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The Best of the Aleph Blog, Part 4

The Best of the Aleph Blog, Part 4

Posted on by David Merkel

The period from November 2007 through January 2008 was challenging, but I did say a lot of good things.? Here’s a sample of the best:

Contemplating Life Without the Guarantors

Markets always beat governments, unless governments get so determined as to subvert markets.? Guarantors provide “thought insurance” so you don’t have to analyze the bond that they guarantee.? But what if the solvency of the guarantor is questioned?

The US Dollar and the Five Stages of Grieving

An important article that explains why currency interventions almost never work.? Required reading for Treasury Departments and Central Banks.

Why Did I Name This Site ?The Aleph Blog??

Cogent explanation for the odd name.? But I have gotten the question a few times as to whether I named my site after Jorge Luis Borges short story, “The Aleph.”? The answer is no, but after reading “The Aleph,” I would say that it folds into reason number four for why this is called The Aleph Blog.? Aleph is big.? Very, very big.

On the Value of Secondary and Primary Markets

They are valuable for different reasons, but they are related.

In Defense of the Ratings Agencies

The original piece, pointing out how the regulators have abandoned their responsibility, having outsourced it to the rating agencies.

Personal Finance, Part 6 ? The First Question

How much are you willing to learn, and how much work do you want to do? For people who ask my advice, that is usually the first question that I ask.

Booyah for Brainy Buybacks! (But not Brain-dead Buybacks.)

There is no simple answer to whether a buyback is the right strategy or not.? It depends on the price of the stock versus its value.

Options as an Asset Class

You can own/short options, but you can’t own/short volatility per se, at least not back in 2007.

Municipal Tensions

We are experiencing the front end of the woes now.? This won’t be over for 20 years.

How to Read the Whole Bible, and Survive the Experience

A simple way to read the whole of the Bible, and avoid getting bored, as so many do who try to read it straight through, and give up when 10-50% done.

In Defense of the Rating Agencies ? II

Anyone can criticize, but who can offer a system that is better than the present one on a comprehensive basis?

The Beauty of Broken Moats

Berky had an opportunity with almost all of the financial guarantors kicked to the curb.? It never worked out because Berky would not take modest risks.? In foresight today, those modest risks don’t seem so modest, so salute Mr. Buffett, who has forgotten more than most of us will ever know.

What Did Buffett Know about the Gen Re Finite Reinsurance Deal with AIG?

Odds are, Buffett knew a lot more than he confessed to know.? Buffett is a maven on insurance issues.

On Benchmarking

Benchmarking enforces conformity on managers, and the shorter-term the horizon, the more it makes them closet indexers.

Pandora and the Fair Value Accounting Rules

There are really tough issues here.? Everyone wants to be accurate, but over what time horizon, and how to adjust over time?? Bright investors will build in provisions for adverse deviation, and be conservative.

Unstable Value Funds?

This didn’t prove to be an issue, in this credit cycle, though form what I heard from insiders, it got close.? If the Fed hadn’t done 0% and QE, my dire predictions might have come true.? They still might in the future.? Be wary.

Meet Some of my Friends

Though the videos have disappeared, the story of how President George W. Bush, Jr. came to visit the factory of a friend of mine (of which I own 1.4%) is an interesting tale.? I was proud of my friend, who is a humble, but a great guy.

A Bonus from MoneySense Magazine

A free version of what Canadian magazine buyers had to pay for. How to earn more while taking less risk.

Personal Finance, Part 11 ? Your Personal Required Investment Earnings Rate

The intuitive explanation of what you need to earn in order to achieve all of your life goals.? It’s probably higher than you think.

With 401(k)s and Other Defined Contribution Plans, Watch Your Wallet

An important article — from the article:

If you are paying more than 1% of assets per year, then something is wrong, unless the asset classes are esoteric, which should not be the case for DC plans.? Remember, you have to be your own guardian with defined contribution plans.? No one will do it for you.? And, if a few of your colleagues complain at the same time, you will be amazed at how quickly it will be taken seriously, because the administrative staff of the plan sponsor usually doesn?t get that much feedback.

In general, high costs are closely correlated with low performance.? Keep a close hand on your wallet, and leave those who are charging you more than 1%, unless they are doing something special for you.

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I think I gave good advice in that era.? As the bubble deflated, investors needed to be more careful, and I highlighted that.? Not that I will always get it right…

The Best of the Aleph Blog, Part 2

The Best of the Aleph Blog, Part 2

Posted on by David Merkel

This second period goes from May to July 2007.? Here we go!

A Modest Proposal to Raise Taxes on Mr. Buffett (and me)

Points out how the problems with the tax code are really more about defining income rather than tax rates.? It is easy for the rich to defer/shelter income — far better to tax increases in net wealth, and tax all people like traders, who are marked-to-market at the end of each fiscal year.

Talking to Management

One of my “labor of love” pieces written for RealMoney — five parts, dealing with how to interrogate management teams.? A lot of the game is asking the wrong questions, and seeing how management answers them.

Back From Bermuda

Uh, this post made me persona non grata in Bermuda for 2-3 years.? I think I could return now.? Part of the difficulty was that I was not told that sessions were supposed to be “off the record.” That said, my blog was the most popular blog in Bermuda for a day.? Apologies, HF, and thanks for inviting me; sorry to embarrass you.

Thinking About What Might Blow Up

Fascinating to see all of the markets that were going to blow up within 15 months trotted out for display.? Also, the basics of my theory on how one detects bubbles.

What Brings Maturity to a Market

Failure brings maturity to a market; risk-based pricing follows the realization of risk.

PIMCO in Theory and Practice

Important piece, because people watch PIMCO on the tube, and think that they make money off of their economic predictions, which are often wrong.? PIMCO is really a bunch of intelligent fixed income quants, who make their money off of mispriced out-of-the-money volatility.

Private Equity: Short Term versus Long Term Rationality

Analyzing comments of Cramer and others as to when the Private Equity bull market would end.

Speculation Gone Wrong, Or, Tops are a Process

I was commenting on how it is hard it is to call a top, because they are processes rather than events.? Who can tell how long foolish liquidity can last?

Trailing E/P as a Function of Treasury Yields and Corporate Spreads

Part one on my “Fed Model.”? Analyzing secondary factors in stock and bond performance.

Subprime Credit, Illiquidity, Leverage, Contagion and Concentration

I suggested that a small number of players would get hit by losses in subprime.? True enough, but what I did not know was how much risk was still being held by investment banks.

Efficient Markets Versus Adaptive Markets

A post I cite frequently, mainly for the joke at the end, but a post that tries to make the point that markets are not fully efficient, but they are somewhat efficient.

Quantitative Analysis is not Trivial ? The Case of PB-ROE

In some environments, PB-ROE and low P/E investing will be similar, but that will not always be true. Do not accept a false simplification, even though it may be true at present. The PB-ROE model is richer, and works in more environments, after adjusting for the limitations listed above. PB-ROE is a very useful tool, and not ?gobbledygook.?

Defends the PB-ROE model while admitting its limitations.

The ?Fed Model?

Defends a version of the dividend discount model, and shows the simplifications that the “Fed Model” imposes are unrealistic, while showing that a more realistic model can add value over the long run.

A Fundamental Approach to Technical Analysis

Tries to explain how an intelligent fundamental investor would think about technicals, particularly in markets that are less liquid.

Twenty-Five Ways to Reduce Investment Risk

This article got me an invite to write an article for a Canadian business magazine.? But this article encapsulates the many ways I think about risk in investing.

Dissent on Dividends

Roger Nusbaum ably pointed out how demographics favors an increasing amount of dividends being paid to retiring Baby Boomers.? That is true.? We have ETNs being set up to do that (beware of Bear Stearns default risk), and hedge fund-of-funds crowding into strategies that synthetically create yield.? Beyond that, we have Wall Street creating funky yield vehicles that gyp facilitate the yield needs of buyers (while handing them capital losses).

My main point is this.? Approach yield the way a businessman would.? If you see an above average yield, say 4% or higher, ask what conditions could lead them to lower the yield. History is replete with situations where companies paid handsome dividends for longer than was advisable.

