What we’re reading (1/11)
“Wall Street ‘Fear Gauge’ At 3-Week High As Stocks Sink” (Reuters). “Wall Street's most watched gauge of investor anxiety rose to a three-week high on Friday as stock indexes sold off following a an upbeat jobs report that pushed back market expectations for further Federal Reserve interest rate cuts.”
“Warren Buffett Prepares His Middle Child for the Job of a Lifetime” (Wall Street Journal). “As a child, Howie Buffett listened to Warren Buffett’s side of telephone conversations, asking questions about things he didn’t understand. As an adult, he turned to his father for advice. And as a director on Berkshire’s board for more than 30 years, he’s had a front-row seat as his father built Berkshire into one of the largest companies in the U.S.”
“The Tax That’s Stopping Older Homeowners From Selling Their Valuable Properties” (Business Insider). “The share of home sales subject to the [capital gains] tax has more than doubled in the past few years. In 2023, 8% of US sellers made more than $500,000 in profit on the sale of their homes, the property data firm CoreLogic found. That's up from 1.3% in 2003 and 3% in 2019. If the threshold had been adjusted for inflation, the $250,000 cutoff for individual home sellers in 1997 dollars would be about twice as high — $496,000 — in 2024 dollars.”
“Why America Is Stuck With An Elevator Crisis” (Axios). “Elevator parts shortages appear to stem largely from two issues: Parts suppliers often prioritize their biggest customers, which in this case happens to be builders in China, where the vast majority of the world's new elevators are installed, according to Smith. And parts are often no longer available for aging — and often obsolete — elevators, meaning they often have to be custom made.”
“Higher Egg Prices May Extend Far Into 2025, And Egg Producers Like Cal-Maine Could Benefit” (Yahoo! Finance). “Eggs are starting the year on a rotten note as prices surge after the return of the bird flu. According to the latest USDA report from mid-December, US egg production is down 4% year over year, with 3% fewer egg-laying hens. Per Datasembly, eggs are at their highest price since January 2023.”
What we’re reading (1/10)
“US Labor Market Exits 2024 With Strong Job Gains, Drop In Unemployment Rate” (Reuters). “U.S. job growth unexpectedly accelerated in December while the unemployment rate fell to 4.1% as the labor market ended the year on a solid footing, reinforcing views that the Federal Reserve would keep interest rates unchanged this month.”
“The Stock Market Embraced Higher Yields. Now It Fears Them.” (Wall Street Journal). “The 10-year bond yield came within a whisker of its high from last April on Wednesday morning, and stocks, especially smaller stocks, didn’t like it one bit. It is part of a switcheroo by investors over the past month. They have shifted from thinking that higher Treasury yields are just an unwelcome side effect of the stronger growth promised by President-elect Donald Trump, to worrying that higher borrowing costs might end up being very important. If the concern is right, get ready for a bumpy ride in 2025.”
“Japan Is The Silicon Valley Of The Robot Revolution. The Stocks Are Cheap.” (Barron’s). “Japan is the Silicon Valley of industrial robotics. Companies like Fanuc, Yaskawa Electric, and Nachi-Fujikoshi churn out nearly half of the global supply of robots, according to the International Federation of Robotics. U.S. producers barely figure, as yet.”
“The Consensus On Havana Syndrome Is Cracking” (The Atlantic). “Two years ago, U.S. intelligence analysts concluded, in unusually emphatic language, that a mysterious and debilitating ailment known as “Havana syndrome” was not the handiwork of a foreign adversary wielding some kind of energy weapon. That long-awaited finding shattered an alternative theory embraced by American diplomats and intelligence officers, who said they had been victims of a deliberate, clandestine campaign by a U.S. adversary, probably Russia, that left them disabled, struggling with chronic pain, and drowning in medical bills. The intelligence report, written chiefly by the CIA, appeared to close the book on Havana syndrome. Turns out, it didn’t. New information has come to light causing some in the intelligence community to adjust their previous conclusions.”
“Zuckerberg Says Biden Administration Pushed Meta ‘Super Hard’ To Take Down Vaccine Content” (CNBC). “‘And they pushed us super hard, to take down the things that were honestly were true,’ Zuckerberg told Rogan. ‘They basically pushed us and said, you know, anything that says that vaccines might have side effects, you basically need to take down.’ Zuckerberg didn’t specify who from the White House made the requests, saying, ‘I wasn’t involved in those conversations directly.” But he said the company’s response was that it wasn’t going to take down content that ‘is kind of inarguably true.’”
What we’re reading (1/9)
“The Stock Market Embraced Higher Yields. Now It Fears Them.” (Wall Street Journal). “The 10-year bond yield came within a whisker of its high from last April on Wednesday morning, and stocks, especially smaller stocks, didn’t like it one bit. It is part of a switcheroo by investors over the past month. They have shifted from thinking that higher Treasury yields are just an unwelcome side effect of the stronger growth promised by President-elect Donald Trump, to worrying that higher borrowing costs might end up being very important. If the concern is right, get ready for a bumpy ride in 2025.”
“30-Year Mortgage Rate Climbs To 6.93%, The Highest Since July” (New York Times). “There was a moment in late September when mortgage rates, after a monthslong decline, appeared poised to drop low enough to bring would-be buyers and sellers off the sidelines. But that window has closed, at least for now. The average rate on the 30-year mortgage, the most popular home loan in the United States, rose to 6.93 percent this week, Freddie Mac reported on Thursday, the highest since early July.”
