Photo Credit: duncan c || I know it is graffiti, but face it, most arguments regarding COVID-19 or politics are little better than graffiti

There’s a popular argument going around about the VAERS [Vaccine Adverse Event Reporting System] database that the COVID-19 [C19] vaccines are killing a lot of people. I am here tonight to tell you that is likely false, but at minimum, that you can’t prove that through the VAERS database.

First a digression: Out of group of one million picked at random in the US, how many people will die on a given day?? Using 2019 US crude mortality data, roughly 20.?

So, out of 470 million vaccine doses administered, how many should have died for any reason within one day of receiving the dose of vaccine? Roughly 9,400.? Within two days? 18,800. How many deaths are in VAERS after one day? 1,921. Two days? 2,415. Expected deaths for any reason versus VAERS data after five days? 47,000 vs 3,244. Fourteen days? 131,600 vs 4,458. 30 days? 282,000 vs 5,629. There are 4,799 additional deaths 31 days and after, and those where no date was specified in the VAERS data. So, 10,428 deaths from COVID in the VAERS database.

So, the VAERS data does not support the idea that the vaccine is killing people.? Now the VAERS database has inconsistent and uncontrolled reporting ? it is a voluntary database, and anyone can post to it, makes any study design pretty useless, which is part of their disclaimers. Many allege underreporting but ask yourself “Could there be more than 25 deaths from the vaccines for every one reported?” Really, I doubt it. A big blip in the death rate from vaccination would get noticed ? you couldn?t suppress it. The news outlets would be all over the story.

We have never had a vaccination campaign of this size in the US before.? We should expect people dying post-vaccination at an ordinary rate.? Where VAERS could be useful would be looking at cause of death codes for a given vaccine, and seeing if there are any death causes that are unusual in proportion.? And that?s what the researchers mostly use the VAERS database for.

From other statistical work I have done I can tell you that the vaccines are generally effective, and that if you don’t have a medical reason to not get vaccinated, you should get vaccinated. The vaccines reduce the likelihood of infection, severity of infection, and the likelihood of death from C19.

And for my Christian friends who object because fetal tissue from abortions long ago were used in the process of creating the vaccines, I will ask you this: many drugs get tested or developed using the aborted fetal tissue, including aspirin, Tylenol, Ibuprofen, Lidocaine, Mucinex, Pepto Bismol, MMR Vaccine, Remdesivir, Tums, Maalox, Preparation H, Claritin, Robitussin, Lipitor, Zoloft, Aleve, Ex-Lax, Benadryl, Suphedrine, and Sudafed, among many others. Are you willing to make the moral claim and do without almost all drugs, not just the C19 vaccines?

Those children are dead, and nothing can be done about it. The cells that comprised their bodies are long since gone. The cells existing today are many generations removed from the babies who were killed through the abortions. Not that they should have been killed (let’s end Roe v Wade), but they have indirectly done more good for mankind than most people (including me) will ever do.

Public health is a proper province of government, unlike most matters that governments concern themselves with today, because it involves matters in health that can be made better via collective action. The Mosaic Law supports this idea. And so I say to my Christian friends, get vaccinated, and stop listening to the right wing media that milks you to make money via advertising.

Photo Credit: eflon || All in all, you’re just another brick in the wall…

In some ways, the Federal Reserve is the whipping boy of Congress. Congress can’t decide on anything significant, so the Fed fills in the blanks, and keeps things moving, even if it creates humongous asset bubbles in the process.

That is what we are facing today. Overvalued stocks, housing, corporate bonds, private equity, and more. Inflation in goods and services may be transitory, but asset inflation is a constant. Whether by QE or rate policy, the Fed tries to end the possibility of recessions by making financing cheap, and blowing asset bubbles in the process.

What of the future? The Fed will be dragged kicking and screaming to tightening. It will follow the stupid Alan Greenspan highway of 25 basis points per meeting. It will be all too predictable, which has little to no impact until it is too late, creating pro-cyclical economic policy, something the Fed specializes in.

The Fed will be surprised (again) to see that the long end of the yield curve does not respond to their efforts. Are they stupid? Yes. the yield curve hasn’t worked in the classical way for over 20 years. In an overindebted economy, long rates are sluggish. Can the Fed abandon the dead orthodoxy of neoclassical economics to embrace the reality of overindebted economics?

