What we’re reading (1/29)
“Are We In Another Housing Bubble?” (Paul Krugman, New York Times). “[T]he case for a bubble isn’t nearly as compelling as it was in 2005 or 2006. That doesn’t mean that all is well. Real estate people I know tell me that there’s still a feeling of unhealthy frenzy, and people who paid high prices for small-town houses may regret it once supply chains get unsnarled and more houses get built. But this time is different.”
“A Market Crash Will Depend On Which Bit Of The Equation Investors Got Wrong” (Financial Times). “Of the 29 business cycles in the US since 1881 only a few have ended in [periods of exterme valuations], according to Professor Russell Napier. But, while each has had its own peculiarities, the basic driver has been much the same: the ability of investors to believe absolutely in something that always turns out to be impossible. Namely that, thanks to some ‘marvels’ of technology, corporate profits will stay high (and probably rise) indefinitely and that interest rates will also stay low indefinitely. In most cycles investors do not think this. They assume cyclical normality — that fast economic growth will lead to capacity constraints and then to inflation and rate rises, something that would slow both economic growth and crimp corporate profits — bringing down valuations.”
“ARK Short Sellers Make $999 Million To Eclipse All Gains In 2021” (Bloomberg). “Rising bond yields and a hawkish pivot by the Federal Reserve have laid waste to the kind of speculative tech stock beloved by ARK in recent months, dragging down [Cathie] Wood’s funds and creating a bonanza for anyone betting against her. While a small bounce in U.S. stocks brought some temporary relief on Friday, her flagship ARK Innovation ETF (ticker ARKK) has still tumbled more than 25% year-to-date.”
“US Equity Factors Post Wide Range Of Losses So Far In 2022” (The Capital Spectator). “Although all the primary US equity factors are posting losses so far in 2022, in line with the broad market, the declines vary by a substantial degree. The market’s overall beta risk, in other words, has been minimized or exacerbated, suggesting that building portfolios based on factor offers investors more control over risk management compared with conventional diversification strategies.”
“Hedge Fund Melvin Lost $6.8 Billion In A Month. Winning It Back Is Taking A Lot Longer.” (Wall Street Journal). “At the worst point in January 2021, Melvin Capital Management was losing more than $1 billion a day as individual investors on online forums such as Reddit banded together to push up prices of stocks Melvin was betting against. ‘We were in a terrible position. Stared death in the face,’ Mr. Plotkin told employees in a Zoom meeting late that month. ‘But we’ve made it through.’ The damage, though, was severe. Melvin’s loss that month was 54.5%, or roughly $6.8 billion, one of the swiftest and steepest declines for a hedge fund since the financial crisis of 2008.”
February picks available soon
We’ll be publishing our Prime and Select picks for the month of February before Tuesday, February 1 (the first trading day of the month). As always, we’ll be measuring SPC’s performance for the month of January, as well as SPC’s cumulative performance, assuming the sale of the January picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Mon., January 31). Performance tracking for the month of February will assume the February picks are bought at the open price (at the mid-point of the opening bid and ask prices) on the first trading day of the month (Tuesday, February 1).
What we’re reading (1/27)
“It’s Jerome Powell Time — And One Wall Street Bank Warns The S&P 500 Could Fall Another 20%. Goldman Sachs Says The Bull Market Will Continue.” (MarketWatch). “The Barclays strategists led by Maneesh Deshpande are more pessimistic, saying it’s too early to buy the dip. Granted, the start of a Fed hike cycle historically hasn’t led to a major selloff, but this time, valuations are already too high and there is downside risk to earnings after the binge in consumption goods. Last week, they noted, there was a change in the selloff, which moved from high-valuation stocks and other speculative assets to a broader contagion.”
“Behind The Stock Market Turmoil: A High-Speed Investor U-Turn” (Wall Street Journal). “Girding themselves against the impact of tighter money, investors are shifting to investments that feel safer, such as dividend stocks and gold exchange-traded funds. Indeed, some high-dividend funds have outperformed this year, including the Invesco High Yield Equity Dividend Achievers ETF, which is flat so far in January.”
“It’s Hard To Tell When The Crypto Bubble Will Burst, Or If There Is One” (New York Times). “As stocks were sold off early this week, crypto prices also plunged. Bitcoin dropped nearly 13 percent before rebounding along with stocks. Ethereum’s own coin, Ether, was briefly down 15 percent. Their price declines have dragged down other digital asset prices, too. Analysts attribute the decline to investors who are pulling their money out of higher-growth, risky assets — including technology stocks — as interest rates are set to rise. That has put a dent in the argument, promoted by crypto boosters, that digital assets offer a hedge against losses in other markets.”
“Gold Is Shining Again As Stocks Wobble And Cryptos Melt down” (CNN Business). “‘Investors are starting to realize bitcoin is more of a risky asset. It's less of a portfolio diversification tool and more of an energy drink,’ [Robert] Minter [Director of ETF Investment Strategy at abrdn] said, referring to the big highs and equally epic pullbacks for crypto prices compared to far more stable moves in gold.”
“Why More Americans Than Ever Are Starting Their Own Businesses” (Vox). “The pandemic has, at least for the time being, halted — and perhaps reversed — a decadeslong decline in the pace of entrepreneurship. Americans applied for a record 5.4 million business ID numbers in 2021, according to census data that goes back to 2004. 2022 is already on track to be a record year as well, according to projections from QuickBooks. While data on true business formations is available only through 2019, growth in ID number applications is closely related to actual business formations.”
What we’re reading (1/26)
“Billionaire Hedge Fund Manager David Einhorn Said An Inflation-Induced Recession Is Imminent — Then The Fed Warned Prices Could Stay Higher For Longer” (Insider). “Star hedge fund manager David Einhorn said no matter what the Federal Reserve does, high-flying inflation will eventually induce a recession. The Greenlight Capital boss said Wednesday in an investor letter obtained by CNBC that his firm has already begun readying itself for an economic downturn as inflation soars to its highest in decades.”