“The Great Crypto Crash” (The Atlantic). “Crypto will become more widespread. And the conventional financial markets will come to look more like the crypto markets—wilder, less transparent, and more unpredictable, with trillion-dollar consequences extending years into the future.”
“Can January Really Tell The Stock Market’s Future? Let Us Count The Ways.” (MarketWatch). “Consider those years in which the Dow declined during each of the three early-January indicators — the Santa Claus rally period, the first five trading days of January, and the entire month of January. In such years the stock market from February through December rose 73% of the time. That’s barely different from the 75% odds of a rising market when the Dow rose over each of these three early-January periods. This is one reason why the r-squared is so low for the composite indicator that is based on a combination of all three early-January indicators.”
“This Could Be The Beginning Of The End For Fire Insurance In California” (Politico). “The state’s insurance market has been teetering on the edge of insolvency for years thanks to catastrophic wildfires that have driven many insurers to stop writing new policies and drop existing ones. Wednesday’s wind-driven wildfires in a part of Los Angeles packed with multimillion-dollar homes could accelerate its collapse.”
What we’re reading (1/8)
“The US Stock Market Has Never Been More Concentrated. Does It Matter?” (Financial Times). “[Owen] Lamont uses the example of AT&T’s break-up as an example of how measures of concentration can be irrelevant to the stock market’s riskiness — being split up into seven smaller companies in 1984 made the market optically less concentrated, but no less risky.”
“On Bubble Watch” (Howard Marks). “[T]o discern a bubble, you can look at valuation parameters, but I’ve long believed a psychological diagnosis is more effective. Whenever I hear ‘there’s no price too high’ or one of its variants – a more disciplined investor might say, ‘of course there’s a price that’s too high, but we’re not there yet’ – I consider it a sure sign that a bubble is brewing.”
“Why Michael Green Is Known As The Cassandra Of Passive Investing” (Institutional Investor). “For the better part of the past decade, Michael Green has been on a mission. From talking to money managers to making the rounds of hedge fund idea dinners to attending conferences geared to everyone from financial analysts to family offices, even wrangling meetings at the International Monetary Fund and the Securities and Exchange Commission, Green has had one message: The craze to invest passively — earn the returns of an entire market rather than those of individual stocks — isn’t the low-cost, risk-free future of investing that everyone thinks it is. Instead, he argues, the growing dominance of passive investing distorts capital formation, creates market instability, and carries the potential for a crash. Green calls it a passive bubble.”
“Fed Minutes Suggest Officials Will Hold Rates Steady For Now” (Wall Street Journal). “Federal Reserve officials saw risks of higher-than-expected inflation, due in part to potential tariffs by President-elect Donald Trump, when they made a ‘finely balanced’ decision last month to lower interest rates, according to minutes of the meeting published Wednesday. The written account of the Dec. 17-18 policy meeting showed officials thought inflation was likely to continue moving down to the central bank’s 2% target, but ‘the process could take longer than previously anticipated’ due in part to possible changes to trade and immigration policy.”
“US Weekly Jobless Claims At 11-Month Low Amid Labor Market Stability” (Reuters). “The number of Americans filing new applications for unemployment benefits fell to an 11-month low last week, pointing to a stable labor market, though a slowdown in hiring has led some laid-off workers to experience long bouts of joblessness.”
What we’re reading (1/7)
“The Billionaire Mining Magnate Who Bet Coal Had A Future—And Won Big” (Wall Street Journal). “Coal, the world’s dirtiest fossil fuel, is booming, and few are profiting more than Low Tuck Kwong, the 76-year-old businessman behind one of Asia’s largest coal-mining complexes. Coal’s resurgence as a cheap and reliable energy source propelled him to a spot on Forbes’s 100 richest people. Low’s wealth is estimated to have swelled to $28 billion from $1 billion in the years since coal was assumed to be headed for the slag heap.”
“Have We Reached Peak Population?” (The Week). “According to the UN's latest projections, the global population is expected to peak at around 10.3 billion in the mid-2080s, earlier than previously predicted. It is then expected to plateau at about 10.2 million by 2100. Experts say lower birth rates and falling fertility levels – especially in "ultra-low" fertility countries like China, Italy and Spain – are to blame for the more imminent peak.”
“If Bitcoin Is The Future, What Explains MicroStrategy’s Need For Speed?” (Financial Times). “Something peculiar is afoot at MicroStrategy. The company has amassed over two per cent of all bitcoin in existence, funded through a combination of shares and convertible bonds. This strategy has turned a humdrum business software firm into something akin to a bitcoin ETF, albeit one trading at a frothy premium to its net asset value. The stock is up over 20 times since the pivot to bitcoin in August 2020. Yet recent months have revealed some curious contradictions in this narrative. While bitcoin has maintained its stratospheric altitude at around $100,000 per coin, MicroStrategy’s stock has drifted lower, shedding 40 per cent since peaking intraday on November 21 at $550, which implied at the time a market cap of $124bn. Even its inclusion in the Nasdaq 100 index failed to boost the share price. Its premium to net asset value has meanwhile decreased from a high of 3.8 times to 1.9 times. This decline in the share price is happening even as the company continues to acquire more bitcoin.”
“Myron Scholes (Stanford Professor and Nobel Prize Winner) on Academic Finance, Black-Scholes Options Pricing, and Regulation” (Jon Hartley). “So Fisher [Black] and I rewrote the paper and try to show that basically everything in our lives was options and option related. And if you really thought about uncertainty, that options were primary and think about the right to do something, but not the obligation and what the value of that right would be.”