I doubt it. I asked two Fed governors three years ago when the Fed would abandon the failed Neoclassical economics. They looked like dead sheep for a moment, before they gave some lame defenses of the theory that can’t account for financial markets or marketing.

What I expect is that the Fed will tighten the Fed funds rate to 1.5% or so, the long end sinking, and then something blows up, and they return to the prior policy of 0% rates, and QE… failed policies that inflate asset bubbles and increase inequality.

We’re in a “doom loop” where there is no way to purge this system of its errors. We would be better off under a gold standard, with stricter regulation of banks. Would we have a recession? Yes, but eventually the economy would grow again organically, without the pollution of stimulus.

That said, the Federal Reserve is not the main problem. The main problem is American culture that will not tolerate severe recessions. We need recessions to liquidate bad debts that hinder the economy from growing rapidly in the future.

We need to accept the boom-bust cycle, and not look to the government or central bank to moderate matters. Bank regulation is another matter, as loose regulation of banks led to extreme booms and busts, particularly between 1870-1913, and 2004-2008.

Conclusion

The Fed will tighten and fail, returning us to the same morass that we are in now. Financial repression via the Fed will continue to create inequality with no smoking gun. Stupid people will finger other causes, when the real cause is the Federal Reserve. We need to eliminate the Federal Reserve, and cause Congress and the Executive Branch to take responsibility for their failed policies.

PS — there could be a currency panic, but I doubt it. Too many countries want to export to the US.

Photo Credit: Chris Blakeley || Always optimistic when things are growing, and in the dumps when it falls apart

Over the years, I have suggested that two firms should break up on a number of occasions: AIG & GE. Both are now in the process of completing their breakups.

The news on GE dropped today, and I was surprised that the media did not pick up on one significant question on the GE breakup. Who gets the insurance liabilities that have been a real pain to GE even after selling off Genworth. As I tweeted:

General Electric to Split Into Three Public Companies – WSJ https://t.co/BR8uXhhDVJ Notably missing from all the $GE press coverage is who has to pay off the insurance liabilities: Aviation, probably the weakest of the three. Could gore those relying on the guarantee… pic.twitter.com/qhT0y4gfXL

— David Merkel (@AlephBlog) November 9, 2021

I think I first suggested that GE should break up in a comment in RealMoney’s Columnist Conversation sometime back in 2005, but that is lost in the pre-2008 RealMoney file system, and exists no more. In terms of what I can show I will quote from this old post from 2008:

5) File this under Sick Sigma, or Six Stigma — GE is finally getting closer to breaking up the enterprise.? It has always been my opinion that conglomerates don’t work because of diseconomies of scale.? As I wrote at RealMoney:

David Merkel

GE — Geriatric Elephant

4/27/2007 1:16 PM EDT

First, my personal bias. Almost every firm with a market cap greater than $100 billion should be broken up. I don’t care how clever the management team is, the diseconomies of scale become crushing in the megacaps.

Regarding GE in specific, it is likely a better buy here than it was in early 1999, when the stock first breached this price level. That said, it doesn’t own Genworth, the insurance company that it had to jettison in order to keep its undeserved AAA rating. Which company did better since the IPO of Genworth? Genworth did so much better that it is not funny. 87% total return (w/divs reinvested) for GNW vs. 28% for GE. A pity that GE IPO’ed it rather than spinning it off to shareholders…

But here’s a problem with breaking GE up. GE Capital, which still provides a lot of the profits could not be AAA as a standalone entity and have an acceptable ROE. It would be single-A rated, which would push up funding costs enough to cut into profit margins. (Note: GE capital could not be A-/A3 rated, or their commercial paper would no longer be A1/P1 which is a necessary condition for investment grade finance companies to be profitable.)

Would GE do as well without a captive finance arm (GE Capital)? It would take some adjustment, but I would think so. So, would I break up GE by selling off GE Capital? Yes, and I would give GE Capital enough excess capital to allow it to stay AAA, even if it means losing the AAA at the industrial company, and then let the new GE Capital management figure out what to do with all of the excess capital, and at what rating to operate.