“Drop Bitcoin As Legal Tender, IMF Urges El Salvador” (CNBC). “The International Monetary Fund is pushing El Salvador to ditch bitcoin as legal tender, according to a statement released on Tuesday. IMF directors ‘stressed that there are large risks associated with the use of bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.’ The report, which was published after bilateral talks with El Salvador, went on to ‘urge’ authorities to narrow the scope of its bitcoin law by removing bitcoin’s status as legal money.”
“We Might Be In A Simulation. How Much Should That Worry Us?” (New York Times). “We may not be able to prove that we are in a simulation, but at the very least, it will be a possibility that we can’t rule out. But it could be more than that. [Philosopher David] Chalmers argues that if we’re in a simulation, there’d be no reason to think it’s the only simulation; in the same way that lots of different computers today are running Microsoft Excel, lots of different machines might be running an instance of the simulation. If that was the case, simulated worlds would vastly outnumber non-sim worlds — meaning that, just as a matter of statistics, it would be not just possible that our world is one of the many simulations but likely. Chalmers writes that ‘the chance we are sims is at least 25 percent or so.’”
“The Struggle Is Real For Zillow'“ (Wall Street Journal). “Agents seemed to pour money into Zillow’s platform over the last two years to take advantage of the scorching market…[t]he number of real-estate agents grew 7% in the U.S. last year compared with 2020, according to the National Association of Realtors, while Zillow’s research shows inventory fell almost 20% over that period to record lows. The combination has resulted in an unusually high ratio of real-estate agents to homes for sale. In red-hot Austin, Texas, CNN reported the ratio was eight-to-one as of May.”
“U.S. House Speaker Pelosi's Stock Trades Attract Growing Following Online” (Reuters). “Transaction reports are typically filed days after the actual purchases and sales, making it potentially difficult for traders aiming to mimic lawmakers' specific trades. ‘It's nonsense, it's very hard to replicate what other people are doing and gain some edge,’ said Sahak Manuelian, Managing Director of Trading at Wedbush Securities in Los Angeles.”
What we’re reading (1/25)
“Was Larry Summers Right All Along?” (New York Magazine). “Once the consummate Democratic insider, he had suffered the fate of so many left-wing wonks of yesteryear: to see one’s dissent derided as economically illiterate and politically treacherous. Progressive commentators declared him a ‘vindictive SOB’ whose caterwauling about inflation was really a bid to ‘spook the markets and crash the economy to punish the administration for shutting him out.’ The New Republic entertained the hope that, after three decades at the center of Democratic politics, Summers was finally ‘becoming irrelevant.’ Ten months later, times have changed.”
“Correction Or Pullback, January’s Swings Call For Calm” (Fisher Investments). “Magnitude aside, the downdraft to start 2022 looks a lot like a correction—and not much like a bear market. The lockdown-induced, warp-speed 2020 version aside, bear markets usually begin gradually—with long rolling tops early…Corrections are different. They normally begin with a bang, for any or even no reason, with stocks falling steeply from a prior high and plunging fast. Typically, they have some big fear or scare story associated with them many presume is driving the negativity. After a swift fall that has most expecting worse to come, stocks turn around and snap back higher—usually about as fast as they fell—with no warning.”
“But Are You Short The Market?” (Marginal Revolution). “‘But are you short the market?’ That is my favorite rejoinder to expressions of radical pessimism. It came to mind recently when I read an opinion piece suggesting that ‘the United States as we know it could come apart at the seams.’…Besides, shorting the market does not have to be impossibly risky. Just buy some unleveraged market puts each year until that position pays off. That’s not a great investment tactic for most people, but it makes sense for diehard pessimists. Are they even asking around about how to do this, the way you might ask for recommendations for a good restaurant or a masseuse?”
“Was The Market Sell-Off Overdone?” (New York Times). “The foundations supporting the market during the pandemic are looking less stable. That starts with the Fed, which has flooded the market with money and kept interest rates low. The unwinding of this stimulus is preoccupying market watchers, who are looking to the central bank this week for clues about its intentions (more on that below). Rising interest rates, combined with uncertain corporate earnings prospects and geopolitical tensions between Russia and Ukraine, form an ‘investor triple-whammy,’ Ben Laidler of eToro wrote in a research note.”
“Cryptocurrency Doesn’t Amount To Much” (Wall Street Journal). “[T]he crypto ecosystem merely mirrors, electronically and anonymously, the most rudimentary components of the regulated financial system. The putative gains are quickly dissipated by crypto’s many weaknesses. The convertibility of stablecoins like Tether to dollars at par is doubtful. People can’t judge credit risk the way banks can. As currently constructed, the crypto ecosystem lacks accountability and legal recourse, so there is little basis for trust. And bitcoin’s basic operations, for example, require enough electricity to power an industrialized nation.”
What we’re reading (1/24)
“When The Superbubble Bursts” (Protocol). “So what do we call what we have now? “Economist Jeremy Grantham says it’s a ‘superbubble’” which he defined as ‘simultaneous bubbles across all major asset classes’ in a report his investment firm, GMO, issued Thursday. Investors could lose $35 trillion if valuations retreated to historic norms, Grantham calculated.”
“Bold Policy Response Needed To Restore Fed Credibility On Inflation” (Mohamed El-Erian, Financial Times). “[T]he Fed needs immediately to stop its asset-purchase programme, guide markets towards expecting three and possibly more interest rises this year and bring forward to March the announcement of plans to reduce its balance sheet. It also needs to explain how it has managed to get its inflation call so wrong and why it is so late in reacting properly. Without that, it will struggle to regain the policy narrative and restore its credibility.”