“The Fact Checks Have Just Become Too Political” (Mark Zuckerberg, Meta). Statement from Mark Zuckerberg.
What we’re reading (1/6)
“Four Years After Capitol Riot, Congress Certifies Trump’s Victory Peacefully” (New York Times). “A joint session of Congress on Monday certified President-elect Donald J. Trump’s victory in the 2024 election, peacefully performing a basic ritual of democracy that was brutally disrupted four years ago by a violent pro-Trump mob inflamed by his lie about a stolen election.”
“Nippon Steel And US Steel File Lawsuits Over Blocked Takeover” (Semafor). “The companies also filed a separate lawsuit against rival steel company Cleveland-Cliffs, its CEO, and the President of the United Steelworkers union, citing ‘illegal and coordinated actions aimed at preventing the transaction’ and undermining Nippon and US Steel’s business practices.”
“‘Enter At Own Risk’: Why Raging Optimism For 2025 Is A Risk For Stocks And The Economy” (Business Insider). “Investors excited for another strong year for the economy and stock market could be getting in their own way — and growth may end up falling short of 2025 expectations, BCA Research said...BCA Research has the most bearish stock market call on Wall Street for 2025. In a previous note, the firm said it still saw a recession as the base case and predicted the S&P 500 would end the year at 4,452, a 26% downside from the index's current levels.”
“How Do People Survive Plane Crashes That Kill Nearly Everyone Else?” (Wall Street Journal). “Investigators assessing the survivability of a plane crash focus on five factors: integrity of the aircraft, effectiveness of safety restraints, G-forces experienced by passengers and crew, the environment inside the aircraft and postcrash factors such as fire or smoke. The two flight attendants who survived the Boeing 737-800 crash were seated in the very back of the plane, which was the only recognizable part of the aircraft left intact.”
“2025 Bond Market Outlook: Yields Range-Bound But Volatile” (Morningstar). “The US economy is expected to post steady growth, without overheating or sliding into recession. At the same time, inflation is expected to remain under control but not fall significantly. Against that backdrop, the Federal Reserve is seen as unlikely to make big changes in monetary policy. Add these factors up and it could mean a bond market that largely bounces back and forth in well-defined ranges, most likely within the highs and lows carved out in 2024.”
December performance review
Hi friends, here with the performance numbers for December:
Prime: -3.89%
Select: -2.92%
SPY ETF: -2.47%
Bogleheads Portfolio (80% VTI, 20% BND): -2.86%
What we’re reading (1/4)
“The Coming American Labour Market Shock” (Financial Times). “What would the country have done if 2022-24 immigration had averaged half a million instead of 2.2mn, and demand for workers stayed strong? It’s an interesting question…This time, with LFPR already high and the US continuing to age, wages would probably have had to rise very sharply, far more than actually happened. After all, the retiree sitting on the sidelines will only enter the job market is they are enticed into doing so. And even with higher wages, actual job creation would likely have been far less. Meanwhile, high wages would have passed into inflation, pushing it even higher than it peaked this cycle.”
“Advertisers Keep Avoiding News Sites, And Publishers Have Had Enough Of It” (Wall Street Journal). “The Washington Post’s crossword puzzle was recently deemed too offensive for advertisers. So was an article about thunderstorms. And a ranking of boxed brownie mixes. Marketers have long been wary about running ads in the news media, concerned that their brands will land next to pieces about terrorism or plane crashes or polarizing political stories. That advertising no-go zone seems to keep widening. It is a headache that news publishers can hardly afford. Many are also grappling with subscriber declines and losses in traffic from Google and other tech platforms, and are now making an aggressive push to change advertisers’ perceptions.”
“The New Science On Alcohol And Cancer: 4 Studies That Found A Link” (Business Insider). “[US Surgeon General Vivek] Murthy outlined the research that persuaded him — and other medical professionals — that alcohol is a serious and under-appreciated health concern…There are four ways alcohol causes cancer, Murthy said, citing a 2021 Nutrients study. The first two are widely accepted, he wrote. Most physicians agree that when alcohol breaks down in the body it can bind to DNA, damaging cells and fueling tumors. There is also robust evidence that alcohol can drive inflammation, which is linked to cancer…The science on alcohol is not cut-and-dry, though. some of the healthiest people in the world — in the Mediterranean and so-called Blue Zones — drink wine daily. Researchers believe the social aspect of alcohol may have strong benefits for longevity. Plus, Murthy's report clashes with a major report by the National Academies of Sciences, Engineering, and Medicine, which was published in December.”
“Nazi Ties To Credit Suisse Ran Deeper Than Was Known, Hidden Files Reveal” (Wall Street Journal). “Switzerland thought it came to terms with its Nazi-assisting past after harrowing probes in the 1990s led its two largest banks to pay more than $1 billion restitution to Holocaust victims. Documents unearthed in bank archives show it might have been at least in part a whitewash.”
“Inside Zildjian, A 400-year-Old Cymbal-Making Company In Massachusetts” (WBUR). “[I]n 1618 the Ottoman sultan summoned Avedis [I] to the Topkapi Palace to make cymbals for elite military bands. The metalsmith’s work pleased the ruler, who gave him permission to found his own business in 1623. The sultan also bestowed Avedis the family name ‘Zildjian’ which actually means cymbal maker…[b]y the 1700s European composers, including Mozart and Haydn, added Zildjian cymbals to their symphonies. ‘So, that's how the reputation grew,’ Debbie [Zildjian] said. Zildjian became synonymous with cymbals after her grandfather Avedis III, an ethnic Armenian, emigrated to the U.S. in 1909. Two decades later he re-located the family’s cymbal business from Turkey to Quincy, Massachusetts with his uncle.”