Splitting up that way would force the industrial arm to become more efficient with its proportionately larger debt load, and would highlight the next round of breakups, which would have the industrial divisions go their own separate ways.

Position: none, and I have never understood the attraction to GE as a stock

Over the years, I continued to write about GE and Genworth (I grew bearish over LTC after analyzing Penn Treaty. I was always bearish on mortgage insurance). I never thought either would do well, but I never expected them to do as badly as they did. Optimistic accounting ploys from the Welch years bit into profits of Immelt, as he was forced to reset accruals higher again and again. Overly aggressive financial and insurance underwriting similarly had to be reversed, and losses realized.

After today, all but the successor firm for GE (Aviation) has a chance to do something significant, freed from the distractions of being in a conglomerate. They can focus, and maybe win. As for GE Aviation, because of the insurance liabilities they will probably receive a valuation discount. Maybe they will sacrifice and pay up, selling the liabilities to Buffett with significant overcollateralization.

American International Group

I first suggested that AIG break up back in 2008. Only M. R. Greenberg had the capability of managing the behemoth, and once he was gone, lower level managers began making decisions that Greenberg would have quashed, which led to short-term gains, and larger long-term losses. After AIG was taken over by the Fed, bit-by-bit they began selling off the pieces — Hartford Steam Boiler, ILFC, AIA, Alico (to MetLife), and more. They were left with a portion of the international P&C business, and the domestic life and P&C businesses.

They are now planning on spinning off the domestic life companies, which will leave AIG as a P&C insurer with relatively clean liabilities (They reinsured Asbestos and Environmental with Berkshire Hathaway).

Where do we go from here?

Is there a lesson here? Avoid complexity. Avoid mixing mixing industrial and financial. Avoid mixing life and P&C. (Allstate is finally splitting that.)

That said, there may be another lesson for the future. What of the extremely large companies that are monopolies? Some of them aren’t complex; they just dominate a large area of the economy as monopolies. Governments want to do one of two things with monopolies. They either want to break them up, or turn them into regulated utilities. Why?

The government doesn’t like entities that get almost as powerful as them, so they limit their size, scope, and subject them to regulation. So be aware if you hold some of the largest companies in the US or the world, because governments have their eyes on them, and want them to be subject to the government(s).

Full disclosure: long MET

Photo Credit: Paul Kagame || Hail Emperor Xi, the greatest since Qin Shi Huang!

Ready for a cold winter? Much of the world is not. Many places have discouraged using hydrocarbons to produce power, ostensibly for environmental goals, whether those are valid or not. Whether by the fiat of the Chinese Communist Party, or because some Eurocrats push a green agenda, many people are facing a winter where power/heat may be limited. And even if there may not be absolute shortages everywhere, higher prices for all forms of energy, will pinch the budgets of many in the lower middle class and below this winter in the Northern Hemisphere.

Part of this stems from central planning. China is the easiest example. Xi Jinping has arrogated to himself more and more power over time, changing the dynamics of the Communist Party, which once at least had some factions, to a unitary party that has only one leader, Emperor President Xi. Some of it came about by eliminating corrupt rivals, but the rest from instilling fear within the Party.

Almost every evening, my wife and I read the Bible together. Recently we have been going through the post-exilic portions of the Old Testament where the Jews live under the rule of the Babylonian and Medo-Persian Empires. Those rulers were typically absolute monarchs: do what I say or die! In going through Esther, my wife commented that it was stupid to have laws that cannot be altered. (The same thing is stated in the Book of Daniel.) My comment back to her was if you were an absolute monarch in that era, you were God walking on earth, and could never be wrong. Thus no decree of an Emperor could be wrong.

And so it is for President Xi: everything he says is right. He may be an atheist, but to the Chinese in Red China, he is “God walking on Earth” in at least the Hegelian sense. As such, he makes a decree, and those serving him are scared to do anything more or less than he wants. But with vague directives, what does he want?

Unilateral authority is particularly vulnerable to making mistakes. In the intermediate-term, China is likely to get weaker because of the increasing concentration of power of President Xi. That’s not to say that capitalist democracies can’t run off the rails, but typically with enough dissenting voices, the worst outcomes don’t usually take place. There are exceptions though.