“Activist Investors Assemble” (DealBook). “Unilever has faced pressure on multiple fronts for weeks, including pushback from shareholders over its now-abandoned pursuit of GlaxoSmithKline’s consumer business. Now the consumer goods giant must deal with a potentially bigger headache: Trian Partners, the activist investment firm run by Nelson Peltz. Trian has amassed a significant stake in Unilever, DealBook’s Michael de la Merced reports. It isn’t clear how big the firm’s holdings are, though Trian began buying shares before Unilever’s pursuit of the Glaxo business became public, according to a source.”
“How Will Europe Cope If Russia Cuts Off Its gas?” (The Economist). “Europe…has a secret weapon. Mr [Massimo] Di Odoardo [of Wood Mackenzie, a consultancy] points to its massive but little-discussed stores of “cushion gas”. For technical and safety reasons, regulators insist that storage units like salt caverns and aquifers maintain a huge amount of gas that is not normally available to put on the market. The analysts at Wood Mackenzie reckon that up to a tenth of this cushion can be used without problems. If regulators gave permission, as they might in a war-induced crisis, it would amount to well over a month’s worth of Russian imports.”
“Leon Black Blames Guy Who Didn’t Maintain Decades-Long Relationship With Notorious Sex Criminal For Trashing His Reputation” (Dealbreaker). “You might think that Apollo Global Management founder Leon Black’s downfall had something to do with his doggedly sticking by his convicted sex offender buddy, Jeffrey Epstein. You might think, whether you believe her to be telling the truth or not, that his alleged sexual abuse of his former mistress might be at fault. Black, as only a billionaire can, knows better. After all, as he and his ilk well know, no one ever enjoys his level of success is actually capable of wrongdoing.”
What we’re reading (1/23)
“How Much Stock Is Too Much in Retirement?” (New York Times). “[Vanguard] now says that some investors who have already entered retirement may be better off if they keep their stock holdings fairly high, retaining a 50 percent allocation to equities. The 50 percent stock retirement portfolio will be a new option available to companies with Vanguard target-date retirement funds in their plans. That is a big increase over the current allocation: just 30 percent stocks and 70 percent bonds.”
“Tech Rout Fueled By Bond-Market Turn” (Wall Street Journal). “Often referred to as real yields, yields on TIPS have been deeply negative since the early days of the Covid-19 pandemic, helping to fuel outsize stock-market gains by pushing investors into riskier assets in search of better returns. Even today they remain below zero, meaning holders are guaranteed to lose money on an inflation-adjusted basis if they hold the bonds to maturity.”
“Is The Market Crashing? No. Here’s What’s Happening To Stocks, Bonds As The Fed Aims To End The Days Of Easy Money, Analysts Say” (MarketWatch). “Underpinning the shift in bullish sentiment is a three-pronged approach by the Federal Reserve toward tighter monetary policy: 1) tapering market-supportive asset purchases, with an eye toward likely concluding those purchases by March; 2) raising benchmark interest rates, which currently stand at a range between 0% and 0.25%, at least three times this year, based on market-based projections; 3) and shrinking its nearly $9 trillion balance sheet, which has grown considerably as the central bank sought to serve as a backstop for markets during a swoon in March of 2020 caused by the pandemic rocking the economy.”
“How Hustle Culture Got America Addicted To Work” (Insider). “The way we glorify work in the United States is both a historical and geographical anomaly, a recent American invention. In Europe, industrialized nations have found a way to marry robust economic growth with dramatically shorter workweeks. And before you try to explain this away with some version of well, that's Europe, it's worth noting that from 1870 to the 1970s, Americans actually worked less than the Germans and the French. ‘While it may seem today that differences in work patterns are eternal aspects of European and American lifestyles,’ a study published by the National Bureau of Economic Research observed in 2005, ‘these differences are modern in origin.’”
“The Forgotten Medieval Habit Of ‘Two Sleeps’” (BBC). “Biphasic sleep was not unique to England…it was widely practised throughout the preindustrial world. In France, the initial sleep was the ‘premier somme’; in Italy, it was ‘primo sonno’. In fact, Eckirch found evidence of the habit in locations as distant as Africa, South and Southeast Asia, Australia, South America and the Middle East.”
What we’re reading (1/22)
“Nasdaq 100’s Unrelenting Declines Ring A Dot-Com Bust Alarm Bell” (Bloomberg). “[T]he Nasdaq 100 just did something it hasn’t done since the aftermath of the internet bubble: fall more than 1% in every session of a week. It doesn’t count as a superlative because Monday was a holiday. But for investors caught up in the selloff, it felt like something shifted…[i]nvestors appear to be paying up for near-term hedges as share prices spiraled down. The CBOE NDX Volatility Index, a gauge of cost options tied to the Nasdaq, jumped 8 points over the four days to 34.06, the highest level since last March.”
“Summers Says He Doubts U.S. Inflation Will Slow To 2% This Year” (Bloomberg). “Former Treasury Secretary Lawrence Summers said he remains worried that policy makers are complacent about inflation and he doubted U.S. consumer prices will return to a 2% pace of increases by the end of this year. With investors expecting the Federal Reserve to next week signal plans to raise interest rates in March, Summers said that ‘the gravity of our situation is still understated’ and that bottlenecks in China, rising oil costs, more expensive housing, tightening labor markets and low borrowing costs all pointed to continued price pressures.”