What we’re reading (1/3)
“2035: An Allocator Looks Back Over The Last 10 Years” (Cliff Asness). “…it turns out that investing in U.S. equities at a CAPE in the high 30s yet again turned out to be a disappointing exercise. Today the CAPE is down to around 20…It turned out that, just as we thought, the U.S. really did have the best companies (most profitable, most innovative, fastest growing) and this indeed continued in this last decade. But it also turned out that paying an epic multiple for the U.S. compared to the rest of the world mattered somewhat more than we thought, and international diversification, as we knew it would one day, did eventually work…we had hoped for much more protection from this volatility from our extensive (like half the portfolio at the peak) allocation to privates. Alas, sadly, and totally unforeseeably, it turned out that levered equities are still equities even if you only occasionally tell your investors their prices (and when you do, you do not really move prices that much). Disappointing, but PE acting like equities would have been tolerable if they had actually outperformed public markets, but they underperformed! It seems that eventually, and a 10-year disappointing market counts as ‘eventually,’ even privates have to be (mostly) marked-to-market.”
“The Fed Has Two Bad Options In 2025: Accept Higher Inflation Or Risk A Recession” (Mohamed El-Erian). “Absent a major policy reset, my baseline scenario for the U.S. includes a somewhat lower immediate growth rate, even as the economy outperforms its peers, and sticky inflation. This will present the Fed with a choice: accept above-target inflation or attempt to bring it down and risk tipping the economy into recession.”
“Biden Blocks Sale of U.S. Steel to Nippon Steel” (Wall Street Journal). “Biden’s decision comes after the Committee on Foreign Investment in the U.S., a federal interagency panel, spent months reviewing the $14.1 billion deal for potential national-security risks. In an order Friday, the White House required the companies to abandon the deal within 30 days unless Cfius agrees to extend the timeline.”
“When Did Growth Begin? New Estimates Of Productivity Growth In England From 1250 To 1870” (Bouscase, et al.). “We estimate productivity growth in England from 1250 to 1870. Real wages over this period were heavily influenced by plague-induced swings in the population. Our estimates account for these Malthusian dynamics. We find that productivity growth was zero prior to 1600. Productivity growth began in 1600—almost a century before the Glorious Revolution. Thus, the onset of productivity growth preceded the bourgeois institutional reforms of 17th century England. We estimate productivity growth of 2% per decade between 1600 and 1800, increasing to 5% per decade between 1810 and 1860. Much of the increase in output growth during the Industrial Revolution is explained by structural change—the falling importance of land in production—rather than faster productivity growth. Stagnant real wages in the 18th and early 19th centuries—’Engels’ Pause’—is explained by rapid population growth putting downward pressure on real wages. Yet, feedback from population growth to real wages is sufficiently weak to permit sustained deviations from the ‘iron law of wages’ prior to the Industrial Revolution.”
“Who Could Win And Lose After The Surgeon General’s Alcohol-Cancer Link Warning” (Business Insider). “Stocks of some of the biggest alcohol companies in the world were down Friday after the surgeon general released his advisory. Shares of Budweiser-maker Anheuser-Busch InBev closed down 2.8% in Belgium. In London, shares of Diageo, the company behind Captain Morgan rum and Ketel One vodka, closed nearly 4% lower. Still, there's reason to doubt that the surgeon general's advisory will lead to a lot less drinking and fewer sales for the big booze makers, Kate Bernot, lead analyst at Sightlines, which researches the alcohol space, told Business Insider.”
What we’re reading (1/2)
“Dow, S&P 500, Nasdaq Fall As Comeback Bid Falters And Tesla, Apple Slide” (Yahoo! Finance). “Stocks erased session gains on Thursday to kick off the first trading day of the new year as Wall Street returned from a holiday break.”
“Mortgage Rates Kick Off 2025 With An Increase, Nearing 7%” (Fox Business). “Freddie Mac's latest Primary Mortgage Market Survey, released Thursday, showed that the average rate on the benchmark 30-year fixed mortgage jumped to 6.91%, up from last week's reading of 6.85%. The average rate on a 30-year loan was 6.62% a year ago.”
“Hindenburg Shorts Carvana, Alleging ‘Grift for the Ages’” (Bloomberg). “Carvana Co. was accused by prominent short-seller Hindenburg Research of impropriety in a report alleging that the auto retailer’s subprime loan portfolio carries substantial risk and its growth is unsustainable.”
“Are Tax Cuts Contractionary At The Zero Lower Bound? Evidence From A Century Of Data” (James Cloyne, et al.). “Popular New Keynesian macroeconomic models predict that cuts in various types of distortionary taxes are contractionary when monetary policy is constrained at the zero lower bound (ZLB). We turn to a long span of history in the United Kingdom to test this hypothesis. Using a new long-run dataset of narrative-identified tax changes from 1918 to 2020, we show that tax cuts are expansionary in both low-interest-rate environments and more normal times. We do not find evidence of a deflationary spiral at the ZLB. Tax cuts may therefore still be a useful tool to stimulate economic activity when monetary policy is constrained.”
