What we’re reading (5/15)
“Global Growth Is Slowing, But Not Stopping—Yet” (The Economist). “[S]o far, what people say and what people do seem to be different things. Global restaurant bookings on OpenTable, a reservations website, are still above the pre-pandemic norm. In America hotel occupancy still shows sign of improvement. A high-frequency measure of Britons’ spending habits, constructed by the Office of National Statistics and the Bank of England, shows little sign that people are holding off on social activities, or on purchases that could be deferred.”
“Ex-Goldman CEO Blankfein Says Recession Possibility Is ‘Very High Risk Factor’” (CNBC). “‘There’s a path. It’s a narrow path,’ said Blankfein, who retired from Goldman Sachs several years ago and now holds the title of senior chairman. ‘But I think the Fed has very powerful tools. It’s hard to finely tune them, and it’s hard to see the effects of them quickly enough to alter it, but I think they’re responding well. It’s definitely a risk.’”
“Investors Stay Put, Because They Can’t Think Of Better Options” (Wall Street Journal). “Many traders say they are on the prowl for other investments, but even tried-and-true alternatives have lost their allure. A dash for cash—a usual strategy during turmoil—looks less appealing when inflation is hovering above 8%, chipping away at purchasing power. Investing in real estate can feel like a nonstarter when mortgage rates are rising and home prices have soared to records. The only option, some investors say? Sitting tight.
“Panic In The Crypto Marker Has Janet Yellen’s Attention” (CNN Business). “Investors in stocks, bonds and commodities are all on edge right now. But in the market for cryptocurrencies, unease has morphed into full-on panic, catching the attention of regulators in Washington tasked with maintaining financial stability.”
“Is There A Housing Shortage Or Not?” (Construction Physics). “We…can’t infer much from the fact that US homebuilding rates per capita are lower than they were in the past, because we would expect that to happen at some point soon regardless.”
What we’re reading (5/12)
“Crash Of TerraUSD Shakes Crypto. ‘There Was A Run On The Bank.’” (Wall Street Journal). “The cryptocurrency TerraUSD had one job: Maintain its value at $1 per coin. Since it launched in 2020, it had mostly done that, rarely straying more than a fraction of a penny from its intended price. That made it an island of stability, a place where traders and investors could stash their funds in between forays into the otherwise frenzied crypto market. This week TerraUSD became part of the frenzy too, slumping by more than a third on Monday and then tumbling as low as 23 cents on Wednesday.”
“Bitcoin Is Increasingly Acting Like Just Another Tech Stock” (New York Times). “The growing correlation helps explain why those who bought the cryptocurrency last year, hoping it would grow more valuable, have seen their investment crater. And while Bitcoin has always been volatile, its increasing resemblance to risky tech stocks starkly shows that its promise as a transformative asset remains unfulfilled.”
“Shaky Stocks Send S&P 500 To The Bear Market Brink And Back” (Bloomberg). “More hair-raising volatility in the S&P 500 pushed the index within spitting distance of a 20% drop, a decline that puts markets on covers of newspapers and holds ominous meaning for the economy. Down as much as 1.9% Thursday and 30 points from a bear market before a last-hour rally, the benchmark appears destined to decrease for a sixth straight week, something it hasn’t done since June 2011.”
“Investors Haven’t Begun To Price In Recession: Here’s How Far The S&P 500 Could Fall” (MarketWatch). “The battered S&P 500 index is not pricing in a recession, according to DataTrek Research. ‘At 4,000, the recession odds imbedded in S&P are close to zero,’ said DataTrek co-founder Nicholas Colas in a note emailed Tuesday. The S&P 500 (SPX) a stock benchmark measuring the performance of large U.S. companies, has dropped more than 16% this year after closing Monday at 3,991.24.”
“The Forgotten Stage Of Human Progress” (The Atlantic). “Many books about innovation and scientific and technological progress are just about people inventing stuff. The takeaway for most readers is that human progress is one damn breakthrough after another…But the insistence on invention often overlooks the fact that we’re running low on the capacity to deploy the tech we already have.”
What we’re reading (5/11)
“Inflation Slipped In April, But Upward Pressures Remain” (Wall Street Journal). “The Labor Department’s consumer-price index reading last month marked the first drop for inflation in eight months, down from an 8.5% annual rate in March. The decline came primarily from a slight easing in April gasoline prices, which have since reached a new high. Broadly, the report offered little evidence that inflation was cooling.”
“For Tens Of Millions Of Americans, The Good Times Are Right Now” (New York Times). “‘Maybe it’s easier to focus on the negative, but a huge number of people, maybe 40 million households, have been doing pretty well,’ said Dean Baker, an economist who was a co-founder of the liberal-leaning Center for Economic and Policy Research. ‘You’d have to go back to the late 1990s to find a similar era. Before that, the 1960s.’”
