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 … [Read More...]
Breaking up is hard to do
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: … [Read More...]
Unforced Errors
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 … [Read More...]
Estimating Future Stock Returns, June 2021 Update
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 … [Read More...]
Book Review: Safe Haven
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: ‘As this book is, in part, a response to those questions, I do want … [Read More...]
How to Avoid “Breaking the Buck” Redux
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 … [Read More...]
How to Avoid “Breaking the Buck”
Picture Credit: photosteve101 || Maybe we can get some glue… I used to write about this topic after the financial crisis a lot. I stopped after the SEC made their last set of changes. But when I read this article today, I decided to tweet this: Investment firms are wary as money-market regulation changes are studied after the run early in the pandemic. https://t.co/SS34ndPUeM My proposal makes more sense — NAV under 0.995, cancel enough shares to renormalize NAV to 1.0025, at which point runs strengthen the MMMF— David Merkel (@AlephBlog) August 30, 2021 When I was an investment actuary, I developed and worked with a large number of insurance products that were managed to be pure savings vehicles. There was usually a short-term guarantee … [Read More...]
An Estimate of the Future
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 … [Read More...]
Why I Like the Debt Ceiling
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 … [Read More...]
Thoughts on 9/11 and its Aftermath
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 ExperienceThe 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 … [Read More...]