“The Illusion Of Information Adequacy” (Hunter Gelbach, et al.). “Participants in our preregistered study (N = 1261) responded to a hypothetical scenario in which control participants received full information and treatment participants received approximately half of that same information. We found that treatment participants assumed that they possessed comparably adequate information and presumed that they were just as competent to make thoughtful decisions based on that information. Participants’ decisions were heavily influenced by which cross-section of information they received. Finally, participants believed that most other people would make a similar decision to the one they made. We discuss the implications in the context of naïve realism and other biases that implicate how people navigate differences of perspective.”
What we’re reading (1/1)
“How The Stock Market Defied Expectations Again This Year, By The Numbers” (Associated Press). “U.S. stocks ripped higher and carried the S&P 500 to records as the economy kept growing and the Federal Reserve began cutting interest rates. The year featured many familiar winners, such as Big Tech, which got even bigger as their stock prices kept growing. But it wasn’t just Apple, Nvidia and the like. Bitcoin, gold and other investments also drove higher.”
“Concentration” (Bespoke). “Over the past decade, the largest stocks’ share of market cap has steadily been growing, and actually, this isn't the only record high to highlight with prior records being set at 29% at the end of 2021 and 30% last year. With that said, the 5.6 percentage point jump versus last year is one of the largest one-year increases in concentration at the top that we've seen.”
“Hopes for a ‘Santa Claus Rally’ Fade on Wall Street” (Wall Street Journal). “There are a number of reasons stocks tend to rally near the end of the year. Traders rebalance their portfolios. Some invest their end-of-year bonuses into the market. Lighter trading volumes around the holidays can amplify stock moves. Investors this season are struggling to embrace the holiday cheer. Speculative assets including bitcoin and economically sensitive stocks such as small-caps have pulled back from the highs they set after Donald Trump’s election victory. The big tech stocks that led the market higher in 2024 stumbled during the last few days of the year. Strategists said that could be due to a slew of uncertainties facing markets.”
“Here’s Where Wall Street Sees Stocks Heading After The Best 2-Year Stretch Since ‘97-’98” (Yahoo! Finance). “With strong earnings expected from a widespread array of companies in 2025 and US economic growth anticipated to remain resilient, the fundamental story for further market increases remains intact for 2025.”
“Oil Kicks Off New Year Higher On Signs Of Lower US Stockpiles” (Bloomberg). “Oil has been stuck in a narrow range since mid-October, with Brent posting a modest annual decline and WTI ending 2024 little changed. Investors are bracing for a glut this year, making it harder for OPEC+ to revive idled production[.]”
January picks available now
The new Prime and Select picks for January are available starting now, based on a model run put through Today (January 1). As a note, I will be measuring the performance on these picks from the first trading day of the month, Thursday, January 2, 2025 (at the mid-spread open price) through the last trading day of the month, Friday, January 31, 2025 (at the mid-spread closing price).
What we’re reading (12/30)
“US Treasury Says Chinese Hackers Stole Documents In ‘Major Incident’” (Reuters). “Chinese state-sponsored hackers breached the U.S. Treasury Department's computer security guardrails this month and stole documents in what Treasury called a ‘major incident,’ according to a letter to lawmakers that Treasury officials provided to Reuters on Monday. The hackers compromised third-party cybersecurity service provider BeyondTrust and were able to access unclassified documents, the letter said.”
“A Record-Shattering $1 Trillion Poured Into ETFs This Year” (Wall Street Journal). “Investors plowed more than $1 trillion into U.S.-based exchange-traded funds in 2024, shattering the previous record set three years ago and raising Wall Street hopes for an even bigger year ahead.”
“Last Madoff Victim Fund Payout Brings Recovery To Nearly 94% Of Ponzi Scheme Losses, DOJ Says” (CNBC). “When Madoff’s fraud first became publicly known, prosecutors estimated the total loss at $65 billion. But that estimate sharply dropped once authorities subtracted the amount of phantom investment gains and interest that Madoff’s customers were duped into believing existed.”
“Britannica Didn’t Just Survive. It’s An A.I. Company Now.” (DealBook). “For nearly 250 years, the Encyclopaedia Britannica was a bookshelf-busting series of gilt-lettered tomes, often purchased to show that its owners cared about knowledge. It was the sort of physical media expected to die in the internet era, and indeed, the encyclopedia’s publisher announced that it was ending the print edition in 2012. Skeptics wondered how Britannica the company could survive in the age of Wikipedia. The answer was to adapt to the times.”
“The Case For More H1B Visas” (Greg Mankiw’s Blog). “From the standpoint of economic efficiency, allowing a highly skilled immigrant to work at a U.S. firm is, for standard reasons, beneficial. The transaction is voluntary, so both the employee and employer are better off. And there are no obvious negative externalities (not counting, of course, pecuniary externalities). In addition, the U.S. government collects more revenue in the form of payroll and income taxes. From the standpoint of economic equality, allowing a highly skilled immigrant is again beneficial. The relative wage of skilled versus unskilled workers depends on, among other things, the relative supply of the two types of worker. When highly skilled workers immigrate into the United States, the demand for less skilled workers rises.”
What we’re reading (12/29)
“Jimmy Carter, Peacemaking President Amid Crises, Is Dead At 100” (New York Times). “Jimmy Carter, who rose from Georgia farmland to become the 39th president of the United States on a promise of national healing after the wounds of Watergate and Vietnam, then lost the White House in a cauldron of economic turmoil at home and crisis in Iran, died on Sunday at his home in Plains, Ga. He was 100.”