“Silicon Valley Won’t Own Up to Its China Problem” (Vanity Fair). “Over the weekend he [Chamath Palihapitiya] seemingly took his hell-raising a step too far when he said on his All-In podcast, in the midst of a discussion about human rights, that he simply didn’t care about the genocide of the Uyghurs, China’s predominantly Muslim minority group. ‘Nobody cares about what’s happening to the Uyghurs, okay,’ he said…[i]t’s estimated that China has secretly imprisoned at least a million Uyghurs in forced labor and prison camps. In December of last year, a public tribunal established by a prominent British human rights lawyer reportedly found that China had engaged in ‘crimes against humanity’ in its treatment of the Uyghurs, including ‘rape, enforced sterilization, torture, imprisonment, persecution, deportation, and enforced disappearance.’”
“What Happened (and Didn’t) When Davos Disappeared” (New York Times). “For the second year in a row, the annual in-person meeting in Davos was scrapped because of the pandemic. An IRL gathering was announced for late May, but the relatively last-minute cancellation makes it easier to assess what has until recently been a hypothetical debate: Would it matter if Davos just went away?”
“The Nanotechnology Revolution Is Here—We Just Haven’t Noticed Yet” (Wall Street Journal). “For decades, computer scientists and physicists speculated that, any minute now, nanotechnology was going to completely reshape our lives, unleashing a wave of humanity-saving inventions. Things haven’t unfolded as they predicted but, quietly, the nanotech revolution is under way. You can thank the microchip. Engineers and scientists are using the same technology perfected over decades to make microchips to create a variety of other miniature marvels, from submicroscopic machines to new kinds of lenses.”
What we’re reading (1/21)
“Nasdaq Tumbles 2% Friday, Notches Worst Week Since 2020 And Falls Deeper Into Correction Territory” (CNBC). “U.S. stocks tumbled on Friday, closing out a losing week and continuing a rough start to 2022. The Nasdaq Composite was hit the hardest with Friday’s selling sending the tech-heavy index to its worst week since 2020.”
“When Pandemic Stars’ Shines Dim” (DealBook). “The future path of the pandemic is uncertain, but investors may have already made up their minds about the prospects for companies that had prospered months earlier. Netflix and Peloton plunged late in the day yesterday, on signs that ‘stay at home’ stocks, which were already under pressure, could take a turn for the worse as people begin to venture out again.”
“We Should Turn Big Box Stores Into Solar Farms” (Gizmodo). “The U.S. has a lot of big box stores. There are more than 100,000 superstores across the country, which means about 7.2 billion square feet (670 million square meters) of rooftop space. Using data from the National Renewable Energy Laboratory, the report estimates that about two-thirds of that underutilized area could be used for solar panels. Fully equipping that space could generate 84.4 terawatt-hours of energy per year, which would save more than 52 million metric tons of carbon dioxide.”
“Crypto Crash Erases More Than $1 Trillion In Market Value” (Bloomberg). “With the Federal Reserve intending to withdraw stimulus from the market, riskier assets the world over have suffered. Bitcoin, the largest digital asset, lost more than 12% Friday and dropped below $36,000 to its lowest level since July. Since its peak in November, it has lost over 45% of its value. Other digital currencies have suffered just as much, if not more, with Ether and meme coins mired in similar drawdowns.”
“As Turkey’s Economy Struggles, Erdogan Goes It Alone” (Washington Post). “The severity of the crisis came into sharp relief this month when the government announced that the annual inflation rate had reached 36.1 percent, the highest since 2002. That rise was driven by the rapid depreciation of the Turkish lira, which lost more than 40 percent of its value last year, and, more broadly, by Erdogan’s push to cut interest rates based on his unorthodox belief that this would lower consumer prices.”
What we’re reading (1/20)
“Fed Opens Debate Over Possible Digital Currency” (Financial Times). “The Federal Reserve has for the first time launched a period of debate and public comment on the introduction of a central bank digital currency, as it seeks to keep pace with global financial innovation and maintain the supremacy of the dollar. After months of anticipation, the Fed on Thursday released a lengthy discussion paper that will serve as the basis of what is expected to be a heated and consequential debate at the heart of the central bank in the coming months — though it made clear it did not ‘favour any policy outcome’ at this point.”
“Why Isn't The Fed Doing Its Job?” (John Cochrane, Project Syndicate). “No wonder America is awash in debt. Everyone assumes that taxpayers will take on losses in the next downturn. Student loans, government pensions, and mortgages have piled up, all waiting their turn for Uncle Sam’s bailout. But each crisis requires larger and larger transfusions. Bond investors eventually will refuse to hand over more wealth for bailouts, and people will not want to hold trillions in newly printed cash. When the bailout that everyone expects fails to materialize, we will wake up in a town on fire – and the firehouse has burned down.”
“Stocks Fall After Giving Up Early Gains” (Wall Street Journal). “U.S. stocks fell on Thursday, as a late-afternoon selloff erased what had been an early rally, showing that investors are still concerned about the prospects of tightening monetary policy and slowing growth. The Nasdaq Composite Index dropped 186.23 points, or 1.3%, to 14154.02, a day after a tech selloff dragged down indexes. The index fell more than 3% from its intraday high to its low. It is now down nearly 12% from its November high.”
“Netflix Quietly Admits Streaming Competition Is Eating Into Growth” (CNBC). “The latest Netflix shareholder letter included a line heard around the world: ‘While this added competition may be affecting our marginal growth some...’ That clause doesn’t sound like much, but it’s Netflix’s strongest admission so far that streaming competition is affecting its subscriber growth.”
“John Deere Is Facing A Farmer Revolt” (Bloomberg). “Farm equipment giant John Deere boasted record profits in 2021 as the global pandemic made consumers and countries more reliant than ever on a functioning agricultural sector. Also last year, unionized workers demanded a piece of the company’s growing pie, and after a strike forced John Deere to provide better compensation to the men and women who make its products. But now the company has another, potentially bigger problem: farmers.”
