How we doin', Seattle?
"When a government official says a problem has been “contained,” pay no attention."
Seth Klarman: Twenty Investment Lessons of 2008
These lessons are even more relevant today than in 2008.
We never learn, and we never fixed anything - we just made our problems bigger.
Things that have never happened before are bound to occur with some regularity.
When excesses such as lax lending standards become widespread and persist for some time, people are lulled into a false sense of security, creating an even more dangerous situation.
Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return.
Risk is not inherent in an investment; it is always relative to the price paid.
Do not trust financial market risk models. Reality is always too complex to be accurately modeled. [Attention Federal Reserve]
Do not accept principal risk while investing short-term cash
The latest trade of a security creates a dangerous illusion that its market price approximates its true value.
Ratings agencies are highly conflicted, unimaginative dupes.
Beware leverage in all its forms.
Financial stocks are particularly risky. Banking, in particular, is a highly leveraged, extremely competitive, and challenging business.
When a government official says a problem has been “contained,” pay no attention.
The government – the ultimate short- term-oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur
Almost no one will accept responsibility for his or her role in precipitating a crisis: not leveraged speculators, not willfully blind leaders of financial institutions, and certainly not regulators, government officials, ratings agencies or politicians.
Fourteen CNBC viewers (i.e., 18% of their audience) were hospitalized today after playing a drinking game using the word, “Metaverse.”
It is unjust, but I still see it just fine.
Sure, Substack’s different, but a lot of people seem to prefer it, and Elon doesn’t deserve me anyway.
This is amusing:
Authored by Ven Ram, Bloomberg cross-asset strategist,
It’s not just the credit markets that are sending out a signal of distress. A key barometer that the Fed watches, the St. Louis Fed Financial Stress Index, is telegraphing a similar message about the state of the US economy.
While the spread between high-yield and investment grade debt captures one major variable, the Fed’s gauge comprises a host of yield spreads, interest rates and other indicators, making it a veritable one-stop-shop.
All of these “indicators” are heavily manipulated by the Fed. Goodhart’s Law something something.
As I’ve joked before…
Anyway…
I’m not a bond guy, but still...
Phoenix Home Price Index, Year-over-Year % Change
Phoenix unemployment rate is the same now as in May 2007.
The SVB bailout was accomplished by the Federal’s Reserve new facility, the BTFP (Bank Term Funding Program). Under the program, Banks can borrow 100% of the face value of U.S. Treasuries, agency debt, and mortgage-backed securities for up to a year. In other words, although the market now properly prices long-dated Treasuries at 70 cents on the dollar, the Fed will lend a full dollar for up to year. The idea is that if depositors are assured that banks can meet their withdrawal requests despite large mark-to-market losses on the banks’ balance sheets, they will leave their deposits in place.
The Fed’s actions may solve a liquidity problem temporarily, but it does nothing to address solvency risk. Loans under the facility are made with recourse beyond the collateral. In other words, if after a year the bank has not repaid the loan, the Fed will keep the collateral and have a claim for the difference. The bank will be just as bad off— worse, in fact, since the Fed is charging interest on the loans.
"They backstopped the liquidity problem, and a lot of people think that's the only problem but in doing so, they've actually once again kicked the can down the road to a much bigger corporate solvency problem."
Chris Cole talking about the Fed on Realvision with Mike Green, April 2021
Let’s think about what happens next: to meet the withdrawals, smaller banks will have to pledge their underwater bonds to the Fed for cash. The large banks will get deposit inflows, enabling them to keep their interest rates low while using the funds to purchase high-yielding, short-term Treasuries, boosting their market share and profitability. Small banks could raise deposit rates to compete, if they were healthy. Given the term structure of their loans, however, they cannot do without locking in negative cash flow. The looming recession will make cash flow deteriorate even at low rates. The economic consequences are profound.
According to Goldman Sachs, small and medium size banks account for roughly 50% of US commercial and industrial lending, 60% of residential real estate lending, 80% of commercial real estate lending, and 45% of consumer lending. The mega-banks can easily open new deposit accounts, but they do not have the operational capacity to replacer so much lending: they prefer larger loans to fewer borrowers, which will further concentrate economic power.
It gets worse. As deposits—the core reserve of the banking system—flee to the Treasury market, it means that the government will stay well funded to make transfer payments to the indigent, fund Raytheon and Zelensky in Ukraine, and pay rising interest costs on its debt. But businesses—real businesses, not just innovation ventures—will find it that much harder to access capital.
Just more blowback from decades of horrific monetary policy.
Fed Chair Arthur Burns Letter to President Nixon, May 19, 1971.
“If things come to the pass of a US suspension of gold sales and purchases, we should do all we can—both substantively and cosmetically—to make it appear that other governments have forced the action on us. We want to portray suspension as a last resort and to present a public image of a cool-headed government responding to ill-conceived, self-defeating actions of others.”
It had already been decided. Three months later Nixon ‘temporarily’ suspended the convertibility of the U.S. dollar into gold. Coincidentally, it’s been downhill for the middle-class ever since.
“If you can depreciate a currency what you’re really lowering is the price of labor." - Michael Hudson
Here’s Arthur Burns’ tenure as Fed Chair:
I posted this in 2013.
Maybe Ben Bernanke was actually the new Arthur Burns.
Dan Oliver is a great financial historian. For example this, from December 2020:
Credit bubbles always serve to misallocate capital, but they also do something worse: they concentrate it. In our system, the more assets a company has, the lower its borrowing costs. According to Federal Reserve data, since 1997, the interest rate for business loans between $10,000 and $100,000 has been 2.5 percent higher, on average, than that for loans above $10 million.
Large companies use their lower cost of capital either as a subsidy to reduce prices and drive smaller competitors out of business or to acquire them. As Amazon CEO Jeff Bezos told Congress: “There are multiple reasons that we might buy a company. Sometimes we’re trying to buy some technology or IP, sometimes it’s a talent acquisition. But the most common case is market position.” The result has been massive industry concentration in every sector.
Nearly half the restaurants in America are chains, every one striving to serve exactly the same thing. Nor do independent restaurants offer variety—two thirds of American restaurants are supplied by a single company: Sysco Foods, an amalgamation of over 150 different distributors (and many of the remaining restaurants are controlled by huge chains with their own distribution systems). This is why, wherever you dine, the food tastes exactly the same (except in the fancies restaurants in the fanciest cities).
These are the Deutsche Bank Executives Responsible for Serving Jeffrey Epstein
Deutsche Bank executives approved Mr. Epstein as a client in 2013 and then kept working with him, even though employees worried about the fact that “40 underage girls had come forward with testimony of Epstein sexually assaulting them,” as the bank put it in internal communications about Mr. Epstein in early 2015.
James B. Stewart: The Day Jeffrey Epstein Told Me He Had Dirt on Powerful People
After I rang, the door was opened by a young woman, her blond hair pulled back in a chignon, who greeted me with what sounded like an Eastern European accent.
I can’t say how old she was, but my guess would be late teens or perhaps 20. Given Mr. Epstein’s past, this struck me as far too close to the line. Why would Mr. Epstein want a reporter’s first impression to be that of a young woman opening his door?
I do like your substack better than your twitter. I would find myself mindlessly scrolling twitter and not giving your tweets much thought. Here it is all aggregated and I can read it when I am ready to sit down and think.
Full of great information as always!