“What I Got Right About Markets in 2024—And Very Wrong” (Wall Street Journal). “I started out the year arguing that there’s no bubble in artificial-intelligence stocks. I’ve ended it concerned about froth after anything AI-related soared in price and the market as a whole reached dizzying heights.”
“San Francisco House Prices Plunge Amid Widespread Tech Layoffs” (New York Post). “Housing prices in San Francisco have plunged to pre-pandemic levels amid widespread layoffs in the tech sector, SFGATE reports. Despite still being one of the more expensive metropolitan areas in the US, prices for condominiums and co-ops in the city were down 14.7% from May 2022 and now average $986,000. Those prices have not been seen since 2015, according to Zillow data analyzed by Wolf Street.”
“A Global Boom In Cocaine Trafficking Defies Decades Of Anti-Drug Efforts” (Washington Post). “The drug lord had already escaped the law in three countries, and he planned to do it again. In less than a decade, Dritan Rexhepi had built a smuggling business that ran from the fields of Colombia to the ports of Ecuador and on to the streets of Europe, Italian and Latin American investigators said, rivaling the influence of Mexico’s powerful cartels. His brand, carved into cocaine packages, was ‘Bello’ — beautiful. The Albanian’s rise from gunman in his home country to transatlantic kingpin is part of a global explosion in the cocaine industry, a trade that is far bigger and more geographically diverse than at any point in history.”
“Many Digital Health Startups Are Quietly Raising Down Rounds And Closing Up Shop. Here’s Why.” (Business Insider). “Many more startups are quietly struggling — cutting their valuations, selling off assets, or closing their doors without any announcement, investors told Business Insider. While in 2021 there were a record 729 healthcare-startup deals, amounting to an eye-popping $29.1 billion, the first three quarters of 2024 brought in only about half of those deals, with much smaller checks: Startups had raised $8.2 billion through September in 379 deals, per Rock Health.”
What we’re reading (12/28)
“A Thrill-Seeking Trade Amps Up Heading Into 2025” (Wall Street Journal). “About 48 million options contracts have changed hands daily on average this year, on pace for a record in data going back to 1973, according to the Options Clearing Corp., or OCC. That is up 9% from last year and would mark the fifth straight year of fresh all-time highs. Options were traditionally used by professional investors to protect portfolios from risk. Now, they have become wildly popular among rookie traders seeking to amplify their bets, especially on extremely volatile stocks…’It’s really the phenomenon of the retail trader that continues to just drive this growth,’ said Catherine Clay, head of global derivatives at Cboe Global Markets.”
“How A.I. Could Reshape The Economic Geography Of America” (New York Times). “Chattanooga, Tenn., a midsize Southern city, is on no one’s list of artificial intelligence hot spots. But as the technology’s use moves beyond a few big city hubs and is more widely adopted across the economy, Chattanooga and other once-struggling cities in the Midwest, Mid-Atlantic and South are poised to be among the unlikely winners, a recent study found. The shared attributes of these metropolitan areas include an educated work force, affordable housing and workers who are mostly in occupations and industries less likely to be replaced or disrupted by A.I., according to the study by two labor economists, Scott Abrahams, an assistant professor at Louisiana State University, and Frank Levy, a professor emeritus at the Massachusetts Institute of Technology.”
“Mortgage Rates Rise Again, Finishing The Year At 6.85% — Just About The Way They Started” (Yahoo! Finance). “Mortgage rates rose again this week to end the year slightly higher than where they began. The average 30-year fixed-rate mortgage rate was 6.85% for the week through Wednesday, according to Freddie Mac data. That’s up from 6.72% a week earlier. Average 15-year mortgage rates rose to 6% from 5.92%.”
“Record-Breaking Ransoms And Breaches: A Timeline Of Ransomware In 2024” (TechCrunch). “It was another record-breaking year for ransomware. When file-locking malware wasn’t causing widespread disruption, like downing online services and lasting outages, ransomware was the cause of unprecedented data theft attacks affecting hundreds of millions of people, in some cases for life. While governments have struck some rare wins against ransomware hackers over the past 12 months, including the disruption of the prolific LockBit gang and the seizure and takedown of Radar, these data theft and extortion attacks continue to increase dramatically, both in terms of frequency and sophistication.”
“Climbing The Ivory Tower: How Socio-Economic Background Shapes Academia” (Ran Abramitzky, et al. working paper). “We explore how socio-economic background shapes academia, collecting the largest dataset of U.S. academics’ backgrounds and research output. Individuals from poorer backgrounds have been severely underrepresented for seven decades, especially in humanities and elite universities. Father’s occupation predicts professors’ discipline choice and, thus, the direction of research. While we find no differences in the average number of publications, academics from poorer backgrounds are both more likely to not publish and to have outstanding publication records. Academics from poorer backgrounds introduce more novel scientific concepts, but are less likely to receive recognition, as measured by citations, Nobel Prize nominations, and awards.”
What we’re reading (12/27)
“Wall St Finishes Down After Sell-Off At End Of Strong Holiday-Shortened Week” (Reuters). “Wall Street's holiday cheer ended abruptly on Friday, with all three main benchmarks closing lower in a broad-based sell-off affecting even tech and growth stocks that had driven markets higher through much of the shortened trading week.”
