What Caused the Financial Crisis?

Photo Credit: Alane Golden || Sad but true — the crisis was all about bad monetary policy, a housing bubble, and poor bank risk management====================== There are a lot of opinions being trotted around ten years after the financial crisis.  A lot of them are self-serving, to deflect blame from areas that they want to protect.  What you are going to read here are my opinions.  You can fault me for this: I will defend my opinions here, which haven’t changed much since the financial crisis.  That said, I will simplify my opinions down to a few categories to make it simpler to remember, because there were a LOT of causes for the crisis. Thus, here are the causes: 1) The Federal Reserve and the People’s Bank of China For different reasons, these two central banks kept interest rates too low, touching off a boom Continue reading "What Caused the Financial Crisis?"

The Balance: Short Selling Stocks- Not for the Faint Hearted

Photo Credit: Heather Wizell || Ah, Wallstrip with Lindsay Campbell (look at the microphone…)

=========================================== Here’s another article that I edited at The Balance: Short Selling Stocks- Not for the Faint Hearted.  The original author started out conservative on the topic, and I took it up another notch. For this article, I:
  • added the information about changes to the uptick rule (which did not reflect anything post-2006),
  • corrected a small math error,
  • made the example more realistic as to how margin works in this situation,
  • added almost all of the section on risks
  • totally rewrote the section on picking shorts (if you dare to do it), and,
  • added the famous comment by Daniel Drew.
I have shorted stock in my life at the hedge fund I worked at, hedging in arbitrage situations, and very rarely to speculate.  Shorting is a form of speculation shorts don’t create economic value. Continue reading "The Balance: Short Selling Stocks- Not for the Faint Hearted"

The Balance: Are You a Speculator or an Investor?

Photo Credit: Bernard Spragg. NZ || Ah, Hong Kong. Home to speculation and Investment.

========================== One thing to do at The Balance is fix old articles.  This article compares speculators and investors.  What I brought to this article was the following:
  • Change the phrasing from trading to speculating to be more pointed.
  • Add more and better criteria to what an investor does.
  • Added the entire section “What To Do”
  • Added a picture and more links.  Corrected grammar in a few spots and tightened up some language.
The main reason to edit this article as I did was to give readers more disciplined ideas with respect to buying and selling, and encourage them have rules, and keep a journal of decisions, together with why they bought, and at what point would they sell.  If not, then investors will not take losses when they ought to, and not Continue reading "The Balance: Are You a Speculator or an Investor?"

The Balance: Considering Event-Driven Investing

Photo credit: miltarymark2007

=========================== I published another article at The Balance: Considering Event-Driven Investing.  This is one place where writing in the third person leaves a lot out.  I’ve done a lot with some types of event-driven investing.
  • Speculating on hurricanes — I did that successfully at the hedge fund 2004, 2005 and 2006.  2006 because I thought the risk of another strong hurricane year was overplayed.  2004 and 2005 because I had a good idea of who was underreporting claims after disasters.  That was the only time in my life that I went from long a company to short without stopping, and I covered on the day the CEO resigned, and caught the bottom tick.
  • Bond deal arbitrage — well, sort of.  I would buy target company bonds and sell the bonds of the parent.  I had to be certain that the Continue reading "The Balance: Considering Event-Driven Investing"

The Best of the Aleph Blog, Part 42

========================= In my view, these were my best posts written between May 2017 and July 2017: The Biggest Problems For Investors Today The “two-minute question” with a half hour response. Perceived Versus Real Risk Tolerance Why questions about objective measures of risk tolerance need to be asked before querying someone about their subjective risk tolerance. Overvaluation is NOT Due to Passive Investing Active managers as a group are very similar to the index.  That shares move from active to passive managers does not affect their valuation, just as one active manager selling to another does not. Goes Down Double-Speed (Update 4) Why the current bull market, the second longest on record, is both amazing and boring at the same time. The Doubling Rule The Doubling Rule, Redux Slightly more complex than the “Rule of 72” but more accurate as you get further away from 8%.
Continue reading "The Best of the Aleph Blog, Part 42"

The Best of the Aleph Blog, Part 41

========================= In my view, these were my best posts written between February 2017 and April 2017: Problems with Constant Compound Interest (6) It is very difficult to get a high real rate of return over a long time.  This article peels apart the math, and brings out the quantitative factors that play a role in the analysis. Yield = Poison (3) When the yield premiums for taking most forms of additional risk are too low, it’s time to take much less risk, and reduce yield considerably. Streaking Into the Record Books? Remember the streak of days where the market did not go down by 1% or more?  It ended and did not set a record, but it was a top 10 long streak. We Get New Highs More Frequently After New Highs Dog bites man, but I have never seen an analysis like this Continue reading "The Best of the Aleph Blog, Part 41"

The Best of the Aleph Blog, Part 40

====================== In my view, these were my best posts written between November 2016 and January 2017: When I was a Boy… Can lessons from the distant past illumine the future?  I think so. On Long-Term Corporate Investments This is timely.  Are US firms too short-term in their orientation? No.  To be more controversial, if companies in the rest of the world imitate the US, they will be better off.  They don’t push the present hard enough, and the great long-term returns don’t materialize as a result. How do you Manage a Company when the Stock is Considerably Overvalued? This was a fun piece to write.  It is a high quality problem (usually), but the rules are the opposite for firms with undervalued stock, which is more common. “Do Half” Applied What should you do if you think you missed the rally? Continue reading "The Best of the Aleph Blog, Part 40"