The first exception is regulators with too much discretionary authority. By pursuing one limited goal in the short-run, such as long-term environmental objectives, they may harm the interests of ordinary people in developed markets by making it hard to get food, fuel/energy, and other necessities. And applying the same rules in foreign policy, they may well condemn the developing world to permanent poverty. The developing world thinks the developed world doesn’t care. They are right, and they will ignore what their current leaders have promised in order to curry temporary favor with the developed world.

Now where there is the ability to self-correct, eventually societies will remove regulators, politicians, etc. That said, some things are more entrenched than others. I speak of the cult of stimulus.

What is more untouchable than the central banks? It’s hard to think of anything more unaccountable. They may technically be beholden to the local parliament, but practically, no one ever messes with them aside from despots pursuing hyperinflation (Venezuela, Turkey, Lebanon, etc.).

What gores me is that the unaccountable central banks never ‘fess up to errors. Listen to this:

“Asset prices remain vulnerable to significant declines should investor risk sentiment deteriorate, progress on containing the virus disappoint, or the economic recovery stall,” the Fed said in its twice-yearly Financial Stability Report released Monday.

Fed Warns of Peril in Run-Up of Risky Asset Prices, Stablecoins

That serial blower of bubbles, the Fed, warns us about the height of risky asset prices. Fed policy works via encouraging economic actors to borrow less or more. They have been running a more aggressive monetary policy than they ever needed to, and in the process have inflated housing prices, stocks, bonds of all sorts, private equity, etc. This is not just true of the Fed in the US, but in most developed country central banks.

This was an unforced error. Monetary policy could have been tightened in mid-2020, and I mean raising the Fed funds rate, not just stopping QE. When the equity markets race to new highs so rapidly, why should any stimulus exist at all?

We don’t need stimulus from Congress either. When demand is so strong that supply chains creak, buckle, and seize up, it is not time to stimulate more, rather, it is time to balance the budget.

I would like to think that supply-chain troubles, inflation, and growth are all transitory. But if in an effort to force growth higher than it should be in the short-run, the growth will still be transitory, but the supply-chain troubles and inflation will persist.

Beware the experts that say they run things for your good; they likely don’t know what they are doing.

=============

Ending note: one more thing, beware the inflation numbers, particularly on items in short supply. If the economists reduce the weights on those things in short supply, it will artificially understate inflation.

Photo Credit: miketransreal || Truly when the small seems big, and the big seems small, reality may intrude and reverse matters

Today I tweeted:

Fed's Preferred Libor Replacement: SOFR Rate Drop Fuels Jitters Over Transfer https://t.co/oqHADuh2YZ As SOFR gets bigger it could screw up short-term lending markets.

— David Merkel (@AlephBlog) October 21, 2021

What I am about to say is speculative. For the last nine years, I have thought that the move away from LIBOR could be a case of “The cure is worse than the disease.” If you are going to have an index for short-term lending it can be created in a few ways:

• Off of surveys, like LIBOR.
• Off of transactions, like SOFR [Secured Overnight Financing Rate], or the on-the-run Treasury yield
• Off of a liability yield, like a cost of funds index

One of the virtues of a non-transactional benchmark is that you won’t have to deal with the problem where the market generating the index is smaller than the market using the index. When that is the case, you can have those in the market using the index attempting to hedge in the smaller market generating the index, leading to distortions, volatility, etc. Though the small market was created to control the large market, when hedging starts, the large market will dominate the small one, and maybe games will get played in the small market to influence the large market.

As I wrote nine years ago in The Rules, Part XXXII:

Dynamic hedging only has the potential of working on deep markets.

Arbitrage pricing can reveal proper prices in smaller less liquid markets if there are larger, more liquid markets to compare against. The process cannot work in reverse, except by accident.

The SOFR market is a lot smaller than all the floating rate financing that goes on, which is transitioning from LIBOR to SOFR. My fear is that as the conversion from LIBOR to SOFR grows, and SOFR-based new issuance expands, that hedging by taking the opposite side of a SOFR trade will come to dominate that market, leading to volatility, and the taint that comes from the appearance of playing games.

Again, I am not certain here, but I think we may regret the transition from LIBOR to SOFR.