“Behind Closed Doors: The Spy-World Scientists Who Argued Covid Was A Lab Leak” (Wall Street Journal). “The dominant view within the intelligence community was clear when Avril Haines, the director of national intelligence, and a couple of her senior analysts, briefed Biden and his top aides on Aug. 24[, 2001]. The National Intelligence Council, a body of senior intelligence officers who reported to Haines and that organized the intelligence review, had concluded with ‘low confidence’ that Covid-19 had emerged when the virus leapt from an animal to a human. So did four intelligence agencies. At the time, the FBI was the only agency that concluded a lab leak was likely, a judgment it had rendered with ‘moderate confidence.’ But neither Bannan nor any other FBI officials were at the briefing to make their case first hand to the president.”
“We Need More Three Mile Islands” (Reason). “Our grids will need an additional capacity of at least 18 gigawatts (GWs) to service AI's data centers by 2030. New York City's grid is about 6 GW annually, so the grid needs about three Big Apples' worth of capacity to satiate AI's energy needs. Intermittent sources, such as wind and solar, cannot meet that need. They are also costly to build for the small amounts of MWh they provide, and the landmass needed to have a capacity comparable to nuclear is extensive. What would take around 15 square miles of solar, nuclear can do in one—and those 15 square miles of solar would produce power only sometimes, while the one square mile of nuclear provides power around the clock.”
“There's Fresh Interest In Informing Potential Jurors About Jury Nullification” (Dealbreaker). “Jury nullification, coupled with voting and that little bit in the Declaration of Independence about the right to abolish tyrannical governments, goes to the very heart of the powers vested in the people to fight tyranny. Given the power that judges and prosecutors wield, how might the people stand up to the application of laws or unruly authority they consider unjust? Well, when the time comes for juries to decide the fate of the defendant, they are told by the judge if they are convinced beyond a reasonable doubt that the defendant committed the crimes that they have been accused of, they must return a verdict of guilty. Thing is, that must there is all bark and no bite.”
“Luigi Mangione And The American Abyss” (City Journal). “It’s no surprise that age is inversely correlated with support for left-wing assassination, since the younger the voter, the more recent his exposure to the American education system. The pro-Mangione reaction epitomizes the dominant traits of contemporary academia: narcissism, a juvenile view of economics, the inability to think in terms of principle and precedent, and ignorance about the civilizational triumph that is Western due process…Mangione’s manifesto reflects his Ivy League education (he graduated from the University of Pennsylvania): it is poorly written (‘I do apologize for any strife of traumas’), riddled with cliché (‘clearly power games [are] at play’), and self-important (‘Evidently I am the first to face it with such brute honesty’).”
January picks available soon
I’ll be publishing the Prime and Select picks for the month of January before Thursday, January 2 (the first trading day of the month). As always, SPC’s performance measurement for the month of December, as well as SPC’s cumulative performance, will assume the sale of the December picks at the closing price (at the mid-point of the closing bid and ask prices) on the last trading day of the month (Tuesday, December 31). Performance tracking for the month of January will assume the January 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 (Thursday, January 2).
What we’re reading (12/21)
“The Next Great Leap In AI Is Behind Schedule And Crazy Expensive” (Wall Street Journal). “OpenAI’s new artificial-intelligence project is behind schedule and running up huge bills. It isn’t clear when—or if—it’ll work. There may not be enough data in the world to make it smart enough. The project, officially called GPT-5 and code-named Orion, has been in the works for more than 18 months and is intended to be a major advancement in the technology that powers ChatGPT. OpenAI’s closest partner and largest investor, Microsoft, had expected to see the new model around mid-2024, say people with knowledge of the matter.”
“AI Is Not Slowing Down, Except For Stop Lights” (Marginal Revolution). “o3 is solving 25% of Frontier Math challenges–these are not in the training set and are challenging for Fields medal winners.”
“What Do We Want From The Mall?” (New York Times). “Decades after mega retail centers became a shorthand for bland suburbia, there may be some hope for them yet.”
“A Risky Corner Of The ETF Market Has Boomed This Year As YOLO Traders Chase The Rally” (Business Insider). “Since their introduction in the early 1990s, ETFs have been groundbreaking in offering the characteristics of a mutual fund — owning a basket of diversified stocks — but offering the daily trading liquidity of a single stock. But even after 30 years, the humble ETF is seeing fresh updates that cater to investors with a strong appetite for risk. Instead of owning a basket of stocks, single-stock ETFs track the price of one stock, which the fund will try to juice returns on by levering up. ‘These are vehicles that mass retail has never had the ability to trade before, until now,’ Todd Sohn, an ETF specialist at Strategas told Business Insider.”
“Silk Bag Traced To Medieval England Reveals Hidden Link To Charlemagne” (Semafor). “A silk bag dating back to the reign of King Henry III of England appears to have a link to Charlemagne, the first Holy Roman Emperor. Now on display at Westminster Abbey, the silk’s pattern of white hares and delicate flowers is a match for the burial shroud encasing Charlemagne’s remains at Aachen Cathedral in Germany, Artnet reported, almost certainly meaning the two pieces were made by the same weaver.”