What we’re reading (1/19)
“Nasdaq Falls More Than 1%, Entering Correction Territory” (Wall Street Journal). “Investors have stepped up bets that the Federal Reserve and other major central banks will tighten monetary policy in the coming months, withdrawing a pillar of support for markets. Mounting expectations of interest-rate rises follow evidence that the drivers of inflation have broadened beyond the supply-chain shock that fueled price gains for much of 2021. That has led to big swings, leaving many stocks in a bear market and stoking giant rotations among different sectors.”
“The Nasdaq Composite Just Logged Its 66th Correction Since 1971—Here’s What History Says Happens Next In The Stock Market” (MarketWatch). “Looking more broadly at the performance of the Nasdaq Composite over the past 65 times it has fallen 10% from a peak, it has finished positive on average, up 0.8%, in the week after, but returns over that first month are weak, until the benchmark breaks through into the three-month period and beyond, where average gains are 2.2%.”
“Wall Street Banks Eye ‘New Normal' For Trading Revenue” (Reuters). “A massive injection of cash into capital markets by the Federal Reserve led to unprecedented liquidity and trading activity through the pandemic as investors sought opportunities to cash in. But trading revenue at leading Wall Street banks fell in the fourth quarter as markets normalized and the Fed scaled back its asset purchases.”
“Congratulations And Commiserations, Derek Flowers” (Dealbreaker). ““Chief risk officer at Wells Fargo” sounds about as poisoned a chalice as exists in any c-suite anywhere. Not quite as unpalatable as, say, chief compliance officer of Credit Suisse (or Wells Fargo, for that matter), but no cup of tea all the same. Now, things aren’t quite as bad as they used to be, someone’s gotta do it, and Derek Flowers has already spent some time mulling over Wells’ precarities as chief credit and market risk officer, so, you know, in for a penny….”
“How Microsoft Bought Activision Blizzard” (DealBook). “In December, with Activision’s stock down sharply, Microsoft reached out to [Activision CEO Bobby] Kotick with a takeover bid. Kotick dismissed the offer, but — eager to steer his beleaguered company to a safe home — told the software giant to come back with a better offer. Microsoft did, beginning a weekslong sprint to hammer out an agreement.”
What we’re reading (1/18)
“Microsoft To Buy Activision Blizzard In All-Cash Deal Valued at $75 Billion” (Wall Street Journal). “The deal, if completed, would sharply expand Microsoft’s already sizable videogame operation, adding a stable of popular game franchises including Call of Duty, World of Warcraft and Candy Crush to Microsoft’s Xbox console business and its own games like Minecraft and Doom. Microsoft said the transaction would make it the world’s third-largest gaming company by revenue, behind China’s Tencent Holdings Ltd. and Japan’s Sony Group Corp.”
“Carlyle Co-Founder David Rubenstein Says ‘We’re Due For A Correction’” (Bloomberg). “‘We’re due for a correction,’ Rubenstein said Tuesday in an interview with Sonali Basak at the Bloomberg Year Ahead Summit in New York. ‘The markets have been very ebullient for quite some time. We’ve basically been having free money.’ Rubenstein said the U.S. economy is ‘generally in good shape,’ but with the Fed signaling four to five rate hikes this year, downward pressure on asset prices is inevitable.”
“After Another Great Year For Stocks, Peril Lingers” (New York Times). “‘There’s no place to hide,’ Melda Mergen, global head of equities at Columbia Threadneedle Investments, said during a presentation of the firm’s 2022 outlook. ‘Most of the markets are at the top of the bar in their current valuations.’”
“Europe’s Energy Crisis Will Trigger Its Worst Neuroses” (The Economist). “The gas-price horror movie is most terrifying for Eurocrats. The causes of the current energy snafu are hard to distil down to a single factor, says Georg Zachmann of Bruegel, a think-tank in Brussels. That leaves plenty of room to designate a scapegoat, and one candidate comes to mind. The European Commission regulates eu energy markets (mostly quite sensibly) and has made carbon neutrality a central plank of the bloc’s future (also sensible). Sound as its policy decisions may be, they have aggravated the current crisis. For example, shifting to coal to keep prices down is less of an option, since it would require buying expensive eu carbon-emissions credits.”
“Blackstone’s New Real Estate Play: The Rent-To-Buy Market” (Financial Times). “By promising tenants that they might one day own their own homes, [Lewis] Ranieri [of Liar’s Poker fame] and his team had created a rental business with economics like no other. Other corporate landlords had to hire legions of professionals to scout for properties to buy. But Ranieri set things up so that ‘the tenants were doing the sourcing for him’, says one person who heard the pitch.”
What we’re reading (1/16)
“Day Traders as ‘Dumb Money’? The Pros Are Now Paying Attention” (Wall Street Journal). “Fund managers who might have once derided small-time day traders as ‘dumb money’ are scouring social-media posts for clues about where the herd might veer next. Some 85% of hedge funds and 42% of asset managers are now tracking retail-trading message boards, according to a survey by Bloomberg Intelligence.”
“Toxic Culture Is Driving the Great Resignation” (M.I.T. Sloan Management Review). “We also analyzed the free text of more than 1.4 million Glassdoor reviews, using the Natural Employee Language Understanding platform developed by CultureX, a company two of us (Donald and Charles) cofounded…[i]n general, corporate culture is a much more reliable predictor of industry-adjusted attrition than how employees assess their compensation…[a] toxic corporate culture, for example, is 10.4 times more powerful than compensation in predicting a company’s attrition rate compared with its industry.”
“Price Controls Set Off Heated Debate As History Gets A Second Look” (New York Times). “As consumer prices soared this fall…a handful of mostly left-leaning economists reignited the long-dormant debate, arguing in opinion columns, policy briefs and social-media posts that the idea deserves a second look. Few if any are arguing for a return to the Nixon-era policies. Many say they aren’t yet ready to endorse price controls, and just want the idea to be taken seriously.”