Back in 2002, I heard Peter Bernstein give an excellent talk on the value of dividends to the Baltimore Security Analysts Society.? At the end, privately, many scoffed, but I thought he was on the right track.? I still like dividends, but I like businesses that grow in value yet more.? Aim for good returns in cash generating businesses, and the dividends will follow.? Stretching for dividends is as bad as stretching for yield on bonds.? That extra bit of yield can be poisonous, leading to capital losses far greater than the incremental yield obtained.

Dividends are good, but they are a very imperfect way to approach the market.

Is the S&P 500 30% undervalued?

A somewhat whimsical piece that looked at implied equity volatility alone, and suggested that either the equity market was low, or equity volatility was high.? The truth was neither.? Equity volatility would blow out and go higher still, along with credit spreads.? Fortunately I was not dogmatic about my model’s conclusions.? I was more bearish in general in late July.

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So much for that era.? It was an interesting time as the bubble neared its apex.

Flavors of Insurance, Part VIII (Financial)

Flavors of Insurance, Part VIII (Financial)

Posted on by David Merkel

Financial guarantee insurers insure creditworthiness in a number of related, but different areas. They insure home mortgages for lenders who accept low down payments. They insure the debt of municipalities, who often find it cheaper to sell insured debt. In structured finance they guarantee the senior-most debt branches of residential mortgage [RMBS], commercial mortgage [CMBS], and asset-backed securities [ABS]. In the corporate credit arena, they guarantee the senior-most debt branches of collateralized debt obligations, and occasionally, single issuer project finance.

There are generally two types of companies in this sub-industry, with a slight overlap of business between them. One group guarantees low down payment mortgages for lenders. The other group engages in the rest of the businesses listed above. Financial guaranty and mortgage insurance are regulated separately from other types of property and casualty insurance. For the most part, companies that engage in these lines of business are specialists, though their continued high profitability is attracting new entrants.

Financial guaranty insurers have a primary function of credit enhancement for the corporate, municipal and consumer credit. In this function, securitization both competes with and facilitates their business. RMBS, CMBS and ABS can be structured as insured deals, or as deals where the senior bonds are protected by subordinated bonds sold to institutional investors at yields appropriate to compensate them for the risk. Even so, insured bonds trade with greater liquidity than uninsured bonds. The financial guaranty insurers are vital to the smooth functioning of structured finance.

The mortgage insurers have faced problems in the recent past. Loss experience on subprime borrowers has been disappointing. There have been bulk loan transactions that have also had poorer loss experience than ordinary transactions that flow one-by-one from lenders. Mortgage insurers are adjusting their pricing to reflect the differing loss costs.

In addition, lenders that originate low down payment mortgages often force the mortgage insurers to cede low-risk parts of the business to reinsurance captives controlled by the lenders. This is a continuing problem, with many of the mortgage insurers refusing to go along with the most uneconomic reinsurance deals.

There are yet other threats that mortgage insurers face. Fannie and Freddie could get their charters adjusted to allow them to accept uninsured mortgages with lower down payments. Large lenders could decide that they don’t need insurance for loans that they keep on balance sheet. Second mortgages compete with mortgage insurance. Inflated appraisals inflate the true amount at risk to the mortgage insurers. Finally, refinancing makes it difficult for the insurers to retain business on their books.

Aiding the mortgage insurers is the continued price appreciation of housing, which lowers the incidence and severity of claims. Homes are critical to most people who own them; it usually is the last thing that people will miss a payment on. Finally, there are significant barriers to entry for new competitors in the mortgage insurance business.

With the financial guaranty insurers, the issues are different. The amount of leverage is huge; the face amount of debt insured at a AAA financial guaranty insurer can be more than one hundred times greater than their surplus. Financial guaranty insurers underwrite to a zero loss tolerance. In other words, every transaction is expected to produce no losses; anything less than that would make the ratings agencies downgrade them severely.

Balance sheet complexity is large in terms of the many contingencies insured. Remember our phrase “too smart for your own good risk?” That may apply here. The rating agencies consistently affirm that these insurers are AAA, but we will argue that the rating agencies are co-dependent with them. The financial guaranty insurers indirectly generate a lot of revenue for the rating agencies. If an insurer begins to slip, initially it would pay the ratings agencies to delay the recognition of that, and work with them to lower leverage; the damage to the ratings agencies and financial guarantee insurers from a downgrade of a financial guarantee insurer to less than AAA would be huge. It would throw into question many of the fundamental underpinnings of the structured securities markets. It would also lead to turbulence in the AAA-only portion of the fixed income markets, which are quite large, but can’t deal with any degree of uncertainty.

Against this, the financial guarantee insurers have the following big advantage: they only guarantee the timely payment of principal and interest of obligations. If it is to their advantage to pay off the obligation immediately, they will do so. If it is to their advantage to string out the payments, they can do that as well. In a time of financial stress, the financial guaranty insurers can pay off claims slowly, and reduce the writing of new business, which would allow them to delever rapidly.

The twin engines of the rise of structured finance and low down payments on mortgages amid a rapidly growing housing market have fueled the performance of this sub-industry. The stocks in this industry have performed well. Valuations today are not outlandish, but they are kept low by the concerns that we have listed above.

In general, we believe that the future will be more risky for this sub-industry than the past. Both engines of growth will be slower in the future. In addition, the mortgage insurers have to contend with borrowers that are reliant on the low interest rates on ARMs in order to continue making payments on their homes. Consumer credit is overextended, and that will affect the loss experience on RMBS and ABS.

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Bringing it to the Present

I wish I had screamed louder.? Yes, I told the party line story back in 2004, but I tried to highlight the risks involved.

When I went to work for Hovde, I had a hierarchy of trust for reserving:

  1. Life
  2. Personal lines / Health
  3. Commercial Lines
  4. Reinsurance
  5. Title
  6. Financial

Financial insurers and mortgage insurers have proven less than sound.? They are just another example of what happens when leverage collapses.

As a bond manager, I never trusted the rating agencies on structured finance.? I wanted my AAA bonds to be AAA without support.

The financial insurers were too critical to the system.? We needed them to work.? That should have been the signal that something was wrong.? When something has to work, we are in big trouble, that is a sign that things are out of balance.

As it is now things are broken, and we are in an intermediate state where we are waiting for guarantors to be created.? The system needs third parties to take risks for pay.

The Rules, Part III

The Rules, Part III

Posted on by David Merkel

Okay, here is tonight’s rule:

The assumption of normality for asset price changes is wrong in virtually every financial market setting.? The proper distributions are fatter tailed and more negatively skewed.

Normality allows researchers to publish, regardless of the truth.

Normality allows risk managers and regulators to pretend that adequate reserves are held against disaster.? It also allows businessmen to achieve acceptable ROEs, while accepting a probability of ruin far in excess of what is prudent.

The normal distribution is a wonderful creation, because it is so simple.? All we need to know is the mean and the variance, which are very simple to calculate.? And… it seems close to fitting a large number of phenomena in nature where the behavior of one party does not affect the behavior of others.

But in economics and finance, the assumption of normality is perpetually violated.? I would guess that it is wrong more often than it is right.? Academics continue to drag out studies assuming normality because it allows them to publish.? academics get statistically significant results more often than they should, because they pursue specification searches, and get to results that they can publish via data mining (and ARIMA error terms — unless there is an a priori reason them, they facilitate specification searches).

And, lest I be accused of being merely biased against academics, this biases me against many businessmen as well.? Many bankers looked at their loss distributions over the prior 25 years in 2007, and assumed that risks were minuscule.? Yes, there were bad periods, but the Fed always rode to the rescue, and losses were low, aside from a few egregious offenders.

Bankers concluded that they could do no wrong, and underwriting suffered.? Rather than looking at more objective measures of risk, bank managements looked at the need to hit their earnings estimates.? Losses had not been large in the past, so the future should be equally good.

When I was a risk manager, I would look at the level of surplus, and would compare it to expected normalized annual losses — if I didn’t have at least 15x normalized annual losses, then I knew I could not survive a reasonably normal spike in defaults at the bottom of the credit cycle, though an assumption of normality, where losses don’t come in bunches, would have allowed me to lever up more.