The Best of the Aleph Blog, Part 39

==================== In my view, these were my best posts written between August 2016 and October 2016: What to do when Ethics are Discouraged Eight ways to promote ethics where it is not popular. On Pricing Grids, Part 1 On Pricing Grids, Part 1a On how to price illiquid bonds, and why GAAP accounting does not matter for financial stock prices. The Cash Will Prove Itself On Donald Trump, during a time in 1990, when he said in the midst of a personal business financial crisis said:
“What I want to do is go and bargain hunt,” he said. “I want to be king of cash.”

I even get to draw analogies to Warren Buffett, Elon Musk, and nifty finance poem that is less known today. Dead as a Severed Horse’s Head A lot of people got skinned by the bankruptcy of Horsehead Holdings, which was Continue reading "The Best of the Aleph Blog, Part 39"

The Balance: On Private Activity Bonds

================= For about two months, I wondered when I would write this.  Now I know… I’m writing it now.  To all my readers, I am letting you know that Aleph Blog is not ending, but it is changing.  I accepted a writing assignment with The Balance.  I am going to write 4-5 articles for them per month, and correct some old articles as well.  I will publish links to them here.  Like Aleph Blog, The Balance is free, so you don’t have to do anything more than click on the article link here to read it. Why did I do this?  I felt I was getting stale in my writing.  I was a little bored; that’s why I wasn’t writing so much.  I had completed all of my main goals for the blog in 2014, and slowly Continue reading "The Balance: On Private Activity Bonds"

The Best of the Aleph Blog, Part 38

=============== In my view, these were my best posts written between May 2016 and July 2016: You Can Get Too Pessimistic
In general, I think there is no value in preparing for the “total disaster” scenario if you live in the developed world.  No one wants to poison their own prosperity, and so the rich and powerful hold back from being too rapacious. <snip> The sun will rise tomorrow, Lord helping us… so diversify and take moderate risks most of time.

Risk vs Return — The Dirty Secret After a certain point, additional risk reduces returns, because average people cannot stomach making the tough decisions when things are too good, or things are too bad. Simple Stuff: What is Risk? I thought of doing Simple Stuff as a series, but this is the only one that I have done so far.  Anyone have an idea for another one?

Continue reading "The Best of the Aleph Blog, Part 38"

The Best of the Aleph Blog, Part 37

========== In my view, these were my best posts written between February 2016 and April 2016: On Investment Charlatans Mostly regarding some scammers pitching preferred stock, but without calling it that.  Always be wary of those that won’t be direct with you. If Someone Tries to Sell You, Don’t Buy It
“Don’t buy what someone else wants to sell you.  Buy what you have researched that you want to buy.”

They Can’t Help You On a Letter from an Expatriate On another type of charlatans, the political sorts.  Two of the few things I had to say prior to the elections in 2016 — the first one about how the problems were bigger than the government could solve, yet the politicians would still promise solutions.  The second was in the same vein, but at greater length. Fly Away From Helicopter Money Last Continue reading "The Best of the Aleph Blog, Part 37"

The Best of the Aleph Blog, Part 36

  ==================== In my view, these were my best posts written between November 2015 and January 2016: Don’t be a Miser in Retirement (Or Ever) It is possible to over-save, and underspend.  You should leave some inheritance for your heirs, but don’t deprive yourself of the benefits that having some assets provides. On Lump Sum Distributions In general it is better to take payments over time than to receive it as a lump sum.  If you do have a lump sum that comes to you, take care not to spend it too rapidly. On Currencies that are Not a Store of Value How would you live if you were trapped in Venezuela, Turkey, Zimbabwe, or some other badly run country with high inflation.  Here are a few bits of advice. Understand Your Liabilities How do you figure out how much expenses you need to Continue reading "The Best of the Aleph Blog, Part 36"

The Best of the Aleph Blog, Part 35

==================== In my view, these were my best posts written between August 2015 and October 2015: Learning from the Past, Part 6 [Hopefully Final, But It Won’t Be…] The currently final episode on my investing errors, covering the last eight years.  Note that Valero has made me five times on my initial investment, though, and I still own it now.  This piece has more of the bright side of what I learned. Musings on the Wealth Effect
“None of the ways I mentioned for getting more money for spending out of investments is likely to produce a lot of additional spending in aggregate across the economy.  As a result, I think that the Executive Branch, the Congress, and the Federal Reserve should be cautious of trying to make asset values rise, or encourage more borrowing against assets.  It will likely not have any significant Continue reading "The Best of the Aleph Blog, Part 35"