“Mostly Wealthy ‘Boomerang Kids’ Moved Back Home During The Pandemic, And It's Intensifying The Wealth Gap” (Insider). “Analyzing the Current Population Survey, the [Federal Reserve] [B]ank [of Cleveland] found that 36% of boomerang kids are from families that earned more than $140,000 per year — the top 20% of the income quintile. Meanwhile, only 10% of boomerang kids are in the lowest income quintile of households earning less than $28,000 per year. And the majority of young adults who didn't live with their parents are from families earning incomes in the middle of this range.”
“Washington's Proposed Rules To Protect Investors Could Widen The Wealth Gap” (Time). “[T]he SEC says it wants to increase the financial transparency of large companies which raise money away from the public markets. In addition, the regulator wants to limit the ability of people with less than $200,000 in annual income or $1 million in net worth to invest in non-public companies. In short, the current system, which already excludes the vast majority of Americans, could get more restrictive.”
What we’re reading (1/15)
“The Yield Curve Is No Longer Sending A Don’t-Worry-Be-Happy Signal, Warns Bond King Jeffrey Gundlach” (MarketWatch). “DoubleLine CEO Jeffrey Gundlach…has unveiled his predictions for the year ahead….he sees headwinds for a stock market that has been ‘supported by QE” and now faces Fed tapering, with Powell sounding ‘more hawkish’ every time he speaks...[h]e said the yield curve had seen ‘pretty powerful flattening’ and was ‘approaching the point where it signals economic weakening. At this stage, the yield curve is no longer sending a don’t-worry-be-happy signal, says Gundlach. It is instead signaling investors to pay attention, he said.”
“The Fed Is About To See A Lot Of New Faces. What It Means For Banks, The Economy And Markets” (CNBC). “In what likely will be just a few months’ time, the Federal Reserve will look a lot different: Three new governors, a new vice chairman, a new banking chief and likely a couple new regional presidents. But while the parts of the institution’s upper echelon may change quite a bit, the whole could look pretty much the same. That’s because Fed-watchers think ideologically there probably will be little change, even if Sarah Bloom Raskin, Lisa Cook and Philip Jefferson are confirmed as new members on the Board of Governors. White House sources say President Joe Biden will nominate the trio in the coming days.”
“Elon Musk’s Tesla Asked Law Firm To Fire Associate Hired From SEC” (Wall Street Journal). “A partner at law firm Cooley LLP got an unexpected call late last year from a lawyer for one of the firm’s most famous clients, Elon Musk’s Tesla Inc., with an ultimatum. The world’s richest man wanted Cooley, which was representing Tesla in numerous lawsuits, to fire one of its attorneys or it would lose the electric-vehicle company’s business, people familiar with the matter said. The target of Mr. Musk’s ire was a former U.S. Securities and Exchange Commission lawyer whom Cooley had hired for its securities litigation and enforcement practice and who had no involvement in the firm’s work for Tesla.”
“Meme Stocks Are Fading As Retail Traders Rotate Into Cryptocurrencies And The Metaverse, Fintech CEO Says” (Insider). “Last January, millions of retail traders banded together to drive eye-popping rallies in highly shorted, nostalgic companies, like GameStop, AMC Theaters, and BlackBerry. Day traders minted a new asset class dubbed the "meme stock" and regularly added new companies to the basket over the course of the year. At one point a tiny Danish biotech company surged more than 1,300% in a day on interest from individual investors looking for the next short squeeze. But observers say those wild spikes are likely to subside as retail traders look to new horizons to replicate last year's massive gains.”
“When It Comes To Living With Covid, Businesses Are On Their Own” (New York Times). “As the federal government’s efforts to contain the coronavirus hit their limits — as the administration itself admits — employers are largely on their own. Business leaders must decide whether and how to use tools such as their own vaccine mandates, masking, distancing, and testing at their offices and other work sites. And more fundamentally, they must decide what kind of company they want to run: one that manages cases or one that manages risk.”
What we’re reading (1/14)
“Wage Inflation Has Arrived In A Big Way And Jamie Dimon Says CEOs ‘Shouldn’t Be Crybabies About It’” (CNBC). “Shares of JPMorgan fell more than 6% on Friday after the bank said that expenses will climb 8% to roughly $77 billion this year, driven by wage inflation and technology investments. Higher expenses will likely push the bank’s returns in 2022 and 2023 below recent results and the lender’s 17% return-on-capital target, according to CFO Jeremy Barnum.”
“Pandemic Profits Begin To Ebb At America’s Biggest Banks” (Wall Street Journal). “Banks have enjoyed unparalleled growth during the pandemic, buoyed by a deal-making boom, market volatility that supercharged trading arms and a housing market that made mortgage lending more profitable than ever. At the same time, the doomsday scenarios that banks girded against in the pandemic’s early days never materialized, which freed up additional profits. Bad loans remain near record lows, and consumer and commercial customers alike have weathered the pandemic with, on average, plenty of cash on hand. Now, some of the forces that pushed bank profits to new records are starting to weaken.”
“Texas Oil Ponzi Schemes Allegedly Funded Private Jets, Luxury Cars, And A Wedding On The Queen Mary” (Gizmodo). “A wedding on a cruise ship, investments in the jade industry in Guatemala, and a private jet: Those are just some of the things investors who thought they were getting rich in the oil industry paid for instead. Two Securities and Exchange Commission lawsuits filed last month against Ponzi-style scammers selling fraudulent investments in the biggest oilfield in the U.S. show how the American oil and gas boom really is the Wild West.”