“Fed Confronts Why It May Have Acted Too Slowly On Inflation” (New York Times). “Several current and former Fed officials have suggested in recent days that, in hindsight, the central bank should have reacted more quickly and forcefully last fall, but that both profound uncertainty about the future and the Fed’s approach to setting policy slowed it down.”
“The Stock Market Is Freaking Out Because Of The End Of Free Money. It All Has To Do With Something Called ‘The Fed put’” (Fortune). “It took a while to sink in after last week, but investors had a full freak-out from Friday through Monday when they realized just how serious the Federal Reserve is about fighting inflation.”
“Fed’s Barkin Says ‘Volcker-Like Recession’ Unnecessary To Bring Inflation Down” (Market Watch). “The Federal Reserve doesn’t need to engineer a ‘Volcker-style recession’ to get inflation under control, said Richmond Fed President Tom Barkin on Tuesday. With the Fed’s benchmark policy rate at 83 basis points, ‘we are still far from the level of interest rates that constrains the economy,’ Barkin said.”
What we’re reading (5/10)
“NFTs Are Plunging In Popularity? Yeah, That Makes Sense.” (MSNBC). “two problems the market is facing. First, the number of active traders has plummeted from almost a million accounts at the start of the year to about 491,000, NBC News reported Thursday. A lack of new interest or sustained interest in an asset is rarely a good sign for its longevity. Second, there’s been a flood of supply. “There are about five NFTs for every buyer, according to data from analytics firm Chainalysis,” the [Wall Street] Journal reported.”
“I Bonds: The Nearly Risk-Free Asset Yielding 9.6%” (U.S. News & World Report). “The U.S. Department of the Treasury recently announced that I bonds will pay a 9.62% interest rate through October 2022, their highest yield since they were first introduced back in 1998. These I bonds are protected against inflation and backed by the U.S. government, making them essentially risk-free investments – the only way these investments fail is if Uncle Sam doesn't pay his debts.”
“‘Buy The Dip’ Believers Are Tested By Market’s Downward Slide” (Wall Street Journal). “Individuals’ willingness to backstop markets throughout this year’s selloff demonstrates that the group—for now—has been more resilient than analysts and trading professionals anticipated. Few were surprised when individual investors pounced on small dips as the market churned higher last year, helping the S&P 500 cruise to 70 records and rewarding those who waded in.”
“A Legal Test For Evaluating Modern Corporate-Executive Self Dealing” (RealClear Markets). “Corporate executives increasingly proudly proclaim that they’re acting in the interests of parties – ‘stakeholders’ – other than their shareholder bosses, creating an agency problem…[t]o be sure, they usually append a line asserting that their actions are also in the long-term interests of shareholders, in some nebulous and ill-defined way. But if these self-serving assertions are sufficient…then the self-dealing exception to the business-judgment rule has been eliminated, and the ability of shareholders to have even the most tenuous control over the actions of their managers has been eliminated.”
“Data And Market Power” (Jan Eeckhout and Laura Veldkamp, NBER). “[W]e craft a model in which economies of scale in data induce a data-rich firm to invest in producing at a lower marginal cost and larger scale. However, the model uncovers much richer interactions between data, welfare and market power. Data affects risk, firm size and the composition of the goods firms produce, all of which affect markups.”
What we’re reading (5/9)
“Stocks Slide To Lowest in 2022 As Rout Continues” (Wall Street Journal). “The most punishing market selloff in years showed no signs of abating Monday, with U.S. stock indexes sliding to new lows for 2022 and other assets, like oil and bitcoin, tumbling as well.”
“The Dollar Is Stronger. Who Wins? Who Loses?” (New York Times). “Fundamentally, a flood of foreign money into U.S. businesses and investments has been driving up the value of the dollar. In fact, a variety of actions that have unsettled the stock and bond markets have worked together to boost the greenback’s value against other currencies. These include the Fed rate increases, Russia’s war in Ukraine, global sanctions on Russia, soaring commodity prices, China’s lockdowns, and Europe’s and Japan’s economic slowdowns.”
“Contra Simpleton Pundits, ‘The Fed’ Didn’t Cause The Stock-Market Correction” (Forbes). “A Federal Reserve that projects its well-overstated influence through the most risk-averse financial institutions on earth is the all-weather explanation for everything stock-market related. Never explained is how. The stock market is risky, banks studiously avoid risk, but minor Fed fiddling with the short rate for credit supposedly tells the market story. What’s sad is the narrative rarely even rates the most basic of interrogation.”