What we’re reading (12/19)
“The Next Big Fed Debate: Has The Era Of Very Low Rates Ended” (Wall Street Journal). “Following the 2008 financial crisis, economists and Fed policymakers steadily revised down their estimates of the neutral rate. Superlow interest rates and reservoirs of monetary stimulus didn’t deliver much of an economic boost. Some economists argued that low interest rates were here to stay, thanks to demographic headwinds from an aging workforce and a chronic shortfall of demand for new investment. Some of these same economists think neutral rates have gone up in the past few years, after a barrage of fiscal stimulus shocked the economy into a new equilibrium during the Covid-19 pandemic. The view last decade that borrowing costs would stay low became embedded in bond yields, mortgage rates, equity prices and countless other assets. The prospect of a higher neutral rate suggests mortgage rates, for example, might be stuck above where they were in the 2010s.”
“America Is One Big Casino Now” (Business Insider). “If it feels like everybody's betting nowadays, it's because a whole lot of people are. 2024 was the year companies from sportsbooks to prediction markets to trading apps asked, "Wanna bet?" And Americans responded with a resounding yes.”
“Workers Don’t Understand The Purpose Of Their Jobs Or Companies, And It’s Leading To ‘The Great Detachment’” (CNBC). “Many workers aren’t happy with their jobs, and their limited options to find a new one are contributing to an era Gallup is calling ‘The Great Detachment,’ according to a new report from the workplace advisory firm. The share of Americans watching for or actively seeking a new job has ticked up to 51% today, compared with 45% in 2020.”
“Existing-Home Sales Elevated 4.8% In November; Post Strongest Year-Over-Year Increase Since June 2021” (National Association of Realtors). “Existing-home sales grew in November, according to the National Association of Realtors. Sales advanced in three major U.S. regions and remained steady in the West. Year-over-year, sales climbed in all four regions.”
“The Wealth Of Stagnation: Falling Growth, Rising Valuations” (Jonathan Paron). “Over the last half-century, economic growth stagnated but stock-market wealth boomed. I present evidence that declining innovation productivity reconciles these trends. At the macro level, I document that R&D spending has fallen relative to value, while M&A spending has doubled relative to R&D. At the micro level, most of the increase in aggregate valuation ratios is explained by a reallocation of sales shares toward high-valuation firms. Using a Schumpeterian model of growth and asset prices, I find that declining innovation productivity explains these facts. When innovation productivity falls, R&D falls and M&A rises. This concentrates production into the hands of the most efficient (high-valuation) incumbents, causing aggregate value to boom. Quantitatively, this explains most of the decline in growth and the rise in valuations. It also helps explain other salient trends, including declining firm entry, rising concentration, and falling interest rates. While stock-market wealth boomed, the present value of consumption (consumer welfare) stagnated with output.”
What we’re reading (12/18)
“Dow Tanks By 1,100 points, Posts First 10-Day Losing Streak Since 1974” (CNBC). “The Dow lost 1,123.03 points, or 2.58%, to 42,326.87, for its worst losing streak since an 11-day slide in 1974. The Wednesday decline was its worst since August and only the second time it lost 1,000 points this year in one session. The S&P 500 lost 2.95% to 5,872.16 and the Nasdaq Composite shed 3.56% to 19,392.69 with losses intensifying into the close of trading.”
“Fed Signals Plan To Slow Rate Cuts, Sending Stocks Lower” (Wall Street Journal). “The Federal Reserve signaled greater doubt over how much it would continue to cut interest rates after agreeing to a reduction on Wednesday that Chair Jerome Powell conceded had been a close call. Stocks went into a nosedive, with the major indexes all logging their worst day in months. The declines accelerated throughout the afternoon as investors digested central-bank forecasts and comments from Powell that spurred concerns that rates might not go down again soon. That was a notable shift after the Fed initiated rate reductions with a larger than usual half-point cut in September in the midst of expectations that a steady sequence of cuts could follow.”
“Bank Of England Expected To Hold Interest Rates” (BBC Business). “The Bank of England is expected to hold interest rates at a meeting later today. Most analysts predict the benchmark rate will stay at its current level of 4.75% when the decision is announced at 12:00 GMT. It comes as inflation rose for the second month in a row to 2.6% in the year to November - pushing it further above the Bank's target of 2%. In November, the Bank's governor Andrew Bailey said the path for rates would likely be "downward from here" but cautioned that the process would be gradual.”
“The 8 Worst Technology Failures Of 2024” (MIT Technology Review). “Some of the foul-ups were funny, like the ‘woke’ AI which got Google in trouble after it drew Black Nazis. Some caused lawsuits, like a computer error by CrowdStrike that left thousands of Delta passengers stranded. We also reaped failures among startups that raced to expand from 2020 to 2022, a period of ultra-low interest rates. But then the economic winds shifted. Money wasn’t free anymore. The result? Bankruptcy and dissolution for companies whose ambitious technological projects, from vertical farms to carbon credits, hadn’t yet turned a profit and might never do so.”
“Our Zestimate Obsession” (Business Insider). “The median error rate for on-market homes is just 2.4%, per the company's website, while the median error rate for off-market homes is 7.49%. Not bad, you might think. But that's where things get sticky. By definition, half of homes sell within the median error rate, e.g., within 2.4% of the Zestimate in either direction for on-market homes. But the other half don't, and Zillow doesn't offer many details on how bad those misses are…When somebody lists their house for sale, the Zestimate will adjust to include all the new seller-provided info: new photos, details on recent renovations, and, most importantly, the list price…But Zillow also keeps a second Zestimate humming in the background, one that never sees the light of day. This version doesn't factor in the list price — it's carrying on as if the house never went up for sale at all. Instead, it's used to calculate the "off-market" error rate. When the house sells, the difference between the final price and this shadow algorithm reveals an error rate that’s much less satisfactory[.]”