“Bridgewater’s Return To Co-CEO Model Rekindles Management Concerns” (Financial Times). “‘I think he’s trying to figure out what to do. He’s either lost his mojo, or just doesn’t want to do it any more,’ said one senior former Bridgewater employee of Dalio. ‘He basically has a firm that is not really structured to be sustainable without him, but isn’t really sustainable with him either.’ The promotion of a youthful former Israeli soldier and a veteran insurance executive to lead what is the world’s biggest hedge fund raised eyebrows in the industry. Nir Bar Dea only joined Bridgewater in 2015, before which he was an adviser to the Israeli UN mission, and an entrepreneur. Although he has an MBA from Wharton in 2014, 40-year old Bar Dea had no experience in finance before starting at Bridgewater, having served in the Israeli Defence Force and risen to the rank of major.”
“The Subversive Genius Of Extremely Slow Email” (The Atlantic). “Every day, the mail still comes. My postal carrier drives her proud van onto the street and then climbs each stoop by foot. The service remains essential, but not as a communications channel. I receive ads and bills, mostly, and the occasional newspaper clipping from my mom. For talking to people, I use email and text and social networking. The mail is a ritual but also a relic. That relic is also the model for a new personal-communication app called Pony Messenger. Think of it as email, if email arrived by post: You compose a message and put it in an outbox; once a day (you can choose morning, afternoon, or evening “pickups”), Pony picks up your outbound dispatches and delivers your inbounds. That’s it. It’s postal-service cosplay. It’s slow email.”
What we’re reading (1/13)
“Four Reasons To Keep Worrying About Inflation” (Jason Furman, Wall Street Journal). “Those who imagine that inflation will be lower argue that the huge burst of fiscal policy is behind us, supply chains will unsnarl, consumers will shift from buying goods to services, workers will return, and prices for commodities like oil will continue to fall. Some of their arguments are overstated, while others are likely wrong. And if we focus only on reasons that inflation should be lower in 2022, we risk ignoring four countervailing forces that will push toward higher inflation this year.”
“Soaring Used Car Prices Are Pushing Inflation Higher, And There’s Not Much The U.S. Can Do About It” (CNBC). “In the past 20 years used cars’ contribution to inflation averaged zero. It’s now more than 1% on a year-over-year basis, according to data from the U.S. Bureau of Labor Statistics.”
“China's Bitcoin Crackdown Is Good For America” (Reason). “The Chinese bitcoin mining ban was great for bitcoin and the United States. The network withstood a fifty percent hashrate shock with little disruption. Mining infrastructure quickly recalibrated and relocated to other more welcoming locations. Now that a similar dynamic is occurring in Kazakhstan, seasoned bitcoin users don't need to fear that the network will be disrupted (even though weak hands may see this as a reason to sell). In terms of uptime, bitcoin keeps on delivering. The great mining migration of 2021 is a fantastic opportunity for the United States.”
“Libor, Long The Most Important Number In Finance, Dies At 52” (New York Times). “Known as Libor, the interest-rate benchmark once underpinned more than $300 trillion in financial contracts but was undone after a yearslong market-rigging scandal came to light in 2008. It turned out that bankers had been coordinating with one another to manipulate the rate…by skewing the number higher or lower for their banks’ gain.”
“Private Equity Firm TPG Hits $10bn Valuation On First Day Of Trading” (Financial Times). “TPG is the largest company to go public in the US so far this year, and its successful listing comes as the wider IPO market grapples with poor performance and rising volatility…In going public, TPG is preparing to dramatically expand its platform, which has $109bn in assets, by launching new funds and investment products and striking acquisitions. TPG raised $1bn in the IPO.”
What we’re reading (1/12)
“Inflation At 40-Year High Pressures Consumers, Fed And Biden” (Associated Press). “Inflation jumped at its fastest pace in nearly 40 years last month, a 7% spike from a year earlier that is increasing household expenses, eating into wage gains and heaping pressure on President Joe Biden and the Federal Reserve to address what has become the biggest threat to the U.S. economy.”
“Inflation Means Interest Rates Could Rise. Higher Interest Rates Will Make The National Debt More Expensive.” (Reason). “With today's higher inflation and rising interest rates (perhaps with more to come), the Congressional Budget Office (CBO) estimates that the interest cost of public debt is $413 billion in 2021, stated in current dollars. Obviously, any dollar spent on interest cannot be spent on government benefits or services.”
“If Prices Keep Rising, A Nightmare Scenario For The US Economy Is A Real Possibility” (CNN Business). “‘There's always the risk of a policy error. The Fed is carrying a monetary policy nuclear football with them, so there is a potential for a mistake,’ said Kristina Hooper, Invesco's chief global market strategist.”
“No, Dollar Strength Doesn’t Mean Weak Stocks” (Fisher Investments). “Arguing pending rate hikes create material upside in long-term yields from here is tantamount to arguing markets aren’t efficient at all. In our experience, that is usually the losing side of the debate. With that said, range-bound long-term rates might still attract overseas capital, but here, too, currency markets are extremely liquid and efficient—and Treasury yields’ premium over their European and Japanese counterparts is also well known and likely priced in. That doesn’t preclude short-term swings, but we think it argues against a sustained move higher.”
“Congress Could Finally Rein In Its Own Controversial Stock Trading” (Vanity Fair). “[S]ome lawmakers have called for a Congress-wide trading ban. House Minority Leader Kevin McCarthy recently expressed interest in ‘instituting new limits or an outright ban on lawmakers holding and trading stocks and equities if Republicans take the majority in November,’ according to Punchbowl News. While McCarthy’s plan is still in its infancy, he’s considering forcing lawmakers ‘to hold only professionally managed mutual funds’ or banning lawmakers ‘from holding stocks in companies or industries their committees oversee,’ the news outlet reported.”
What we’re reading (1/11)
“Cathie Wood’s Rollercoaster Performance Offers A Familiar Lesson About Volatility” (Forbes). “ARKK’s ETF flows indicate the average investor in the fund is underwater. StoneX market strategist, Vincent Deluard, summed up why in a recent report. ‘The ARK Innovation ETF has returned 346% since its inception but no value has been created due to flows’ poor timing,’ he writes.”