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

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

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

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

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

Image Credit: All images courtesy of Aleph Blog || Lookout below!

I’ll keep this brief, as I’ve said it so many times before. This market is on borrowed time. The only comparable period for this market is from the fourth quarter of 1999 to the third quarter of 2000 — the dot-com bubble, which was another period of speculation fueled by loose monetary policy. Here’s a picture of what price returns were like from that era over the next ten years (but with a 2% dividend yield).

And we are touching the sky at present. Though at the end of the quarter, the S&P 500 was priced to return -0.91%/year over the next ten years, at present that value is -1.41%/year. None of these figures are adjusted for inflation. At the recent high of 4,536.95 on September 2nd, the expected return was -1.73%/year for the next ten years. This graph shows how we are touching the sky:

The actual line is touching the maximum line. The future line gives an idea of how valuations could normalize over ten years.

The Dow 36,000 crowd will get their day in the sun, maybe even this year, or it might not happen until 2035. But even if it hits the level, it’s unlikely that it will stay above that level for most of the rest of the next 10 years.

I’ll close with a quote from something I wrote recently:

And I think even as the market falls, value should do well, as it did in 2000-2001. This piece from Bob Arnott at Research Affiliates makes a good case for it.

So play it safe; it’s a messy speculative world out there. It wouldn’t take much for it to turn ugly.

Picture Credit: Wiley Publishing || Ah, the golden umbrella!

This is a tough book to review. I don’t like the writing style — it is pompous, and drags you through a variety of “rabbit trails” that aren’t necessary to the core ideas of the book. Simplicity is beauty, so going on a travelogue of your philosophical interests detracts from the presentation of this book. As I have often said, the book needed a better editor who could overrule the author and say “That’s not relevant.” “That’s boring.” “Get to the point.” and “This is thin gruel.”

Quoting from pages 4-5:

Then there are the modeling issues — a decent part of the book assumes that yearly returns are essentially random. Market returns are regime-dependent. There is momentum. There is weak mean reversion. The results in prior years affect the current year, both positively and negatively.

Toward the end of his analysis the author recognizes the problem and then uses 25-year blocks of S&P 500 returns 1900-2019 (or so), without noting that it gives undue weight to the years in the middle that get oversampled.

The grand problem is that we only have one history — and is it normal or an accident? We assume normal, but how can we know? Also, though we have 120 or so reliable years of performance for the pseudo-S&P 500, for options on the S&P 500, we only have ~35 years of data. For more esoteric diversifying investments, we have 10-40 years of data. We have no strong data on how they might have performed prior to their inception. Also, their modern presence may have affected the performance of the S&P 500.

Simulation analyses have to be done ultra-carefully. It’s best to develop an integrated structural model, deciding what variables are random and how they correlate with each other. Then use pseudo-random multivariate values for the analysis. I used these to great value to my employers 1996-2003 when I was an investment actuary.

What I Liked

But I like the book in some ways. He makes the important point that hedging when the cost of the hedge is fair or even in your favor is an advantage. And this is well known by regulated financial companies. There are two ways to win. 1) Source liabilities at favorable terms. 2) Buy assets on favorable terms. This book is about the first idea: insure your portfolio when it pays to do so. Happily, the insurance costs the least during bull markets, when everyone is hyperconfident. It costs the most during bear markets, where everyone is hyper-scared. So hedge more when it is cheap, and less when it is expensive. Simple, huh? But the book leaves this idea implicit. It never states it this plainly.

Second, I like his idea that the safest route is the one that maximizes expected wealth over time. That is underappreciated by asset managers.

Third, I appreciate that he brings in the Kelly Criterion, which is one of the best ways to deal with the risk-reward question, which in this case, is how you size your hedges.

Finally, he talks about maximizing the fifth percentile of likely outcomes, which in a well-structured model will keep the investor in the game, allowing the investor to cruise through bear markets, and stay invested. Hey, many actuaries have been doing that for life insurers over the last 25 years. Welcome to the club.

The Central Conundrum

He classifies his hedges as store-of-value, alpha, and insurance. Store of value is short-term savings that has no possibility of loss, which oddly he has at 7%/yr. That might be a long term average, or not, but when modeling the future, variables have to be forward-looking. There is no sign of 7% on the horizon at no risk.