And I have known my share of management teams that pushed at the risk manager, telling him he was too conservative.? The company couldn’t earn an adequate return on capital at such low levels of leverage.? Equity analysts expected constant growth out of financial stocks, which sadly are cyclical stocks — it is a mature industry, and mature industries are cyclical by nature.? So they added more leverage, and things worked well for a while, until things blew up.

So long as consumers felt that they could add more debt, the bet could go on, with occasional minor interruptions while the Fed mopped up the damage.? But that stopped when the Fed could not drop rates below zero.? Still, the Fed found new ways to subsidize the debts of privileged parties, by buying up their long term debts and holding them.

Look, if you want to regulate properly, you can’t rely on normality.? It does not work in finance and economics.? When looking at loss statistics, don’t look at the mean or the variance.? Instead look at the maximum 3-year loss, and gross it up by 20%.? The surplus of a company should be able to absorb the maximum amount of losses from 3 years, and then some.? I use this as an example rule; tailor it to your needs as you see best.? I used 3 years because the bust phase of when the credit cycle is rarely severe for more than 3 years in a row.

If you want to manage risk internally properly you should think similarly — look at the outliers, and ask whether you can survive something worse than that.? Here’s a personal example: if someone had come to me two months ago and asked me how likely it would be that my area near Baltimore could get 60+ inches of snow in a one week time span, I would have said, “That’s not impossible, but that is way beyond the prior record, which I think is around 30+ inches.? Very unlikely.”? Well, it happened, and five weeks of warmer weather later, my backyard is still half covered by snow.

Markets, like the weather, are far more variable than we would like to admit, and attempts to tame them often lead to suppressed volatility for a time, but with explosions of volatility later, as economic actors begin to presume upon the low volatility as their birthright, and begin to speculate more aggressively, building up progressively more leverage as they go.

So when analyzing risk look at the worst possible outcomes, and build a plan that can handle that.? Size your leverage to reflect that; in a really risky business, you might have no leverage, and extra bits of slack capital in high-quality short-term debt claims.

Finally, remember my analogy of bicycle versus table stability.? A bicycle has to keep on moving to stay upright. A table does not have to move to stay upright, and only a severe event will upend a large table.

I developed this analogy back when I was a corporate bond manager, because there were some companies that would only stay afloat if they kept moving, i.e., if operating cash flow continued at its projected pace. That is bicycle stability; they have to keep pedaling. There were other companies that could survive a setback in earnings, and even lose money for a time, and the debt would still be good. That is table stability.

This is why stress-testing beats value-at-risk in a crisis, and why the insurers came through the crisis so much better than the banks.? When liquidity disappears, strategies that require continued liquidity can cause their companies to disappear.

Better safe than sorry.? Banks should run their businesses using stress tests that will cause them to have lower ROEs because of the additional capital needed to assure solvency.? The regulations have been too loose for too long.

My Visit to the US Treasury, Part 6

My Visit to the US Treasury, Part 6

Posted on by David Merkel

Now, none of us knew when we came that only bloggers were invited.? Personally, I expected it to be a broader press briefing that some bloggers could come to as well.? “Deep background” is well understood to the press, but new to bloggers.? My blogging friends at the meeting can correct me, but all of us were surprised that it was only bloggers at the meeting.

My only clue that they might have treated us nicer than some other gatherings, was that some staffers not at the meeting came in after the meeting to raid some cookies.? Now, maybe that is normal regardless there.? I’ve seen the same things in corporate settings.? The e-mail announcement, “Open season in room 406!”? That said, the chocolate chip cookies were all gone. :(? I had one, as did Tyler, I think.? Maybe the Treasury officials had the rest.

Personally, I am comfortable with the restrictions on reporting from the meeting.? The Treasury’s high-level staff sound the same tune.? It doesn’t matter if we identify them or not, they reflect the policies of the Obama Treasury.? With restrictions on not identifying who said what, to me it does not matter, because they were senior Treasury officials.? We can quote, or approximately quote.? We can’t tie it to a single person.? That doesn’t affect us much.? We know what they think, and we can write about it.? We just can’t say exactly who said it, or whether they were there.

Making Money or Not

Few areas of the US government are designed to make money.? One of the main points that Treasury made to us was that the TARP would cost little, or might make money.? TARP is a piece of a larger puzzle.? My question is this, counting in all of the bailouts, including all stimulus programs, what is the cost to the taxpayer?? Now, I ask my readers what they know here. E-mail me with any comprehensive pieces that you have seen, or put it in the comments, so that all can see.

When I look at the bailouts, AIG, Fannie, and Freddie have sucked up /are sucking up resources.? With respect to the GSEs, I appreciate the view that the Administration views Fannie and Freddie as a hole in the system that they can use to funnel money to housing without asking Congress for approval.? Certainly their financial result show it.? Fannie lost a lot of money last quarter and is begging for help.? Freddie lost less, but is not asking for money now, but they likely will in the future.? As for the Treasury, they have opted to not maximize the value of Fannie by allowing her to sell of tax credits to others, notably Goldman and Berky.? They are not interested in maximizing the value of the GSEs, only of using them for their policy goals.

One slide the Treasury showed us was that they thought they were making money across all of the TARP bailouts that they did.? Also, that their guarantee programs had made money as well.

True, so far the guarantee programs have made money.? That does not mean that the government should be in that business, as it may encourage greater risk taking later, because they think the government will rescue them in times of trouble.? In England, at least some think it is a bad precedent.

TARP may be doing okay, but the same moral hazard argument applies.? Also, bailouts may come after shareholders have lost a lot, but management teams may (and seem to be now) benefit disproportionately from the bailout.? Away from that, the losses from the GSEs, Auto companies, and AIG swamp other gains.? That’s what it seems to me.? Does anyone else know better?? Please put it in the comments, for all to see.

Away from that, consider how the FDIC is basically broke, and that the FHA is not far behind.? This crisis is not over.

A Place of Agreement

One place where I can agree with the Treasury is that there should be only one regulator of depositary institutions.? The insurance industry can choose among states, but for the most part there are states for big companies,and states for small companies.? The states willing to regulate the big insurance companies have done a great job relative to the banking regulators.? There are few failures.? AIG died for non-insurance reasons.? Penn Treaty was a basket case long before the crisis.? Who else died?

Having one regulator for banks will remove the ability of the banks to choose the weak regulator.? It raises the risk that the one regulator will be corrupted.? That’s a lesser risk, because with many regulators, the odds that one will be corrupt are high, and corrupt institutions will go to them to be regulated.? With one regulator, politicians can more easily watch the troubles, and can more easily assign blame.

I have no objection to one national insurance regulator either.? That said, many states will object, because they have differing standards.? But does Congress really want to do insurance law?? It takes up a lot of time and is complex.

The Final Note for Now

Things always look best for a borrower immediately after his most recent loan.? So it is for most programs in our economy that favor giving loans in this crisis to stimulate demand.? So it was in the 70s and 80s with lesser developed countries.? The finances looked great after the loans, but after they had spent it away on consumption, things looked much, much, worse.

So it is with government programs that interfere with the free market through offering cheap lending terms.? They give a temporary lift that leads to greater problems once the subsidy is spent away.? So it is now with government subsidies and loans.

Other Posts

Two more posts on the meeting, one from a blogger who was there:

A Sit Down With Senior Treasury Officials – Part II

and one who was not, somewhat critical, but constructively so:

Treasury and the?Blogs

As for me, I’m glad I went.? I have a better zeitgeist of the US Treasury.? I am not more impressed, nor less impressed with them.? I do want the Federal Reserve to consider inviting us to meet with them.? They are far less accountable than the Treasury, and many of us would like to counsel them on their behavior that seemed smart at the time, but will likely prove destructive to the republic.? Dare you invite us, Ben, or do you have less courage than the Treasury?

Opportunities in Bank Bonds, Part 2

Opportunities in Bank Bonds, Part 2

Posted on by David Merkel

Thinking about Citigroup and Bank of America — Given to Finacorp Clients 3/4/09

When the government gets involved in business, the rules of the game change. Creditworthiness becomes less of an ?analyze the metrics? affair, and more of a ?how strong of a guarantee? affair. What would it take to make the US Government change the way that it is behaving?