“Fed Warns Of Worsening Market Liquidity In Stability Report” (Bloomberg). “‘According to some measures, market liquidity has declined since late 2021 in the markets for recently-issued U.S. cash Treasury securities and for equity index futures,’ the U.S. central bank said in its Financial Stability Report.”
“Wait, Trader Joe Was A Real Guy?” (CNN Business). “Joe Coulombe, a struggling convenience store owner in Los Angeles, decided in 1967 to open a grocery chain to appeal to the small but growing number of well-educated, well-traveled consumers that mainstream supermarkets were ignoring. ‘I have an ideal audience in mind,’ he told the Los Angeles Times in 1981. ‘This is a person who got a Fulbright scholarship, went to Europe for a couple of years and developed a taste for something other than Velveeta’ ordinary beer and Folgers coffee, he said.”
What we’re reading (5/8)
“Market’s 2022 Slide Has Already Changed Investor Behavior” (Wall Street Journal). “For much of the past two years, individual investors had rushed to the options market to place ultrabullish bets on stocks. Options bets became synonymous with the frenzy surrounding meme stocks, as shares of companies such as GameStop Corp. and AMC Entertainment Holdings Inc. soared. Now, much of that speculation appears to be winding down. Net call option volumes in single stocks recently hit the lowest level since April 2020, according to Deutsche Bank.”
“Day Trader Army Loses All the Money It Made In Meme-Stock Era” (Bloomberg). “It’s ending as fast as it began for retail day traders, whose crowd-sourced daring was the pre-eminent story of pandemic equities. Nursing losses in 2022 that are worse than the rest of the market’s, amateur investors who jumped in when the lockdown began have now given back all of their once-prodigious gains, according to an estimate by Morgan Stanley. The calculation is based on trades placed by new entrants since the start of 2020 and uses exchange and public price-feed data to tally overall profits and losses.”
“Market Pain Isn’t Over, But You Will Get Through This” (New York Times). “If you are looking for patterns in the market’s wild swings, the answer is simple: The financial markets are coming to grips with a stunning policy change by the Federal Reserve. Over the last two decades, financial markets may have become so accustomed to encouragement from the Fed that they just don’t know how to react, now that the central bank is doing its best to slow down the economy.”
“Airbnb CEO Brian Chesky, Who Recently Announced Employees Can Work From Home Forever, Calls The Office An ‘Anachronistic Form’ And ‘From A Pre-Digital Age’” (Insider). “‘I think that the office as we know it, is over,’ he [AirBnB CEO Brian Chesky] told Time. ‘We can't try to hold on to 2019 any more than 1950. We have to move forward.’”
“Three World Wars: Fiscal-Monetary Consequences” (George J. Hall and Thomas J. Sargent). “This paper describes how the US government made ‘the public pay for’ surges in expenditures associated with three world wars. We apply an approach of Becker (1962) by focusing exclusively on a consolidated government budget constraint and ignoring other parts of macroeconomic models…It is striking how little of the War on COVID-19 has thus far been financed by explicit taxation, even compared to World Wars I and II.”
What we’re reading (5/7)
“Policy Has Tightened A Lot. Is It Enough?” (Neel Kashkari). “We are seeing the power of forward guidance: the FOMC has signaled where policy is headed in the future and markets have adjusted in anticipation of those policy moves, including both expected increases in the funds rate and decreases in the balance sheet. Because the FOMC has strong credibility with market participants, they take our forward guidance seriously, as they should.”
“How You Know When The Fed Has Lost Control” (Global Macro Monitor). “When your fave local coffee house has eliminated the 15 percent gratuity option on Square. That is today relative to a fortnight ago, folks. Racking my brain to find the Gruatity supply chain disruption here. Anyone? Classic case of inflationary expectations becoming deeply imbedded in the economy or is it possibly a relative price shift as political power moves to favor labor vs. Das Kapital? We think a bit of both. Mr. Powell has a lot of wood to chop, if he could chop wood. But can and will he? We suspect today’s stock market mega ramp is not exactly what the Fed wanted. ‘Reducing demand to dampen inflation?’ Total the oppo today, folks. Wealth effect. The Fed needs asset prices lower in the near term.”
“Was The ‘Bond King’ Great?” (Institutional Investor). “He felt he, and his peers, were untested. Since the early 1980s, when he and a handful of other well-known managers got their start, market conditions had been so favorable for bonds that the bond investors couldn’t actually claim to be great — at least not yet. Interest rates were still on a decades-long, relatively steady march lower, which is fuel for higher bond prices. (One of the simpler finance equations: The price of a bond rises as interest rates decline.)”