He includes gold in this bucket, and thinks it is a genuine diversifier, with which I agree. Then there is alpha, which for him is commodity trading advisors who are trend followers, who do well when volatility is high. He also briefly touches on a variety of investments that he has tested, and finds they don’t aid the growth of terminal net worth on average.

Then there is insurance, which he never spells out exactly what it is, and the author says it is the most effective way to hedge, and profit. He hides his trade secrets.

What he should have told you I will reveal here. The insurance he is probably talking about is put options on stock or corporate bond indexes (particularly high-yield), or paying for protection on indexed credit-default swaps (best, but only institutions can do this). Imagine paying a constant percentage portfolio value by period to protect your portfolio. When valuations are high, implied volatility is low, and the insurance is cheap when you need it. When valuations are low, implied volatility is high, and the insurance is expensive when you don’t need it. In that situation, your existing hedges might have appreciated so much that you sell them off and go unhedged. Implied volatility can only go so high, before it mean-reverts. When option prices get high, potential hedgers and speculators who would be option buyers sit on their hands, and don’t do anything.

Quibbles

Already stated.

Summary / Who Would Benefit from this Book

If you have read this book review, you have learned more than the book will give you. I really don’t think many people will learn much from this book.

Full disclosure: The publisher kind of pushed a free copy on me, after I commented that I wasn’t crazy about the author’s last book.

Picture Credit: Jackie || Though the idea for the lights bringing back the twin towers is beautiful, for me, someone who travelled to the PATH station beneath them many times, I miss the twin towers.

For those that don’t know my blog well, I described what happened to me during 9/11 in two places:

• My 9/11 Experience
• The Education of a Corporate Bond Manager, Part I (and a little bit in part VI, but that’s mostly on bond management)

There’s one small thing I left out. I was planning to go to a conference at the World Trade Center on 9/12, if things were in good enough order at my work. I had to leave it flexible, because I did not know what would come of my client meeting planned for 9/11 — the client was rarely reasonable, and I might have to jump on a bunch of projects, and not go to NYC. As it was, I never had to make that choice. The events that unfolded made it for me.

One of the things that surprised me at the time was all the people who said, “Why did they attack us? What did we ever do to them?” in the US. I remember an email that came to me saying that, and I came up with seven reasons why they would do it. Now, I don’t have that email, so I am guessing at what I said, and I may not be able to come up with all seven, but I will try to do it here.

1. The US supports Israel.
2. Our entertainment dominates the globe, and poisons their culture, as many in Islamic countries like the entertainment, and become lukewarm to serious Islam.
3. We support “moderate” Islamic governments, which keeps serious Islamists out of power.
4. We kept bases in Saudi Arabia, desecrating their Holy Land.
5. The Saudi Monarchy talks a good game with respect to Islam, but they oppose radicalism, and the US supports them.
6. They hate the US because it is so morally degenerate, and yet so rich, which gnaws at them because the more consistent a nation is with Islam (excluding the accident of crude oil), the poorer they tend to be.
7. The US invaded Iraq for less than significant reasons in Gulf War I. The US & Israel make military and pseudo-military actions with impunity in the Middle East. Think of Reagan bombing Ghaddafi.

Okay, I got to seven, and I suspect at least six of these were in my original email. My statement to those I ran across in 2001 was that the attack was not irrational. They had genuine reasons to hate the US government.

I think we didn’t learn anything from 9/11. Or, we didn’t care that we offended them. We essentially doubled down.

1. We fought Gulf War II.
2. We invaded Afghanistan, a nation that is not a nation, and tried to change it, blowing a lot of money on a hopeless cause. Cultural change is almost impossible to achieve, and certainly will not happen when pushed by outsiders.
3. The O-bomber used drone strikes with impunity to eliminate enemies, and occasionally innocent people by mistake. Now Biden follows in his footsteps.
4. Seal team six eliminated Osama Bin Laden in Pakistan. (Do we really want a world where those who are technologically powerful can assassinate with impunity? How should we feel about Salvador Allende of Chile?)

I believe that war is legitimate if there are legitimate reasons. I believe in Just War Theory. Aside from that, I tend to be a pacifist. One of the few things I liked about Trump was that he was probably the least hawkish President that we had in a long time. I don’t think the US has had a legitimate war over the last 70 years. It is our job to defend our nation, not the world as a whole.