But first, how have the US Government, Citigroup and Bank of America been behaving? I?m going to begin this with timelines for Citigroup and Bank of America. Things have happened fast, so a review of how we got to this stage in the crisis could be instructive in where things might go from here.

Citigroup Timeline

1. 9/29/08 ? C agrees to buy WB?s banking business. WFC offers more, but C?s offer is backed by FDIC. (Share Price prior to news ~ $20, afterwards $18.)

2. 10/9/08 ? C abandons bid to buy WB?s banking business. (Share Price prior to news ~ $13, afterwards $14.)

3. 10/14/08 ? C receives $25 billion in TARP money. (Share Price prior to news ~ $16, afterwards $19.)

4. 10/16/08 ? C reports 3Q net loss of $2.8B. (Share Price prior to news $9.52, afterwards $8.89.)

5. 11/17/08 ? C announces plan to lay off 52,000 workers. (Share Price prior to news $8.89, afterwards $8.36.)

6. 11/18/08 ? Mike Mayo predicts that C could lose money in 2009. (Share Price prior to news $8.36, afterwards $6.40.)

7. 11/19/08 ? C forced to take SIVs back on balance sheet after $3.3B losses. (Share Price prior to news $6.40, afterwards $4.71.)

8. 11/23/08 ? US Government invest $20B in C, and guarantees $306B of their liabilities. Fitch downgrades rating to A+. (Share Price prior to news $3.77, afterwards $5.95.)

9. 12/2/08 ? C sells $5.5B of FDIC-backed debt. (Share Price prior to news $6.45, afterwards $7.22.)

10. 12/19/08 ? S&P cuts C?s rating by two notches to A. Moody?s cuts C?s rating by two notches to A2.

11. 1/13/09 ? C sells brokerage unit for $2.7B to MS. Most C units are rumored to be up for sale. (Share Price prior to news $5.60, afterwards $5.90.)

12. 1/16/09 ? C reports $8.3B loss, announces plan to split in two. (Share Price prior to news $3.83, afterwards $3.50.)

13. 1/20/09 ? C slashes dividend to .01/share. (Share Price prior to news $3.50, afterwards $2.80.)

14. 1/23/09 ? C is effectively nationalized, argues Bloomberg. Increasingly, as a ward of the US Government, C increases lending, and home loan modifications.

15. 2/27/09 ? C announces a goodwill writedown of $9.6B, adding $9B to the losses of 4Q08. US Government enters a deal to convert $25B of preferred stake to common, pari with private institutional investors, increasing C?s tangible capital, and raising US ownership to 36%. Moody?s cuts C?s rating by two notches to A3. (Share Price prior to news $2.46, afterwards $1.50.)


Bank of America Timeline

1. 1/11/08 ? BAC agrees to buy CFC. Regulators offer BAC capital relief, letting them lend more to their broker-dealer subsidiary. (39.41 — 38.50)

2. 1/24/08 ? No capital will need to be raised after a $12B sale of preferred stock. (36.83 ? 40.57)

3. 3/10/08 ? Allegations of fraud and growing mortgage losses swirl around CFC. BAC affirms that the purchase will go through. (37.13 ? 35.31)

4. 4/21/08 ? BAC misses earnings as bad debt gets written down $6B. Moody?s cuts ratings of BAC to Aa2. (37.79 ? 37.61)

5. 5/15/08 ? CEO Ken Lewis criticizes the bailouts of Wall Street firms. (Sorry, couldn?t resist.) Aside from Bear, at that time, it was mostly Fed lending programs. (36.88 ? 36.71)

6. 5/21/08 ? BAC sells $2.7B of preferred stock. (35.40 ? 34.63)

7. 6/2/08 ? CEO Lewis calls the CFC deal compelling. (33.84 ? 33.58)

8. 6/19/08 ? Price of CFC deal adjusted down. (28.46 ? 28.14)

9. 7/1/08 ? CFC deal closes. (23.31 ? 23.81)

10. 7/8/08 ? CEO Lewis announces that the dividend will be maintained, and there is no need to raise more capital. (21.56 ? 23.54)

11. 7/16/08 ? Fitch cuts BAC rating two notches to A+. (19.45 ? 22.67)

12. 7/21/08 ? BAC beats estimates for 2Q08. Also announces that it does not plan to guarantee the debts of CFC. (27.85 ? 32.35)

13. 9/10/08 ? KBW cuts BAC to underperform, citing constrained capital. (32.97 ? 32.40)

14. 9/15/08 ? BAC agrees to buy MER for $44B as Lehman goes into Chapter 11. S&P cuts BAC?s rating to AA-. (28.23 ? 26.55)

15. 10/6/08 ? BAC misses 3Q estimates, cuts the dividend, and announces an offering of common stock. (29.65 ? 23.77)

16. 10/8/08 ? BAC raises $10B through selling common stock. (23.33 ? 19.63)

17. 10/16/08 ? MER announces fifth straight quarterly loss of $5.1B. (24.41 — 24.25)

18. 10/30/08 ? BAC announces a $15B issue of preferred stock to the US Government under the TARP program. $10B for Merrill (23.31 ? 22.78)

19. 11/18/08 ? CEO Lewis says MER acquisition is on track. (15.17 ? 15.19)

20. 12/5/08 ? BAC sells $9B of FDIC-backed debt. (13.90 ? 15.24)

21. 12/11/08 ? BAC announces job cuts of 35,000. (16.33 ? 14.91)

22. 12/19/08 — S&P cuts BAC?s rating to A+. (14.07 ? 13.80)

23. 1/2/09 ? BAC closes MER deal. (13.92 ? 14.33)

24. 1/7/09?BAC sells $2.8B of China Construction Bank stock. (14.11 ? 13.71)

25. 1/8/09 ? Moody?s cuts ratings of BAC to Aa3. (13.82 ? 13.54)

26. 1/16/09 — $138B lifeline extended by the US Government — $20B more of preferred stock, and guarantees on assets and derivatives equal to $118B. BAC cuts dividend to 1 cent/share. (7.18 ? 5.10)

27. 1/23/09 ? John Thain fired as Merrill loses $15.4B for 4Q08. (5.37 ? 6.24)

28. 2/20/09 ? CEO Lewis says that the finances of BAC are fine, and they don?t need additional help. (3.61 ? 3.79)

29. 2/24/09 ? CEO Lewis says that BAC is stronger than rivals. (4.03 ? 4.73)

30. 2/25/09 ? CEO Lewis says that Countrywide and Merrill will be stars in 2009. (You can?t make these up.) (4.81 ? 5.16)

31. 3/3/08 — S&P cuts BAC?s rating to A. (3.95 ? 3.65)


I bolded the cases where government actions were taken. What common factors can be found in the actions of the government?

  • Unwillingness to harm bondholders. Common and preferred stock can be diluted/destroyed, but not unsecured debtholders, not even junior ones.
  • The US Government is willing to give up protections for taxpayers if it would save institutions that they deem ?too big to fail.?
  • They are willing to give the money to the holding companies, rather than protecting operating banks and other regulated financials.
  • The US Government is willing to do it in pieces, with grumbling, but they will keep doing it until the US economy either normalizes, or falls apart.
  • The economic incentives of the banks become muddled with the goals of the government. More money is available to those that support the goals of the government, rather than only profits.

I think that the government?s actions encourage the laziness of bankers ? why sell assets when you can finance them? Why try to eke out profits when the government feeds additional liquidity to those that do their bidding?

As I said in my last article, there is some political pressure to make the bondholders of some of the holding companies share in the pain. I don?t think that will be effective in the short run for two reasons:

  • Inertia ? DC is slow to change even strategies that seem not to be working.
  • Large bond managers (e.g., PIMCO, BlackRock) that are providing many services to the US Treasury regarding the TARP have large holdings of senior debt, and they will do all they can to tell policymakers that it is a bad idea to have senior debt be compromised. It would have large systemic risk implications! Possibly, there is regulatory capture going on in the boldest way ever. Bond managers, representing the bond market, tell the US Treasury what they should do. Shades of the Clinton Administration.