“Does China Have Hidden Reservoirs Of Growth Potential?” (Noah Smith). “Within the last year, I’ve noticed a distinct souring on the topic of China’s growth prospects among the commentariat. This makes sense, of course. Between seemingly never-ending Covid lockdowns, a protracted crash in the vast real estate sector, Xi’s weird crackdown on internet companies, and the fear of Russia-like sanctions in the event of a conflict, there are now a lot more reasons to worry that China’s amazing catch-up growth story is drawing to an end. In fact, these new stumbles come on the heels of longer-term trends that have relentlessly pushed down China’s growth prospects — slowing productivity growth, reduced opportunities for copying Western technology, and rapidly aging demographics.”
“Companies Are Stuck Between Their Workers And Politicians” (DealBook). “It’s not hard to suss out the reasons that employee activism started to rise. With the government seemingly incapable of action on complex issues that affect the lives of Americans, employees started turning to their companies as institutions with the money and clout to affect change. Companies have financial power, and when they threaten to take action on a political issue, they can get results.”
What we’re reading (5/6)
“S&P Suffers Longest Weekly Losing Streak In Decade: Markets Wrap” (Bloomberg). “At the end of a week marked by fickle trading, quick reversals and heightened anxiety, the S&P 500 failed to stay in the green and fell to its lowest level in about a year. The gauge posted its fifth straight weekly drop -- the longest losing streak since June 2011. The tech-heavy Nasdaq 100 underperformed. Treasury 10-year yields remained above 3%, while the dollar rose. Gasoline futures in New York settled at a record high.”
“Ex-Fed Official Says Rates Of At Least 3.5% Will Be Needed To Slow Inflation” (Wall Street Journal). “‘Even under a plausible best-case scenario in which most of the inflation overshoot last year and this year turns out to have been transitory, the funds rate will, I believe, ultimately need to be raised well into restrictive territory,’ said Richard Clarida, referring to the federal-funds rate, in remarks prepared for delivery Friday at a conference at Stanford University’s Hoover Institution.”
“Consumer Debt Soared By $52 Billion In March” (CNN Business). “Paying off credit card debt is about to get even more difficult for those who don't make the minimum monthly payment: The Federal Reserve on Wednesday announced a half-point rate hike as part of a series of actions intended to address rampant inflation. That means interest rates will rise on everything from credit cards to car loans, pressuring household budgets even further.”
“What Is Happening To The People Falling For Crypto And NFTs” (New York Times). “‘On the one hand we’re seeing problem after problem after problem on a scale that has not been seen in most technologies,’ she told me. On the other hand, well-funded companies are running Super Bowl ads pushing crypto to the public, and big financial firms are gearing up to let people invest in digital currencies as part of their retirement funds. And much of this stuff is unregulated.”
“500 Kilos Of Cocaine Found In Coffee Bags At Nespresso Plant” (Moneyweb). “Nespresso said employees immediately informed the police on Monday after discovering a suspicious substance at its production site in Romont. The cocaine is more than 80% pure and its market value is estimated at more than 50 million francs ($50.6 million), the police said.”
What we’re reading (5/5)
“Dow, S&P 500 Slide More Than 3% As Investors Reassess Fed Comments” (Wall Street Journal). “The stock market took its biggest U-turn since the early days of the pandemic Thursday, with the Dow Jones Industrial Average posting its largest decline this year just 24 hours after its largest gain since 2020.”
“2022 Selloff Has Left The U.S. Stock Market Undervalued” (Morningstar). “[W]e think this selloff has pushed the broad U.S. equity market down too far. Following this downturn, our measure of market valuation is now well into the undervalued territory. According to a composite of the stocks followed by Morningstar’s equity research analyst team, the broad U.S. equity market is now trading at a 12% discount to fair value.”
“Who Wins From Carnage In The Credit Markets?” (The Economist). “For bondpickers, divergence will be further fuelled by a withdrawal of liquidity from the market. On June 1st the Federal Reserve will begin winding down its $5.8trn portfolio of Treasuries; by September, it intends to be shrinking it by $60bn a month. That amounts to the disappearance of an annual buyer of 3% of publicly held Treasuries, whose yields are thus likely to rise. As a result corporate borrowers will have to work harder to convince investors to buy their debt rather than seek the safety of government paper. Such a buyers’ market means more scrutiny of debt issuers, and more variance in the yields they have to offer.”
“The Myth Of The Genius Tech Inventor” (New York Times). “It’s practically an insult in Silicon Valley to say that an executive is extremely capable at running a company. Inventors, not great managers, are often the ones celebrated in technology…[b]ut the fixation on an individual’s ingenuity above all other abilities is a selective memory of tech history. Triumph is often the result of imagination combined with obsessive business savvy.”