“AQR Quant Fund Kicks Off The Year With 10% Gain After 2021 Rebound” (Financial Times). “A computer-powered investment fund run by AQR posted double-digit gains in the opening days of 2022, building on a strong performance last year that has bolstered industry hopes that the long ‘quant winter’ has finally passed.”
“Jamie Dimon Says The US Economy Is Booming, Inflation Will Stay Hot, And The Fed May Have To Hike Rates Hard...” (Insider). “‘I'd personally be surprised if it's just four increases next year. I think that four increases of 25 basis points is a very, very little amount and very easy for the economy to absorb,’ referring to how times the Fed will hike interest rates in 2022.”
“Fed’s Powell Says Economy No Longer Needs Aggressive Stimulus” (Wall Street Journal). “Mr. Powell said he was optimistic that supply-chain bottlenecks would ease this year to help bring down inflation as the Fed takes its foot off the gas pedal. But he told lawmakers at his Senate confirmation hearing that if inflation stayed elevated, the Fed would be ready to step on the brakes. “If we have to raise interest rates more over time, we will,” he said.”
“Washington, D.C., Has An Insider-Trading Problem” (New York Magazine). “A surprisingly large number of Congress members also appeared to have been able to use their inside knowledge for financial gain while unemployed Americans were lining up at food banks. Four senators were probed by the Department of Justice for insider trading, and at least one of them is still part of an active SEC investigation.”
What we’re reading (1/10)
“Tech Stocks Tumble, Extending Last Week’s Losses” (Wall Street Journal). “The tech-heavy Nasdaq Composite was down 1.8% in afternoon trading. Last week the benchmark posted its biggest one-week percentage decline since February, as rising bond yields punctured tech valuations. The S&P 500 slid 1.3% on Monday, on track for its fifth consecutive day of losses. The Dow Jones Industrial Average fell 1%, or about 375 points. Chip maker Nvidia, one of 2021’s best-performing stocks, slumped 3.9%, while Facebook parent Meta Platforms retreated 2.7%. Apple, Microsoft and Twitter all declined more than 1%.”
“The Fed’s Doomsday Prophet Has A Dire Warning About Where We’re Headed” (Politico). “While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system. On all of these points, Hoenig was correct. And on all of these points, he was ignored. We are now living in a world that Hoenig warned about.”
“The Federal Reserve Needs To Get A Lot More Hawkish” (Former NYFRB President Bill Dudley, Bloomberg). “In an economy with above-trend growth pushing unemployment below the level consistent with stable prices, the median forecast has inflation melting away, falling to 2.6% in 2022, 2.3% in 2023 and 2.1% in 2024…[t]his is a remarkable, even surreal forecast: Inflation won’t be a problem, even if the Fed does little to rein it in. How high might rates go? If inflation is running above the Fed’s 2% target, they must adjust both to compensate for higher inflation and to achieve tight monetary policy. So if inflation subsides to 2.5% to 3% as supply chain issues dissipate, then a federal funds rate peak in the 3%-to-4% range seems reasonable.”
“Nearly A Quarter Of Workers Plan To Quit In 2022, Report Shows” (Protocol). “The Great Resignation will likely continue into 2022. About one-quarter of workers are looking to get a new job this year, according to a report from ResumeBuilder.com released earlier this week. Of those employees, some want to move into tech-related industries such as IT, business and finance.”
“My First Impressions Of Web3” (Moxie Marlinspike). “Given the history of why web1 became web2, what seems strange to me about web3 is that technologies like ethereum have been built with many of the same implicit trappings as web1. To make these technologies usable, the space is consolidating around… platforms…I think this is very similar to the situation with email. I can run my own mail server, but it doesn’t functionally matter for privacy, censorship resistance, or control – because GMail is going to be on the other end of every email that I send or receive anyway. Once a distributed ecosystem centralizes around a platform for convenience, it becomes the worst of both worlds: centralized control, but still distributed enough to become mired in time.”
What we’re reading (1/9)
“Risk Bubbles Are Deflating Everywhere, Some Market Watchers Say” (Bloomberg). “To Bank of America strategists including Michael Hartnett, a bubble is “simultaneously popping” in assets including cryptocurrencies, palladium, long-duration technology stocks, and other historically risky areas of the market. The winding down in speculative areas comes as investors brace for the U.S. Federal Reserve to pick up the pace of policy tightening.”
“Reddit Taps Morgan Stanley, Goldman Sachs For IPO - Source” (Reuters). “Reddit had confidentially filed for an IPO in December and is aiming for a valuation of over $15 billion at the time of its flotation. It was valued at $10 billion in a private fundraising round led by Fidelity Management in August.”
“Americans’ Finances Got Stronger In The Pandemic—Confounding Early Fears” (Wall Street Journal). “The personal saving rate—a measure of how much money people have left over after spending and taxes—hit a record 33.8% in April 2020, according to the Bureau of Economic Analysis. The rate averaged just under 8% for the two years before the pandemic began.”
“Data Update 1 for 2022: It is Moneyball Time!” (Musings on Markets). Some good reminders from the “Dean of Wall Street” along with his annual data update: “1. More data is not always better than less data…2. Data does not always provide direction…3. Mean Reversion works, until it does not…4. The consensus can be wrong.”
“The Market For Prestige Whiskeys Is Drawing Scammers And Counterfeits As Coveted Bottles Sell For Thousands Of Dollars” (Insider). “Counterfeiters are taking advantage of the boom in domestic sales of super-premium American whiskey, or bottles valued at more than $50. Demand is well-outstripping supply at the very high end of the market where bottles sell for at least $500 and the demand has created a thriving secondary market.”