What we’re reading (8/14)
“Nobody’s Buying Homes, Nobody’s Switching Jobs—And America’s Mobility Is Stalling” (Wall Street Journal). “Americans are stuck in place. People are moving to new homes and new cities at around the lowest rate on record. Companies have fewer roles for entry-level workers trying to launch their lives. Workers who do have jobs are hanging on to them. Economists worry the phenomenon is putting some of the country’s trademark dynamism at risk.”
“The Hidden Risks In Private Equity Funds” (Larry Swedroe).Perhaps the most egregious practice in the 40 Act private equity space involves charging carry fees on unrealized gains. This means investors pay performance fees on paper profits that may never materialize into actual returns. No sophisticated institutional investor would accept such terms, understanding that unrealized gains—especially those created through immediate markups—may prove fictitious over time. The practice essentially allows fund managers to extract fees based on their own valuation assumptions rather than proven investment performance. This creates a dangerous misalignment of incentives where managers benefit from aggressive markups regardless of ultimate investment outcomes. Retail investors should absolutely avoid any fund that charges carry fees on unrealized gains.”
“Slowly Strangling The Pharmaceutical Industry” (Civitas Institute). “Unlike many private uses of monopoly power, a government monopoly, backed by state force, can last a long time. Its short-term effects are manifest, just as in the selection derby when companies lobby the government to direct its wrath against one of its competitors, so that it can ease its burden. But it will still not escape losses even if it avoids the executioner’s axe, because the presence in the market of an underpriced substitute will force it to cut rates or lose customers. And in the long run, drug development will be impaired across the board because no one wants to develop the next blockbuster drug if the government takes away its gains by clever regulation. Indeed, matters could get still worse if the government expands the program or eases the conditions for imposing its prices. And for what? The stated justification is to reduce Medicare costs—but in the worst possible way. The system is broken in its basic operations. Yet so long as these monopoly devices prop it up, meaningful reform remains far away, which is why the Second Circuit’s misplaced reliance on consent promises to usher in a bleak age for private drug development.”
“If You’re Feeling FOMO, Envy And Greed About Record Stock Prices, You’re Not Alone. That’s How Market Bubbles Form.” (MarketWatch). “[A] market bubble can materialize even when most investors are worried about one. Like now. A recent Bank of America fund-manager survey found that a record 91% of survey participants believe the stock market is overvalued, and Google Trends shows a sizable increase in recent weeks in the number of finance-related searches focusing on bubbles, as you can see from the chart below.”
“Hedge Funds Shift Bets To Double Down On Big Tech Amid AI Boom” (Yahoo! Finance). “Wall Street's largest hedge funds, Bridgewater Associates, Tiger Global Management and Discovery Capital, increased their exposure to Big Tech in the second quarter amid a generational boom in the growth of artificial intelligence. During the June quarter, hedge funds cut their exposure to laggards in industries like aerospace and defense, and consumer and retail, as part of a broader move back to momentum investing.”