“Tiger Is Suffering One Of The Biggest Hedge Fund Drawdowns In History” (Financial Times). “Back of the envelope calculations based on the reported $35bn size of Tiger’s overall public equities book at the end of last year indicate that it has probably suffered a nominal loss of at least $15bn in 2022…. To put that into perspective, Citadel lost 55 per cent for an estimated $8bn loss in the 2008 financial crisis, which led CNBC to camp a van outside its Chicago headquarters and nearly caused it to perish.”
What we’re reading (5/4)
“Fed Raises Rates By Half A Percentage Point — The Biggest Hike In Two Decades — To Fight Inflation” (CNBC). “The Federal Reserve on Wednesday raised its benchmark interest rate by half a percentage point, the most aggressive step yet in its fight against a 40-year high in inflation. ‘Inflation is much too high and we understand the hardship it is causing. We’re moving expeditiously to bring it back down,’ Fed Chairman Jerome Powell said[.]”
“A Minsky Moment For Venture Capital?” (Financial Times). “Venture capital returns have puked this year. The next dangerous stage is investor outflows.” Apparently, Refinitiv’s venture capital index is down 46 percent year-to-date.
“Everything’s A WeWork Now” (Wired). “[W]hile WeWork has become a cautionary tale, office life in the US has quietly embraced several of its core tenets. Many workers who spent the last two years at home—a small portion of the overall labor force—are being called back to offices that look different from the ones they vacated in 2020, with fewer desks and more open spaces designed to foster collaboration.”
“The Era Of Cheap And Plenty May Be Ending” (New York Times). “[A]s the pandemic and the war in Ukraine continue to weigh on trade and business ties, [the] period of plenty appears to be undergoing a partial reversal. Companies are rethinking where to source their products and stocking up on inventory, even if that means lower efficiency and higher costs. If it lasts, such a shift away from fine-tuned globalization could have important implications for inflation and the world’s economy.”
“American Consumers Are Shopping, Traveling And Working Out Like It’s 2019” (Wall Street Journal). “Live Nation, which owns Ticketmaster, said concert ticket sales were up 45% as of February 2022 compared with the same period in 2019, the last full prepandemic year. As of February, the company had 30% more concerts planned for 2022 than 2019. Membership levels at gym chain Planet Fitness in January surpassed prepandemic levels following a stretch in which some 25% of the nation’s gyms closed, according to industry data.”
What we’re reading (5/3)
“US Stocks End Higher In Choppy Trading Session As Oil Prices And Bond Yields Fall Ahead Of Critical Fed Decision” (Insider). “US stocks closed higher Tuesday as investors prepare for a key interest rate decision from the Federal Reserve at the conclusion of its meeting tomorrow. The central bank is expected to ramp up monetary policy tightening at the end of its meeting on Wednesday as part of its campaign to tamp down inflation that is running at 40-year highs. Wall Street is broadly expecting the Fed to hike rates by 50 basis points.”
“Elon Musk Plans To Take Twitter Public A Few Years After Buyout” (Wall Street Journal). “Mr. Musk said he plans to stage an initial public offering of Twitter in as little as three years of buying it, according to people familiar with the matter. The deal is expected to close later this year, subject to conditions including the approval of Twitter shareholders and regulators, the company has said.”
“America Is Trying To Fix The Chip Shortage One Factory At A Time” (Vox). “This new crop of chip factories, sometimes called fabs, won’t be ready in time to solve the current chip shortage. These facilities will take years to build, and even when they’re completed, they won’t produce as many chips as the US uses. Still, the government thinks the fabs could play a critical role in blunting the impact of a future crisis, like climate change or another pandemic.”
“SEC Launches A Hiring Spree To Fight Cryptocurrency Fraud” (CNN Business). “The additional 20 positions will result in almost a doubling in size of the agency's Cyber Unit, which is also being renamed the Crypto Assets and Cyber Unit to reflect the group's growing mission, the SEC said in a release. The Cyber Unit was first founded within the SEC's enforcement division in 2017.”
“Watchdogs Take A Swipe At Apple Pay” (The Economist). “There is not yet an app to keep track of the growing number of antitrust complaints against Apple. But perhaps there should be. On May 2nd the European Commission, the EU’s executive arm, added another to the pile. Following an investigation begun in 2020, it sent the smartphone-maker a ‘statement of objections’, saying that, in the commission’s view, Apple is abusing its power in the market for smartphone payments.”