I think we have created more problems in the Middle East over the last 20 years, and to the degree we feel we have to continue to interfere there, those problems will increase still more. If you think of George Washington warning about “entangling alliances,” I think we have fallen into the dangers that he described. And if you think of Eisenhower warning us about the “military-industrial complex,” that has come to dominate us as well.

We may have beaten back serious Islam for a time, but it will come back. We have offended them too much. The US has to understand that the hatred that exists in the Middle East can’t be solved. Let them fight, and let us stay out of it. Protect our nation? Yes. Protect the world? No. Offensive wars are almost never just.

Part of being a strong nation is controlling that strength, and only using it in the most severe situations that affect us directly. If you waste that strength on lesser matters, you weaken you own nation, and your reputation abroad.

So no, I don’t think we did the right things as a nation post-9/11, and I haven’t even touched on the loss of freedom here. The US needs to be more humble, and not impose its will on the rest of the world.

Picture Credit: All pictures today are by me. Aleph Blog

What sounded simple yesterday proved harder to put into a spreadsheet than I expected. Nonetheless, I got it done. As an aside, I wanted to mention one thing I don’t think I have disclosed before: I competed in the Modeloff competition four or five times. I always got to the second round. One time my first round score had me in the top 20, and one time my second round score had me in the top 1%. I never made it to the finals — it is no place for old men. I asked one of the organizers if I was the oldest guy in the contest, and he said, “No, there is one guy older than you.”

The grand challenge of this model was solving two messy simultaneous equations to find the loss percentage. That took me two hours to solve, due to repeated errors where I tried to do it too quickly. Always go back to first principles, and solve things step by step.

Tonight, I am only changing one variable, the most important one for this discussion, what are the assets worth at the close, prior to withdrawals. In my first example, that value is $996,100, leaving the Closing Pro-forma Shadow NAV at 99.51%, which doesn’t break the buck by a hair. The withdrawals get paid in full, and the fund lives to fight for another day with no press release.

In the second scenario, the closing assets prior to withdrawal are $995,900, leaving the Closing Pro-forma Shadow NAV at 99.49%, which breaks the buck by a hair. The withdrawals get paid at a 3.04% discount. The small withdrawers lose additional units, but the amount of money they requested comes in full. The large withdrawers don’t get paid in full. A large withdrawer is asking for all or almost all of their money back. The assumption in this set of scenarios is that the large withdrawers are asking for 92% of their assets back in aggregate. The calculation balances the losses between a payment discount, and loss of most of the remaining units.

In the third scenario, the closing assets prior to withdrawal are $985,000, leaving the Closing Pro-forma Shadow NAV at 98.13%, which breaks the buck. The withdrawals get paid at a 8.48% discount. Those staying still have all of their units at greater than par.

In the fourth scenario, the closing assets prior to withdrawal are $980,000, leaving the Closing Pro-forma Shadow NAV at 97.50%. The withdrawals get paid at a 10.00% discount. Those staying also lose units, but their higher income rate will compensate for that, unless the losses are permanent from defaulted assets. Nonetheless, the losses they take are minor relative to those who withdrew from the MMF.

In the fifth scenario, the meltdown scenario worse than Reserve Primary, the closing assets prior to withdrawal are $950,000, leaving the Closing Pro-forma Shadow NAV at 93.75%. The withdrawals get paid at a 10.00% discount. Those staying also lose units, but their higher income rate will compensate for that, unless the losses are permanent from defaulted assets. Nonetheless, the losses they take are less than those who withdrew from the MMF.

My contention is this: a structure like this would prevent money market panics. Would it stop something like the Great Financial Crisis? (2008-9) Of course not. The disaster was going to happen regardless. The money market funds were in the wrong place at the wrong time. The repo markets were far more significant, and still have not gotten fixed.

When I get a moment, I will submit this to the SEC, as I did the last time after the Great Financial Crisis. I talked with two of the lawyers at the SEC, who said my idea was promising, but too radical. We’ll see what happens this time. It will likely be nothing, but who can tell? Gensler might be willing to consider something radical.