The Best of the Aleph Blog, Part 34

========================= In my view, these were my best posts written between May 2015 and July 2015: Learning from the Past, Part 5b [Institutional Stock Version] Learning from the Past, Part 5c [Institutional Stock Version] How I did a bad job for Hovde on Scottish Re and National Atlantic Holdings.  Also, what I did to mitigate the errors.  (And I am supposed to be really good with insurance companies…) The SEC Pursues a Fool’s Errand On why the Consolidated Audit Trial [CAT] is a bad idea.  Preventing “flash crashes” is not a desirable goal; they teach people not to use market orders, and to be careful.  The market is a place for big guys, not little guys. On Partnership Investing What do you have to be careful about if you are entering into a partnership? On Risk-Based Liquidity and Systemic Risk On how Continue reading "The Best of the Aleph Blog, Part 34"

The Pips are Squeaking

Photo Credit: sid================= This should be a short post.  I just want to note the degree of stress that many emerging market countries are under.  The Fed raises rates, and something blows up.  That is often the class of debt that has grown the most in the bull phase of the cycle, or, the one that has financed with short-term debt.  This is the “volatility machine” that Michael Pettis wrote so well about. The Brazilian stocks I own have been falling.  A little lower, and I will make them double-weight positions.  Five times earnings for utilities that cannot be done without?  Wave the shares in. Look at Argentina, Indonesia, and Turkey.  Fundamentally misfinanced.  Maybe own assets there that have enduring demand.  I own IRSA [IRS]. Russia is fundamentally sound.  I own shares in RSXJ, which is Continue reading "The Pips are Squeaking"

Thoughts on Bank Debt

  I have long said that until an asset class goes through a “failure cycle,” risk-based pricing will be weak toward the assets in question.  One asset class that has become popular of late is bank debt.  Bank debt is a loan to a corporation that typically has first priority to make claims on the company in bankruptcy, ahead of the bondholders, much less the preferred stockholders and the common equity. Though it is called bank debt, often the loans are arranged by banks and allow others to lend alongside them.  This has become popular among closed-end funds and ETFs like BKLN.  What are the advantages?
  • In the past credit losses have been low, partially because of strong covenants and low availability.
  • The loans have floating rates, so if interest rates rise, you get paid more, assuming the company does not choke on Continue reading "Thoughts on Bank Debt"

Why I Watch the Thirty

============= I like long bonds.  I am not saying that I like them as an investment.  I like them because they tell me about the economy. Though I argued to the Obama Administration that they should issue Fifties, Centuries and Perpetuals, the Thirty-year bond remains the longest bond issued.  I think its yield tells us a lot about the economy. How fast is nominal growth?  Look at the Thirty; it is highly correlated with that. What should the Fed use for its monetary policy?  Look at the Thirty, and don’t let the Five-year note get a higher yield than it.  Also, don’t let the spread of the Two-year versus the Thirty get higher than 1.5%.  When things are bad, stimulus is fine, but it is better to wait at a high spread than goose the spread higher. Excesses Continue reading "Why I Watch the Thirty"

Notes on the Fed Announcements

========================== Listening to the Fed Chair’s press conference, there was one thing where I disagreed with what Powell was saying.  He said a few times that they only made one decision at the FOMC meeting, that of raising the Fed Funds rate and the reverse repo rate by 0.25%.  They made another decision as well. The decided to raise the rate of quantitative tightening [QT] by increasing the rate of Treasury, MBS and agency bonds rolloff by $10B/month starting in April. They did that by increasing the rate of reduction of MBS and agency bonds from $8B to $12B/month, and Treasuries from $12B to $18B/month. The total rate of QT goes from $20B to $30B/month.  This may raise rates on the longer end, because the Fed will no longer buy so much debt. There was also a little concern over
Continue reading "Notes on the Fed Announcements"

Just Don’t Invert the Yield Curve

Photo Credit: Brookings Institution

================================ Jerome Powell is not an economist, and as such, has the potential to try to remake the way the Fed does monetary policy.  Rather than hold onto outmoded ideas ideas like the Phillips Curve, which may have made sense when the US was a more insular economy, there are better ways to think of monetary policy from a structural standpoint of how financial firms work. (Note: the Phillips Curve relies on a very simple assumption that goods and services price inflation stems from wage inflation, and that wage inflation occurs when domestic unemployment is low.  In a global economy, those relationships are broken when labor can be easily added from sources outside of the US.) Financial firms tend to grow rapidly when the yield curve is steeply sloped.  Borrowing short and lending long is profitable, at least in the short-run.  Continue reading "Just Don’t Invert the Yield Curve"

Why I Like Foreign Small Cap ETFs

Photo Credit: amanda tipton || It may not be foreign, and not an ETF, but it IS a small cap

====================== This should be a short post.  When I like a foreign market because it seems cheap (blood running in the streets), I sometimes buy a small cap ETF or closed-end fund rather than the cheaper large cap version.  Why?
  • They diversify a US-centric portfolio better.  There are several reasons for that:
  • a) the large companies of many countries are often concentrated in the industries that the nation specializes in, and are not diversified of themselves
  • b) the large companies are typically exporters, and the smaller companies are typically not exporters. Another way to look at it is that you are getting exposure to the local economy with the small caps, versus the global economy for the large caps.
  • They are often cheaper than the large caps.
  • Continue reading "Why I Like Foreign Small Cap ETFs"