What we’re reading (5/2)
“10-Year Treasury Yield Hits 3% For First Time Since 2018” (Wall Street Journal). “The yield on the benchmark 10-year Treasury note, which rises when bond prices fall, surged at the start of U.S. trading and reached as high as 3.008% in the afternoon, as traders braced for the outcome of this week’s Federal Reserve meeting. It then slipped below 3% to settle at 2.995%, according to Tradeweb, up from 2.885% Friday.”
“US Stocks Reverse Course To Close Higher Even As 10-year Treasury Hits 3% And Fed Rate Hike Looms” (Insider). “The S&P 500 led stocks lower for much of the day, falling as much as 1% before investors began to buy the dip and push the broader market higher near the end of the day. The Nasdaq finished up by nearly 2%.”
“What's Driving The Historic Bear Market For Bonds?” (Morningstar). “The culprits are the usual suspects when bond prices decline. It’s the surge in inflation and the Federal Reserve’s moves to raise interest rates which are to blame. The central bank will be front and center this week when its policy-setting Federal Open Market Committee meets for the first time since it raised rates in March. The Fed is expected to raise interest rates by another half a percent Wednesday, which would be the first rate hike of that magnitude in 22 years.”
“Has Inflation Reached A Peak? Three Signs That Prices Could Soon Come Down” (CNN Business). “During the stagflation of the 1970s, both sticky and flexible inflation grew. But so far sticky inflation has remained relatively flat compared with flexible inflation, a good sign that this could still be temporary.”
“Measuring Knowledge” (James Heckman and Jin Zhou, NBER). “We examine if conventional, broadly-defined measures of skill are the same across people who are comparable on detailed knowledge measures. We reject the hypothesis of aggregate scale invariance and call into question the uncritical use of test scores in research on education and on skill formation. We compare different measures of skill and ability and reject the hypothesis of valid aggregate measures of skill.”
What we’re reading (5/1)
“Wall Street Reluctantly Embraces Crypto” (Wall Street Journal). “Hedge funds and other professional investors were already trading cryptocurrencies, but many money managers—from mutual-fund giants to pension funds—are increasingly eager to find a way into the crypto markets, executives said. Inflation and rising interest rates have damped expectations for returns on stocks and bonds, making cryptocurrencies more attractive.”
“Bonds Are Suddenly Getting Love From Investors Hedging Recession” (Bloomberg). “Investors plagued by fear and shunning stocks are rediscovering a time-honored antidote: U.S. government bonds. That may seem surprising, given that the Treasury market has been battered by its worst losses on record this year. But with yields holding at the highest in years, the Federal Reserve on course to raise interest rates aggressively in the face of surging inflation, and growth sputtering overseas, cash is flowing back in as investors seek to protect against the risk that the economy will tumble into a recession -- pulling the stock market further down with it.”
“Why A Fragile Stock Market Faces Danger From Rising Real Yields As ‘TINA’ Trade Fades” (MarketWatch). “Rising inflation-adjusted yields in the U.S. are undermining the long-running trade in which investors favor stocks over other asset classes, and are poised to hit the technology sector even harder. That trade — known as ‘TINA,’ an acronym for ‘There Is No Alternative’ to equities — is being increasingly tested by real yields, which have risen from below zero on expectations of aggressively higher interest rates by the Federal Reserve. Five-, 10- and 30-year inflation-adjusted yields are at their highest or least negative levels of roughly the past two years, according to Tradeweb.”
“Dissecting The Equity Premium” (Tyler Beason and David Schreindorfer, University of Chicago Press). “We use option prices and realized returns to decompose risk premia into different parts of the return state space. In the data, 8/10 of the average equity premium is attributable to monthly returns below -10%, but returns below -30% matter very little. In contrast, prominent asset pricing models based on habits, long-run risks, rare disasters, undiversifiable idiosyncratic risk, and constrained intermediaries attribute the premium predominantly to returns above -10% or to the extreme left tail. We show that the discrepancy arises from an unrealistically small price of risk for stock market tail events in the models.”
“Netflix’s Big Wake-Up Call: The Power Clash Behind The Crash” (The Hollywood Reporter). “Sources say some Netflix executives began to worry about the burgeoning number of shows. ‘It was, ‘Hey, guys, do we think this is enough? Because we are cannibalizing our own shit,’ ’ says a former insider. And then there was Holland’s concern about the lack of curation and quality control. An important creative talent who had successes working with Holland muses: ‘I wonder if, say, a bonobo throwing shit at a whiteboard full of titles as a method of deciding what projects to make would have more or less success than all of these other ‘deciders’ who think they know what people want or don’t want.’”
