The Rules, Part XXX (30)
In the recent run-up, there was talk of the infallibility of equities. This led to a higher level of variable compensation in the economy through option and share issuance and low pressure to raise fixed wages. This was yet another form of hidden leverage, which hid the unprofitability of enterprises through share dilution. That was...
The Rules, Part XXIX
Risk premiums should never be capitalized, they should only be taken into income as earned. This may end up being another odd post of mine. I’m going to start writing about bank regulation, but I will end up talking about monetary policy. There are many people who hate the rating agencies. They hate them because...
The Rules, Part XXVIII
Rebalancing of any sort in investing presumes an underlying stability to the economic system, and thus, market returns. Rebalancing will not protect against socialism, war, or an overleveraged position. The concept of rebalancing requires the idea of reversion to mean. It will not protect you when profound shifts are happening, where the market are moving...
The Rules, Part XXVII, and, Seeming Cheapness vs Margin of Safety
The market takes action against firms that carry positions bigger than their funding base can handle. Temporarily, things may look good as the position is established, because the price rises as the position shifts from being a marginal part of the market to a structural part of the market. After that happens, valuation-motivated sellers appear...
The Rules, Part XXIV
Every excess eventually unwinds. When an excess unwinds, the fall gets exacerbated by trend-followers blowing out of mutual and other pooled funds with lousy relative performance. If you had a list of who owned a given publicly-traded asset, and when they bought it, you would know a lot about how patient, intelligent, indebted, etc.,...
The Rules, Part XXIII
A Ponzi scheme needs an ever-increasing flow of money to survive. Same for a market bubble. When the flow’s growth begins to slow, the bubble will wobble. When it stops, it will pop. When it goes negative, it is too late. Here’s how a Ponzi scheme works for the promoter: Prior Net Assets + Receipts...
The Rules, Part XXII
Rapid money supply growth with no consumer price inflation can only really occur within the confines of an asset price bubble, or else, where does the money go? Interest rates are low at such a time because of the incredible liquidity, and complacency of lenders that they will get an equal amount of purchasing power...
The Rules, Part XXI
Before I start this evening, I have a request for readers, and a comment for new readers. (Note: if you are reading this anywhere but directly at my blog, please realize that you have to come to my blog for me to hear what you are saying. I do not read comments anywhere else but...
Book Review: Inflated
This book was not what I expected. I expected a book on the current crisis, and got a book on monetary/credit policy over the whole of the existence of the US. What is more, unlike most books that cover a long sweep of history, this book is even, and does not overemphasize the recent past,...
The Rules, Part XX
In the end, economic systems work, and judicial systems modify to accommodate that. The only exception to that is when a culture is dying. I have been scratching my head over all the problems in the residential mortgage market. How can foreclosure take place, when there is no note, properly endorsed, to display? How can...
The Rules, Part XIX
There is room for a new risk model based on the idea that risk is unique among individuals, and inversely related to the price paid for an asset. If a risk control model has an asset becoming more risky when prices fall, it is wrong. After doing my talk for the Society of Actuaries last...
The Rules, Part XVIII
When rules become known and acted upon, the system changes to incorporate them, making them temporarily useless, until they are forgotten again. When a single strategy becomes dominant, it can become temporarily self-reinforcing. Eventually, it will become self-reinforcing on the negative side. A healthy market ecology has multiple strategies that are working in separate areas...
