are ways to discourage people from running for the exits in the midst of a crisis, to the harm of everyone else.

PS — when I started writing tonight, I was just going to trot out my old proposals, but when I went through my history of working with guaranteed insurance products, I was reminded that our best risk-controlled products spread the losses onto those who leave at inopportune times. When I realized that, my old idea got a lot sharper.

Photo Credit: amanda tipton || When I was younger, I wanted to read the whole local library. Now that I am older, I doubt the value of most books.

I’m getting older, and so are my readers. A practical impact of getting older is lightening up on possessions so that your heirs won’t have so much to dispose of when you die. My wife and I went through the whole house recently and eliminated 50% of the books that we owned.

We threw away 5% of the books, thinking that no one should read them, they were too damaged, or, they were out of date. We gave 15% to our children, after inviting them to peruse what we were getting rid of. We also gave them four bookcases. We gave 30% of the books away to Goodwill.

That still leaves us with around 1,500 books. But they are the books that we like, and as far as kids books go, the ones we think our grandchildren will like. Oh, yeah, I’m a grandpa now. Two grandsons, a granddaughter on the way, and yet another child coming first quarter of 2022. Wow.

My wife thought she would be more severe at eliminating books, but it turned out to be the opposite. I probably eliminated two-thirds of my economics, finance, and investing books. All of my finance and investing books are now in my office, and fit into one ordinary six foot tall, 27 inches wide bookshelf. The economics books fit on one shelf. Economic history books fit on two shelves. Why did I give away so many?

Longtime readers know I am not a fan of the neoclassical school of economics. I think economics is best understood apart from detailed mathematics. Even in finance and investing, you should never need calculus. We don’t live in a continuous time world.

Though actuaries are tested on calculus, they almost never use it. Early in my career, I tried applying calculus to some of my models, and it didn’t make much of a difference.

I probably jettisoned 75% of my economics, investment and finance books. I did it because I didn’t think they represented reality well. Usually “ad hoc” modeling is superior to trying to apply academic models, if modeling is warranted at all.

I realize that authors have many reasons to write books.

• They have a passion for the topic.
• They want to gain name recognition to benefit their business.
• They are trying to make money off the book (bon chance)

Not that authors or publishers should listen to me, but most books don’t deserve to be published. Why?

• They don’t break new ground.
• They aren’t well-written or well-edited.
• They are wrong in the way they view the world. (They engage in wish-fulfillment.)
• They don’t deliver on what the cover promises.

The last one deserves amplification. Back when I was reviewing many books, this was my single largest complaint. Many books were advertised to answer a crunchy problem, and the book didn’t address the topic significantly. In talking with some of the authors, they told me that it was the publishers who engaged in chicanery to sell the books, even though the authors wrote the books with a different purpose.

Now, if I live long enough, I may write a book. I don’t expect that you will buy it. Why? I will probably have disclosed enough of the book at this blog. Why pay for what you don’t have to?

My main point here is to be skeptical, but not cynical. I eliminated some of my books, not all of them. There is truth in some books. Be careful and analyze the arguments made in books closely. Keep what you think is valid, and toss the rest, unless it is a classic error like “The Communist Manifesto.” The classic errors are worth keeping so that you can remain aware of the ways that important twisted people think.