April 2022 performance update
Friends, here with a monthly performance update. The key numbers are:
Prime: -1.21%
Select: -10.68%
SPY ETF: -9.11%
Bogleheads Portfolio (80% VTI, 20% BND): -8.29%
It goes without saying, but I am elated by this month’s results. As has been widely reported, it was the worst April for the U.S. stock market (as measured by the S&P 500) in 52 years. Discount rates continued rising sharply in the month, U.S. GDP declined, and the geopolitical crisis in Ukraine worsened. All told, trillions of dollars of notional financial asset value evaporated before our eyes. Against that backdrop, Prime mostly stayed afloat, falling negative only toward the end of the month, with the market as a whole performing nearly 9x worse. As I have said before, for a quasi-activist investor (even a model-driven one), volatility is a friend, as it is hard to beat the market when it is rising linearly in a low-volatility environment like 2021. The important point is that it is easy to achieve mechanically “amplified” market returns that go up more than the market when it is up and go down more than the market when it is down (e.g., through leverage). But it is very hard to beat the market on average when it is up and still outperform it when it is down.
Select fell along with the broader market, but a silver lining is that the gap between it at the Bogleheads benchmark widened somewhat. Let’s see what May brings.
Stoney Point Total Performance History
May picks available now
The new Prime and Select picks for May are available starting now, based on a model run put through today (April 30). As a note, we’ll be measuring the performance on these picks from the first trading day of the month, Monday, May 2, 2022 (at the mid-spread open price) through the last trading day of the month, Tuesday, May 31, 2022 (at the mid-spread closing price).
What we’re reading (4/30)
“As Odds Rise For A Recession, What's Your Investment Strategy?” (USA Today). “Odds for an economic recession in the U.S. seem to be rising by the day, so what should people do to prepare? Not much, financial advisers say. That answer may surprise newer investors who’ve been fortunate to see mostly economic expansion and stellar stock returns in the past 25 years. But to those who have lived a bit longer and seen a few cycles, they know to just stay focused and patient.”
“Investment Adviser’s Stock Market Formula Paid Dividends” (Wall Street Journal). “She recommended stocks largely on the basis of dividend yields. ‘Dividends are real money—not just figures on a balance sheet,’ she and Janet Lowe wrote in a 1988 book, ‘Dividends Don’t Lie.’ Earnings could be manipulated, she reminded investors. ‘If a company doesn’t pay a dividend, it’s a speculation,’ she said…Ms. Weiss died April 25 at her home in San Diego’s La Jolla neighborhood. She was 96.”
“Don’t Take The Surprising Drop In G.D.P. At Face Value” (The New Yorker). “If you add these three volatile factors [imports, inventories, government spending] and affecting G.D.P. together, they reduced the headline growth figure by roughly 4.5 percentage points, which explains why it came in negative even though underlying spending by households and businesses was strong.”
“What To Know Before You Add Bitcoin To Your 401(k)” (Washington Post). “Fidelity Investments announced that it will allow employers to offer their employees bitcoin in their workplace retirement plans. It was, in many ways, inevitable, but the timing is problematic, as the U.S. economy may be stumbling into some harder times.”
“Working 9 To 2, And Again After Dinner” (New York Times). “Time spent working after traditional hours has grown 28 percent since March 2020, according to data from Microsoft Teams users, and weekend work has increased 14 percent.”
What we’re reading (4/29)
“US Stocks Crater As The Dow Sheds 939 Points And Nasdaq Notches Its Worst Month Since 2008” (Insider). “US stocks fell Friday, as each of the three major indexes capped off losing months. The tech-heavy Nasdaq closed out its worst-performing month since 2008, shedding more than 3% for the day as investors fled the e-commerce giant after downbeat earnings.”
“America’s S&P 500 Suffers Its Worst April In 52 Years” (The Economist). There are a few glimmers of hope, however. First, corporate profits remain healthy. S&P 500 companies are so far reporting an average growth of 6.6% in second-quarter earnings, according to FactSet, a data provider. Second, many firms are sitting on big cash piles that they can use to make their shares more attractive with dividends, share buybacks and acquisitions.”
“Escape To Zoom Island” (GQ). “With the rest of the planet facing restrictions and isolation, the Savoyians reveled in their strange dystopian paradise. ‘I call it the Madeira magic,’ Dijan says. ‘People just kept extending their trips or canceling their flights, and the crazier and crazier it got.’ Much of the craziness was due to the other part of Madeira’s magical storm: the boom in cryptocurrency.”
“The U.S. Wants To Tackle Inflation. Here’s Why That Should Worry The Rest Of The World.” (New York Times). “The trade-off faced by the Fed — between price stability and employment — is usually framed in strictly domestic terms. But aggressive efforts to quell inflation in the United States can have major, unpredictable effects around the world, often with long-lasting, negative consequences for countries in the Global South.”