Personally, I don?t think that the balance sheet of the US Government is big enough to handle all of the liabilities that they will be asked to absorb, equitize, or guarantee. Bondholders need to watch for stresses and strains that will appear in the currency and Treasury security markets, and be prepared for the day when the US Government says, ?No more. We can no longer afford this largesse. No one is too big to fail. Chapter 11 and RTC 2 for all failed financial companies.?

That is the main risk here, but it should not appear for a while. Gauge your own willingness to play in the bonds of firms like Citigroup and Bank of America. Without continued help from the US Government, they are insolvent; current prices factor in support for some time, but if that help should evaporate, prices will drop considerably. Dancing near the edge of a cliff is rarely advisable, even if you get paid to do it. Play this carefully.

Speculation Away From Subprime, Part 3

Speculation Away From Subprime, Part 3

Posted on by David Merkel

More on speculation, while avoiding subprime which is still over-reported.

  1. How much risk do hedge funds pose to the financial system?? My view is that the most severe risks of the financial system are being taken on by hedge funds.? If these hedge funds are fully capitalized by equity (not borrowing money or other assets), then there is little risk to the financial system.? The problem is that many do finance their positions, as has been seen in the Bear Stearns hedge funds, magnifying the loss, and wiping out most if not all of the equity.
  2. There is a tendency with hedge funds to hedge away “vanilla risks” (my phrase), while retaining the concentrated risks that have a greater tendency to be mispriced.? I want to get a copy of Richard Bookstaber’s new book that makes this point.? Let’s face it.? Most hedging is done through liquid instruments to hedge less liquid instruments with greater return potential.? Most hedge funds are fundamentally short liquidity, and are subject to trouble when liquidity gets scarce (which ususally means, credit spreads rise dramatically).
  3. Every investment strategy has a limit as to how much cash it can employ, no matter how smart the people are running the strategy.? Inefficiencies are finite.? Now Renaissance Institutional is feeling the pain.? My greater question here is whether they have pushed up the prices of assets that they own to levels not generally supportable in their absence, simply due to their growth in assets?? Big firms often create their own mini-bubbles when they pass the limit of how much money they can run in a strategy.? Asset growth is self-reinforcing to performance, until you pass the limit.
  4. I have seen the statistic criticized, but it is still true that we are at a high for short interest.? When short interest gets too high, it is difficult but not impossible for prices to fall a great deal.? The degree of short interest can affect the short-term price path of a security, but cannot affect the long term business outcome.? Shorts are “side bets” that do not affect the ultimate outcome (leaving aside toxic converts, etc.).
  5. I’ve said it before, and I’ll say it again, there are too many vulture investors in the present environment.? It is difficult for distressed assets to fall too far in such an environment, barring overleveraged assets like the Bear Funds.? That said, Sowood benefits from the liquidity of Citadel.
  6. Doug Kass takes a swipe at easy credit conditions that facilitated the aggressive nature of many hedge funds.? This is one to lay at the feet of foreign banks and US banks interested in keeping their earnings growing, without care for risk.
  7. Should you be worried if you have an interest in the equity of CDOs?? (Your defined benefit pension plan, should you have one, may own some of those…)? At present the key factors are these… does the CDO have exposure to subprime or Alt-A lending, home equity lending, or Single-B or lower high yield debt?? If so, you have reason to worry.? Those with investment grade debt, or non-housing related Asset-backed securities have less reason to worry.
  8. There have been a lot of bits and bytes spilled over mark-to-model.? I want to raise a slightly different issue: mark-to-models.? There isn’t just one model, and human nature being what it is, there is a tendency for economic actors to choose models that are more favorable to themselves.? This raises the problem that one long an illiquid asset, and one short an illiquid asset might choose different values for the asset, leading to a deadweight loss in aggregate, because when the position matures, on net, a loss will be taken between the two parties.? For a one-sided example of this you can review Berky’s attempts to close out Gen Re’s swap book; they lost a lot more than they anticipated, because their model marks were too favorable.
  9. If you need more proof of that point, review this article on how hedge funds are smoothing their returns through marks on illiquid securities.? Though the article doesn’t state that thereis any aggregate mis-marking, I personally would find that difficult to believe.
  10. If you need still more proof, consider this article.? The problem for hedge fund managers gets worse when illiquid assets are financed by debt.? At that point, variations in the marked prices become severe in their impacts, particularly if debt covenants are threatened.

That’s all in this series.? I’ll take up other issues tomorrow, DV.? Until then, be aware of the games people play when there are illiquid assets and leverage… definitely a toxic mix.? In this cycle, might simplicity will come into vogue again?? Could balanced funds become the new orthodoxy?? I’m not holding my breath.

Neither a Borrower nor a Lender be

Posted on by David Merkel

Photo Credit: Ben Schumin || Looks like a place where you may get a fast deal, but not the best deal.

Remember 125% LTV loans on houses prior to the financial crisis? Well, auto loans now are their twin separated at birth. The Wall Street Journal wrote an article recently about those who lend more than 100% on automobiles.

Now, in the old days, auto loans were short. They were shorter than five years, and never more than 80% of the value of the car. This meant that the balance of auto loan would always be less than the depreciated value of the car under ordinary circumstances.

But as has been common in American history, we always test the limits in lending. Maturities have been lengthened and loan-to-value ratios expanded. If you need a car, and your current loan is more than the value of the car you want to trade in, some lender will be willing to roll the loss into the value of the loan to purchase the next car, with a higher interest rate to compensate for the added risk.

Why is the risk higher? Auto loans are collateralized by the car. If you don’t pay, the repo man comes and takes the car. If the car is worth less than the loan, the borrower is liable for the difference. When the difference is big, the lender will pursue the borrower for payment, and either get the payment, or send the borrower into bankruptcy. The costs of bankruptcy to the borrower means losing the car and not being able to borrow for seven years or so.

But there will be costs to the lender as well. In a financial crisis, most of them will go bankrupt themselves. They aren’t thickly capitalized, and can’t afford a lot of losses. That’s part of the price of making low quality loans.

What to do

The first step in doing well here is to buy a cheap car that is of reasonable quality, even if it isn’t fashionable. I have only once paid more than $11,000 for a car, and that was for a 15-seat Ford XLT Van that last 14 years for me. Typically these days, I buy refurbished cars that have been through a wreck, and carry a salvage title. I would say, “You don’t need to look good,” but I look just fine. I pay very little for cars, and they last well.

Part of the challenge is finding honest auto dealers who charge a reasonable markup over their costs. Ask your smart friends for advice. (If you don’t have smart friends, get some.) Part of the price of the method that I use is that few lenders will lend on “salvage title” vehicles, so I have to pay cash. It is better to borrow unsecured at a high rate and buy a cheap but quality salvage title car than to buy an expensive vehicle from a regular dealer.

There is a hidden cost to buying salvage title cars though. If there is an accident and it is totaled, the insurer will pay you far less than for a similar non-salvage title vehicle.

Don’t Borrow to Buy a Car

This is the simplest advice. When I was 27, my parents came to visit me in California. My Father looked at the two used cars that my wife and I owned, and praised me — “You haven’t bought a lot of fancy rolling stock.”

I have never taken out an auto loan. I never will. Borrowing should only be for things that don’t depreciate, like a house.

People need to get over the idea that their car has to be powerful or pretty, and focus on buying cars that are reliable. Paying less for a car is one of the easiest ways to save money, so long as you get a quality car.

Avoid Owning Shares in Auto Lenders

I don’t know who you have to avoid here. I can’t think of a pure play. If you know of one, please mention it in the comments. I simply know that those who lend without adequate security eventually get hosed.

You would think we would have learned from the Financial Crisis, but the more I look at current conditions, the more I think we are short-sighted.

We are not facing a banking crisis now, but maybe we might around 2030. The banks are mostly in good shape now, but perhaps we might see the failure of some non-bank lenders in the next recession who have lent too much on autos.

In summary, try to avoid borrowing on a car, and don’t own companies who lend more than 100% on a car.

PS — three articles that I have written on buying cars:

Simple Stuff: What is Risk?

Simple Stuff: What is Risk?