“Warren Buffett Is Still Setting Berkshire’s Direction. For How Much Longer?” (Wall Street Journal). “More than 40,000 people are expected to descend on Omaha this weekend for Berkshire’s first in-person shareholder meeting since 2019. They will be traveling hundreds, and in some cases, thousands of miles just to have a chance to hear from the famed ‘Oracle of Omaha,’ who turned 91 in August. But even as Berkshire thrives, it is contending with an unusual number of big challenges.”
What we’re reading (4/28)
“Amazon Shares Plunge 10% After Company Issues Disappointing Revenue Forecast” (Yahoo!Finance). “Shares of Amazon (AMZ) dropped after the company revealed a revenue forecast that missed analyst estimates as consumers curb online spending in the face of economic uncertainty and a return to in-person activities. The company also reported a loss on its investment in electric-vehicle maker Rivian Automotive.”
“Teladoc Stock Plunges As The Stay-At-Home Economy Fizzles” (CNN Business). “The huge pandemic boom for virtual health company Teladoc appears to be over. More people are willing to leave home for doctor visits, and shares of Teladoc (TDOC) plunged more than 45% Thursday. The company warned of a weak sales outlook and higher costs in its earnings report after the closing bell Wednesday.”
“One Of Cathie Wood’s Top Stock Picks Just Plunged 40%” (Wall Street Journal). “Cathie Wood suffered another setback, this time courtesy of Teladoc Health Inc. The digital-health company at one point lost roughly half its market value on Thursday following its disappointing financial forecast. Teladoc’s stock finished down 40%, its worst day in its nearly seven-year history as a publicly traded company.”
“Fixed Income: Class 5 Rapids” (Comerica). “It is clear that inflation and volatility will be part of the fixed income environment for the next several years. Investors will need to continue to manage their fixed income exposure with this in mind, and structure portfolios that provide some degree of protection from inflation.”
“Musk Is Already Shaking Up Twitter” (DealBook). “Elon Musk doesn’t own Twitter yet, but he’s already making his presence felt there. Musk took aim at Twitter employees and others this week in a round of tweets that raised new concerns about the company’s future under his freewheeling approach to content moderation. (He also said — with tongue presumably in cheek — that he would buy Coca-Cola next, ‘to put the cocaine back in.’).”
May picks available soon
We’ll be publishing our Prime and Select picks for the month of April before Monday, May 2 (the first trading day of the month). As always, we’ll be measuring SPC’s performance for the month of April, as well as SPC’s cumulative performance, assuming the sale of the April picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Fri., April 29). Performance tracking for the month of May will assume the May 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 (Monday, May 2).
What we’re reading (4/27)
“Investment Firm Head Arrested On Charges Of Multibillion-Dollar Fraud And Racketeering” (CNN Business). “Federal agents arrested Archegos Capital Management founder Sung Kook ‘Bill’ Hwang on Wednesday morning on fraud charges, roughly one year after the investment firm's spectacular meltdown sent shock waves through Wall Street.”
“Stock Rout Is Fed’s ‘Best-Case Scenario’ As Powell-Put Era Ends” (Bloomberg). “Financial conditions -- a cross-asset measure of market health from equities to fixed income -- have finally started to tighten over the past week in sympathy with the recent plunge in equities, led by richly priced technology companies.”
“Judge Rules Elon Musk Didn’t Act Unlawfully In SolarCity Takeover” (Wall Street Journal). “Elon Musk won a major victory in Delaware court on Wednesday, when a judge ruled the Tesla Inc. chief executive didn’t act unlawfully in the electric-vehicle maker’s roughly $2.1 billion takeover of SolarCity Corp.”
“Michael Lewis On Why Americans Don’t Trust Experts” (Vox). “Why don’t Americans trust the experts? One answer is that experts get a lot of things wrong and often they pay a big price for those mistakes. From the forever wars to the 2008 financial crisis to the botched pandemic response, it seems Americans are constantly careening from one avoidable catastrophe to another. Another answer is…[that] [t]he digital revolution has transformed the information space in ways that have empowered individuals and undermined the dominant institutions in society — government, media, the academy — and the elites who run them.”
“Mom And Pop Investors Took A Billion-Dollar Bath Trading Options During The Pandemic” (Yahoo!Finance). “Turns out, taking leveraged flyers on meme stocks mentioned on Reddit’s WallStreetBets trading forum is harder than it looks. New research from economists at the London Business School found that mom-and-pop day traders managed to lose more than $1 billion during the bull market. The bill climbs to $5 billion when the cost of doing business with market-makers is factored in.”