Posted on by David Merkel

Photo Credit: GotCredit

Photo Credit: GotCredit

This is another piece in the irregular Simple Stuff series, which is an attempt to make complex topics simple. ?Today’s topic is:

What is risk?

Here is my simple definition of risk:

Risk is the probability that an entity will not meet its goals, and the degree of pain it will go through depending on?how much?it?missed the goals.

There are several good things about this definition:

  • Note that the word “money” is not mentioned. ?As such, it can cover a wide number of situations.
  • It is individual. ?The same size of a miss of a goal for one person may cause him to go broke, while another just has to miss a vacation. ?The same event may happen for two people — it may be a miss for one, and not for the other one.
  • It catches both aspects of risk — likelihood of a bad event, and degree of harm from?how badly the goal was missed.
  • It takes into account the possibility that there are many goals that must be met.
  • It covers both composite entities like corporations, families, nations and cultures, as well as individuals.
  • It doesn’t make life easy for academic economists who want to have a uniform definition of risk so that they can publish economics and finance papers that are bogus. ?Erudite, but bogus.
  • It doesn’t specify that there has to be a single time horizon, or any time horizon.
  • It doesn’t specify a method for analysis. ?That should vary by the situation being analyzed.

But this is a blog on finance and investing risk, so now I will focus on that large class of situations.

What is Financial Risk?

Here are some things that financial risk can be:

  • You don’t get to retire when you want to, or, your retirement is not as nice as you might like
  • One or more of your children can’t go to college, or, can’t go to the college that the would like to attend
  • You can’t buy the home/auto/etc. of your choice.
  • A financial security plan, like a defined benefit plan, or Social Security has to cut back benefit payments.
  • The firm you work for goes broke, or gets competed into an also-ran.
  • You lose your job, can’t find another job?as good, and you default on important regular bills as a result. ?The same applies to people who run their own business.
  • Levered financial businesses, like banks and shadow banks, make too many loans to marginal borrowers, and find at some point that their borrowers can’t pay them back, and at the same time, no one wants to lend to them. ?This can be harmful not just to the?banks and shadow banks, but to the economy as a whole.

Let’s use retirement as an example of how to analyze financial risk. ?I have a series of articles that I have written on the topic based on the idea of the?personal required investment earnings rate [PRIER]. ?PRIER is not a unique concept of mine, but is attempt to apply the ideas of professionals trying to manage the assets and liabilities of an endowment, defined benefit plan, or life insurance company to the needs of an individual or a family.

The main idea is to try to calculate the rate of return you will need over time to meet your eventual goals. ?From my prior “PRIER” article, which was written back in January 2008, prior to the financial crisis:

To the extent that one can estimate what one can reasonably save (hard, but worth doing), and what the needs of the future will cost, and when they will come due (harder, but worth doing), one can estimate personal contribution and required investment earnings rates.? Set up a spreadsheet with current assets and the likely savings as positive figures, and the future needs as negative figures, with the likely dates next to them.? Then use the XIRR function in Excel to estimate the personal required investment earnings rate [PRIER].

I?m treating financial planning in the same way that a Defined Benefit pension plan analyzes its risks.? There?s a reason for this, and I?ll get to that later.? Just as we know that a high assumed investment earnings rate at a defined benefit pension plan is a red flag, it is the same to an individual with a high PRIER.

Now, suppose at the end of the exercise one finds that the PRIER is greater than the yield on 10-year BBB bonds by more than 3%.? (Today that would be higher than 9%.)? That means you are not likely to make your goals.?? You can either:

  • Save more, or,
  • Reduce future expectations,whether that comes from doing the same things cheaper, or deferring when you do them.

Those are hard choices, but most people don?t make those choices because they never sit down and run the numbers.? Now, I left out a common choice that is more commonly chosen: invest more aggressively.? This is more commonly done because it is ?free.?? In order to get more return, one must take more risk, so take more risk and you will get more return, right?? Right?!

Sadly, no.? Go back to Defined Benefit programs for a moment.? Think of the last eight years, where the average DB plan has been chasing a 8-9%/yr required yield.? What have they earned?? On a 60/40 equity/debt mandate, using the S&P 500 and the Lehman Aggregate as proxies, the return would be 3.5%/year, with the lion?s share coming from the less risky investment grade bonds.? The overshoot of the ?90s has been replaced by the undershoot of the 2000s.? Now, missing your funding target for eight years at 5%/yr or so is serious stuff, and this is a problem being faced by DB pension plans and individuals today.

The article goes on, and there are several others that flesh out the ideas further:

Simple Summary

Though there are complexities in trying to manage financial risk, the main ideas for dealing with financial risk are?these:

  1. Spend time estimating your future needs and what resources you can put toward them.
  2. Be conservative in what you think you assets can earn.
  3. Be flexible in your goals if you find that you cannot reasonably achieve your dreams.
  4. Consider what can go wrong, get proper insurance where needed, and be judicious on taking on large fixed commitments to spend money in the future.

PS — Two final notes:

On the topic of “what can go wrong in personal finance, I did a series on that here.

Investment risk is sometimes confused with volatility. ?Here’s a discussion of when that makes sense, and when it doesn”t.

Sorted Weekly Tweets

Posted on by David Merkel

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

Real Estate

  • NYC’s biggest-ever office-to-housing conversion is opening in the Financial District at prices ranging from just over $1 million for a studio to $12.75 million for a four-bedroom spread https://t.co/sXCwHGAgC3  Nice, if you can afford it. Feb 24, 2023
  • Home lenders are looking for ways to make 6% mortgages more appealing https://t.co/fOq3ulMZm0  Don’t do a buydown of the first-year interest rate. If you can’t afford the house on a level rate basis, don’t buy the house. What will you do when the rate rises? Feb 24, 2023
  • That 3% Mortgage Just Keeps Getting Better https://t.co/mFcum8UPo1  Rather than prepay, invest prepayment money in higher-yielding safe bonds. If rates fall such it doesn’t work anymore, take the appreciated bonds and do a big prepayment Feb 24, 2023
  • The US housing market lost the most value since 2008 https://t.co/qJYXFrPWp7  Has the FOMC forgotten the lessons of the Great Financial Crisis? Yes! Same errors that Bernanke committed… same certainty Feb 23, 2023
  • A growing number of big office landlords are defaulting on their loans, reflecting high interest rates and the popularity of remote and hybrid work policies https://t.co/5LJIGtxPrn  Slow motion train wreck Feb 22, 2023
  • Some people buying their first home will see their fees cut by about $800 a year under a new program that aims to address soaring borrowing costs https://t.co/ABVJpJfqj1  Make FHA loans more attractive by reducing the rate charged on mortgage insurance by 0.3% Feb 22, 2023
  • A couple near Chicago sees investing in real estate as a way to boost their wealth. A financial pro offers advice https://t.co/lVFWXKktkX  No. Real estate is a business. Consider the value of your time, as you say you want to start a family. Buy shares in equity REITs instead. Feb 22, 2023
  • Pyramid’s Crossgates Mall loans lurch toward default https://t.co/Xx2tiOqSR6  “Like most large malls across the U.S., the Crossgates business model has been crushed by the pandemic and changing shopping trends” Feb 21, 2023
  • A growing number of big office landlords are defaulting on their loans, reflecting high interest rates and the popularity of remote and hybrid work policies https://t.co/5LJIGtxPrn  Office properties & lower quality retail will show increasing defaults Feb 21, 2023
  • Europe’s property sector is springing cash calls and dividend cuts on shareholders. But investors in the financially stronger firms aren’t all smiles @hughes_chris https://t.co/nxWXx4cVWw  Effect is highest in Sweden, lowest in the UK Feb 21, 2023
  • A California-based real-estate agent was arranging a deposit when she realized she was getting scammed. “My guy was ready to wire $70,000 to this escrow. Thank God he didn’t.” https://t.co/IRvY6Ap0fW  Bizarre real estate stories where crime was a factor. Feb 20, 2023

Odds & Ends

  • Starbucks launches a range of olive oil-infused drinks in Italy to boost market share in a country where it’s struggled to gain a foothold https://t.co/qsDrYX3fHr  That will work? Feb 23, 2023
  • Is tort reform in the Sunshine State even possible? https://t.co/xyLdMxeue8  Unlikely. By the state gov’t being too interventionist in market issues and yet allowing for too many tort claims to go to trial, the P&C insurance markets are broken in Florida Feb 23, 2023
  • @michaelxpettis I said something like this yesterday, but not as well. Thanks. Feb 23, 2023
  • The Securities and Exchange Commission is investigating whether investor-protection laws were violated as stablecoins were issued https://t.co/PAF7eJnwfF  They are akin to deposit accounts in banking, and should be regulated that way. This one doesn’t belong to the SEC. Feb 23, 2023
  • Social Security Myths That Won’t Die https://t.co/BFGmcGq9GE  Mostly correct, though there are some nuances that he misses. Worth a read. Feb 22, 2023
  • The pandemic wiped out decades of gains by US students. Many parents are in the dark about how far their own kids must go to recover https://t.co/MKkoW2YSuK  One big error of the COVID era was not requiring an additional year of school for students, to make up for what they missed Feb 22, 2023
  • Major brokerages and news media feature technical analysis https://t.co/D6REmikOvx  Pictures grab people, because they like patterns, whether intellectually defensible or not. Feb 21, 2023
  • My tweet “Clouds moving rapidly west, with strong surface winds out of the south” s/b “Clouds moving rapidly east, with strong surface winds out of the south” But what a day, now it is “Clouds moving rapidly east, with strong surface winds out of the north” Feb 21, 2023
  • The Perfect Retirement Investment Nobody Wants https://t.co/27PPPYbt3k  Life insurers have gotten badly burned on LTC. Many annuity companies don’t want to offer LTC. Agents don’t like Immediate Annuities because they never get another commission from the policyholder Feb 21, 2023
  • Asda is rationing sales of fruit and vegetables after widespread shortages. Here’s what UK shoppers need to know https://t.co/x7ITKaOtuU  Effects of a bad growing season in N. Africa Feb 21, 2023
  • Plains, Ga., has about 550 residents—including Jimmy Carter, who is receiving home hospice care. “When I heard the news my heart hurt to know that he was going through this.” https://t.co/3Q5eSEDV6s  Liberal Baptist became a most improbable President of the US Feb 20, 2023

Non-US

  • Soaring onion prices are forcing governments to protect supplies https://t.co/QpkUL7EyZN  If you want to see riots, have poor people unable to afford moderately good food. Feb 25, 2023
  • New Zealand’s recent cyclone shows “the importance of physical cash still in society today,” RBNZ Assistant Governor Karen Silk says https://t.co/lxfSOZh3Th  You can’t have a society without physical currency Feb 25, 2023
  • How India is shaking off its shackles and emerging as an economic power https://t.co/E7WETLSov6  This is wishful thinking. Cultures change slowly, and the Indian government is still pretty corrupt. Feb 23, 2023
  • Iraq is planning to pay for private-sector imports from China in yuan, injecting foreign currency into the financial system to help ease pressure on the dinar https://t.co/IIQsGpJNbI  Will do little for the Iraq economy Feb 22, 2023
  • Iran introduces fresh restrictions on foreign currency sales after a rush on euros and dollars weakened the rial to an all-time low of 500,000 against the greenback https://t.co/BCAg4mi3Om  Corruption, bad policy and sanctions create this hyperflation Feb 21, 2023
  • Kazakhstan says local brokerages that snapped up Russian sovereign debt last year did so largely on behalf of clients who were Kazakh and Russian residents https://t.co/he4RkZaErR  Own Russian sovereign debt? There is liquidity in Kazakhstan. Feb 21, 2023
  • Russian exports of discounted crude and fuel oil to China jumped to record levels as the re-opening of the world’s biggest energy importer gathers pace https://t.co/j6iiSMmeFT  The discounts to Brent for Urals ($13) and Espo ($8) Crude are smaller than what I have read in the past Feb 21, 2023
  • Terrorists were blamed when explosives were found in an SUV parked outside the home of Mumbai’s richest man. The truth was far more alarming. https://t.co/ckyNmd6as8  Long article on entrenched police/political corruption. Another reason India will not develop Feb 21, 2023
  • Japan promises radical spending to boost its birthrate. Will it work? https://t.co/judPpbjI0z  It probably won’t, but perhaps governments could reduce old-age social insurance payments to those who don’t raise children, making the systems solvent #thepunishmentfitsthecrime Feb 20, 2023

Portfolio Management

  • Wagering on the bounce in stocks was always a long shot. Now it’s looking like a sucker’s bet https://t.co/Uy9U89wJBF  The problem is greater for growth stocks Feb 25, 2023
  • “There’s a risk that the macro economy delivers results that markets are still woefully unprepared for,” Billionaire quant investor Cliff Asness warned https://t.co/1yPXSxPr4f  “the valuation gap between the priciest and cheapest stocks is still at the 94th percentile” #agree Feb 23, 2023
  • The fixed-income market has become too bearish, too quickly https://t.co/4CyBDZevFM  Hard to say. There seems to be more demand to borrow on the long end of late. They may be wrong, but the long end of the bond market is rarely irrational. Feb 22, 2023
  • Rajiv Jain is the opposite of Ark CEO Cathie Wood. He’s quietly built a stock-picking juggernaut by investing in old-school, out-of-favor companies https://t.co/JEYvyUM7WD  Difficult to get so many decisions right consistently. Feb 22, 2023
  • The DJIA’s shake-up in the summer of 2020 dumped Exxon Mobil, Pfizer and Raytheon just as it was their turn to thrive https://t.co/QAnLl0umqv  The short-run effect of index inclusion/deletion is up/down, but the 2020 DJIA changes had the opposite performance over the next 2.6 yrs Feb 21, 2023
  • Rising interest rates boosted corporate pensions last year. This year rising rates may boost costs. https://t.co/YctKh06Uxi  It doesn’t have to work this way. You can invest to immunize your pension costs against changes in interest rates. It’s not rocket science. Feb 20, 2023
  • Biden’s SEC is coming for your investment account https://t.co/kTUj8hg9nQ  Actually, Gensler’s proposal would level the playing field, and create a fairer market structure for smaller investors. Why we have such a fragmented market system today astounds me. Feb 18, 2023

Economics

  • “It’s everywhere.” A bird flu outbreak has led to the death of nearly 60 million farm-raised chickens, turkeys and ducks in the U.S. Farmers fear the virus is here to stay. https://t.co/3v2NvG5N5u  A greater proportion of laying hens have died vs chickens generally in the US. Feb 23, 2023
  • Which explains why egg prices have risen so much more than chicken meat prices… https://t.co/eEyGIkUTVG  Feb 23, 2023
  • The world’s largest trial of the four-day work week finds a majority of companies are making the shift https://t.co/hnAky9goEQ  Color me dubious Feb 21, 2023
  • The rise of kitchen table economics https://t.co/Bo6nBxqnZB  Yes, contracts are too complex and construe everything in favor of the large corporations, but you don’t have to sign them unless you are getting enough value. Feb 21, 2023
  • Letter: The economic conditions that make wars more likely https://t.co/NfubUHNC8R  “A plan is needed to regulate current account imbalances, which draws on John Maynard Keynes’s project for an international clearing union.” You really want near-fixed exchange rates? Feb 21, 2023
  • Presidents are tweeting about it, and it’s featuring in election campaigns: Here’s how the world fertilizer crisis became political https://t.co/in7c4UVLgO  This is over shortages of potash & phosphate. Also trade issues stemming from a few wars and their related sanctions Feb 21, 2023

US Politics

  • Illinois Governor J.B. Pritzker said he’s willing to spend what it takes to keep Ron DeSantis & Donald Trump out of the White House https://t.co/V8cFk679HD  “Taking your eye off the ball.” I’ve done that. Neglects core responsibilities as governor to criticize national politicians Feb 25, 2023
  • White House is considering two economists who in the Obama administration—Karen Dynan and Janice Eberly—as candidates to become the Federal Reserve’s vice chair https://t.co/IbgMLjjkiP  Please, not an economist. No academics. No former Fed or government lackeys. Feb 23, 2023
  • The Defense Department and Microsoft are investigating an error that exposed military emails, highlighting the security risk of moving sensitive Pentagon data to the cloud https://t.co/w2YPXK9VCM  Happens to the best of us, and the government as well. Feb 23, 2023
  • Biden’s Social Security Trap by @wjmcgurn https://t.co/o2c5ZSJQrV  There is no political will to solve OASDHI (Social Security). Thus in 2032, we will face a scenario like this: https://t.co/BXY54hjsoB  https://t.co/8YWKsnmZvX  Feb 21, 2023
  • The PCAOB says it doesn’t have jurisdiction to monitor audits of privately held crypto firms. Some say there are ways to strengthen the board’s crypto oversight https://t.co/GUoKyWjYY6  Until you can say it is a deposit, commodity, or security, you don’t know how to regulate/audit Feb 21, 2023

Technology

  • Germ-zapping lasers can help cut down on infections after surgery https://t.co/979qq9KSSu  Sounds promising. Feb 25, 2023
  • How Rust went from a side project to the world’s most-loved programming language https://t.co/YvAvVy4H0K  Long read, but fascinating. Memory flaws are one of the biggest reasons for software crashes, and Rust eliminates that problem. Feb 24, 2023
  • Apple is making major progress on a no-prick blood glucose monitoring system for its smartwatch https://t.co/fzN4nDBa1Q  Big stuff, if it works, which has been elusive so far Feb 23, 2023
  • Ozempic’s popularity among people looking to lose weight has limited supplies for diabetes patients who depend on the drug to control their blood sugar https://t.co/2cFHjgLzjK  What is nice for those who want to lose weight is necessary for diabetics Feb 22, 2023
  • Removing carbon from the air will be a key step in fighting climate change. But it’s plagued by problems https://t.co/IhFxHwvqYV  Interesting, if it genuinely does what they say it does Feb 20, 2023

China

  • Xi Jinping is set to have more control in decisions over the financial system, with the likely revival of a powerful committee and a possible appointment of a key ally in the central bank https://t.co/eu2p8z2dpx  What good or bad comes from this is a mystery – ill-minded tinkering Feb 25, 2023
  • Empty shipping containers pile up at packed Chinese port as orders dwindle https://t.co/3f8GPQ1By3  So much for the Chinese economic recovery Feb 21, 2023
  • Thousands of Chinese Retirees Protest Government Cuts to Benefits https://t.co/8JmxGfyENx  Social Insurance plans fail when the ratio of workers to beneficiaries gets too low. Feb 21, 2023
  • Any gains China might have anticipated from its embrace of Russia are hard to spot. But the costs are clear & growing https://t.co/F8wNl8ruWU  “Xi is trapped in a strategic dilemma, at the mercy of events. His erstwhile masterstroke is looking more and more like a losing bet.” Feb 21, 2023
  • Pakistan’s creditors are demanding China take as big a haircut as them in any sovereign debt restructuring, perhaps bigger. It should @mihirssharma https://t.co/2wnXDsT4nW  If corruption is not ended, debt forgiveness won’t do much Feb 20, 2023

Companies

  • Carvana’s disappointing quarterly results sent the online used-car dealer’s stock into freefall and triggered a string of warnings from analysts https://t.co/Pe6xrZjMBT  So much for showmanship $CVNA Feb 25, 2023
  • BYD Most Likely Faked Its 2022 Sales Numbers, Real Ones Could Be Much Lower https://t.co/hpjoersddF  I have no idea, but if true, wow. Feb 24, 2023
  • National Public Radio will reduce its staff by 10% after projecting a $30 million revenue shortfall for the coming year https://t.co/shgKfke3Xb  In the end, it is just a business, albeit a nonprofit. Good nonprofits care for their people and don’t overexpand during booms https://t.co/Tlzm6Habx1  Feb 23, 2023
  • The EV question for auto executives is: How quickly should they make the shift to electric vehicles? https://t.co/8MaVClqMLB  The danger is in moving too fast on this. Let unsubsidized consumers decide. Feb 22, 2023
  • Almost a decade ago, Elon Musk envisioned a passenger transit that moved at nearly the speed of sound. Where is it? https://t.co/rhGkIWdDSn  Hyperloop: Boring fantasy, not technology Feb 21, 2023

South Africa

  • Eskom’s chairman says outgoing CEO behaved “reprehensibly” when he made accusations of theft and corruption within the state-owned electricity company https://t.co/dupwUx6T1U  Telling the truth is “reprehensible.” Coal thieves also a problem. Get ready for more blackouts. Feb 23, 2023
  • South Africa’s rand rallies after the budget unveiled details of plans to deal with debt at the ailing state-run power utility Eskom https://t.co/TX3kvaN8PN  Unless you deal with corruption and crime surrounding Eskom, this is all for naught Feb 22, 2023
  • South Africa’s finance minister will probably spend about five minutes of his budget speech Wednesday on Eskom — a tense 300 seconds for bondholders https://t.co/SBswUTR3G4  If you can’t end the corruption & sabotage regarding Eskom, the debt transfer won’t help South Africa Feb 21, 2023

Ukraine War

  • As NATO’s military commander a decade ago, Admiral @StavridisJ worked productively with Russian generals. But Putin’s obstinance led to his doomed war in Ukraine https://t.co/73lA9K8J0B  The Russian military exists to make the French military look good Feb 23, 2023
  • As Russia’s invasion of Ukraine enters year two & relations with China worsen, concerns persist over whether the US is ready to fight a war https://t.co/w2JbHsZNi0  “Every single person knows that what we’re doing is crazy,” said Ferrari. “But everybody is helpless to change it.” Feb 21, 2023
  • Vladimir Putin should read the story of King Croesus. In fact, so should we all https://t.co/abmJ06n3qu  Almost no expected the current outcome. That said, many wars end in a stalemate. That seems to be what is happening now. Feb 20, 2023

Personal Finance

  • Why don’t we talk about money? https://t.co/uYnJdKGDFs  Other reasons: looking bad by comparison, people may think you are arrogant because you have done well. I think children need to understand how the economics of the family works, so they can do it as well or better Feb 22, 2023
  • Some parents aren’t waiting for retirement or urgent healthcare needs to move in with adult children https://t.co/EeBAGjFVHu  Think hard about this, and all the adults talk it through — who is in charge? How are bills paid? Privacy? There are many ways for this to go wrong. Feb 22, 2023
  • Markets Weekend: When is a Banc not a bank? https://t.co/QoSdP3yFKx  When it offers bonds that function like deposit accounts. How Compound Banc could originate the loans mentioned does not make sense. Avoid. Avoid. AVOID! ht: @felixsalmon Feb 20, 2023

Adani Group

  • The combined market value of Adani Group’s shares have just fallen below $100 billion https://t.co/qsNPOK1xGh  The question is how much liquidity they really have, versus maturing debts and needed working capital. Paying off a few debts w/scarce liquidity could backfire Feb 22, 2023
  • Almost a month after a bombshell short seller report lopped off $132B in market value from Gautam Adani’s empire, the Indian billionaire has doubled down on his comeback strategy https://t.co/7RybNimFLC  Making a virtue of necessity, while capital costs skyrocket Feb 20, 2023
  • Adani Group stocks have seen more than $132 billion of market value wiped out since the explosive Hindenburg Research report, but none is hit as bad as Adani Total Gas https://t.co/3j9MzDyK5S  What a chart https://t.co/nlK8PZNAKZ  Feb 20, 2023

Credit

  • The $1.8 trillion student debt bubble is about to burst https://t.co/LPQAkME8BI  Do NOT borrow money to get a degree that will NOT give you the income to repay the debts. And don’t complain unless someone forced you to go to college & take on the debt Feb 25, 2023
  • An office landlord tied to money manager Pimco has defaulted on $1.7 billion of mortgage notes https://t.co/xUCEuoGkfW  Becoming a self-reinforcing cycle of skittish lenders, defaults, sagging prices for offices. Feb 24, 2023
  • A quirky German debt product is gaining fans around the world. Here’s what it is all about https://t.co/FvUnDBAfLJ  Illiquid promissory notes with low disclosure and no secondary market. I can see why borrowers like it, but all the lenders get is extra yield vs a traditional debt Feb 22, 2023
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